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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 31, 1997
REGISTRATION NO. 333-29261
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
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:
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
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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 , 1997
PROSPECTUS
3,400,000 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 requires
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, the Common Stock and
the Warrants approved for quotation on the Nasdaq National Market under the
symbols "HCMHU," "HCMH" and "HCMHW", respectively.
------------------------
SEE "RISK FACTORS" COMMENCING ON PAGE 14 FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS. THESE RISKS INCLUDE:
<TABLE>
<S> <C>
- - Total reliance upon Principals and other key personnel. - Failure of a public market to develop or be sustained
- - Inability of the Company to control the operations of for the Units, Common Stock or Warrants.
the Company's taxable subsidiaries (which are - Difficulty of acquiring Mortgage Assets (as defined
controlled by the Principals), which could result in herein) at favorable spreads relative to borrowing costs
decisions by such subsidiaries that do not reflect the in an environment of increasing competition.
Company's best interests. - Adverse general economic conditions, which generally
- - Significant increases in short-term interest rates, cause decreasing demand for consumer credit and declining
which would adversely affect the Company's borrowing real estate values, either of which would negatively
costs and could negatively impact the Company's net impact the Company's net income.
income. - Consequences of failing to maintain REIT status which
- - Conflicts of interest with, and material benefits to, would result in the Company being subject to tax as a
affiliates of the Company, including certain officers regular corporation.
and directors, in connection with the Formation
Transactions (as defined herein) and the operation of
the Company's continuing business.
- - The possibility that the Company, in light of its
recent formation and limited operating experience, may
lack the ability to effectively manage its operations
and planned growth.
</TABLE>
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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.
<TABLE>
<CAPTION>
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
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<S> <C> <C> <C>
Per Unit.......... $ $ $
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Total(3).......... $ $ $
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</TABLE>
(1) Excludes the value of Warrants to be issued to Stifel, Nicolaus & Company,
Incorporated and Montgomery Securities to purchase 102,000 shares of Common
Stock (117,300 shares 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 $650,000.
(3) The Company has granted the Underwriters an option exercisable within 30
days after the date of this Prospectus to purchase up to 510,000 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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PAGE PAGE
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PROSPECTUS SUMMARY........................ 4 Market Considerations............ 24
The Company........................... 4 Investment Company Act Risk...... 25
General.......................... 4 Legislative and Regulatory
Management....................... 4 Risk........................... 26
The Company's Operations......... 5 Shares Eligible for Future
Competitive Advantages........... 6 Sale........................... 26
Purpose of the Offering.......... 6 Preferred Stock; Restrictions on
Structure and Formation Ownership of Common Stock;
Transactions................... 7 Anti-takeover Measures......... 27
Dividend Policy and Distributions..... 12 THE COMPANY............................... 28
Summary Risk Factors.................. 12 USE OF PROCEEDS........................... 28
The Offering.......................... 13 DIVIDEND POLICY AND DISTRIBUTIONS......... 28
RISK FACTORS.............................. 14 DIVIDEND REINVESTMENT PLAN................ 29
Dependence Upon Principals and Other DILUTION.................................. 30
Key Personnel....................... 14 CAPITALIZATION............................ 31
Recent Formation and Limited Operating PRO FORMA CONSOLIDATING FINANCIAL DATA.... 32
Histories........................... 14 SELECTED FINANCIAL DATA................... 34
Benefits to the Principals............ 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
Negative Effect on Financial Condition FINANCIAL CONDITION AND RESULTS OF
Due to Board of Director's Ability OPERATIONS.............................. 35
to Change Policies of the Company... 15 Results of Operations................. 35
Absence of Independent Valuation for Three Months Ended March 31, 1997
Allocation of Equity Interest in Compared to Three Months Ended March
HCLP and HCHI....................... 15 31, 1996............................ 35
Principals' Conflicts of Interest..... 15 Year Ended December 31, 1996 Compared
Immediate and Substantial Dilution.... 16 to Year Ended December 31, 1995..... 36
Mortgage Assets with Poor Year Ended December 31, 1995 Compared
Documentation and Poor Payment to Year Ended December 31, 1994..... 38
Histories........................... 16 Inflation............................. 40
Defaults on Mortgage Assets........... 16 Liquidity and Capital Resources....... 40
Defaults on Commercial BUSINESS.................................. 42
Mortgages...................... 16 General............................... 42
Effect of Adverse Economic Background....................... 42
Conditions on Multifamily Business Strategy................ 42
Properties..................... 17 Investment Portfolio.................. 43
Decreases in Value of Retail, General.......................... 43
Office and Industrial Single-Family Mortgage
Properties..................... 17 Operations..................... 43
Environmental Liabilities Commercial Mortgage Loans and
Associated with Contaminated Multifamily Mortgage Loans..... 46
Properties..................... 18 Accumulation Period Acquisitions...... 48
Risks Related to Operations........... 18 Due Diligence Operations.............. 49
Negative Effects of Fluctuating Financing............................. 49
Interest Rates................. 18 General.......................... 49
Reduction of Income Due to Reverse Repurchase Agreements.... 49
Prepayment..................... 19 Securitization and Sale Process....... 50
Defaults by Borrowers under General.......................... 50
Mortgage Assets................ 20 Credit Enhancement............... 51
Losses Related to Investing in Other Mortgage-Backed
Subordinated Classes of Securities..................... 52
Mortgage-Backed Securities..... 20 Capital Allocation Guidelines
Losses Related to Borrowings and (CAG).......................... 52
Substantial Leverage........... 21 Implementation of the CAG -- Mark
Insufficient Demand for Mortgage to Market Accounting........... 53
Loans and the Company's Loan Risk Management....................... 54
Products....................... 22 Credit Risk Management........... 54
Lack of Geographic Interest Rate Risk Management.... 54
Diversification................ 22 Prepayment Risk Management....... 55
Ability to Acquire Mortgage Hedging............................... 55
Assets at Favorable Spreads Investment Portfolio............. 55
Relative to Borrowing Costs; Costs and Limitations............ 57
Competition and Supply......... 22 Relationships Among Affiliates........ 57
Failure to Maintain REIT Status; PMSR/OMSR............................. 57
Company Subject to Tax as a Regulation............................ 57
Regular Corporation............ 23 Competition........................... 58
Potential Characterization of Employees............................. 58
Distribution as UBTI; Taxation Service Marks......................... 58
of Tax-Exempt Investors........ 23 Facilities............................ 58
Taxable Mortgage Pool Risk; Future Revisions in Policies and
Increased Taxation............. 24 Strategies.......................... 59
Failure of HCLP to Qualify as a
Partnership for Federal Income
Tax Purposes................... 24
</TABLE>
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<TABLE>
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Legal Proceedings..................... 59 Repurchase of Shares and Restrictions
HCHI ORGANIZATIONAL CHART................. 61 on Transfer......................... 81
MANAGEMENT................................ 62 Transfer Agent........................ 83
Directors and Executive Officers...... 62 SHARES ELIGIBLE FOR FUTURE SALE........... 83
Terms of Directors and Officers....... 64 General............................... 83
Committees of the Board............... 64 Registration Rights................... 84
Compensation of Directors............. 65 CERTAIN PROVISIONS OF MARYLAND LAW AND OF
Compensation Committee Interlocks..... 65 THE COMPANY'S CHARTER AND BYLAWS........ 84
Executive Compensation................ 65 Removal of Directors.................. 84
Bonus Incentive Compensation Plan..... 66 Business Combinations................. 84
Employment Agreements................. 66 Control Share Acquisitions............ 84
401(k) Plan........................... 67 Amendment to the Charter.............. 85
1997 Stock Option Plan................ 67 Dissolution of the Company............ 85
STRUCTURE AND FORMATION TRANSACTIONS...... 70 Advance Notice of Director Nominations
The Structure of the Company.......... 70 and New Business.................... 85
HCLP.................................. 70 Anti-takeover Effect of Certain
HCP, HCMC and HCS..................... 71 Provisions of Maryland Law and the
The Formation of HCHI and HCLP........ 71 Charter and Bylaws.................. 86
Structure of HCP and Subsidiaries Limitation of Liability and
Prior to the Consummation of Indemnification..................... 86
the Formation Transactions..... 71 FEDERAL INCOME TAX CONSIDERATIONS......... 87
Formation Transactions........... 72 General............................... 87
Consequences of the Formation Opinion of Counsel.................... 87
Transactions................... 72 Requirements for Qualification as a
Determination and Valuation of REIT................................ 88
Ownership Interests............ 73 Record Keeping Requirements........... 92
Benefits to the Principals....... 74 Termination or Revocation of REIT
CERTAIN TRANSACTIONS...................... 75 Status.............................. 92
The HCP Shareholders' Agreement....... 75 Taxation of HCHI...................... 92
The Formation Transactions............ 75 Tax Aspects of HCHI's Investment in
Partnership Agreement; Redemption HCLP................................ 93
Rights.............................. 75 Taxation of Taxable Affiliates........ 97
Contingent Limited Partner Interests Taxation of Taxable U.S.
in HCLP............................. 75 Stockholders........................ 97
Employment Agreements................. 75 Withholding........................... 98
Principals' Ownership................. 75 Taxation of Tax-Exempt Stockholders... 99
THE PARTNERSHIP AGREEMENT................. 76 Certain United States Federal Income
General............................... 76 Tax Considerations Applicable to
Economic Participation by Units....... 76 Foreign Holders..................... 99
Management............................ 76 Information Reporting and Backup
Financing............................. 76 Withholding......................... 100
Transferability of Interests.......... 77 Special Considerations................ 100
Redemption/Exchange Rights............ 77 Proposed Tax Legislation.............. 101
Operations............................ 77 Other Tax Consequences................ 101
Term.................................. 77 ERISA INVESTORS........................... 101
Fiduciary Duty........................ 78 UNDERWRITING.............................. 103
Indemnification....................... 78 LEGAL MATTERS............................. 105
PRINCIPAL STOCKHOLDERS.................... 79 EXPERTS................................... 105
DESCRIPTION OF SECURITIES................. 79 ADDITIONAL INFORMATION.................... 105
Common Stock.......................... 79 GLOSSARY.................................. 106
Preferred Stock....................... 80 TABLE OF CONTENTS TO FINANCIAL
Warrants.............................. 80 STATEMENTS.............................. F-1
</TABLE>
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICES 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 106. 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 Mortgage
Holdings, L.P., a Delaware limited partnership ("HCLP"), 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 which will invest in Mortgage
Assets and continue the existing business of HCP. The Company's activities will
include (i) acquiring primarily Single-Family Mortgage Loans with documentation
or payment history deficiencies which cause the loans to be ineligible for sale
to government-sponsored agencies (referred to as "non-conforming" 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 an existing network of
sales representatives targeting financial institutions throughout the United
States. The Company will originate Multifamily Mortgage Loans and Commercial
Mortgage Loans through its existing conduit, 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) its focus on originating Multifamily
Mortgage Loans and Commercial Mortgage Loans, which generally have higher yields
than conforming Single-Family Mortgage Loans, (ii) purchasing nonconforming
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.
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. The Principals estimate that, at each of these institutions, they
supervised trades of Mortgage Assets of up to $100 million per day and were
responsible for the management and hedging of portfolios of Mortgage Assets of
up to an estimated $1 billion. At Citicorp Investment Bank, Mr. Burchett
co-managed a mortgage finance department, which included responsibilities for
the trading of mortgage assets, and led the development of its residential
conduit, Citimae, which, Mr. Burchett estimates, securitized over $6 billion in
single-family mortgage loans during his tenure. At Citicorp Investment
4
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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.
THE COMPANY'S OPERATIONS
General. HCHI was incorporated in the state of Maryland on June 10, 1997.
HCLP was formed in the state of Delaware on June 11, 1997. Neither HCHI nor HCLP
will conduct any activities prior to the consummation of the Offering. HCP was
incorporated in 1989 and manages Mortgage Loan and other trading activities and
provides Mortgage Loan 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 consummation of
the Offering. HCS, which was incorporated in 1989, is a broker/dealer. Upon the
closing of the Offering, HCHI will contribute the net proceeds of the Offering
to HCLP, which will acquire the Investment Portfolio (as defined below) using
such net proceeds and the net proceeds of borrowings and securitizations.
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").
The Company, through its predecessors, has been in the business of
acquiring, trading and securitizing seasoned (more than one year) Single-Family
Mortgage Loans since 1995 by employing sales representatives (currently six) to
focus on purchasing pools of Mortgage Loans from a national customer list of
banks, thrifts and other mortgage investors. The Company typically targets loan
pools containing non-conforming Single-Family Mortgage Loans. The Company does
not originate Single-Family Mortgage Loans. The Company has historically pursued
a strategy of correcting the deficiencies of these Single-Family Mortgage Loans
and subsequently selling the Single-Family Mortgage Loans at a profit. In the
past, the Company has conducted these activities for [ ] and
[ ] and as sole asset manager to [ ], Inc.
Since 1995, these entities have purchased over $189 million in Single-Family
Mortgage Loans and have, in the aggregate, earned a return on capital of over
50% (before payment of asset management fees to the Company) on Single-Family
Mortgage Loans sold into the marketplace. Historically, these returns on capital
were generally earned through a strategy of selling the Single-Family Mortgage
Loans within eighteen months. The Principals of the Company have the expertise
in purchasing, servicing, securitizing, hedging and selling Single-Family
Mortgage Loans as described herein. However, subsequent to the closing of the
Offering, the Single-Family Mortgage Loans will be owned through the REIT
structure, and any return will be realized over the life of the applicable
Single-Family Mortgage Loan. The Principals believe this investment strategy
will most likely cause future returns on capital to decline from historical
levels.
Since its inception in 1992, HCMC has originated over $500 million of
conduit eligible Multifamily Mortgage Loans and has sold Multifamily Mortgage
Loans to seven of the major "Wall Street" conduits. The majority of the
Multifamily Mortgage Loans were sold to issuers of commercial mortgage-backed
securities or investors for their portfolios. 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 it will seek to obtain by being a vertically
integrated company (acting as originator, servicer and owner of Commercial
Mortgage Loans).
The Company intends to utilize its expertise and organization to acquire
and securitize Single-Family Mortgage Loans and Commercial Mortgage Loans to
earn higher returns than could generally be earned from
5
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purchasing Mortgage Securities in the marketplace. However, there can be no
assurance that the Company will be able to earn such higher returns. While the
Company has historically resold its acquired Mortgage Loans within eighteen
months at a gain, the Principals of the Company believe that the Company will
successfully make the transition to a long-term investment strategy due to its
experience in financing with repurchase agreements, securitizing and hedging
portfolios of Mortgage Assets.
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 initial period 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 can be no assurance
that the Company will be able to earn such 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. The
Principals of the Company are experienced in the acquisition of Mortgage Assets.
An affiliate of the Company 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 Services. Effective February 1, 1997, the
affiliate no longer acts as a subadvisor for this Fund as result of a merger at
the Fund level.
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. 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
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) experienced management team, (ii) tax
advantaged status as a REIT, (iii) position as both originator of Commercial
Mortgage Assets and Multi-Family Mortgage Assets and investor in Mortgage
Assets, (iv) freedom from certain regulatory-related burdens affecting certain
competitors, (v) ability to securitize its Mortgage Assets, (vi) cost-efficient
operations relative to certain competitors, and (vii) 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 status. 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
The Company has been an active acquirer and seller of 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 assets for investment. The Principals believe that the REIT
structure is
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6
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the most efficient structure for owning Mortgage Assets and will permit the
Company to grow as a vertically integrated mortgage holder while maintaining
access to capital.
STRUCTURE AND FORMATION TRANSACTIONS
The Structure. The following diagram depicts the structure of the Company
immediately after the consummation 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, (ii) permit
the Principals to defer the tax liabilities they would incur if they contributed
a majority of the stock in HCP to the Company in exchange for shares of Common
Stock rather than partnership units of HCLP, and (iii) 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]
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(1) HCHI will be the sole general partner of HCLP with a percentage interest in
HCLP of 83.61%. The Principals will be the limited partners of HCLP with an
aggregate initial percentage interest in HCLP of 16.39%. The Principals'
percentage interest in HCLP may increase to 19.69% if the Earn-Out fully
vests. See "The Partnership Agreement -- Economic Participation by Units."
(2) HCLP will own 100% of the HCP Preferred representing the right to receive
97% of dividend distributions by HCP and the Principals will own 100% of the
common stock of HCP representing the right to receive 3% of dividend
distributions by HCP.
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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.
Initially, all of the Common Stock of HCHI will be owned by the investors in the
Offering. The Principals will not initially own any Common Stock of HCHI but may
acquire shares in exchange for interests in HCLP, 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 "The Partnership Agreement -- Redemption/Exchange
Rights;" "Management -- 1997 Stock Option Plan;" and "Management -- Bonus
Incentive Compensation Plan." HCHI will contribute the net proceeds of the
Offering to HCLP. It is anticipated that, for as long as HCLP remains in
existence, HCHI will not own significant amounts of assets other than its
interest in HCLP.
HCLP will acquire the Investment Portfolio using the net proceeds of the
Offering and the net proceeds of borrowings and securitizations. HCHI will be
the sole general partner of HCLP and will generally control the operations and
affairs of HCLP. The Principals will contribute the HCP Preferred to HCLP and
will be the limited partners of HCLP. As limited partners, the Principals will
generally have no right to participate in HCLP's operations and affairs. The
Principals will, however, serve as directors and officers of HCHI. See
"Management -- Directors and Executive Officers." It is anticipated that HCLP's
assets will consist primarily of the Investment Portfolio and the HCP Preferred.
The economic interests in HCLP will be expressed in terms of partnership
units, each of which will represent a fractional, undivided interest in HCLP's
distributions, profits and losses. Initially, HCHI will own 83.61% and the
Principals will own the other 16.39% of the partnership units of HCLP (entitling
them to 83.61% and 16.39%, respectively, of HCLP's distributions, profits and
losses). Additional partnership units will be issued to the Principals (giving
them 19.69% of the partnership units, subject to dilution by other issuances of
partnership units), if the Earn-Out fully vests. The vesting of the Earn-Out
depends upon the achievement of certain levels of Total Return per Unit through
September 30, 2002. See "The Partnership Agreement -- Economic Participation by
Units" and "Structure and Formation Transactions." The partnership units
acquired by the Principals (including any additional units to be issued upon the
vesting of the Earn-Out) represent the consideration given to the Principals in
exchange for their contribution of the HCP Preferred to HCLP. Beginning one year
after the closing of the Offering, the Principals will have the rights to cause
their partnership units to be redeemed for cash or, at the election of HCHI,
exchanged for shares of Common Stock of HCHI of equivalent value. HCHI's
percentage ownership of HCLP will increase by the percentage of ownership
represented by any partnership units it acquires from the Principals in exchange
for shares of HCHI Common Stock.
It is anticipated that, for as long as HCLP remains in existence, HCHI will
receive substantially all of its revenue in the form of distributions from HCLP
out of 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
tax that HCHI must pay because it fails to qualify as a REIT. See "Federal
Income Tax Considerations -- Requirements for Qualification as a REIT" and
"-- Taxation of HCHI." While tax payments that HCHI is required to make may
impede the vesting of the Earn-Out and reduce the value of the Common Stock that
the Principals may receive upon exercising their redemption/exchange rights, the
amounts distributable to the Principals as limited partners of HCLP may not be
adversely affected by taxes that HCHI must pay. See "Risk Factors -- Principals'
Conflicts of Interest" and "The Partnership Agreement -- Economic Participation
by Units."
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 and HCLP. HCP will conduct the Due Diligence
Operations and will support HCLP'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 HCLP. HCS
will facilitate the Company's trading activities by acting as a broker/dealer.
See "Risk Factors -- Principals' Conflicts of Interest."
HCLP will own all of the HCP Preferred but will generally have no right to
participate in the operations and the affairs of HCP, HCMC and HCS (other than
to approve certain fundamental transactions such as
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<PAGE> 10
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 generally control the operations and
affairs of HCP, HCMC and HCS. See "Structure and Formation Transactions." This
ownership structure is required because HCHI will be deemed for tax purposes to
own its proportionate share of the assets of HCLP and because, as a REIT, it
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.
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 HCLP and the Principals in proportion to the numbers of shares
held by them (so that, initially, each dividend distribution will be made 97% to
HCLP and 3% to the Principals). As the holder of the HCP Preferred, however,
HCLP will have the right to receive $10,000,000 ($12,500,000 if the Earn-Out
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 only a 3% economic interest in 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 or HCLP. See "Structure
and Formation Transactions -- The Formation of HCHI and HCLP -- Benefits to the
Principals" and "Certain Transactions -- The HCP Shareholders' Agreement."
The contributed assets and liabilities of the predecessor business will be
recorded at their respective net book values based on historical cost at the
date of contribution ($675,262 as of March 31, 1997) in conjunction with the
issuance of 16.39% of the initially outstanding partnership units of HCLP to the
Principals. Under the Earn-Out, additional partnership units of HCLP may be
issued to the Principals representing up to 3.3% of the outstanding partnership
units. The additional partnership units will have no recorded book value.
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
([ ] and [ ]) were formed with
institutional investors ([ ], in the case of
[ ]; [ ] and [ ], a
subsidiary of [ ], in the case of [ ]) to
engage in mortgage loan trading activities, with HCP acting as manager entitled
to receive up to 50% of profits depending upon performance. The third entity
([ ]) was formed with [ ], 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 has 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 [ ] 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 [ ] and
[ ], it will distribute to the Principals before the closing
of the Offering its rights to any receivables from those entities arising
between March 31, 1997 and the closing of the Offering. HCP has also separately
managed assets for [ ], 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 March 31,
1997 and the closing of the Offering under its management contract with
[ ].
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
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of 49% and 75%, respectively, in two inactive corporations, and (iii) interests
of various percentages in four active limited liability companies and one
inactive limited liability company.
The following shall constitute the Formation Transactions (all but the last
of which will occur prior to or concurrently with the closing of the Offering):
- HCHI and HCLP have been formed as a Maryland corporation and a
Delaware limited partnership, respectively.
- HCP will 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 ([ ]
and [ ]) and as sole asset manager to
[ ], 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 March 31, 1997 and the closing of the Offering from these
investment entities. See "Structure and Formation
Transactions -- The Formation of HCHI and HCLP -- Benefits to the
Principals."
- HCHI will sell 3,400,000 Units in the Offering.
- HCHI will be the sole general partner of HCLP and will contribute
the net proceeds of the Offering to HCLP. At the same time, the
Principals will contribute the HCP Preferred to HCLP as the limited
partners of HCLP.
- HCP will complete the termination of (or the disposition of its
interests in) [ ], [ ] 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.
For additional information regarding the Formation Transactions, see "Structure
and Formation Transactions." Immediately after the consummation of the Formation
Transactions, (i) the Company will be comprised of HCHI, HCLP, HCP, HCMC and
HCS, (ii) the purchasers of Units in the Offering will own all of the Common
Stock (and all of the Warrants, except for the Representatives' Warrants), (iii)
HCHI will be the sole general partner of and own 83.61% of the partnership units
of HCLP, (iv) the Principals will be the limited partners of and own 16.39% of
the partnership units of HCLP, (v) HCLP will own all of the HCP Preferred, (vi)
the Principals will own all of the HCP Common, and (vii) HCMC and HCS will be
wholly owned subsidiaries of HCP. The percentage of the partnership units of
HCLP owned by the Principals may increase to up to 19.69%, subject to dilution
by other issuances of interests in HCLP, if the Earn-Out vests. The partnership
units of HCLP received by the Principals (including the Earn-Out) represent the
consideration given to the Principals in exchange for the contribution of the
HCP Preferred to HCLP. Pursuant to the partnership agreement governing HCLP (the
"Partnership Agreement"), the Principals will have certain rights to cause their
partnership units of HCLP to be redeemed for cash or, at the election of HCHI,
exchanged for shares of Common Stock of equivalent value beginning one year
after the closing of the Offering. The Principals' percentage ownership interest
in the Company may be further increased as a result of their participation in
the 1997 Stock Option Plan and the Bonus Incentive Compensation Plan. See
"Management -- 1997 Stock Option Plan;" and "-- Bonus Incentive Compensation
Plan."
In connection with the contribution by the Principals of the HCP Preferred
to HCLP, no third-party appraisals or fairness opinions have been or will be
obtained. There can be no assurance that the value of the partnership units of
HCLP received by the Principals will be equivalent to the fair market value of
the HCP Preferred contributed by them to HCLP. See "Risk Factors -- Benefits to
the Principals" and "-- Absence of Independent Valuation for Allocation of
Equity Interests in HCLP and HCHI;" "Structure and Formation
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Transactions -- The Formation of HCHI and HCLP -- Determination and Valuation of
Ownership Interests."
Benefits to Insiders; Conflicts of Interest. 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
[ ] and [ ] and as asset
manager to [ ], 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 March 31, 1997 and the consummation of the Offering from
these investment entities. See "Structure and Formation
Transactions -- The Formation of HCHI and HCLP -- Benefits to the
Principals."
- The Principals will receive in exchange for the HCP Preferred (i)
16.39% of the initially outstanding partnership units of HCLP (with
a total value of $10,000,000 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 partnership units of HCLP
increasing their percentage of the partnership units of HCLP to up
to 19.69%, subject to dilution by other issuances of interests in
HCLP. In addition, the Principals will have certain rights to cause
their partnership units of HCLP to be redeemed for cash or, at the
election of HCHI, exchanged for shares of Common Stock of equivalent
value beginning one year after the closing of the Offering. The
terms of the agreements by which the Principals will acquire their
partnership units of HCLP 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 holders of partnership units of HCLP. As the
limited partners of HCLP, the Principals may prevent HCHI from
dissolving HCLP for as long as limited partners own at least 2% of
the outstanding partnership units of HCLP. The amounts distributable
to the Principals by HCLP may not be adversely affected by any taxes
that HCHI must pay. Accordingly, the Principals may lack some of the
disincentives they would have as stockholders of HCHI to cause the
Company to engage in activities that subject HCHI to tax. See "Risk
Factors -- Benefits to the Principals;" "The Partnership
Agreement -- Economic Participation by Units" and
"Management -- 1997 Stock Option Plan." At March 31, 1997, the book
value of the HCP Preferred to be contributed to HCLP by the
Principals was $675,262. The value of the benefits to be received by
the Principals in exchange for the HCP Preferred may equal
$12,500,000 if the Earn-Out fully vests (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) based upon an assumed issue
price of the Common Stock in the Offering of $15.00 per share.
- Subject to lender approval, John A. Burchett will be released from
his personal guarantee of indebtedness of HCP which equaled
$1,425,000 as of March 31, 1997. See "Risk Factors -- Benefits to
the Principals" and "Structure and Formation Transactions -- The
Formation of HCHI and HCLP -- Benefits to the Principals."
- The Principals will serve as directors and officers of HCHI for
which they will receive aggregate 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."
- 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 and affairs of HCP, HCMC and HCS. Shares of HCP Common
held by a Principal may be repurchased, at a price based upon the
initial $10,000,000 valuation of the HCP Preferred (subject to
subsequent valuation adjustments) if, among other things, the
Principal ceases to be employed by the Company or to own an interest
in HCHI or HCLP. See "Structure
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and Formation Transactions -- The Formation of HCHI and
HCLP -- Benefits to the Principals" and "Certain Transactions -- The
HCP Shareholders' Agreement."
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;" "The Partnership
Agreement -- Redemption/Exchange Rights" and "Certain Transactions."
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 contributions of
the Principals, each of whom would be difficult to replace.
- 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.
- 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 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 HCHI will acquire its general
partnership interest in HCLP and such individuals will acquire their
limited partner interests in HCLP.
- The Principals will realize material benefits in connection with the
Formation Transactions.
- Although HCP and HCMC have conducted operations since 1989 and 1992,
respectively, HCHI and HCLP are newly formed entities. In light of
its recent formation and limited operating experience as a REIT, the
Company may lack the ability to effectively manage its operations
and planned growth. The success of the Company will depend on the
diligence and skill of its officers and employees, who have no prior
experience in managing a REIT.
- The failure of a public market to develop or be sustained for the
Units, the Common Stock or the Warrants may occur.
- The Company may experience difficulty in acquiring Mortgage Assets
at favorable spreads relative to borrowing costs in an environment
of increasing competition.
- 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.
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- The investment and financing policies of the Company and its
policies with respect to certain other activities, including growth,
debt capitalization, distributions, REIT status and operating
policies, will be determined by the Board of Directors.
- There can be no assurance that the initial public offering price of
the Units reflects the fair market value of the interest in the
Company represented by the Units.
- 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 OFFERING
<TABLE>
<S> <C>
Units Offered by the Company(1)(2)................................................. 3,400,000
Units to be Outstanding after the closing of the Offering(2)....................... 3,400,000
Common Stock to be Outstanding after the closing of the Offering(2)(3)(4).......... 4,066,667
Common Stock Purchase Warrants to be Outstanding after the closing of the
Offering(2)(5)..................................................................... 3,502,000
Common Stock Options to be Outstanding after the Offering.......................... 325,333
Use of Proceeds...................................... To provide funding for the Investment
Portfolio and Due Diligence Operations
and for general corporate purposes.
Proposed Nasdaq Symbol
For the Units....................................................................... HCMHU
For the Common Stock................................................................ HCMH
For the Warrants.................................................................... HCMHW
</TABLE>
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(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 510,000 Units to cover over-allotments is not exercised. See
"Underwriting."
(3) Includes 666,667 shares of Common Stock that may be issued to the Principals
in connection with the exchange of their partnership units of HCLP. See "The
Partnership Agreement -- Redemption/Exchange Rights."
(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) 102,000
shares (117,300 if the Underwriters' over-allotment option is exercised) of
Common Stock reserved for issuance upon the exercise of the Representatives'
Warrants, (iv) 166,667 shares of Common Stock that may be issued to the
Principals in connection with the exchange of contingent partnership units
of HCLP 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" and "Structure and Formation Transactions."
(5) Exercisable at the initial public offering price. Includes the
Representatives' Warrants. The Warrants included with the Units are not
detachable until six months after the closing of the Offering.
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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 contributions 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-compete 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 LIMITED OPERATING HISTORY
Although HCP and HCMC have conducted operations since 1989 and 1992,
respectively, HCHI and HCLP are newly formed entities. The success of the
Company will depend on the diligence and skill of its officers and employees.
Although the Principals have extensive experience in the mortgage finance
business, the Principals have no prior experience in managing a REIT. See
"Management -- Directors and Executive Officers." The Company has not purchased
or committed to purchase any Mortgage Assets. 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 consummation of the
Formation Transactions, HCP is not able to divest itself of all of its interests
in [ ] and [ ] and divest itself as sole
asset manager to [ ], HCP will distribute to the Principals
its rights to any receivables arising between March 31, 1997 and the closing of
the Offering from these investment entities. In the consummation of the
Formation Transactions and the closing of the Offering, (i) the Principals will
receive, in exchange for the HCP Preferred, 16.39% of the initially outstanding
partnership units of HCLP (with a total value of $10,000,000 based on an assumed
price of the Common Stock in the Offering of $15.00 per share) and (ii) subject
to lender approval, John A. Burchett will be released from his personal
guarantee of indebtedness of HCP, which equaled $1,425,000 as of March 31, 1997.
After the consummation of the Formation Transactions and the closing of the
Offering, as additional consideration for the contribution of the HCP Preferred
by the Principals to HCLP, if the Earn-Out partially or fully vests, additional
partnership units of HCLP may be issued to the Principals, increasing their
percentage of the partnership units of HCLP to up to 19.69%, subject to dilution
by other issuances of interests in HCLP. In addition, beginning one year after
the closing of the Offering, the Principals will have certain rights to cause
their partnership units of HCLP to be
14
<PAGE> 16
redeemed for cash or, at the election of HCHI, exchanged for shares of Common
Stock of equivalent value. The Principals will serve as directors and officers
of the Company, for which they will 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;" "The Partnership
Agreement -- Redemption/Exchange Rights;" "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 HCLP AND
HCHI
The capitalization of HCHI and the allocation of partnership units of HCLP
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 or HCLP. No third-party
appraisals or fairness opinions have been or will be obtained in connection with
the contributions of the HCP Preferred to HCLP. The equity interests in HCLP
allocated to HCHI in respect of the shares of Common Stock to be held by the
public were determined based upon discussions between the Principals and the
Representatives. See "Structure and Formation Transactions" and "Underwriting."
Accordingly, there can be no assurance that the initial public offering price of
the Units to the public in the Offering reflects the fair market value of the
interest of the purchasers of Units in the Offering in the business of the
Company.
PRINCIPALS' CONFLICTS OF INTEREST
The terms of the agreements pursuant to which HCHI and the Principals will
acquire their partnership units of HCLP 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 and HCLP -- Determination and Valuation of Ownership Interests." Certain
aspects of the businesses of the Company are 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 HCLP. After the closing of the
Offering and the consummation of the Formation Transactions, the Principals will
own all of the voting common stock of HCP, and HCLP will own all of the
non-voting HCP Preferred. As the holder of the HCP Preferred, HCLP will receive
97% of the dividend distributions generated by the operations of HCP, HCMC and
HCS (and will have a liquidation preference that will initially equal
$10,000,000 and that may increase to $12,500,000 if the Earn-Out fully vests).
However, since HCLP is an operating company and not a passive entity, HCLP'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 HCLP. 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, HCLP, 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 limited partner interests or shares
of Common Stock. In addition, there can be no assurance that the post-Formation
Transactions relationship
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between HCHI and HCLP, 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.
It is anticipated that, for as long as HCLP remains in existence, HCHI will
receive substantially all of its cash receipts in the form of distributions from
HCLP out of the 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 any taxes 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." The amounts distributable to the Principals in their capacities as
limited partners of HCLP may not be adversely affected by any taxes that HCHI
must pay. Accordingly, the Principals may lack some of the disincentives they
would have as stockholders of HCHI to cause the Company to engage in activities
that subject HCHI to tax.
IMMEDIATE AND SUBSTANTIAL DILUTION
After giving effect to the Formation Transactions and assuming no exercise
of the Warrants, purchasers of the Units in the Offering will experience
immediate dilution of approximately $2.29 per share of Common Stock. In the
event that the Principals receive 166,667 shares of Common Stock that may be
issued to them in exchange for partnership units of HCLP received under the
Earn-Out, purchasers of the Units in the Offering would experience further
dilution of approximately $.50 per share of Common Stock. See "Dilution."
MORTGAGE ASSETS WITH POOR DOCUMENTATION AND POOR PAYMENT HISTORIES
The Company plans to invest in non-conforming Single-Family Mortgage Loans.
Single-Family Mortgage Loans that are missing collateral 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 inadequate
property valuation. Such loans also risk exposure to consumer protection relief
in the event of a loss of disclosure documents which limit the ability 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 Mortgage
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 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 greater risk of loss
than single-family mortgage lending, in part because it typically involves
larger 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
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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 non-recourse 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 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 improvement, 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 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 release to another tenant or may become functionally obsolete relative to
newer industrial properties.
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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 Mortgage Loan, thus
decreasing the volume of Mortgage Loans. 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."
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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.
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 loan to convert to a
fixed-rate 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."
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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 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
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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 98%, 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 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 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
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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 committed to 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 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
22
<PAGE> 24
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
other financial institutions, including, but not limited to, banks and
investment banks. Many of the institutions with which the Company will compete
in this operation 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 complexity of these qualification requirements is greater in
the case of a REIT that holds its assets in partnership form. The REIT election
will cover only HCHI and not any of the Company's taxable affiliates, including
HCP, HCMC and HCS, which will be subject to Federal income tax. See "Federal
Income Tax Considerations -- Requirements for Qualification as a REIT."
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 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."
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
23
<PAGE> 25
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 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."
FAILURE OF HCLP TO QUALIFY AS A PARTNERSHIP FOR FEDERAL INCOME TAX PURPOSES
The Company will receive an opinion of Morse, Barnes-Brown & Pendleton,
P.C., counsel to the Company, to the effect that HCLP is properly treated as a
partnership for Federal income tax purposes. If the IRS were to successfully
challenge the tax status of HCLP as a partnership for Federal income tax
purposes, HCLP would be taxable as a corporation. In such event, the character
of the Company's assets and income would change, which would preclude the
Company from qualifying as a REIT. The imposition of a corporate tax on HCLP
would reduce the amount of funds available for distribution to the Company and
its stockholders. See "Federal Income Tax Considerations -- Tax Aspects of
HCHI's Investment in HCLP."
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 Nasdaq National Market to list the Units, the Warrants and
the Common Stock.
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
24
<PAGE> 26
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.
Exchange of Limited Partner Interests. The Principals will have the right
to cause their partnership units of HCLP to be redeemed for cash or, at the
Company's option, to be exchanged for Common Stock beginning one year after the
closing of the Offering based upon a formula tied to the market value of the
Common Stock. The issuance of any substantial block of Common Stock to the
Principals could have a negative effect on the trading price of the Common
Stock. See "The Partnership Agreement -- Redemption/ Exchange Rights."
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 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 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.
25
<PAGE> 27
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 3,400,000 shares of Common Stock offered hereby
will be immediately eligible for sale in the public market without restriction
beginning on the date of this Prospectus. The 666,667 shares of Common Stock
that may be issued to the Principals in exchange for partnership units of HCLP
and the 166,667 shares of Common Stock that may be issued to the Principals in
connection with the exchange of contingent partnership units issued 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, they will not sell, contract to sell or
otherwise dispose of any 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 of the initial public offering price pursuant to the Company's
1997 Stock Option Plan, (ii) 3,400,000 shares of Common Stock may be issued upon
the exercise of the Warrants, and (iii) up to 117,300 shares of Common Stock may
be issued upon exercise of the Representatives' Warrants. See "Underwriting."
The Principals have registration rights for the Common Stock into which their
partnership units of HCLP may be exchanged and, accordingly, will have the
ability to exercise such rights and sell their Common Stock, in the event that
their partnership units of HCLP are exchanged, free of the Rule 144 volume
limitation after the one-year lock-up period expires. See "Shares Eligible for
Future Sale -- Registration Rights."
26
<PAGE> 28
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. In addition, pursuant to
the Partnership Agreement, the Principals will have certain rights to cause
their limited partner interests in HCLP to be redeemed for cash or, at the
election of the Company, exchanged for shares of Common Stock of equivalent
value beginning one year after 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;" "Description of
Securities;" and "The Partnership Agreement -- Redemption/Exchange Rights."
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
$46,780,000 (or $53,894,500 if the Underwriters' over-allotment option is
exercised in full), assuming an offering price of $15.00 per Unit.
Contemporaneously with the contribution of the HCP Preferred to HCLP at the
closing of the Offering, the Company will contribute the net proceeds of the
Offering to HCLP in exchange for 83.61% of the initially outstanding partnership
units of HCLP. See "Structure and Formation Transactions." It is expected that
approximately 94% and 5% of such proceeds will be used to provide funding for
the Investment Portfolio and the Due Diligence Operations, respectively. The
balance of such 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. Since the Company will own its interests
in HCP, HCMC and HCS through HCLP, cash from the operations of HCP, HCMC and HCS
will flow to the Company through HCLP. To the extent consistent with the
Company's qualification as a REIT, HCLP, HCP, HCMC and HCS will make quarterly
distributions to the Company. Since HCP, HCMC and HCS will not be covered by the
REIT election, dividend distributions made by HCP, HCMC and HCS will not be
deductible by them for Federal income tax purposes.
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<PAGE> 30
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 and assuming no exercise
of the Warrants, the pro forma net tangible book value of the Company would
increase by $675,262 assuming the Principals exchanged their partnership units
of HCLP for 666,667 shares of Common Stock. The Formation Transactions represent
an immediate dilution of $2.29 per share of Common Stock.
The net tangible book value per share of Common Stock could potentially be
further diluted by $.50 per share of Common Stock upon the issuance by the
Company of 166,667 shares of Common Stock that may be issued to the Principals
in connection with the exchange of contingent partnership units of HCLP that may
be issued if the Earn-Out vests. See "The Partnership Agreement -- Economic
Participation by Units."
<TABLE>
<CAPTION>
OFFERING
---------------
<S> <C> <C>
Assumed Initial Public Offering Price per Unit............................... $15.00
Dilution per share of Common Stock attributable to the Formation
Transactions(1)............................................................ (2.29)
Potential dilution per share of Common Stock attributable to the Formation
Transactions(2)............................................................ (.50)
Fully diluted value per Unit............................................ $12.21
</TABLE>
- ---------------
(1) Assumes the issuance by the Company of 666,667 shares of Common Stock in
connection with the exchange of partnership units of HCLP.
(2) Assumes the issuance by the Company of 166,667 shares of Common Stock that
may be issued to the Principals in connection with the exchange of
contingent partnership units of HCLP that may be issued if the Earn-Out
vests.
The following table summarizes on a pro forma basis as of June 13, 1997 the
differences between the total consideration paid and the average price per share
of Common Stock paid by the Principals prior to the closing of the Offering and
by the new investors in the Offering with respect to the Units purchased from
the Company, assuming no exercise of the Warrants:
<TABLE>
<CAPTION>
SHARES OF THE COMPANY TOTAL CONSIDERATION AVERAGE PRICE
--------------------- ---------------------- ------------------------
OFFERING NUMBER PERCENT AMOUNT(3) PERCENT PER SHARE OF THE COMPANY
-------- --------- ------- ---------- ------- ------------------------
<S> <C> <C> <C> <C> <C>
Principals......... 666,667(1) 16.39% 675,262 1.31% $ 1.01
166,667(2) 3.30% 0 0% $0.00
--------- ------ ---------- ------
833,334 19.69% 675,262 1.31%
New Investors...... 3,400,000 80.31% 51,000,000 98.69% $15.00
--------- ------ ---------- ------
Total.... 4,233,334 100.00% 51,675,262 100.00%
========= ====== ========== ======
</TABLE>
- ---------------
(1) Assumes the issuance by the Company of 666,667 shares of Common Stock in
connection with the exchange of partnership units of HCLP.
(2) Assumes the issuance by the Company of 166,667 shares of Common Stock that
may be issued to the Principals in connection with the exchange of
contingent partnership units of HCLP that may be issued if the Earn-Out
vests.
(3) For Principals, the book value of their contribution is used; for new
investors, their cash contribution is used.
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<PAGE> 32
CAPITALIZATION
The capitalization of the Company (i) as of July 31, 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 (iii) as adjusted to reflect
certain shares of Common Stock that may be issued to the Principals and other
employees of the Company 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, 3,400,000 and 4,558,667 shares as
adjusted, respectively.......................... -0- $ 34 $ 46
---- ------- -------
Additional paid-in capital......................... -0- $46,746 $52,289
---- ------- -------
Total Capitalization............................... $-0- $46,780 $52,335
==== ======= =======
</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 510,000 Units and
assuming no exercise of the Warrants.
(2) Includes (i) 666,667 shares of Common Stock that may be issued to the
Principals in connection with the exchange of their partnership units of
HCLP for an assumed net tangible book value of $675,262 (as of March 31,
1997); (ii) 166,667 shares of Common Stock that may be issued to the
Principals in connection with the exchange of contingent partnership units
of HCLP that may be issued 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 and HCLP." See "Management -- 1997 Stock Option Plan."
31
<PAGE> 33
HANOVER CAPITAL MORTGAGE HOLDINGS, INC. AND SUBSIDIARY
PRO FORMA CONSOLIDATING FINANCIAL DATA
The following pro forma consolidating balance sheet has been prepared based
on the historical audited June 30, 1997 balance sheet of HCHI. The unaudited pro
forma consolidating 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 consolidating income statement has been
prepared because HCHI has no operating history. Upon completion of the Formation
Transactions, HCHI intends to invest, through HCLP, on a leveraged basis,
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 through HCLP, 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 consolidating 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. HCLP is a recently formed Delaware limited partnership. HCP is a New
York corporation, established in 1989. HCHI will account for its investment in
HCP through HCLP on the equity method of accounting.
32
<PAGE> 34
HANOVER CAPITAL MORTGAGE HOLDINGS, INC. AND SUBSIDIARY
PRO FORMA CONSOLIDATING BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
AT JUNE 30, 1997 (INCEPTION)
----------------------------------------------------------------------------------
[1] [2]
INCREASE INCREASE PRO FORMA
HISTORICAL (DECREASE) (DECREASE) [3] --------------
-------------- -------------- --------------- INCREASE HANOVER
HANOVER HANOVER HANOVER (DECREASE) CAPITAL
CAPITAL CAPITAL CAPITAL ------------- MORTGAGE
MORTGAGE MORTGAGE MORTGAGE CONSOLIDATION HOLDINGS, INC.
HOLDINGS, INC. HOLDINGS, INC. HOLDINGS, L.P. ELIMINATIONS AND SUBSIDIARY
-------------- -------------- --------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash.......................... $150 $ (150) $46,780,000 $ 46,780,000
Investment in Hanover Capital
Mortgage Holdings, L.P. .... 46,780,000 (46,780,000)
Investment in Hanover Capital
Partners, Ltd. ............. 675,282 675,282
---- ----------- ----------- ------------ -----------
TOTAL ASSETS.................. $150 $ 46,779,850 $47,455,282 $ (46,780,000) $ 47,455,282
==== =========== =========== ============ ===========
TOTAL LIABILITIES
AND EQUITY
Minority interest............. $ 675,282 $ 675,282
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 3,400,000
shares, historical, and
proforma, respectively...... -- 34,000 34,000
Additional paid-in capital.... $150 46,745,850 46,746,000
Capital Accounts
General partner............. 46,780,000 (46,780,000)
Limited partners............ 675,282 (675,282)
---- ----------- ----------- ------------ -----------
TOTAL LIABILITIES AND
EQUITY...................... $150 $ 46,779,850 $47,455,282 $ (46,780,000) $ 47,455,282
==== =========== =========== ============ ===========
</TABLE>
- ---------------
(1) Reflects, on the books of HCHI, the balance of the estimated net proceeds
($46,779,850) from the Offering assuming no exercise of the Underwriters'
overallotment option at a price of $15.00 per Unit.
Reflects, on the books of HCHI, HCHI's investment of the net proceeds
($46,780,000) of the Offering in HCLP. HCHI will be the sole general partner
of HCLP with an initial 83.61% ownership percentage.
(2) Reflects, on the books of HCLP, the Principals' investment in HCLP
consisting of the HCP Preferred, which represents 97% of the book value
($675,282) of HCP at the time of the Offering.
Reflects, on the books of HCLP, HCHI's contribution of the net proceeds
($46,780,000) of the Offering to HCLP.
(3) Normal consolidating elimination adjustments to reflect the accounting for
HCHI on a consolidated basis with its Subsidiary (HCLP). The investment in
HCP is reflected on the equity method of accounting.
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 three months ended March 31, 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 three months ended March 31,
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 three months ended March 31, 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>
THREE MONTHS ENDED
MARCH 31 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.................... $ 1,501 $ 1,875 $ 8,324 $ 7,526 $ 10,194 $ 3,853 $ 5,215
Loan brokerage/asset management fee... 302 218 2,469 1,771 659 -- --
Mortgage sales and servicing.......... 305 327 971 2,289 2,527 3,961 537
Other income.......................... 85 67 356 296 189 20 10
------- ---------- ------- ------- -------- ------- -------
Total revenues................. 2,193 2,487 12,120 11,882 13,569 7,834 5,762
------- ---------- ------- ------- -------- ------- -------
Expenses
Personnel expense..................... 1,002 1,041 4,227 3,832 4,002 3,538 1,436
Appraisal, inspection and other
professional fees................... 285 254 3,128 2,594 5,244 272 286
Subcontractor expense................. 512 848 2,920 2,739 2,171 1,851 2,320
Travel and subsistence................ 63 338 617 860 315 472 497
Occupancy expense..................... 125 152 537 438 415 256 155
General and administrative expense.... 108 127 525 1,066 1,162 1,025 681
Reversal of reserve for IRS
assessment.......................... -- -- (278) -- --
Interest expense...................... 22 24 134 160 102 64 61
Depreciation and amortization......... 32 34 126 114 84 50 39
------- ---------- ------- ------- -------- ------- -------
Total expenses................. 2,149 2,818 11,936 11,803 13,495 7,528 5,475
------- ---------- ------- ------- -------- ------- -------
Income before income taxes.............. 44 (331) 184 79 74 306 287
Income tax expense (benefit)............ 23 (126) 74 51 128 147 121
------- ---------- ------- ------- -------- ------- -------
Net income (loss)....................... $ 21 $ (205) $ 110 $ 28 $ (54) $ 159 $ 166
======= ========== ======= ======= ======== ======= =======
Net income (loss) per share............. $127.73 $(1,230.69) $658.74 $169.80 $(323.99) $954.47 $996.19
Dividends per share..................... $ -- $ -- $ -- $ -- $ -- $ -- $211.01
CONSOLIDATED BALANCE SHEET DATA
Cash and cash equivalents............... $ 161 $ 652 $ 162 $ 912 $ 300 $ 1,308 $ 536
Accounts receivable..................... 1,011 1,529 3,684 1,533 2,396 954 1,423
Accrued revenue on contracts in
progress.............................. 507 18 550 165 1,177 248 339
Receivables from related parties........ 765 256 629 230 252 1,192 88
------- ---------- ------- ------- -------- ------- -------
Total assets............................ 3,165 3,332 5,758 3,529 4,701 4,061 2,717
Note payable to bank.................... 1,425 1,185 1,045 1,375 1,500 950 930
Stockholders' equity.................... 695 353 675 667 639 693 534
</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")).
Neither HCHI nor HCLP is acquiring any operating assets from any predecessor
entities. HCLP 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 HCLP as described in "Formation and
Structure Transactions."
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
The net income in the first quarter of 1997 was $21,000 as compared to a
net loss of $205,000 in the same period in 1996. Income before income taxes was
$44,000 in the first quarter of 1997 as compared to a $331,000 loss before
income taxes recorded in the first quarter of 1996.
Total revenue in the first quarter of 1997 was $2,193,000, a decrease of
11.8% from the total revenues of $2,487,000 in the first quarter of 1996. This
decrease in total revenues was primarily a result of a decrease in due diligence
revenues totaling $374,000. 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 less labor intensive and
required less travel and lodging in the first quarter of 1997 as compared to the
first quarter of 1996. Accordingly, despite the decrease in revenues, the first
quarter 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 showed an increase from $233,000 in the first quarter of
1996 to $247,000 in the first quarter of 1997. HCP's current contract to provide
commercial due diligence for the FDIC has a termination date in June 1997.
Revenues from loan brokering/asset management fee operations were $302,000
in the first quarter of 1997 as compared to $218,000 in the first quarter of
1996, an increase of $84,000 or 38.5%. This increase resulted from an increase
in the asset management fee income recognition, which was $157,000 in the first
quarter of 1997 as compared to $0 in the first quarter of 1996. Asset management
fees are recognized by HCP, to the extent that HCP, as the sole asset manager
for [ ] and [ ], 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.
Mortgage sales and servicing revenues, conducted through HCMC, decreased by
$22,000 or 6.7% from $327,000 in the first quarter of 1996 to $305,000 in the
first quarter of 1997. Revenues generated by multifamily mortgage servicing
decreased by $41,000 while mortgage sales (including revenues generated by
mortgage originations, applications and gains on sale) increased by $19,000. The
decreased mortgage servicing
35
<PAGE> 37
revenues were a direct result of the decrease in Multifamily Mortgage Loans
serviced (average servicing portfolio of $127.1 million as of the quarter ended
March 31, 1997 compared to $274.2 million as of the quarter ended March 31,
1996). A portion of the increase in revenues from mortgage sales resulted from
the fees generated from originating Multifamily Mortgage Loans totaling $22.3
million in 1997 as compared to $16.9 million in 1996. During the first quarter
of 1996, HCMC added several Multifamily Mortgage Loans to its servicing
portfolio and recorded gains on sale of $33,000. No new loans have been 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 quarter of 1997 were $2,149,000 as compared to
$2,818,000 in the first quarter of 1996, a decrease of $669,000. With the
exception of expenses relating to appraisal, inspection and other professional
fees, all operating expense categories reflected decreases in the first quarter
of 1997 as compared to the first quarter of 1996. Expenses for appraisal,
inspection and other professional fees were $285,000 in the first quarter of
1997 as compared to $254,000 in the first quarter of 1996, an increase of
$31,000 or 12.2%. This increase resulted from the nature of due diligence
contract work performed in the first quarter of 1997 as compared to the first
quarter of 1996 (requiring more third-party appraisal work) and the extent of
professional fees required to close $22.3 million of Multifamily Mortgage Loans
in the first quarter of 1997.
The other expense categories reflected declines ranging from 3.7% for
personnel expenses to 81.4% for travel and subsistence expenses. The scope of
due diligence contract work performed in the first quarter 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 higher in
the first quarter of 1996 for subcontractor expense and travel and subsistence
expense. In addition, personnel expenses reflected bonuses equal to $70,000 in
the first quarter of 1996 and $2,000 in the first quarter of 1997. There were
minimal changes in the staffing levels of HCP and HCMC from March 31, 1996 to
March 31, 1997.
The 18.8% decrease in occupancy expense resulted primarily from the
decrease in rent expense in the first quarter of 1997 as compared to the first
quarter 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.
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 the sole
asset manager for [ ] and [ ]. 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
36
<PAGE> 38
capital before asset management fees (for all mortgage pools of
[ ] and [ ]) of 34.9% 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 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
37
<PAGE> 39
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 the sole asset manager for [ ] and
[ ].
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 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.
38
<PAGE> 40
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.
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.
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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 three months ended March 31, 1997 and the years ended December
31, 1996, 1995 and 1994, net cash provided by (used in) operating activities was
($366,000), ($283,000), $671,000, and ($1,837,000), respectively. Net cash for
the three months ended March 31, 1997, and 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. 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 [ ] and
[ ]. 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 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 three months
ended March 31, 1997, and the years ended December 31, 1996, 1995 and 1994 was
($15,000), $(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 three months ended March 31,
1997 and the year ended December 31, 1996 was negatively impacted primarily by
the purchase of fixed assets.
During the three months ended March 31, 1997, and the years ended December
31, 1996, 1995 and 1994, net cash provided by (used in) financing activities was
$380,000, ($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.
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During 1996, the Company also used $66,000 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 March 31, 1997 was
a $1,425,000 (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.
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 which will invest in Mortgage
Assets and continue the existing business of HCP. The Company's activities will
include (i) acquiring primarily Single-Family Mortgage Loans with documentation
or payment history deficiencies which cause the loans to be ineligible for sale
to government-sponsored agencies (referred to as "non-conforming "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 an existing network of
sales representatives targeting financial institutions throughout the United
States. The Company will originate Multifamily Mortgage Loans and Commercial
Mortgage Loans through its existing conduit, 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 nonconforming
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.
Management of the Company estimates that at least 95% of the Company's
gross income will be generated by its Investment Portfolio. The balance of the
Company's gross income, in the form of dividends from its taxable subsidiary,
HCP, is estimated to be less than 5%.
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 existing
wholesale Commercial, Multifamily and Single-family Mortgage Loan
acquisition network to create attractive investment opportunities;
- 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
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- 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 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 expertise and 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. While the Company has historically resold its
acquired Mortgage Loans at a gain, the Principals of the Company believe that
the Company will successfully make the transition to a long-term investment
strategy due to its significant experience in financing with repurchase
agreements, securitizing and hedging portfolios of Mortgage Assets.
Single-Family Mortgage Operations
The Company, through its predecessors, has been in the business of
acquiring, trading and securitizing seasoned (more than one year) Single-Family
Mortgage Loans since 1995 by employing sales representatives (currently six) to
focus on purchasing pools of Mortgage Loans from a national customer list of
banks, thrifts and other mortgage investors. The Company typically targets loan
pools containing non-conforming Single-Family Mortgage Loans. The Company does
not originate Single-Family Mortgage Loans. The Company has historically pursued
a strategy of correcting the deficiencies of these Single-Family Mortgage Loans
and subsequently selling the Single-Family Mortgage Loans at a profit. In the
past, the Company has conducted these activities as asset manager to a
subsidiary of a financial institution and two limited liability companies in
which institutional partners provided a majority of the equity capital and
earned a majority of the investment return. Since 1995, the investment entities
have purchased over $189 million in Single-Family Mortgage Loans and have, in
the aggregate, earned a return on equity of over 50% (before payment of asset
management fees to the Company) on Single-Family Mortgage Loans sold into the
marketplace. Historically, these returns on equity were generally earned through
a strategy of selling the Single-Family Mortgage Loans within eighteen months.
The Principals of the Company have the expertise in purchasing, servicing,
securitizing, hedging and selling Single-Family Mortgage Loans as described
herein. However, subsequent to the closing of the Offering, the Single-Family
Mortgage Loans will be owned through the REIT structure, and any return will be
realized over the life of the applicable Single-Family Mortgage Loan. The
Principals believe this investment strategy will most likely cause future
returns on equity to decline from historical levels.
Single-Family Acquisitions Process. The Company has and will continue to
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 sales force and management of the
Company have developed relationships with banks, finance companies, mortgage
companies and investment banks, which the Principals believe will be a
continuing source of information on available Single-Family Mortgage Loan
portfolios. The Company's customers are national, and the Company has contacts
with hundreds of financial institutions including over 70 out of the top 100
mortgage originators and servicers. The Principals have past experience in
purchasing Single-Family Mortgage Loan portfolios and securities dating back to
1983. The Company has sales representatives, who are employees of the Company,
located in Illinois, Minnesota, California, Massachusetts and New York. In
addition, the Company has a due diligence and underwriting staff, located in
Edison, New Jersey, consisting of approximately seven full-time employees. The
due diligence staff contributes 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
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providing additional information on loan pools through the Due Diligence
Operations, the Company is able to better assess the value of loan pools than in
the absence of such information. HCP, as asset manager for the three investment
entities discussed above, has historically bid for over $1 billion of
Single-Family Mortgage Loan products, has historically purchased over $189
million in Single-Family Mortgage Loans and has, in the aggregate historically,
earned a return on capital of over 50% through the sale of the Single-Family
Mortgage Loans into the marketplace. See "Risk Factors -- Risks Related to
Operations." The management team performed similar functions at Bankers Trust
and Citicorp. 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 average size of the Single-Family Mortgage Loan
portfolios acquired by the Company was $14 million for the first three months of
1997 and $9.3 million for the year ended December 31, 1996. The Principals of
the Company believe that the Company's funding flexibility, experienced
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 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
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 also reviews 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.
During the due diligence process, the Company often discovers
non-conforming elements of the 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.
The Company maintains an internal process to improve the value of the
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. However, there
are no assurances that the Principals will be able to do so in the future. The
Company will continue to utilize the same bidding, underwriting and clean up
processes. 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 after
financing or securitization, as opposed to recognizing a gain upon sale of the
Single-Family Mortgage Loan portfolio.
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Single-Family Market Trends. The market for Single-Family Mortgage Loans
is generally segregated by Single-Family Mortgage Loan maturity and quality. New
production (one year or less) mortgages may either be "A", "B", "C" or "D"
quality. Generally, the "A" quality paper is originated for the Agencies (FNMA
or FHLMC) or the conduits for jumbo (over $214,600) Single-Family Mortgage
Loans. The "B", "C" or "D" paper is originated for the subprime market and is
often securitized. The Single-Family Mortgage Loans over one year old ("Seasoned
Single-Family Mortgage Loans") are traded by the originators or subsequent
purchasers, including banks, thrifts, mortgage companies, insurance companies
and credit unions, and can range from accurately documented performing
Single-Family Mortgage Loans to document deficient/sub-performing Single-Family
Mortgage Loans. The Company focuses on (i) bulk purchases of "A" quality loans
that have fallen out of intended disposition strategies for certain reasons,
including payment history or document deficiencies ("Fallout Single-Family
Mortgage Loans"), and (ii) Seasoned Single-Family Mortgage Loans. The market for
new production "A" paper is highly competitive and the profit margins are very
tight, depending mostly on the servicing rights to recognize a gain. The new
production "B through D" market is higher yielding, but carries greater risk due
to the questionable creditworthiness of the borrowers.
The opportunities to acquire "non-conforming" Seasoned Single-Family
Mortgage Loans have been and continue to be expanded by two primary trends.
First, banks and thrifts are increasingly restructuring their balance sheets to
sell certain non-conforming Seasoned Single-Family Mortgage Loans which may have
some type of documentation problem. Second, mortgage bankers have expanded their
level of activity with respect to the sale of their Fallout Single-Family
Mortgage Loans.
Successful participation in the market for Fallout Single-Family Mortgage
Loans and Seasoned Single-Family Mortgage Loans depends upon experience in
numerous aspects of the Single-Family Mortgage Loan market, from originations
and servicing to trading and securitization. Successful participation requires
the ability to recognize value in these Single-Family Mortgage Loans and the
ability to cure the deficiencies and/or answer the questions that raise doubts
among investors. The Company's management believes that it has the expertise and
the experience necessary to aggregate these Single-Family Mortgage Loans for
securitization and optimize their value. Document deficiencies for Single-Family
Mortgage Loans include missing collateral documents, such as the original note,
mortgage, or title policy, or missing credit documents, such as the original
appraisal, application or disclosure documents, or both.
Single-Family Acquisition Strategy. The Company believes that through its
underwriting, due diligence, asset management and securitization work, 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 reviews 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.
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Single-Family Servicing. Pools of Single-Family Mortgage Loans are
purchased both with servicing retained and servicing released. In the cases of
pools purchased with servicing released, the Company places the servicing with a
qualified residential servicer. In the cases of pools purchased with servicing
retained, the Company considers reputation and review of 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."
Commercial Mortgage Loans and Multifamily Mortgage Loans
Since its inception in 1992, HCMC has originated over $500 million of
conduit eligible Multifamily Mortgage Loans and has sold Multifamily Mortgage
Loans to seven of the major "Wall Street" conduits. The majority of the
Multifamily Mortgage Loans were sold to issuers of commercial mortgage-backed
securities or investors for their portfolios. 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 operates 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. The Company 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 completely 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 maintains in Illinois, Minnesota,
California, Massachusetts and New York will concentrate primarily on sourcing
pools of Single-Family Mortgage Loans and selling the
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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 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 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, the Company's existing conduit
will retain the servicing rights on the Commercial Mortgage Loans and
Multifamily Mortgage Loans held in the Investment Portfolio. The Company's
existing conduit may also retain the servicing rights on loans originated and
sold to third party conduits. The Company's existing conduit, as servicer, will
have the risks associated with operating a mortgage servicing business as well
as the risk of ownership of the servicing.
At March 31, 1997, the Company serviced approximately $127 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.
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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 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.
An affiliate of the Company 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.
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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. 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.
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 is 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
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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.
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.
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
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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 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.
The Principals of the Company are experienced in the securitization 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
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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 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
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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's preliminary
CAG provides for the following levels of capital for the types of Mortgage
Assets indicated:
<TABLE>
<CAPTION>
EXPECTED
MINIMUM COMPANY'S
LENDER LIQUIDITY CAG EQUITY
ASSET CATEGORY HAIRCUT(1) CUSHION(2) REQUIRED(3)
----------------------------------------- ---------- ---------- ------------
<S> <C> <C> <C>
AAA -- Agency............................ 2% 5% 7%
AAA -- Private........................... 3% 5% 8%
AA....................................... 5% 5% 10%
A........................................ 15% 5% 20%
BBB...................................... 15% 5% 20%
BB....................................... 15% 5% 20%
B........................................ 15% 5% 20%
Other Mtg.(NR)........................... 15% 5% 20%
</TABLE>
- ---------------
(1) 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. On the other extreme, "B"
rated securities and securities not registered with the Commission are
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.
(2) COMPANY'S LIQUIDITY CUSHION -- the additional equity, 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.
(3) CAG EQUITY REQUIRED -- the sum of the Minimum Lender Haircut and the
Company's Liquidity Cushion.
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
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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
Like that of most portfolio investors, the Company's portfolio income is
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 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 the
Company's existing conduit to underwriting standards established by the Company.
These underwriting standards reflect the experience of the conduit in its past
originations of over $500 million for other conduits 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 the Company's conduit, a
separate credit sign-off will be required before Commercial Mortgage Loans are
transferred to the Investment Portfolio from the Company's conduit. The Mortgage
Loans will be monitored after inclusion in the Mortgage Assets by the servicing
department of the Company's conduit. 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 with significant
experience in evaluating 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
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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 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's
primary interest rate risk will be with respect to Mortgage Assets financed with
reverse repurchase agreements and Mortgage Loans held prior to securitization.
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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 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 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 severely
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.
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<PAGE> 58
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 primarily
through HCLP. HCP will continue to conduct the Due Diligence Operations and, in
addition, will support HCLP's acquisition and investment activities by providing
due diligence services to HCLP. HCMC will originate, sell and service
Multifamily Mortgage Loans and Commercial Mortgage Loans and, in addition, will
support HCLP's acquisition and investment activities by serving as a source of
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 be the sole general partner, and the Principals will be the
limited partners, of HCLP. As limited partners of HCLP, the Principals will have
the right to cause their partnership units to be redeemed for cash or, at the
Company's option, exchanged for Common Stock. HCLP 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.
The Company has significant experience in the management of servicing
operations and in the valuation of servicing rights.
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
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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.
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.
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In addition to the executive offices, the Company's operations are 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 July 1997 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 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
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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 to pay any amount that is agreed or determined to
be due. HCP has recently received a settlement offer from the IRS for
approximately $122,000. 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
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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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..................... 54 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.................... 43 Senior Vice President, Chief Financial
Officer, Treasurer and Assistant
Secretary
Julia Curran......................... 35 Senior Vice President
James C. Strickler................... 40 Senior Vice President
TBD.................................. Director
TBD.................................. Director
TBD.................................. Director
</TABLE>
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. Mr. Burchett estimates that, during his
tenure, Citicorp bought and sold over $9 billion in Mortgage Loans and private
label mortgage-backed securities. He believes that much of that volume was
through the Citimae mortgage conduit, a single-family residential mortgage
conduit created during his tenure. The remainder of the volume was in the
trading of mortgage whole loan portfolios which were not readily securitizable.
Also during that period, Mr. Burchett estimates that Citimae issued
approximately $6 billion in 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. At HCP, Ms. Tavares has valued, purchased and
re-sold through a six member sales force a wide variety of whole loans on behalf
of two limited liability companies formed by HCP to provide capital for its
trading activities. Ms. Tavares has purchased a wide variety of performing and
semi-performing pools of primarily Single-Family Mortgage Loans ranging from
heterogene-
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ous 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 Wall Street firms and some regional banks who 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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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.
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 three 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 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
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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.
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.
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(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 employees 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. This Bonus Incentive Compensation Plan
will accrue bonuses quarterly and award bonuses annually to those employees out
of a total pool based upon quarterly net income before Bonus Incentive
Compensation as follows:
<TABLE>
<CAPTION>
MULTIPLIED
BROE(1) IN EXCESS OF BASE BROE(2) BY: BONUS % BY
---------------------------------------------- ------- ----------
<S> <C> <C>
Zero or less.................................. 0% Bonus Base(4)
Zero to 6%.................................... 12.00% Bonus Base(4)
Greater than 6%............................... 15.00% Bonus Base(4)
</TABLE>
- ---------------
(1) "BROE" means bonus return on equity and is determined on a calendar quarter
basis by dividing (a) the Company's quarterly Net Income before Bonus
Incentive Compensation multiplied by a factor of four (4), by (b) the
Average Net Worth for the same calendar quarter. 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 quarterly average of the end of the month Ten-Year U.S.
Treasury Rate, plus 4.0%.
(3) "Average Net Worth" is the quarterly 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 calendar quarter.
(4) "Bonus Base" is equal to (a) the Quarterly Net Income before Bonus Incentive
Compensation minus (b) (i) the Average Net Worth multiplied by (ii) the Base
BROE divided by (iii) four.
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 preceding year.
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
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<PAGE> 68
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 two consecutive
weeks 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 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 are intended to result
in the material personal enrichment of the executive officer at the expense of
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 six months 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
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<PAGE> 69
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.
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.
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<PAGE> 70
Contingent Options. All stock options granted by the Compensation
Committee pursuant to the 1997 Stock Option Plan will be contingent and will
vest, subject to other vesting requirements imposed by the Compensation
Committee, according to the following schedule. One-third of such stock options
will vest as of each of the first three Earn-Out Measuring Dates through which
the Total Return per Unit equals at least a 20% annualized return on the initial
public offering price. In addition, any unvested portion of such stock options
will vest as of any Earn-Out Measuring Date through which the Total Return per
Unit is at least equal to the initial public offering price. In determining
whether such stock options have vested, appropriate adjustments will be made for
stock splits, recapitalizations, stock dividends and transactions having similar
effects.
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<PAGE> 71
STRUCTURE AND FORMATION TRANSACTIONS
THE STRUCTURE OF THE COMPANY
The Company will conduct its operations through several entities. The
structure is designed primarily to (i) permit the Company to acquire the
ownership of a majority of the shares of stock in HCP and HCP's subsidiaries
while preserving the Company's qualification as a REIT, (ii) permit the
Principals to defer the tax liabilities they would incur if they contributed a
majority of the shares of stock in HCP and HCP's subsidiaries to the Company in
exchange for shares of Common Stock rather than partnership units of HCLP, and
(iii) 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" and " -- Tax Aspects of HCHI's Investment in HCLP."
HCLP
HCLP will acquire the Investment Portfolio using the net proceeds of the
Offering and the net proceeds of borrowings and securitizations. HCHI will be
the sole general partner of HCLP and, through its directors and officers, will
control the operations and affairs of HCLP. It is not anticipated that HCHI will
have significant amounts of assets other than its interest in HCLP. The
Principals will be the limited partners of HCLP. As limited partners, the
Principals will generally have no right to participate in HCLP's operations and
affairs. Under HCLP's partnership agreement (the "Partnership Agreement"),
however, the limited partners of HCLP may prevent the dissolution of HCLP by
HCHI for as long as they own at least 2% of the outstanding partnership units of
HCLP. In addition, the Principals will participate in the control of HCLP as
directors and officers of HCHI. See "Management -- Directors and Executive
Officers." It is anticipated that HCLP's assets will consist primarily of the
Investment Portfolio and the HCP Preferred.
The economic interests in HCLP will be expressed in terms of partnership
units, each of which will represent a fractional, undivided interest in HCLP's
distributions, profits and losses. Initially, HCHI will own 83.61% and the
Principals will own the other 16.39% of the partnership units of HCLP (entitling
them to 83.61% and 16.39%, respectively, of HCLP's distributions, profits and
losses). Additional partnership units will be issued to the Principals (giving
them 19.69% of the partnership units, subject to dilution by other issuances of
partnership units), if the Earn-Out fully vests. The vesting of the Earn-Out
depends upon the achievement of certain levels of Total Return per Unit through
September 30, 2002. See "The Partnership Agreement -- Economic Participation by
Units." The partnership units acquired by the Principals (including any
additional units to be issued upon the vesting of the Earn-Out) represent the
consideration given to the Principals in exchange for their contribution of the
HCP Preferred to HCLP. Beginning one year after the closing of the Offering, the
Principals will have rights to cause their partnership units to be redeemed for
cash or, at the election of HCHI, exchanged for shares of Common Stock of HCHI
of equivalent value. HCHI's percentage ownership of HCLP will increase by the
percentage of ownership represented by any partnership units it acquires from
the Principals in exchange for shares of HCHI Common Stock. The Principals may
also receive shares of Common Stock as a result of their participation in the
Company's 1997 Stock Option Plan and the Company's Bonus Incentive Compensation
Plan. See "Management -- Stock Option Plan" and " -- Bonus Incentive
Compensation Plan."
It is anticipated that, for as long as HCLP remains in existence, HCHI will
receive substantially all of its revenue in the form of distributions from HCLP
out of the 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 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." While tax payments that HCHI is required to make may impede the vesting
of the Earn-Out and depress the amount of cash and/or the value of the Common
Stock that the Principals may receive upon exercising their redemption/exchange
rights, the amounts distributable to the Principals as limited partners of HCLP
may not be adversely affected by taxes that HCHI must pay. See "Risk
Factors -- Principals' Conflicts of Interest" and "The Partnership
Agreement -- Economic Participation by Units."
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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 and HCLP. HCP will conduct the Due Diligence
Operations and will support HCLP'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 HCLP. HCS
will facilitate the Company's trading activities by acting as a broker/dealer.
HCLP 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 HCHI will be deemed for tax purposes to own its
proportionate share of the assets of HCLP and because, as a REIT, it 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. 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 HCLP and the
Principals in proportion to the numbers of shares held by them (so that,
initially, each dividend distribution will be made 97% to HCLP and 3% to the
Principals). As the holder of the HCP Preferred, however, HCLP will have the
right to receive $10,000,000 ($12,500,000 if the Earn-Out 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 only
a 3% economic interest in 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 or HCLP. See "-- The Formation of HCHI and HCLP -- Benefits to
the Principals" and "Certain Transactions -- The HCP Shareholders' Agreement.
THE FORMATION OF HCHI AND HCLP
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
([ ] and [ ]) were formed with
institutional investors ([ ], in the case of
[ ]; [ ] and [ ], Inc.,
a subsidiary of [ ], in the case of ABH-I LLC), to engage in
mortgage loan trading activities with HCP acting as sole 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 [ ], 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 [ ] 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 [ ] and
[ ], it will distribute to the Principals before the closing
of the Offering its rights to any receivables from those entities arising
between March 31, 1997 and the closing of the Offering. HCP has also separately
managed assets for [ ], 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
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<PAGE> 73
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 March 31,
1997 and the closing of the Offering under its management contract with
[ ]. 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.
Formation Transactions
The following Formation Transactions will be consummated prior to or on the
closing of the Offering (or, in the case of the completion of the termination of
[ ], [ ] and any other entities beside
HCMC and HCS in which it owns interests and that were not terminated before the
closing of the Offering, as soon as practicable after the close of the
Offering):
- HCHI and HCLP have been formed as a Maryland corporation and a
Delaware limited partnership, respectively.
- HCP will 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 and HCLP in exchange for any shares of HCP Common they
acquire).
- 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 ([ ] and [ ]) and as
sole asset manager to [ ] 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 March 31, 1997 and the closing of the Offering from these
investment entities. See "Structure and Formation
Transactions -- Benefits to the Principals."
- HCHI will sell 3,400,000 Units in the Offering.
- HCHI will be the sole general partner of HCLP and will contribute the
net proceeds of the Offering to HCLP. At the same time, the Principals
will contribute the HCP Preferred to HCLP as the limited partners of
HCLP.
- HCP will complete the wind down of (or the disposition of its
interests in) , 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.
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, HCLP, HCP, HCMC and HCS.
- The purchasers of Units in the Offering will own all of the equity
interests in HCHI (except for the Representatives' Warrants).
- HCHI will be the sole general partner of and own 83.61% of the
partnership units of HCLP.
- The Principals will be the limited partners of and own 16.39% of the
partnership units of HCLP. The percentage of the partnership units of
HCLP owned by the Principals may increase to up to 19.69%, subject to
dilution by the issuance of other interests in HCLP, if the Earn-Out
vests. See
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"The Partnership Agreement -- Economic Participation by Units;"
"Certain Transactions -- The HCP Shareholders' Agreement."
- HCLP will own all of the HCP Preferred (entitling HCLP 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.
Pursuant to the Partnership Agreement, the Principals will have certain
rights to cause their partnership units of HCLP to be redeemed for cash or, at
the election of HCHI, shares of Common Stock of equivalent value beginning one
year after the closing of the Offering. If all of the Principals were to
exchange their partnership units of HCLP for Common Stock immediately after the
closing of the Offering (notwithstanding the provision of the Partnership
Agreement that prohibits such redemption before one year after the closing of
the Offering), but subject to the Ownership Limit, (i) HCHI would own a 100%
interest in HCLP, and (ii) the Principals would own 16.39% of the Common Stock
(with rights to receive up to an additional 3.30% of the Common Stock, subject
to dilution by further issuances of Common Stock, if the Earn-Out vests). See
"The Partnership Agreement -- Redemption/Exchange Rights."
Determination and Valuation of Ownership Interests
The percentage interests of HCHI and the Principals in HCLP were determined
based upon negotiations between the Representative and the Principals. See
"Underwriting." Assuming the issuance of 3,400,000 Units in the Offering, HCHI
will initially hold 83.61% of the partnership units of HCLP, and the Principals
will initially hold 16.39% of the partnership units of HCLP. As additional
consideration for the contribution of the HCP Preferred by the Principals to
HCLP, the Principals may be issued additional partnership units of HCLP
(increasing the percentage of partnership units owned by them to up to 19.69%)
subject to dilution by other issuances of interests in HCLP, if the Earn-Out
partially or fully vests. See " -- The Structure of the Company;" "-- HCLP;"
"The Partnership Agreement -- Economic Participation by Units." If the
Underwriters' over-allotment option is exercised in full, HCHI will initially
hold 85.43% of the partnership units of HCLP, and the Principals will hold
14.57% of the partnership units of HCLP. These percentage interests will not be
affected by the initial public offering price.
In connection with the contribution of the HCP Preferred to HCLP, 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 or the determination of HCHI's percentage interest in HCLP. The
valuation of the Company and its components has been determined based solely
upon negotiations between the Representatives and the Principals. See
"Underwriting." Based on an assumed initial public offering price of the Common
Stock of $15.00 per share, the aggregate consideration to be paid by HCHI and
HCLP for the HCP Preferred consists of approximately $10,000,000 in partnership
units redeemable for cash or Common Stock (and may increase to approximately
$12,500,000 in partnership units redeemable for cash or Common Stock if the
Earn-Out vests. There can be no assurance that the value of the partnership
units received by the Principals in the Formation Transactions will be
equivalent to the fair market value of the HCP Preferred.
The contributed assets and liabilities of the predecessor business will be
recorded at their respective net book values based on historical cost at the
date of contribution ($675,282 as of March 31, 1997) in conjunction with the
issuance of 16.39% of the initially outstanding partnership units of HCLP to the
Principals. Upon the partial or full vesting of the Earn-Out, additional
partnership units of HCLP will be issued to the Principals representing up to
3.3% of the outstanding partnership units (taking into account the issuance of
such additional units). Such additional partnership units will have no recorded
book value.
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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 [ ] and [ ] and as
sole asset manager to [ ], 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 March 31, 1997 and the closing of the
Offering from these investment entities.
- The Principals will receive in exchange for the HCP Preferred (i)
16.39% of the initially outstanding partnership units of HCLP (with a
total value of $10,000,000 based on an assumed initial public offering
price of the Common Stock in the Offering of $15.00 per share) and
(ii) if the Earn-Out partially or fully vests, additional partnership
units of HCLP increasing their percentage of the partnership units of
HCLP to up to 19.69%, subject to dilution by other issuances of
interests in HCLP. In addition, the Principals will have certain
rights to cause their partnership units of HCLP to be redeemed for
cash or, at the election of HCHI, exchanged for shares of Common Stock
in the Company of equivalent value beginning one year after the
closing of the Offering. See "Risk Factors -- Benefits to the
Principals" and "The Partnership Agreement -- Economic Participation
by Units."
- Subject to lender approval, John A. Burchett will be released from his
personal guarantee of indebtedness of HCP which equaled $1,425,000 as
of March 31, 1997. See "Risk Factors -- Benefits 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."
- 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 initial $10,000,000 valuation
of the HCP Preferred subject to subsequent valuation adjustments if,
among other things, the Principal ceases to be employed by the Company
or to own an interest in HCHI or HCLP. See "Certain
Transactions -- the HCP Shareholders' Agreement."
See "Risk Factors -- Principals' Conflicts of Interest;" "The Partnership
Agreement -- Economic Participation by Units;" and " -- Redemption/Exchange
Rights" and "Certain Transactions."
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CERTAIN TRANSACTIONS
THE HCP SHAREHOLDERS' AGREEMENT
Upon the closing of the Offering, HCLP, 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, HCLP 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 or HCLP, (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 initial $10,000,000 valuation of the HCP
Preferred subject to subsequent valuation adjustments (including an increase in
valuation to up to $12,500,000 if the Earn-Out vests). To avoid the loss of
HCHI's REIT status, HCLP 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 and HCLP."
PARTNERSHIP AGREEMENT; REDEMPTION RIGHTS
The Company will enter into the Partnership Agreement with the Principals
upon the closing of the Offering. Among other things, the Partnership Agreement
provides that the limited partners have the right to require HCLP to redeem all
or any portion of their partnership units at any time beginning one year after
the closing of the Offering for cash or, at the election of the Company, shares
of Common Stock. See "The Partnership Agreement -- Redemption/Exchange Rights."
CONTINGENT LIMITED PARTNER INTERESTS IN HCLP
The Principals will be entitled to receive additional partnership units of
HCLP if the Earn-Out partially or fully vests. See "The Partnership
Agreement -- Economic Participation by Units."
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."
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THE PARTNERSHIP AGREEMENT
The following summary of the material provisions of the Partnership
Agreement, including the descriptions of certain provisions set forth elsewhere
in this Prospectus, does not purport to be complete and is subject to and
qualified in its entirety by reference to the Partnership Agreement, which is
filed as an exhibit to the Registration Statement of which this Prospectus is a
part.
GENERAL
HCLP will be operated as a Delaware limited partnership pursuant to the
terms of the Partnership Agreement. HCHI will be the sole general partner of
HCLP and will contribute to HCLP all of the net proceeds of the Offering. The
Principals will be the limited partners of HCLP and will contribute the HCP
Preferred to HCLP.
ECONOMIC PARTICIPATION BY UNITS
HCHI and the Principals will participate in distributions, profits and
losses of HCLP based upon their holdings of partnership units of HCLP.
Initially, HCHI and the Principals will own 83.61% and 16.39% of the partnership
units of HCLP, respectively. The Principals will be entitled to receive
additional partnership units representing the Earn-Out of up to 3.3% of the
outstanding partnership units, subject to dilution by other issuances of
interests in HCLP, subject to vesting of the Earn-Out. One-third of the Earn-Out
will vest as of each of the first three Earn-Out Measuring Dates through which
the Total Return per Unit equals at least a 20% annualized return on the initial
public offering price. In addition, any unvested portion of the Earn-Out will
vest as of any Earn-Out Measuring Date through which the Total Return per Unit
is at least equal to the initial public offering price. 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
partnership units of the Principals (including the Earn-Out) represent the
consideration given to the Principals in exchange for the contribution of the
HCP Preferred to HCLP. The percentage ownership interests of HCHI and the
Principals in HCLP will be adjusted from time to time to reflect redemptions,
exchanges, issuances of additional partnership units and similar events. As the
general partner of HCLP, HCHI may cause HCLP to issue such additional
partnership units as are in the best interests of HCLP and to admit any person
as a partner in exchange for the contribution by such person of cash and/or
property which HCHI in its sole discretion determines is desirable to further
the purposes of HCLP.
If the Principals vest in the Earn-Out as described in the preceding
paragraph, they will be issued additional partnership units or, if HCLP has
ceased to exist (as a result, for example, of exercises of redemption/exchange
rights), shares of Common Stock subject to the Ownership Limit.
MANAGEMENT
Generally, pursuant to the Partnership Agreement, HCHI, as the sole general
partner of HCLP, will have full, exclusive and complete responsibility for and
discretion in the management and control of HCLP, provided that, for as long as
limited partners own at least 2% of the outstanding partnership units of HCLP,
HCHI may not cause the dissolution of HCLP (other than by a merger or
consolidation or a sale or other disposition of all or substantially all of the
assets of HCLP) without the consent of the holders of at least a majority of the
partnership units held by limited partners. HCHI will be reimbursed on a monthly
basis for all expenses it incurs in managing HCLP's affairs, including
compensation and other administrative expenses incurred in connection with
accounting, administrative, legal and other services rendered to HCLP. The
limited partners of HCLP will have no authority in such capacity to transact
business for, or participate in the management activities or decisions of, HCLP.
The limited partners may not remove HCHI as general partner.
FINANCING
HCLP can obtain funds necessary to meet its needs, obligations and
requirements from either an affiliate or a third party (including from HCHI), as
HCHI determines to be in the best interests of HCLP. Any such financing may be
convertible in whole or in part into additional partnership units of HCLP, may
be secured or
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unsecured and may be issued through public offerings or private placements. If
HCLP does not borrow all required funds, HCHI may itself borrow such funds and
lend such funds to HCLP on the same terms or may raise such funds in any other
manner (including an issuance of shares of stock in HCHI). With certain limited
exceptions, if HCHI issues shares of stock to raise such funds, it is required
to contribute the amount of the funds so raised to HCLP in exchange for
additional partnership units of HCLP. HCLP will pay all expenses of HCHI
incurred in connection with any capital raising transactions undertaken by HCHI
for funds that are contributed to HCLP.
TRANSFERABILITY OF INTERESTS
With certain limited exceptions, HCHI may not transfer all or any part of
its general partner interest in HCLP without the consent of the holders of a
majority of the partnership units held by limited partners. A limited partner
will have no right to transfer all or any portion of his or her interest in HCLP
without the consent of the general partner, provided that no such consent will
be required for (i) transfers to other partners, family members, affiliates and
trusts for family members, and (ii) transfers made by exercising
redemption/exchange rights described below.
REDEMPTION/EXCHANGE RIGHTS
Limited partners (other than HCHI with respect to any limited partner
interests that it acquires) will have the right to require HCLP to redeem all or
any portion of their partnership units at any time beginning one year after the
closing of the Offering for cash (based upon the value of the Common Stock that
HCHI would be required to deliver in exchange for the partnership units if it
elected to purchase them). In lieu of HCLP's redeeming partnership units for
cash, HCHI may elect to issue to the limited partner (in exchange for the
partnership units) a number of shares of Common Stock corresponding to such
partnership units in value. For such purpose, the value of the partnership units
held by the limited partners of HCLP is determined by dividing (i) the market
value of the outstanding shares of HCHI's capital stock corresponding to the
class of interests in HCLP that includes such partnership units by (ii) the
percentage interest of HCHI in such class of interests in HCLP. If partnership
units are redeemed by HCLP for cash not received from HCHI for such purpose, the
percentage interests of the remaining partners in HCLP will be increased on a
pro rata basis. If instead partnership units are redeemed for cash received from
HCHI for such purpose or are exchanged for shares of Common Stock, HCHI's
percentage interest in HCLP will be increased by the percentage interest
represented by such partnership units.
OPERATIONS
The Partnership Agreement (i) requires that HCLP be operated in a manner
that will enable HCHI to satisfy the requirements for qualifying as a REIT for
Federal income tax purposes and to avoid being subject to any Federal income or
excise tax liability, and (ii) provides that all or a portion of the available
cash of HCLP will be distributed from time to time (but at least quarterly) as
determined by HCHI, in its sole discretion, pro rata in accordance with
partners' holdings of partnership units. Beginning immediately after the
consummation of the Formation Transactions, HCHI is required to conduct all of
its business activities through HCLP.
TERM
HCLP will continue until the first to occur of (i) December 31, 2096, (ii)
a written election to dissolve made by the general partner with the consent of
holders of at least a majority of the partnership units held by limited partners
if the limited partners own at least 2% of the outstanding partnership units of
HCLP, (iii) the sale of all or substantially all of the assets of HCLP, (iv) the
redemption or exchange for shares of Common Stock of all of the limited
partners' partnership units, or (v) the bankruptcy or dissolution of the general
partner, provided that the bankruptcy or dissolution of the general partner will
not cause HCLP to dissolve if a successor general partner is appointed by the
holders (other than the general partner) of at least a majority of the
partnership units held by the limited partners.
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FIDUCIARY DUTY
The Partnership Agreement provides that HCHI in its capacity as general
partner of HCLP (i) will act for the collective benefit of HCLP, the Principals
and HCHI's stockholders, and (ii) will not be required to give priority to the
separate interests of the Principals or HCHI's stockholders so long as it acts
in good faith.
INDEMNIFICATION
To the extent permitted by law, the Partnership Agreement provides for
indemnification of and the advance of expenses to HCHI and its affiliates and
any officers, directors, agents, contractors, employees thereof (collectively,
the "Indemnitee") from and against any and all losses, claims, damages,
liabilities, joint or several expenses (including reasonable legal fees and
expenses), judgments, fines, settlements and other amounts arising from any and
all claims, demands, actions, suits or proceedings (including arbitration and
mediation proceedings), civil, criminal, administrative or investigative, that
relate, directly or indirectly, to the formation, business or operations of HCLP
in which any Indemnitee may be involved, or is threatened to be involved, as a
party, witness or otherwise, by reason of the fact that such person was made a
party to a proceeding by reason of his or its status as an Indemnitee, or his or
its liability, pursuant to a loan guarantee or otherwise, for any indebtedness
of HCLP or any subsidiary of HCLP (or which it has assumed or taken assets
subject to) whether or not the same shall proceed to judgment or be settled or
otherwise be brought to a conclusion, except only if and to the extent that it
is finally adjudicated that the act or omission of the Indemnitee was material
to the matter giving rise to the proceeding and was committed with fraud, gross
negligence or willful misconduct.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information respecting the
beneficial ownership of the Common Stock as of July 31, 1997 assuming HCHI's
election to issue Common Stock to the Principals in lieu of cash upon the
exercise of the Principals of the right to exchange their partnership units of
HCLP for cash (including the 166,667 shares of Common Stock that may be issued
to the Principals in exchange for the partnership units issued to them upon full
vesting of the Earn-Out) as adjusted 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)......................... 458,334 55.00% 11.88%
Irma N. Tavares(5)............................. 125,000 15.00% 3.55%
Joyce S. Mizerak(5)............................ 125,000 15.00% 3.55%
George J. Ostendorf(6)......................... 125,000 15.00% 3.55%
All Directors and executive officers as a group
(7 persons).................................. 833,334 100.00% 19.69%
</TABLE>
- ---------------
(1) Assumes the election of HCHI to issue Common Stock to the Principals in lieu
of cash upon the exercise on behalf of the Principals of the right to
exchange their partnership units of HCLP for cash (including the 166,667
shares of Common Stock that may be issued to the Principals in exchange for
the partnership units issued to them upon full vesting of the Earn-Out). See
"Structure and Formation Transactions -- The Structure of the Company;" "The
Partnership Agreement -- Economic Participation by Units;"
"-- Redemption/Exchange Rights." Does not include the exercise of any
options that may be granted to the Principals pursuant to the 1997 Stock
Option Plan.
(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
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majority of the Board of Directors, or by stockholders holding at least a
majority of the outstanding shares of 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 of the Nasdaq National Market. 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.
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
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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 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
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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
3,400,000 Units, 3,400,000 shares of Common Stock reserved for the Warrants,
102,000 shares of Common Stock (117,300 shares if the over-allotment option is
exercised) reserved for the Representatives' Warrants, 666,667 shares of Common
Stock reserved for the issuance to the Principals in connection with the
exchange of their partnership units of HCLP and 166,667 shares reserved for the
issuance to the Principals in exchange for the partnership units that will be
issued to them upon the vesting of the Earn-Out. The Units, Warrants and Common
Stock issued in the Offering will be freely tradable 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 Nasdaq National Market 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 may acquire upon the possible redemption of the limited partner
interests in HCLP.
Pursuant to the Registration Rights Agreement, Principals who would not own
less than 30% of the Registrable Securities (as defined therein) that would then
be outstanding if all of the limited partner interests in HCLP by the Principals
were exchanged for Registrable Shares may request, 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. The Company has agreed to pay all registration
expenses in connection with the first shelf registration and the Principals have
agreed to pay all registration expenses in connection with the second
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
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be cast on the matter, excluding shares of stock owned by the acquirer, by
officers or by directors who are 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
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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.
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 HCHI's sole assets will consist of units of
partnership interest in HCLP, cash and cash items. For purposes of applying the
asset tests, HCHI will be deemed to own its proportionate share of the assets of
HCLP (and of any other partnership in which HCHI or HCLP acquires an interest).
Accordingly, HCHI anticipates that, for purposes of applying the asset tests,
substantially all of its assets will
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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,
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 and HCLP to
ensure compliance with the asset tests.
Since neither HCHI nor HCLP will own any voting securities of HCP, the
ownership of the HCP Preferred by HCLP will not cause HCHI to violate the 10% of
voting securities limit. If HCHI's share of 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 $10,000,000 and may
thereafter be revalued at $12,500,000 if additional partnership units
representing up to 3.3% of the outstanding partnership units of HCLP are issued
to the Principals upon the vesting of the Earn-Out. See "The Partnership
Agreement -- Economic Participation by Units." HCHI intends to monitor the value
of the HCP Preferred and believes that its share of 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. For purposes of applying the
income-based tests, HCHI will be deemed to recognize its proportionate share of
the gross income of HCLP (and of any other partnership in which HCHI or HCLP
acquires an interest), which share will have the same character in HCHI's hands
as in the hands of HCLP (or other partnership).
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
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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 ("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 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").
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
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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.
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 by HCHI, HCLP or
any other partnership in which HCHI owns an interest 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
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cash payment, HCHI may have to sell assets, borrow (or cause HCLP, 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."
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
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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 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 or HCLP (or any other partnership in
which HCHI acquires an interest) 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 or HCLP (or other partnership) 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 or HCLP (or other partnership), 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, HCLP or other partnership 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."
TAX ASPECTS OF HCHI'S INVESTMENT IN HCLP
The Company will acquire and hold the Investment Portfolio primarily
through HCLP. HCHI will be the sole general partner of HCLP and will initially
own 83.61% of the outstanding partnership units of HCLP (subject to reduction by
the issuance of additional partnership units to the Principals upon the vesting
of the Earn-Out). See "Structure and Formation Transactions" and "The
Partnership Agreement." The following discussion summarizes certain Federal
income tax considerations applicable solely to HCHI's investment in HCLP.
Regard for the Structure. If a partnership is formed or availed of in
connection with a transaction a principal purpose of which is to reduce
substantially the present value of the partners' aggregate Federal tax liability
in a manner that is inconsistent with the partnership tax rules of the Code (a
"Prohibited Purpose"), the IRS may recast the transaction for tax purposes as
may be appropriate to achieve results that are consistent with those rules. In
such a case, the IRS may, among other things, disregard the partnership or one
or more of the partners. The applicable Treasury Regulations provide that the
partnership tax rules are
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intended to permit taxpayers to conduct joint business (including investment)
activities through a flexible economic arrangement without incurring
entity-level tax. Implicit in such intent are that (i) the partnership must be
bona fide and each partnership transaction (or series of related transactions)
must have a substantial business purpose, (ii) the form of each partnership
transaction must be respected under substance over form principles and (iii)
subject to the policy objectives of the partnership tax rules, the tax
consequences to each partner of partnership operations and transactions between
the partnership and the partner must accurately reflect the partners' economic
agreement and clearly reflect the partner's income. Under the Treasury
Regulations, the determination of whether a transaction has a Prohibited Purpose
is made based on all the facts and circumstances. Among the factors to be
considered is whether the present value of the partners' aggregate federal tax
liability is substantially less than would be the case if purportedly separate
transactions that are designed to achieve a particular end result are integrated
and treated as steps in a single transaction.
The Principals would incur substantial Federal income tax liabilities if
they contributed the HCP Preferred to HCHI in exchange for Common Stock rather
than to HCLP in exchange for partnership units of HCLP. In an example in the
Treasury Regulations, however, a Prohibited Purpose was found to be lacking, and
a recasting was prohibited, under circumstances similar to those surrounding the
consummation of the Formation Transactions. The Company believes that the
Formation Transactions will be respected for Federal income tax purposes.
Nonetheless, as the Formation Transactions are not identical to those described
in the example in the Treasury Regulations (in the example, the rights to
exchange limited partnership interests for cash or REIT shares could not be
exercised for two years, and the REIT was free to engage in activities other
than through the partnership), there can be no assurance that the IRS will
respect the Formation Transactions.
Partnership Classification. The Company has not requested, and does not
intend to request, a ruling from the IRS that HCLP will be classified as a
partnership for federal income tax purposes. Instead, Counsel is of the opinion,
based on certain factual assumptions and representations made by HCHI as the
general partner of HCLP, that HCLP will be treated as a partnership for Federal
income tax purposes and not as an association taxable as a corporation or a
publicly traded partnership. Unlike an IRS ruling, an opinion of counsel is not
binding on the IRS, and no assurance can be given that the IRS will not
challenge the status of HCLP as a partnership for federal income tax purposes.
If for any reason HCLP were taxable as a corporation rather than a
partnership for Federal income tax purposes, HCHI would not be deemed to own its
proportionate share of the assets (and to recognize its proportionate share of
the gross income) of HCLP. Instead, for purposes of the REIT qualification
tests, the asset of HCHI with respect to HCLP would be shares of stock, and the
income of HCHI with respect to HCLP would be dividends. As a result, HCHI would
most likely be unable to satisfy the asset and income tests, which would thus
prevent HCHI from qualifying as a REIT. See "-- Requirements for Qualification
as a REIT -- Nature of Assets;" "-- Sources of Income;" "-- Termination or
Revocation of REIT Status." In addition, any change in the status of HCLP for
tax purposes might be treated as a taxable event, in which case HCHI could incur
a tax liability without any related cash distribution from HCLP. Further, if
HCLP were to be treated as an association taxable as a corporation, items of
income, gain, loss, deduction and credit of HCLP would not pass through to its
partners, including HCHI; instead, HCLP would be taxable as a corporation,
subject to entity-level taxation on its net income at regular corporate tax
rates. The partners of HCLP would be treated for Federal income tax purposes as
stockholders, with distributions to such partners being characterized as
dividends to the extent of HCLP's current or accumulated earnings and profits.
The opinion of Counsel is based, in part, on Treasury Regulations recently
issued in final form governing the classification of a business entity as a
partnership or an association taxable as a corporation for Federal income tax
purposes (the "Final Classification Regulations"). The Final Classification
Regulations were effective as of January 1, 1997, and replaced the former
four-factor test used to distinguish partnerships from corporations for tax
purposes. In general, under the Final Classification Regulations, a U.S.
business entity that has at least two members, is not organized under a state or
federal statute as a corporation, is not described under a state statute as a
joint-stock company or joint-stock association and does not meet certain other
narrow definitions set forth therein (an "eligible entity") may elect to be
classified as either a partnership or an association taxable as a corporation.
The Final Classification Regulations also provide for a
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"default" classification for an eligible entity that fails to file a
classification election. Under the "default" classification, such an entity will
be classified as a partnership if it has two or more members.
Notwithstanding the classification of a business entity formed as a
partnership under the Final Classification Regulations, such an entity will
nonetheless be treated as a corporation for federal income tax purposes if it is
a "publicly traded partnership." A publicly traded partnership is generally a
partnership the interests in which are either traded on an established
securities market or readily tradable on a secondary market (or the substantial
equivalent thereof). A publicly traded partnership will be treated as a
corporation for federal income tax purposes unless at least 90% of its gross
income for a taxable year consists of "qualifying income" under Section 7704(d)
of the Code, which generally includes any income that is qualifying income for
purposes of the 95% gross income test applicable to a REIT (the "90% Passive
Income Exception"). See "-- Requirements for Qualification as a REIT -- Sources
of Income."
Recently issued Treasury Regulations effective for taxable years beginning
after December 31, 1995 provide limited safe harbors from the definition of a
publicly traded partnership. Pursuant to one such safe harbor (the "Private
Placement Exception"), interests in a partnership will not be treated as readily
tradable on a secondary market or the substantial equivalent thereof if (i) all
interests in the partnership were issued in a transaction (or transactions) that
was not required to be registered under the Securities Act, and (ii) the
partnership does not have more than 100 partners at any time during the
partnership's taxable year. In determining the number of partners in a
partnership, a person owning an interest in a flow-through entity (i.e., a
partnership, grantor trust or S corporation) that in turn owns an interest in a
partnership will be treated as a partner in such partnership for purposes of the
100 partner rule only if (i) substantially all of the value of the owner's
interest in the flow-through entity is attributable to the flow-through entity's
interest in the partnership, and (ii) a principal purpose of the use of the
tiered arrangement is to permit the partnership to satisfy the 100-partner
limitation. Because no interests in HCLP have been or are traded on an
established securities market and because HCLP should not be treated as having
more than 100 partners, HCHI believes that HCLP presently qualifies for the
Private Placement Exception. HCLP intends to monitor closely its compliance with
the Private Placement Exception to ensure that the exception remains applicable.
Even if HCLP were considered to be a publicly traded partnership because it was
deemed to have more than 100 partners, however, HCLP would not be treated as a
corporation for Federal income tax purposes if it otherwise qualified for the
90% Passive Income Exception from such treatment.
Income Taxation of HCLP and its Partners. A partnership is not a separate
taxable entity for Federal income tax purposes. Rather, the partners are
allocated their proportionate shares of the items of income, gain, loss,
deduction and credit of the partnership, and are potentially subject to tax
thereon, without regard to the amounts of any distributions they receive from
the partnership. HCHI will be required to take into account its allocable share
of the foregoing items of HCLP for purposes of the various REIT income tests and
in the computation of its "REIT taxable income." See "-- Requirements for
Qualification as a REIT -- Sources of Income."
Although a partnership agreement will generally determine the allocation of
a partnership's income and losses among the partners, such allocations will be
disregarded for Federal tax purposes if they do not comply with the provisions
of Section 704(b) and the Treasury Regulations promulgated thereunder. If an
allocation is not recognized for federal income tax purposes, the item subject
to the allocation will be reallocated in accordance with the partners' interests
in the partnership, which will be determined by taking into account all of the
facts and circumstances relating to the economic arrangement of the partners
with respect to such item. The allocations of taxable income and loss contained
in the Partnership Agreement are intended to comply with the requirements of
Section 704(b) of the Code and the Treasury Regulations promulgated thereunder.
Pursuant to Section 704(c) of the Code, income, gain, loss and deduction
attributable to appreciated or depreciated property that is contributed to a
partnership in exchange for an interest in the partnership must be allocated for
Federal income tax purposes in a manner such that the contributing partner is
charged with, or benefits from, respectively, the unrealized loss or unrealized
gain associated with the property at the time of the contribution. The amount of
such unrealized loss or unrealized gain is generally equal to the difference
between the fair market value of the contributed property at the time of
contribution and the adjusted basis of
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such property for tax purposes at the time of contribution. Such allocations are
solely for Federal income tax purposes and do not affect the book capital
accounts or other economic or legal arrangements among the partners. The
Principals and HCHI will contribute the HCP Preferred and cash, respectively, to
HCLP as the partners of HCLP. Since there will be unrealized gain with respect
to the HCP Preferred, the Partnership Agreement will require that the unrealized
gain, if and when realized, will be allocated to the Principals or their
successors in a manner that is consistent with Section 704(c) of the Code. If
HCHI acquires partnership units of HCLP from any of the Principals, HCHI will
succeed to the Principals' share of the unrealized gain inherent in the HCP
Preferred. The recognition of unrealized gain by HCHI will increase the amount
that HCHI must distribute to its stockholders to satisfy the REIT distribution
requirement. See "-- Requirements for Qualification as a REIT -- Distributions."
HCHI may, however, be able to take advantage of certain positive basis
adjustments that could offset such unrealized gains. In addition, it is not
anticipated that any such unrealized gains will be recognized unless HCP
disposes of the HCLP Preferred. See "-- Redemption or Exchange of Limited
Partner Interests."
The foregoing principles may also affect the calculation of HCHI's earnings
and profits for purposes of determining the portions of its distributions that
are taxable as dividends. See "-- Taxation of Taxable U.S. Stockholders." The
application of these rules over time may result in a higher portion of HCHI's
distributions being taxed as dividends than would have been the case had HCLP
purchased the HCP Preferred for cash.
Basis. HCHI's adjusted basis in its partnership interest in HCLP for tax
purposes generally (i) will be increased by (a) the amount of cash and the basis
of any other property contributed to HCLP by HCHI, and (b) HCHI's allocable
share of HCLP's income, and (ii) will be reduced, but not below zero, by (a)
HCHI's allocable share of HCLP's losses, and (b) the amount of cash and the
basis of any other property distributed by HCLP to HCHI. Increases and decreases
in HCHI's share of HCLP's debts will be treated as cash contributions by HCHI to
HCLP and cash distributions by HCLP to HCHI, respectively.
If HCHI's distributive share of any loss of HCLP exceeds HCHI's adjusted
basis in its interest in HCLP, the recognition of such excess loss will be
deferred until such time and to the extent that HCHI has adjusted basis in its
interest in HCLP. To the extent that any distribution by HCLP to HCHI (including
any constructive distribution resulting from a decrease in HCHI's share of the
indebtedness of HCLP) would reduce HCHI's adjusted basis in its interest in HCLP
below zero, such distribution will constitute taxable income to HCHI. Any such
taxable income will normally be characterized as a capital gain, and if HCHI's
interest in HCLP has been held for longer than the long-term capital gain
holding period (currently one year), such gain will be long-term.
Redemption or Exchange of Partnership Units. Under the Partnership
Agreement, HCHI may cause HCLP to make an election under Section 754 of the
Code. Such an election would require that special adjustments to the tax bases
of HCLP's assets be made upon transfers of interests in HCLP and distributions
to partners of HCLP that exceed their adjusted bases in their interests in HCLP.
In the case of a transfer of an interest in HCLP, the adjustments apply only to
the transferee and generally result in the treatment of the transferee as having
acquired a direct interest in the corresponding share of HCLP's assets (so that
the transferee has an aggregate initial basis in that share of HCLP's assets
equal to its initial basis in the transferred interest). In the case of a
distribution, the election generally results in an increase or decrease in
HCLP's aggregate basis in its assets equal to the amount of any gain or loss,
respectively, recognized by the distributee by reason of the distribution. Basis
adjustments resulting from a Section 754 election may be positive or negative,
depending upon whether partnership assets have appreciated or depreciated at the
time of the applicable transfer or distribution. A partner's positive basis
adjustments may have the effect of reducing the net income that the partner must
report with respect to the partnership. Negative adjustments, on the other hand,
may increase the amount of income that the partner must report. If HCHI acquires
partnership units for cash or shares of Common Stock, it will have an initial
basis in such partnership units equal to the amount of such cash or the value of
such shares of Common Stock (plus the share of any debt of HCLP corresponding to
such partnership units). There can be no assurance, however, that HCHI will
cause HCLP to make a Section 754 election or that such an election, if made,
will result in positive basis adjustments for HCHI with respect to HCLP's
assets.
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Redemptions of partnership units by HCLP could prevent HCLP from
distributing sufficient amounts to HCHI to enable HCHI to satisfy the REIT
distribution requirements. HCHI, however, has the right to issue shares of
Common Stock to the Principals in lieu of HCLP's redemption of their partnership
units for cash. See "The Partnership Agreement" and "-- Requirements for
Qualification as a REIT."
HCLP will terminate for federal income tax purposes if HCHI becomes the
only partner of HCLP as a result of redemptions or exchanges of partnership
units. In that case, HCHI will acquire all of HCLP's assets with an aggregate
adjusted basis equal to its adjusted basis in its interest in HCLP as of the
time immediately before the termination (reduced by any money distributed to
HCHI in the termination). Such aggregate basis will generally be allocated among
the various assets acquired by HCHI from HCLP in proportion to the adjusted
bases of such assets in the hands of HCLP (determined by taking into account any
special basis adjustments of HCHI with respect to such assets resulting from a
Section 754 election).
Tax Matters. Pursuant to the Partnership Agreement, HCHI will be the "tax
matters partner" of HCLP for federal income tax purposes within the meaning of
Code Section 6231(a)(7) and, as such, will have all rights and authority as a
"tax matters partner" under the Partnership Agreement.
TAXATION OF TAXABLE AFFILIATES
Although HCLP will not be separately taxable on its income, 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.
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
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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.
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.
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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).
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 or HCLP 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
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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 or HCLP 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 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
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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.
PROPOSED TAX LEGISLATION
As of the date of this Prospectus, the House of Representatives and the
Senate have passed versions of proposed tax legislation (H.R. 2014) that would,
if enacted, amend certain of the provisions of the Code applicable to REITs. The
REIT provisions of the two versions are identical. If enacted, the proposed
legislation would, among other things, (i) impose 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)
waive 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) permit 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) repeal the 30% of
income limit for REIT qualification, (v) extend 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) expand the types of interest rate hedges that may generate income that
qualifies under the 95% of income test. The proposed legislation would also
reduce the maximum federal long-term capital gain rate applicable to individuals
to 20%.
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.
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
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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............................................... 3,400,000
</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 510,000 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 has 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 sell to the Representatives, for nominal
consideration, warrants to purchase from the Company up to 102,000 (117,300 if
the over-allotment option is exercised) shares of Common Stock at an exercise
price equal to the initial public offering price (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
103
<PAGE> 105
Representatives' Warrants contain anti-dilution provisions providing for
appropriate adjustment upon the occurrence of certain events. See "Description
of Securities."
The Representatives have informed the Company that they do not expect the
Underwriters to confirm sales of Units offered by this Prospectus to any
accounts over which they exercise discretionary authority.
Application has been made to have the Units, the Warrants and the Common
Stock approved for quotation on the Nasdaq National Market.
The Company has been advised by the Representatives that the
Representatives presently intend to make a market in the Units, 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 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 Common Stock and the Warrants. 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 Nasdaq
National Market 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.
104
<PAGE> 106
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 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.
105
<PAGE> 107
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.
"Average Spread" means, for any period, (i) the average value of a share of
Common Stock issued in the Offering minus (ii) the initial public offering
price.
"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, HCLP, 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 additional partnership units of HCLP representing 3.3% of
all partnership units of HCLP outstanding after their issuance (subject to
dilution by other issuances of partnership units of HCLP) that will be issued to
the Principals if (i) the Total Return per Unit equals at least a 20% annualized
return on the initial offering price of the Units through any three Earn-Out
Measuring Dates or (ii) the Total Return per Unit is at least equal to the
initial public offering price of the Units as of any Earn-Out Measuring Date.
"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.
"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.
106
<PAGE> 108
"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.
"HCLP" means Hanover Capital Mortgage Holdings, L.P., a Delaware limited
partnership.
"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.
"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
107
<PAGE> 109
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 a bona fide interest rate swap or cap agreement
entered into by HCHI to hedge variable rate indebtedness only, that HCHI
incurred or expects to incur to acquire or carry Qualified REIT Assets, as
defined in Section 856(c)(6)(G) of the Code.
"Qualified REIT Assets" means Pass-Through Certificates, Mortgage Loans,
Agency Certificates and other assets of the type described in Code Section
856(c)(6)(B).
"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 Asset" 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 102,000 (117,300 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.
"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.
108
<PAGE> 110
"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.
"Total Return per Unit" means, as of any Earn-Out Measuring Date, (i) two
times the Average Spread for the 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 of the Common Stock of the Company issued in
the Offering through and including such Earn-Out Measuring Date.
"UBTI" means "unrelated trade or business taxable income" as defined in
Section 512 of the Code.
109
<PAGE> 111
TABLE OF CONTENTS TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
INDEPENDENT AUDITORS' REPORT........................................................ F-2
Balance Sheet....................................................................... F-3
Note to Balance Sheet............................................................... F-4
HANOVER CAPITAL PARTNERS LTD. AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT.......................................................... F-5
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1996 AND 1995 AND FOR EACH OF THE
THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996:
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> 112
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
July 28, 1997
F-2
<PAGE> 113
HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
(IN ORGANIZATION)
BALANCE SHEET
JUNE 30, 1997
<TABLE>
<S> <C>
ASSETS
Cash.............................................................. $150
TOTAL ASSETS...................................................... $150
----
TOTAL STOCKHOLDER 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 EQUITY.......................................... $150
====
</TABLE>
See note to balance sheet
F-3
<PAGE> 114
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 will operate its business
activities through a subsidiary, Hanover Capital Mortgage Holdings, L.P., a
Delaware limited partnership of which the Company will be the sole general
partner (Subsidiary). The Company's business activities will consist of (i)
investing in mortgage loans and mortgage assets through Subsidiary and (ii)
owning an equity investment through Subsidiary 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 3,400,000 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 contribute the net proceeds of the Offering to Subsidiary, as its general
partner investment.
F-4
<PAGE> 115
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> 116
HANOVER CAPITAL PARTNERS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash.............................................................. $ 161,546 $ 912,196
Investment in marketable securities............................... 16,443 42,465
Accounts receivable............................................... 3,683,865 1,533,748
Receivables from related parties.................................. 521,539 229,804
Accrued revenue on contracts in progress.......................... 549,781 164,901
Prepaid expenses and other current assets......................... 143,026 93,155
---------- ----------
Total current assets...................................... 5,076,200 2,976,269
PROPERTY AND EQUIPMENT -- Net....................................... 316,057 301,217
MORTGAGE SERVICING RIGHTS........................................... 30,587 46,904
OTHER ASSETS........................................................ 227,548 204,634
DUE FROM OFFICER.................................................... 107,532 --
---------- ----------
TOTAL ASSETS........................................................ $5,757,924 $3,529,024
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accrued appraisal and subcontractor costs......................... $2,807,172 $ 66,158
Accounts payable and accrued expenses............................. 678,390 574,372
Note payable to bank.............................................. -- 1,375,000
Income taxes payable.............................................. 89,477 179,967
Deferred revenue.................................................. 194,334 209,280
Notes payable to related parties.................................. 133,018 --
Deferred income taxes............................................. 12,993 30,215
Other liabilities................................................. 122,400 --
---------- ----------
Total current liabilities................................. 4,037,784 2,434,992
---------- ----------
LONG-TERM LIABILITIES
Note payable to bank.............................................. 1,045,000 --
Minority interest................................................. 250 27,185
Other liabilities................................................. -- 400,000
---------- ----------
Total long-term liabilities............................... 1,045,250 427,185
---------- ----------
Total liabilities......................................... 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 and 165.800 shares in 1996 and 1995,
respectively.................................................. 2 1
Class B: par value $.01 -- authorized, 1,000 shares;
outstanding 0 and 41.460 shares in 1996 and 1995,
respectively.................................................. -- 1
Additional paid-in capital........................................ 57,440 165,999
Retained earnings................................................. 617,448 500,846
---------- ----------
Total stockholders' equity................................ 674,890 666,847
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......................... $5,757,924 $3,529,024
========== ==========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 117
HANOVER CAPITAL PARTNERS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Due diligence fees................................ $ 8,323,789 $ 7,525,620 $10,194,293
Loan brokering/asset management fees.............. 2,469,378 1,770,665 658,922
Mortgage sales and servicing...................... 970,757 2,289,440 2,527,183
Other income...................................... 355,715 295,944 188,162
----------- ----------- -----------
Total revenues............................ 12,119,639 11,881,669 13,568,560
----------- ----------- -----------
EXPENSES:
Personnel expense................................. 4,227,226 3,831,426 4,002,179
Appraisal, inspection and other professional 3,128,225 2,593,001 5,244,176
fees...........................................
Subcontractor expense............................. 2,919,509 2,738,903 2,170,514
Travel and subsistence............................ 616,795 860,253 315,496
Occupancy expense................................. 536,520 437,830 414,894
General and administrative expense................ 525,143 1,066,220 1,161,752
Reversal of reserve for IRS assessment............ (277,600) -- --
Interest expense.................................. 134,393 160,439 101,764
Depreciation and amortization..................... 125,928 114,174 84,023
----------- ----------- -----------
Total expenses............................ 11,936,139 11,802,246 13,494,798
----------- ----------- -----------
INCOME BEFORE INCOME TAX PROVISION.................. 183,500 79,423 73,762
INCOME TAX PROVISION................................ 73,870 51,165 127,681
----------- ----------- -----------
NET INCOME (LOSS)................................... $ 109,630 $ 28,258 $ (53,919)
=========== =========== ===========
NET INCOME (LOSS) PER SHARE......................... $ 658.74 $ 169.80 $ (323.99)
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE> 118
HANOVER CAPITAL PARTNERS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995
<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
======= == ======= === ========= ======== =========
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE> 119
HANOVER CAPITAL PARTNERS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ---------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................ $ 109,630 $ 28,258 $ (53,919)
Adjustments to reconcile net income (loss) to net cash (used in)
provided by operating activities:
Depreciation and amortization.................................. 125,928 114,174 84,023
Gain on sale of mortgage servicing rights...................... (52,318) (232,587) (523,793)
Reversal of reserve for IRS assessment......................... (277,600) -- --
Loss on disposal of property and equipment..................... -- 10,261 --
Loss on sale of trading securities............................. 1,360 753 3,366
Purchase of trading securities................................. (1,931) (29,951) (116,649)
Sale of trading securities..................................... 26,593 100,016 --
Distribution of subsidiary to stockholders..................... 6,972 -- --
Changes in assets -- (increase) decrease:
Accounts receivable.......................................... (2,150,117) 862,364 (1,442,160)
Receivables from related parties............................. (308,808) 22,582 939,955
Accrued revenue on contracts in progress..................... (384,880) 1,011,785 (928,743)
Prepaid expenses and other current assets.................... (49,871) (39,169) (26,523)
Other assets................................................. (22,914) (154,108) (16,500)
Changes in liabilities -- increase (decrease):
Accrued appraisal and subcontractor costs.................... 2,741,014 21,931 44,227
Accounts payable and accrued expenses........................ 104,018 (913,692) 523,422
Income taxes payable......................................... (90,490) 15,634 (20,283)
Deferred income taxes........................................ (17,222) (114,326) 36,315
Deferred revenue............................................. (14,946) 113,855 (514,043)
Minority interest............................................ (26,935) (147,057) 174,242
----------- ---------- -----------
Net cash (used in) provided by operating activities....... (282,517) 670,723 (1,837,063)
----------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.............................. (133,317) (43,421) (144,971)
Sale of property and equipment................................... 4,592 1,704 --
Proceeds from sale of mortgage servicing rights.................. 94,043 423,563 523,793
Capitalization of mortgage servicing rights...................... (37,451) (264,141) --
----------- ---------- -----------
Net cash (used in) provided by investing activities....... (72,133) 117,705 378,822
----------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of note payable to bank................................ (330,000) (125,000) (250,000)
Redemption of Class A common stock............................... (66,000) -- --
Proceeds from note payable to bank............................... -- -- 800,000
Repayment of subordinated debt................................... -- (51,299) (100,000)
----------- ---------- -----------
Net cash (used in) provided by financing activities....... (396,000) (176,299) 450,000
----------- ---------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS............... (750,650) 612,129 (1,008,241)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR....................... 912,196 300,067 1,308,308
----------- ---------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR............................. $ 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
SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the year for:
Income taxes................................................... $ 205,075 $ 176,119 $ 189,458
=========== ========== ===========
Interest....................................................... $ 125,748 $ 164,420 $ 101,754
=========== ========== ===========
</TABLE>
See notes to consolidated financial statements.
F-9
<PAGE> 120
HANOVER CAPITAL PARTNERS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
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 on a percentage of completion method based on the extent
of progress toward completion of the related contract. Depending upon the nature
of each contract, revenue recognition is based on either (a) costs incurred to
date relative to total estimated project costs or (b) number of items completed
to date relative to the contract total.
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. Under SFAS 91, direct loan
origination costs and loan origination fees are offset.
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> 121
HANOVER CAPITAL PARTNERS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
g. Deferred Revenue -- Cash advances received for certain service
contracts are recorded in the accompanying consolidated balance sheets as
deferred revenue and are recognized ratably over the respective period as the
services are provided.
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
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> 122
HANOVER CAPITAL PARTNERS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
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.
4. CONCENTRATION RISK
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>
1996 1995 1994
- ---- ---- ----
<S> <C> <C>
46% 32% 44%
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 accounts for the
payment of principal and interest to investors and property taxes and insurance
premiums on behalf of borrowers. As of December 31, 1996 and 1995, HCMC was
servicing 46 and 96 loans, respectively with unpaid principal balances of
$129,315,400 and $285,790,700, including loans subserviced for others of
$44,241,919 and $176,705,450, respectively. Escrow balances maintained by HCMC
were $4,352,400 and $11,543,200 at 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 December 31, 1996 and
1995.
F-12
<PAGE> 123
HANOVER CAPITAL PARTNERS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The Company adopted SFAS 122 effective January 1, 1995. Activity in
mortgage servicing rights for the years ended December 31, 1996 and 1995 was as
follows:
<TABLE>
<CAPTION>
1996 1995
-------- ---------
<S> <C> <C>
Beginning balance........................................... $ 46,904 $ --
Capitalization.............................................. 37,451 264,141
Sales....................................................... (41,725) (190,976)
Scheduled amortization...................................... (12,043) (26,261)
-------- ---------
$ 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 December 31, 1996 and 1995 consist of
the following:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Due from ABH-I LLC (includes $431,118 of asset management fees
in 1996)..................................................... $451,604 $ 49,660
Due from Hanover Asset Services, Inc........................... 6,420 5,144
Due from (to) Alpine/Hanover LLC............................... 4,361 (838)
-------- --------
Due from related entities...................................... 462,385 53,966
Due from officers.............................................. 166,686 175,838
-------- --------
Receivables from related parties............................... $629,071 $229,804
======== ========
</TABLE>
The amounts due from related entities, ABH-I, LLC Hanover Asset Services,
Inc. and Alpine/Hanover 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 $1,370,000, $1,362,000 and $304,000 for the
years ended December 31, 1996, 1995 and 1994, respectively.
Amounts due from officers in 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 December 31, 1996 and 1995 consist of
the following:
<TABLE>
<CAPTION>
1996 1995
-------- ---------
<S> <C> <C>
Note payable to officer...................................... $ 42,559 $ --
Notes payable to ABH-I, LLC.................................. 90,459 --
-------- --------
Notes payable to related parties............................. $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.
F-13
<PAGE> 124
HANOVER CAPITAL PARTNERS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Notes payable to ABH-I LLC at December 31, 1996 consisted of three (3)
promissory notes totaling $90,459. 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 (8.25% 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 December 31, 1996 and 1995 consists of the
following:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Office machinery and equipment............................... $ 388,123 $ 265,136
Furniture and fixtures....................................... 111,246 106,501
Leasehold improvements....................................... 68,553 68,553
--------- ---------
567,922 440,190
Less accumulated depreciation and amortization............... (251,865) (138,973)
--------- ---------
Property and equipment -- net................................ $ 316,057 $ 301,217
========= =========
</TABLE>
Depreciation expense for the years ended December 31, 1996, 1995 and 1994
was $113,885, $87,913 and $84,023, respectively.
8. INCOME TAXES
The components of deferred income taxes as of December 31, 1996 and 1995
are as follows:
<TABLE>
<CAPTION>
1996 1995
-------- ---------
<S> <C> <C>
Deferred tax assets........................................... $ 52,409 $ 160,000
Deferred tax liabilities...................................... (65,402) (190,215)
-------- ---------
Net deferred tax liabilities.................................. $(12,993) $ (30,215)
======== =========
</TABLE>
The items resulting in significant temporary differences 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 years ended
December 31, 1996, 1995 and 1994 consist of the following:
<TABLE>
<CAPTION>
1996 1995 1994
-------- --------- --------
<S> <C> <C> <C>
Current -- Federal, state and local............... $ 91,092 $ 165,491 $169,122
Deferred -- Federal, state and local.............. (17,222) (114,326) (41,441)
-------- --------- --------
Total............................................. $ 73,870 $ 51,165 $127,681
======== ========= ========
</TABLE>
F-14
<PAGE> 125
HANOVER CAPITAL PARTNERS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The income tax provision differs from amounts computed at statutory rates,
as follows:
<TABLE>
<CAPTION>
1996 1995
------- --------
<S> <C> <C>
Federal income taxes at statutory rate........................ $56,518 $ 27,006
State and local income taxes net of Federal benefit........... 14,836 9,417
Differences resulting primarily from the Company's recognition
of accounts receivable, accounts payable and deferred
revenue on the cash basis for income tax purposes........... -- --
Unconsolidated subsidiary's net income........................ (12,793) --
Meals and entertainment....................................... 3,719 6,291
Officers' life insurance...................................... 8,576 9,114
Other, net.................................................... 3,014 (663)
------- --------
Total......................................................... $73,870 $ 51,165
======= ========
</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 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 December 31, 1996 and 1995 consists of a short-term
note of $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
December 31, 1996 and 1995 was 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.
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.
F-15
<PAGE> 126
HANOVER CAPITAL PARTNERS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
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 years ended December 31, 1996, 1995 and 1994 amounted
to $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 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
limited partnership interests in a Delaware limited partnership, Hanover Capital
Mortgage Holdings, L.P. ("HCLP"). In connection with the proposed formation of
and public offering of ownership units in a Maryland corporation, Hanover
Capital Mortgage Holdings, Inc. ("HCHI"), the net proceeds of the offering would
be contributed to HCLP in exchange for a sole general partnership interest
representing 83.61% of the economic interests in HCLP. HCHI will be established
to comply with the REIT provisions of the Internal Revenue Code.
F-16
<PAGE> 127
- ------------------------------------------------------
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............................. 62
Structure and Formation Transactions... 70
Certain Transactions................... 75
The Partnership Agreement.............. 76
Principal Stockholders................. 79
Description of Securities.............. 79
Shares Eligible for Future Sale........ 83
Certain Provisions of Maryland Law and
the Company's Charter and By-Laws.... 84
Federal Income Tax Considerations...... 87
ERISA Investors........................ 101
Underwriting........................... 103
Legal Matters.......................... 105
Experts................................ 105
Additional Information................. 105
Glossary............................... 106
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.
======================================================
3,400,000 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> 128
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.......... $ 38,484.23
NASD filing fee.............................................. 13,175.31
Nasdaq National Market filing fee............................ 10,000.00
Printing and engraving expenses.............................. 175,000.00
Legal fees and expenses...................................... 150,000.00
Accounting fees and expenses................................. 200,000.00
Transfer agent and custodian fees............................ 10,000.00
Miscellaneous................................................ 53,340.46
-----------------
Total.............................................. $650,000.00
</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 contribute the HCP Preferred to HCLP in exchange for the limited partners
interests in HCLP.
Upon the closing of the Offering, the Company will issue Warrants to
purchase an aggregate of 102,000 (117,300 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> 129
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 36.1 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....................................................... F-3
Note to Balance Sheet............................................... F-4
HANOVER CAPITAL PARTNERS LTD. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1996 AND 1995 AND
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996:
Balance Sheets...................................................... F-3
Statements of Operations............................................ F-4
Statements of Stockholders' Equity.................................. F-5
Statements of Cash Flows............................................ F-6
Notes to Consolidated Financial Statements.......................... F-7
</TABLE>
(b) Exhibits.
II-2
<PAGE> 130
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)
*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
10.1 Agreement of Limited Partnership of HCLP
10.2 Form of Amended and Restated Agreement of Limited Partnership of HCLP
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 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
</TABLE>
II-3
<PAGE> 131
<TABLE>
<C> <S>
**21 Subsidiaries of HCHI
23.1 Consent 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 Consent of Nominated Directors
</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> 132
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. 1 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 day of , 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. 1 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, , 1997
- ------------------------------------- Chief Executive Officer, and
John A. Burchett President (Principal Executive
Officer)
/s/ IRMA N. TAVARES Managing Director and Director , 1997
- -------------------------------------
Irma N. Tavares
/s/ JOYCE S. MIZERAK Managing Director, Secretary , 1997
- ------------------------------------- and Director
Joyce S. Mizerak
/s/ GEORGE J. OSTENDORF Managing Director and Director , 1997
- -------------------------------------
George J. Ostendorf
/s/ RALPH F. LAUGHLIN Senior Vice President, Chief , 1997
- ------------------------------------- Financial Officer, Treasurer
Ralph F. Laughlin and Assistant Secretary
(Principal Financial and
Accounting Officer)
</TABLE>
II-5
<PAGE> 133
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)
*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
10.1 Agreement of Limited Partnership of HCLP
10.2 Form of Amended and Restated Agreement of Limited Partnership of HCLP
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 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
</TABLE>
<PAGE> 134
<TABLE>
<C> <S>
**21 Subsidiaries of HCHI
23.1 Consent 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 Consent of Nominated Directors
</TABLE>
- ---------------
* To be filed by amendment.
** Previously filed.
<PAGE> 1
EXHIBIT 10.1
AGREEMENT OF LIMITED PARTNERSHIP
OF
HANOVER CAPITAL MORTGAGE HOLDINGS, L.P.
(A Delaware Limited Partnership)
AGREEMENT OF LIMITED PARTNERSHIP OF HANOVER CAPITAL MORTGAGE HOLDINGS,
L.P., a Delaware limited partnership (the "Partnership"), dated as of June 12,
1997, by and among Hanover Capital Mortgage Holdings, Inc., a Maryland
corporation, as general partner (the "General Partner"), and John A. Burchett,
Joyce S. Mizerak, George J. Ostendorf and Irma N. Tavares, as limited partners
(the "Limited Partners"). The General Partner and the Limited Partners are
sometimes together referred to herein as the "Partners," and each of the General
Partner and the Limited Partners is sometimes referred to herein as a "Partner."
RECITALS
A. The General Partner 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 Limited Partners 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
Limited Partners 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. Effective upon the closing of the Offering, the Partners will execute
and deliver an Amended and Restated Agreement of Limited Partnership of the
Partnership substantially in the form of the attached Exhibit 2 (the "Amended
Agreement") pursuant to which, among other things, (i) the General Partner will
contribute the net proceeds of the Offering to the Partnership in exchange for
the general partner interest in the Partnership, and (ii) the Limited Partners
will contribute the HCP Preferred to the Partnership in exchange for limited
partner interests in the Partnership.
E. The Partners desire to form the Partnership, pursuant to the Revised
Uniform Limited Partnership Act as enacted by the State of Delaware (6 Del. C.
Section 17-101, et seq.) (the "Act"), and execute and deliver this Agreement
prior to the closing of the Offering to set forth the terms by which they will
be bound.
<PAGE> 2
AGREEMENT
NOW, THEREFORE, for good and valuable consideration the receipt and legal
sufficiency is hereby acknowledged, the parties hereto agree as follows:
1. Name. The name of the Partnership shall be Hanover Capital Mortgage
Holdings, L.P.
2. Purpose. The Partnership's purpose and character of business shall be
(i) to conduct any business that may be lawfully conducted by a limited
partnership organized pursuant to the Act, including but not limited to directly
and indirectly purchasing, originating, holding, financing, hedging, selling and
securitizing (a) conforming and non-conforming single family, multifamily and
commercial mortgage loans and deeds of trust (including interests in real
property acquired upon or in lieu of foreclosure thereof) and (b) securities (or
undivided interests therein) evidencing undivided interests in pools of mortgage
loans, adjustable and fixed rate debt obligations collateralized by mortgage
loans and/or mortgage certificates, and regular and residual interests in REMICs
(within the meaning of Sections 860A through 860G of the Internal Revenue Code,
as amended (the "Code")), provided, however, that such business shall be
conducted in such a manner as to permit the General Partner at all times to be
classified as a REIT for federal income tax purposes, unless the General Partner
ceases to qualify as a REIT for reasons other than the conduct of the business
of the Partnership, (ii) to own interests (directly and indirectly) in HCP, any
subsidiaries of HCP and any partnerships, joint ventures and other similar
arrangements organized to engage in any of the foregoing, and (iii) to do
anything necessary or incidental to the foregoing.
3. Place of Business; Agent. The name and address of the resident agent of
the Partnership in the State of Delaware is Corporation Service Company, 1013
Centre Road, Wilmington, New Castle County, Delaware 19805. The address of the
principal office of the Partnership in the State of Delaware is c/o Corporation
Service Company, 1013 Centre Road, Wilmington, New Castle County, Delaware
19805. The principal office of the Partnership is located at 100 Metroplex
Drive, Suite 301, Edison, NJ 08817 or such other place as the General Partner
may from time to time designate by notice to the Limited Partners. The
Partnership may maintain offices at such other place or places within or outside
the State of Delaware as the General Partner deems advisable.
4. Term. The Partnership shall continue in full force and effect until
December 31, 2096 or until earlier terminated pursuant to Section 8.
2
<PAGE> 3
5. Capital Contributions; Capital Accounts; Ownership of Assets.
5.1 Subject to Section 12, the Partners shall make capital
contributions to the Partnership at such times and in such amounts as they shall
unanimously determine to be appropriate.
5.2 The Partnership shall maintain capital accounts for the Partners
in accordance with the Treasury Regulations under Section 704(b) of the Code.
5.3 All assets of the Partnership shall be owned by the Partnership
as an entity.
6. Allocations of Profit or Loss.
6.1 Subject to Sections 6.2 and 6.3, all allocations of profit or
loss (and the items making up any such profit or loss) shall be made to the
Partners in proportion to their respective capital contributions.
6.2 Notwithstanding Section 6.1, the General Partner may make such
special allocations of items of income, gain, loss, deduction and expenditure
(for book purposes, tax purposes or both) as it determines are necessary to
comply with the Treasury Regulations under Sections 704(b) and 704(c) of the
Code.
6.3 To the extent that any allocations made pursuant to Section 6.2
would otherwise cause any distributions by the Partnership to be made other than
in proportion to the Partners' capital contributions, the General Partner shall
make such other allocations as it determines are appropriate to prevent such
unintended result.
7. Non-liquidating Distributions. Subject to Section 8, the Partnership
shall make distributions of available cash at such times and in such amounts as
the General Partner determines to be appropriate. All distributions pursuant to
this Section 7 shall be made to the Partners in proportion to their respective
capital contributions.
8. Dissolution; Wind-up; Liquidating Distributions.
8.1 The Partnership shall dissolve upon the first to occur of (i)
the expiration of its term as specified in Section 4, (ii) an event of
withdrawal of the General Partner (as defined in Section 17-402 of the Act)
unless, in any such case, the business of the Partnership is continued with the
written consent of a majority in interest (by capital contributions) of the
Limited Partners within 90 days after the occurrence of such event, (iii) the
election of the General Partner to dissolve the Partnership or (iv) the entry of
a decree of judicial dissolution of the Partnership pursuant to the Act.
8.2 After the dissolution of the Partnership, the General Partner
(or, if one is appointed, a liquidating trustee) shall wind up and liquidate the
Partnership, exercising its
3
<PAGE> 4
reasonable discretion in determining the time, manner and terms of any sale or
sales of Partnership assets for the purpose of obtaining fair value for such
assets (having due regard to the activity and condition of the relevant markets
and general financial and economic conditions). The assets of the Partnership
shall first be applied to the payment of, or the establishment of adequate
reserves or other provision for the payment of, the debts and obligations of the
Partnership. Thereafter, there shall be made a final allocation of profit or
loss, as the case may be, and other items to the Partners' capital accounts in
accordance with Section 6. Subject to Section 8.3, the assets of the Partnership
(or the proceeds of sales or other dispositions in liquidation of assets of the
Partnership) remaining after the payment or other provision for the
Partnership's debts and obligations shall be distributed to the Partners in
proportion to the positive balances in their capital accounts determined after
the final allocation of profit or loss and other items to capital accounts has
been made. Amounts reserved or otherwise set aside in connection with the
Partnership's liquidation for the payment of debts and obligations shall be
distributed to the Partners, in the same proportions that such amounts would
have been distributed hereunder if distributed upon the Partnership's
liquidation, as soon as practicable.
8.3 The General Partner (or a liquidating trustee if one is
appointed) may cause the Partnership to distribute assets in kind upon the
Partnership's liquidation, provided, however, that no Partner shall be
distributed less than his or her pro rata share (based upon the Partners'
capital account balances) of any asset that is to be distributed in kind without
such Partner's express written consent thereto. Any asset to be distributed in
kind shall be distributed on the basis of its fair market value as reasonably
and in good faith determined by the General Partner with the approval of a
majority in interest (by capital contributions) of the Limited Partners (or by a
liquidating trustee if one is appointed). For purposes of making the final
allocation of profit or loss and other items required by Section 8.1, any asset
other than cash that is to be distributed in kind shall be treated as having
then been sold by the Partnership for its fair market value as determined under
this Section 8.3 (provided that, solely for purposes of making the final
allocation of profit or loss and other items required by Section 8.2, the fair
market value of any asset that is distributed subject to a nonrecourse
indebtedness shall not be less than the amount of such indebtedness). Each
Partner who receives an interest in any Partnership asset distributed hereunder
shall hold his or her interest in such asset as a tenant-in-common with any
other Partners who receive an interest in such asset.
9. Management; Indemnification.
9.1 Except as otherwise expressly provided in this Agreement, the
General Partner shall have exclusive management power over the business and
affairs of the Partnership, and shall have all of the powers of the general
partner of a limited partnership under the Act. Subject to Section 9.2, the
General Partner is authorized, by way of example and not limitation, to: (i)
negotiate, execute, deliver, perform, modify, supplement, amend and terminate
any contract, agreement, instrument, document or other writing necessary for, or
convenient or incidental to, the accomplishment of the Partnership's purpose and
the carrying on of the Partnership's business, including but not limited to
purchase and sale agreements, loan or other financing agreements (including,
without limitation, reverse repurchase agreements), deeds and leases, notes,
employment and consulting agreements, management agreements, security
4
<PAGE> 5
agreements, conveyances, contracts (including, without limitation, hedging
contracts), guarantees, warranties, indemnities, waivers and releases, (ii)
borrow money and pledge assets to secure such borrowings, (iii) hire and
compensate agents, contractors, subcontractors, employees, managers,
accountants, attorneys, consultants and others, (iv) apply for, obtain, hold and
grant licenses, trademarks, tradenames, copyrights and other rights, permissions
and approvals, (v) purchase, finance, hold, securitize and sell assets, (vi)
apply for and obtain insurance and (vii) establish, maintain, close and
supervise the deposit of any monies of the Partnership with federally insured
banking institutions or other institutions as it may select, and to draw checks
or other orders or expenditures from such accounts upon such signature or
signatures as it may determine.
9.2 Notwithstanding Section 9.1, and in addition to any other
matters as to which unanimity of the Partners is required under this Agreement,
the consent of a majority in interest (by capital contributions) of the Limited
Partners shall be required to approve (i) any action that would make it
impossible to carry on the ordinary business of the Partnership except as
otherwise expressly provided in this Agreement, (ii) the possession of any
Partnership property, or the assignment of any rights in specific Partnership
property, for other than a Partnership purpose except as otherwise expressly
provided in this Agreement, (iii) the admission to the Partnership of any new
Partner except as provided in Section 10, (iv) the performance of any act that
would subject a Limited Partner to liability as a general partner in any
jurisdiction or any other liability except as provided herein or in the Act or
(v) the entry into any contract, mortgage, loan or other agreement or
transaction that prohibits or restricts, or has the effect of prohibiting or
restricting, the ability of the Partners to enter into, or consummate the
transactions contemplated by, the Amended Agreement.
9.3 The Partners intend that the Partnership be classified as a
partnership for income tax purposes and shall do such reasonable things,
including but not limited to making any appropriate filings, as are necessary to
secure such classification. No Partner shall make any election or other filing
with any taxing or governmental authority (including but not limited to an
election or filing pursuant to Treasury Regulations Section 301.7701-3) which
would cause the Partnership to be classified as an association taxable as a
corporation for federal income tax purposes.
9.4 The General Partner may appoint officers of the Partnership,
including a President, one or more Vice Presidents, a Treasurer, a Secretary and
such other officers as it may determine to be appropriate. The General Partner
may use descriptive words or phrases to designate the standing, seniority or
area of special competence of any officer. A person may hold more than one
office. An officer of the Partnership shall have such authority and duties as
the General Partner may from time to time determine (but in no event shall have
greater authority in any respect than the General Partner). The General Partner
may from time to time create or eliminate offices of the Partnership and
establish, increase, reduce or otherwise modify the responsibilities of any
officer, in each case as it determines to be appropriate. Each officer shall
serve until his or her successor is duly elected or, if earlier, until his or
her death, resignation or removal. A vacancy in any office may be filled only by
the General Partner. An officer may resign at any time by notifying the General
Partner in writing. Any resignation of an officer shall
5
<PAGE> 6
be effective upon the receipt of such notice by the General Partner or on such
later date as is specified therein. An officer may be removed by the General
Partner at any time with or without cause.
9.5 Any person or entity dealing with the Partnership may rely upon
a certificate signed by the General Partner as to (i) the existence or
non-existence of any fact or facts which constitute conditions precedent to acts
by a Partner or in any other manner germane to the affairs of the Partnership
and (ii) the person or persons who are authorized to execute and deliver any
instrument or document of the Partnership or to take any action on behalf of the
Partnership.
9.6 No Partner or officer shall be liable, responsible or
accountable to the Partnership or to any Partner for any loss or damage incurred
by reason of any act or omission of such Partner or officer performed or omitted
(i) in good faith either on behalf of the Partnership or in furtherance of the
interests of the Partnership, (ii) in a manner reasonably believed by such
Partner or officer to be within the scope of his or her authority and (iii)
without fraud, gross negligence or willful misconduct. To the fullest extent
permitted by law, the Partnership shall indemnify the Partners and any officers
for, and shall hold them harmless from and against, any and all damages, losses,
liabilities, fines, penalties, amounts paid in settlement, costs and expenses
(including attorneys' fees and expenses) actually and reasonably incurred by
them in connection with any threatened, pending or completed demands, claims,
actions, suits or proceedings, whether civil, criminal, administrative or
investigative, brought or threatened against them by reason of or in connection
with actions taken or omitted to be taken by them on behalf of the Partnership,
provided that no Partner or officer shall be entitled to indemnification
hereunder for any damage, loss, liability, fine, penalty, amount paid in
settlement, cost or expense incurred by such Partner or officer as a result of
his or her bad faith, fraud, gross negligence or willful misconduct. No Partner
shall have any personal liability for the payment of any indemnification
obligation of the Partnership hereunder. Expenses (including attorneys' fees)
incurred by a Partner or officer in defending any civil, criminal,
administrative or investigative action, suit or proceeding may be paid by the
Partnership in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such Partner or
officer to repay such amount, unless it shall ultimately be determined that such
Partner or officer is entitled to be indemnified by the Partnership pursuant to
this Section 9.6. The Partnership shall have the power to purchase and maintain
insurance on behalf of the Partners and any officers against any liability
asserted against and incurred by them or arising out of their actions on behalf
of the Partnership, whether or not the Partnership would have the power to
indemnify them against such liability under the provisions of this Section 9.6
or the Act.
10. Transfers. No Partner shall be entitled to voluntarily transfer his,
her or its interest in the Partnership without the express written consent of
the General Partner (or, if such Partner is the General Partner, a majority in
interest (by capital contributions) of the Limited Partners). A transferee of an
interest in the Partnership (whether by voluntary transfer, involuntary transfer
or operation of law) shall not be admitted to the Partnership as a Partner
without the express written consent of the General Partner (or, if the
transferor of such interest is
6
<PAGE> 7
the General Partner, a majority in interest (by capital contributions) of the
Limited Partners); provided, however, that, no consent of any Partner shall be
required for the admission to the Partnership of any assignee of a Limited
Partner (i) who is a duly appointed executor, guardian or other legal
representative of a Limited Partner who dies or becomes incapacitated or (ii)
who acquires all or any portion of the interest of a Limited Partner by reason
of such Limited Partner's death. Unless and until an assignee of a Partner's
interest (whether pursuant to a voluntary or involuntary transfer or by
operation of law) becomes a substituted Partner, such assignee shall have only
the rights to receive the distributions his assignor would have been entitled to
receive and shall not be a Partner with any of the other rights or powers of a
Partner hereunder.
11. Withdrawals. No Partner may voluntarily resign or withdraw from the
Partnership, or receive any distribution on account of his, her or its
resignation or withdrawal (whether voluntary, involuntary or by operation of
law), without the express written consent of the General Partner (or, if such
Partner is the General Partner, a majority in interest (by capital
contributions) of the Limited Partners) thereto. Subject to Section 10 of this
Agreement and Section 17-705 of the Act, all rights of a Partner to participate
in the management, business and affairs of the Partnership shall terminate upon
such Partner's death, dissolution, bankruptcy, adjudicated insanity, resignation
or withdrawal.
12. Consummation of Certain Transactions.
12.1 Prior to the closing of the Offering, the Limited Partners
shall exchange their shares of capital stock of HCP for the HCP Common and the
HCP Preferred pursuant to the Plan of Recapitalization.
12.2 Effective upon the closing of the Offering, the Partners shall
execute and deliver the Amended Agreement, which shall amend, restate and
supersede this Agreement in every respect. Pursuant to the Amended Agreement,
(i) the General Partner shall contribute the net proceeds of the Offering to the
Partnership in exchange for the general partner interest in the Partnership, and
(ii) the Limited Partners shall contribute the HCP Preferred to the Partnership
in exchange for the limited partner interests in the Partnership. In addition,
the Partners 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.
13. Amendments. This Agreement may not be amended without the express
written consent of each of the Partners.
14. Partition. No Partner or successor-in-interest to a Partner shall have
the right while this Agreement remains in effect to have any property of the
Partnership partitioned, or to file a complaint or institute any proceeding at
law or in equity to have such property of the Partnership partitioned, and each
Partner, on behalf of himself or herself and his or her successors,
representatives, heirs and assigns, hereby waives any such right. It is the
intention of
7
<PAGE> 8
the Partners that the rights of the parties hereto and their
successors-in-interest, as among themselves, shall be governed by the terms of
this Agreement, and that the rights of the Partners and their
successors-in-interest to assign, transfer, sell or otherwise dispose of any
interest in the Partnership shall be subject to the limitations and restrictions
set forth in this Agreement.
15. Certificate of Limited Partnership. The General Partner shall, and is
hereby authorized to, file a Certificate of Limited Partnership for the
Partnership with the Office of the Secretary of State of Delaware and such other
certificates, instruments, documents and other writings as may be required by,
or may be appropriate under, the laws of the State of Delaware or of any
jurisdiction in which the Partnership is doing or intends to do business.
16. Notices.
16.1 Any notice to a Partner shall be at the address of such Partner
set forth on the attached Schedule 1 or at such other mailing address of which
such Partner shall prospectively notify the Partnership and the other Partners
in writing (any such other mailing address shall be duly noted by the General
Partner by an amendment to Schedule 1, which shall not require the further
consent of the Partners). Any notice to the Partnership shall be at the address
of the Partnership as set forth in Section 3 or at such other mailing address of
which the Partnership shall prospectively notify the Partners in writing.
16.2 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 confirmatory notice is sent by first-class
mail, postage prepaid, and (iv) if delivered by hand, on the date of receipt.
17. 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.
18. 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.
19. Applicable Law. This Agreement shall be governed by, and construed and
enforced in accordance with, the internal laws of the State of Delaware 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.
8
<PAGE> 9
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
GENERAL PARTNER: LIMITED PARTNERS:
Hanover Capital Mortgage Holdings, Inc.
- ------------------------------- -----------------------------
By: John A. Burchett
Its:
-----------------------------
Joyce S. Mizerak
-----------------------------
George J. Ostendorf
-----------------------------
Irma N. Tavares
9
<PAGE> 10
Schedule 1
Partners
Hanover Capital Mortgage Holdings, Inc.
__________________________
__________________________
TIN:______________________
John A. Burchett
896 Highland Avenue
Westfield, NJ 07090
SS#:_____________________
Joyce S. Mizerak
11 Foxhill Run
Monmouth Jct., NJ 08852
SS#:_____________________
George J. Ostendorf
506 Marshall Street
Arlington Heights, IL 60004
SS#:_____________________
Irma N. Tavares
1 Kevin Road
Scotch Plains, NJ 07076
SS#:_____________________
10
<PAGE> 1
EXHIBIT 10.2
AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
HANOVER CAPITAL MORTGAGE HOLDINGS, L.P.
<PAGE> 2
<TABLE>
TABLE OF CONTENTS
<CAPTION>
PAGE
<S> <C>
ARTICLE 1
DEFINED TERMS.................................................................................................... 1
1.1 Definitions.................................................................................... 1
ARTICLE 2
ORGANIZATIONAL MATTERS.......................................................................................... 13
2.1 Organization.................................................................................. 13
2.2 Name. ........................................................................................ 14
2.3 Resident Agent; Principal Office.............................................................. 14
2.4 Power of Attorney............................................................................. 14
2.5 Term.......................................................................................... 15
2.6 Number of Partners............................................................................ 15
ARTICLE 3
PURPOSE......................................................................................................... 15
3.1 Purpose and Business.......................................................................... 15
3.2 Powers........................................................................................ 15
3.3 Partnership Only for Purposes Specified....................................................... 15
3.4 Representations and Warranties by the Parties................................................. 16
ARTICLE 4
CAPITAL CONTRIBUTIONS........................................................................................... 17
4.1 Capital Contributions of the Partners......................................................... 17
4.2 Loans by Third Parties........................................................................ 17
4.3 Additional Funding and Capital Contributions.................................................. 17
4.4 Stock Option Plan............................................................................. 19
4.5 Earn-Out of Original Limited Partners......................................................... 19
4.6 Other Contribution Provisions................................................................. 20
ARTICLE 5
DISTRIBUTIONS................................................................................................... 20
5.1 Requirement and Characterization of Distributions............................................. 20
5.2 Distributions in Kind......................................................................... 20
5.3 Distributions Upon Liquidation................................................................ 20
5.4 Distributions to Reflect Issuance of Additional Partnership Interests......................... 20
ARTICLE 6
ALLOCATIONS..................................................................................................... 21
6.1 Timing and Amount of Allocations of Net Income and Net Loss................................... 21
</TABLE>
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<TABLE>
<S> <C>
6.2 General Allocations........................................................................... 21
6.3 Additional Allocation Provisions.............................................................. 21
6.4 Tax Allocations............................................................................... 23
ARTICLE 7
MANAGEMENT AND OPERATIONS OF BUSINESS........................................................................... 24
7.1 Management.................................................................................... 24
7.2 Certificate of Limited Partnership............................................................ 27
7.3 Restrictions on General Partner's Authority................................................... 27
7.4 Reimbursement of the General Partner.......................................................... 29
7.5 Outside Activities of the General Partner..................................................... 30
7.6 Contracts with Affiliates..................................................................... 30
7.7 Indemnification............................................................................... 31
7.8 Liability of the General Partner.............................................................. 32
7.9 Other Matters Concerning the General Partner.................................................. 33
7.10 Title to Partnership Assets................................................................... 34
7.11 Reliance by Third Parties..................................................................... 34
ARTICLE 8
RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS...................................................................... 34
8.1 Limitation of Liability....................................................................... 34
8.2 Management of Business........................................................................ 34
8.3 Outside Activities of Limited Partners........................................................ 34
8.4 Return of Capital............................................................................. 35
8.5 Rights of Limited Partners Relating to the Partnership........................................ 35
8.6 Redemption Rights............................................................................. 36
ARTICLE 9
BOOKS, RECORDS, ACCOUNTING AND REPORTS.......................................................................... 37
9.1 Records and Accounting........................................................................ 37
9.2 Fiscal Year................................................................................... 38
9.3 Reports....................................................................................... 38
ARTICLE 10
TAX MATTERS..................................................................................................... 38
10.1 Preparation of Tax Returns.................................................................... 38
10.2 Tax Elections................................................................................. 38
10.3 Tax Matters Partner........................................................................... 38
10.4 Organizational Expenses....................................................................... 40
10.5 Withholding................................................................................... 40
ARTICLE 11
TRANSFERS AND WITHDRAWALS....................................................................................... 40
11.1 Transfer...................................................................................... 40
11.2 Transfer of General Partner's Partnership Interest............................................ 41
</TABLE>
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<TABLE>
<S> <C>
11.3 Limited Partners' Rights to Transfer.......................................................... 41
11.4 Substituted Limited Partners.................................................................. 42
11.5 Assignees..................................................................................... 43
11.6 General Provisions............................................................................ 43
ARTICLE 12
ADMISSION OF PARTNERS........................................................................................... 45
12.1 Admission of Successor General Partner........................................................ 45
12.2 Admission of Additional Limited Partners...................................................... 45
12.3 Amendment of Agreement and Certificate of Limited Partnership................................. 45
ARTICLE 13
DISSOLUTION AND LIQUIDATION..................................................................................... 46
13.1 Dissolution................................................................................... 46
13.2 Winding Up.................................................................................... 46
13.3 Compliance with Timing Requirements of Regulations............................................ 47
13.4 Deemed Distribution and Recontribution........................................................ 48
13.5 Rights of Limited Partners.................................................................... 48
13.6 Notice of Dissolution......................................................................... 48
13.7 Cancellation of Certificate of Limited Partnership............................................ 48
13.8 Reasonable Time for Winding-Up................................................................ 48
13.9 Waiver of Partition........................................................................... 48
ARTICLE 14
AMENDMENT OF PARTNERSHIP AGREEMENT; CONSENTS.................................................................... 48
14.1 Amendments.................................................................................... 48
14.2 Action by the Partners........................................................................ 49
ARTICLE 15
GENERAL PROVISIONS.............................................................................................. 49
15.1 Addresses and Notice.......................................................................... 49
15.2 Titles and Captions........................................................................... 49
15.3 Pronouns and Plurals.......................................................................... 50
15.4 Further Action................................................................................ 50
15.5 Binding Effect................................................................................ 50
15.6 Creditors..................................................................................... 50
15.7 Waiver........................................................................................ 50
15.8 Counterparts.................................................................................. 50
15.9 Applicable Law................................................................................ 50
15.10 Invalidity of Provisions...................................................................... 50
15.11 Limitation to Preserve REIT Status............................................................ 50
15.12 Entire Agreement.............................................................................. 51
15.13 No Rights as Stockholders..................................................................... 51
</TABLE>
iii
<PAGE> 5
EXHIBITS
Exhibit A - Partners, Contributions and Partnership Interests
Exhibit B - Notice of Redemption
Exhibit C - Constructive Ownership Definition
Exhibit D - Form of Partnership Unit Certificate
Exhibit E - Schedule of REIT Shares Actually or Constructively Owned by
Limited Partners Other Than Those Acquired Pursuant to an
Exchange
iv
<PAGE> 6
AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
HANOVER CAPITAL MORTGAGE HOLDINGS, L.P.
THIS AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP,
dated as of _________, 1997, is entered into by and among Hanover Capital
Mortgage Holdings, Inc., a Maryland corporation (the "Company"), as the General
Partner, and the Persons whose names are set forth on Exhibit A attached hereto,
as the Limited Partners, together with any other Persons who become Partners in
the Partnership as provided herein.
RECITALS
WHEREAS, the limited partnership was formed on June ___, 1997
and an original agreement of limited partnership was entered into between the
Company, as general partner, and John A. Burchett, Joyce S. Mizerak, George J.
Ostendorf and Irma N. Tavares, as limited partners (the "Original Limited
Partners");
WHEREAS, the Company proposes to effect a public offering of
its common stock, to cause the Partnership to acquire the HCP Preferred,
Mortgage Assets and other assets, to cause the Partnership to enter into certain
transactions, and to contribute the remaining net proceeds from the public
offering to the Partnership;
WHEREAS, the Partnership will issue Partnership Interests to
the Company and other persons in accordance with the foregoing transactions;
WHEREAS, upon the completion of the foregoing transactions,
the Partnership shall return the original capital contributions made by the
Company and the Original Limited Partners and any ongoing interest in the
Partnership of the Company and the Original Limited Partners shall be based on
their respective contributions as contemplated below; and
WHEREAS, by virtue of their respective execution of this
Agreement the Company and the Original Limited Partners hereby consent to the
amendment and restatement of the original agreement of limited partnership;
NOW, THEREFORE, BE IT RESOLVED, that for good and adequate
consideration, the receipt of which is hereby acknowledged, the parties hereto
agree as follows:
ARTICLE 1
DEFINED TERMS
. 1.1 DEFINITIONS
The following definitions shall be for all purposes, unless
otherwise clearly indicated to the contrary, applied to the terms used in this
Agreement:
"Act" means the Delaware Revised Uniform Limited Partnership
Act, as it may be amended from time to time, and any successor to such statute.
"Additional Funds" shall have the meaning set forth in
Section 4.3.A.
<PAGE> 7
"Additional Limited Partner" means a Person admitted to the
Partnership as a Limited Partner pursuant to Section 12.2 hereof and who is
shown as such on the books and records of the Partnership.
"Adjusted Capital Account Balance" means, with respect to any
Partner, the balance in such Partner's Capital Account as of the end of the
relevant fiscal year, after giving effect to the following adjustments: (i)
decrease such balance by any amounts which such Partner is obligated to restore
pursuant to this Agreement or is deemed to be obligated to restore pursuant to
Regulations Section 1.704-1(b)(2)(ii)(c) or the penultimate sentence of each of
Regulations Sections 1.704-2(i)(5) and 1.704-2(g)(1); and (ii) increase such
balance by the items described in Regulations Section 1.704-1(b)(2)(ii)(d)(4),
(5) and (6).
"Adjusted Capital Account Deficit" means, with respect to any
Partner, the deficit balance, if any, in such Partner's Capital Account as of
the end of the relevant fiscal year, after giving effect to the following
adjustments: (i) decrease such deficit by any amounts which such Partner is
obligated to restore pursuant to this Agreement or is deemed to be obligated to
restore pursuant to Regulations Section 1.704-1(b)(2)(ii)(c) or the penultimate
sentence of each of Regulations Sections 1.704-2(i)(5) and 1.704-2(g)(1); and
(ii) increase such deficit by the items described in Regulations Section
1.704-1(b)(2)(ii)(d)(4), (5) and (6). The foregoing definition of Adjusted
Capital Account Deficit is intended to comply with the provisions of Regulations
Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith.
"Adjustment Date" means, with respect to any Capital
Contribution, the close of business on the Business Day last preceding the date
of the Capital Contribution, provided, that if such Capital Contribution is
being made by the General Partner in respect of the proceeds from the issuance
of REIT Shares (or the issuance of the General Partner's securities exercisable
for, convertible into or exchangeable for REIT Shares), then the Adjustment Date
shall be as of the close of business on the Business Day last preceding the date
of the issuance of such securities.
"Affiliate" means, with respect to any Person, any Person
directly or indirectly controlling, controlled by or under common control with
such Person.
"Agreed Value" means (i) in the case of any Contributed
Property set forth in Exhibit A and as of the time of its contribution to the
Partnership, the Agreed Value of such property as set forth in Exhibit A; (ii)
in the case of any Contributed Property not set forth in Exhibit A and as of the
time of its contribution to the Partnership, the fair market value of such
property or other consideration as determined by the General Partner, reduced by
any liabilities either assumed by the Partnership upon such contribution or to
which such property is subject when contributed as determined under Section 752
of the Code and the Regulations thereunder; and (iii) in the case of any
property distributed to a Partner by the Partnership, the fair market value of
such property as determined by the General Partner at the time such property is
distributed, reduced by any indebtedness either assumed by such Partner upon
such distribution or to which such property is subject at the time of the
distribution as determined under Section 752 of the Code and the Regulations
thereunder.
"Agreement" means this Amended and Restated Agreement of
Limited Partnership, as it may be amended, modified, supplemented or restated
from time to time.
"Appraisal" means with respect to any assets, the opinion of
an independent third party experienced in the valuation of similar assets,
selected by the General Partner in good faith; such opinion may be in the form
of an opinion by such independent third party that the value for such asset as
set by the General Partner is fair, from a financial point of view, to the
Partnership.
2
<PAGE> 8
"Assignee" means a Person to whom one or more Partnership
Units have been transferred in a manner permitted under this Agreement, but who
has not become a Substituted Limited Partner, and who has the rights set forth
in Section 11.5.
"Available Cash" means, with respect to any period for which
such calculation is being made,
(i) the sum of:
(a) the Partnership's Net Income or Net Loss (as the
case may be) for such period,
(b) Depreciation and all other noncash charges
deducted in determining Net Income or Net Loss for such
period,
(c) the amount of any reduction in reserves of the
Partnership referred to in clause (ii)(f) below (including,
without limitation, reductions resulting because the General
Partner determines such amounts are no longer necessary),
(d) the excess of the net proceeds from the sale,
exchange, disposition, or refinancing of Partnership property
for such period over the gain (or loss, as the case may be)
recognized from any such sale, exchange, disposition, or
refinancing during such period(excluding Terminating Capital
Transactions), and
(e) all other cash received by the Partnership for
such period that was not included in determining Net Income or
Net Loss for such period;
(ii) less the sum of:
(a) all principal debt payments made during such
period by the Partnership,
(b) capital expenditures made by the Partnership
during such period (including but not limited to the costs of
acquiring Mortgage Assets),
(c) investments in any entity (including loans made
thereto) to the extent that such investments are not otherwise
described in clauses (ii)(a) or (b),
(d) all other expenditures and payments not deducted
in determining Net Income or Net Loss for such period,
(e) any amount included in determining Net Income or
Net Loss for such period that was not received by the
Partnership during such period,
(f) the amount of any increase in reserves
established during such period which the General Partner
determines are necessary or appropriate in its sole and
absolute discretion, and
(g) the amount of any working capital accounts and
other cash or similar balances which the General Partner
determines to be necessary or appropriate in its sole and
absolute discretion.
3
<PAGE> 9
Notwithstanding the foregoing, Available Cash shall not include any cash
received or reductions in reserves, or take into account any disbursements made
or reserves established, after commencement of the dissolution and liquidation
of the Partnership.
"Average Spread" means, for any period, (i) the average Fair
Market Value of an IPO Share minus (ii) the IPO Price.
"Board of Directors" means the Board of Directors of the
General Partner.
"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.
"Capital Account" means, with respect to any Partner, the
Capital Account maintained for such Partner in accordance with the following
provisions:
a) To each Partner's Capital Account there shall be added such
Partner's Capital Contributions, such Partner's share of Net Income and any
items in the nature of income or gain which are specially allocated pursuant to
Section 6.3, and the amount of any Partnership liabilities assumed by such
Partner or which are secured by any property distributed to such Partner.
b) From each Partner's Capital Account there shall be
subtracted the amount of cash and the Gross Asset Value of any property
distributed to such Partner pursuant to any provision of this Agreement, such
Partner's distributive share of Net Losses and any items in the nature of
expenses or losses which are specially allocated pursuant to Section 6.3 hereof,
and the amount of any liabilities of such Partner assumed by the Partnership or
which are secured by any property contributed by such Partner to the
Partnership.
c) In the event any interest in the Partnership is transferred
in accordance with the terms of this Agreement, the transferee shall succeed to
the Capital Account of the transferor to the extent it relates to the
transferred interest.
d) In determining the amount of any liability for purposes of
subsections (a) and (b) hereof, there shall be taken into account Code section
752(c) and any other applicable provisions of the Code and Regulations.
e) The foregoing provisions and the other provisions of this
Agreement relating to the maintenance of Capital Accounts are intended to comply
with Regulations Sections 1.704-1(b) and 1.704-2, and shall be interpreted and
applied in a manner consistent with such Regulations. In the event the General
Partner shall determine that it is prudent to modify the manner in which the
Capital Accounts, or any debits or credits thereto (including, without
limitation, debits or credits relating to liabilities which are secured by
contributed or distributed property or which are assumed by the Partnership, the
General Partner, or the Limited Partners) are computed in order to comply with
such Regulations, the General Partner may make such modification, provided that
it is not likely to have a material effect on the amounts distributable to any
Person pursuant to Article 13 of this Agreement upon the dissolution of the
Partnership. The General Partner also shall (i) make any adjustments that are
necessary or appropriate to maintain equality between the Capital Accounts of
the Partners and the amount of Partnership capital reflected on the
Partnership's balance sheet, as computed for book purposes, in accordance with
Regulations Section 1.704-1(b)(2)(iv)(q), and (ii) make any appropriate
modifications in the event unanticipated events might otherwise cause this
Agreement not to comply with Regulations Section 1.704-1(b) or Section 1.704-2.
"Capital Contribution" means, with respect to any Partner, the
amount of money and the initial Gross Asset Value of any property (other than
money) contributed to the Partnership by such Partner.
4
<PAGE> 10
"Cash Amount" means, with respect to any Partnership Units
subject to a Redemption, an amount of cash equal to the Deemed Partnership
Interest Value attributable to such Partnership Units.
"Certificate" means the Certificate of Limited Partnership
relating to the Partnership filed in the office of the Secretary of State of
Delaware, as amended from time to time in accordance with the terms hereof and
the Act.
"Charter" means the Articles of Incorporation of the General
Partner filed with the Maryland State Department of Assessments and Taxation on
June 10, 1997, as amended or restated from time to time.
"CMO" means an adjustable or fixed rate debt obligation that
is collateralized by Mortgage Loans and/or mortgage certificates.
"Code" means the Internal Revenue Code of 1986, as amended
from time to time or any successor statute thereto, as interpreted by the
applicable regulations thereunder. Any reference herein to a specific section or
sections of the Code shall be deemed to include a reference to any corresponding
provision of future law.
"Company" means Hanover Capital Mortgage Holdings, Inc., a
Maryland corporation.
"Consent" means the consent to, approval of, or vote on a
proposed action by a Partner given in accordance with Article 14 hereof.
"Consent of the Limited Partners" means the Consent of a
Majority in Interest of the Limited Partners other than the Company, which
Consent shall be obtained prior to the taking of any action for which it is
required by this Agreement and may be given or withheld by a Majority in
Interest of the Limited Partners, unless otherwise expressly provided herein, in
their sole and absolute discretion.
"Consent of the Partners" means the Consent of Partners
holding Percentage Interests that in the aggregate are equal to or greater than
66-2/3% of the aggregate Percentage Interests of all Partners, which Consent
shall be obtained prior to the taking of any action for which it is required by
this Agreement and may be given or withheld by such Partners, in their sole and
absolute discretion.
"Constructively Own" means ownership under the constructive
ownership rules described in Exhibit C.
"Contributed Property" means each property or other asset
(excluding cash), in such form as may be permitted by the Act, contributed or
deemed contributed to the Partnership (or, to the extent provided in applicable
regulations, deemed contributed to the Partnership on termination and
reconstitution thereof pursuant to Section 708 of the Code).
"Debt" means, as to any Person, as of any date of
determination, (i) all indebtedness of such Person for borrowed money or for the
deferred purchase price of property or services; (ii) all amounts owed by such
Person to banks or other Persons in respect of reimbursement obligations under
letters of credit, surety bonds and other similar instruments guaranteeing
payment or other performance of obligations by such Person; (iii) all
indebtedness for borrowed money or for the deferred purchase price of property
or services secured by any lien on any property owned by such Person, to the
extent attributable to such Person's interest in such property, even though such
Person has not assumed or become liable for the payment thereof; and (iv) lease
obligations of such Person which, in accordance with generally accepted
accounting principles, should be capitalized.
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"Deemed Partnership Interest Value" means, as of any date with
respect to any class of Partnership Interests, the Deemed Value of the
Partnership Interests of such class multiplied by the applicable Partner's
Percentage Interest of such class.
"Deemed Value of the Partnership Interests" means, as of any
date with respect to any class of Partnership Interests, (i) the total number of
shares of capital stock of the General Partner corresponding to such class of
Partnership Interests (as provided for in Sections 4.1 and 4.3.C) issued and
outstanding as of the close of business on such date (excluding any treasury
shares) multiplied by the Fair Market Value of a share of such capital stock on
such date; (ii) divided by the Percentage Interest of the General Partner in
such class of Partnership Interests on such date.
"Depreciation" means, for each fiscal year or other period, an
amount equal to the depreciation, amortization or other cost recovery deduction
allowable with respect to an asset for such year or other period, except that if
the Gross Asset Value of an asset differs from its adjusted basis for federal
income tax purposes at the beginning of such year or other period, Depreciation
shall be an amount which bears the same ratio to such beginning Gross Asset
Value as the federal income tax depreciation, amortization or other cost
recovery deduction for such year or other period bears to such beginning
adjusted tax basis; provided, however, that if the federal income tax
depreciation, amortization or other cost recovery deduction for such year is
zero, Depreciation shall be determined with reference to such beginning Gross
Asset Value using any reasonable method selected by the General Partner.
"Earn-Out Adjustment" means an amount equal to $2,500,000.
"Earn-Out Measuring Date" means each September 30 beginning
with September 30, 1998 and ending with September 30, 2002.
"Earn-Out Units" means (i) the number of Partnership Units
that would have been issued to the Original Limited Partners in exchange for the
HCP Preferred as of the Effective Date had the HCP Preferred had an Agreed Value
as of the Effective Date of $12,500,000 minus (ii) the number of Partnership
Units issued to the Original Limited Partners in exchange for the HCP Preferred
as of the Effective Date (subject to appropriate adjustment for 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 the General Partner pursuant to a pro rata distribution by the
Partnership and transactions having like effect). Any Earn-Out Units that are
issued shall be of the same class as the Partnership Interests initially issued
to the General Partner and the Original Limited Partners hereunder.
"Effective Date" means the date of closing of the initial
public offering of REIT Shares upon which date contributions set forth on
Exhibit A shall become effective.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended from time to time (or any corresponding provisions of
succeeding laws).
"Fair Market Value" means, with respect to any share of
capital stock or Other Security of the General Partner, 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 or Other
Securities 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 or Other Securities 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 the General Partner, or (iii) if such
shares or Other Securities are not listed or admitted to trading on any
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<PAGE> 12
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 the General Partner, 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 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 10 days prior to the date in question,
the Fair Market Value of such shares or Other Securities shall be determined by
the General Partner acting on the basis of such quotations and other information
as it considers appropriate. In the event the REIT Shares Amount for any shares
includes rights that a holder of such shares would be entitled to receive, then
the Fair Market Value of such rights shall be determined by the General Partner
acting on the basis of such quotations and other information as it considers
appropriate; and provided further that, in connection with determining the
Deemed Value of the Partnership Interests for purposes of determining the number
of additional Partnership Units issuable upon a Capital Contribution funded by
an underwritten public offering of shares of capital stock of the General
Partner, the Fair Market Value of such shares shall be the public offering price
per share of such class of capital stock sold.
"Funding Debt" means the incurrence of any Debt by or on
behalf of the General Partner for the purpose of providing funds to the
Partnership.
"General Partner" means the Company or its successors as
general partner of the Partnership.
"General Partner Interest" means a Partnership Interest held
by the General Partner. A General Partner Interest may be expressed as a number
of Partnership Units.
"General Partner Loan" shall have the meaning set forth in
Section 4.3.B.
"General Partner Payment" shall have the meaning set forth in
Section 15.11.
"Gross Asset Value" means, with respect to any asset, the
asset's adjusted basis for federal income tax purposes, except as follows:
(a) The initial Gross Asset Value of any asset
contributed by a Partner to the Partnership shall be the gross fair market value
of such asset, as determined by the contributing Partner and the General Partner
(as set forth on Exhibit A attached hereto, as such exhibit may be amended from
time to time); provided that, if the contributing Partner is the General Partner
then, except with respect to the General Partner's initial Capital Contribution
which shall be determined as set forth on Exhibit A, or capital contributions of
cash, REIT Shares or other shares of capital stock of the General Partner, the
determination of the fair market value of the contributed asset shall be
determined by (i) the price paid by the General Partner if the asset is acquired
by the General Partner contemporaneously with its contribution to the
Partnership, or (ii) by Appraisal if otherwise acquired by the General Partner.
(b) As of the times listed below, the Gross Asset Values
of all Partnership assets shall be adjusted to equal their respective gross fair
market values, as determined by the General Partner using such reasonable method
of valuation as it may adopt, provided, however, that for such purpose, the net
value of all of the Partnership assets, in the aggregate, shall be equal to the
Deemed Value of the Partnership Interests of all classes of Partnership
Interests then outstanding, regardless of the method of valuation adopted by the
General Partner:
(i) the acquisition of an additional interest in the
Partnership by a new or existing Partner in exchange for more
than a de minimis Capital Contribution, if the General Partner
reasonably determines that such adjustment is necessary or
appropriate to reflect the relative economic interests of the
Partners in the Partnership;
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<PAGE> 13
(ii) the distribution by the Partnership to a
Partner of more than a de minimis amount of Partnership cash
or property as consideration for an interest in the
Partnership if the General Partner reasonably determines that
such adjustment is necessary or appropriate to reflect the
relative economic interests of the Partners in the
Partnership;
(iii) the liquidation of the Partnership within
the meaning of Regulations Section 1.704-1(b)(2)(ii)(g); and
(iv) at such other times as the General Partner
shall reasonably determine necessary or advisable in order to
comply with Regulations Sections 1.704-1(b) and 1.704-2.
(c) The Gross Asset Value of any Partnership asset
distributed to a Partner shall be the gross fair market value of such asset on
the date of distribution as determined by the distributee and the General
Partner, or if the distributee and the General Partner cannot agree on such a
determination, by Appraisal.
(d) The Gross Asset Values of Partnership assets shall be
increased (or decreased) to reflect any adjustments to the adjusted basis of
such assets pursuant to Code Section 734(b) or Code Section 743(b), but only to
the extent that such adjustments are taken into account in determining Capital
Accounts pursuant to Regulations Section 1.704-1(b)(2)(iv)(m); provided,
however, that Gross Asset Values shall not be adjusted pursuant to this
subparagraph (d) to the extent that the General Partner reasonably determines
that an adjustment pursuant to subparagraph (b) is necessary or appropriate in
connection with a transaction that would otherwise result in an adjustment
pursuant to this subparagraph (d).
(e) If the Gross Asset Value of a Partnership asset has
been determined or adjusted pursuant to subparagraph (a), (b) or (d), such Gross
Asset Value shall thereafter be adjusted by the Depreciation taken into account
with respect to such asset for purposes of computing Net Income and Net Losses.
"HCP" means Hanover Capital Partners Ltd., a New York
corporation.
"HCP Preferred" means the shares of Series A Preferred Stock,
$.01 par value per share, of HCP contributed to the Partnership as of the
Effective Date by John A. Burchett, Joyce S. Mizerak, George J. Ostendorf and
Irma N. Tavares.
"Holder" means either the Partner or Assignee owning a
Partnership Unit.
"Immediate Family" means, with respect to any natural Person,
(i) such Person's estate, current or former spouse, descendants (by blood or
adoption), parents, parents-in-law, siblings and descendants of siblings (by
blood or adoption) and (ii) any trust or estate, all of the beneficiaries of
which consist of such Person and/or Persons included in (i).
"Incapacity" or "Incapacitated" means, (i) as to any
individual Partner, death, total physical disability or entry by a court of
competent jurisdiction adjudicating him or her incompetent to manage his or her
Person or his or her estate; (ii) as to any corporation which is a Partner, the
filing of a certificate of dissolution, or its equivalent, for the corporation
or the revocation of its charter; (iii) as to any partnership which is a
Partner, the dissolution and commencement of winding up of the partnership; (iv)
as to any estate which is a Partner, the distribution by the fiduciary of the
estate's entire interest in the Partnership; (v) as to any trustee of a trust
which is a Partner, the termination of the trust (but not the substitution of a
new trustee); or (vi) as to any Partner, the bankruptcy of such Partner. For
purposes of this definition, bankruptcy of a Partner shall be deemed to have
occurred when (a) the Partner commences
8
<PAGE> 14
a voluntary proceeding seeking liquidation, reorganization or other relief under
any bankruptcy, insolvency or other similar law now or hereafter in effect, (b)
the Partner is adjudged as bankrupt or insolvent, or a final and nonappealable
order for relief under any bankruptcy, insolvency or similar law now or
hereafter in effect has been entered against the Partner, (c) the Partner
executes and delivers a general assignment for the benefit of the Partner's
creditors, (d) the Partner files an answer or other pleading admitting or
failing to contest the material allegations of a petition filed against the
Partner in any proceeding of the nature described in clause (b) above, (e) the
Partner seeks, consents to or acquiesces in the appointment of a trustee,
receiver or liquidator for the Partner or for all or any substantial part of the
Partner's properties, (f) any proceeding seeking liquidation, reorganization or
other relief under any bankruptcy, insolvency or other similar law now or
hereafter in effect has not been dismissed within 120 days after the
commencement thereof, (g) the appointment without the Partner's consent or
acquiescence of a trustee, receiver or liquidator has not been vacated or stayed
within 90 days of such appointment, or (h) an appointment referred to in clause
(g) is not vacated within 90 days after the expiration of any such stay.
"Indemnitee" means (i) any Person subject to a claim or demand
or made or threatened to be made a party to, or involved or threatened to be
involved in, an action, suit or proceeding by reason of his or her status as (A)
the General Partner or (B) a director, officer, employee or agent of the
Partnership, the General Partner or any Subsidiary of the Partnership or the
General Partner and (ii) such other Persons (including Affiliates of the General
Partner or the Partnership) as the General Partner may designate from time to
time, in its sole and absolute discretion.
"IPO Share" means a REIT Share issued by the Company in its
initial underwritten public offering.
"IPO Price" means the initial public offering price of a Unit
in the Offering.
"IRS" means the Internal Revenue Service, which administers
the internal revenue laws of the United States.
"Limited Partner" means any Person named as a Limited Partner
in Exhibit A attached hereto, as such exhibit may be amended from time to time,
or any Substituted Limited Partner or Additional Limited Partner, in such
Person's capacity as a Limited Partner in the Partnership.
"Limited Partnership Interest" means a Partnership Interest of
a Limited Partner representing a fractional part of the Partnership Interests of
all Limited Partners and includes any and all benefits to which the holder of
such a Partnership Interest may be entitled as provided in this Agreement,
together with all obligations of such Person to comply with the terms and
provisions of this Agreement. A Limited Partnership Interest may be expressed as
a number of Partnership Units.
"Liquidating Events" shall have the meaning set forth in
Section 13.1.
"Liquidator" shall have the meaning set forth in
Section 13.2.A.
"Majority in Interest of the Limited Partners" means Limited
Partners (other than the General Partner and any Limited Partner fifty percent
(50%) or more of whose equity is owned, directly or indirectly, by the General
Partner) holding Percentage Interests that in the aggregate are greater than
fifty percent (50%) of the aggregate Percentage Interests of all Limited
Partners (other than the General Partner and any Limited Partner fifty percent
(50%) or more of whose equity is owned, directly or indirectly, by the General
Partner).
"Majority in Interest of Partners" means Partners holding
Percentage Interests that are greater than fifty percent (50%) of the aggregate
Percentage Interests of all Partners.
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<PAGE> 15
"Mortgage Assets" means Mortgage Loans (including interests in
real property acquired upon or in lieu of foreclosure thereof) and
Mortgage-Backed Securities.
"Mortgage-Backed Securities" means (i) Pass-Through
Certificates, (ii) CMOs and (iii) REMICs.
"Mortgage Loans" means both conforming and non-conforming
single family, multifamily and commercial mortgage loans and deeds of trust.
"Net Income" or "Net Loss" means for each fiscal year of the
Partnership, an amount equal to the Partnership's taxable income or loss for
such fiscal year, determined in accordance with Code Section 703(a) (for this
purpose, all items of income, gain, loss or deduction required to be stated
separately pursuant to Code Section 703(a)(1) shall be included in taxable
income or loss), with the following adjustments: (a) Any income of the
Partnership that is exempt from federal income tax and not otherwise taken into
account in computing Net Income or Net Loss pursuant to this definition of Net
Income or Net Loss shall be added to such taxable income or loss; (b) Any
expenditures of the Partnership described in Code Section 705(a)(2)(B) or
treated as Code Section 705(a)(2)(B) expenditures pursuant to Regulations
Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account in computing
Net Income or Net Loss pursuant to this definition of Net Income or Net Loss,
shall be subtracted from such taxable income or loss; (c) In the event the Gross
Asset Value of any Partnership asset is adjusted pursuant to subparagraph (b) or
subparagraph (c) of the definition of Gross Asset Value, the amount of such
adjustment shall be taken into account as gain or loss from the disposition of
such asset for purposes of computing Net Income or Net Loss; (d) Gain or loss
resulting from any disposition of property with respect to which gain or loss is
recognized for federal income tax purposes shall be computed by reference to the
Gross Asset Value of the property disposed of, notwithstanding that the adjusted
tax basis of such property differs from its Gross Asset Value; (e) In lieu of
the depreciation, amortization, and other cost recovery deductions taken into
account in computing such taxable income or loss, there shall be taken into
account Depreciation for such fiscal year; (f) To the extent an adjustment to
the adjusted tax basis of any Partnership asset pursuant to Code Section 734(b)
or Code Section 743(b) is required pursuant to Regulations Section
1.704-1(b)(2)(iv)(m)(4) to be taken into account in determining Capital Accounts
as a result of a distribution other than in liquidation of a Partner's interest
in the Partnership, the amount of such adjustment shall be treated as an item of
gain (if the adjustment increases the basis of the asset) or loss (if the
adjustment decreases the basis of the asset) from the disposition of the asset
and shall be taken into account for purposes of computing Net Income or Net
Loss; and (g) Notwithstanding any other provision of this definition of Net
Income or Net Loss, any items which are specially allocated pursuant to Section
6.3 hereof shall not be taken into account in computing Net Income or Net Loss.
The amounts of the items of Partnership income, gain, loss, or deduction
available to be specially allocated pursuant to Section 6.3 hereof shall be
determined by applying rules analogous to those set forth in this definition of
Net Income or Net Loss.
"Nonrecourse Deductions" shall have the meaning set forth in
Regulations Section 1.704-2(b)(1), and the amount of Nonrecourse Deductions for
a Partnership Year shall be determined in accordance with the rules of
Regulations Section 1.704-2(c).
"Nonrecourse Liability" shall have the meaning set forth in
Regulations Section 1.752-1(a)(2).
"Notice of Redemption" means the Notice of Redemption
substantially in the form of Exhibit B to this Agreement.
"Original Limited Partners" means the Limited Partners of the
Partnership, listed on Exhibit A hereto, as of the Effective Date.
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<PAGE> 16
"Other Securities" means (i) any rights, options, warrants or
convertible or exchangeable securities having the right to subscribe for or
purchase REIT Shares or other shares of capital stock of the General Partner,
excluding grants under any Stock Option Plan, or (ii) any Debt issued by the
General Partner that provides any of the rights described in clause (i).
"Partner" means a General Partner or a Limited Partner, and
"Partners" means the General Partner and the Limited Partners.
"Partner Minimum Gain" means an amount, with respect to each
Partner Nonrecourse Debt, equal to the Partnership Minimum Gain that would
result if such Partner Nonrecourse Debt were treated as a Nonrecourse Liability,
determined in accordance with Regulations Section 1.704-2(i)(3).
"Partner Nonrecourse Debt" shall have the meaning set forth in
Regulations Section 1.704-2(b)(4).
"Partner Nonrecourse Deductions" shall have the meaning set
forth in Regulations Section 1.704-2(i)(2), and the amount of Partner
Nonrecourse Deductions with respect to a Partner Nonrecourse Debt for a
Partnership Year shall be determined in accordance with the rules of Regulations
Section 1.704-2(i)(2).
"Partnership" means the limited partnership formed under the
Act and governed by this Agreement, and any successor thereto.
"Partnership Interest" means an ownership interest in the
Partnership of either a Limited Partner or the General Partner and includes any
and all benefits to which the holder of such a Partnership Interest may be
entitled as provided in this Agreement, together with all obligations of such
Person to comply with the terms and provisions of this Agreement. There may be
one or more classes of Partnership Interests as provided in Section 4.3. A
Partnership Interest may be expressed as a number of Partnership Units. Unless
otherwise expressly provided for by the General Partner at the time of the
original issuance of any Partnership Interests, all Partnership Interests
(whether of a Limited Partner or a General Partner) shall be of the same class.
"Partnership Minimum Gain" shall have the meaning set forth in
Regulations Section 1.704-2(b)(2), and the amount of Partnership Minimum Gain,
as well as any net increase or decrease in Partnership Minimum Gain, for a
Partnership Year shall be determined in accordance with the rules of Regulations
Section 1.704-2(d).
"Partnership Record Date" means the record date established by
the General Partner for the distribution of Available Cash pursuant to Section
5.1 hereof which record date shall be the same as the record date established by
the General Partner for a distribution to its stockholders of some or all of its
portion of such distribution.
"Partnership Unit" means, with respect to any class of
Partnership Interest, a fractional, undivided share of such class of Partnership
Interest issued pursuant to Sections 4.1 and 4.3. The ownership of Partnership
Units may be evidenced by a certificate for units substantially in the form of
Exhibit D hereto or as the General Partner may determine with respect to any
class of Partnership Units issued from time to time under Section 4.1 and 4.3.
"Partnership Year" means the fiscal year of the Partnership,
which shall be the calendar year.
"Pass-Through Certificate" means securities (or interests
therein) evidencing undivided ownership interests in a pool of Mortgage Loans,
the holders of which receive a "pass-through" of the
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<PAGE> 17
principal and interest paid in connection with the underlying Mortgage Loans in
accordance with their respective undivided interests in the pool.
"Percentage Interest" means, as to a Partner holding a class
of Partnership Interests, its interest in the Partnership as determined by
dividing the Partnership Units of such class owned by such Partner by the total
number of Partnership Units of such class then outstanding as specified in
Exhibit A attached hereto, as such exhibit may be amended from time to time. If
the Partnership issues more than one class of Partnership Interest, the interest
in the Partnership among the classes of Partnership Interests shall be
determined as set forth in the amendment to the Partnership Agreement setting
forth the rights and privileges of such additional classes of Partnership
Interest, if any, as contemplated by Section 4.3.C hereof.
"Person" means an individual or a corporation, partnership,
limited liability company, trust, unincorporated organization, association or
other entity.
"Pro Rata Portion" means, with respect to any Original Limited
Partner (or his or her representatives, successors or assigns, as the case may
be), a fraction (i) the numerator of which is the number of Partnership Units
initially issued to such Original Limited Partner in exchange for his or her
portion of the HCP Preferred and (ii) the denominator of which is the total
number of Partnership Units initially issued to the Original Limited Partners in
exchange for the HCP Preferred.
"Qualified REIT Subsidiary" means any Subsidiary of the
General Partner that is a "qualified REIT subsidiary" within the meaning of
Section 856(i) of the Code.
"Qualified Transferee" means an "Accredited Investor" as
defined in Rule 501 promulgated under the Securities Act.
"Redemption" shall have the meaning set forth in
Section 8.6.A.
"Regulations" means the Income Tax Regulations promulgated
under the Code, as such regulations may be amended from time to time (including
corresponding provisions of succeeding regulations).
"Regulatory Allocations" shall have the meaning set forth in
Section 6.3.A(viii) of this Agreement.
"REIT" means a real estate investment trust under Sections 856
through 860 of the Code.
"REIT Requirements" shall have the meaning set forth in
Section 5.1.
"REIT Share" means a share of common stock, par value $.01 per
share, of the General Partner.
"REIT Shares Amount" means, as of any date, an aggregate
number of REIT Shares equal to the number of Tendered Units, or in the case of
Section 11.2.B, all Units, as adjusted pursuant to Section 7.5 (in the event the
General Partner acquires material assets, other than on behalf of the
Partnership) and for 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 the General Partner
pursuant to a pro rata distribution by the Partnership; provided, however, that
under no circumstances shall the REIT Shares Amount with respect to any Tendered
Units be a number of REIT Shares having an aggregate Fair Market Value that is
less than the Deemed Partnership Interest Value represented by such Tendered
Units (as of the Specified Redemption Date or other applicable valuation date).
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<PAGE> 18
"REMIC" means, as the context may require, (i) a real estate
mortgage investment conduit as defined in Section 860D of the Code or (ii) any
regular or residual interest in a REMIC within the meaning of Section 860G(a)(1)
or Section 860G(a)(2), respectively, of the Code.
"Securities Act" means the Securities Act of 1933, as amended,
and the rules and regulations of the Securities and Exchange Commission
promulgated thereunder. Any reference herein to a specific section, rule or form
thereunder shall be deemed to include a reference to any corresponding successor
to such section, rule or form.
"Securities Exchange Act" means the Securities Exchange Act of
1934, as amended, and the rules and regulations of the Securities and Exchange
Commission promulgated thereunder. Any reference herein to a specific section,
rule or form thereunder shall be deemed to include a reference to any
corresponding successor to such section, rule or form.
"Specified Redemption Date" means the day of receipt by the
General Partner of a Notice of Redemption.
"Stock Option Plan" means any stock option plan of the General
Partner.
"Subsidiary" means, with respect to any Person, any
corporation or other entity of which a majority of (i) the voting power of the
voting equity securities or (ii) the outstanding equity interests is owned,
directly or indirectly, by such Person.
"Subsidiary Partnership" means any partnership that is a
Subsidiary of the Partnership.
"Substituted Limited Partner" means a Person who is admitted
as a Limited Partner to the Partnership pursuant to Section 11.4.
"Surviving Partnership" shall have the meaning set forth in
Section 11.2.C.
"Tax Items" shall have the meaning set forth in Section 6.4.A.
"Tendered Units" shall have the meaning set forth in
Section 8.6.A.
"Tendering Partner" shall have the meaning set forth in
Section 8.6.A.
"Terminating Capital Transaction" means any sale or other
disposition of all or substantially all of the assets of the Partnership or a
related series of transactions that, taken together, result in the sale or other
disposition of all or substantially all of the assets of the Partnership.
"Total Return per Unit" means, as of any Earn-Out Measuring
Date, (i) two times the Average Spread for the 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 an IPO Share through and including such
Earn-Out Measuring Date.
ARTICLE 2
ORGANIZATIONAL MATTERS
2.1 ORGANIZATION. The Partnership is a limited partnership
formed pursuant to the provisions of the Act and upon the terms and conditions
set forth in this Agreement. Except as expressly provided herein, the rights and
obligations of the Partners and the administration and termination of the
Partnership shall be governed by the Act. The Partnership Interest of each
Partner shall be personal property for all purposes.
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2.2 NAME. The name of the Partnership is Hanover Capital
Mortgage Holdings, L.P. The Partnership's business may be conducted under any
other name or names deemed advisable by the General Partner, including the name
of the General Partner or any Affiliate thereof. The words "Limited
Partnership," "L.P.," "Ltd." or similar words or letters shall be included in
the Partnership's name where necessary for the purposes of complying with the
laws of any jurisdiction that so requires. The General Partner in its sole and
absolute discretion may change the name of the Partnership at any time and from
time to time and shall notify the Limited Partners of such change in the next
regular communication to the Limited Partners.
2.3 RESIDENT AGENT; PRINCIPAL OFFICE. The name and
address of the resident agent of the Partnership in the State of Delaware
is Corporation Service Company, 1013 Centre Road, Wilmington, New Castle
County, Delaware 19805. The address of the principal office of the Partnership
in the State of Delaware is c/o Corporation Service Company, 1013 Centre Road,
Wilmington, New Castle County, Delaware 19805. The principal office of the
Partnership is located at 100 Metroplex Drive, Suite 301, Edison, NJ 08817 or
such other place as the General Partner may from time to time designate by
notice to the Limited Partners. The Partnership may maintain offices at such
other place or places within or outside the State of Delaware as the General
Partner deems advisable.
. 2.4 POWER OF ATTORNEY
A. Each Limited Partner and each Assignee constitutes
and appoints the General Partner, any Liquidator, and authorized officers and
attorneys-in-fact of each, and each of those acting singly, in each case with
full power of substitution, as its true and lawful agent and attorney-in-fact,
with full power and authority in its name, place and stead to: (1) execute,
swear to, acknowledge, deliver, file and record in the appropriate public
offices (a) all certificates, documents and other instruments (including,
without limitation, this Agreement and the Certificate and all amendments or
restatements thereof) that the General Partner or the Liquidator deems
appropriate or necessary to form, qualify or continue the existence or
qualification of the Partnership as a limited partnership (or a partnership in
which the Limited Partners have limited liability) in the State of Delaware and
in all other jurisdictions in which the Partnership may conduct business or own
property; (b) all instruments that the General Partner or any Liquidator deems
appropriate or necessary to reflect any amendment, change, modification or
restatement of this Agreement made in accordance with its terms; (c) all
conveyances and other instruments or documents that the General Partner or any
Liquidator deems appropriate or necessary to reflect the dissolution and
liquidation of the Partnership pursuant to the terms of this Agreement,
including, without limitation, a certificate of cancellation; (d) all
instruments relating to the admission, withdrawal, removal or substitution of
any Partner pursuant to, or other events described in, Articles 11, 12 and 13
hereof or the Capital Contribution of any Partner; and (e) all certificates,
documents and other instruments relating to the determination of the rights,
preferences and privileges of Partnership Interests; and (2) execute, swear to,
acknowledge and file all ballots, consents, approvals, waivers, certificates and
other instruments appropriate or necessary, in the sole and absolute discretion
of the General Partner or any Liquidator, to make, evidence, give, confirm or
ratify any vote, consent, approval, agreement or other action which is made or
given by the Partners hereunder or is appropriate or necessary, in the sole
discretion of the General Partner or any Liquidator, to effectuate the terms or
intent of this Agreement. Nothing contained herein shall be construed as
authorizing the General Partner or any Liquidator to amend this Agreement except
in accordance with Article 14 hereof or as may be otherwise expressly provided
for in this Agreement.
B. The foregoing power of attorney is hereby declared
to be irrevocable and a power coupled with an interest, in recognition of the
fact that each of the Partners will be relying upon the power of the General
Partner and any Liquidator to act as contemplated by this Agreement in any
filing or other action by it on behalf of the Partnership, and it shall survive
and not be affected by the subsequent Incapacity of any Limited Partner or
Assignee and the transfer of all or any portion of such Limited Partner's or
Assignee's Partnership Units and shall extend to such Limited Partner's or
Assignee's heirs, successors, assigns and personal representatives. Each such
Limited Partner or Assignee hereby
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agrees to be bound by any representation made by the General Partner or any
Liquidator, acting in good faith pursuant to such power of attorney; and each
such Limited Partner or Assignee hereby waives any and all defenses which may be
available to contest, negate or disaffirm the action of the General Partner or
any Liquidator, taken in good faith under such power of attorney. Each Limited
Partner or Assignee shall execute and deliver to the General Partner or any
Liquidator, within 15 days after receipt of the General Partner's or
Liquidator's request therefor, such further designation, powers of attorney and
other instruments as the General Partner or the Liquidator, as the case may be,
deems necessary to effectuate this Agreement and the purposes of the
Partnership.
2.5 TERM. The term of the Partnership commenced on June ___,
1997 and shall continue until December 31, 2096 unless it is dissolved sooner
pursuant to the provisions of Article 13 or as otherwise provided by law.
2.6 NUMBER OF PARTNERS. The Partnership shall not at any time
have more than 100 partners (including as partners those persons indirectly
owning an interest in the Partnership through a partnership, limited liability
company, S corporation or grantor trust (such entity, a "flow through entity"),
but only if substantially all of the value of such person's interest in the flow
through entity is attributable to the flow through entity's interest (direct or
indirect) in the Partnership).
ARTICLE 3
PURPOSE
3.1 PURPOSE AND BUSINESS. The purpose and nature of the
business to be conducted by the Partnership is (i) to conduct any business that
may be lawfully conducted by a limited partnership organized pursuant to the
Act, including but not limited to directly and indirectly purchasing,
originating, holding, financing, hedging, selling and securitizing Mortgage
Assets, provided, however, that such business shall be conducted in such a
manner as to permit the General Partner at all times to be classified as a REIT
for federal income tax purposes, unless the General Partner ceases to qualify as
a REIT for reasons other than the conduct of the business of the Partnership,
(ii) to own interests (directly and indirectly) in HCP, any Subsidiaries of HCP
and any partnerships, joint ventures and other similar arrangements organized to
engage in any of the foregoing, and (iii) to do anything necessary or incidental
to the foregoing. In connection with the foregoing, and without limiting the
General Partner's right in its sole discretion to cease qualifying as a REIT,
the Partners acknowledge that the General Partner's current intent to operate
and qualify as a REIT inures to the benefit of all the Partners and not solely
the General Partner.
3.2 POWERS. The Partnership is empowered to do any and all
acts and things necessary, appropriate, proper, advisable, incidental to or
convenient for the furtherance and accomplishment of the purposes and business
described herein and for the protection and benefit of the Partnership,
including, without limitation, full power and authority, directly or through its
ownership interest in other entities, to enter into, perform and carry out
contracts of any kind, borrow money and issue evidences of indebtedness, whether
or not secured, in connection with the purchase, origination, holding,
financing, hedging, sale and securitization of Mortgage Assets; provided,
however, that the Partnership shall not take, or refrain from taking, any action
which, in the judgment of the General Partner, in its sole and absolute
discretion, (i) could adversely affect the ability of the General Partner to
continue to qualify as a REIT, (ii) could subject the General Partner to any
taxes under Section 857 or Section 4981 of the Code, or (iii) could violate any
law or regulation of any governmental body or agency having jurisdiction over
the General Partner or its securities, unless any such action (or inaction)
under (i), (ii) or (iii) shall have been specifically consented to by the
General Partner in writing.
3.3 PARTNERSHIP ONLY FOR PURPOSES SPECIFIED. The Partnership
shall be a partnership only for the purposes specified in Section 3.1 hereof,
and this Agreement shall not be deemed to create a partnership among the
Partners with respect to any activities whatsoever other than the activities
within the purposes of the Partnership as specified in Section 3.1 hereof.
Except as otherwise provided in
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this Agreement, no Partner shall have any authority to act for, bind, commit or
assume any obligation or responsibility on behalf of the Partnership, its
properties or any other Partner. No Partner, in its capacity as a Partner under
this Agreement, shall be responsible or liable for any indebtedness or
obligation of another Partner, nor shall the Partnership be responsible or
liable for any indebtedness or obligation of any Partner, incurred either before
or after the execution and delivery of this Agreement by such Partner, except as
to those responsibilities, liabilities, indebtedness or obligations incurred
pursuant to and as limited by the terms of this Agreement and the Act.
. 3.4 REPRESENTATIONS AND WARRANTIES BY THE PARTIES
A. Each Partner represents and warrants to each
other Partner that (i) such Partner has, if not an individual, the power and
authority or, if an individual, the legal capacity to enter into this Agreement
and perform such Partner's obligations hereunder, (ii) the consummation of the
transactions contemplated by this Agreement to be performed by such Partner will
not result in a breach or violation of, or a default under, any agreement by
which such Partner or any of such Partner's property is or are bound, or any
statute, regulation, order or other law to which such Partner is subject, (iii)
such Partner is neither a "foreign person" within the meaning of Section 1445(f)
of the Code nor a "foreign partner" within the meaning of Section 1446(e) of the
Code, and (iv) this Agreement has been duly executed and delivered by such
Partner and is binding upon, and enforceable against, such Partner in accordance
with its terms.
B. Each Partner that is not an individual
represents and warrants to each other Partner that (i) its execution and
delivery of this Agreement and all transactions contemplated by this Agreement
to be performed by it have been duly authorized by all necessary action,
including without limitation, that of its general partner(s), committee(s),
trustee(s), beneficiaries, directors and/or stockholder(s), as the case may be,
as required, (ii) the consummation of such transactions shall not result in a
breach or violation of, or a default under, its certificate of limited
partnership, partnership agreement, trust agreement, limited liability company
operating agreement, charter or by-laws, as the case may be, any agreement by
which such Partner or any of such Partner's properties or any of its partners,
beneficiaries, trustees or stockholders, as the case may be, is or are bound, or
any statute, regulation, order or other law to which such Partner or any of its
partners, trustees, beneficiaries or stockholders, as the case may be, is or are
subject, (iii) such Partner is neither a "foreign person" within the meaning of
Section 1445(f) of the Code nor a "foreign partner" within the meaning of
Section 1446(e) of the Code, and (iv) this Agreement has been duly executed and
delivered by such Partner and is binding upon, and enforceable against, such
Partner in accordance with its terms.
C. Each Partner represents, warrants and agrees
that it has acquired and continues to hold its interest in the Partnership for
its own account for investment only and not for the purpose of, or with a view
toward, the resale or distribution of all or any part thereof, nor with a view
toward selling or otherwise distributing such interest or any part thereof at
any particular time or under any predetermined circumstances. Each Partner
further represents and warrants that it is a sophisticated investor, able and
accustomed to handling sophisticated financial matters for itself, particularly
real estate investments, and that it has a sufficiently high net worth that it
does not anticipate a need for the funds it has invested in the Partnership in
what it understands to be a highly speculative and illiquid investment.
D. Each Partner further represents, warrants
and agrees as follows:
(i) Except as provided in Exhibit E, it
does not actually own or Constructively Own any stock in the General Partner.
(ii) Upon request of the General Partner,
it will disclose to the General Partner the amount of REIT Shares or other
shares of capital stock of the General Partner that it actually owns or
Constructively Owns.
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(iii) It understands that if, for any
reason, (a) the representations, warranties or agreements set forth in
Subparagraph D(i) or (ii) of this Section 3.4 are violated, or (b) the
Partnership's actual or Constructive Ownership of the REIT Shares or other
shares of capital stock of the General Partner violates the limitations set
forth in the Charter, then (1) some or all of the Redemption rights of such
Partner may become non-exercisable, and (2) some or all of the REIT Shares owned
by such Partner may be automatically transferred to a trust for the benefit of a
charitable beneficiary, as provided in the Charter.
E. The representations and warranties contained
in Sections 3.4.A, 3.4.B, 3.4.C and 3.4.D hereof shall survive the execution and
delivery of this Agreement by each Partner and the dissolution and winding up of
the Partnership.
F. Each Partner hereby acknowledges that no
representations as to potential profit, cash flows, funds from operations or
yield, if any, in respect of the Partnership or the General Partner have been
made by any Partner or any employee or representative or Affiliate of any
Partner, and that projections and any other information, including, without
limitation, financial and descriptive information and documentation, which may
have been in any manner submitted to such Partner shall not constitute any
representation or warranty of any kind or nature, express or implied.
ARTICLE 4
CAPITAL CONTRIBUTIONS
4.1 CAPITAL CONTRIBUTIONS OF THE PARTNERS. At the time of
their respective execution of this Agreement, the Partners shall make Capital
Contributions as set forth in Exhibit A to this Agreement. The Partners shall
own Partnership Units of the class and in the amounts set forth in Exhibit A and
shall have a Percentage Interest in the Partnership as set forth in Exhibit A,
which Percentage Interest shall be adjusted in Exhibit A from time to time by
the General Partner to the extent necessary to accurately reflect exchanges,
redemptions, Capital Contributions, the issuance of additional Partnership Units
or similar events having an effect on a Partner's Percentage Interest. Except as
required by law or as otherwise provided in Sections 4.3, 4.4 and 10.5, no
Partner shall be required or permitted to make any additional Capital
Contributions or loans to the Partnership. Unless otherwise specified by the
General Partner at the time of the creation of any class of Partnership
Interests, the corresponding class of capital stock for any Partnership Units
issued shall be REIT Shares.
4.2 LOANS BY THIRD PARTIES. Subject to Section 4.3, the
Partnership may incur Debt, or enter into other similar credit, guarantee,
financing or refinancing arrangements for any purpose (including, without
limitation, in connection with any further acquisitions of Mortgage Assets) with
any Person that is not the General Partner upon such terms as the General
Partner determines appropriate; provided that, the Partnership shall not incur
any Debt that is recourse to the General Partner, except to the extent otherwise
agreed to by the General Partner in its sole discretion.
. 4.3 ADDITIONAL FUNDING AND CAPITAL CONTRIBUTIONS
A. General. The General Partner may, at any time and
from time to time, determine that the Partnership requires additional funds
("Additional Funds") for the acquisition of additional Mortgage Assets or for
such other Partnership purposes as the General Partner may determine. Additional
Funds may be raised by the Partnership, at the election of the General Partner,
in any manner provided in, and in accordance with, the terms of this Section
4.3. No Person shall have any preemptive, preferential or similar right or
rights to subscribe for or acquire any Partnership Interest, except as set forth
in this Section 4.3.
B. General Partner Loans. The General Partner may
enter into a Funding Debt, including, without limitation, a Funding Debt that is
convertible into REIT Shares, and lend the
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Additional Funds to the Partnership (a "General Partner Loan"); provided,
however, that the General Partner shall not be obligated to lend the net
proceeds of any Funding Debt to the Partnership in a manner that would be
inconsistent with the General Partner's ability to remain qualified as a REIT.
If the General Partner enters into such a Funding Debt, the General Partner Loan
will consist of the net proceeds from such Funding Debt and will be on
comparable terms and conditions, including interest rate, repayment schedule and
costs and expenses, as shall be applicable with respect to or incurred in
connection with such Funding Debt.
C. Issuance of Additional Partnership Interests. The
General Partner may raise all or any portion of the Additional Funds by
accepting additional Capital Contributions, including, without limitation, the
issuance of Partnership Units for interests in Mortgage Assets. In connection
with any such additional Capital Contributions (of cash or property), the
General Partner is hereby authorized to cause the Partnership from time to time
to issue to Partners (including the General Partner) or other Persons
(including, without limitation, in connection with the contribution of property
to the Partnership) additional Partnership Units or other Partnership Interests
in one or more classes, or one or more series of any of such classes, with such
designations, preferences and relative, participating, optional or other special
rights, powers, and duties, including rights, powers, and duties senior to then
existing Limited Partnership Interests, all as shall be determined by the
General Partner in its sole and absolute discretion subject to Delaware law, and
as set forth by amendment to this Agreement, including without limitation, (i)
the allocations of items of Partnership income, gain, loss, deduction, and
credit to such class or series of Partnership Interests; (ii) the right of each
such class or series of Partnership Interests to share in Partnership
distributions; (iii) the rights of each such class or series of Partnership
Interests upon dissolution and liquidation of the Partnership; and (iv) the
right to vote, including, without limitation, the limited partner approval
rights set forth in Section 11.2.A hereof; provided that no such additional
Partnership Units or other Partnership Interests shall be issued to the General
Partner unless either (a) the additional Partnership Interests are issued in
connection with the grant, award, or issuance of shares of the General Partner
pursuant to Section 4.3.D below, which shares have designations, preferences,
and other rights (except voting rights) such that the economic interests
attributable to such shares are substantially similar to the designations,
preferences and other rights of the additional Partnership Interests issued to
the General Partner in accordance with this Section 4.3.C, or (b) the additional
Partnership Interests are issued to all Partners holding Partnership Interests
in the same class in proportion to their respective Percentage Interests in such
class. In the event that the Partnership issues additional Partnership Interests
pursuant to this Section 4.3.C, the General Partner shall make such revisions to
this Agreement (including but not limited to the revisions described in Section
5.4, Section 6.2.B, and Section 8.6) as it determines are necessary to reflect
the issuance of such additional Partnership Interests.
D. Issuance of REIT Shares or Other Securities by the
General Partner. The General Partner shall not issue any additional REIT Shares
(other than REIT Shares issued pursuant to Section 8.6 hereof or pursuant to a
dividend or distribution (including any stock split) of REIT Shares to all of
its stockholders), other shares of capital stock of the General Partner or Other
Securities unless the General Partner shall make a Capital Contribution of the
net proceeds from the issuance of such additional REIT Shares, other shares of
capital stock or Other Securities, as the case may be, and from the exercise of
the rights contained in such additional Other Securities, as the case may be.
The General Partner's Capital Account shall be increased by the amount of cash
so contributed.
E. Percentage Interest Adjustments in the Case of
Capital Contributions for Partnership Units. Upon the acceptance of additional
Capital Contributions in exchange for Partnership Units of a particular class of
Partnership Interest, the Percentage Interest related thereto shall be equal to
a fraction, the numerator of which is equal to the amount of cash and the Agreed
Value of the property contributed in respect of such class of Partnership
Interest as of the Business Day immediately preceding the date on which the
additional Capital Contributions are made (an "Adjustment Date") and the
denominator of which is equal to the sum of (i) the Deemed Value of the
Partnership Interests of such class (computed as of the Business Day immediately
preceding the Adjustment Date) and (ii) the aggregate amount of additional
Capital Contributions contributed to the Partnership on such Adjustment Date in
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respect of such class of Partnership Interests. The Percentage Interest of each
other Partner holding Partnership Interests of such class not making a full pro
rata Capital Contribution shall be adjusted to equal a fraction, the numerator
of which is equal to the sum of (i) the Deemed Partnership Interest Value of
such Limited Partner of such class (computed as of the Business Day immediately
preceding the Adjustment Date) and (ii) the amount of additional Capital
Contributions made by such Partner to the Partnership in respect of such class
of Partnership Interests as of such Adjustment Date, and the denominator of
which is equal to the sum of (i) the Deemed Value of the Partnership Interests
of such class (computed as of the Business Day immediately preceding the
Adjustment Date), plus (ii) the aggregate amount of additional Capital
Contributions contributed to the Partnership on such Adjustment Date in respect
of such class. Notwithstanding the foregoing, solely for purposes of calculating
a Partner's Percentage Interest pursuant to this Section 4.3.E, cash Capital
Contributions by the General Partner will be deemed to equal the cash
contributed by the General Partner plus, in the case of cash contributions
funded by an offering of any capital stock of the General Partner, the offering
costs attributable to the cash contributed to the Partnership. The General
Partner shall promptly give each Partner written notice of its Percentage
Interest, as adjusted.
4.4 STOCK OPTION PLAN. If at any time or from time to
time the General Partner sells or issues REIT Shares pursuant to any Stock
Option Plan, the General Partner shall contribute any proceeds therefrom to the
Partnership as an additional Capital Contribution and shall receive an amount of
additional Partnership Units equal to the number of REIT Shares so sold or
issued. The General Partner's Capital Account shall be increased by the amount
of cash so contributed.
4.5 EARN-OUT OF ORIGINAL LIMITED PARTNERS. The parties
hereto acknowledge that the Agreed Value of the HCP Preferred as set forth in
Exhibit A is not determinable with absolute certainty and was arrived at based
upon discussions between the Original Limited Partners and the underwriters for
the Company's initial public offering. To account for the possibility that the
HCP Preferred may have a value that is greater than its Agreed Value as set
forth in Exhibit A, the Original Limited Partners shall be entitled to receive
the Earn-Out Units as provided, and subject to the conditions set forth, in this
Section 4.5.
A. 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, the Partnership shall issue to each Original
Limited Partner his or her Pro Rata Portion of the lesser of (i) one-third of
the total number of Earn-Out Units or (ii) the number of Earn-Out Units that
have not theretofore been issued pursuant to this Section 4.5.
B. If the Total Return per Unit as of any Earn-Out
Measuring Date is equal to or greater than the IPO Price, the Partnership shall
issue to each Original Limited Partner his or her Pro Rata Portion of the number
of Earn-Out Units that have not theretofore been issued pursuant to this Section
4.5.
C. It is intended that each Earn-Out Unit that is
issued will represent a fractional, undivided share of the class of Partnership
Interest in which it is included in the capital and profits of the Partnership.
Accordingly, from and after the time that any Earn-Out Units are issued, the
General Partner shall make such special allocations pursuant to Section
6.3.A(ix) as are necessary to cause the Adjusted Capital Account Balances of the
Partners holding Partnership Units of the class that includes the Earn-Out Units
to be in the same proportions as their Percentage Interests with respect to such
class.
D. Appropriate adjustments shall be made in applying
this Section 4.5 for stock dividends and distributions, stock splits and
subdivisions, reverse stock splits and combinations, recapitalizations,
distributions of rights, warrants or options, distributions of evidences of
indebtedness or assets relating to assets not received by the General Partner
pursuant to a pro rata distribution by the Partnership and transactions having
like effect. Any Earn-Out Units that are issued shall be of the same class as
the Partnership Interests initially issued to the General Partner and the
Original Limited Partners
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hereunder. The Original Limited Partners shall have all of the rights and
obligations hereunder with respect to any Earn-Out Units that are issued to them
as they have with respect to the Partnership Units initially issued to them. The
rights of the Original Limited Partners to receive Earn-Out Units, and any such
Earn-Out Units that are issued, shall be assignable in accordance with the
provisions of Articles 11 and 12.
E. If the Partnership terminates before the last
Earn-Out Measuring Date without having issued all of the Earn-Out Units, and if
the Partnership would otherwise have been required to issue Earn-Out Units
hereunder as of any Earn-Out Measuring Date after such termination, the Company
shall issue to the Original Limited Partners, subject to the ownership
limitations set forth in the Charter, the REIT Shares Amount (determined as of
such Earn-Out Measuring Date) allocable to any Earn-Out Units that would
thereafter have been issued as of such Earn-Out Measuring Date.
4.6 OTHER CONTRIBUTION PROVISIONS. In the event that any
Partner is admitted to the Partnership and is given a Capital Account in
exchange for services rendered to the Partnership, such transaction shall be
treated by the Partnership and the affected Partner as if the Partnership had
compensated such Partner in cash, and the Partner had contributed such cash to
the capital of the Partnership.
ARTICLE 5
DISTRIBUTIONS
5.1 REQUIREMENT AND CHARACTERIZATION OF DISTRIBUTIONS. The
General Partner shall cause the Partnership to distribute quarterly all, or such
portion as the General Partner may in its discretion determine, of Available
Cash generated by the Partnership during such quarter to the Partners who are
Partners on the Partnership Record Date with respect to such quarter, (1) first,
with respect to any Partnership Interests that are entitled to any preference in
distribution, in accordance with the rights of such class of Partnership
Interests (and within such class, pro rata in proportion to the respective
Percentage Interests on such Partnership Record Date), and, (2) second, with
respect to Partnership Interests that are not entitled to any preference in
distribution, pro rata to each such class in accordance with the terms of such
class (and within each such class, pro rata in proportion with the respective
Percentage Interests on such Partnership Record Date). Unless otherwise
expressly provided for herein or in an agreement at the time a new class of
Partnership Interests is created in accordance with Article 4 hereof, no
Partnership Interest shall be entitled to a distribution in preference to any
other Partnership Interest. The General Partner shall take such reasonable
efforts, as determined by it in its sole and absolute discretion and consistent
with its qualification as a REIT, to cause the Partnership to distribute
sufficient amounts to enable the General Partner to pay stockholder dividends
that will (a) satisfy the requirements for qualifying as a REIT under the Code
and Regulations ("REIT Requirements"), and (b) avoid any federal income or
excise tax liability of the General Partner.
5.2 DISTRIBUTION IN KIND. No right is given to any Partner to
demand and receive property other than cash. The General Partner may determine,
in its sole and absolute discretion, to make a distribution in kind to the
Partners of Partnership assets, and such assets shall be distributed in such a
fashion as to ensure that the fair market value is distributed and allocated in
accordance with Articles 5, 6 and 10.
5.3 DISTRIBUTION UPON LIQUIDATION. Proceeds from a Terminating
Capital Transaction shall be distributed to the Partners in accordance with
Section 13.2.
5.4 DISTRIBUTION TO REFLECT ISSUANCE OF ADDITIONAL PARTNERSHIP
INTERESTS. In the event that the Partnership issues additional Partnership
Interests to the General Partner or any Additional Limited Partner pursuant to
Section 4.3.C or 4.4 hereof, the General Partner shall make such revisions to
this Article 5 as it determines are necessary to reflect the issuance of such
additional Partnership Interests.
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ARTICLE 6
ALLOCATIONS
6.1 TIMING AND AMOUNT OF ALLOCATIONS OF NET INCOME AND
NET LOSS
Net Income and Net Loss of the Partnership shall be determined
and allocated with respect to each fiscal year of the Partnership as of the end
of each such year. Subject to the other provisions of this Article 6, an
allocation to a Partner of a share of Net Income or Net Loss shall be treated as
an allocation of the same share of each item of income, gain, loss or deduction
that is taken into account in computing Net Income or Net Loss.
6.2 GENERAL ALLOCATIONS.
A. Except as otherwise provided in this
Article 6, Net Income and Net Loss shall be allocated to each of the Partners
holding the same class of Partnership Interests in accordance with their
respective Percentage Interest of such class.
B. In the event that the Partnership issues
additional Partnership Interests to the General Partner or any Additional
Limited Partner pursuant to Section 4.3 or 4.4 hereof, the General Partner shall
make such revisions to this Section 6.2 as it determines are necessary to
reflect the terms of the issuance of such additional Partnership Interests,
including making preferential allocations to certain classes of Partnership
Interests.
6.3 ADDITIONAL ALLOCATION PROVISIONS
Notwithstanding the foregoing provisions of this Article 6,
the following provisions of this Section 6.3 shall be applied for any period
before any allocations are made for such period pursuant to Section 6.2:
A. (i) Minimum Gain Chargeback. Except as
otherwise provided in Regulations Section 1.704-2(f), notwithstanding the
provisions of Section 6.2 of the Agreement, or any other provision of this
Article 6, if there is a net decrease in Partnership Minimum Gain during any
fiscal year, each Partner shall be specially allocated items of Partnership
income and gain for such year (and, if necessary, subsequent years) in an amount
equal to such Partner's share of the net decrease in Partnership Minimum Gain,
as determined under Regulations Section 1.704-2(g). Allocations pursuant to the
previous sentence shall be made in proportion to the respective amounts required
to be allocated to each Partner pursuant thereto. The items to be allocated
shall be determined in accordance with Regulations Sections 1.704-2(f)(6) and
1.704-2(j)(2). This Section 6.3.A(i) is intended to qualify as a "minimum gain
chargeback" within the meaning of Regulation Section 1.704-2(f) which shall be
controlling in the event of a conflict between such Regulation and this Section
6.3.A(i).
(ii) Partner Minimum Gain Chargeback.
Except as otherwise provided in Regulations Section 1.704-2(i)(4), and
notwithstanding the provisions of Section 6.2 of the Agreement, or any other
provision of this Article 6 (except Section 6.3.A(i)), if there is a net
decrease in Partner Minimum Gain attributable to a Partner Nonrecourse Debt
during any fiscal year, each Partner who has a share of the Partner Minimum Gain
attributable to such Partner Nonrecourse Debt, determined in accordance with
Regulations Section 1.704-2(i)(5), shall be specially allocated items of
Partnership income and gain for such year (and, if necessary, subsequent years)
in an amount equal to such Partner's share of the net decrease in Partner
Minimum Gain attributable to such Partner Nonrecourse Debt, determined in
accordance with Regulations Section 1.704-2(i)(4). Allocations pursuant to the
previous sentence shall be made in proportion to the respective amounts
required to be allocated to each General Partner and Limited Partner pursuant
thereto. The items to be so allocated shall be determined in accordance with
Regulations
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Sections 1.704-2(i)(4) and 1.704-2(j)(2). This Section 6.3.A(ii) is intended to
qualify as a "chargeback of partner nonrecourse debt minimum gain" within the
meaning of Regulation Section 1.704-2(i) which shall be controlling in the event
of a conflict between such Regulation and this Section 6.3.A(ii).
(iii) Nonrecourse Deductions and Partner
Nonrecourse Deductions. Any Nonrecourse Deductions for any fiscal year shall be
specially allocated to the Partners in accordance with their Percentage
Interests. Any Partner Nonrecourse Deductions for any fiscal year shall be
specially allocated to the Partner(s) who bears the economic risk of loss with
respect to the Partner Nonrecourse Debt to which such Partner Nonrecourse
Deductions are attributable, in accordance with Regulations Sections
1.704-2(b)(4) and 1.704-2(i).
(iv) Qualified Income Offset. If any
Partner unexpectedly receives an adjustment, allocation or distribution
described in Regulations Section 1.704-1(b)(2)(ii)(d)(4), (5) or (6) which
causes such Partner to have an (or increases the amount of such Partner's)
Adjusted Capital Account Deficit, items of Partnership income and gain shall be
allocated, in accordance with Regulations Section 1.704-1(b)(2)(ii)(d), to the
Partner in an amount and manner sufficient to eliminate, to the extent required
by such Regulations, the Adjusted Capital Account Deficit of the Partner as
quickly as possible provided that an allocation pursuant to this Section
6.3.A(iv) shall be made if and only to the extent that such Partner would have
an Adjusted Capital Account Deficit after all other allocations provided in this
Article 6 have been tentatively made as if this Section 6.3.A(iv) were not in
the Agreement. It is intended that this Section 6.3.A(iv) qualify and be
construed as a "qualified income offset" within the meaning of Regulations
1.704-1(b)(2)(ii)(d), which shall be controlling in the event of a conflict
between such Regulations and this Section 6.3.A(iv).
(v) Gross Income Allocation. In the
event any Partner has a deficit Capital Account at the end of any fiscal year
which is in excess of the sum of (1) the amount (if any) such Partner is
obligated to restore to the Partnership, and (2) the amount such Partner is
deemed to be obligated to restore pursuant to Regulations Section
1.704-1(b)(2)(ii)(c) or the penultimate sentences of Regulations Sections
1.704-2(g)(1) and 1.704-2(i)(5), each such Partner shall be specially allocated
items of Partnership income and gain in the amount of such excess as quickly as
possible, provided that an allocation pursuant to this Section 6.3.A(v) shall be
made if and only to the extent that such Partner would have a deficit Capital
Account in excess of such sum after all other allocations provided in this
Article 6 have been tentatively made as if this Section 6.3.A(v) and Section
6.3.A(iv) were not in the Agreement.
(vi) Limitation on Allocation of Net
Loss. To the extent any allocation of Net Loss would cause or increase an
Adjusted Capital Account Deficit as to any Partner, such allocation of Net Loss
shall be reallocated among the other Partners in accordance with their
respective Percentage Interests, subject to the limitations of this Section
6.3.A(vi).
(vii) Section 754 Adjustment. To the
extent an adjustment to the adjusted tax basis of any Partnership asset pursuant
to Code Section 734(b) or Code Section 743(b) is required, pursuant to
Regulations Section 1.704-1(b)(2)(iv)(m)(2) or Regulations Section
1.704-1(b)(2)(iv)(m)(4), to be taken into account in determining Capital
Accounts as the result of a distribution to a Partner in complete liquidation of
his interest in the Partnership, the amount of such adjustment to the Capital
Accounts shall be treated as an item of gain (if the adjustment increases the
basis of the asset) or loss (if the adjustment decreases such basis) and such
gain or loss shall be specially allocated to the Partners in accordance with
their interests in the Partnership in the event that Regulations Section 1.704-
1(b)(2)(iv)(m)(2) applies, or to the Partners to whom such distribution was made
in the event that Regulations Section 1.704-1(b)(2)(iv)(m)(4) applies.
(viii) Curative Allocation. The allocations
set forth in Sections 6.3.A(i), (ii), (iii), (iv), (v), (vi) and (vii) (the
"Regulatory Allocations") are intended to comply with certain regulatory
requirements, including the requirements of Regulations Sections 1.704-1(b) and
1.704-2. Notwithstanding the provisions of Sections 6.1 and 6.2, the Regulatory
Allocations shall be taken
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into account in allocating other items of income, gain, loss and deduction among
the Partners so that, to the extent possible, the net amount of such allocations
of other items and the Regulatory Allocations to each Partner shall be equal to
the net amount that would have been allocated to each such Partner if the
Regulatory Allocations had not occurred.
(ix) Earn-Out Adjustment. From and after
the time that any Earn-Out Units are issued, the General Partner shall make such
special allocations as are necessary to cause the Adjusted Capital Account
Balances of the Partners holding Partnership Units of the class that includes
the Earn-Out Units to be in the same proportions as their Percentage Interests
with respect to such class. To the extent possible consistent with applicable
federal income tax principles and the Company's continued qualification as a
REIT, any such special allocations of items of income and gain to the Original
Limited Partners shall consist first of adjustments to the Gross Asset Value of
the HCP Preferred in amounts at least equal to the portion of the Earn-Out
Adjustment allocable to the Earn-Out Units that have been issued. Any further
special allocations pursuant to this Section 6.3.A(ix) shall be made in such
manner as the General Partner reasonably and in good faith determines will give
effect to the intentions expressed in Section 4.5.C with the least adverse tax
consequence to the Partners.
B. For purposes of determining a Partner's
proportional share of the "excess nonrecourse liabilities" of the Partnership
within the meaning of Regulations Section 1.752-3(a)(3), each Partner's interest
in Partnership profits shall be such Partner's Percentage Interest.
. 6.4 TAX ALLOCATIONS
A. Except as otherwise provided in this
Section 6.4, for income tax purposes each item of income, gain, loss and
deduction (collectively, "Tax Items") shall be allocated among the Partners in
the same manner as its correlative item of "book" income, gain, loss or
deduction is allocated pursuant to Sections 6.2 and 6.3.
B. Notwithstanding Section 6.4.A, Tax Items
with respect to Partnership property that is contributed to the Partnership by a
Partner shall be shared among the Partners for income tax purposes pursuant to
Regulations promulgated under Section 704(c) of the Code, so as to take into
account the variation, if any, between the basis of the property to the
Partnership and its initial Gross Asset Value. With respect to Partnership
property that is initially contributed to the Partnership upon its formation
pursuant to Section 4.1, such variation between basis and initial Gross Asset
Value shall be taken into account under the "traditional method" as described in
Regulations Section 1.704-3(b). With respect to properties subsequently
contributed to the Partnership, the Partnership shall account for such variation
under any method approved under Section 704(c) of the Code and the applicable
regulations as chosen by the General Partner. In the event the Gross Asset Value
of any Partnership asset is adjusted pursuant to subparagraph (b) of the
definition of Gross Asset Value (provided in Article 1 of this Agreement),
subsequent allocations of Tax Items with respect to such asset shall take
account of the variation, if any, between the adjusted basis of such asset and
its Gross Asset Value in the same manner as under Section 704(c) of the Code and
the applicable regulations consistent with the requirements of Regulations
Section 1.704-1(b)(2)(iv)(g) using any method approved under 704(c) of the Code
and the applicable regulations as chosen by the General Partner; provided,
however, that allocations of Tax Items corresponding to adjustments in the Gross
Asset Value of the HCP Preferred that are specially allocated pursuant to
Section 6.3.A(ix) shall be taken into account under the "traditional method" as
described in Regulations Section 1.704-3(b).
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ARTICLE 7
MANAGEMENT AND OPERATION OF BUSINESS
7.1 MANAGEMENT
A. Except as otherwise expressly provided in
this Agreement, all management powers over the business and affairs of the
Partnership are exclusively vested in the General Partner, and no Limited
Partner shall have any right to participate in or exercise control or management
power over the business and affairs of the Partnership. The General Partner may
not be removed by the Limited Partners with or without cause, except with the
consent of the General Partner. In addition to the powers now or hereafter
granted a general partner of a limited partnership under the Act and other
applicable law or which are granted to the General Partner under any other
provision of this Agreement, the General Partner, subject to the other
provisions hereof including Section 7.3, shall have full power and authority to
do all things deemed necessary or desirable by it to conduct the business of the
Partnership, to exercise all powers set forth in Section 3.2 hereof and to
effectuate the purposes set forth in Section 3.1 hereof, including, without
limitation:
(1) the making of any expenditures, the
lending or borrowing of money
(including, without limitation, making
prepayments on loans, borrowing money to
fund operations through reverse
repurchase agreements and other forms of
financings, and borrowing money to
permit the Partnership to make
distributions to its Partners in such
amounts as will permit the General
Partner (so long as the General Partner
has determined to qualify as a REIT) to
avoid the payment of any federal income
tax (including, for this purpose, any
excise tax pursuant to Section 4981 of
the Code) and to make distributions to
its stockholders sufficient to permit
the General Partner to maintain REIT
status), the assumption or guarantee of,
or other contracting for, indebtedness
and other liabilities, the issuance of
evidences of indebtedness (including the
securing of same by pledge or other lien
or encumbrance on all or any of the
Partnership's assets) and the incurring
of any obligations it deems necessary
for the conduct of the activities of the
Partnership;
(2) the making of tax, regulatory and other
filings, or rendering of periodic or
other reports to governmental or other
agencies having jurisdiction over the
business or assets of the Partnership;
(3) the purchase, origination, holding,
financing, sale or securitization
(including, without limitation, by
issuing or causing the issuance of CMOs
and REMICs) of any Mortgage Assets or
other assets of the Partnership, or the
merger or other combination of the
Partnership with or into another entity;
(4) the pledge, hypothecation or other
encumbrance of all or any assets of the
Partnership for any purpose consistent
with the terms of this Agreement and on
any terms it sees fit, including,
without limitation, the financing of the
conduct or the operations of the General
Partner or the Partnership, the lending
of funds to other Persons (including,
without limitation, the General Partner
(if necessary to permit the financing or
capitalization of a subsidiary of the
General Partner or the Partnership) and
any Subsidiaries of the Partnership) and
the repayment of obligations of the
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Partnership, any of its Subsidiaries and
any other Person in which it has an
equity investment;
(5) the negotiation, execution, and
performance of any contracts,
conveyances or other documents,
instruments, agreements or other
writings that the General Partner
considers useful or necessary to the
conduct of the Partnership's operations
or the implementation of the General
Partner's powers under this Agreement;
(6) the distribution of Partnership cash or
other Partnership assets in accordance
with this Agreement;
(7) the selection and dismissal of employees
of the Partnership (including, without
limitation, employees having titles such
as "president," "vice president,"
"secretary" and "treasurer"), and
agents, outside attorneys, accountants,
consultants and contractors of the
Partnership, the determination of their
compensation and other terms of
employment or hiring, including waivers
of conflicts of interest and the payment
of their expenses and compensation out
of the Partnership's assets;
(8) the maintenance of such insurance for
the benefit of the Partnership and the
Partners as it deems necessary or
appropriate;
(9) the formation of, or acquisition of an
interest in, and the contribution of
property to, any further limited or
general partnerships, joint ventures or
other relationships that it deems
desirable (including, without
limitation, the acquisition of interests
in, and the contributions of property to
HCP, any Subsidiary of HCP or the
Partnership, and any other Person in
which it has an equity investment from
time to time); provided that, as long as
the General Partner has determined to
continue to qualify as a REIT, the
Partnership may not engage in any such
formation, acquisition or contribution
that would cause the General Partner to
fail to qualify as a REIT;
(10) the control of any matters affecting the
rights and obligations of the
Partnership, including the conduct of
litigation and the incurring of legal
expense and the settlement of claims and
litigation, and the indemnification of
any Person against liabilities and
contingencies to the extent permitted by
law;
(11) the undertaking of any action in
connection with the Partnership's direct
or indirect investment in any Person
(including, without limitation,
contributing or loaning Partnership
funds to, incurring indebtedness on
behalf of, or guarantying the
obligations of any such Persons);
(12) subject to the other provisions in this
Agreement, the determination of the fair
market value of any Partnership property
distributed in kind using such
reasonable method of valuation as it may
adopt, provided that such methods are
otherwise consistent with requirements
of this Agreement;
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(13) the engagement in hedging activities to
the extent consistent with the Company's
continued qualification as a REIT,
including, without limitation, mandatory
and optional forward selling of Mortgage
Loans and Mortgage-Backed Securities,
interest rate caps and floors and the
buying and selling of futures and
options on futures;
(14) holding, managing, investing and
reinvesting cash and other assets of the
Partnership;
(15) the collection and receipt of revenues
and income of the Partnership;
(16) the exercise, directly or indirectly
through any attorney-in-fact acting
under a general or limited power of
attorney, of any right, including the
right to vote, appurtenant to any asset
or investment held by the Partnership;
(17) the exercise of any of the powers of the
General Partner enumerated in this
Agreement on behalf of or in connection
with any Subsidiary of the Partnership
or any other Person in which the
Partnership has a direct or indirect
interest, or jointly with any such
Subsidiary or other Person;
(18) the exercise of any of the powers of the
General Partner enumerated in this
Agreement on behalf of any Person in
which the Partnership does not have an
interest, pursuant to contractual or
other arrangements with such Person;
(19) the deposit, investment and reinvestment
of Company cash in such accounts and
funds as the General Partner shall
determine to be appropriate pending the
distribution of such cash or the use of
such cash for Company purposes; and
(20) the making, execution and delivery of
any and all purchase and sale
agreements, loan or other financing
agreements (including, without
limitation, reverse repurchase
agreements), deeds and leases
(including, without limitation, to
property acquired upon or in lieu of the
foreclosure of Mortgage Assets), notes,
employment and consulting agreements,
management agreements, security
agreements, conveyances, contracts
(including, without limitation, hedging
contracts), guarantees, warranties,
indemnities, waivers, releases, legal
instruments, certificates or other
writings necessary or appropriate in the
judgment of the General Partner for the
accomplishment of any of the powers of
the General Partner enumerated in this
Agreement, including, without
limitation, in connection with the
purchase, origination, holding,
financing, hedging, sale or
securitization (including, without
limitation, by issuing or causing the
issuance of CMOs and REMICs) of any
Mortgage Assets or other assets of the
Partnership.
B. Each of the Limited Partners agrees that the
General Partner is authorized to execute, deliver and perform the
above-mentioned agreements and transactions on behalf of the Partnership without
any further act, approval or vote of the partners, notwithstanding any other
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provisions of this Agreement (except as provided in Section 7.3), the Act or any
applicable law, rule or regulation. The execution, delivery or performance by
the General Partner or the Partnership of any agreement authorized or permitted
under this Agreement shall not constitute a breach by the General Partner of any
duty that the General Partner may owe the Partnership or the Limited Partners or
any other Persons under this Agreement or of any duty stated or implied by law
or equity.
C. At all times from and after the date hereof,
the General Partner may cause the Partnership to obtain and maintain liability
insurance for the Indemnities hereunder.
D. At all times from and after the date hereof,
the General Partner may cause the Partnership to establish and maintain working
capital and other reserves in such amounts as the General Partner, in it sole
and absolute discretion, deems appropriate and reasonable from time to time.
E. In exercising its authority under this
Agreement, the General Partner may, but shall be under no obligation to, take
into account the tax consequences to any Partner (including the General Partner)
of any action taken by the General Partner. The General Partner and the
Partnership shall not have liability to a Limited Partner under any
circumstances as a result of an income tax liability incurred by such Limited
Partner as a result of an action (or inaction) by the General Partner pursuant
to its authority under this Agreement.
F. Except as otherwise provided herein, to the
extent the duties of the General Partner require expenditures of funds to be
paid to third parties, the General Partner shall not have any obligations
hereunder except to the extent that Partnership funds are reasonably available
to it for the performance of such duties, and nothing herein contained shall be
deemed to authorize or require the General Partner, in its capacity as such, to
expend its individual funds for payment to third parties or to undertake any
individual liability or obligation on behalf of the Partnership.
7.2 CERTIFICATE OF LIMITED PARTNERSHIP. To the extent
that such action is determined by the General Partner to be reasonable and
necessary or appropriate, the General Partner shall file amendments to and
restatements of the Certificate and do all the things to maintain the
Partnership as a limited partnership (or a partnership in which the limited
partners have limited liability) under the laws of the State of Delaware and to
maintain the Partnership's qualification to do business as a foreign limited
partnership in each other state, the District of Columbia or other jurisdiction,
in which the Partnership may elect to do business or own property. Subject to
the terms of Section 8.5.A(4) hereof, the General Partner shall not be required,
before or after filing, to deliver or mail a copy of the Certificate or any
amendment thereto to any Limited Partner. The General Partner shall use all
reasonable efforts to cause to be filed such other certificates or documents as
may be reasonable and necessary or appropriate for the formation, continuation,
qualification and operation of a limited partnership (or a partnership in which
the limited partners have limited liability) in the State of Delaware, and any
other state, or the District of Columbia or other jurisdiction, in which the
Partnership may elect to do business or own property.
7.3 RESTRICTIONS ON GENERAL PARTNER'S AUTHORITY
A. The General Partner may not take any action
in contravention of this Agreement, including, without limitation:
(1) take any action that would make it
impossible to carry on the ordinary
business of the Partnership, except as
otherwise provided in this Agreement;
(2) possess Partnership property, or assign
any rights in specific Partnership
property, for other than a Partnership
purpose except as otherwise provided in
this Agreement;
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(3) admit a Person as a Partner, except as
otherwise provided in this Agreement;
(4) perform any act that would subject a
Limited Partner to liability as a
general partner in any jurisdiction or
any other liability except as provided
herein or under the Act; or
(5) enter into any contract, mortgage, loan
or other agreement or transaction that
prohibits or restricts, or has the
effect of prohibiting or restricting,
the ability of a Limited Partner to
exercise its rights to a Redemption in
full, except with the written consent of
such Limited Partner.
B. The General Partner shall not, without the
prior Consent of the Partners, undertake, on behalf of the Partnership, any of
the following actions or enter into any transaction which would have the effect
of such transactions:
(1) make a general assignment for the
benefit of creditors or appoint or
acquiesce in the appointment of a
custodian, receiver or trustee for all
or any part of the assets of the
Partnership;
(2) institute any proceeding for bankruptcy
on behalf of the Partnership; or
(3) confess a judgment against the
Partnership.
C. If the aggregate Limited Partnership
Interests of all Limited Partners (other than the Company) represents 2% or more
of the aggregate Partnership Interests, the General Partner shall not, without
the prior Consent of the Limited Partners, undertake, on behalf of the
Partnership, any action or enter into any transaction (other than a merger or
consolidation of the Partnership with or into any other Person or the sale of
all or substantially all of the assets and properties which would have the
effect of dissolving the Partnership.
D. Notwithstanding Sections 7.3.B and 7.3.C
hereof, but subject to Section 7.3.E hereof, the General Partner shall have the
power, without the Consent of the Limited Partners, to amend this Agreement as
may be required to facilitate or implement any of the following purposes:
(1) to add to the obligations of the General
Partner or surrender any right or power
granted to the General Partner or any
Affiliate of the General Partner for the
benefit of the Limited Partners;
(2) to reflect the issuance of additional
Partnership Interests pursuant to
Sections 4.3.C and 4.4 or the admission,
substitution, termination, or withdrawal
of Partners in accordance with this
Agreement;
(3) to reflect a change that is of an
inconsequential nature and does not
adversely affect the Limited Partners in
any material respect, or to cure any
ambiguity in, correct or supplement any
provision in, or make other changes with
respect to matters arising under, this
Agreement that will not be inconsistent
with law or with the provisions of this
Agreement;
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(4) to satisfy any requirements, conditions,
or guidelines contained in any order,
directive, opinion, ruling or regulation
of a federal or state agency or
contained in federal or state law;
(5) to reflect such changes as are
reasonably necessary for the General
Partner to maintain its status as a
REIT, including changes which may be
necessitated due to a change in
applicable law (or an authoritative
interpretation thereof) or a ruling of
the IRS; and
(6) to modify, as set forth in the
definition of "Capital Account," the
manner in which Capital Accounts are
computed.
The General Partner will provide notice to the Limited Partners when any action
under this Section 7.3.D is taken.
E. Without the Consent of the Limited Partners,
(i) except as provided in Section 7.3.D, this Agreement shall not be amended,
modified or terminated other than to reflect the admission, substitution,
termination or withdrawal of partners pursuant to Article 12 hereof, (ii) the
General Partner shall not approve or acquiesce to the transfer of the
Partnership Interest of the General Partner to any Person other than the
Partnership or admit into the Partnership any Additional or Substitute General
Partners, (iii) notwithstanding Sections 7.3.B, 7.3.C and 7.3.D hereof, Section
11.2 of this Agreement shall not be amended, and no action in contravention of
Section 11.2 hereof shall be taken, and (iv) the General Partner shall not make
any election or other filing with any taxing or governmental authority
(including but not limited to an election or filing pursuant to Treasury
Regulations Section 301.7701-3) that would cause the Partnership to be
classified as an association taxable as a corporation for federal income tax
purposes. In addition, notwithstanding Sections 7.3.B, 7.3.C and 7.3.D hereof,
this Agreement shall not be amended, and no action may be taken by the General
Partner, without the Consent of each Partner adversely affected if such
amendment or action would (a) convert a Limited Partner's interest in the
Partnership into a general partner's interest (except as the result of the
General Partner acquiring such interest), (b) modify the limited liability of a
Limited Partner, (c) alter rights of the Partner to receive distributions
pursuant to Article 5 or Section 13.2.A(4), or the allocations specified in
Article 6 (except as permitted pursuant to Section 4.3 and Section 7.3.D(2)
hereof), (d) alter or modify the rights to a Redemption or the REIT Shares
Amount as set forth in Section 8.6, and related definitions hereof or (e) amend
this Section 7.3.E. Further, no amendment may alter the restrictions on the
General Partner's authority set forth elsewhere in this Section 7.3 without the
Consent specified in such section.
7.4 REIMBURSEMENT OF THE GENERAL PARTNER
A. Except as provided in this Section 7.4 and
elsewhere in this Agreement (including the provisions of Articles 5 and 6
regarding distributions, payments and allocations to which it may be entitled),
the General Partner shall not be compensated for its services as general partner
of the Partnership.
B. Subject to Section 15.11, the General
Partner shall be reimbursed on a monthly basis, or such other basis as the
General Partner may determine in its sole and absolute discretion, for all
expenses it incurs relating to the ownership of interests in and operation of,
or for the benefit of, the Partnership. The Limited Partners acknowledge that
the General Partner's sole business is the ownership of interests in and
operation of the Partnership and that such expenses are incurred for the benefit
of the Partnership; provided that, the General Partner shall not be reimbursed
for expenses it incurs relating to the organization of the Partnership and the
General Partner or the initial public offering or subsequent public offerings of
REIT shares, other shares of capital stock or Funding Debt by the General
Partner, but shall be reimbursed for expenses it incurs with respect to any
other issuance of additional Partnership Interests pursuant to the provisions
hereof. Such reimbursements shall be in addition to any reimbursement to the
General Partner as a result of indemnification pursuant to Section 7.7 hereof.
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C. If and to the extent any reimbursements to the
General Partner pursuant to this Section 7.4 constitute gross income of the
General Partner (as opposed to the repayment of advances made by the General
Partner on behalf of the Partnership), such amounts shall constitute guaranteed
payments within the meaning of Section 707(c) of the Code, shall be treated
consistently therewith by the Partnership and all Partners, and shall not be
treated as distributions for purposes of computing the Partners' Capital
Accounts.
7.5 OUTSIDE ACTIVITIES OF THE GENERAL PARTNER
A. Except in connection with a transaction authorized
in Section 11.2 hereof, without the Consent of the Limited Partners, the General
Partner shall not, directly or indirectly, enter into or conduct any business,
other than in connection with the ownership, acquisition and disposition of
Partnership Interests as a General Partner and the management of the business
and affairs of the Partnership, its operation as a public reporting company with
a class (or classes) of securities registered under the Securities Exchange Act,
its operation as a REIT and such activities as are incidental to the same.
Without the Consent of the Limited Partners, the General Partner shall not,
directly or indirectly, (i) participate in any activity other than those of the
Partnership, HCP and their Subsidiaries or (ii) acquire any interest in any real
or personal property other than its interests in the Partnership, HCP and their
Subsidiaries (and the properties of such entities) and its interests in such
bank accounts, similar instruments or other short-term investments as it deems
necessary to carry out its responsibilities contemplated under this Agreement
and the Charter. Any Limited Partner Interests acquired by the General Partner,
whether pursuant to exercise by a Limited Partner of its right of Redemption, or
otherwise, shall be automatically converted into a General Partner Interest
comprised of an identical number of Partnership Units of the same class. If, at
any time, the General Partner acquires material assets (other than on behalf of
the Partnership) the definition of "REIT Shares Amount" shall be adjusted, as
reasonably agreed to by the General Partner and the other Limited Partners, to
reflect the relative Fair Market Value of a share of capital stock of the
General Partner relative to the Deemed Partnership Interest Value of the related
Partnership Unit. The General Partner's interests in the Partnership, HCP and
their Subsidiaries (and the properties of such entities) and its interests in
such bank accounts, similar instruments or short-term investments as the General
Partner deems necessary to carry out its responsibilities contemplated under
this Agreement and the Charter are interests which the General Partner is
permitted to acquire and hold for purposes of this Section 7.5.A.
B. In the event the General Partner exercises its
rights under the Charter to purchase REIT Shares, then the General Partner shall
cause the Partnership to purchase from it a number of Partnership Units of the
appropriate class as determined based on the REIT Shares Amount equal to the
number of REIT Shares so purchased on the same terms that the General Partner
purchased such REIT Shares.
7.6 CONTRACTS WITH AFFILIATES
A. The Partnership may lend, contribute to and
otherwise engage in transactions with Persons in which it has an equity
investment, and such Persons may borrow funds from the Partnership, on terms and
conditions established in the sole and absolute discretion of the General
Partner. The foregoing authority shall not create any right or benefit in favor
of any Person.
B. Except as provided in Section 7.5.A, the
Partnership may transfer assets to, acquire assets from and contract for the
provision of services with joint ventures, other partnerships, corporations or
other business entities in which it owns or thereby acquires an interest upon
such terms and subject to such conditions consistent with this Agreement and
applicable law.
C. The General Partner, in its sole and absolute
discretion and without the approval of the Limited Partners, may propose and
adopt on behalf of the Partnership employee benefit
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plans funded by the Partnership for the benefit of employees of the General
Partner, the Partnership, HCP and any of their respective Subsidiaries and
Affiliates in respect of services performed, directly or indirectly, for the
benefit of the Partnership, the General Partner or any of such Subsidiaries and
Affiliates. The General Partner also is expressly authorized to cause the
Partnership to issue to it Partnership Units corresponding to REIT Shares issued
by the General Partner pursuant to its Stock Option Plan or any similar or
successor plan and to repurchase such Partnership Units from the General Partner
to the extent necessary to permit the General Partner to repurchase such REIT
Shares in accordance with such plan.
7.7 INDEMNIFICATION
A. The Partnership shall indemnify an Indemnitee from
and against any and all losses, claims, damages, liabilities, joint or several,
expenses (including legal fees and expenses), judgments, fines, settlements, and
other amounts arising from any and all claims, demands, actions, suits or
proceedings, civil, criminal, administrative or investigative, that relate to
the operations of the Partnership as set forth in this Agreement in which any
Indemnitee may be involved, or is threatened to be involved, as a party or
otherwise, unless it is established that: (i) the act or omission of the
Indemnitee was material to the matter giving rise to the proceeding and either
was committed in bad faith or was the result of active and deliberate
dishonesty; (ii) the Indemnitee actually received an improper personal benefit
in money, property or services; or (iii) in the case of any criminal proceeding,
the Indemnitee had reasonable cause to believe that the act or omission was
unlawful. Without limitation, the foregoing indemnity shall extend to any
liability of any Indemnitee, pursuant to a loan guaranty or otherwise, for any
indebtedness of the Partnership or any Subsidiary of the Partnership (including,
without limitation, any indebtedness which the Partnership or any Subsidiary of
the Partnership has assumed or taken subject to), and the General Partner is
hereby authorized and empowered, on behalf of the Partnership, to enter into one
or more indemnity agreements consistent with the provisions of this Section 7.7
in favor of any Indemnitee having or potentially having liability for any such
indebtedness. The termination of any proceeding by judgment, order or settlement
does not create a presumption that the Indemnitee did not meet the requisite
standard of conduct set forth in this Section 7.7.A. The termination of any
proceeding by conviction or upon a plea of nolo contendere or its equivalent, or
any entry of an order of probation prior to judgment, creates a rebuttable
presumption that the Indemnitee acted in a manner contrary to that specified in
this Section 7.7.A. Any indemnification pursuant to this Section 7.7 shall be
made only out of the assets of the Partnership.
B. Reasonable expenses incurred by an Indemnitee who
is a party to a proceeding may be paid or reimbursed by the Partnership in
advance of the final disposition of the proceeding upon receipt by the
Partnership of (i) a written affirmation by the Indemnitee of the Indemnitee's
good faith belief that the standard of conduct necessary for indemnification by
the Partnership as authorized in Subparagraph A of this Section 7.7 has been
met, and (ii) a written undertaking by or on behalf of the Indemnitee to repay
the amount if it shall ultimately be determined that the standard of conduct has
not been met.
C. The indemnification provided by this Section 7.7
shall be in addition to any other rights to which an Indemnitee or any other
Person may be entitled under any agreement, pursuant to any vote of the
Partners, as a matter of law or otherwise, and shall continue as to an
Indemnitee who has ceased to serve in such capacity.
D. The Partnership may purchase and maintain
insurance, on behalf of the Indemnitees and such other Persons as the General
Partner shall determine, against any liability that may be asserted against or
expenses that may be incurred by any such Person in connection with the
Partnership's activities, regardless of whether the Partnership would have the
power to indemnify such Person against such liability under the provisions of
this Agreement.
E. For purposes of this Section 7.7, the Partnership
shall be deemed to have requested an Indemnitee to serve as fiduciary of an
employee benefit plan whenever the performance
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by it of its duties to the Partnership also imposes duties on, or otherwise
involves services by, it to the plan or participants or beneficiaries of the
plan; excise taxes assessed on an Indemnitee with respect to an employee benefit
plan pursuant to applicable law shall constitute fines within the meaning of
Section 7.7; and actions taken or omitted by the Indemnitee with respect to an
employee benefit plan in the performance of its duties for a purpose reasonably
believed by it to be in the interest of the participants and beneficiaries of
the plan shall be deemed to be for a purpose which is not opposed to the best
interests of the Partnership.
F. In no event may an Indemnitee subject the Limited
Partners to personal liability by reason of the indemnification provisions set
forth in this Agreement.
G. An Indemnitee shall not be denied indemnification
in whole or in part under this Section 7.7 because the Indemnitee had an
interest in the transaction with respect to which the indemnification applies if
the transaction was otherwise permitted by the terms of this Agreement.
H. The provisions of this Section 7.7 are for the
benefit of the Indemnitees, their heirs, successors, assigns and administrators
and shall not be deemed to create any rights for the benefit of any other
Persons. Any amendment, modification or repeal of this Section 7.7 or any
provision hereof shall be prospective only and shall not in any way affect the
limitations on the Partnership's liability to any Indemnitee under this Section
7.7 as in effect immediately prior to such amendment, modification or repeal
with respect to claims arising from or relating to matters occurring, in whole
or in part, prior to such amendment, modification or repeal, regardless of when
such claims may arise or be asserted.
I. If and to the extent any reimbursements to the
General Partner pursuant to this Section 7.7 constitute gross income of the
General Partner (as opposed to the repayment of advances made by the General
Partner on behalf of the Partnership) such amounts shall constitute guaranteed
payments within the meaning of Section 707(c) of the Code, shall be treated
consistently therewith by the Partnership and all Partners, and shall not be
treated as distributions for purposes of computing the Partners' Capital
Accounts.
J. Any indemnification hereunder is subject to, and
limited by, the provisions of Section 17-108 of the Act.
K. In the event the Partnership is made a party to
any litigation or otherwise incurs any loss or expense as a result of or in
connection with any Partner's personal obligations or liabilities unrelated to
Partnership business, such Partner shall indemnify and reimburse the Partnership
for all such loss and expense incurred, including legal fees, and the
Partnership Interest of such Partner may be charged therefor. The liability of a
Partner under this Section 7.7.K shall not be limited to such Partner's
Partnership Interest, but shall be enforceable against such Partner personally.
7.8 LIABILITY OF THE GENERAL PARTNER
A. Notwithstanding anything to the contrary set forth
in this Agreement, none of the General Partner and any of its officers,
directors, agents and employees shall be liable or accountable in damages or
otherwise to the Partnership, any Partners or any Assignees, or their successors
or assigns, for losses sustained, liabilities incurred or benefits not derived
as a result of errors in judgment or mistakes of fact or law or any act or
omission if the General Partner acted in good faith.
B. The Limited Partners expressly acknowledge that
the General Partner is acting for the benefit of the Partnership, the Limited
Partners and the General Partner's stockholders collectively, that the General
Partner is under no obligation to give priority to the separate interests of the
Limited Partners or the General Partner's stockholders (including, without
limitation, the tax consequences to Limited Partners or Assignees or to
stockholders) in deciding whether to cause the Partnership to take
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(or decline to take) any actions and that the General Partner shall not be
liable to the Partnership or to any Limited Partner for monetary damages for
losses sustained, liabilities incurred, or benefits not derived by Limited
Partners in connection with such decisions, provided that the General Partner
has acted in good faith.
C. Subject to its obligations and duties as General
Partner set forth in Section 7.1.A hereof, the General Partner may exercise any
of the powers granted to it by this Agreement and perform any of the duties
imposed upon it hereunder either directly or by or through its agents. The
General Partner shall not be responsible for any misconduct or negligence on the
part of any such agent appointed by it in good faith.
D. Any amendment, modification or repeal of this
Section 7.8 or any provision hereof shall be prospective only and shall not in
any way affect the limitations on the liability of the General Partner and any
of its officers, directors, agents and employees to the Partnership and the
Limited Partners under this Section 7.8 as in effect immediately prior to such
amendment, modification or repeal with respect to claims arising from or
relating to matters occurring, in whole or in part, prior to such amendment,
modification or repeal, regardless of when such claims may arise or be asserted.
7.9 OTHER MATTERS CONCERNING THE GENERAL PARTNER
A. The General Partner may rely and shall be
protected in acting or refraining from acting upon any resolution, certificate,
statement, instrument, opinion, report, notice, request, consent, order, bond,
debenture, or other paper or document believed by it to be genuine and to have
been signed or presented by the proper party or parties.
B. The General Partner may consult with legal
counsel, accountants, appraisers, management consultants, investment bankers and
other consultants and advisers selected by it, and any act taken or omitted to
be taken in reliance upon the opinion of such Persons as to matters which such
General Partner reasonably believes to be within such Person's professional or
expert competence shall be conclusively presumed to have been done or omitted in
good faith and in accordance with such opinion.
C. The General Partner shall have the right, in
respect of any of its powers or obligations hereunder, to act through any of its
duly authorized officers and a duly appointed attorney or attorneys-in-fact.
Each such attorney shall, to the extent provided by the General Partner in the
power of attorney, have full power and authority to do and perform all and every
act and duty which is permitted or required to be done by the General Partner
hereunder.
D. Notwithstanding any other provisions of this
Agreement or any non-mandatory provision of the Act, any action of the General
Partner on behalf of the Partnership or any decision of the General Partner to
refrain from acting on behalf of the Partnership, undertaken in the good faith
belief that such action or omission is necessary or advisable in order (i) to
protect the ability of the General Partner to continue to qualify as a REIT or
(ii) to avoid the General Partner incurring any taxes under Section 857 or
Section 4981 of the Code, is expressly authorized under this Agreement and is
deemed approved by all of the Limited Partners.
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7.10 TITLE TO PARTNERSHIP ASSETS. Title to Partnership assets,
whether real, personal or mixed and whether tangible or intangible, shall be
deemed to be owned by the Partnership as an entity, and no Partners,
individually or collectively, shall have any ownership interest in such
Partnership assets or any portion thereof. Title to any or all of the
Partnership assets may be held in the name of the Partnership, the General
Partner or one or more nominees, as the General Partner may determine, including
Affiliates of the General Partner. The General Partner hereby declares and
warrants that any Partnership assets for which legal title is held in the name
of the General Partner or any nominee or Affiliate of the General Partner shall
be deemed held by the General Partner or such nominee or Affiliate for the use
and benefit of the Partnership in accordance with the provisions of this
Agreement; provided, however, that the General Partner shall use its best
efforts to cause beneficial and record title to such assets to be vested in the
Partnership as soon as reasonably practicable. All Partnership assets shall be
recorded as the property of the Partnership in its books and records,
irrespective of the name in which legal title to such Partnership assets is
held.
7.11 RELIANCE BY THIRD PARTIES. Notwithstanding anything to
the contrary in this Agreement, any Person dealing with the Partnership shall be
entitled to assume that the General Partner has full power and authority to
encumber, sell or otherwise use in any manner any and all assets of the
Partnership and to enter into any contracts on behalf of the Partnership, and
such Person shall be entitled to deal with the General Partner as if it were the
Partnership's sole party in interest, both legally and beneficially. Each
Limited Partner hereby waives any and all defenses or other remedies which may
be available against such Person to contest, negate or disaffirm any action of
the General Partner in connection with any such dealing. In no event shall any
Person dealing with the General Partner or its representatives be obligated to
ascertain that the terms of this Agreement have been complied with or to inquire
into the necessity or expedience of any act or action of the General Partner or
its representatives. Each and every certificate, document or other instrument
executed on behalf of the Partnership by the General Partner or its
representatives shall be conclusive evidence in favor of any and every Person
relying thereon or claiming thereunder that (i) at the time of the execution and
delivery of such certificate, document or instrument, this Agreement was in full
force and effect, (ii) the Person executing and delivering such certificate,
document or instrument was duly authorized and empowered to do so for and on
behalf of the Partnership and (iii) such certificate, document or instrument was
duly executed and delivered in accordance with the terms and provisions of this
Agreement and is binding upon the Partnership.
ARTICLE 8
RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS
8.1 LIMITATION OF LIABILITY. The Limited Partners shall have
no liability under this Agreement except as expressly provided in this Agreement
or under the Act.
8.2 MANAGEMENT OF BUSINESS. No Limited Partner or Assignee
(other than the General Partner, any of its Affiliates or any officer, director,
employee, general partner, agent or trustee of the General Partner, the
Partnership or any of their Affiliates, in their capacity as such), in its
capacity as such, shall take part in the operations, management or control
(within the meaning of the Act) of the Partnership's business, transact any
business in the Partnership's name or have the power to sign documents for or
otherwise bind the Partnership. The transaction of any such business by the
General Partner, any of its Affiliates or any officer, director, employee,
general partner, agent or trustee of the General Partner, the Partnership or any
of their Subsidiaries and Affiliates, in their capacity as such, shall not
affect, impair or eliminate the limitations on the liability of the Limited
Partners or Assignees under this Agreement.
8.3 OUTSIDE ACTIVITIES OF LIMITED PARTNERS. Subject to any
agreements entered into by a Limited Partner or its Affiliates with the General
Partner, the Partnership, HCP or a Subsidiary, any Limited Partner and any
officer, director, employee, agent, trustee, Affiliate or stockholder of any
Limited Partner shall be entitled to and may have business interests and engage
in business activities in addition to those relating to the Partnership,
including business interests and activities in direct competition
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with the Partnership or that are enhanced by the activities of the Partnership.
Neither the Partnership nor any Partners shall have any rights by virtue of this
Agreement in any business ventures of any Limited Partner or Assignee. Subject
to such agreements, none of the Limited Partners nor any other Person shall have
any rights by virtue of this Agreement or the partnership relationship
established hereby in any business ventures of any other Person, other than the
Limited Partners benefiting from the business conducted by the General Partner,
and such other Person shall have no obligation pursuant to this Agreement to
offer any interest in any such business ventures to the Partnership, any Limited
Partner or any such other Person, even if such opportunity is of a character
which, if presented to the Partnership, any Limited Partner or such other
Person, could be taken by such other Person.
8.4 RETURN OF CAPITAL. Except pursuant to the rights of
Redemption set forth in Section 8.6, no Limited Partner shall be entitled to the
withdrawal or return of his or her Capital Contribution, except to the extent of
distributions made pursuant to this Agreement or upon termination of the
Partnership as provided herein. No Limited Partner or Assignee shall have
priority over any other Limited Partner or Assignee either as to the return of
Capital Contributions, or as otherwise expressly provided in this Agreement, as
to profits, losses, distributions or credits.
8.5 RIGHTS OF LIMITED PARTNERS RELATING TO THE
PARTNERSHIP
A. In addition to other rights provided by this
Agreement or by the Act, and except as limited by Section 8.5.C hereof, each
Limited Partner shall have the right, for a purpose reasonably related to such
Limited Partner's interest as a limited partner in the Partnership, upon written
demand with a statement of the purpose of such demand and at the Partnership's
expense:
(1) to obtain a copy of the most recent
annual and quarterly reports filed with
the Securities and Exchange Commission
by the General Partner pursuant to the
Securities Exchange Act, and each
communication sent to the stockholders
of the General Partner;
(2) to obtain a copy of the Partnership's
federal, state and local income tax
returns for each Partnership Year;
(3) to obtain a current list of the name and
last known business, residence or
mailing address of each Partner;
(4) to obtain a copy of this Agreement and
the Certificate and all amendments
thereto, together with executed copies
of all powers of attorney pursuant to
which this Agreement, the Certificate
and all amendments thereto have been
executed; and
(5) to obtain true and full information
regarding the amount of cash and a
description and statement of any other
property or services contributed by each
Partner and which each Partner has
agreed to contribute in the future, and
the date on which each became a Partner.
B. The Partnership shall notify each Limited
Partner in writing of any adjustment made in the calculation of the REIT Shares
Amount within 10 Business Days of the date such change becomes effective.
C. Notwithstanding any other provision of this
Section 8.5, the General Partner may keep confidential from the Limited
Partners, for such period of time as the General Partner determines in its sole
and absolute discretion to be reasonable, any information that (i) the General
Partner believes to be in the nature of trade secrets or other information the
disclosure of which the General Partner
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in good faith believes is not in the best interests of the Partnership or (ii)
the Partnership or the General Partner is required by law or by agreements with
unaffiliated third parties to keep confidential.
8.6 REDEMPTION RIGHTS
A. On or after the date one year after the Effective
Date, each Limited Partner shall have the right (subject to the terms and
conditions set forth herein) to require the Partnership to redeem all or a
portion of the Partnership Units held by such Limited Partner (such Partnership
Units being hereafter referred to as "Tendered Units") in exchange for the Cash
Amount (a "Redemption"), provided that the terms of such Partnership Units do
not provide that such Partnership Units are not entitled to a right of
Redemption. Unless otherwise expressly provided in this Agreement or a separate
agreement entered into between the Partnership and the holders of such
Partnership Units, all Partnership Units shall be entitled to a right of
Redemption hereunder. Any Redemption shall be exercised pursuant to a Notice of
Redemption delivered to the General Partner by the Limited Partner who is
exercising the right (the "Tendering Partner"). The Cash Amount shall be
delivered as a certified check payable to the Tendering Partner within 10 days
of the Specified Redemption Date in accordance with the instructions set forth
in the Notice of Redemption.
B. Notwithstanding Section 8.6.A above, if a Limited
Partner has delivered to the General Partner a Notice of Redemption then the
General Partner may, in its sole and absolute discretion (subject to the
limitations on ownership and transfer of REIT Shares set forth in Article Ninth
of the Charter), elect to acquire some or all of the Tendered Units from the
Tendering Partner in exchange for the REIT Shares Amount (as of the Specified
Redemption Date) and, if the General Partner so elects, the Tendering Partner
shall sell the Tendered Units to the General Partner in exchange for the REIT
Shares Amount. In such event, the Tendering Partner shall have no right to cause
the Partnership to redeem such Tendered Units. The General Partner shall
promptly give such Tendering Partner written notice of its election, and the
Tendering Partner may elect to withdraw its redemption request at any time prior
to the acceptance of the Cash Amount or REIT Shares Amount by such Tendering
Partner.
C. The REIT Shares Amount, if applicable, shall be
delivered as duly authorized, validly issued, fully paid and nonassessable REIT
Shares and, if applicable, free of any pledge, lien, encumbrance or restriction,
other than those provided in the Charter, the Bylaws of the General Partner, the
Securities Act, relevant state securities or blue sky laws and any applicable
registration rights agreement with respect to such REIT Shares entered into by
the Tendering Partner. The REIT Shares Amount shall be registered in the name
and otherwise delivered as set forth in the Notice of Redemption.
Notwithstanding any delay in such delivery (but subject to Section 8.6.E), the
Tendering Partner shall be deemed the owner of such REIT Shares for all
purposes, including without limitation, rights to vote or consent, and receive
dividends, as of the Specified Redemption Date.
D. Each Limited Partner covenants and agrees with the
General Partner that all Tendered Units shall be delivered to the General
Partner free and clear of all liens, claims and encumbrances whatsoever and
should any such liens, claims and/or encumbrances exist or arise with respect to
such Tendered Units, the General Partner shall be under no obligation to acquire
the same. Each Limited Partner further agrees that, in the event any state or
local property transfer tax is payable as a result of the transfer of its
Tendered Units to the General Partner (or its designee), such Limited Partner
shall assume and pay such transfer tax.
E. Notwithstanding the provisions of Section 8.6.A,
8.6.B, 8.6.C or any other provision of this Agreement, a Limited Partner (i)
shall not be entitled to effect a Redemption for cash or an exchange for REIT
Shares to the extent the ownership or right to acquire REIT Shares pursuant to
such exchange by such Partner on the Specified Redemption Date would cause such
Partner or any other Person, or, in the opinion of counsel selected by the
General Partner, may cause such Partner or any other Person, to violate the
restrictions on ownership and transfer of REIT Shares set forth in Article Ninth
of the Charter and (ii) shall have no rights under this Agreement to acquire
REIT Shares which would otherwise
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be prohibited under the Charter. To the extent any attempted Redemption or
exchange for REIT Shares would be in violation of this Section 8.6.E, the
General Partner shall cause such REIT Shares to be issued to a charitable trust
as provided in Article Ninth of the Charter or, if such issuance to a charitable
trust would not prevent a violation of this Section 8.6.E, such Redemption or
exchange shall be null and void ab initio and such Limited Partner shall not
acquire any rights or economic interest in the cash otherwise payable upon such
redemption or the REIT Shares otherwise issuable upon such exchange.
F. Notwithstanding anything herein to the
contrary (but subject to Section 8.6.E), with respect to any Redemption or
exchange for REIT Shares pursuant to this Section 8.6:
(1) All Partnership Units acquired by the
General Partner pursuant thereto shall
automatically, and without further
action required, be converted into and
deemed to be General Partner Interests
comprised of the same number and class
of Partnership Units.
(2) Without the consent of the General
Partner, no Limited Partner may effect a
Redemption for less than 500 Partnership
Units or, if the Limited Partner holds
less than 500 Partnership Units, all of
the Partnership Units held by such
Limited Partner.
(3) Without the consent of the General
Partner, each Limited Partner may not
effect a Redemption during the period
after the Partnership Record Date with
respect to a distribution and before the
record date established by the General
Partner for a distribution to its
stockholders of some or all of its
portion of such distribution.
(4) Each Tendering Partner shall continue to
own all Partnership Units subject to any
Redemption or exchange for REIT Shares,
and be treated as a Limited Partner with
respect to such Partnership Units for
all purposes of this Agreement, until
such Partnership Units are transferred
to the General Partner and paid for or
exchanged on the Specified Redemption
Date. Until a Specified Redemption Date,
the Tendering Partner shall have no
rights as a stockholder of the General
Partner with respect to such Tendering
Partner's Partnership Units.
G. In the event that the Partnership issues
additional Partnership Interests to any Additional Limited Partner pursuant to
Section 4.3.C hereof, the General Partner shall make such revisions to this
Section 8.6 as it determines are necessary to reflect the issuance of such
additional Partnership Interests.
ARTICLE 9
BOOKS, RECORDS, ACCOUNTING AND REPORTS
9.1 RECORDS AND ACCOUNTING. The General Partner shall keep or
cause to be kept at the principal office of the Partnership appropriate books
and records with respect to the Partnership's business, including without
limitation, all books and records necessary to provide to the Limited Partners
any information, lists and copies of documents required to be provided pursuant
to Section 9.3 hereof. Any records maintained by or on behalf of the Partnership
in the regular course of its business may be kept on, or be in the form of,
punch cards, magnetic tape, photographs, micrographics or any other information
storage device, provided that the records so maintained are convertible into
clearly legible written form within a reasonable period of time. The books of
the Partnership shall be maintained, for financial and tax reporting purposes,
on an accrual basis in accordance with generally accepted accounting principles.
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9.2 FISCAL YEAR. The fiscal year of the Partnership shall
be the calendar year.
9.3 REPORTS
A. As soon as practicable, but in no event later than
105 days after the close of each Partnership Year, or such earlier date as they
are filed with the Securities and Exchange Commission if applicable, the General
Partner shall cause to be mailed to each Limited Partner as of the close of the
Partnership Year an annual report containing financial statements of the
Partnership, or of the General Partner if such statements are prepared solely on
a consolidated basis with the General Partner, for such Partnership Year,
presented in accordance with generally accepted accounting principles, such
statements to be audited by a nationally recognized firm of independent public
accountants selected by the General Partner.
B. As soon as practicable, but in no event later than
45 days after the close of each calendar quarter (except the last calendar
quarter of each year), or such earlier date as they are filed with the
Securities and Exchange Commission, the General Partner shall cause to be mailed
to each Limited Partner as of the last day of the calendar quarter, a report
containing unaudited financial statements of the Partnership, or of the General
Partner, if such statements are prepared solely on a consolidated basis with the
General Partner, presented in accordance with the applicable law or regulation,
or as the General Partner determines to be appropriate.
ARTICLE 10
TAX MATTERS
10.1 PREPARATION OF TAX RETURNS. The General Partner shall
arrange for the preparation and timely filing of all returns of Partnership
income, gains, deductions, losses and other items required of the Partnership
for federal and state income tax purposes and shall use all reasonable efforts
to furnish, within 90 days of the close of each taxable year, the tax
information reasonably required by Limited Partners for federal and state income
tax reporting purposes.
10.2 TAX ELECTIONS. Except as otherwise provided herein,
the General Partner shall, in its sole and absolute discretion, determine
whether to make any available election pursuant to the Code, including the
election under Section 754 of the Code. The General Partner shall have the right
to seek to revoke any such election (including without limitation, any election
under Section 754 of the Code) upon the General Partner's determination in its
sole and absolute discretion that such revocation is in the best interests of
the Partners.
10.3 TAX MATTERS PARTNER
A. The General Partner shall be the "tax
matters partner" of the Partnership for federal income tax purposes. Pursuant to
Section 6223(c) of the Code, upon receipt of notice from the IRS of the
beginning of an administrative proceeding with respect to the Partnership, the
tax matters partner shall furnish the IRS with the name, address and profit
interest of each of the Limited Partners and Assignees; provided, however, that
such information is provided to the Partnership by the Limited Partners and
Assignees.
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B. The tax matters partner is authorized, but
not required:
(1) to enter into any settlement with the
IRS with respect to any administrative
or judicial proceedings for the
adjustment of Partnership items required
to be taken into account by a Partner
for income tax purposes (such
administrative proceedings being
referred to as a "tax audit" and such
judicial proceedings being referred to
as "judicial review"), and in the
settlement agreement the tax matters
partner may expressly state that such
agreement shall bind all Partners,
except that such settlement agreement
shall not bind any Partner (i) who
(within the time prescribed pursuant to
the Code and Regulations) files a
statement with the IRS providing that
the tax matters partner shall not have
the authority to enter into a settlement
agreement on behalf of such Partner or
(ii) who is a "notice partner" (as
defined in Section 6231 of the Code) or
a member of a "notice group" (as defined
in Section 6223(b)(2) of the Code);
(2) in the event that a notice of a final
administrative adjustment at the
Partnership level of any item required
to be taken into account by a Partner
for tax purposes (a "final adjustment")
is mailed to the tax matters partner, to
seek judicial review of such final
adjustment, including the filing of a
petition for readjustment with the Tax
Court or the United States Claims Court,
or the filing of a complaint for refund
with the District Court of the United
States for the district in which the
Partnership's principal place of
business is located;
(3) to intervene in any action brought by
any other Partner for judicial review of
a final adjustment;
(4) to file a request for an administrative
adjustment with the IRS at any time and,
if any part of such request is not
allowed by the IRS, to file an
appropriate pleading (petition or
complaint) for judicial review with
respect to such request;
(5) to enter into an agreement with the IRS
to extend the period for assessing any
tax which is attributable to any item
required to be taken into account by a
Partner for tax purposes, or an item
affected by such item; and
(6) to take any other action on behalf of
the Partners of the Partnership in
connection with any tax audit or
judicial review proceeding to the extent
permitted by applicable law or
regulations. The taking of any action
and the incurring of any expense by the
tax matters partner in connection with
any such proceeding, except to the
extent required by law, is a matter in
the sole and absolute discretion of the
tax matters partner and the provisions
relating to indemnification of the
General Partner set forth in Section 7.7
of this Agreement shall be fully
applicable to the tax matters partner in
its capacity as such.
C. The tax matters partner shall receive no
compensation for its services. All third party costs and expenses incurred by
the tax matters partner in performing its duties as such
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(including legal and accounting fees) shall be borne by the Partnership. Nothing
herein shall be construed to restrict the Partnership from engaging an
accounting firm to assist the tax matters partner in discharging its duties
hereunder, so long as the compensation paid by the Partnership for such services
is reasonable.
10.4 ORGANIZATIONAL EXPENSES. The Partnership shall
elect to deduct expenses, if any, incurred by it in organizing the Partnership
ratably over a 60-month period as provided in Section 709 of the Code.
10.5 WITHHOLDING. Each Limited Partner hereby authorizes
the Partnership to withhold from or pay on behalf of or with respect to such
Limited Partner any amount of federal, state, local, or foreign taxes that the
General Partner determines that the Partnership is required to withhold or pay
with respect to any amount distributable or allocable to such Limited Partner
pursuant to this Agreement, including, without limitation, any taxes required to
be withheld or paid by the Partnership pursuant to Sections 1441, 1442, 1445 or
1446 of the Code. Any amount paid on behalf of or with respect to a Limited
Partner shall constitute a loan by the Partnership to such Limited Partner,
which loan shall be repaid by such Limited Partner within 15 days after notice
from the General Partner that such payment must be made unless (i) the
Partnership withholds such payment from a distribution which would otherwise be
made to the Limited Partner or (ii) the General Partner determines, in its sole
and absolute discretion, that such payment may be satisfied out of the available
funds of the Partnership which would, but for such payment, be distributed to
the Limited Partner. Any amounts withheld pursuant to the foregoing clauses (i)
or (ii) shall be treated as having been distributed to such Limited Partner.
Each Limited Partner hereby unconditionally and irrevocably grants to the
Partnership a security interest in such Limited Partner's Partnership Interest
to secure such Limited Partner's obligation to pay to the Partnership any
amounts required to be paid pursuant to this Section 10.5. In the event that a
Limited Partner fails to pay any amounts owed to the Partnership pursuant to
this Section 10.5 when due, the General Partner may, in its sole and absolute
discretion, elect to make the payment to the Partnership on behalf of such
defaulting Limited Partner, and in such event shall be deemed to have loaned
such amount to such defaulting Limited Partner and shall succeed to all rights
and remedies of the Partnership as against such defaulting Limited Partner
(including, without limitation, the right to receive distributions and the
holding of a security interest in such Limited Partner's Partnership Interest).
Any amounts payable by a Limited Partner hereunder shall bear interest at the
base rate on corporate loans at large United States money center commercial
banks, as published from time to time in the Wall Street Journal, plus two
percentage points (but not higher than the maximum lawful rate) from the date
such amount is due (i.e., 15 days after demand) until such amount is paid in
full. Each Limited Partner shall take such actions as the Partnership or the
General Partner shall request in order to perfect or enforce the security
interest created hereunder.
ARTICLE 11
TRANSFERS AND WITHDRAWALS
11.1 TRANSFER.
A. The term "transfer," when used in this
Article 11 with respect to a Partnership Interest, shall be deemed to refer to a
transaction by which the General Partner purports to assign its General Partner
Interest to another Person or by which a Limited Partner purports to assign its
Limited Partnership Interest to another Person, and includes a sale, assignment,
gift (outright or in trust), pledge, encumbrance, hypothecation, mortgage,
exchange or any other disposition by law or otherwise. The term "transfer" when
used in this Article 11 does not include any Redemption or exchange for REIT
Shares pursuant to Section 8.6. No part of the interest of a Limited Partner
shall be subject to the claims of any creditor, any spouse for alimony or
support, or to legal process, and may not be voluntarily or involuntarily
alienated or encumbered, except as may be specifically provided for in this
Agreement or applicable law.
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B. No Partnership Interest shall be
transferred, in whole or in part, except in accordance with the terms and
conditions set forth in this Article 11. Any transfer or purported transfer of a
Partnership Interest not made in accordance with this Article 11 shall be null
and void.
11.2 TRANSFER OF GENERAL PARTNER'S PARTNERSHIP INTEREST.
The General Partner shall not withdraw from the Partnership and shall not
transfer all or any portion of its interest in the Partnership (whether by sale,
statutory merger or consolidation, liquidation or otherwise) without the Consent
of the Limited Partners, which may be given or withheld by each Limited Partner
in its sole and absolute discretion, and only upon the admission of a successor
General Partner pursuant to Section 12.1. Upon any transfer of a Partnership
Interest in accordance with the provisions of this Section 11.2, the transferee
shall become a substitute General Partner for all purposes herein, and shall be
vested with the powers and rights of the transferor General Partner, and shall
be liable for all obligations and responsible for all duties of the General
Partner, once such transferee has executed such instruments as may be necessary
to effectuate such admission and to confirm the agreement of such transferee to
be bound by all the terms and provisions of this Agreement with respect to the
Partnership Interest so acquired. It is a condition to any transfer otherwise
permitted hereunder that the transferee assumes, by operation of law or express
agreement, all of the obligations of the transferor General Partner under this
Agreement with respect to such transferred Partnership Interest, and no such
transfer (other than pursuant to a statutory merger or consolidation wherein all
obligations and liabilities of the transferor General Partner are assumed by a
successor corporation by operation of law) shall relieve the transferor General
Partner of its obligations under this Agreement without the Consent of the
Partners, in their reasonable discretion. In the event the General Partner
withdraws from the Partnership, in violation of this Agreement or otherwise, or
otherwise dissolves or terminates, or upon the Incapacity of the General
Partner, all of the remaining Partners may elect to continue the Partnership
business by selecting a substitute General Partner in accordance with the Act.
Notwithstanding the foregoing, the General Partner shall be entitled to engage
in any merger, consolidation or other combination with or into another Person,
sale of all or substantially all of its assets or any reclassification,
recapitalization or change of its outstanding equity interests, all as it shall
determine in its sole discretion.
11.3 LIMITED PARTNERS' RIGHTS TO TRANSFER.
A. No Limited Partner shall transfer all or any
portion of its Partnership Interest to any transferee without the consent of the
General Partner (which the General Partner may withhold in its sole and absolute
discretion) and the satisfaction of the conditions set forth below in this
Section 11.3.A; provided, however, that, notwithstanding any other provision of
this Agreement, any Limited Partner may, without the consent of the General
Partner or the satisfaction of any of the conditions set forth below in this
Section 11.3.A, (i) exercise its rights of Redemption under Section 8.6 and (ii)
at any time transfer all or any portion of its Partnership Interest to an
Affiliate, another Limited Partner or an Immediate Family member of a Limited
Partner, subject to the provisions of Section 11.6. Subject to the foregoing
proviso:
(a) General Partner Right of First Refusal.
The transferring Partner shall give
written notice of the proposed transfer
to the General Partner, which notice
shall state (i) the identity of the
proposed transferee, and (ii) the amount
and type of consideration proposed to be
received for the transferred Partnership
Units. The General Partner shall have 10
days upon which to give the transferring
Partner notice of its election to
acquire the Partnership Units on the
proposed terms. If it so elects, it
shall purchase the Partnership Units on
such terms within 10 days after giving
notice of such election. If it does not
so elect, the transferring Partner may
transfer such Partnership Units to a
third party, on economic terms no more
favorable to the transferee than the
proposed terms, subject to the other
conditions of this Section 11.3.
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(b) Qualified Transferee. Any transfer of a
Partnership Interest shall be made only
to Qualified Transferees.
It is a condition to any transfer otherwise permitted
hereunder that the transferee assumes by operation of law or express agreement
all of the obligations of the transferor Limited Partner under this Agreement
with respect to such transferred Partnership Interest and no such transfer
(other than pursuant to a statutory merger or consolidation wherein all
obligations and liabilities of the transferor Partner are assumed by a successor
corporation by operation of law) shall relieve the transferor Partner of its
obligations under this Agreement without the approval of the General Partner, in
its reasonable discretion. Notwithstanding the foregoing, any transferee of any
transferred Partnership Interest shall be subject to any and all ownership
limitations contained in the Charter and the representations in Section 3.4.D.
Any transferee, whether or not admitted as a Substituted Limited Partner, shall
take subject to the obligations of the transferor hereunder. Unless admitted as
a Substitute Limited Partner, no transferee, whether by a voluntary transfer, by
operation of law or otherwise, shall have rights hereunder, other than the
rights of an Assignee as provided in Section 11.5.
B. If a Limited Partner is subject to
Incapacity, the executor, administrator, trustee, committee, guardian,
conservator, or receiver of such Limited Partner's estate shall have all the
rights of a Limited Partner, but not more rights than those enjoyed by other
Limited Partners, for the purpose of settling or managing the estate, and such
power as the Incapacitated Limited Partner possessed to transfer all or any part
of his or its interest in the Partnership. The Incapacity of a Limited Partner,
in and of itself, shall not dissolve or terminate the Partnership.
C. The General Partner may prohibit any
transfer otherwise permitted under Section 11.3 by a Limited Partner of his or
her Partnership Units if, in the opinion of legal counsel to the Partnership,
such transfer would require the filing of a registration statement under the
Securities Act by the Partnership or would otherwise violate any federal or
state securities laws or regulations applicable to the Partnership or the
Partnership Unit.
D. No transfer by a Limited Partner of his or
her Partnership Units (including any Redemption or exchange for REIT Shares
pursuant to Section 8.6) may be made to any person if such transfer is
effectuated through an "established securities market" or a "secondary market
(or the substantial equivalent thereof)" within the meaning of Section 7704 of
the Code.
E. No transfer of any Partnership Units may be
made to a lender to the Partnership or any Person who is related (within the
meaning of Section 1.752-4(b) of the Regulations) to any lender to the
Partnership whose loan constitutes a Nonrecourse Liability, without the consent
of the General Partner, in its sole and absolute discretion; provided that, as a
condition to such consent, the lender will be required to enter into an
arrangement with the Partnership and the General Partner to redeem or exchange
for the REIT Shares Amount any Partnership Units in which a security interest is
held simultaneously with the time at which such lender would be deemed to be a
partner in the Partnership for purposes of allocating liabilities to such lender
under Section 752 of the Code.
11.4 SUBSTITUTED LIMITED PARTNERS
A. No Limited Partner shall have the right to
substitute a transferee as a Limited Partner in his or her place; provided,
however, that a Person to whom an interest of a Limited Partner may be
transferred without the consent of the General Partner pursuant to Section 11.3
shall be admitted to the Partnership as a Substituted Limited Partner upon his
or her request therefor subject to Section 11.6. The General Partner shall,
however, have the right to consent to the admission of a permitted transferee of
the interest of a Limited Partner, other than a transferee in a transfer
permitted by Section 11.3 hereof without the consent of the General Partner, as
a Substituted Limited Partner, pursuant to this Section 11.4, which consent may
be given or withheld by the General Partner in its sole and absolute discretion.
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The General Partner's failure or refusal to permit a transferee of any such
interests to become a Substituted Limited Partner shall not give rise to any
cause of action against the Partnership or any Partner.
B. A transferee who has been admitted as a
Substituted Limited Partner in accordance with this Article 11 shall have all
the rights and powers and be subject to all the restrictions and liabilities of
a Limited Partner under this Agreement. The admission of any transferee as a
Substituted Limited Partner shall be subject to the transferee executing and
delivering to the Partnership an acceptance of all of the terms and conditions
of this Agreement (including without limitation, the provisions of Section 2.4
and such other documents or instruments as may be required to effect the
admission, each in form and substance satisfactory to the General Partner) and
the acknowledgment by such transferee that each of the representations and
warranties set forth in Section 3.4 hereof are true and correct with respect to
such transferee as of the date of the transfer of the Partnership Interest to
such transferee.
C. Upon the admission of a Substituted Limited
Partner, the General Partner shall amend Exhibit A to reflect the name, address,
number of Partnership Units, and Percentage Interest of such Substituted Limited
Partner and to eliminate or adjust, if necessary, the name, address and interest
of the predecessor of such Substituted Limited Partner.
11.5 ASSIGNEES. If the General Partner, in its sole and
absolute discretion, does not consent to the admission of any permitted
transferee under Section 11.3 as a Substituted Limited Partner, as described in
Section 11.4, such transferee shall be considered an Assignee for purposes of
this Agreement. An Assignee shall be entitled to all the rights of an assignee
of a limited partnership interest under the Act, including the right to receive
distributions from the Partnership and the share of Net Income, Net Losses, gain
and loss attributable to the Partnership Units assigned to such transferee, the
rights to transfer the Partnership Units provided in this Article 11, and the
right of Redemption provided in Section 8.6, but shall not be deemed to be a
holder of Partnership Units for any other purpose under this Agreement, and
shall not be entitled to effect a Consent with respect to such Partnership Units
on any matter presented to the Limited Partners for approval (such Consent
remaining with the transferor Limited Partner). In the event any such transferee
desires to make a further assignment of any such Partnership Units, such
transferee shall be subject to all the provisions of this Article 11 to the same
extent and in the same manner as any Limited Partner desiring to make an
assignment of Partnership Units.
11.6 GENERAL PROVISIONS.
A. No Limited Partner may voluntarily withdraw from
the Partnership other than as a result of (i) a permitted transfer of all of
such Limited Partner's Partnership Units in accordance with this Article 11 or
(ii) pursuant to the exercise of its right of Redemption of all of such Limited
Partner's Partnership Units under Section 8.6.
B. Any Limited Partner who shall transfer all of such
Limited Partner's Partnership Units in a transfer permitted pursuant to this
Article 11 or pursuant to the exercise of its rights of Redemption of all of
such Limited Partner's Partnership Units under Section 8.6 shall cease to be a
Limited Partner.
C. Transfers pursuant to this Article 11 may only be
made on the first day of a fiscal quarter of the Partnership, unless the General
Partner otherwise agrees.
D. If any Partnership Interest is transferred,
assigned or redeemed during any quarterly segment of the Partnership's fiscal
year in compliance with the provisions of this Article 11 or transferred or
redeemed pursuant to Section 8.6, on any day other than the first day of a
Partnership Year, then Net Income, Net Losses, each item thereof and all other
items attributable to such Partnership Interest for such fiscal year shall be
divided and allocated between the transferor Partner and the transferee Partner
by taking into account their varying interests during the fiscal year in
accordance with Section 706(d) of the Code, using the interim closing of the
books method. Except as otherwise required by
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Section 706(d) of the Code, solely for purposes of making such allocations, each
of such items for the calendar month in which the transfer, assignment or
redemption occurs shall be allocated to the Person who is a Partner as of
midnight on the last day of said month and none of such items for the calendar
month in which a redemption occurs will be allocated to the redeeming Partner.
All distributions of Available Cash with respect to which the Partnership Record
Date is before the date of such transfer, assignment or redemption shall be made
to the transferor Partner, and all distributions of Available Cash thereafter,
in the case of a transfer or assignment other than a redemption, shall be made
to the transferee Partner.
E. In addition to any other restrictions on transfer
herein contained, including without limitation the provisions of this Article 11
and Section 2.6, in no event may any transfer or assignment of a Partnership
Interest by any Partner (including by way of a Redemption) be made (i) to any
person or entity who lacks the legal right, power or capacity to own a
Partnership Interest; (ii) in violation of applicable law; (iii) of any
component portion of a Partnership Interest, such as the Capital Account, or
rights to distributions, separate and apart from all other components of a
Partnership Interest; (iv) if in the opinion of legal counsel to the Partnership
such transfer would cause a termination of the Partnership for federal or state
income tax purposes (except as a result of the Redemption or exchange for REIT
Shares of all Partnership Units held by all Limited Partners or pursuant to a
Termination Transaction expressly permitted under Section 11.2); (v) if in the
opinion of counsel to the Partnership such transfer would cause the Partnership
to cease to be classified as a partnership for federal or state income tax
purposes (except as a result of the Redemption or exchange for REIT Shares of
all Partnership Units held by all Limited Partners); (vi) if such transfer would
cause the Partnership to become, with respect to any employee benefit plan
subject to Title I of ERISA, a "party-in-interest" (as defined in Section 3(14)
of ERISA) or a "disqualified person" (as defined in Section 4975(c) of the
Code); (vii) if such transfer would, in the opinion of counsel to the
Partnership, cause any portion of the assets of the Partnership to constitute
assets of any employee benefit plan pursuant to Department of Labor Regulations
Section 2510.2-101; (viii) if such transfer requires the registration of such
Partnership Interest pursuant to any applicable federal or state securities
laws; (ix) if such transfer is effectuated through an "established securities
market" or a "secondary market" (or the substantial equivalent thereof) within
the meaning of Section 7704 of the Code or such transfer causes the Partnership
to become a "Publicly Traded Partnership," as such term is defined in Sections
469(k)(2) or 7704(b) of the Code; (x) if such transfer subjects the Partnership
to be regulated under the Investment Company Act of 1940, the Investment
Advisors Act of 1940 or ERISA, each as amended; (xi) if the transferee or
assignee of such Partnership Interest is unable to make the representations set
forth in Section 3.4.D or such transfer could otherwise adversely affect the
ability of the General Partner to remain qualified as a REIT; or (xii) if in the
opinion of legal counsel for the Partnership such transfer would adversely
affect the ability of the General Partner to continue to qualify as a REIT or
subject the General Partner to any additional taxes under Section 857 or Section
4981 of the Code.
F. The General Partner shall monitor the transfers of
interests in the Partnership to determine (i) if such interests are being traded
on an "established securities market" or a "secondary market (or the substantial
equivalent thereof)" within the meaning of Section 7704 of the Code, and (ii)
whether additional transfers of interests would result in the Partnership being
unable to qualify for at least one of the "safe harbors" set forth in
Regulations Section 1.7704-1 (or such other guidance subsequently published by
the IRS setting forth safe harbors under which interests will not be treated as
"readily tradable on a secondary market (or the substantial equivalent thereof)"
within the meaning of Section 7704 of the Code) (the "Safe Harbors"). The
General Partner shall take all steps reasonably necessary or appropriate to
prevent any trading of interests or any recognition by the Partnership of
transfers made on such markets and, except as otherwise provided herein, to
insure that at least one of the Safe Harbors is met.
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ARTICLE 12
ADMISSION OF PARTNERS
12.1 ADMISSION OF SUCCESSOR GENERAL PARTNER. A successor
to all of the General Partner's General Partner Interest pursuant to Section
11.2 hereof who is proposed to be admitted as a successor General Partner shall
be admitted to the Partnership as the General Partner, effective upon such
transfer. Any such transferee shall carry on the business of the Partnership
without dissolution. In each case, the admission shall be subject to the
successor General Partner executing and delivering to the Partnership an
acceptance of all of the terms and conditions of this Agreement and such other
documents or instruments as may be required to effect the admission. In the case
of such admission on any day other than the first day of a Partnership Year, all
items attributable to the General Partner Interest for such Partnership Year
shall be allocated between the transferring General Partner and such successor
as provided in Article 11 hereof.
12.2 ADMISSION OF ADDITIONAL LIMITED PARTNERS.
A. After the admission to the Partnership of the
initial Limited Partners on the date hereof, a Person who makes a Capital
Contribution to the Partnership in accordance with this Agreement shall be
admitted to the Partnership as an Additional Limited Partner only upon
furnishing to the General Partner (i) evidence of acceptance in form
satisfactory to the General Partner of all of the terms and conditions of this
Agreement, including, without limitation, the power of attorney granted in
Section 2.4 hereof and (ii) such other documents or instruments as may be
required in the discretion of the General Partner in order to effect such
Person's admission as an Additional Limited Partner.
B. Notwithstanding anything to the contrary in this
Section 12.2, no Person shall be admitted as an Additional Limited Partner
without the consent of the General Partner, which consent may be given or
withheld in the General Partner's sole and absolute discretion. The admission of
any Person as an Additional Limited Partner shall become effective on the date
upon which the name of such Person is recorded on the books and records of the
Partnership, following the receipt of the Capital Contribution in respect of
such Limited Partner, the documents set forth in Paragraph A of this Section
12.2 hereof and the consent of the General Partner to such admission. If any
Additional Limited Partner is admitted to the Partnership on first day of a
Partnership Year, then Net Income, Net Losses, each item thereof and all other
items allocable among Partners and Assignees for such Partnership Year shall be
allocated among such Limited Partner and all other Partners and Assignees by
taking into account their varying interests during the Partnership Year in
accordance with Section 706(d) of the Code, using the interim closing books
method. Solely for purposes of making such allocations, each of such items for
the calendar month in which an admission of an Additional Limited Partner occurs
shall be allocated among all the Partners and Assignees including such
Additional Limited Partner. All distributions of Available Cash with respect to
which the Partnership Record Date is before the date of such admission shall be
made solely to Partners and Assignees other than the Additional Limited Partner
(other than in its capacity as an Assignee) and except as otherwise agreed to by
the Additional Limited Partners and the General Partner, and all distributions
of Available Cash thereafter shall be made to all Partners and Assignees
including such Additional Limited Partner.
12.3 AMENDMENT OF AGREEMENT AND CERTIFICATE OF LIMITED
PARTNERSHIP. For the admission to the Partnership of any Partner, the General
Partner shall take all steps necessary and appropriate under the Act to amend
the records of the Partnership and, if necessary, to prepare as soon as
practical an amendment of this Agreement (including an amendment of Exhibit A)
and, if required by law, shall prepare and file an amendment to the Certificate
and may for this purpose exercise the power of attorney granted pursuant to
Section 2.4 hereof.
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ARTICLE 13
DISSOLUTION AND LIQUIDATION
13.1 DISSOLUTION. The Partnership shall not be dissolved
by the admission of Substituted Limited Partners or Additional Limited Partners
or by the admission of a successor General Partner in accordance with the terms
of this Agreement. Upon the withdrawal of the General Partner, any successor
General Partner (selected as described in Section 13.1.B below) shall continue
the business of the Partnership. The Partnership shall dissolve, and its affairs
shall be wound up, upon the first to occur of any of the following ("Liquidating
Events"):
A. the expiration of its term as provided in
Section 2.5 hereof;
B. an event of withdrawal of the General
Partner, as defined in the Act, unless, within 90 days after the withdrawal, a
majority in Interest of the Limited Partners agree in writing, in their sole and
absolute discretion, to continue the business of the Partnership and to the
appointment, effective as of the date of withdrawal, of a substitute General
Partner;
C. subject to the provisions of Section 7.3.C
hereof, an election to dissolve the Partnership made by the General Partner;
D. entry of a decree of judicial dissolution of
the Partnership pursuant to the provisions of the Act;
E. the sale of all or substantially all of the
assets and properties of the Partnership;
F. the Incapacity of the General Partner,
unless a Majority in Interest of the Limited Partners, in their sole and
absolute discretion, agree in writing to continue the business of the
Partnership and to the appointment, effective as of a date prior to the date of
such Incapacity, of a substitute General Partner; or
G. the Redemption or exchange for REIT Shares
of all Partnership Units (other than those of the General Partner).
13.2 WINDING UP.
A. Upon the occurrence of a Liquidating Event,
the Partnership shall continue solely for the purposes of winding up its affairs
in an orderly manner, liquidating its assets, and satisfying the claims of its
creditors and Partners. No Partner shall take any action that is inconsistent
with, or not necessary to or appropriate for, the winding up of the
Partnership's business and affairs. The General Partner (or, in the event there
is no remaining General Partner, any Person elected by a Majority in Interest of
the Limited Partners (the "Liquidator")) shall be responsible for overseeing the
winding up and dissolution of the Partnership and shall take full account of the
Partnership's liabilities and assets and the Partnership property shall be
liquidated as promptly as is consistent with obtaining the fair value thereof,
and the proceeds therefrom (which may, to the extent determined by the General
Partner, include shares of stock of the General Partner) shall be applied and
distributed in the following order:
(1) First, to the payment and discharge of
all of the Partnership's debts and
liabilities to creditors other than the
Partners;
(2) Second, to the payment and discharge of
all of the Partnership's debts and
liabilities to the General Partner;
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(3) Third, to the payment and discharge of
all of the Partnership's debts and
liabilities to the other Partners; and
(4) The balance, if any, to the General
Partner and Limited Partners in
accordance with their positive Capital
Account balances, determined after
taking into account all Capital Account
adjustments for the Partnership taxable
year during which the liquidation occurs
(other than those made as a result of
the liquidating distribution set forth
in this Section 13.2.A(4)).
The General Partner shall not receive any additional compensation for any
services performed pursuant to this Article 13 other than reimbursement of its
expenses as provided in Section 7.4.
B. Notwithstanding the provisions of
Section 13.2.A hereof which require liquidation of the assets of the
Partnership, but subject to the order of priorities set forth therein, if prior
to or upon dissolution of the Partnership the Liquidator determines that an
immediate sale of part or all of the Partnership's assets would be impractical
or would cause undue loss to the Partners, the Liquidator may, in its sole and
absolute discretion, defer for a reasonable time the liquidation of any assets
except those necessary to satisfy liabilities of the Partnership (including to
those Partners as creditors) and/or distribute to the Partners, in lieu of cash,
as tenants in common and in accordance with the provisions of Section 13.2.A
hereof, undivided interests in such Partnership assets as the Liquidator deems
not suitable for liquidation. Any such distributions in kind shall be made only
if, in the good faith judgment of the Liquidator, such distributions in kind are
in the best interest of the Partners and would not subject them to liabilities
relating to the distributed properties, and shall be subject to such conditions
relating to the disposition and management of such properties as the Liquidator
deems reasonable and equitable and to any agreements governing the operation of
such properties at such time. The Liquidator shall determine the fair market
value of any property distributed in kind using such reasonable method of
valuation as it may adopt.
13.3 COMPLIANCE WITH TIMING REQUIREMENTS OF REGULATIONS.
In the event the Partnership is "liquidated" within the meaning of Regulations
Section 1.704-1(b)(2)(ii)(g), distributions shall be made pursuant to this
Article 13 to the General Partner and Limited Partners who have positive Capital
Accounts in compliance with Regulations Section 1.704-1(b)(2)(ii)(b)(2). If any
Partner has a deficit balance in his or her Capital Account (after giving effect
to all contributions, distributions and allocations for the taxable years,
including the year during which such liquidation occurs), such Partner shall
have no obligation to make any contribution to the capital of the Partnership
with respect to such deficit, and such deficit shall not be considered a debt
owed to the Partnership or to any other Person for any purpose whatsoever. In
the discretion of the Liquidator or the General Partner, a pro rata portion of
the distributions that would otherwise be made to the General Partner and
Limited Partners pursuant to this Article 13 may be:
A. distributed to a trust established for the
benefit of the General Partner and Limited Partners for the purposes of
liquidating Partnership assets, collecting amounts owed to the Partnership, and
paying any contingent or unforeseen liabilities or obligations of the
Partnership or of the General Partner arising out of or in connection with the
Partnership. The assets of any such trust shall be distributed to the General
Partner and Limited Partners from time to time, in the reasonable discretion of
the Liquidator or the General Partner, in the same proportions and the amount
distributed to such trust by the Partnership would otherwise have been
distributed to the General Partner and Limited Partners pursuant to this
Agreement; or
B. withheld to provide a reasonable reserve for
Partnership liabilities (contingent or otherwise) and to reflect the unrealized
portion of any installment obligations owed to the Partnership, provided that
such withheld amounts shall be distributed to the General Partner and Limited
Partners as soon as practicable.
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13.4 DEEMED DISTRIBUTION AND RECONTRIBUTION.
Notwithstanding any other provision of this Article 13, in the event the
Partnership is liquidated within the meaning of Regulations Section 1.704-
1(b)(2)(ii)(g) but no Liquidating Event has occurred, the Partnership's property
shall not be liquidated, the Partnership's liabilities shall not be paid or
discharged, and the Partnership's affairs shall not be wound up. Instead, the
Partnership shall be deemed to have distributed the Partnership property in kind
to the General Partner and Limited Partners, who shall be deemed for federal and
state income tax purposes (and only federal and state income tax purposes) to
have assumed and taken such property subject to all Partnership liabilities, all
in accordance with their respective Capital Accounts. Immediately thereafter,
the General Partner and Limited Partners shall be deemed to have recontributed
the Partnership property in kind to the Partnership, which shall be deemed for
federal and state income tax purposes to have assumed and taken such property
subject to all such liabilities.
13.5 RIGHTS OF LIMITED PARTNERS. Except as otherwise
provided in this Agreement, each Limited Partner shall look solely to the assets
of the Partnership for the return of his Capital Contribution and shall have no
right or power to demand or receive property from the General Partner. No
Limited Partner shall have priority over any other Limited Partner as to the
return of his Capital Contributions, distributions or allocations.
13.6 NOTICE OF DISSOLUTION. In the event a Liquidating
Event occurs or an event occurs that would, but for provisions of Section 13.1,
result in a dissolution of the Partnership, the General Partner shall, within 30
days thereafter, provide written notice thereof to each of the Partners and to
all other parties with whom the Partnership regularly conducts business (as
determined in the discretion of the General Partner) and shall publish notice
thereof in a newspaper of general circulation in each place in which the
Partnership regularly conducts business (as determined in the discretion of the
General Partner).
13.7 CANCELLATION OF CERTIFICATE OF LIMITED PARTNERSHIP.
Upon the completion of the liquidation of the Partnership cash and property as
provided in Section 13.2 hereof, the Partnership shall be terminated and the
Certificate and all qualifications of the Partnership as a foreign limited
partnership in jurisdictions other than the State of Delaware shall be cancelled
and such other actions as may be necessary to terminate the Partnership shall be
taken.
13.8 REASONABLE TIME FOR WINDING-UP. A reasonable time
shall be allowed for the orderly winding-up of the business and affairs of the
Partnership and the liquidation of its assets pursuant to Section 13.2 hereof,
in order to minimize any losses otherwise attendant upon such winding-up, and
the provisions of this Agreement shall remain in effect between the Partners
during the period of liquidation.
13.9 WAIVER OF PARTITION. Each Partner hereby waives any
right to partition of the Partnership property.
ARTICLE 14
AMENDMENT OF PARTNERSHIP AGREEMENT; CONSENTS
14.1 AMENDMENTS.
A. The actions requiring consent or approval of the
Partners or of the Limited Partners pursuant to this Agreement, including
Section 7.3, or otherwise pursuant to applicable law, are subject to the
procedures in this Article 14.
B. Amendments to this Agreement requiring the consent
or approval of Limited Partners may be proposed by the General Partner or by any
Limited Partner. Following such proposal, the General Partner shall submit any
proposed amendment to the Partners or the Limited Partners, as applicable. The
General Partner shall seek the written consent or approval of the Partners or of
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the Limited Partners on the proposed amendment or shall call a meeting to vote
thereon and to transact any other business that it may deem appropriate. For
purposes of obtaining a written consent, the General Partner may require a
response within a reasonable specified time, but not less than 15 days, and
failure to respond in such time period shall constitute a consent which is
consistent with the General Partner's recommendation (if so recommended) with
respect to the proposal; provided that an action shall become effective at such
time as requisite consents are received even if prior to such specified time.
14.2 ACTION BY THE PARTNERS.
A. Meetings of the Partners may be called by the
General Partner and shall be called upon the receipt by the General Partner of a
written request by Limited Partners holding twenty-five percent (25%) or more of
the Partnership Interests held by Limited Partners. The call shall state the
nature of the business to be transacted. Notice of any such meeting shall be
given to all Partners not less than seven days nor more than 30 days prior to
the date of such meeting. Partners may vote in person or by proxy at such
meeting. Whenever the vote of the Percentage Interests of the Partners, or the
Consent of the Partners or Consent of the Limited Partners is permitted or
required under this Agreement, such vote or Consent may be given at a meeting of
Partners or may be given in accordance with the procedure prescribed in Section
14.1 hereof.
B. Any action required or permitted to be taken at a
meeting of the Partners may be taken without a meeting if a written consent
setting forth the action so taken is signed by the percentage as is expressly
required by this Agreement for the action in question. Such consent may be in
one instrument or in several instruments, and shall have the same force and
effect as a vote of the Percentage Interests of the Partners (expressly required
by this Agreement). Such consent shall be filed with the General Partner. An
action so taken shall be deemed to have been taken at a meeting held on the
effective date so certified.
C. Each Limited Partner may authorize any Person or
Persons to act for him by proxy on all matters in which a Limited Partner is
entitled to participate, including waiving notice of any meeting, or voting or
participating at a meeting. Every proxy must be signed by the Limited Partner or
his attorney-in-fact. No proxy shall be valid after the expiration of 11 months
from the date thereof unless otherwise provided in the proxy. Every proxy shall
be revocable at the pleasure of the Limited Partner executing it.
D. Each meeting of Partners shall be conducted by the
General Partner or such other Person as the General Partner may appoint pursuant
to such rules for the conduct of the meeting as the General Partner or such
other Person deems appropriate.
ARTICLE 15
GENERAL PROVISIONS
15.1 ADDRESSES AND NOTICE. Any notice, demand, request or
report required or permitted to be given or made to a Partner or Assignee under
this Agreement shall be in writing and shall be deemed given or made when
delivered in person or when sent by certified first class United States mail,
nationally recognized overnight delivery service or facsimile transmission to
the Partner or Assignee at the address set forth in Exhibit A or such other
address as the Partners shall notify the General Partner in writing.
15.2 TITLES AND CAPTIONS. All article or section titles
or captions in this Agreement are for convenience only. They shall not be deemed
part of this Agreement and in no way define, limit, extend or describe the scope
or intent of any provisions hereof. Except as specifically provided otherwise,
references to "Articles" and "Sections" are to Articles and Sections of this
Agreement.
49
<PAGE> 55
15.3 PRONOUNS AND PLURALS. Whenever the context may
require, any pronoun used in this Agreement shall include the corresponding
masculine, feminine or neuter forms, and the singular form of nouns, pronouns
and verbs shall include the plural and vice versa.
15.4 FURTHER ACTION. The parties shall execute and deliver
all documents, provide all information and take or refrain from taking action as
may be necessary or appropriate to achieve the purposes of this Agreement.
15.5 BINDING EFFECT. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their heirs, executors,
administrators, successors, legal representatives and permitted assigns.
15.6 CREDITORS. Other than as expressly set forth herein
with respect to Indemnitees, none of the provisions of this Agreement shall be
for the benefit of, or shall be enforceable by, any creditor of the Partnership.
15.7 WAIVER. No failure or delay by any party to insist
upon the strict performance of any covenant, duty, agreement or condition of
this Agreement or to exercise any right or remedy consequent upon any breach
thereof shall constitute waiver of any such breach or any other covenant, duty,
agreement or condition.
15.8 COUNTERPARTS. This Agreement may be executed in
counterparts, all of which together shall constitute one agreement binding on
all the parties hereto, notwithstanding that all such parties are not
signatories to the original or the same counterpart. Each party shall become
bound by this Agreement immediately upon affixing its signature hereto.
15.9 APPLICATION LAW. This Agreement shall be construed in
accordance with and governed by the laws of the State of Delaware, without
regard to the principles of conflicts of law.
15.10 INVALIDITY OF PROVISIONS. If any provision of this
Agreement is or becomes invalid, illegal or unenforceable in any respect, the
validity, legality and enforceability of the remaining provisions contained
herein shall not be affected thereby.
15.11 LIMITATION TO PRESERVE REIT STATUS. To the extent
that any amount paid or credited to the General Partner or its officers,
directors, employees or agents pursuant to Section 7.4 or Section 7.7 would
constitute gross income to the General Partner for purposes of Sections
856(c)(2) or 856(c)(3) of the Code (a "General Partner Payment") then,
notwithstanding any other provision of this Agreement, the amount of such
General Partner Payments for any fiscal year shall not exceed the lesser of:
(1) (i) an amount equal to the excess, if any, of (a) 5%
of the General Partner's total gross income (but not
including the amount of any General Partner Payments)
for the fiscal year which is described in subsections
(A) through (H) of Section 856(c)(2) of the Code over
(b) the amount of gross income (within the meaning of
Section 856(c)(2) of the Code) derived by the General
Partner from sources other than those described in
subsections (A) through (H) of Section 856(c)(2) of
the Code (but not including the amount of any General
Partner Payments); or
(ii) an amount equal to the excess, if any, of (a) 25% of
the General Partner's total gross income (but not
including the amount of any General Partner Payments)
for the fiscal year which is described in subsections
(A) through (I) of Section 856(c)(3) of the Code
over (b) the amount of gross income (within the
meaning of Section 856(c)(3) of the Code) derived by
the General Partner from sources other than those
described in subsections (A) through (I) of Section
856(c)(3) of
50
<PAGE> 56
the Code (but not including the amount of any
General Partner Payments); provided, however, that
General Partner Payments in excess of the amounts
set forth in subparagraphs (i) and (ii) above may be
made if the General Partner, as a condition
precedent, obtains an opinion of tax counsel that
the receipt of such excess amounts would not
adversely affect the General Partner's ability to
qualify as a REIT. To the extent General Partner
Payments may not be made in a year due to the
foregoing limitations, such General Partner Payments
shall carry over and be treated as arising in the
following year, provided, however, that such amounts
shall not carry over for more than five years, and
if not paid within such five year period, shall
expire; provided further, that (i) as General
Partner Payments are made, such payments shall be
applied first to carry over amounts outstanding, if
any, and (ii) with respect to carry over amounts for
more than one Partnership Year, such payments shall
be applied to the earliest Partnership Year first.
15.2 ENTIRE AGREEMENT.. This Agreement contains the entire
understanding and agreement among the Partners with respect to the subject
matter hereof and supersedes any other prior written or oral understandings or
agreements among them with respect thereto.
15.13 NO RIGHTS AS STOCKHOLDERS. Nothing contained in this
Agreement shall be construed as conferring upon the holders of Partnership Units
any rights whatsoever as stockholders of the General Partner, including without
limitation any right to receive dividends or other distributions made to
stockholders of the General Partner or to vote or to consent or to receive
notice as stockholders in respect of any meeting of stockholders for the
election of directors of the General Partner or any other matter.
[Remainder of Page Intentionally Left Blank]
51
<PAGE> 57
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first written above.
GENERAL PARTNER:
Hanover Capital Mortgage Holdings, Inc.,
a Maryland corporation
By:
-------------------------------------
President and Chief Executive Officer
LIMITED PARTNERS:
-------------------------------
John A. Burchett
-------------------------------
Joyce S. Mizerak
-------------------------------
George J. Ostendorf
-------------------------------
Irma N. Tavares
52
<PAGE> 58
EXHIBIT A
PARTNERS, CONTRIBUTIONS AND PARTNERSHIP INTERESTS
A-1
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<PAGE> 59
EXHIBIT B
NOTICE OF REDEMPTION
The undersigned hereby [irrevocably] (i) exchanges
____________ Limited Partnership Units in Hanover Capital Mortgage Holdings,
L.P. in accordance with the terms of the Amended and Restated Agreement of
Limited Partnership of Hanover Capital Mortgage Holdings, L.P. dated as of
__________, as amended, and the rights of Redemption referred to therein, (ii)
surrenders such Limited Partnership Units and all right, title and interest
therein, and (iii) directs that the cash (or, if applicable, REIT Shares)
deliverable upon Redemption or exchange be delivered to the address specified
below, and if applicable, that such REIT Shares be registered or placed in the
name(s) and at the address(es) specified below.
Dated:
------------------------
Name of Limited Partner:
----------------------------
------------------------------------
(Signature of Limited Partner)
------------------------------------
(Street Address)
------------------------------------
Signature Guaranteed by:
------------------------------------
Issue REIT Shares in the name of:
Please insert social security or identifying number:
Address (if different than above):
B-1
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<PAGE> 60
EXHIBIT C
CONSTRUCTIVE OWNERSHIP DEFINITION
The term "Constructively Owns" means ownership determined
through the application of the constructive ownership rules of Section 318 of
the Code, as modified by Section 856(d)(5) of the Code. Generally, these rules
provide the following:
a. an individual is considered as owning the Ownership Interest that is
owned, actually or constructively, by or for his spouse, his children, his
grandchildren, and his parents;
b. an Ownership Interest that is owned, actually or constructively, by
or for a partnership or estate is considered as owned proportionately by its
partners or beneficiaries;
c. an Ownership Interest that is owned, actually or constructively, by
or for a trust is considered as owned by its beneficiaries in proportion to the
actuarial interest of such beneficiaries (provided, however, that in the case of
a "grantor trust" the Ownership Interest will be considered as owned by the
grantors);
d. if 10 percent or more in value of the stock in a corporation is
owned, actually or constructively, by or for any person, such person shall be
considered as owning the Ownership Interest that is owned, actually or
constructively, by or for such corporation in that proportion which the value of
the stock which such person so owns bears to the value of all the stock in such
corporation;
e. an Ownership Interest that is owned, actually or constructively, by
or for a partner of a partnership or a beneficiary of an estate or trust shall
be considered as owned by the partnership, estate, or trust (or, in the case of
a grantor trust, the grantors);
f. if 10 percent or more in value of the stock in a corporation is
owned, actually or constructively, by or for any person, such corporation shall
be considered as owning the Ownership Interest that is owned, actually or
constructively, by or for such person;
g. if any person has an option to acquire an Ownership Interest
(including an option to acquire an option or any one of a series of such
options), such Ownership Interest shall be considered as owned by such person;
h. an Ownership Interest that is constructively owned by a person by
reason of the application of the rules described in paragraphs (a) through (g)
above shall, for purposes of applying paragraphs (a) through (g), be considered
as actually owned by such person, provided, however, that (i) an Ownership
Interest constructively owned by an individual by reason of paragraph (a) shall
not be considered as owned by him for purposes of again applying paragraph (a)
in order to make another the constructive owner of such Ownership Interest, (ii)
an Ownership Interest constructively owned by a partnership, estate, trust, or
corporation by reason of the application of paragraphs (e) or (f) shall not be
considered as owned by it for purposes of applying paragraphs (b), (c), or (d)
in order to make another the constructive owner of such Ownership Interest,
(iii) if an Ownership Interest may be considered as owned by an individual under
paragraphs (a) or (g), it shall be considered as owned by him under paragraph
(g), and (iv) for purposes of the above described rules, an S corporation shall
be treated as a partnership and any stockholder of the S corporation shall be
treated as a partner of such partnership except that this rule shall not apply
for purposes of determining whether stock in the S corporation is constructively
owned by any person.
i. For purposes of the above summary of the constructive ownership
rules, the term "Ownership Interest" means the ownership of stock with respect
to a corporation and, with respect to any other type of entity, the ownership of
an interest in either its assets or net profits.
C-1
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<PAGE> 61
C-2
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<PAGE> 62
EXHIBIT D
FORM OF PARTNERSHIP UNIT CERTIFICATE
CERTIFICATE FOR PARTNERSHIP UNITS OF
HANOVER CAPITAL MORTGAGE HOLDINGS, L.P.
No. _______________ _________________ UNITS
Hanover Capital Mortgage Holdings, Inc., as the General
Partner of Hanover Capital Mortgage Holdings, L.P., a Delaware limited
partnership (the "Operating Partnership"), hereby certifies that
_________________________ is a Limited Partner of the Operating Partnership
whose Partnership Interests therein, as set forth in the Amended and Restated
Agreement of Limited Partnership of Hanover Capital Mortgage Holdings, L.P.,
dated as of ______________, 1997 (as it may be amended, modified or supplemented
from time to time in accordance with its terms) (the "Partnership Agreement"),
under which the Operating Partnership is existing (copies of which are on file
at the Operating Partnership's principal office at 100 Metroplex Drive, Suite
301, Edison, NJ 08817, represent ______________ units of limited partnership
interest in the Operating Partnership (the "Partnership Units").
THE PARTNERSHIP UNITS REPRESENTED BY THIS CERTIFICATE OR
INSTRUMENT MAY NOT BE TRANSFERRED, SOLD, ASSIGNED, PLEDGED, HYPOTHECATED OR
OTHERWISE DISPOSED OF UNLESS SUCH TRANSFER, SALE, ASSIGNMENT, PLEDGE,
HYPOTHECATION OR OTHER DISPOSITION COMPLIES WITH THE PROVISIONS OF THE
PARTNERSHIP AGREEMENT (A COPY OF WHICH IS ON FILE WITH THE OPERATING
PARTNERSHIP). EXCEPT AS OTHERWISE PROVIDED IN THE PARTNERSHIP AGREEMENT, NO
TRANSFER, SALE, ASSIGNMENT, PLEDGE, HYPOTHECATION OR OTHER DISPOSITION OF THE
PARTNERSHIP UNITS REPRESENTED BY THIS CERTIFICATE MAY BE MADE EXCEPT (A)
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "ACT"), OR (B) IF THE PARTNERSHIP HAS BEEN FURNISHED WITH
A SATISFACTORY OPINION OF COUNSEL FOR THE HOLDER OF THE PARTNERSHIP UNITS
REPRESENTED BY THIS CERTIFICATE THAT SUCH TRANSFER, SALE, ASSIGNMENT, PLEDGE,
HYPOTHECATION OR OTHER DISPOSITION IS EXEMPT FROM THE PROVISIONS OF SECTION 5 OF
THE ACT AND THE RULES AND REGULATIONS IN EFFECT THEREUNDER.
DATED: ______________, 1997.
___________________________________________
General Partner of Hanover Capital Mortgage
Holdings, L.P.
ATTEST:
By: _______________________ By: ________________________
D-1
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<PAGE> 63
EXHIBIT E
SCHEDULE OF REIT SHARES
ACTUALLY OR CONSTRUCTIVELY OWNED BY LIMITED PARTNERS
OTHER THAN THOSE ACQUIRED PURSUANT TO AN EXCHANGE
<PAGE> 1
EXHIBIT 10.3
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement ("Agreement") is entered into as of
the ___ day of ____________________, 1997, by and among Hanover Capital Mortgage
Holdings, Inc., a Maryland corporation (the "Company"), and the persons listed
on Exhibit A hereto who are signatories to this Agreement (individually, a
"Holder," and collectively, the "Holders").
Whereas, in connection with the formation and capitalization of the
Company, the Holders will contribute ownership and equity interests in certain
businesses in exchange for limited partnership interests in Hanover Capital
Mortgage Holdings, L.P., a limited partnership of which the Company will be the
general partner and the Holders will be the limited partners, all as set forth
in the Company's Registration Statement on Form S-11 (SEC File No. 333-29261);
Whereas, depending on the financial performance of the Company, the
Holders will be entitled to receive additional limited partnership interests in
Hanover Capital Mortgage Holdings, L.P. and/or Common Stock of the Company;
Whereas, the Company may, under certain circumstances, issue shares of
Common Stock to the Holders in exchange for their limited partnership interests
in Hanover Capital Mortgage Holdings, L.P.;
Whereas, the Common Stock of the Company that may be issued to the
Holders in exchange for their limited partnerships interests in Hanover Capital
Mortgage Holdings, L.P. or as performance shares will not be registered under
the Securities Act of 1933, as amended;
Whereas, the parties wish to set forth certain rights of the Holders
with respect to the Common Stock of the Company;
Now, therefore, for and in consideration of the mutual promises set
forth in this Agreement and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:
Article I. DEFINITIONS.
1.1 "Agreement" means this Registration Rights Agreement, as amended,
modified, or supplemented from time to time.
1.2 "Closing" means the closing of the sale of the Company's Common
Stock pursuant to the Company's Registration Statement.
1.3 "Closing Date" means the date on which the Closing occurs.
1.4 "Common Stock" means (a) the Company's Common Stock, $.01 par
value, as authorized on the date of this Agreement, and (b) any other securities
into which or for which the
<PAGE> 2
securities described in (a) may be converted or exchanged pursuant to a plan of
recapitalization, reorganization, merger, sale of assets or otherwise.
1.5 "Exchange Act" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the SEC thereunder, all as in effect
at the time.
1.6 "Holders" means the persons listed on Exhibit A hereto who are
signatories to this Agreement.
1.7 "Partnership" means Hanover Capital Mortgage Holdings, L.P., a
Delaware limited partnership.
1.8 "Registrable Shares" means shares of Common Stock acquired by a
Holder from the Company in exchange for all or any part of the Holder's limited
partnership interests in the Partnership or issued to a Holder by the Company
based on the financial performance of the Company, all as described in the
Registration Statement and the exhibits thereto. As of the Closing Date, each
Holder will own the number of Registrable Shares set forth after his or her name
in Exhibit A attached hereto. Registrable Shares shall cease to be Registrable
Shares upon any sale pursuant to an effective registration statement under the
Securities Act, Section 4(1) of the Securities Act or Securities Act Rule
144(k).
1.9 "Registration Expenses" means all expenses reasonably and actually
incurred by the Company in connection with the preparation, filing and
processing of any registration statement pursuant to Articles II or III below,
as well as the Company's obligations under Article IV below, including, without
limitation, all registration and filing fees, Nasdaq or exchange listing fees,
printing expenses, reasonable and actual fees and expenses of counsel for the
Company, state (and foreign, if applicable) Blue Sky fees and expenses, and any
special accounting and auditing expenses of the Company incident to any such
registration statement, but excluding underwriting discounts, selling
commissions and the fees and expenses of a Holder's own counsel.
1.10 "Registration Statement" means the Registration Statement of the
Company on Form S-11 (SEC File number 333-29261).
1.11 "SEC" means the United States Securities and Exchange Commission.
1.12 "Securities Act" shall mean the Securities Act of 1933, as
amended, and the rules and regulations of the SEC thereunder, all as in effect
at the time.
Article II. Required Registration.
2.1 On two occasions, commencing at any time on or after one year after
the Closing Date and provided that the Company is then eligible to use SEC
Registration Statement Form S-3, upon the written request of Holders who would
own not less than 30% of the Registrable Shares that would then be outstanding
if all of the limited partnership interests in the Partnership held by the
Holders were exchanged for Registrable Shares (a "Registration Request"), the
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<PAGE> 3
Company agrees to file with the SEC, no later than 30 days after receipt of the
Registration Request, a shelf registration statement on Form S-3 under
Securities Act Rule 415 or any successor rule (a "Shelf Registration") with
respect to the number of Registrable Shares indicated in the Registration
Request. If not all of the Holders have made the Registration Request, the
Company will notify in writing the other Holders of the Registration Request.
Upon written request by any other Holder given to the Company within 10 business
days after receipt by the Holder of the Company's notification, the Company will
include in the Shelf Registration the number of Registrable Shares requested by
such Holder. The Holders will notify the Company of the method or methods of
distribution they propose to use for the offer and sale of the Registrable
Shares to be included in the Shelf Registration, and such information shall be
included in the prospectus included in the Shelf Registration to the extent such
methods are permitted by applicable law. The Company will use commercially
reasonable efforts to cause any Shelf Registration to be declared effective
under the Securities Act as soon as reasonably practicable.
2.2 The Company will keep any Shelf Registration continuously effective
until the sooner of (i) the date on which all of the Registrable Shares covered
by the Shelf Registration have been sold thereunder, or (ii) 24 months after the
effective date of the Shelf Registration.
2.3 The Company will pay all Registration Expenses in connection with
the first Shelf Registration, and the Holders shall pay all Registration
Expenses in connection with the second Shelf Registration; provided, however,
that the Holders shall be responsible for the payment of (i) any underwriting
discounts or commissions to any broker-dealer attributable to the sale of the
Registrable Shares, (ii) any fees or expenses incurred by the Holders in
connection with any Shelf Registration which, according to the written
instructions of any regulatory authority, the Company is not permitted to pay,
or (iii) the fees and expenses of legal counsel for the Holders.
2.4 The Company shall not be required to effect more than two Shelf
Registrations pursuant to this Article II; provided, however, that a Shelf
Registration shall be deemed satisfied only when a Shelf Registration covering
the applicable Registrable Shares (i) shall have become effective and, if the
method of distribution is a firm commitment underwritten public offering, all
such Registrable Shares have been sold, or (ii) shall have been withdrawn at the
request of the Holders (other than as a result of information concerning the
business or financial condition of the Company which is made known to the
Holders after the Registration Request).
Article III. Incidental Registration.
3.1 If at any time on or after the date that is one year after the
Closing Date, the Company proposes to file a registration statement under the
Securities Act for an offering of securities, the Company shall give written
notice of such proposed registration statement as promptly as practicable (but
in any event not less than 30 days prior to the filing of such registration
statement) to the Holders. If, within 15 business days after receipt of such a
notice, a Holder requests the Company in writing to include any Registrable
Shares that are owned by the Holder, the Company shall include in the
registration statement such number of Registrable Shares as the Holder shall
request. The Company will use commercially reasonable efforts to
-3-
<PAGE> 4
cause all Registrable Shares, with respect to which the Holders have requested
registration, to be registered under the Securities Act to the extent necessary
to permit the distribution thereof in accordance with the intended methods of
distribution specified in the request of such Holders; provided, however, that
the Company shall have the right to postpone or withdraw any registration
effected pursuant to this Article II without obligation to any Holder. The
Company shall not be required to give notice of, or to include Registrable
Shares in, any registration statement if the proposed offering relates solely to
(i) securities to be offered to employees pursuant to an employee benefit plan,
(ii) securities proposed to be issued in exchange for securities or assets of,
or in connection with a merger or consolidation with, another entity, (iii) an
offering of convertible preferred stock of the Company, (iv) securities to be
offered by the Company to holders of any class or series of its then existing
securities, (v) securities issuable upon the conversion of securities which are
the subject of an underwritten redemption, or (vi) securities to be offered or
issued pursuant to a combination of transactions referred to in the preceding
clauses (i) through (v).
3.2 In connection with any registration statement under this Article
III involving an underwritten offering, the Company shall not be required to
include any Registrable Shares in such registration statement unless the Holders
accept the terms of the underwriting, including customary indemnification and
contribution provisions, as agreed between the Company and the underwriters
selected by it. If in the opinion of the managing underwriter(s) of the
offering, it is desirable because of marketing or other factors to limit the
number of Registrable Shares to be included in the offering, then the Company
shall be required to include in the registration only that number of Registrable
Shares, if any, which the managing underwriter believes should be included
therein; provided, however, that no persons or entities other than the Company,
the Holders and other persons or entities holding registration rights shall be
permitted to include securities in the offering. If the number of Registrable
Shares to be included in the offering in accordance with the foregoing is less
than the total number of shares which the Holders of Registrable Shares have
requested to be included, then the Holders of Registrable Shares who have
requested registration and other holders of securities entitled to include them
in the registration statement shall participate in the registration pro rata
based upon their total ownership of shares of Common Stock (giving effect to the
conversion into Common Stock of all securities convertible or exchangeable for
Common Stock). If as a result, any Holder would be entitled to include more
securities than such Holder requested to be registered, the excess shall be
allocated pro rata among the other Holders requesting registration, in the
manner described in the preceding sentence.
3.3 The Company will pay all Registration Expenses in connection with
any registration pursuant to this Article III.
3.4 The Company will keep any registration statement to which this
Article III applies continuously effective, in the case of a firm commitment
underwritten public offering, until each underwriter has completed the
distribution of all securities purchased by it and, in the case of any other
offering, until the earlier of the sale of all Registrable Shares covered
thereby or 180 days after the effective date thereof.
-4-
<PAGE> 5
Article IV. Obligations in connection with Registrations.
4.1 If and whenever the Company is required by the provisions of this
Agreement to use reasonable commercial efforts to effect the registration of any
of the Registrable Shares under the Securities Act, the Company shall:
(a) file with the SEC a registration statement with respect to
such Registrable Shares and use reasonable commercial efforts to cause the
registration statement to become and remain effective for the period set forth
in Article II or III above, as the case may be;
(b) as expeditiously as possible, prepare and file with the
Commission any amendments and supplements to the registration statement and the
prospectus included in the registration statement as may be necessary to keep
the registration statement compliant with the rules, regulations or instructions
applicable to the form of registration statement and the Securities Act
(c) as expeditiously as possible, furnish to each selling
Holder such reasonable numbers of copies of the prospectus, including any
preliminary prospectus, in conformity with the requirements of the Securities
Act, and such other documents as the Holder may reasonably request in order to
facilitate the distribution of the Registrable Shares by the Holder;
(d) as expeditiously as possible, use reasonable commercial
efforts to register or qualify the Registrable Shares covered by the
registration statement under the securities or Blue Sky laws of such states (or
foreign jurisdictions, as applicable) as the Holders shall reasonably request,
and do any and all other acts and things that may be necessary or desirable to
enable the Holders to consummate the distribution in such states of the
Registrable Shares; provided, however, that the Company shall not be required in
connection with this Subsection (d) to qualify as a foreign corporation or
execute a general consent to service of process in any jurisdiction;
(e) keep the Holders informed as to the preparation, filing
and progress of any registration statement; and
(f) give the Holders and their representatives the opportunity
to make such reasonable examination and inquiry into the financial condition and
business of the Company and its affiliates as counsel for the Holders may deem
necessary or prudent in connection with the preparation of the registration
statement or any other materials to be used in connection with the registration
statement.
4.2 If the Company has delivered preliminary or final prospectuses to
the Holders and, after having done so, the prospectus is amended to comply with
the requirements of the Securities Act, the Company shall promptly notify the
Holders and, if requested, the Holders shall immediately cease making offers of
Registrable Shares and return all prospectuses to the Company. The Company shall
promptly provide each Holder with revised prospectuses and,
-5-
<PAGE> 6
following receipt of the revised prospectuses, the Holder may resume making
offers of the Registrable Shares.
4.3 Each Holder with Registrable Shares included in an effective
registration statement will cease making offers or sales pursuant to the
registration statement during any period (not to exceed ten business days) in
which the Company determines that it is in possession of material non-public
information that, for valid business reasons, it wishes to keep confidential and
so notifies the Holders in writing.
4.4 If the Company shall list or maintain the listing of the Common
Stock on any securities exchange or national market system, it will, at its
expense and as necessary to permit the registration and sale of the Holder's
Registrable Shares hereunder, list and maintain such shares thereon.
Article V. Indemnification and Contribution.
5.1 (i) In the case of each registration pursuant to Article II or III
above, the Company agrees to indemnify and hold harmless the Holders (other than
a Holder who is required by the Securities Act to sign the registration
statement, whether or not the Holder actually signs (each a "Signing Holder"))
and each person (if any) who controls any Holder (other than a Signing Holder)
within the meaning of Section 15 of the Securities Act, and (ii) in the case of
each registration pursuant to Article II above, the Company agrees to indemnify
and hold harmless each underwriter, if any, of Registrable Shares and each
person (if any) who controls any such underwriter within the meaning of Section
15 of the Securities Act, against any and all losses, claims, damages, or
liabilities to which they or any of them may become subject under the Securities
Act or any other statute or common law, including any amount paid in settlement
of any litigation, commenced or threatened, if such settlement is effected with
the written consent of the Company, and to reimburse them for any legal or other
expenses incurred by them in connection with investigating any claims and
defending any actions, insofar as any such losses, claims, damages, liabilities,
or actions arise out of or are based upon (a) any untrue statement or alleged
untrue statement of a material fact contained in the registration statement
(including any other document incorporated in the registration statement) filed
to register the sale of the Registrable Shares or any post-effective amendment
thereto or in any filing made in connection with the qualification of the
offering under blue sky or other securities laws of jurisdictions in which the
Registrable Shares are offered (a "Blue Sky Filing"), or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading, or (b) any untrue statement or
alleged untrue statement of a material fact contained in any preliminary
prospectus, if used prior to the effective date of such registration statement,
or contained in the final prospectus (as amended or supplemented if the Company
shall have filed with the SEC any amendment thereof or supplement thereto) if
used within the period during which the Company is required to keep current the
registration statement to which such prospectus relates, or the omission or
alleged omission to state therein (if so used) a material fact necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading; provided, however, that (i) a Holder shall not
be entitled to
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<PAGE> 7
indemnification under this Section 5.1 for any losses, claims, damages,
liabilities, or actions arising out of, or based upon, any such untrue statement
or alleged untrue statement, or any such omission or alleged omission, if such
statement or omission was made in reliance upon and in conformity with written
information furnished to the Company by the Holder (acting solely in his or her
capacity as a selling stockholder and not as a director or officer of the
Company) or such underwriter specifically for use in connection with preparation
of the registration statement, any preliminary prospectus or final prospectus
contained in the registration statement, any such amendment or supplement
thereto or any Blue Sky Filing, and (ii) the provisions of this Section 5.1
shall not inure to the benefit of any such underwriter or any person controlling
such underwriter if such underwriter failed to send or give a copy of the final
prospectus to the person asserting the claim at or prior to the written
confirmation of the sale of such shares to such person (and the underwriter was
required to do so) and if the untrue statement or omission concerned has been
corrected in such final prospectus.
5.2 (i) In the case of each registration pursuant to Article II or III,
each Holder agrees, and (ii) in the case of each registration pursuant to
Article II, each underwriter, if any, of Registrable Shares shall agree, in the
same manner and to the same extent as set forth in Section 5.1, to indemnify and
hold harmless the Company, each person (if any) who controls the Company within
the meaning of Section 15 of the Securities Act, the directors of the Company
(other than Signing Holders), and those officers of the Company who shall have
signed any such registration statement (other than Signing Holders), with
respect to any untrue statement or alleged untrue statement in, or omission or
alleged omission from, such registration statement or any post-effective
amendment thereto or any preliminary prospectus or final prospectus (as amended
or supplemented if amended or supplemented as aforesaid) contained in such
registration statement or any Blue Sky Filing, if such statement or omission was
made in reliance upon and in conformity with written information furnished to
the Company by the Holder (acting solely in his or her capacity as a selling
stockholder and not as a director or officer of the Company) or such underwriter
specifically for use in connection with the preparation of the registration
statement, any preliminary prospectus or final prospectus contained in the
registration statement, any such amendment or supplement thereto, or any Blue
Sky Filing.
5.3 (a) Each indemnified party shall, with reasonable promptness after
its receipt of written notice of the commencement of any action against such
indemnified party in respect of which indemnity may be sought from an
indemnifying party under this Article V, notify the indemnifying party or
parties in writing of the commencement thereof.
(b) The omission to notify an indemnifying party shall not relieve it
from any liability which it may have to any indemnified party unless the failure
to give notice materially adversely affects the ability of the indemnifying
party to defend a claim which is the subject of indemnification (in which case
the indemnifying party shall be relieved of its obligation only to the extent of
offsetting any loss, damage, or liability it suffers as a consequence of the
failure against its monetary obligation to the indemnified party).
(c) In case any such action shall be brought against any indemnified
party and the indemnified party shall so notify an indemnifying party of the
commencement thereof, the
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<PAGE> 8
indemnifying party shall be entitled to participate therein and to the extent it
may wish, jointly with any other indemnifying party similarly notified, to
assume the defense thereof with counsel reasonably satisfactory to the
indemnified party and, after notice from the indemnifying party to such
indemnified party of its election to assume the defense thereof, the
indemnifying party shall not be liable to such indemnified party for any legal
or other expenses subsequently incurred by such indemnified party in connection
with the defense thereof other than reasonable costs of investigation, except as
provided below.
(d) The indemnified party shall have the right to employ one firm of
separate counsel in each jurisdiction in any such action and participate in the
defense thereof, but the fees and expenses of such counsel shall be paid by the
indemnified party engaging such counsel unless (i) the indemnifying party agrees
to pay the same, (ii) the indemnifying party fails to assume the defense of such
action with counsel reasonably satisfactory to the indemnified party, or (iii)
the named parties to any such action (including any impleaded parties) have been
advised by such counsel that representation of such indemnified party and the
indemnifying party by the same counsel would be inappropriate under applicable
standards of professional conduct (in which case the indemnifying party shall
not have the right to assume the defense of such action on behalf of such
indemnified party). No indemnifying party shall be liable for any settlement
entered into without its consent.
(e) The indemnity agreements contained in this Article V shall be in
addition to any liabilities which the indemnifying party may have pursuant to
law.
5.5 (a) If for any reason the indemnification provisions of this
Article V are either unavailable or insufficient to hold harmless an indemnified
party in respect of any losses, claims, damages, or liabilities referred to
herein, then the party that otherwise would be required to provide
indemnification (for purposes of this Section 5.5, the "Indemnifying Party") in
respect of such losses, claims, damages, or liabilities, shall contribute to the
amount paid or payable by the party that would otherwise be entitled to
indemnification (for purposes of this Section, the "Indemnified Party") as a
result of such losses, claims, damages, liabilities, or expense, in such
proportion as is appropriate to reflect the relative fault of the Indemnifying
Party and the Indemnified Party, as well as any other relevant equitable
considerations. The relative fault of the Indemnifying Party and Indemnified
Party shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or omission or alleged
omission to state a material fact related to information supplied by the
Indemnifying Party or Indemnified Party, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement 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 any legal or other fees or expenses reasonably incurred by
such party. In no event shall any Holder of Registrable Shares covered by a
registration be required to contribute an amount greater than the dollar amount
of the proceeds received by the Holder from the sale of Registrable Shares
pursuant to the registration giving rise to the liability.
(b) The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 5.5 were determined by pro rata allocation
or by any other method of
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<PAGE> 9
allocation which does not take account of the equitable considerations referred
to in Section 5.5(a). No person or entity determined to have committed a
fraudulent misrepresentation (within the meaning of Section ll(f) of the
Securities Act) shall be entitled to contribution under this Section 5.5 from
any person or entity who was not guilty of such fraudulent misrepresentation.
Article VI. General Provisions.
6.1 The Company agrees to:
(a) contemporaneously with the effective date of the
Registration Statement, to cause its Common Stock to be registered with the SEC
under the Exchanges Act;
(b) comply with the requirements of Rule 144(c) under the
Securities Act with respect to current public information about the Company;
(c) use reasonable commercial efforts to file with the
Commission in a timely manner all reports and other documents required of the
Company under the Securities Act and the Exchange Act; and
(d) furnish to any holder of Registrable Shares upon request
(i) a written statement by the Company as to its compliance with the
requirements of said Rule 144(c), and the reporting requirements of the
Securities Act and the Exchange Act, (ii) a copy of the most recent annual or
quarterly report of the Company, and (iii) such other reports and documents of
the Company as such Holder may reasonably request to avail itself of any similar
rule or regulation of the Commission allowing it to sell any such securities
without registration.
6.2 This Agreement, and the rights of a Holder hereunder, may be
assigned by the Holders to any person or entity to which Registrable Shares or a
limited partnership interest in the Partnership are transferred by the Holder,
and such transferee shall be deemed a "Holder" for purposes of this Agreement;
provided that the transferee provides prior written notice of such assignment to
the Company.
6.3 All communications required or permitted under this Agreement shall
be in writing and shall be deemed to have been given when actually delivered to
the addressee, when deposited in the United States mail, certified, postage
prepaid, return receipt requested, or one business day after delivery to a
reputable overnight delivery service which provides evidence of delivery, to the
Company at its address set forth above and to a Holder at his address set forth
in Exhibit A.
6.4 This Agreement and Exhibit A hereto constitute the entire agreement
of the parties and supersede all prior written agreements and prior and
contemporaneous oral agreements, understandings and negotiations with respect to
the subject matter hereof.
6.5 In addition to any and all other remedies that may be available at
law in the event of any breach of this Agreement, the Holders shall be entitled
to specific performance of the
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agreements and obligations of the Company hereunder and to such other injunctive
or other equitable relief as may be granted by a court of competent
jurisdiction.
6.6 When the context in which words are used in this Agreement
indicates that such is the intent, words in the singular shall include the
plural, and the masculine gender shall include the neuter or female gender.
6.7 This Agreement may be executed in several counterparts, each of
which shall be deemed to be an original copy and all of which together shall
constitute one and the same instrument binding on all parties hereto,
notwithstanding that all parties shall not have signed the same counterpart.
6.8 This Agreement shall be governed by and construed in accordance
with the laws of the state of Maryland.
In witness whereof, each party hereto has duly executed this Agreement
as of the day and year first above written.
Company: Holders:
Hanover Capital Mortgage Holdings, Inc.
--------------------------------
By: John A. Burchett
------------------------------------
Name:
Title:
--------------------------------
Irma N. Tavares
--------------------------------
Joyce S. Mizerak
--------------------------------
George J. Ostendorf
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<PAGE> 1
EXHIBIT 10.4
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, L.P., a Delaware limited partnership having its principal place of
business at 100 Metroplex Drive, Suite 301, Edison, NJ 08817 (the
"Partnership"), (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 Amended and Restated Agreement of Limited
Partnership of Hanover Capital Mortgage Holdings, L.P., dated as of ___________,
1997 (the "Partnership Agreement"), the Initial Shareholders contributed all of
the Preferred Shares to the Partnership in exchange for units of partnership
interest in the Partnership.
D. The Initial Shareholders and the Partnership hold the Common Shares
and Preferred Shares, respectively, set forth opposite their names on the
attached SCHEDULE 1.
E. The Company, the Partnership and the Initial Shareholders desire to
amend and restate the First Amended Agreement in its entirety in an effort to
ensure that (i) Hanover Capital Mortgage Holdings, Inc., a Maryland corporation
("HCHI") and the general partner of the Partnership, 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 HCHI and the Partnership to the extent
provided in this Agreement. The Original Agreement and the First Amended
Agreement have been superseded in every respect by this Agreement.
<PAGE> 2
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.
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.
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;
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<PAGE> 3
(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.
GROSS COMPANY VALUE. "Gross Company Value" shall mean, as of any date
of determination for as long as the Partnership (or HCHI) holds a majority of
the Preferred Shares, (a) the "Gross Asset Value," as reasonably and in good
faith determined by HCHI's Board of Directors in accordance with the Partnership
Agreement, of the Shares held by the Partnership (or HCHI) as of such date
divided by (b) a fraction, the numerator of which is the number of Shares held
by the Partnership (or HCHI) as of such date and the denominator of which is the
number of Shares that are outstanding as of such date. For as long as it holds
Shares, the Partnership (or HCHI) shall provide the other Shareholders with
statements of the Gross Asset Value of the Shares held by it in response to
reasonable written requests by such other Shareholders therefor. If neither the
Partnership nor HCHI holds a majority of the Preferred Shares as of the date of
determination, the Gross Company Value shall be the aggregate value of all of
the Shares as determined as provided in Section 3(g) of this Agreement.
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-
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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.
OPTION EVENT. "Option Event" shall mean, with respect to any Common
Shareholder (other than the Partnership, HCHI or any Affiliate or Subsidiary of
the Partnership or 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
Partnership, 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, the
Partnership 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 or the
Partnership;
(b) an Event of Bankruptcy with respect to such Common
Shareholder;
(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 value (per
share) of the Common Shares of a Common Shareholder who suffers an Option Event
determined by dividing (a) the Gross Company Value as of the date of such Option
Event by (b) the total number of outstanding Shares as of the date of such
Option Event.
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).
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<PAGE> 5
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.
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 the Partnership,
HCHI or any Affiliate or Subsidiary of the Partnership or 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:
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<PAGE> 6
(a) NOTICE TO COMPANY AND OTHER SHAREHOLDERS. If at any time a
Common Shareholder (other than the Partnership, HCHI or any Affiliate or
Subsidiary of the Partnership or 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 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 as of the date of the Transfer Notice.
(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.
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(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 extensions 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 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 one hundred twenty (120) days after
the delivery of the Transfer Notice. Notwithstanding any other provision of this
Agreement, however, if the Offer Price of such Offered Shares has been
determined pursuant to Section 3(g) below, (i) any Person who has elected to
purchase any of such Offered Shares shall have the right to thereafter reduce
(including to zero) the number of Offered Shares he, she or it has elected to
purchase by delivering a written notice thereof to the Offeror (and the other
Persons who have elected to purchase any of such Offered Shares shall have
oversubscription rights with respect to such reduction) within ten (10) days
after such determination (but in any event before such closing), and (ii) such
closing shall take place thirty (30) days after such determination (or on the
next day that is not a Saturday, Sunday or legal holiday in New York, New York).
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
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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 expiration of the Preferred Offer Period plus any ten (10) day extensions
thereof pursuant to Section 2(d), after which, if such Offered Shares have not
been Transferred to such Third 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 the Partnership,
HCHI or any Affiliate or Subsidiary of the Partnership or 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.
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(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 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
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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 one hundred twenty (120) days after the occurrence of such Option
Event. Notwithstanding any other provision of this Agreement, however, if the
Option Event Value of such Option Shares has been determined pursuant to Section
3(g) below, (i) any Person who has elected to purchase any of such Option Shares
shall have the right to thereafter reduce (including to zero) the number of
Option Shares he, she or it has elected to purchase by a written notice thereof
to the Optionor (and the other Persons who have elected to purchase any of such
Option Shares shall have oversubscription rights with respect to such
reduction), and (ii) such closing shall take place within the thirty day period
after such determination. 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 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.
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(g) VALUE OF SHARES IF NEITHER THE PARTNERSHIP NOR HCHI A
MAJORITY PREFERRED SHAREHOLDER. If neither the Partnership nor HCHI holds a
majority of the Preferred Shares as of the date any Optionor suffers an Option
Event and the Company or any Common or Preferred Optionee has elected to
purchase any or all of the Optionor's Option Shares, the Gross Company Value
shall be determined by valuing the Company on a "going concern" rather than a
"liquidation" basis as of the time of such Option Event pursuant to this Section
3(g).
(i) AGREEMENT AS TO VALUE. The Optionor and the
Persons who have elected to purchase any or all of the Option Shares pursuant to
this Section 3 (the "Purchasers") shall attempt to determine such Gross Company
Value in good faith. If the Optionor and those of the Purchasers who have
elected to purchase a majority of the total number of Option Shares which the
Purchasers have elected to purchase (a "Majority of the Purchasers") reach an
agreement as to the Gross Company Value within thirty (30) days after the last
timely delivery of an election by a Purchaser to purchase any or all of the
Option Shares, such agreed upon amount shall be the Gross Company Value for
purposes of any purchase of Option Shares from such Optionor as a result of such
Option Event.
(ii) AGREEMENT AS TO APPRAISER. If an agreement
as to the Gross Company Value is not reached by the Optionor and a Majority of
the Purchasers pursuant to Section 3(g)(i) immediately above within thirty (30)
days after the last timely delivery of an election by a Purchaser to purchase
any or all of the Option Shares, the Optionor and the Purchasers shall use their
best efforts to agree on the selection of an independent appraiser or investment
banking firm to determine the Gross Company Value. If the Option Shares of more
than one Optionor are then being valued, each such Optionor shall participate in
the selection of such appraiser or investment banking firm so that the value of
all such Option Shares may be determined by a single appraiser or investment
banking firm. If the Optionor and a Majority of the Purchasers reach an
agreement as to the selection of an appraiser or investment banking firm within
sixty (60) days after the last timely delivery of an election by a Purchaser to
purchase any or all of the Option Shares, such appraiser or investment banking
firm shall determine the Gross Company Value within sixty (60) days after its
selection. The amount determined by such appraiser or investment banking firm
shall be the Gross Company Value for purposes of any purchase of Option Shares
from such Optionor as a result of such Option Event.
(iii) NO AGREEMENT AS TO APPRAISER. If an
appraiser or investment banking firm has not been selected to determine the
Gross Company Value pursuant to Section 3(g)(ii) immediately above within sixty
(60) days after the last timely delivery of an election by a Purchaser to
purchase any or all of the Option Shares, two independent appraisers or
investment banking firms with at least five (5) years of experience in valuing
companies engaged in businesses similar to that of the Company shall be selected
to determine the Gross Company Value. One such appraiser or investment banking
firm shall be promptly selected by the Optionor. The other such appraiser of
investment banking firm shall be promptly selected by a Majority of the
Purchasers. If a Majority of the Purchasers are unable to agree among themselves
on such a selection within a thirty (30) day period, the selection of an
appraiser or investment banking firm for the Purchasers shall be made by the
Board of Directors of the Company. After two appraisers or investment banking
firms have been selected to determine the
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Gross Company Value pursuant to this Section 3(g)(iii), such two appraisers or
investment banking firms shall separately determine the Gross Company Value
within sixty (60) days after their respective selections, and the Gross Company
Value (for purposes of any purchase of Option Shares from the Optionor as a
result of such Option Event) shall be the arithmetic average of the amounts
determined by such appraisers or investment banking firms; PROVIDED, that if the
higher of such values exceeds the lower of such values by more than 25% of such
lower value, either the Optionor or a Majority of the Purchasers may cause such
two appraisers or investment banking firms to select a third appraiser or
investment banking firm to determine the Gross Company Value, in which case the
Gross Company Value (for purposes of any purchase of Option Shares from the
Optionor as a result of such Option Event) shall be the arithmetic average of
the two of such three amounts that are closest together.
(iv) COST OF APPRAISALS. If a single appraiser or
investment banking firm determines the Gross Company Value pursuant to Section
3(g)(ii) above, the cost of such appraiser or investment banking firm shall be
paid one-half by the Optionor and one-half by the Purchasers (as among them, in
proportion to the numbers of Option Shares they have elected to purchase). If
two appraisers or investment banking firms determine the Gross Company Value,
(A) the costs of the appraiser or investment banking firm selected by the
Optionor shall be paid by the Optionor, and (B) the costs of the appraiser or
investment banking firm selected by a Majority of the Purchasers shall be paid
by the Purchasers (as among them, in proportion to the numbers of Option Shares
they have elected to purchase). The costs of any third appraiser or investment
banking firm shall be paid by the Purchasers (as among them, in proportion to
the numbers of Option Shares they have elected to purchase) unless the Gross
Company Value determined by such third appraiser or investment banking firm is
closer to the value determined by the appraiser or investment banking firm
selected by a Majority of the Purchasers than to the value determined by the
appraiser or investment banking firm selected by the Optionor, in which case the
costs of such third appraiser or investment banking firm shall be paid by the
Optionor.
(v) VALUATION METHODOLOGY. The valuation factors
that may be considered in determining the Gross Company Value may include,
without limitation, the following: the current earnings of the Company and each
of its Affiliates and Subsidiaries; the earnings history of the Company and each
of its Affiliates and Subsidiaries; the prices paid for interests in similar
businesses during any relevant recent period; the average price/earnings ratios
of companies engaged in similar businesses; the current market values of the
assets of the Company and its Affiliates and Subsidiaries; management and
executive performance; tax liabilities to which the Company and its Affiliates
and Subsidiaries may be subject; and such additional criteria which are
appropriate to review in valuing interests in a going business.
(h) 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
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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.
(i) 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.
(j) 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 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
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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.
(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
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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.
(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.
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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.
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
16
<PAGE> 17
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.
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.
17
<PAGE> 18
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]
18
<PAGE> 19
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:
"PARTNERSHIP"
HANOVER CAPITAL MORTGAGE , L.P.
By: Hanover Capital Mortgage Holdings, Inc.,
General Partner
By:
----------------------------------------
Name:
Title:
"BURCHETT"
--------------------------------------------
John A. Burchett
"MIZERAK"
--------------------------------------------
Joyce S. Mizerak
"OSTENDORF"
--------------------------------------------
George J. Ostendorf
"TAVARES"
--------------------------------------------
Irma N. Tavares
19
<PAGE> 20
SCHEDULE 1
Shareholder Number and Class of Shares
----------- --------------------------
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 A Common
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
20
<PAGE> 1
EXHIBIT 10.5
AGREEMENT AND PLAN OF RECAPITALIZATION
THIS AGREEMENT AND PLAN OF RECAPITALIZATION (the "Agreement"), dated as
of the ___ day of _______________, 1997 (the "Effective Date"), is entered into
by and among 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"), 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
"Shareholders," and each of Burchett, Mizerak, Ostendorf and Tavares is
individually referred to as a "Shareholder."
RECITALS
A. The Shareholders hold the numbers of issued and outstanding shares
of the Company's Class A Common Stock, $.01 par value per share ("Old Class A
Stock"), set forth opposite their respective names on the attached SCHEDULE 1.
B. The Shareholders desire to (i) amend the Company's Certificate of
Incorporation pursuant to a Certificate of Amendment in the form attached hereto
as EXHIBIT A (the "Certificate of Amendment"), and (ii) exchange their shares of
Old Class A Stock for 3,000 shares of the Company's Class A Common Stock, $.01
par value per share, to be authorized pursuant to the Certificate of Amendment
("New Class A Stock") and 97,000 shares of the Company's Series A Preferred
Stock, $.01 par value per share, to be authorized pursuant to the Certificate of
Amendment ("New Preferred Stock").
C. The Shareholders intend that the exchange of their shares of Old
Class A Stock for shares of New Class A Stock and New Preferred Stock will be
tax-free to them under Sections 354 and 1036 of the Internal Revenue Code of
1986, as amended (the "Code").
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants herein
contained and other valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereby agree as follows:
1. THE RECAPITALIZATION. As of _____________ (the "Closing Date"), (i)
the Company and the Shareholders shall cause the Certificate of Amendment to be
filed with the Secretary of State of the State of New York (and in any other
offices in which the Certificate of Amendment must be filed to become effective
and to permit the consummation of the transactions contemplated by this
Agreement), (ii) the Shareholders shall deliver to the Company for cancellation
their shares of Old Class A Stock, and (iii) the Company shall issue to the
Shareholders, in exchange for their shares of Old Class A Stock, the shares of
New Class A Stock and New Preferred Stock set forth opposite their
<PAGE> 2
respective names on the attached SCHEDULE 2. The exchange by the Shareholders of
their shares of Old Class A Stock for shares of New Class A Stock and New
Preferred Stock is intended to be a "reorganization" within the meaning of
Section 368(a)(1)(E) of the Code, and this Agreement is intended to constitute a
"plan of reorganization" for purposes of the regulations under Section 368 of
the Code.
2. APPROVAL OF THE RECAPITALIZATION. Before the Closing Date, the
Shareholders, in their respective capacities as shareholders and Directors of
the Company, shall approve (i) the filing of the Certificate of Amendment, and
(ii) the issuance by the Company of the shares of New Class A Stock and New
Preferred Stock to be issued to the Shareholders in exchange for their shares of
Old Class A Stock pursuant to Section 1 above.
3. LEGENDS ON CERTIFICATES. Upon original issuance, the
certificates representing the shares of New Class A Stock and New Preferred
Stock (and all securities issued in respect of such securities or in exchange
therefor or substitution thereof) shall bear a legend in substantially the
following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"). SUCH SECURITIES MAY NOT BE OFFERED, SOLD, TRANSFERRED,
PLEDGED, HYPOTHECATED OR ASSIGNED IN THE ABSENCE OF SUCH
REGISTRATION OR AN EXEMPTION THEREFROM UNDER SUCH ACT. IN
ADDITION, THESE SECURITIES ARE SUBJECT TO THE TERMS AND
CONDITIONS, INCLUDING RESTRICTIONS ON TRANSFER, OF AN AMENDED
AND RESTATED SHAREHOLDERS' AGREEMENT, DATED AS OF JANUARY 1,
1996, 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.
4. SHAREHOLDERS' REPRESENTATIONS AND WARRANTIES. Each of the
Shareholders represents and warrants to the Company and the other Shareholders
as follows:
(a) The shares of Old Class A Stock set forth opposite his or
her name on SCHEDULE 1 are owned beneficially and of record by him or her, free
and clear of all liens, claims, charges and encumbrances whatsoever other than
pursuant to the Amended and
2
<PAGE> 3
Restated Shareholders' Agreement, dated as of January 1, 1996, among the
Shareholders and the Company.
(b) He or she is acquiring the shares of New Class A Stock and
New Preferred Stock set forth opposite his or her name on SCHEDULE 2 solely for
his or her own account and not with a view to, or in connection with, any
distribution thereof or any part thereof, or interest therein, in any
transaction which would be in violation of the registration requirements of the
securities laws of the United States of America or of any state securities laws.
(c) He or she (i) has been provided with any materials or
information that he or she has requested relating to the Company and its
affairs, (ii) has had the opportunity to ask questions of the Company's
management regarding the Company's prospects and the terms and conditions of the
transactions to be effected hereby, and (iii) has been advised by the Company,
and been given the opportunity, to retain separate counsel in connection with
the negotiation and documentation of the transactions to be effected hereby.
(d) All of the Shareholders' representations and warranties
under this Agreement are true, correct and complete and shall survive the
execution and delivery of this Agreement and the Closing Date.
5. 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 hereof. Neither this Agreement nor any provision hereof
may be waived, modified, amended or terminated except by a written agreement
signed by all of the parties hereto. Waiver by a party hereto 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. SEVERABILITY. The invalidity or unenforceability of any
particular provision of this Agreement shall not affect the other provisions
hereof, and this Agreement shall be construed in all respects as if the invalid
or unenforceable provision were omitted.
7. 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 when delivered by hand or upon receipt after being
mailed by registered or certified mail, return receipt requested, with postage
prepaid, to the respective addresses set forth below:
3
<PAGE> 4
(a) For notices and communications to the Company:
Hanover Capital Partners Ltd.
90 West Street, Suite 1508
New York, New York 10006
Attention: President
(b) 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 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 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 8, each party
shall have the right to change the mailing address for future notices and
communications to such party.
8. 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.
9. 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.
10. 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.
11. 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.
4
<PAGE> 5
12. DUE AUTHORITY. The Company represents and warrants to each of the
Shareholders that this Agreement has been duly authorized, executed and
delivered by the Company.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
"COMPANY"
HANOVER CAPITAL PARTNERS LTD.
By:
----------------------------------------
John A. Burchett, President
SHAREHOLDERS:
"BURCHETT"
--------------------------------------------
John A. Burchett
"MIZERAK"
--------------------------------------------
Joyce S. Mizerak
"OSTENDORF"
--------------------------------------------
George J. Ostendorf
"TAVARES"
--------------------------------------------
Irma N. Tavares
5
<PAGE> 6
SCHEDULE 1
Current Shareholdings
---------------------
Shareholder Shares Owned
----------- ------------
John A. Burchett 91.532 shares of Old Class A
896 Highland Avenue Stock
Westfield, NJ 07090
Joyce S. Mizerak 24.964 shares of Old Class A
11 Foxhill Run Stock
Monmouth Junction, NJ 08852
George J. Ostendorf 24.964 shares of Old Class A
506 E. Marshall Street Stock
Arlington Heights, IL 60004
Irma N. Tavares 24.964 shares of Old Class A
1 Kevin Road Stock
Scotch Plains, NJ 07076
6
<PAGE> 7
SCHEDULE 2
Post-Transaction Shareholdings
------------------------------
Shareholder Shares to be Owned
----------- ------------------
John A. Burchett 1,650 shares of New Class A Stock
53,350 shares of New Preferred Stock
Joyce S. Mizerak 450 shares of New Class A Stock
14,550 shares of New Preferred Stock
George J. Ostendorf 450 shares of New Class A Stock
14,550 shares of New Preferred Stock
Irma N. Tavares 450 shares of New Class A Stock
14,550 shares of New Preferred Stock
7
<PAGE> 1
Exhibit 10.12
STANDARD FORM OF OFFICE LEASE
THE REAL ESTATE BOARD OF NEW YORK, INC.
AGREEMENT OF LEASE, made as of this 6th day of May 1991, between IRWIN
KAHN, as Receiver, having an office at 299 Broadway, New York, New York 10007
party of the first part, hereinafter referred as OWNER, and HANOVER CAPITAL
PARTNERS LTD., having an office at 90 West Street, New York, NY 10007 party of
the second part, hereinafter referred to as TENANT, WITNESSETH: Owner hereby
leases to Tenant and Tenant hereby hires from Owner Room 1508 in the building
known as 90 West Street in the Borough of Manhattan, City of New York, for the
term of five (5) years (or until such term shall sooner cease and expire as
hereinafter provided) to commence on the Commencement Date as hereinafter
defined and to end on the last day of the month in which the Fifth Anniversary
of the Commencement day occurs both dates inclusive, at an annual rental rate of
$48,457 per annum from the Commencement Date through June 30, 1994 and $39,576
per annum from July 1, 1994 through the end of the term ("Basic Rent") which
Tenant agrees to pay in lawful money of the United States which shall be legal
tender in payment of all debts and dues, public and private, at the time of
payment, in equal monthly installments in advance on the first day of each month
during said term, at the office of Owner or such other place as Owner may
designate, without any set off or deduction whatsoever, except that Tenant shall
pay the first monthly installment(s) on the execution hereof (unless this lease
be a renewal).
In the event that, at the commencement of the term of this lease, or
thereafter, Tenant shall be in default in the payment of rent to Owner pursuant
to the terms of another lease with Owner or with Owner's predecessor in
interest, Owner may at Owner's option and without notice to Tenant add the
amount of such arrears to any monthly installment of rent payable hereunder and
the same shall be payable to Owner as additional rent.
The parties hereto, for themselves, their heirs, distributees, executors,
administrators, legal representatives, successors and assigns, hereby convenant
as follows:
RENT OCCUPANCY:
1. Tenant shall pay the rent as above and as hereinafter provided.
2. Tenant shall use and occupy demised premises for General and Executive
Offices and for no other purpose.
TENANT ALTERATIONS:
3. Tenant shall make no changes in or to the demised premises of any nature
without Owner's prior written consent. Subject to the prior written consent of
Owner, and to the provisions of this article, Tenant at Tenant's expense, may
make alterations, installations, additions or improvements which are
non-structural and which do not affect utility services or plumbing and
electrical lines, in or to the interior of the demised premises by using
contractors or mechanics first approved by Owner. Tenant shall, before making
any alterations, additions, installations or improvements, at its expense,
obtain all permits, approvals and certificates required by any governmental or
quasi-governmental bodies and (upon completion) certificates of final approval
thereof and shall deliver promptly duplicates of all such permits, approvals and
certificates to Owner and Tenant agrees to carry and will cause Tenant's
contractors and sub-contractors to carry such workman's compensation, general
liability, personal and property damage insurance as Owner may require. If any
mechanic's lien is filed against the demised premises, or the building of which
the same forms a part, for work claimed to have been done for, or materials
furnished to, Tenant, whether or not done pursuant to this article, the same
shall be discharged by Tenant within thirty days thereafter, at Tenant's
expense, by filing the bond required by law. All fixtures and all paneling,
partitions, railings and like installations, installed in the premises at any
time, either by Tenant or by Owner in Tenant's behalf, shall, upon installation,
become the property of Owner and shall remain upon and be surrendered with the
demised premises unless Owner, by notice to Tenant no later than twenty days
prior to the date fixed as the termination of this lease, elects to relinquish
Owner's right thereto and to have them removed by Tenant, in which event the
same shall be removed from the premises by Tenant prior to the expiration of the
lease, at Tenant's expense. Nothing in this Article shall be construed to give
Owner title to or to prevent Tenant's removal of trade fixtures, moveable office
furniture and equipment, but upon removal of any such from the premises or upon
removal of other installations as may be required by Owner, Tenant shall
immediately and at its expense, repair and restore the premises to the condition
existing prior to installation and repair any damage to the demised premises
or the building due to such removal. All property permitted or required to be
removed, by Tenant at the end of the term remaining in the premises after
Tenant's removal shall be deemed abandoned and may, at the election of Owner,
either by retained as Owner's property or may be removed from the premises by
Owner, at Tenant's expense.
MAINTENANCE AND REPAIRS:
4. Tenant shall, throughout the term of this lease, take good care of the
demised premises and the fixtures and appurtenances therein. Tenant shall be
responsible for all damage or injury to the demised premises or any other part
of the building and the systems and equipment thereof, whether requiring
structural or nonstructural repairs caused by or resulting from carelessness,
omission, neglect or improper conduct of Tenant, Tenant's subtenants, agents,
employees, invitees or licenses, or which arise out of any work, labor, service
or equipment done for or supplied to Tenant or any subtenant or arising out of
the installation, use or operation of the property or equipment of Tenant or any
subtenant. Tenant shall also repair all damage to the building and the demised
premises caused by the moving of Tenant's fixtures, furniture and equipment.
Tenant shall promptly make, at Tenant's expense, all repairs in and to the
demised premises for which Tenant is responsible, using only the contractor for
the trade or trades in question. Any other repairs in or to the building or the
facilities and systems thereof for which Tenant is responsible shall be
performed by Owner at the Tenant's expense. Owner shall maintain in good working
order and repair the exterior and the structural portions of the building,
including the structural portions of its demised premises, and the public
portions of the building interior and the building plumbing, electrical, heating
and ventilating systems (to the extent such systems presently exist) serving the
demised premises. Tenant agrees to give prompt notice of any defective condition
in the premises for which Owner may be responsible hereunder. There shall be no
allowance to Tenant for diminution of rental value and no liability on the part
of Owner by reason of inconvenience, annoyance or injury to business arising
from Owner or others making repairs, alterations, additions or improvements in
or to any portion of the building or the demised premises or in and to the
fixtures, appurtenances or equipment thereof. It is specifically agreed that
Tenant shall not be entitled to any setoff or reduction of rent by reason of any
failure of Owner to comply with the convenants of this or any other article of
this Lease. Tenant agrees that Tenant's sole remedy at law in such instance will
be by way of an action of damages for breach of contract. The provisions of this
Article 4 shall not apply in the case of fire or other casualty with are dealt
with in Article 9 hereof.
WINDOW CLEANING:
5. Tenant will not clean nor require, permit, suffer or allow any window in
the demised premises to be cleaned from the outside in violation of Section 202
of the Labor Law or any other applicable law or of the Rules of the Board of
Standards and Appeals, or of any other Board or body having or asserting
jurisdiction.
REQUIREMENTS OF LAWS, FIRE INSURANCE, FLOOR LOADS:
6. Prior to the commencement of the lease terms, if Tenant is then in
possession, and at all times thereafter, Tenant at Tenant's sole cost and
expense, shall promptly comply with all present and future laws, orders and
regulations of all state, federal, municipal and local governments, departments,
commissions and boards and any direction of any public officer pursuant to law,
and all orders, rules and regulations of the New York Board of Fire
Underwriters, Insurance Services Office, or any similar body which shall impose
any violation, order or duty upon Owner or Tenant with respect to the demised
premises, whether or not arising out of Tenant's use or manner of use thereof,
(including Tenant's permitted use) or, with respect to the building if arising
out of Tenant's which contractor must be approved by Owner in writing and which
approval shall not be unreasonably withheld or delayed.
<PAGE> 2
use or manner of use of the premises or the building (including the use
permitted under the lease). Nothing herein shall require Tenant to make
structural repairs or alterations unless Tenant has, by its manner of use of
the demised premises or method of operation therein, violated any such laws,
ordinances, orders, rules, regulations or requirements with respect thereto.
Tenant may, after securing Owner to Owner's satisfaction against all damages,
interest, penalties and expenses, including, but not limited to, reasonable
attorney's fees, by cash deposit or by surety bond in an amount and in a
company satisfactory to Owner, contest and appeal any such laws, ordinances,
orders, rules, regulations or requirements provided same is done with all
reasonable promptness and provided such appeal shall not subject Owner to
prosecution for a criminal offense or constitute a default under any lease or
mortgage under which Owner may be obligated, or cause the demised premises or
any part thereof to be condemned or vacated. Tenant shall not do or permit any
act or thing to be done in or to the demised premises which is contrary to
law, or which will invalidate or be in conflict with public liability, fire or
other policies of insurance at any time carried by or for the benefit of Owner
with respect to the demised premises or the building of which the demised
premises form a part, or which shall or might subject Owner to any liability or
responsibility to any person or for property damage. Tenant shall not keep
anything in the demised premises except as now or hereafter permitted by he
Fire Department, Board of Fire Underwriters, Fire Insurance Rating Organization
or other authority having jurisdiction, and then only in such manner and such
quantity so as not to increase the rate for fire insurance applicable to the
building, nor use the premises in a manner which will increase the insurance
rate for the building or any property located therein over that in effect prior
to the commencement of Tenant's occupancy. Tenant shall pay all costs,
expenses, fines, penalties, or damages, which may be imposed upon Owner by
reason of Tenant's failure to comply with the provisions of this article and if
by reason of such failure the fire insurance rate shall, at the beginning of
this lease or at any time thereafter, be higher than it otherwise would be,
then Tenant shall reimburse Owner, as additional rent hereunder, for that
portion of all fire insurance premiums thereafter paid by Owner which shall
have been charged because of such failure by Tenant. In any action or
proceeding wherein Owner and Tenant are parties, a schedule or "make-up" of
rate for the building or demised premises issued by the New York Fire Insurance
Exchange, or other body making fire insurance rates applicable to said premises
shall be conclusive evidence of the facts therein stated and of the several
items and charges in the fire insurance rates then applicable to said premises.
Tenant shall not place a load upon any floor of the demised premises exceeding
the floor load per square foot area which it was designed to carry and which is
allowed by law. Owner reserves the right to prescribe the weight and position of
all safes, business machines and mechanical equipment. Such installations shall
be placed and maintained by Tenant, at Tenant's expense, in setting sufficient,
in Owner's judgement, to absorb and prevent vibration, noise and annoyance.
SUBORDINATION
7. This lease is subject and subordinate to all ground or underlying
leases and to all mortgages which may now or hereafter affect such leases or
the real property of which demised premises are a part and to all renewals,
modifications, consolidations, replacements and extensions of any such
underlying leases and mortgages. This clause shall be self-operative and no
further instrument of subordination shall be required by any ground or
underlying lessor or by any mortgagee, affecting any lease or the real property
of which the demised premises are a part. In confirmation of such
subordination, Tenant shall execute promptly any certificate that Owner may
request.
PROPERTY - LOSS, DAMAGE, REIMBURSEMENT, INDEMNITY:
8. Owner or its agents shall not be liable for any damage to property of
Tenant or of others entrusted to employees of the building, nor for loss of or
damage to any property of Tenant by theft or otherwise, nor for any injury or
damage to persons or property resulting from any cause of whatsoever nature,
unless caused by or due to the negligence of Owner, its agents, servants or
employees. Owner or its agents will not be liable for any such damage caused by
other tenants or persons in, upon or about said building or caused by
operations in construction of any private, public or quasi public work.
If at any time windows of the demised premises are temporarily closed,
darkened or bricked up (or permanently closed, darkened or bricked up, if
required by law) for any reason whatsoever including, but not limited to
Owner's own acts, Owner shall not be liable for any damage Tenant may sustain
thereby and Tenant shall not be entitled to any compensation therefor nor
abatement or diminution of rent nor shall the same release Tenant from its
obligations hereunder nor constitute an eviction. Tenant shall indemnify and
save harmless Owner against and from all liabilities, obligations, damages,
penalties, claims, costs and expenses for which Owner shall not be reimbursed
by insurance, including reasonable attorneys fees, paid, suffered or incurred
as a result of any breach by Tenant, Tenant's agents, contractors, employees,
invitees, or licensees, of any covenant or condition of this lease, or the
carelessness, negligence or improper conduct of the Tenant, Tenant's agents,
contractors, employees, invitees or licensees. Tenant's liability under this
lease extends to the acts and omissions of any sub-tenant, and any agent,
contractor, employee, invitee or licensee of any sub-tenant. In case any action
or proceeding is brought against Owner by reason of such claim, Tenant, upon
written notice from Owner, will, at Tenant's expense, resist or defend such
action or proceeding by counsel approved by Owner in writing, such approval
not to be unreasonably withheld.
DESTRUCTION, FIRE AND OTHER CASUALTY:
9. (a) If the demised premises or any part thereof shall be damaged by
fire or other casualty, Tenant shall give immediate notice thereof to Owner and
this lease shall continue in full force and effect except as hereinafter set
forth. (b) If the demised premises are partially unusable by fire or other
casualty, the damages thereto shall be repaired by and at the expense of Owner
and the rent, until such repair shall be substantially completed, shall be
apportioned from the day following the casualty according to the part of the
premises which is usable. (c) If the demised premises are totally damaged or
rendered wholly unusable by fire or other casualty, then the rent shall be
proportionately paid up to the time of the casualty and thenceforth shall cease
until the date when the premises shall have been repaired and restored by
Owner, subject to Owner's right to elect not to restore the same as hereinafter
provided. (d) If the demised premises are rendered wholly unusable or (whether
or not the demised premises are damaged in whole or in part) if the building
shall be so damaged that Owner shall decide to demolish it or to rebuild it,
then, in any of such events, Owner may elect to terminate this lease by written
notice to Tenant, given within 90 days after such fire or casualty, specifying
a date for the expiration of the lease, which date shall not be more than 60
days after the giving of such notice, and upon the date specified in such
notice the term of this lease shall expire as fully and completely as if such
date were the date set forth above for the termination of this lease and Tenant
shall forthwith quit, surrender and vacate the premises without prejudice
however, to Landlord's rights and remedies against Tenant under the lease
provisions in effect prior to such termination, and any rent owing shall be
paid up to such date and any payments of rent made by Tenant which were on
account of any period subsequent to such date shall be returned to Tenant.
Unless Owner shall serve a termination notice as provided for herein, owner
shall make the repairs and restorations under the conditions of (b) and (c)
hereof, with all reasonable expedition, subject to delays due to adjustment of
insurance claims, labor troubles and causes beyond Owner's control. After any
such casualty, Tenant shall cooperate with Owner's restoration by removing
from the premises as promptly as reasonably possible, all of Tenant's
salvageable inventory and movable equipment, furniture, and other property.
Tenant's liability for rent shall resume five (5) days after written notice
from Owner that the premises are substantially ready for Tenant's occupancy.
(e) Nothing contained hereinabove shall relieve Tenant from liability that may
exist as a result of damage from fire or other casualty. Notwithstanding the
foregoing, each party shall look first to any insurance in its favor before
making any claim against the other party for recovery for loss or damage
resulting from fire or other casualty, and to the extent that such insurance is
in force and collectible and to the extent permitted by law, Owner and Tenant
each hereby releases and waives all right of recovery against the other or any
one claiming through or under each of them by way of subrogation or otherwise.
The foregoing release and waiver shall be in force only if both releasors'
insurance policies contain a clause providing that such a release or waiver
shall not invalidate the insurance. if, and to the extent, that such waiver can
be obtained only by the payment of additional premiums, then the party
benefitting from the waiver shall pay such premium within ten days after
written demand or shall be deemed to have agreed that the party obtaining
insurance coverage shall be free of any further obligation under the provisions
hereof with respect to waiver of subrogation. Tenant acknowledges that Owner
will not carry insurance on Tenant's furniture and/or furnishings or any
fixtures or equipment, improvements, or appurtenances removable by Tenant and
agrees that Owner will not be obligated to repair any damage thereto or replace
the same. (f) Tenant hereby waives the provisions of Section 227 of the Real
Property Law and agrees that the provisions of this article shall govern and
control in lieu thereof.
EMINENT DOMAIN:
10. If the whole or any part of the demised premises shall be acquired or
condemned by Eminent Domain for any public or quasi public use or purpose,
then and in that event, the term of this lease shall cease and terminate from
the date of title vesting in such proceeding and Tenant shall have no claim
for the value of any unexpired term of said lease and assigns to Owner,
Tenant's entire interest in any such award.
ASSIGNMENT, MORTGAGE, ETC.:
11. Tenant, for itself, its heirs, distributees, executors, administrators,
legal representatives, successors and assigns, expressly covenants that it
shall not assign, mortgage or encumber this agreement, nor underlet, or suffer
or permit the demised premises or any part thereof to be used by others,
without the prior written consent of Owner in each instance. Transfer of the
majority of the stock of a corporate Tenant shall be deemed an assignment. If
this lease be assigned, or if the demised premises or any part thereof be
underlet or occupied by anybody other than Tenant, Owner may, after default by
Tenant, collect rent from the assignee, under-tenant or occupant, and apply the
net amount collected to the rent herein reserved, but no such assignment,
underletting, occupancy or collection shall be deemed a waiver of this
covenant, or the acceptance of the assignee, under-tenant or occupant as
tenant, or a release of Tenant from the further performance by Tenant of
covenants on the part of Tenant herein contained. The consent by Owner to an
assignment or underletting shall not in any way be construed to relieve Tenant
from obtaining the express consent in writing of the Owner to any further
assignment or underletting.
ELECTRIC CURRENT:
12. Rates and conditions in respect to submetering or rent inclusion,
as the case may be, to be added in RIDER attached hereto. Tenant covenants and
agrees that at all times its use of electric current shall not exceed the
capacity of existing feeders to the building or the risers or wiring
installation and Tenant may not use any electrical equipment which, in Owner's
opinion, reasonably exercised, will overload such installations or interfere
with the use thereof by other tenants of the building. The change at any time of
the character of electric service shall in no wise make Owner liable or
responsible to Tenant, for any loss, damages or expenses which Tenant may
sustain.
ACCESS TO PREMISES:
13. Owner or Owner's agents shall have the right (but shall not be
obligated) to enter the demised premises in any emergency at any time, and, at
other reasonable times, to examine the same and to make such repairs,
replacements and improvements as Owner may deem necessary and reasonably
desirable to the demised premises or to any other portion of the building or
which Owner may elect to perform. Tenant shall permit Owner to use and maintain
and replace pipes and conduits in and though the demised premises and to erect
new pipes and conduits therein provided they are concealed within the walls,
floor, or ceiling. Owner may, during the progress of any work in the demised
premises, take all necessary materials and equipment into said premises without
the same constituting an eviction nor shall the Tenant be entitled to any
abatement of rent while such work is in progress nor to any damages by reason or
loss or interruption of business or otherwise. Throughout the term hereof Owner
shall have the right to enter the demised premises at reasonable hours for the
purpose of showing the
* Landlord shall not unreasonably interfere with the conduct of Tenant's
business.
<PAGE> 3
it is erected or the demised premises, the rents, leases, expenses of operation
or any other matter or thing affecting or related to the premises except as
herein expressly set forth and no rights, easements or licenses are acquired
by Tenant by implication or otherwise except as expressly set forth in the
provisions of this lease. Tenant has inspected the building and the demised
premises and is thoroughly acquainted with their condition and agrees to take
the same "as is" and acknowledges that the taking of possession of the demised
premises by Tenant shall be conclusive evidence that the said premises and the
building of which the same form a part were in good and satisfactory condition
at the time such possession was so taken, except as to latent defects. All
understandings and agreements heretofore made between the parties hereto are
merged in this contract, which alone fully and completely expresses the
agreement between Owner and Tenant and any executory agreement hereafter made
shall be ineffective to change, modify, discharge or effect an abandonment of
it in whole or in part, unless such executory agreement is in writing and
signed by the party against whom enforcement of the change, modification,
discharge or abandonment is sought.
END OF TERM:
22. Upon the expiration or other termination of the term of this lease,
Tenant shall quit and surrender to Owner the demised premises, broom clean, in
good order and condition, ordinary wear and damages which Tenant is not required
to repair as provided elsewhere in this lease excepted, and Tenant shall remove
all its property. Tenant's obligation to observe or perform this convenant shall
survive the expiration or other termination of this lease. If the last day of
the term of this Lease or any renewal thereof, falls on Sunday, this lease shall
expire at noon on the preceding Saturday unless it be a legal holiday in which
case it shall expire at noon on the preceding business day.
QUIET ENJOYMENT:
23. Owner convenants and agrees with Tenant that upon Tenant paying the
rent and additional rent and observing and performing all the terms, convenants
and conditions, on Tenant's part to be observed and performed, Tenant may
peaceably and quietly enjoy the premises hereby demised, subject,
never the less, to the terms and conditions of this lease including, but not
limited to, Article 31 hereof and to the ground lease, underlying leases and
mortgages here in before mentioned.
FAILURE TO GIVE POSSESSION:
24. If owner is unable to give possession of the demised premises on the
date of the commencement of the term hereof, because of the holding-over or
retention of possession of any tenant, undertenant or occupants or if the
demised premises are located in a building being constructed, because such
building has not been sufficiently completed to make the premises ready for
occupancy or because of the fact that a certificate of occupancy has not been
procured or for any other reason, Owner shall not be subject to any liability
for failure to give possession on said date and the validity of the lease shall
not be impaired under such circumstances, nor shall the same be construed in any
wise to extend the term of this lease, but the rent payable thereunder shall be
abated (provided Tenant is not responsible for Owner's inability to obtain
possession) until after Owner shall have given Tenant written notice that the
premises are substantially ready for Tenant's occupancy. If permission is given
to Tenant to enter into the possession of the demised premises or to occupy
premises other than the demised premises prior to the date specified as the
commencement of the term of this lease, Tenant convenants and agrees that such
occupancy shall be deemed to be under all the terms, convenants, conditions and
provisions of this lease, except as to the covenants to pay rent. The provisions
of this article are intended to constitute "an express provision to the to the
contrary" within the meaning of Section 223-a of the New York Real Property Law.
NO WAIVER:
25. The failure of Owner to seek redress for violation of, or to insist
upon the strict performance of any convenant of condition of this lease or of
any of the rules or Regulations, set forth or hereafter adopted by Owner, shall
not prevent a subsequent act which would have originally constituted a violation
from having all the force and effect of an original violation. The receipt by
Owner of rent with knowledge of the breach of any convenant of this lease shall
not be deemed a waiver of such breach and no provision of this lease shall be
deemed to have been waived by Owner unless such waiver be in writing signed by
Owner. No payment by Tenant or receipt by Owner of a lesser amount than the
monthly rent herein stipulated shall be deemed to be other than on account of
the earliest stipulated rent, nor shall any endorsement or statement of any
check or any letter accompanying any check or payment as rent be deemed an
accord and satisfaction, and Owner may accept such check or payment without
prejudice to Owner's right to recover the balance of such rent or pursue any
other remedy in this lease provided. No act or thing done by Owner or Owner's
agent during the term hereby demised shall be deemed an acceptance of a
surrender of said premises, and no agreement to accept such surrender shall be
valid unless in writing signed by Owner. No employee of Owner or Owner's agent
shall have any power to accept the keys of said premises prior to the
termination of the lease and the delivery of keys to any such agent or employee
shall not operate as a termination of the lease or a surrender of the premises.
WAIVER OF TRIAL BY JURY:
26. It is mutually agreed by and between Owner and Tenant that the
respective parties hereto shall and they hereby do waive trial by jury in any
action, proceeding or counter-claim brought by either of the parties hereto
against the other (except for personal injury or property damage) on any matters
whatsoever arising out of or in any way connected with this lease, the
relationship of Owner and Tenant, Tenant's use of or occupancy of said premises,
and any emergency statutory or any other statutory remedy. It is further
mutually agreed that in the event Owner commences any summary proceeding for
possession of the premises, Tenant will not interpose any counterclaim of
whatever nature or description in any such proceeding including a counterclaim
under Article 4.
INABILITY TO PERFORM:
27. This Lease and the obligation of Tenant to pay rent hereunder and
perform all of the other convenants and agreements hereunder on part of Tenant
to be performed shall in no wise be affected, impaired or excused because Owner
is unable to fulfill any of its obligations under this lease or to supply or is
delayed in supplying any service expressly or impliedly to be supplied or is
unable to make, or is delayed in making any repair, additions, alternations or
decorations or is unable to supply or is delayed in supplying any equipment or
fixtures if Owner is prevented or delayed from so doing by reason of strike or
labor troubles or any cause whatsoever other than solely a financial inability
including, but not limited to, government preemption in connection with a
National Emergency or by reason of any rule, order or regulation of any
department or subdivision thereof of any government agency or by reason of the
conditions of supply and demand which have been or are affected by war or other
emergency.
BILLS AND NOTICES:
28. Except as otherwise in this lease provided, a bill, statement, notice
or communication which Owner may desire or be required to give to Tenant, shall
be deemed sufficiently given or rendered if, in writing, delivered to Tenant
personally or sent by registered or certified mail addressed to Tenant at the
building of which the demised premises form a part or at the last known
residence address or business address of Tenant or left at any of the aforesaid
premises addressed to Tenant, and the time of the rendition of such bill or
statement and of the giving of such notice or communication shall be deemed to
be the time when the same is delivered to tenant, mailed, or left at the
premises as herein provided a copy of notices to Tenant shall be sent by regular
mail to: Elwood F. Collins, Rose, Guthrie Alexander & Ferdon, 180 Maiden Lane,
New York, New York 10038. Any notice by Tenant to Owner must be served by
registered or certified mail addressed to Owner at the address first hereinabove
given or at such other address as Owner shall designate by written notice.
SERVICES PROVIDED BY OWNERS:
29. As long as Tenant is not in default under any of the convenants of this
lease, Owners shall provide: (a) necessary elevator facilities on business days
from 8 a.m. to 6 p.m. (b) water for ordinary lavatory purposes, but if Tenant
uses or consumes water for any other purpose or in unusual quantities (of which
fact Owner shall be the sole judge), Owner may install a water meter at Tenant's
expense which tenant shall thereafter maintain at Tenant's expense in good
working order and repair to register such water consumption and Tenant shall pay
for water consumed as shown on said meter as additional rent as and when bills
are rendered; (c) cleaning service for the demised premises on business days at
Owner's expense provided that the same are kept in order by Tenant. If, however,
said premises are to be kept clean by tenant, it shall be done at Tenant's sole
expense, in a manner satisfactory to Owner and no one other than persons
approved by Owner shall be permitted to enter said premises or the building of
which they are part for such purpose. Tenant shall pay Owner the cost of removal
of any of Tenant's refuse and rubbish from the building; (d) the building is a
24 hour, 7-day a week building; (e) Owner reserves the right to stop services of
the heating, elevators, plumbing, air-conditioning, power systems or cleaning or
other services, if any, when necessary by reason of accident or for repairs,
alterations, replacements or improvements necessary or desirable in the judgment
of Owner for as long as may be reasonably required by reason thereof. If the
building of which the demised premises are a part supplies manually-operated
elevator service and upon ten days' written notice to Tenant, proceed with
alterations necessary therefor without in any wise affecting this lease or the
obligation of Tenant hereunder. The same shall be done with a minimum of
inconvenience to tenant and Owner shall pursue the alternation with due
diligence.
CAPTIONS:
30. The Captions are inserted only as a matter of convenience and for
reference and in no way define, limit or described the scope of this lease nor
the intent of any provisions thereof.
DEFINITIONS:
31. The term "office", or "offices", wherever used in this lease, shall
not be construed to mean premises used as store or stores, for the sale or
display, at any time, of goods, wares or merchandise, of any kind, or as a
restaurant, shop, booth, bootblack or other stand, barber shop, or for other
similar purposes or for manufacturing. The term "Owner" means a landlord or
lessor, and as used in this lease means only the owner, or the mortgages in
possession, for the time being of the land and building (or the owner of a lease
of the building or of the land and building) of which the demised premises form
a part, so that in the event of any sale or sales of said land and building or
of said lease, or in the event of a lease of said building, or of the land and
building, the said Owner shall be and hereby is entirely freed and relieved of
all convenants and obligations of Owner hereunder, and it shall be deemed and
construed without further agreement between the parties or their successors in
interest, or between parties and the purchaser, at any such sale, or the said
leases of the building, or of the land and building, that the purchaser or the
leases of the building has assumed and agreed to carry out any and all
convenants and obligations of Owner, hereunder. The words "re-enter" and
"re-entry" as used in this lease are not restricted to their technical legal
meaning. The term "business days" as used in this lease shall exclude Saturdays
(except such portion thereof as is covered by specific hours in Article 29
hereof), Sundays and all days observed by the State or Federal Government as
legal holidays and those designated as holidays by the applicable building
service union employees service contract or by the applicable Operating
Engineers contract with respect to HVAC service.
<PAGE> 4
ADJACENT 32. If an excavation shall be made upon land adjacent to the
EXCAVATION -- demised premises, or shall be authorized to be made. Tenant
SHORING: shall afford to the person causing or authorized to cause such
excavation, license to enter upon the demised premises for the
purpose of doing such work as said person shall deem necessary to preserve the
wall or the building of which demised premises form a part from injury or
damage and to support the same by proper foundations without any claim for
damages or indemnity against Owner, or diminution or abatement of rent.
RULES AND 33. Tenant and Tenant's servants, employees, agents, visitors,
REGULATIONS and licensees shall observe faithfully, and comply strictly
with, the Rules and Regulations and such other and further
reasonable Rules and Regulations as Owner or Owner's agents may from time to
time adopt. Notice of any additional rules and regulations shall be given in
such manner as Owner may elect. In case Tenant disputes the reasonableness of
any additional Rule or Regulation hereafter made or adopted by Owner or Owner's
agents, the parties hereto agree to submit the question of the reasonableness
of such Rule or Regulation for decision to the New York office of the American
Arbitration Association, whose determination shall be final and conclusive upon
the parties hereto. The right to dispute the reasonableness of any additional
Rule or Regulation upon Tenant's part shall be deemed waived unless the same
shall be asserted by service of a notice, in writing upon Owner within ten (10)
days after the giving of notice thereof. Nothing in this lease contained shall
be construed to impose upon Owner any duty or obligation to enforce the Rules
and Regulations or terms, covenants or conditions in any other lease, as against
any other tenant and Owner shall not be liable to Tenant for violation of the
same by any other tenant, its servants, employees, agents, visitors or
licensers.
SECURITY: 34. Tenant has deposited with Owner the sum of $13,374.67 as
security for the faithful performance and observance by Tenant
of the terms, provisions and conditions of this lease; it is agreed that in the
event Tenant defaults in respect of any of the terms, provisions and conditions
of this lease, including, but not limited to, the payment of rent and
additional rent, Owner may use, apply or retain the whole or any part of the
security so deposited to the extent required for the payment of any rent and
additional rent or any other sum as to which Tenant is in default or for any
sum which Owner may expend or may be required to expend by reason of Tenant's
default in respect of any of the terms, covenants and conditions of this lease,
including but not limited to, any damages or deficiency in the re-letting of
the premises whether such damages or deficiency accrued before or after summary
proceedings or other re-entry by Owner. In the event that Tenant shall fully and
faithfully comply with all of the terms, provisions, covenants and conditions
of this lease, the security shall be returned to Tenant after the date fixed as
the end of the Lease and after delivery of entire possession building or
leasing of the building, of which the demised premises form a part, Owner
shall have the right to transfer the security to the vendee or lessee and Owner
shall thereupon be released by Tenant from all liability for the return of such
security, and Tenant agrees to look to the new Owner solely for the return of
said security, and it is agreed that the provisions hereof shall apply to every
transfer or assignment made of the security to a new Owner. Tenant further
covenants that it will not assign or encumber or attempt to assign or encumber
the monies deposited herein as security and that neither Owner nor its
successors or assigns shall be bound by any such assignment, encumbrance,
attempted assignment or attempted encumbrance.
ESTOPPED 35. Tenant, at any time, and from time to time, upon at least
CERTIFICATE: 10 day's prior notice by Owner, shall execute, acknowledge and
deliver to Owner, and/or to any other person, firm or
corporation specified by Owner, a statement certifying that this Lease is
unmodified and in full force and effect (or, if there have been modifications,
that the same is in full force and effect as modified and stating the
modifications), stating the dates to which the rent and additional rent have
been paid, and stating whether or not there exists any default by Owner under
this Lease, and, if so, specifying each such default.
SUCCESSORS 36. The convenants, conditions and agreements contained in this
AND ASSIGNS: lease shall bind and insure to the benefit of Owner and Tenant
and their respective heirs, distributes, executors,
administrators, successors, and except as otherwise provided in this case,
their assigns.
- --------------------
Space to be filled in or deleted.
SEE RIDER ANNEXED HERETO AND MADE A PART HEREOF.
IN WITNESS HEREOF, Owner and Tenant have respectively signed and sealed this
lease as of the day and year first above written.
Witness for Owner: /s/ IRWIN KAHN
---------------------------- [CORP. SEAL]
IRWIN KAHN, as Receiver
- ------------------------------ ----------------------------------- [L.S]
Witness for Tenant: ---------------------------- [CORP. SEAL]
HANOVER CAPITAL PARTNERS, LTD.
/s/ By /s/
- ------------------------------ -------------------------------- [L.S]
<TABLE>
<CAPTION>
ACKNOWLEDGMENTS
<S> <C>
CORPORATE OWNER CORPORATE TENANT
STATE OF NEW YORK. ss.: STATE OF NEW YORK. ss.:
County of County of
On this day of ,19 , before me On this day of ,19 , before me
personally came personally came
to me known, who being by me duly sworn, did depose and to me known, who being by me duly sworn, did depose and
say that he resides in : say that he resides in :
that he is the of that he is the of
the corporation described in and which executed the foregoing the corporation described in and which executed the foregoing
instrument, as OWNER; that he knows the seal of said instrument, as TENANT; that he knows the seal of said
corporation; that the seal affixed to said instrument is such corporation; that the seal affixed to said instrument is such
corporate seal; that it was so affixed by order of the Board corporate seal; that it was so affixed by order of the Board
of Directors of said corporation, and that he signed his name of Directors of said corporation, and that he signed his name
thereto by like order. thereto by like order.
---------------------------------------------------- ----------------------------------------------
INDIVIDUAL OWNER INDIVIDUAL TENANT
STATE OF NEW YORK. ss.: STATE OF NEW YORK. ss.:
County of County of
On this day of ,19 , before me On this day of ,19 , before me
personally came personally came
to me known and known to me to be the individual to me known and known to me to be the individual
described in and who, as OWNER, executed the foregoing described in and who, as TENANT, executed the foregoing
instrument and acknowledged to me that instrument and acknowledged to me that
be executed the same. be executed the same.
---------------------------------------------------- ----------------------------------------------
* if the security was so transferred
</TABLE>
<PAGE> 5
GUARANTY
FOR VALUE RECEIVED, and in consideration for, and as an inducement to Owner
making the within lease with Tenant, the undersigned guarantees to Owner,
Owner's successors and assigns, the full performance and observance of all the
covenants, conditions and agreements, therein provided to be performed and
observed by Tenant, including the "Rules and Regulations" as therein provided,
without requiring any notice of non-payment, non-performance, or
non-observance, or proof, or notice, or demand, whereby to charge the
undersigned therefor, all of which the undersigned hereby expressly waives and
expressly agrees that the validity of this agreement and the obligations of
the guarantor hereunder shall in no wise be terminated, affected or impaired by
reason of the assertion by Owner against Tenant of any of the rights or
remedies reserved to Owner pursuant to the provisions of the within lease. The
undersigned further covenants and agrees that this guaranty shall remain and
continue in full force and effect as to any renewal, modification or extension
of this lease and during any period when Tenant is occupying the premises as a
"statutory tenant." As a further inducement to Owner to make this lease and in
consideration thereof, Owner and the undersigned against the other on any
matters whatsoever arising out of, under, or by virtue of the terms of this
lease or of this guaranty that Owner and the undersigned shall and do hereby
waive trial by jury.
Dated New York City 19
--------------------------------------------- -------
WITNESS
- ------------------------------------------------------------------------------
STATE OF NEW YORK, ) ss.:
County of )
On this day of ,19 ,before me
personally came
to me known and known to me to be the individual described in, and who executed
the foregoing Guaranty and acknowledged to me that he executed the same.
--------------------------------------
Notary
- ------------------------------------------------------------------------[L.S.]
Residence
--------------------------------------------------------------------
Business Address
--------------------------------------------------------------
Firm Name
---------------------------------------------------------------------
IMPORTANT -- PLEASE READ
RULES AND REGULATIONS ATTACHED TO AND MADE A PART OF THIS LEASE IN ACCORDANCE
WITH ARTICLE 33.
1. The sidewalks, entrances, driveways, passages, courts, elevators,
vestibules, stairways, corridors or halls shall not be obstructed or encumbered
by any Tenant or used for any purpose other than for ingress or egress from the
demised premises and for delivery of merchandise and equipment in a prompt and
efficient manner using elevators and passageways designated for such delivery
by Owner. There shall not be used in any space, or in the public hall of the
building, either by any Tenant or by jobbers or others in the delivery or
receipt of merchandise, any hand trucks, except those equipped with rubber
tires and sideguards. If said premises are situated on the ground floor of the
building, Tenant thereof shall further, at Tenant's expense, keep the sidewalk
and curb in front of said premises clean and free from ice, snow, dirt and
rubbish.
2. The water and wash closets and plumbing fixtures shall not be used for any
purposes other than those for which they were designed or constructed and no
sweepings, rubbish, rags, acids or other substances shall be deposited therein,
and the expense of any breakage, stoppage, or damage resulting from the
violation of this rule shall be borne by the Tenant who, or whose clerks,
agents, employees or visitors, shall have caused it.
3. No carpet, rug or other article shall be hung or shaken out of any window of
the building, and no Tenant shall sweep or throw or permit to be swept or
thrown from the demised premises any dirt or other substances into any of the
corridors or halls, elevators, or out of the doors or windows or stairways of
the building and Tenant shall not use, keep or permit to be used or kept any
foul or noxious gas or substance in the demised premises, or permit or suffer
the demised premises to be occupied or used in a manner offensive or
objectionable to Owner or other occupants of the buildings by reason of noise,
odors, and/or vibrations, or interfere in any way with other Tenants or those
having business therein, nor shall any animals or birds be kept in or about the
building. Smoking or carrying lighted cigars or cigarettes in the elevators of
the building is prohibited.
4. No awnings or other projections shall be attached to the outside walls of
the building without the prior written consent of the Owner.
5. No sign, advertisement, notice or other lettering shall be exhibited,
inscribed, painted or affixed by any Tenant on any part of the outside of the
demised premises or the building or on the inside of the demised premises if
the same is visible from the outside of the premises without the prior written
consent of Owner, except that the name of Tenant may appear on the entrance
door of the premises. In the event of the violation of the foregoing by any
Tenant, Owner may remove same without any liability, and may charge the expense
incurred by such removal to Tenant or Tenants violating this rule. Interior
signs on doors and directory tablet shall be inscribed, painted or affixed for
each Tenant by Owner at the expense of such Tenant, and shall be of a size,
color and style acceptable to Owner.
6. No Tenant shall mark, paint, drill into, or in any way deface any part of
the demised premises of the building of which they form a part. No boring,
cutting or stringing of wires shall be permitted, except with the prior written
consent of Owner, and as Owner may direct. No Tenant shall lay linoleum, or
other similar floor covering is desired to be used an interlining of builder's
deadening felt shall be first affixed to the floor, by a paste or other
material, soluble in water, the use of cement or other similar adhesive
material being expressly prohibited.
7. No additional locks or bolts of any kind shall be placed upon any of the
doors or windows by any Tenant, nor shall any changes be made in existing locks
or mechanism thereof. Each Tenant must, upon the termination of his Tenancy,
restore to Owner all keys of stores, offices and toilet rooms, either furnished
to, or otherwise procured by, such Tenant, and in the event of the loss of any
keys, so furnished, such Tenant shall pay to Owner the cost thereof.
8. Freight, furniture, business equipment, merchandise and bulky matter of any
description shall be delivered to and removed from the premises only on the
freight elevators and through the service entrances and corridors, and only
during hours and in a manner approved by Owner. Owner reserves the right to
inspect all freight to be brought into the building and to exclude from the
building all freight which violates any of these Rules and Regulations of the
lease or which these Rules and Regulations are a part.
9. Canvassing, soliciting and peddling in the building is prohibited and each
Tenant shall cooperate to prevent the same.
10. Owner reserves the right to exclude from the building between the hours of
6 P.M. and 8 A.M. and at all hours on Sundays, and legal holidays all persons
who do no present a pass to the building signed by Owner. Owner will furnish
passes to persons for whom any Tenant requests same in writing. Each Tenant
shall be responsible for all persons for whom he requests such pass and shall be
liable to Owner for all acts of such persons.
11. Owner shall have the right to prohibit any advertising by any Tenant which
in Owner's opinion, tends to impair the reputation of the building or its
desirability as a building for offices, and upon written notice from Owner,
Tenant shall refrain from or discontinue such advertising.
12. Owner shall not bring or permit to be brought or kept in or on the demised
premises, any inflammable, combustible or explosive fluid, material, chemical
or substance, or cause or permit any odors of cooking or other processes, or
any unusual or other objectionable odors to permeate in or emanate from the
demised premises.
13. If the building contains central air conditioning and ventilation, Tenant
agrees to keep all windows closed at all times and to abide by all rules and
regulations issued by the Owner with respect to such services. If Tenant
requires air conditioning or ventilation after the usual hours, Tenant shall
give notice in writing to the building superintendent prior to 3:00 P.M. in
the case of services required on week days, and prior 3:00. P.M. on the day
prior in the case of after hours service required on weekends or on holidays.
14. Tenant shall not move any safe, heavy machinery, heavy equipment, bulky
matter, or fixtures into or out of the building without Landlord's prior written
consent. If such safe, machinery, equipment, bulky matter or fixtures requires
special handling, all work in connection therewith shall comply with the
Administrative Code of the City of New York and all other laws and regulations
applicable thereto and shall be done during such hours as Owner may designate.
Address
Premises
===============================================================================
IRWIN KAHN, as Receiver
TO
HANOVER CAPITAL PARTNERS LTD.
===============================================================================
STANDARD FORM OF
OFFICE
[LOGO] [LOGO]
LEASE
THE REAL ESTATE BOARD OF NEW YORK, INC.
(R)Copyright 1993. All rights Reserved.
Reproduction in whole or in part prohibited.
===============================================================================
Dated 19 .
Rent per Year
Rent per Month
Term
From
To
Drawn by Checked by
------------------------ -------------------------------
Entered by Approved by
---------------------- ------------------------------
===============================================================================
<PAGE> 6
RIDER ATTACHED HERETO AND MADE PART OF LEASE DATED THE DAY OF APRIL _____,
1991 BY AND BETWEEN IRWIN KAHN, AS RECEIVER, AS LANDLORD, AND HANOVER CAPITAL
PARTNERS, LTD., AS TENANT, COVERING ROOM 1508 AT 90 WEST STREET, NEW YORK, NEW
YORK
- --------------------------------------------------------------------------------
Wherever the terms, covenants and conditions contained in the printed portion of
this Lease shall be in conflict with any of the terms, covenants and conditions
in the Additional Clauses 41 through 81 that follow, the Additional Clauses
shall prevail.
41. DEFINITIONS AND CAPTIONS:
-------------------------
The captions, numbers and definitions herein are inserted only as a matter
of convenience and are not intended to define, limit, construe or describe the
scope or intent of any paragraph, nor in any way affect this Lease. In
conjunction herewith, the defined term "Landlord" as used in this Rider shall be
deemed to be one and the same as the defined term "Owner" as used in the printed
portion of this Lease.
42. BROKER:
-------
Tenant represents and warrants that it has dealt with no broker except
Newmark & Co. Real Estate, Inc. (the "Brokers") in connection with the execution
of this Lease or the showing of the demised premises and agrees to hold and save
Landlord harmless from and against any and all liabilities from any claims of
any broker (including, without limitation, the cost of counsel fees in
connection with the defense of any such claims) except the Brokers.
43. "AS IS" CONDITION:
------------------
The Tenant has inspected the Demised Premises and agrees to accept the same
in its present "as is" condition, and the Landlord makes no representation as to
the condition of the premises, except for the work that the Landlord has
obligated itself to perform, as more particularly hereinafter described.
44. INDEMNIFICATION:
----------------
Tenant agrees to indemnify and save Landlord harmless against and from any
and all claims by or on behalf of any person or persons, firm or firms,
corporation or corporations, arising from any work or thing or circumstance or
occurrence whatsoever done by or on behalf of Tenant, in or about the demised
premises, and will further indemnify and save Landlord harmless against and from
any and all claims arising from any breach or default on the part of Tenant in
the performance of any covenant or agreement on the part of Tenant to be
performed, pursuant to the terms of this Lease, or arising from any act or
negligence of Tenant, or any of its agents, contractors, servants, employees,
invitees or licensees, and from and against all costs, reasonable counsel fees,
expenses and liabilities incurred in or about any such claim or action or
proceeding brought thereon; and in case any action or proceeding be brought
against Landlord by reason of any such claim, Tenant, upon notice from Landlord,
covenants to resist or defend, at Tenant's expense, such action or proceeding by
counsel reasonably satisfactory to Landlord.
45. EXCULPATION:
------------
If the Landlord or any successor in interest be an individual, joint
venture, tenancy in common, co-partnership, unincorporated association, or other
unincorporated aggregate of individuals or a corporation (all of which are
referred to below in this Article 45 individually and collectively, as a
"Landlord Entity"), then, anything elsewhere to the contrary notwithstanding,
Tenant shall look solely to the estate and property of such Landlord Entity in
the land and Building of which the Demised Premises are a part, for the
satisfaction of
<PAGE> 7
Tenant's remedies for the collection of a judgment (or other judicial process)
requiring the payment of money by Landlord Entity in the event of any default or
breach by Landlord Entity with respect to any of the terms, covenants and
conditions of the Lease to be observed and/or performed by Landlord Entity other
than for the return of Tenant's security deposit, and no other property or
assets of such Landlord Entity shall be subject to levy, execution or other
enforcement procedure for the satisfaction or Tenant's remedies.
46. TENANT'S REPRESENTATION:
------------------------
Tenant covenants that it will not do or suffer to be done in or upon the
said premises any act or thing which shall damage the Landlord or its tenants,
and covenants that no business shall be carried on, nor any act or acts suffered
or permitted to be done on said premises that in any manner conflicts with, or
is contrary, to any law.
Tenant covenants that if it performs any construction or alteration at the
Demised Premises in accordance with all of the other terms and conditions of
this Lease and, as a result of said construction, the normal heating supplied by
the Landlord is altered or reduced, then the Landlord shall not be required to
provide extra heat or perform any installations beyond what was being supplied
or provided prior to the Tenant's work.
47. INSURANCE:
----------
(a) Tenant covenants and agrees that at all times during the term of this
Lease, Tenant shall immediately secure, and thereafter maintain in full force,
during the term hereof, at its own cost and expense, comprehensive general
personal injury and property damage liability insurance against claims for
bodily injury, death and property damage, such insurance to afford minimum
protection during the term of this Lease, of not less than $2,000,000 for bodily
injury or death unless as a condition of Owner obtaining an umbrella policy a
larger face amount is required, in which case Tenant may supply such greater
amount of liability and insurance and not less than $500,000 for property
damage, as well as fire and casualty insurance, together with extended coverage,
in such amounts as required by Landlord. Such insurance policies shall name
Landlord and Tenant as insureds. Such policies shall insure against all costs,
expenses and/or liability arising out of or based upon any and all claims,
accidents, injuries and damages whatsoever normally covered by such insurance
caused to any person or property, wherein such accident, damage or injury
occurred on or about the Demised Premises or. the land and building of which the
Demised Premises are a part. Such insurance shall be carried by an insurance
company or companies licensed to do business in the State of New York and
reasonably acceptable to Landlord. Upon commencement of the term hereof, and
thereafter at least ten (10) days prior to the expiration of any such policy,
Tenant shall deliver to Landlord the policy or policies of insurance or
certificates thereof and evidence of the payment of the premium therefor. In the
event Tenant shall fail to provide the aforesaid insurance Landlord shall have
the right, but not the obligation, after giving Tenant five (5) days' written
notice given in accordance with Article 28, to procure and pay for any of such
insurance and Tenant shall reimburse Landlord, on the first of the following
month, as additional rent, the cost thereof with interest at the then maximum
legal rate on the amount paid from the date of payment to the date of
reimbursement. Each such policy shall contain an endorsement that such insurance
may not be cancelled or amended except upon thirty (30) days' written notice to
Landlord. Tenant's failure to provide and keep in force the aforementioned
insurance shall be regarded as a material default hereunder, entitling Landlord
to exercise any or all of the remedies as herein provided in the event of
Tenant's default.
-2-
<PAGE> 8
(b) (i) Landlord agrees that, if obtainable at no additional cost, it will
include in its fire insurance policies appropriate clauses pursuant to which the
insurance companies (y) waive all right of Subrogation against Tenant with
respect to losses payable under such policies and/or (z) agree that such
policies shall not be invalidated should the insured waive in writing prior to a
loss any or all right of recovery against any party for losses covered by such
policies. But should any additional premiums be exacted for any such clause or
clauses, Landlord shall be released from the obligation hereby imposed unless
Tenant shall agree to pay such additional premium.
(ii) Tenant agrees to include, if obtainable at no additional cost, in
its fire insurance policy or policies on its furniture, furnishings, fixtures
and other property removable by Tenant under the provisions of this lease
appropriate clauses pursuant to which the insurance company or companies (y)
waive the right of subrogation against Landlord, its agents, servants, and
employees and/or any tenant of space in the Building with respect to losses
payable under such policy or policies and/or (z) agree that such policy or
policies shall not be invalidated should the insured waive in writing prior to a
loss any or all right of recovery against any party for losses covered by such
policy or policies. But should any additional premium be exacted for any such
clause or clauses, Tenant shall be released from the obligation hereby imposed
unless Landlord or the other tenants shall agree to pay such additional premium.
(iii) Provided that Landlord's right of full recovery under its policy
or policies aforesaid is not adversely affected or prejudiced thereby, Landlord
hereby waives any and all right of recovery which it might otherwise have
against Tenant, its servants, agents and employees, for loss or damage occurring
to the Building and the fixtures, appurtenances and equipment therein, to the
extent the same is covered by Landlord's insurance, notwithstanding that such
loss or damage may result from the negligence or fault of Tenant, its servants,
agents or employees. Provided that Tenant's right of full recovery under its
aforesaid policy or policies is not adversely affected or prejudiced thereby,
Tenant hereby waives any and all right of recovery which it might otherwise have
against Landlord, its servants, agent and employees, and against every other
tenant in the Building whose shall have executed a similar waiver as set forth
in this Section 47(b)(iii) for loss or damage to, Tenant's furniture,
furnishings, fixtures and other property removable by Tenant under the
provisions hereof to the extent that same is covered by Tenant's insurance,
notwithstanding that such loss or damage may result from the negligence or fault
of Landlord, its servants, agents or employees, or such other tenant and the
servants, agents or employees thereof.
48. LANDLORD'S ACCESS:
------------------
Tenant covenants and agrees that it will permit Landlord, its agents,
servants, employees, licensees, invitees and contractors, at any and all times
during regular business hours, to pass and repass on and through the Demised
Premises, or such portion thereof as may be necessary, in order that they or any
of them may gain access to any facilities of the Building. Landlord shall make
reasonable efforts to give Tenant advance notice of such entry and to avoid
disruption of Tenant's business activities. Tenant agrees further that it will,
during the entire term of this Lease, keep the Landlord informed of the
telephone numbers of at least three persons or parties having keys to the
Demised Premises in order that, in the event of an emergency which requires
Landlord to have access to such facilities during other than regular business
hours, Landlord may arrange with such persons or parties to be admitted to the
Demised Premises, provided, however, that if Landlord is unable to arrange for
admittance to the Demised Premises during any such emergency, or if time does
not permit the making of such
-3-
<PAGE> 9
arrangements, Landlord shall have the right to gain admittance to the Demised
Premises by forcibly or otherwise breaking into the Demised Premises, and the
sole liability of Landlord to Tenant in such event shall be that Landlord shall
be obligated to repair all damage caused by such breaking in within a reasonable
time after the occurrence thereof. In addition, the Tenant shall supply to the
Landlord a key for the Demised Premises for access for cleaning and for any
other business purpose as provided in this Lease. Such key(s) shall be supplied
upon execution hereof, by Tenant.
49. ELECTRICITY:
------------
A. At the commencement of the term hereof, electricity shall be supplied to
the Demised Premises in accordance with the provision of subsection B(2) of this
Article 49. However, at any time and from time to time during the term of this
Lease, Landlord shall have the option of having electricity supplied .to the
Demised Premises in accordance with the provisions of either of the other
subsections of Paragraph B of this Article, upon sixty days prior notice to
Tenant, and Landlord may exercise such option more than once during the term,
including, without limitation, returning to the provisions of a subsection under
which electricity was originally or previously supplied to Tenant.
B. (1) SUBMETERING. Landlord shall furnish electricity to the Demised
Premises on a submetered basis and Tenant covenants and agrees to purchase the
same from Landlord or Landlord's designated agent at charges, terms and rates
set, from time to time, during the term of this Lease by Landlord, which shall
not be higher than those specified in the service classification in effect on
January 1, 1970 pursuant to which Landlord then purchased electric current from
the public utility corporation servicing the Building; provided, however, said
charges shall be increased in the same percentage as any percentage increase in
the billing to Landlord for electricity for the entire Building, by reason of
increase in Landlord's electric rates, charges, fuel adjustment or service
classifications, or by taxes or charges of any kind imposed thereon, or for any
other such reason, subsequent to January 1, 1970. Any such percentage increase
in Landlord's billing for electricity shall be computed by. the application of
the average consumption (energy and demand) of electricity for the entire
Building for the twelve (12) full months immediately prior to the rate change,
other change, or any changed methods of or rules on billing for same, on a
consistent basis to the new rate and to the service classification in effect on
January 1, 1970. If the average consumption of electricity for the entire
Building for said prior twelve (12) months cannot reasonably be applied and used
with respect to changed methods of or rules on billing, then the percentage
increase shall be computed by the use of the average consumption (energy and
demand) for the entire Building for the first three (3) months after such
change, projected to a full twelve (12) months and that same consumption, so
projected, shall be applied to the service classification in effect on January
1, 1970. Where more than one meter measures the service of Tenant in the
Building, the service rendered through each meter may be computed and billed
separately in accordance with the provisions hereof. Bills therefore shall be
rendered at such times as Landlord may elect and the amount, as computed from a
meter, shall be deemed to be, and be paid as, additional rent. In the event such
bills are not paid within ten (10) days after the same are rendered, Landlord
may, without further notice, discontinue the service of electric current to the
Demised Premises without releasing Tenant from any liability for any damage or
loss sustained by Tenant by such discontinuance of service provided, however,
that in the event Landlord shall discontinue furnishing electric service to the
Demised Premises pursuant to the preceding provisions of this sentence and
Tenant shall pay to Landlord such delinquent amounts, then, provided Landlord
shall not have Exercised its right to terminate this Lease, Landlord shall
resume providing
-4-
<PAGE> 10
such electrical service to the Demised Premises. In no event shall bills
rendered by Landlord pursuant to this Section 49(B) include any charge for
electricity furnished to portions of the Building other than the Demised
Premises.
(2) RENT INCLUSION. For the purposes of this subsection B(2), Landlord
and Tenant agree that:
(a) The term "Electric Rate" (including all applicable surcharges,
demand charges, energy charges, fuel adjustment charges, time of day charges,
taxes and other sums payable in respect thereof) shall mean the Service
Classification pursuant to which Landlord purchases electricity from the utility
company servicing the Building in effect on October 1, 1984.
(b) The term "Cost per kilowatthour" shall mean the total cost for
electricity incurred by Landlord to service the Building during a particular
time period (including all applicable surcharges, demand charges, energy
charges, fuel adjustment charges, time of day charges, taxes and other sums
payable in respect thereof) divided by the total kilowatt hours purchased by
Landlord during such period.
(c) As long as Tenant is not in default under any of the covenants
of this Lease, including, without limitation, payment of the Base Rent and any
Additional Rent, Landlord shall furnish Tenant with all such electric energy
reasonably required in connection with the permitted use and occupancy of the
Demised Premises for lighting, light office equipment and the usual small
business machines including copying machines, personal computers and related
peripheral equipment, a refrigerator and microwave oven. In addition to the Base
Rent payable annually hereunder, Tenant shall pay for the cost of such service
at the initial rate of $6,984 per annum (the "Minimum Electric Charge"), which
payments shall constitute Additional Rent hereunder. At any time and from time
to time following the commencement of the term, at Landlord's option, Landlord
may cause a survey to be made by an independent electrical engineer or
consultant selected by Landlord of the consumption of electric energy in the
Demised Premises. The survey will include a determination of the power
requirements of Tenant's equipment (including, but not limited to, any air
conditioning equipment provided by Landlord) and of the lighting in the Demised
Premises and a determination of the periods of use of such equipment and
lighting. The results of the survey will be projected with such adjustments as
may be appropriate to arrive at an estimate of the annual consumption of
electric energy in the Demised Premises. On the basis of said estimate, applying
the Electric Rate to Tenant's usage, the estimated cost attributable to the
furnishing by Landlord of such quantity of electric energy to the Demised
Premises shall be determined. If such estimated cost shall be greater than the
sum set forth above, then the Additional Rent per annum shall be increased as of
the date of such survey so as equitably to reflect such estimated additional
cost. The determination of Landlord's consultant or engineer shall be conclusive
hereunder on Landlord and on Tenant from and after the delivery of copies of
such determination to Landlord and Tenant, unless within fifteen (15) days after
the delivery of such copies, Tenant disputes such determination. If Tenant
disputes the determination, it shall at its own expense, obtain from a
reputable, independent electrical consultant its own survey of Tenant's
electrical lighting and power load and hours of use thereof. Tenant's consultant
and Landlord's consultant shall then seek to agree on a finding of such
determination. If they cannot agree, they shall choose a third reputable
electrical consultant whose cost shall be shared equally by Landlord and Tenant,
to make a similar survey and the determination by such third electrical
consultant shall be controlling. (If they cannot agree on such third consultant,
within ten (10) days, then either party may apply to the Supreme Court in the
County of New
-5-
<PAGE> 11
York for the appointment of such third consultant.) However, pending such
determination, Tenant shall pay to Landlord the amount due based on the
application of the Electric Rate to the estimate of Tenant's annual consumption
of electric energy in the Demised Premises as determined by Landlord's
independent electrical consulting firm, provided, however, if the amount
determined as aforesaid is different from that determined by Landlord's
electrical consulting firm, then Landlord and Tenant shall make adjustment for
any deficiency owed by Tenant or overage paid by Tenant pursuant to the decision
of Landlord's electrical consulting firm. There may be, 'from time to time
thereafter, a further appropriate adjustment in such Additional Rent based on a
survey as above provided, if, after the commencement date of the term there is
any change in the cost attributable to the furnishing by Landlord of electric
energy to the Demised Premises based upon any change in any one or more of the
following factors: (i) any material alteration or material addition to Tenant's
electrical equipment and/or appliances in the Demised Premises, or (ii) any
increase since the effective date of the last adjustment or the commencement
date of this Lease, whichever shall be applicable, in the Electric Rate, or
(iii) use of additional electric energy in the Demised Premises, i.e., use of
electric energy in excess of such reasonable quantity to be furnished as
hereinbefore provided in the first sentence of this subparagraph.
Notwithstanding any other terms and conditions of this Article, in the event
that the cost to Landlord of furnishing electricity service shall increase
because of an increase in the Electric Rate, then Landlord may, at its option to
be exercised by written notice to Tenant, increase the Additional Rent by an
amount equal to the sum set forth above multiplied by the percentage increase in
the cost to Landlord. The increased Additional Rent payable by virtue of such
notice shall commence as of the date of said increase in the rate payable by
Landlord to such public utility. Under no circumstances shall the electrical
inclusion charge be less than the Minimum Electric Charge.
(3) DIRECT METER. Tenant, at Tenant's sole cost and expense, shall
obtain electricity directly from the utility company furnishing electricity to
the Building. The cost of such service shall be paid by Tenant directly to such
utility company.
C. Tenant's use of electric current in the Demised Premises shall not at
any time exceed the capacity of any of the electrical conductors and equipment
in or otherwise serving the Demised Premises. Tenant shall not make or perform
or permit the making of, any alterations to wiring, installations or other
electrical facilities in or serving the Demised Premises without the prior
consent of Landlord in each instance (which shall not be unreasonably withheld).
Should Landlord grant any such consent, all additional risers or other equipment
required therefor shall be installed by Landlord and the cost thereof shall be
paid by Tenant upon Landlord's demand; any such work performed by Landlord shall
be of workmanlike quality and the cost thereof shall be comparable to costs
payable for similar type installations performed by owners of property similar
to the Building.
D. Unless the same shall arise due to the willful act of Landlord in
default of any of the terms and conditions or this Lease, Landlord shall not be
liable in any way to Tenant for any failure or defect in the supply or character
of electric energy furnished to the Demised Premises by reason of any
requirement act or omission of the public utility company-servicing the Building
with electricity or for any other reason whatsoever.
E. Landlord reserves the right to discontinue furnishing electric energy to
Tenant at any time upon sixty (60) days' written notice to Tenant, and from and
after the effective date of such termination, Landlord shall no longer be
obligated to furnish Tenant with electric energy, provided, however, that such
-6-
<PAGE> 12
termination date may be extended for a time reasonably necessary for Tenant to
make arrangements to obtain electric service directly from the public utility
company servicing the Building. If Landlord exercises such right of termination,
this Lease shall remain unaffected thereby and shall continue in full force and
effect; and thereafter Tenant shall diligently arrange to obtain electric
service directly from the public utility company servicing the Building, and may
utilize the then existing electric feeders, risers and wiring servicing the
Demised Premises to the extent available and safely capable of being used for
such purposes and only to the extent of Tenant's then authorized connected load.
Landlord shall be obligated to pay no part of any cost required for Tenant's
direct electrical service.
F. If any tax (other than a Federal, State or City Income Tax) is imposed
upon Landlord's receipt from the sale or resale of electricity to Tenant by any
Federal, State or Municipal Authority, Tenant covenants and agrees that where
permitted by law, Tenant's pro rata share of such taxes shall be passed on to
and included in the bill of, and paid by Tenant to Landlord.
50. RENT ESCALATION - COST INCREASE:
--------------------------------
(A) For purposes of the formula and other provisions set forth in this
Article and elsewhere in this Lease:
(1) "Rate" shall mean the minimum regular hourly wage rate, including
adjustments of every kind and nature (including, without limitation, all sums
paid for Fringe Benefits, as hereinafter defined) prescribed for Porters (as
hereinafter defined) for Class A office buildings (or any successor category),
pursuant to the present and any successor agreement between the Realty Advisory
Board on Labor Relations, Incorporated (or any successor thereto) and Local 32B
of the Building Service Employees International Union, AFL-CIO (or any successor
thereto), covering the wage rates for porters in such buildings ("Agreement"),
provided, however, that, (a) if, at any time during the Term, regular employment
of Porters occurs on days or during hours when the overtime or other premium pay
rates are in effect pursuant to the Agreement, "Rate" shall mean the average
hourly wage rate, including adjustments of every kind and nature (including,
without limitation, Fringe Benefits) for the hours in a calendar week during
which Porters are regularly employed (e.g., if, pursuant to the Agreement, the
regular weekly employment of Porters is for forty hours, at a regular hourly
wage rate, including Fringe Benefits, of $12.00 for the first thirty hours and
an overtime hourly wage rate, including Fringe Benefits, of $15.00 for the
remaining ten hours, the average hourly wage rate, including Fringe Benefits,
for the applicable period shall be the weekly wage rate of $510.00 divided by
the number of regular hours of employment, to wit, forty, or $12.75), and that,
(b) if, at any time during the Term, no Agreement exists, "Rate" shall mean the
average minimum regular hourly wage rate, including adjustments of every kind
and nature (including, without limitation, Fringe Benefits) actually payable to
Porters at the rate for Porters employed at Class A office buildings as such
buildings are presently described in the Agreement, except that at no time shall
the amount payable be less than the amount being paid by the Tenant pursuant to
this paragraph at the time the rate ceases to exist.
(2) "Base Rate" shall mean the Rate in effect during the calendar year
in which this Lease commences.
(3) "Multiplication Factor" shall mean 2328.
(4) "Porters" shall mean those employees who have been employed for
two (2) years or more and who are engaged in the general maintenance and
operation of office buildings, classified as "others" in the current Agreement
or, failing such classification in any subsequent agreement, the most nearly
comparable classification in such Agreement.
-7-
<PAGE> 13
(5) "Fringe Benefits" shall mean all sums directly or indirectly paid
for so-called "fringe benefits" including, without limitation, the costs of (a)
pensions, welfare funds, training funds and dues; (b) social security,
vacations, sick pay, holidays, jury duty, medical checkup, lunch time, relief
time and other paid time off; and (c) unemployment, workers' compensation,
disability benefits, health, life, accident and other types of insurance.
(B) If, in any year during the Term, the Rate exceeds the Base Rate, Tenant
shall pay Landlord an amount ("Expense Escalation") equal to the product of the
Multiplication Factor multiplied by 100% of the amount by which the Rate exceeds
the Base Rate, appropriately adjusted for any such period which is only
partially within the Term. The Expense Escalation shall be payable in equal
monthly installments, commencing with the first installment of Fixed Rent due on
or after the effective date of any increase in the Rate and continuing
thereafter until the effective date of any subsequent increase, whereupon such
installments shall be appropriately adjusted. Landlord shall furnish Tenant with
a statement itemizing Tenant's liability pursuant to this subdivision whenever
such liability arises or o changes. Except as limited by Articles 9 and 10,
Tenant's obligation to make such payments shall survive the Expiration Date or
any sooner termination of this Lease. Notwithstanding the foregoing, if, by
reason of any law or any rule, order, regulation or requirement of any
governmental or quasi-governmental authority having or asserting jurisdiction
"Law"), (collectively, an increase in the Rate is reduced or does not take
effect, or increases in the Rate are limited or prohibited, then, for the period
covered by the Law ("Law Period"), the applicable increase ("Increase") in the
Rate for purposes of this Article, shall be the increase in the Rate ("Prior
Increase") which most immediately preceded the effective date of the Law. The
Increase shall take effect on the date following the expiration of the period
for the Prior Increase and an equivalent Increase shall take effect on each
anniversary of such effective date during the Law Period.
(c) Each notice given by Landlord pursuant to subdivision (B) shall be
binding upon Tenant unless, within thirty (30) days after its receipt of such
notice, Tenant notifies Landlord of its disagreement therewith, specifying the
portion thereof with which Tenant disagrees. Pending resolution of such dispute,
Tenant shall, without prejudice to its rights, pay all amounts determined by
Landlord to be due, subject to prompt refund by Landlord (without interest) upon
any contrary determination.
(D) Landlord's failure to timely bill all or any portion of the Expense
Escalation (or any increase therein) for any period or periods during the Term
(whether because of failure to timely consummate an Agreement or because of
error or oversight of Landlord or its managing agent or for any other reason)
shall not constitute a waiver of Landlord's right to ultimately collect such
amount, nor a waiver of Landlord's right to bill Tenant at any subsequent time
retroactively for the entire amount so unbilled, which unbilled amount shall be
payable within thirty (30) days after being so billed.
51. REAL ESTATE TAX ESCALATION:
---------------------------
Tenant shall pay to Landlord, as additional rent, tax escalation in
accordance with this Article.
A. As used in this Article, the following definitions shall apply:
1. The term "Base Tax Year" as hereinafter set forth for the
determination of real estate tax escalation shall mean the New York City real
estate tax year commencing July 1, 1990 and ending June 30, 1991.
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<PAGE> 14
2. The term "The Percentage" shall be deemed to mean .7 percent.
3. The term "the Building Project" shall mean all of the land together
with the improvements thereon known as 90 West Street, New York, New York.
4. The term "Comparative Year" shall mean the respective twelve (12)
months following the Base Tax Year, and each subsequent period of twelve (12)
months.
5. The term "Real Estate Taxes" shall mean the total of all taxes and
special or other assessments and/or vault charges levied, assessed or imposed at
any time by any governmental authority upon or against the Building Project, and
also any tax or assessment levied, assessed or imposed at any time by any
governmental authority in connection with the receipt of income or rents from
said Building Project to the extent that same shall be in lieu of all or a
portion of any of the aforesaid taxes or assessments, or additions or increases
thereof, upon or against said Building Project. If, due to a future change in
the method of taxation or in the taxing authority, or for any other reason, a
franchise, income, transit, profit or other tax or governmental imposition,
however designated, shall be levied against Landlord in substitution in whole or
in part for the Real Estate Taxes, or in lieu of additions to or increases of
said Real Estate Taxes, then such franchise, income, transit, profit or other
tax or governmental imposition shall be deemed to be included within the
definition of "Real Estate Taxes" for the purposes hereof. As to special
assessments which are payable over a period of time extending beyond the term of
this Lease, only a pro rata portion thereof, covering the portion of the terms
of this Lease unexpired at the time of the imposition of such assessment, shall
be included in "Real Estate Taxes". If, by law, any assessment may be paid in
installments, then, for the purposes hereof (a) such assessment shall be deemed
to have been payable in the maximum number of installments permitted by law and
(b) there shall be included .in Real Estate Taxes, for each Comparative Year in
which such installments may be paid, the installments of such assessment so
becoming payable during such Comparative Year, together with interest payable
during such Comparative Year. If there is imposed an income tax measured by
rental income, the Building will be considered the only asset owned by Landlord.
6. The phrase "Real Estate Taxes payable during the Base Tax Year"
shall mean that amount obtained by multiplying the valuation actually used by
the City of New York, of the land and building of the Building Project (whether
same be actual or a transitional assessment), for purposes of billing Real
Estate Taxes during the Base Tax Year by the Base Tax Year rate for each $100.00
for such valuation.
B. In the event that the Real Estate Taxes payable for any Comparative Year
shall exceed the amount of such Real Estate Taxes payable during the Base Tax
Year, Tenant shall pay to Landlord, as additional rent for such Comparative
Year, an amount equal to The Percentage multiplied by the difference between the
Base Tax Year and the Comparative Year (the "Excess"). By or after the start of
the Comparative Year following the Base Tax Year, and by or after the start of
each Comparative Year thereafter, Landlord shall furnish to Tenant a statement
of the Real Estate Taxes payable during the Base Year and each Comparative Year,
which statement shall reflect the amount to be paid by the Tenant pursuant to
this paragraph 51. Tenant's obligation to pay the amount herein provided for
shall survive the expiration or earlier termination of this Lease.
C. The amount due pursuant to the calculation provided for in
sub-paragraph B above shall be due and payable within ten (10)
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<PAGE> 15
days after Landlord shall have delivered to Tenant a statement setting forth the
amount of the Excess and the basis therefor. Bills for such Taxes shall be
sufficient evidence of amount, for the purpose of calculating The Percentage. In
the event Tenant fails to pay its proportionate share when due, Landlord shall
be entitled, with respect thereto, to any and all remedies to which Landlord may
be entitled under this Lease for default in the payment of rent. The failure of
Landlord to bill Tenant for the additional rent due in any fiscal year shall not
prejudice the right of Landlord to subsequently bill Tenant for such fiscal year
or any subsequent fiscal year.
D. Should the Real Estate Taxes payable during the Base Tax Year be reduced
by final determination of legal proceedings, settlement or otherwise, then, the
Real Estate Taxes payable during the Base Tax Year shall be correspondingly
revised, the additional rent theretofore paid or payable hereunder for all
Comparative Years shall be recomputed on the basis of such reduction, and Tenant
shall pay to Landlord as additional rent, within ten (10) days after being
billed therefor, any deficiency between the amount of such additional rent as
theretofore computed and the amount thereof due as the result of such
recomputations. Should the Real Estate Taxes payable during the Base Tax Year be
increased by such final determination of legal proceedings, settlement or
otherwise, then appropriate recomputation and adjustment also shall be made and
the amount due by the Landlord to the Tenant shall be paid within ten (10) days
after the recomputation. Should the Real Estate Taxes paid during any
Comparative Year be increased or decreased by a final determination of legal
proceedings, settlement or otherwise, then an appropriate recomputation and
adjustment shall be made between the Landlord and Tenant and any amount owed by
the Tenant shall be paid within ten (10) days after the Tenant is billed
therefor and be deemed additional rent, and any amount owed by the Landlord to
the Tenant shall be paid within ten (10) days of the recomputation.
E. Upon the date of any expiration or termination of this Lease (except
termination because of Tenant's default), whether the same be the date herein
above set forth for the expiration of the term or any prior or subsequent date,
a proportionate share of said additional rent for the comparative year during
which such expiration or termination occurs shall immediately become due and
payable by Tenant to Landlord, if not theretofore already billed and paid. The
said proportionate share shall be based upon the length of time that this Lease
shall have been in existence during such Comparative Year. Landlord shall, as
soon as reasonably practicable, compute the additional rent due from Tenant, as
aforesaid, which computations shall either be based on that Comparative Year's
actual figures or be an estimate based upon the most recent statements prepared
by Landlord and furnished to Tenant. If an estimate is used, then Landlord shall
cause statements to be prepared on the basis of the Comparative Year's actual
figures as soon as they are available, and within ten (10) days after such
statement or statements are prepared by Landlord and furnished to Tenant,
Landlord and Tenant shall make appropriate adjustments of any estimated payments
theretofore made, which shall survive any expiration or termination of this
Lease.
F. Any delay or failure of Landlord in billing for any additional rent
shall not constitute a waiver of or in any way impair the continuing obligation
of Tenant to pay such additional rent.
52. LATE PAYMENT CLAUSE:
--------------------
It is agreed that the rental under this Lease is due and payable in equal
monthly installments in advance on the first day of each month during the entire
lease term. In the event that any monthly installment of rent, or any other
payment required to
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<PAGE> 16
be made by the Tenant under this Lease shall be overdue more than ten (10) days
a late charge of 4(cent) for each dollar so overdue may be charged by the
Landlord for each month, or fraction of each month, from its due date until
paid, for the purpose of defraying the expenses incurred in handling delinquent
payments.
53. ATTORNMENT:
-----------
A. Tenant agrees that if by reason of default on the part of Landlord
herein, under any ground or underlying lease or any leasehold mortgage affecting
Landlord's interest (as ground lessee), a ground or underlying lessor or a
leasehold mortgagee shall enter into and become possessed of the real property
of which the Demised Premises form a part, or any part or parts of such real
property, either through possession or foreclosure action or proceedings, or
through the issuance and delivery of a new lease of the Premises covered by the
ground or underlying lease to said leasehold mortgagee, then, if this Lease is
in full force and effect at such time, Tenant shall attorn to such lessor or
such leasehold mortgagee as its Landlord; and in such event, such lessor or
leasehold mortgagee shall not be liable to Tenant for any defaults theretofore
committed by Landlord and no such default shall give rise to any rights of
offset or deduction against the rents payable under this Lease.
B. The provisions for attornment hereinbefore set forth shall not require
the execution of any further instrument. However, if such lessor or mortgagee to
which Tenant agrees to attorn, as aforesaid, reasonably requests a further
instrument expressing such attornment, Tenant agrees to execute the same
promptly and if Tenant fails so to do, Tenant hereby appoints Landlord Tenant's
attorney-in-fact to execute any such instrument for and on behalf of Tenant.
54. ENTIRE AGREEMENT:
-----------------
A. This Lease contains the entire agreement between the parties, and any
agreement hereafter made shall not operate to change, modify, or discharge this
Lease in whole or in part unless such agreement is in writing and signed by the
party sought to be charged therewith.
B. Tenant expressly acknowledges and agrees that Landlord and its agents
have not made and are not making, and Tenant, in executing and delivering this
Lease, is not relying upon, any warranties, representations, promises or
statements, except to the extent that the same are expressly set forth in this
Lease or in any other written agreement which may be made between the parties
concurrently with the execution and delivery of this Lease and shall expressly
refer to this Lease.
C. This Lease shall be governed in all respects by the laws of the State
of New York.
55. SAVING PROVISION:
-----------------
If any provision of this Lease, or its application to any situation shall
be invalid or unenforceable to any extent, the remainder of this Lease, or the
application thereof to situations other than that as to which is invalid or
unenforceable, shall be not affected thereby, and every other provision of this
Lease shall be valid and enforceable to the fullest extent permitted by Law.
56. LEASE NOT BINDING UNLESS EXECUTED:
----------------------------------
Submission by Landlord of the within Lease for execution by Tenant, shall
confer no rights nor impose any obligations on either party unless and until
both Landlord and Tenant shall have executed this Lease and duplicate originals
thereof shall have been delivered to the respective parties.
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<PAGE> 17
57. ASSIGNMENT AND SUBLETTING, MORTGAGING:
--------------------------------------
A. Tenant, for itself, its heirs, distributees, executors, administrators,
legal representatives, successors and assigns, expressly covenants that it shall
not assign, or mortgage or otherwise encumber, all or any part of its interest
in this Lease, sublet the Demised Premises, in whole or in part, or suffer or
permit the Demised Premises or any part thereof to be used by others, without
the prior written consent of Landlord in each instance.
B. If Tenant shall desire to assign its interest in this Lease or to sublet
the Demised Premises, the Tenant shall submit to Landlord a written request for
Landlord's consent to such assignment or subletting, which request shall be
accompanied by the following information: (i) the name and address of the
proposed assignee or subtenant; (ii) the terms and conditions of the proposed
assignment or subletting; (iii) the nature and character of the business of the
proposed assignee or subtenant and its proposed use of the Demised Premises; and
(iv) current financial information and any other information Landlord may
reasonably request with respect to the proposed assignee or subtenant. Landlord,
by notice given to Tenant within thirty (30) days after receipt of Tenant's
request for consent, may terminate this Lease on a date to be specified in said
notice (the "Termination Date"), which date shall be not earlier than one (1)
day before the effective date of the proposed assignment or subletting nor later
than sixty-one (61) days after said effective date. Tenant shall vacate and
surrender the Demised Premises on or before the Termination Date and the term of
this Lease shall end on the Termination Date as if it were the Expiration Date.
C. If Landlord shall not exercise its option to terminate this Lease
pursuant to subsection B above, Landlord shall not unreasonably withhold its
consent to the proposed assignment or subletting for the use permitted in this
Lease, provided that:
(1) the Demised Premises shall not, without Landlord's prior consent,
have been listed or otherwise publicly advertised for assignment or subletting
at a rental rate lower than the higher of (a) the Fixed Annual Rent and all
Additional Rent then payable, or (b) the then prevailing rental rate for other
space in the Building, and Tenant shall not enter into any sublease at a lower
rental rate than 75% of the the Fixed Annual Rent and all Additional Rent then
payable;
(2) Tenant shall not then be in default hereunder beyond the
expiration of any applicable grace period;
(3) the proposed assignee or subtenant shall have a financial
standing, be of a character, be engaged in a business, and propose to use the
Demised Premises, in a manner in keeping with the standards of the Building;
(4) the proposed assignee or subtenant shall not then be a tenant,
subtenant or assignee of any space in the Building, nor shall the proposed
assignee or subtenant be a person or entity with whom Landlord is then
negotiating to lease space in the Building;
(5) the character of the business to be conducted in the Demised
Premises by the proposed assignee or subtenant shall not be likely to
substantially increase Operating Expenses or Building Energy Costs or elevators
in the Building;
(6) in case of subletting, the subtenant shall be expressly subject to
all of the obligations of Tenant under this Lease other than to pay rent and
Additional Rent and the further condition and restriction that such sublease
shall not be
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<PAGE> 18
assigned, encumbered or otherwise transferred or the Demised Premises further
sublet by the subtenant in whole or in part, or any part thereof suffered or
permitted by the subtenant to be used or occupied by others, without the prior
written consent of Landlord in each instance;
(7) no subletting shall end later than one (1) day before the
Expiration Date nor shall any subletting be for a term of less than two (2)
years unless it commences less than two (2) years before the Expiration Date;
(8) no subletting shall be for less than the entire Demised Premises;
and
(9) Tenant shall reimburse Landlord on demand for any costs, including
reasonable attorneys' fees and disbursements, that may be incurred by Landlord
in connection with said assignment or sublease.
If there is a dispute between Landlord and Tenant as to the reasonableness of
Landlord's refusal to consent to any subletting or assignment, such dispute
shall be determined by arbitration in The City of New York in accordance with
the prevailing rules of the American Arbitration Association. The arbitrators
shall be bound by the provisions of this Lease and shall not add to, subtract
from, or otherwise modify such provisions. Notwithstanding any contrary
provisions hereof, Tenant hereby waives any claim against Landlord for money
damages which it may have based upon any assertion that Landlord has
unreasonably withheld or unreasonably delayed any consent to any assignment or a
subletting pursuant to this Article. Tenant agrees that its sole remedy shall be
an action or proceeding to enforce such provision or for specific performance.
D. Every subletting hereunder is subject to the express condition, and by
accepting a sublease hereunder each subtenant shall be conclusively deemed to
have agreed, that if this Lease should be terminated prior to the Expiration
Date or if Landlord should succeed to any portion of Tenant's estate in the
Demised Premises, then at Landlord's election such subtenant shall either
surrender that portion of the Demised Premises to Landlord within sixty (60)
days of Landlord's request therefor, or shall attorn to and recognize Landlord
as such subtenant's landlord under such sublease, and such subtenant shall
promptly execute and deliver any instrument Landlord may reasonably request to
evidence such attornment.
E. Tenant shall deliver to Landlord a copy of each sublease or assignment
made hereunder within ten (10) days after the date of its execution. Tenant
shall remain fully liable for the performance of all of Tenant's obligations
hereunder notwithstanding any subletting or assignment provided for herein and,
without limiting the generality of the foregoing, shall remain fully responsible
and liable to Landlord for all acts and omissions of any subtenant, assignee or
anyone claiming by, through or under any subtenant or assignee which shall be in
violation of any of the obligations of this Lease, and any such violation shall
be deemed to be a violation by Tenant. Notwithstanding any assignment and
assumption by the assignee of the obligations of Tenant hereunder, Tenant herein
named, and each immediate or remote successor in interest of Tenant herein
named, shall remain liable jointly and severally (as a primary obligor) with its
assignee and all subsequent assignees for the performance of Tenant's
obligations hereunder, and shall remain fully and directly responsible and
liable to Landlord for all acts and omissions on the part of any assignee
subsequent to it in violation of any of the obligations of this Lease.
F. Notwithstanding anything to the contrary contained in this Lease, no
assignment of Tenant's interest in this Lease shall be binding upon Landlord
unless the assignee, and, if the
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<PAGE> 19
assignee is a partnership, the individual partners thereof, shall execute and
deliver to Landlord an agreement, in recordable form, whereby such assignee
agrees unconditionally to be personally bound by and to perform all of the
obligations of Tenant hereunder from and after the date of such assignment and
further expressly agrees that notwithstanding such assignment the provisions of
this Article shall continue to be binding upon such assignee with respect to all
future assignments and transfers.
G. If Landlord shall have consented to any assignment or subletting, or if
there is any transfer of this Lease by operation of law or otherwise, and if
Tenant shall receive any consideration from its assignee or subtenant for or in
connection with the assignment of Tenant's interest in this Lease or the
subletting of the Demised Premises, as the case may be (including, but not
limited to, sums paid for the sale or rental of Tenant's fixtures, leasehold
improvements, equipment, furniture or other personal property less, in the case
of a sale thereof, the then net unamortized or undepreciated cost thereof
determined on the basis of Tenant's federal income tax returns) or, if Tenant
shall sublet the Demised Premises at a rental rate (including additional rent)
which shall exceed the Fixed Annual Rent and Additional Rent then payable
hereunder, Tenant shall pay to Landlord, as Additional Rent hereunder, the full
amount of such excess. In calculating the amount to be paid to Landlord as
Additional Rent pursuant to this subparagraph G such amount shall be reduced by
the reasonable cost of such assignment and subletting including brokerage
commissions, counsel fees, advertising expenses, any taxes payable and any other
reasonable costs associated with such an assignment or subletting.
H. Any transfer, by operation of law or otherwise, of the interest of
Tenant in this Lease (in whole or in part) or of a fifty percent (50%) or
greater interest in Tenant (whether stock, partnership interest or otherwise)
except for such a transfer by operation of law or by bequest on the death of a
principal, shall be deemed an assignment of this Lease within the meaning of
this Article. (The issuance of shares of such stock to other than the existing
shareholders shall be deemed to be a transfer of such stock for the purposes of
this Article.) If there has been a previous transfer of less than fifty percent
(50%) interest in Tenant, any other transfer of an interest in Tenant shall be
deemed an assignment of the interest of Tenant in this Lease within the meaning
of this Article. Anything contained herein.to the contrary notwithstanding, the
provisions of this section H shall not apply to the sale of shares by persons
other than those deemed "insiders" within the meaning of the Securities Exchange
Act of 1934, as amended, where such sale is effected through any recognized
exchange or through the "over-the-counter market", unless the same be related
to, result in or be the result of any merger, consolidation, tender offer,
takeover or other activity involving the acquisition of control of Tenant by
another unrelated corporation or legal entity. Notwithstanding the foregoing,
companies related to and controlled by Tenant, may use desk space in the Demised
Premises without the necessity of obtaining the consent of the Landlord. In
addition Tenant shall be permitted, without obtaining the consent of the
Landlord, to (i) assign the lease or sublet the Demised Premises to any entity
which controls or is controlled by Tenant or is under common control or (ii)
transfer Tenant's interest in this lease to any corporation or partnership into
which Tenant is merged or consolidated or to which substantially all of Tenant's
assets are transferred provided that the resulting business entity has a net
worth calculated according to generally accepted accounting principles, equal to
the greater of Tenant's net worth (i) immediately prior to the merger,
consolidation or transfer or (ii) Tenant's net worth on the execution of this
lease, and is engaged in the same 'business as Tenant. All references to
"Tenant" in this section H shall also be deemed to refer to any immediate or
remote subtenant or assignee of Tenant.
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<PAGE> 20
statement to Tenant therefore, and if any expenditure is incurred in collecting
such obligations, such sum shall be recoverable by Landlord as additional
damages.
61. SPECIAL SERVICES:
-----------------
Upon Tenant's request, Landlord or its managing agent may, but, except as
otherwise expressly provided in this Lease, shall not be obligated to, perform
or cause to be performed for Tenant from time to time various construction,
repair and maintenance work, moving services and other types of work or services
in or about the Demised Premises and the building. If such work or services
shall be performed for Tenant, Tenant agrees to pay therefor either the standard
charges of Landlord or its managing agent in effect from time to time, if any,
or the amount agreed to be paid for such services. Tenant agrees to pay all such
charges within ten (10) days after Landlord or Landlord's managing agent has
submitted a bill therefor and, unless otherwise expressly provided in writing,
such charges shall be payable as additional rental under this Lease and in the
event of a default hereunder that Landlord would have in the event of a default
in the payment of annual rental.
62. MODIFICATION FOR MORTGAGE:
--------------------------
If, in connection with obtaining financing or refinancing for the Building
of which the Demised Premises form a part, a banking, insurance or other
institution lender shall request reasonable modifications to this Lease as a
condition to such financing or refinancing, Tenant will not unreasonably
withhold, delay or defer its consent thereto, provided that such modifications
do not diminish the obligations of Landlord or increase the obligations of
Tenant hereunder (except, perhaps, to the extent that Tenant may be required to
give notices of any defaults by Landlord to such lender and/or permit the curing
of such default by such lender with the granting of such additional time for
such curing as may be required for such lender to get possession of the said
Building) or adversely affect the leasehold interest hereby created. In no event
shall a requirement that the consent of any such lender be given for any
modification, termination or surrender of the Lease be deemed to adversely
affect the leasehold interest hereby created.
63. CLEANING SERVICES:
------------------
The rental herein provides for building standard cleaning services, which
includes daily office cleaning, removal of trash and window cleaning but all
waxing, washing of floors, cleaning of blinds and light fixtures, if any, shall
be done at the sole cost and expense of Tenant.
64. EXTERMINATION:
--------------
Tenant, at its sole cost and expense, shall maintain such extermination
services as are necessary to keep the Demised Premises free of pests and vermin
at all times. Tenant shall utilize for such extermination services only
contractors designated by Landlord in Landlord's sole discretion.
65. ODORS:
------
A. Tenant shall not permit any unusual or obnoxious odors to emanate from
the Demised Premises. Tenant will, within five (5) days after written notice
from Landlord, install at its own cost and expense, reasonable control devices
or procedures to eliminate such odors, if any. In the event such condition is
not remedied within said five-day period, Landlord may, at its discretion,
either (a) cure such condition and thereafter add the cost end expense incurred
by Landlord therefor to the next monthly rental to become due and Tenant shall
pay said amount as additional rent; or (b) treat such failure on the part of
Tenant
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<PAGE> 21
to eliminate such obnoxious odors as a material default hereunder entitling.
Landlord to any of its remedies pursuant to the terms of this Lease. Landlord
shall have the right to enter the Demised Premises at any time to inspect the
same and ascertain whether they are clean and free of odors.
B. Tenant covenants that it will hold Landlord harmless against all claims,
damages or causes of action for damages arising after the commencement of the
term of this Lease and will indemnify Landlord for all such suits, orders or
decrees and judgments entered thereon brought on account of any such permeation
from the Demised Premises of unusual or objectionable odors, and Tenant shall
further covenant to pay any attorney's fees or other legal expenses made
necessary in connection with any claim or suit as aforesaid.
C. In the event Landlord requires Tenant to install reasonable control
devices or procedures to eliminate such odors, the material, size and location
of such installations shall be subject to Landlord's prior written approval.
Such work shall not be commenced until plan and specifications therefor have
been submitted to and approved by Landlord.
66. FLOOR LOADS:
------------
Tenant shall not place a load upon any floor of the Demised Premises
exceeding the floor load per square foot area which it was designed to carry and
which is allowed by law. Tenant agrees to position all machines, safes, business
machines, printing equipment or other mechanical equipment in such locations as
to minimize noise and vibration emanating therefrom. All of such installations
shall be placed and maintained by Tenant, at Tenant's sole expense, in setting
sufficient, in Landlord's sole judgment, to absorb and prevent vibration, noise
and annoyance to other Tenants in Landlord's building.
All of such machines and/or equipment installed by Tenant in the Demised
Premises will not at any time be in violation of existing laws affecting the
Demised Premises or in violation of the Certificate of Occupancy issued for the
building of which the Demised Premises are a part.
67. HEAT AND AIR CONDITIONING
-------------------------
(a) Any use of the Demised Premises, or any part thereof, or rearrangement
of partitioning in a manner that interferes with normal operation of the heat
and air-conditioning systems (hereinafter called the systems) servicing the
same, may require changes in-such systems. Such changes, so occasioned, shall be
made by Tenant, at its expense, subject to Landlord's prior written approval of
such changes, which approval may be withheld for any reason. Tenant shall not
make any change, alteration, addition or substitution to the air-conditioning
system without Landlord's prior written approval, which may be withheld for any
reason.
(b) Landlord shall maintain and operate the heating system and shall,
subject to the design specifications of the heating system and to energy
conservation requirements of, and voluntary energy conservation programs
sponsored by, governmental authorities, furnish heat (hereinafter called "Heat
Service") to the Demised Premises. Heat Service shall be provided, as may be
required for comfortable occupancy of the Demised Premises, during the regular
hours (that is, between the hours of 8:00 A.M. and 6:00 P.M.) of business days
(which term is used herein to mean all days except Saturday, Sunday and those
days that are observed by the State or Federal government as legal holidays and
those days designated as holidays by the applicable building service union
employees' contract) throughout the year. If Tenant shall require Heat Service
during hours other than the regular hours or on days other than business days
(hereinafter
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<PAGE> 22
called after hours service), Landlord shall furnish after hours service upon
reasonable advance notice from Tenant, and Tenant shall pay, on demand,
Landlord's established charges therefor.
(c) Air conditioning (hereinafter referred to as "A/C service") shall be
supplied to the Demised premises by one or more package air conditioning units
(hereinafter referred to as the "Unit") located on the floor of which the
Demised Premises form a part. Landlord shall maintain and operate the air
conditioning system servicing the demised Premises, and shall, subject to the
design specifications of the systems and to energy conservation requirements of,
and voluntary energy conservation programs sponsored by, governmental
authorities, furnish A/C service in the Demised Premises. A/C service shall be
provided, as may be required for comfortable occupancy of the Demises Premises,
during regular hours (that is, between the hours of 8:00 A.M. and 6:00 P.M.) of
business days (which term is used herein to mean all days except Saturday,
Sundays, those days that are observed by the State or Federal government as
legal holidays and those days designated as holidays by the applicable building
service union employees' contract) from May 15 through September 15 of
each-year. If Tenant shall require A/C service during hours other than regular
hours or on days other than business day (hereinafter called "after hours
service"), Landlord shall furnish such after hours service upon reasonable
advance notice from Tenant, and Tenant shall pay, on demand, Landlord's
established charge therefor.
(d) With respect to the A/C system, Tenant shall pay its pro-rata share
(hereinafter referred to as "Tenant's A/C Share") of the maintenance, repair and
replacement costs, incurred by Landlord in order to properly and continuously
maintain the Unit. Tenant's A/C Share shall be expressed as a percentage and
shall be computed on the basis of a fraction, the numerator of which shall be
the Multiplication Factor and the denominator of which shall be the total square
foot area of the floor serviced by such Unit (hereinafter referred to as the
"Shared A/C Space"). Landlord, using the formula set forth above, shall compute
Tenant's A/C Share as of the commencement of the term. Landlord shall recompute
Tenant's A/C Share after a change in occupancy in the Share A/C Share occurs,
and shall send Tenant notice thereof, such recomputation to be retroactive to
the date of such change in occupancy. Tenant's A/C Share shall be payable by
Tenant as Additional Rent within ten (10) days after the rendition by Landlord
of bills therefor. Landlord shall pass along to the Tenant any Warranty that it
has covering the Unit.
(e) If any permits or licenses shall be required for the operation Of any
air-conditioning unit in or service to the Demised Premises, Landlord shall have
the option of obtaining the same on Tenant's behalf and at Tenant's expense, or
by written notice to Tenant requiring Tenant, at Tenant's expense, to obtain and
maintain any such permits or licenses.
68. INTENTIONALLY OMITTED:
----------------------
69. CONDITIONAL LIMITATION:
-----------------------
A. If Tenant shall default in the payment of the Base Rent reserved herein,
or any item of additional rent herein mentioned, or any part of either on any
day upon which the same ought to be paid and such default continues for more
than five (5) days after written notice of such default by Landlord to Tenant
then Landlord may thereafter serve a written three (3) days' notice of
cancellation of this Lease and the term hereunder shall end and expire as fully
and completely as if the expiration of such three (3) day period were the day
herein definitely fixed for the end and expiration of this Lease end the term
thereof, and Tenant shall then quit and surrender the Demised Premises to
Landlord, but Tenant shall remain liable as elsewhere provided in this Lease.
-18-
<PAGE> 23
70. HOLD-OVER:
---------
If Tenant holds over in possession after the expiration or sooner
termination of the original term or of any extended term of this Lease, such
holding over shall not be deemed to extend the term or renew the Lease, but such
holding over thereafter shall continue upon the covenants and conditions. herein
set forth except that the charge for use and occupancy of such holding over for
each calendar month or part thereof (even if such part shall be a small fraction
of a calendar month) shall be the sum of:
(a) 1/12 of the highest annual rent rate set forth on page one of this
Lease, times 2.5, plus = 841.25
(b) 1/12 of the net increase, if any, in annual fixed rental due solely to
increases in the cost of the value of electric service furnished to
the premises in effect on the last day of the term of the Lease, plus
(c) 1/12 of all other items of annual additional rental, which annual
additional rental would have been payable pursuant to this Lease had
this lease not expired, plus
(d) those other items of additional rent (not annual additional rent)
which would have been payable monthly pursuant to this Lease, had this
lease not expired,
which total sum Tenant agrees to pay to Landlord promptly upon demand, in full,
without set-off or deduction. Neither the billing nor the collection of use and
occupancy in the above amount shall be deemed a waiver of any right of Landlord
to collect damages for Tenant's failure to vacate the Demised Premises after the
expiration or sooner termination of this Lease. The aforesaid provisions of this
Article shall survive the expiration or sooner termination of this Lease.
71. LIMITATION ON RENT:
-------------------
If at the commencement of, or at any time during the term of this Lease,
the rent reserved in this Lease is not fully collectible by reason of any
Federal, State, County or City law, proclamation, order or regulation, or
direction of a public officer or body pursuant to law, Tenant agrees to take
such steps as Landlord may request to permit Landlord to collect the maximum
rents which may be legally permissible from time to time during the continuance
of such legal rent restriction (but not in excess of the amounts reserved
therefor under this Lease). Upon the termination of such legal rent restriction,
Tenant shall pay to Landlord, to the extent permitted by law, an amount equal to
(a) the restriction less (b) the rents paid by Tenant to Landlord during the
period such legal rent restriction was in effect.
72. BUILDING DIRECTORY:
-------------------
At the written request of Tenant, Landlord shall list on the building's
directory the name of Tenant, any trade name under which Tenant has the right to
operate, any other entity permitted to occupy any portion of the Demised
Premises under the terms of this lease, up to a maximum of three (3) listings
without charge to the Tenant. If requested by Tenant, Landlord may (but shall
not be required to) list the name of Tenant's subsidiaries and affiliates;
however, the listing of any name other than that of Tenant shall neither grant
such party or entity any right or interest in this lease or in the Demised
Premises nor constitute Landlord's consent to any assignment or sublease to, or
occupancy of the Demised Premises by, such party or entity. Except for the name
of Tenant, any such listing may be terminated by Landlord, at any time, without
notice.
-19-
<PAGE> 24
73. ADDITIONAL RENT:
----------------
All payments other than the annual rental to be made by Tenant pursuant to
this Lease shall be deemed additional rent and, in the event of any nonpayment
thereof, Landlord shall have all rights and remedies provided for herein or by
law for nonpayment of rent. Tenant shall have one hundred twenty (120) days from
its receipt of any additional rent statement to notify Landlord, by certified
mail, return receipt requested, that it disputes the correctness of such
statement. After the expiration of such one hundred twenty (120) day period,
such statement shall be binding and conclusive upon Tenant. If Tenant disputes
the correctness of any such statement, Tenant shall, as a condition precedent to
its right to contest such correctness, make payment of the additional rent
billed, without prejudice to its position. If such dispute is finally determined
in Tenant's favor, Landlord shall refund to Tenant the amount overpaid.
74. USE:
----
Tenant acknowledges that the Demised Premises are located in a building
constituting a first-class office building. Tenant agrees that it will operate
the Demised Premises in a manner consistent with such a building.
75. SIGNAGE:
--------
The Tenant shall not, without the prior written consent of the Landlord,
install nor continue the use of any signs on the windows of the Demised
Premises or on the door or in the hallways on the floor on which the Demised
Premises are located. The Tenant shall submit to the Landlord a rendering of any
new proposed sign which shall be uniform to those in the building. If the
Landlord gives its consent to a sign as provided for in this paragraph the
Tenant, at the Tenant's own cost and expense, shall keep such sign in good and
working condition. In addition, the Tenant shall pay, at its own cost and
expense, the Landlord's cost of the sign and its installation.
76. MECHANIC'S LIENS:
-----------------
A. Notice is hereby given that the Landlord shall not, under any
circumstances, be liable to pay for any work, labor or services rendered or
materials furnished to or for the account of the Tenant upon or in connection
with the Demised Premises, and that no mechanic's or other liens for work, labor
or services rendered or materials furnished to or for the account of the Tenant
shall, under any circumstances, attach to or affect the reversionary or other
estate or interest of the Landlord in or to the Demised Premises or in and to
any alterations, repairs or improvements to be erected or made thereon.
B. The Tenant shall not suffer nor permit, during the term hereby granted,
any mechanic's or other liens for work, labor, services or materials rendered or
furnished to or for the account of the Tenant upon or in connection with the
Demised Premises or to any improvements erected or to be erected upon the same,
or any portion thereof; and it is understood that Tenant shall obtain and
deliver unconditional written waivers of mechanic's liens as specifically set
forth in Paragraph 3 of the printed form hereof. Nevertheless, Tenant shall hold
the Landlord and the Demised Premises harmless from all liens or charges, of
whatever nature or description, arising from, or in consequence of, any
alterations or improvements that the Tenant shall make, or cause to be made,
upon the Demised Premises.
C. If a notice of mechanic's lien be filed against the Demised Premises for
labor or materials alleged to have been furnished, or to be furnished at the
demised premises to or for
-20-
<PAGE> 25
the Lessee or to or for someone claiming under the Lessee; and if the Lessee
shall fail to take such action as shall cause such lien to be discharged within
ten (10) days after the filing of such notice; the Lessor may pay the amount of
such lien or discharge' it by deposit or by bonding, proceeding, and in the
event of such deposit or bonding proceedings, the Lessor may require the lienor
to prosecute an appropriate action to enforce the lienor's claim. In such case,
the Lessor may pay any judgment recovered on such claim. Any amount. paid or
expense incurred by the Lessor, as in the clause provided, and any expense
incurred or sum of money paid by the Lessor by reason of the failure of the
Lessee to comply with any provision of this Lease, or in defending any such
action, shall be deemed to be additional rent for the Demised Premises, and
shall be due and payable by the Lessee to the Lessor on the first day of the
next following month or at the option of the Lessor, on the first day of any
succeeding month. The receipt by the Lessor of any installment of the regular
stipulated rent hereunder or any of such additional rent shall not be a waiver
of any other additional rent then due.
77. TENANT'S LIABILITY FOR CONSTRUCTION:
------------------------------------
A. That in the event the Tenant performs any construction or alterations at
the Demised Premises, Landlord shall not be responsible for any structural
defect, latent or otherwise, in the premises, any equipment for the removal of
asbestos or change of conditions elsewhere in the building or in the premises
resulting from Tenant's construction or alteration, or for any damages to same
or to goods or things contained or placed thereon or in the vicinity thereof.
B. Tenant will indemnify and save Landlord harmless from and against any
and all liabilities, obligations, damages, penalties, claims, costs, charges and
expenses including reasonable attorney's fees, which may be imposed upon or
incurred by or asserted against Landlord by reason of any of the following
occurring during the terms of this Lease:
(i) any work or thing done by Tenant or any agent, contractor,
employee, licensee or invitee of Tenant in, on or about the demised premises or
any part thereof;
(ii) any use, non-use, possession, occupation, condition, operation,
maintenance or management by Tenant of the Demised Premises, yards or
passageways to and from the addition to the existing building;
(iii) all fines, suits, proceedings, claims, demands and actions or
any kind or nature whatsoever brought by anyone whomsoever arising or growing
out of or in any wise connection with the Tenant's use, operation and
maintenance or the Demised Premises;
(iv) any accident, injury, or damage to any person or property
occurring in the Demised Premises or any part thereof;
(v) any failure on the part of Tenant to perform or comply with any of
the agreements, terms, or conditions contained in this Lease on its part to be
performed or complied with. In the event that any action or proceeding shall be
brought by Landlord by reason of any. claim covered by this paragraph, Tenant,
upon written notice from Landlord, will at Tenant's sole cost and expense resist
or defend the same.
(vi) Tenant has been advised that Landlord makes no representation.
as to the load bearing capacity of the structure.
-21-
<PAGE> 26
78. TENANT'S WORK:
--------------
Prior to the Tenant commencing any work respecting any alteration or
improvement at the Demised Premises, Tenant shall satisfy each and every
conditions set forth below.
(1) Tenant shall, at its sole cost and expense, supply Landlord with
professionally prepared plans and specifications. Landlord hereby reserves the
right to require certain revisions of such plans and specifications respecting
the design and/or cosmetic features reflected therein, but further agrees not to
unreasonably delay or withhold its consent for Tenant to be able to proceed with
the anticipated work reflected on said plans and specifications.
(2) Subsequent to the delivery and approval by Landlord of Tenant's plans
and specifications, Tenant shall employ its own contractor in connection with
the construction to be performed at the Demised Premises in accordance with
those approved plans and specifications. Tenant agrees that all work to be
performed shall be done in accordance with good and sound building standards and
shall be further performed in a professional workmanlike manner. All of the
Tenant's work shall be done in accordance with all governmental regulations,
with the Tenant being responsible at its own cost and expense for obtaining
permits and approvals, including asbestos inspection and removal, if necessary,
as well as write-offs and compliance with the other provisions of this Lease.
Furthermore, Tenant agrees that all work to be performed by any of the trades
employed shall in no way affect work being performed at the building by Landlord
and the unions which Landlord's contractors' employees may be members of.
(3) Tenant shall provide Landlord with a payment and completion bond
covering any work to be performed by Tenant which runs in favor of Landlord, and
shall further issue to Landlord a hold harmless and indemnification agreement
relative to such proposed work.
(4) Tenant shall provide insurance coverage in amounts satisfactory to
Landlord which shall protect Landlord's interest during the course of
construction and, in addition thereto, Tenant shall provide Landlord with a
Certificate of Insurance reflecting such coverage, and the naming of Landlord as
additional insured.
In the event Tenant shall violate any of the above provisions, same shall
be considered a material breach under this Lease and Landlord shall be entitled
to immediately avail itself of all legal remedies that it is entitled to with
respect to such breach.
79. LANDLORD'S WORK:
----------------
A. Landlord shall perform the following work at its sole cost and
expense:
1. Paint the entire demised premises in building standard manner in
tenant's choice of building standard colors.
2. Carpet entire demised premises in building standard manner in Tenant's
choice of building standard colors.
3. Remove 50 linear feet of existing partitions and repair any ceiling
damage caused thereby.
4. Construct standard closet.
-22-
<PAGE> 27
B. The Demised Premises shall be deemed ready for occupancy. on the date
that Landlord's Work in the Demised Premises shall have been substantially
completed; and it shall be so deemed notwithstanding the fact that minor or
insubstantial details of construction, mechanical adjustment, or decoration
remain to be performed, the non-completion of which do not materially interfere
with Tenant's use of the Demised Premises.
80. SECURITY DEPOSIT:
-----------------
Tenant's security deposit under Tenant's existing lease for other premises
in the Building ("Prior Lease") shall be applied to the security required to be
paid pursuant to this Lease and, supplementing the provisions of Article 34 of
the printed portion of this Lease, the security deposit being held hereunder
shall bear interest payable to Tenant annually after deducting a 1%
administrative fee payable to Landlord.
81. SURRENDER OF LEASE FOR OTHER PREMISES:
--------------------------------------
Tenant is presently the lessee of premises in the Building of which the
Demised Premises is a part. Upon the commencement date of the term of this
Lease, Tenant shall be deemed to have surrendered the Prior Lease and shall
promptly vacate the premises covered by the Prior Lease. Upon Tenant vacating
said other premises and surrendering possession of said premises pursuant to the
terms of the Prior Lease, Landlord shall be deemed to have accepted such
surrender and neither party shall have any further obligation to the other in
respect of the Prior Lease except with respect to those matters specifically
stated in the Prior Lease to survive the expiration of the term thereof. If for
any reason whatsoever the termination of the Prior Lease shall hereafter be held
to be invalid, then Tenant shall have the right to terminate this lease upon
notice to Landlord.
82. TERM:
-----
The Term of this Lease, for which the Demised Premises are hereby leased,
shall commence (herein called the "Commencement Date") on a date which shall be
(i) the day on which the Demised Premises are. ready for occupancy (as defined
in Article 79) or (ii) the day Tenant, or anyone claiming under or through
Tenant, first occupies the Demised Premises for business, whichever occurs
earlier, and shall end on the last day of the month preceding the month in which
occurs the fifth (5th) anniversary of the Commencement Date (herein called the
"Expiration Date"), or shall end on such earlier date upon which said term may
expire or be cancelled or terminated pursuant to any of the conditions or
covenants of this Lease or pursuant to law. Promptly following the Commencement
Date, Tenant shall, at Landlord's request, enter into a supplementary agreement
in recordable form fixing the date of the Commencement Date.
83. LANDLORD'S INABILITY TO DELIVER POSSESSION:
-------------------------------------------
If Landlord is unable to deliver possession of the Demised Premises ready
for occupancy as defined in Article 79 within sixty (60) days of the date
hereof, Tenant may, by notice given within five (5) days after such sixty (60)
day period, terminate this lease and upon such termination, neither party shall
have any liability to other under the terms of this Lease.
/s/ Irwin Kahn
---------------------------------------
IRWIN KAHN, AS RECEIVER, LANDLORD
HANOVER CAPITAL PARTNERS, LTD.
By: /s/ ??????
-----------------------------------
-23-
<PAGE> 28
FIRST AMENDMENT OF LEASE
------------------------
THIS AGREEMENT, made as of the 1st day of July, 1996, between FGP 90 WEST
STREET, INC., a Delaware corporation, having an office at 292 Madison Avenue,
Fifth Floor, New York, New York 10017 ("LANDLORD"), and HANOVER CAPITAL
PARTNERS, LTD., a New York corporation having an office at 90 West Street, New
York, New York 10006 ("TENANT").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, by Agreement of Lease dated as of May 6, 1991, (the "LEASE"),
between Irwin Kahn, Landlord's predecessor-in-interest and Tenant, Landlord did
demise and let unto Tenant and Tenant did hire and take a portion of tim
fifteenth (15th) floor consisting of approximately 2,328 rentable square feet,
known as Suite 1508, as more particularly described in the Lease (the "DEMISED
PREMISES") in the building (the "BUILDING") known by the street address 90 West
Street, New York, New York; and
WHEREAS, Tenant desires to extend the term of the Lease, to remain in
possession of the Demised Premises, to retain possession of certain storage
space located on the sixth floor of the Building known as 6th floor storage
space "A" (hereinafter the "Storage Space") and to make certain other
modifications to the Lease, and Landlord is agreeable thereto on the terms and
conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants herein and for other
good and valuable consideration, the mutual receipt and legal sufficiency of
which is hereby acknowledged, the parties agree as follows:
1. Effective as of July 1, 1996, (the "Effective Date"), the Lease is
hereby amended such that the term of the lease, unless sooner terminated in
accordance with its terms, is extended through and including noon on November
30, 2001 ("Extended Term") upon all of the terms, covenants and conditions
therein (except as otherwise modified hereby).
2. Tenant hereby represents that it is in possession of and is fully
familiar with the condition of the Demised Premises and agrees to take the same
in its condition "as is"
1
<PAGE> 29
as of the Effective Date, and that Landlord shall have no obligation to alter,
repair or otherwise prepare fire same for Tenant's occupancy, except that
Landlord agrees at its sole cost and expense to do the following work
("Landlord's Work") in a building standard manner and with building standard
materials:
INSTALL THERMOSTATIC CONTROLS ON EACH RADIATOR UNIT LOCATED WITHIN THE DEMISED
PREMISES.
It is acknowledged that Landlord will undertake Landlord's Work while Tenant is
in occupancy of rite Demised Premises. Tenant agrees to comply with all requests
of Landlord in coordination of Landlord's Work (including, without limitation,
temporary relocation of Tenant's property and personnel) so that the same may be
done in a timely, safe and cost efficient manner.
3. Tenant represents anti warrants that it has dealt with no broker,
finder or like agent in connection with this First Amendment of Lease other than
The Galbreath Company, and Tenant does hereby agree to indemnify and hold
Landlord harmless of and from any and all loss, costs, (damage or expense
(including, without limitation, attorneys' fees and disbursements) incurred by
Landlord by reason of any claim of, or liability to, any other broker, finder or
like agent who) shall claim to have (dealt with Tenant in connection with this
First Amendment of Lease.
4. Tenant hereby acknowledges that Landlord is not in default under
the Lease. Tenant further releases Landlord from and hereby waives any present
or future claims arising from facts, circumstances or conditions occurring prior
to the execution hereof, including, but not limited to, any claims under the
Lease seeking any portion of any tax certiorari refunds received by Landlord or
its predecessor(s) or to be received by Landlord based upon challenges for the
1995/1996 New York City real estate tax year or before and any claims for
damages in connection with the Building's HVAC system or the units in the
Demised Premises.
5. Article 47 of the Lease is hereby deleted in its entirety and
tile following is substituted therefor:
"47. INSURANCE. Tenant, at its sole cost and expense, shall tiering the
term hereof, procure, pay for and keep in full force and effect: (i)
commercial general liability insurance or comprehensive general liability
insurance with broad form endorsement with respect to rite Demised Premises
and the operations of Tenant and any concessionaires, contractors or
subtenants of Tenant in, on or about the Demised Premises in which the
limits of coverage
2
<PAGE> 30
shall be not less than Two Million Dollars ($2,000,000) combined single limit
per occurrence; (ii) statutory workers' compensation coverage anti employers'
liability as required by state law; (iii) all risk property insurance insuring
against the perils of fire, extended coverage, theft, vandalism, malicious
mischief and, if applicable, boiler and machinery coverage, written at
replacement cost value in an adequate amount to avoid coinsurance and a
replacement cost endorsement insuring property owned by Tenant, for which Tenant
is legally liable or that was installed at Tenant's expense, and which is
located in the building, including, without limitation, furniture and
furnishings, equipment, trade fixtures (other than tenant improvements installed
by Landlord), Tenant's merchandise, and all items of personal property of
Tenant, including property of Tenant's customers located on or in the Demised
Premises; (iv) with respect to alterations, improvements anti the like required
or permitted to be made by Tenant hereunder, contingent liability and builder's
risk insurance, in amounts reasonably satisfactory to Landlord, and Tenant will
require Tenant's contractors to carry appropriate insurance naming Landlord as
additional insured and otherwise in accordance with Landlord's requirements
therefor; (v) such other insurance as Tenant deems necessary to protect its
property and its business against all perils commonly insured against by prudent
tenants; (vi) if applicable, product liability coverage, including, without
limitation, liquor liability coverage and coverage for liability arising out of
the consumption of food and/or alcoholic beverages on or obtained at the Demised
Premises, of not less than Two Million Dollars ($2,000,000) per occurrence
bodily injury and death and property damage; and (vii) such oilier insurance
with respect to the Demised Premises and in such amounts as Landlord may from
time to time reasonably require against such oilier insurable hazards or risks
which at the time are commonly insured against in the case of property similar
to the Demised Premises and used as provided herein. The foregoing limits shall
be increased from time to time in the event that Landlord, in its reasonable
judgement, shall determine that the amounts of insurance are not adequate to pay
any claims that may be brought under the foregoing policies. All policies shall
be written on an occurrence basis and shall include coverage for continual or
repeated exposure to conditions which result in bodily injury or property damage
neither expected nor intended from the standpoint of the insured. Such policies
are to be written by a company having a general policy holder's rating of not
less than A and a rating in financial size of Category XI as rated in the most
current "Best's" insurance reports, and authorized and licensed to issue such
policies in the State where the Demised Premises are
3
<PAGE> 31
located. Any such insurance required of Tenant hereunder may be furnished by
Tenant under any blanket policy carried by it, providing the policy properly
allocates tile required limits to this Building, or under a separate policy
thereof. Each policy evidencing insurance as required to be carried by Tenant
pursuant to this Article shall contain the following provisions and/or clauses:
(i) A cross-liability clause; (ii) a provision that such policy and the coverage
evidenced thereby shall be primary and non-contributing with respect to any
policies carried by Landlord, and that any coverage carried by Landlord shall be
excess insurance; (iii) a provision including Landlord, Landlord's managing
agent and other parties (including mortgagees) designated by Landlord as
additional insureds (except with respect to workers' compensation insurance);
(iv) a waiver by the insurer of any right of subrogation against Landlord, its
agents, employees and representatives which arises or might arise by reason of
any payment under such policy or by reasons of any act or omission of Landlord,
its agents, employees, or representatives; (v) a severability clause; and (vi) a
provision that the insurer will not cancel, materially change, reduce coverage
or fail to renew the coverage provided by such policy without first giving
Landlord and all additional insureds thirty (30) days' prior written notice.
A copy of each paid-up policy or certificate of insurance with evidence of
payment and appropriately authenticated by the insurer or its authorized agent
certifying that such policy has been issued providing the coverage required by
this Article and containing provisions specified herein, shall be delivered to
Landlord not more than fifteen (15) days after the Effective Date and, upon
renewals, not less than thirty (30) clays prior to the expiration of such
coverage.
If Tenant fails to procure, maintain and/or pay for, at the times and for
tile durations specified in this Article, any insurance required by this
Article, or fails to carry insurance required by law or governmental
regulations, or fails to provide proof of all such insurance as required by the
Lease, as amended, Landlord may (but without obligation to do so) at anytime or
from time to time, and without notice, procure such insurance anti pay the
premiums therefor, in which event Tenant shall repay to Landlord, as additional
rent hereunder, all sums so paid by Landlord and any costs or expense incurred
by Landlord in connection therewith, together with an administrative charge
equal to ten percent (10%) of such cost or expense, within ten (10) days
following Landlord's written demand to Tenant for such payment. No such purchase
by Landlord shall be deemed a waiver of Tenant's default and Landlord may pursue
its hill rights and remedies on account of such default.
4
<PAGE> 32
Tenant shall not carry any stock of goods or do anything in or about the
Demised Premises which will in any way tend to increase the insurance rates on
the Demised Premises and/or the building in which the Demised Premises is
located and/or the contents thereof. Tenant agrees that it will not keep or
allow in or upon the Demised Premises any article which may be prohibited by any
insurance policy in force from time to time covering the building. Tenant shall
promptly comply with all reasonable requirements of the insurance authority or
of any insurer now or hereafter in effect relating to the Demised Premises. if
Tenant installs any electrical equipment that overloads the lines in the Demised
Premises, Tenant shall at its own expense make whatever changes are necessary to
comply with the requirements of the insurance underwriters and governmental
authorities having jurisdiction.
Tenant covenants to indemnify Landlord, its officers, directors,
stockholders, beneficiaries, partners, representatives, agents and employees and
save them harmless (except for loss or damage resulting solely from the
negligence of Landlord) from and against any and all claims, actions, damages,
liability, cost and expense, including, without limitation, attorney's fees and
disbursements, in connection with all losses, including loss of life, personal
injury and/or damage to property, arising from or out of any occurrence in, upon
or at the Demised Premises or the Occupancy or use by Tenant of the Demised
Premises or any part thereof, or arising from or out of Tenant's failure to
comply with any directions given by Landlord, its agents, contractors, or
employees. For the purpose hereof, the Demised Premises shall include the
service areas adjoining the same, any loading platform area allocated to the use
of Tenant and any adjacent sidewalks. If Landlord or an other party so
indemnified shall, without fault, be made a party to any litigation commenced
by or against Tenant, or if Landlord or any such party shall, in its sole
discretion, determine that it must intervene in such litigation to protect its
connection with relief of Tenant ordered pursuant to the Bankruptcy Code (11 USC
101 et. seq.), then Tenant shall protect and hold them harmless and shall pay
all costs, expenses and reasonable attorney's fees and disbursements incurred or
paid by such party in connection with such litigation."
6. As of the Effective Date:
(a) The fixed annual rent (also referred to in the Lease as "Basic
Rent" and "Base Rent") shall be as follows:
5
<PAGE> 33
(i) YEAR 1 -- July 1, 1996 through June 30, 1997 -- $41,904.00 per
annum, payable in equal monthly installments on or before the first of each
month in the amount of $3,492.00;
(ii) YEAR 2 -- July 1, 1997 through June 30, 1998 -- $41,904.00 per
annum, payable in equal monthly installments on or before the first of each
month in the amount of $3,492.00;
(ii) YEAR 3 -- July 1, 1998, through June 30, 1999 -- $41,904.00 per
annum, payable in equal monthly installments on or before the first of each
month in the amount of $3,492.00;
(iv) YEAR 4 -- July 1, 1999 through June 30, 2000 -- $44,232.00 per
annum, payable in equal monthly installments on or before the first of each
month in the amount of $3,686.00;
(v) YEAR 5 -- July 1, 2000 through November 30 2001, (17 months) --
$44,232.00 per annual (62,662.00 total), payable in equal monthly installments
on or before the first of each month in the amount of $3,686.00;
(b) Provided Tenant is not then in default under the Lease, as hereby
amended, then Tenant shall not be required to pay fixed annual rent for the
first month of each of the first five years of the Extended Term, to wit: July
1996, July 1997, July 1998, July 1999, July 2000. If the Lease, as amended,
shall be terminated at any time because of a default by Tenant under the Lease,
as amended, then, in addition to all other amounts owed to Landlord on account
thereof, Tenant shall also be required to pay Landlord the amount of any
abatement allowed to Tenant under this SUBPARAGRAPH 6(b);
(c) The security deposit under the Lease, as amended, shall be
decreased to $3,686.00. Landlord shall return to Tenant any sums it is presently
holding as security under the Lease in excess of 43,686.00 within 45 days of the
date of execution hereof.
(d) All of the provisions contained in the Lease relating to
additional rent shall remain unmodified by this First Amendment of Lease, except
that:
(i) Article 50(A)(2), which defines the Base rate for the Cost
(porter wage) Increase, shall be modified so that the "Base Rate" shall mean the
Rate in effect in the year 1996. In addition, the term "Rate" as defined therein
shall be modified only to the extent that it shall exclude an adjustment for any
sums paid for Fringe Benefits;
(ii) Article 51(A)(1), which defines the Base Tax Year for the
purpose of determining the real estate tax escalation shall be modified so that
the term "Base Tax Year" shall now mean the New York City real estate tax year
commencing July 1, 1996
6
<PAGE> 34
and ending June 30, 1997. In addition, Article 51 shall be amended to include
the following covenant; "F, The foregoing provisions notwithstanding, under no
circumstances shall Landlord be required to reimburse Tenant in connection with
a reduction in Real Estate Taxes in an amount which exceeds the total amount
paid by Tenant under this Article for the year in which such tax reduction
applies."
7. TENANT'S TERMINATION OPTION: (A) Provided that Tenant has not
defaulted under the Lease, as amended, and subject to the provision of this
ARTICLE 7, Tenant shall have the option (the "TERMINATION OPTION") to terminate
the Lease, as amended, and the term and estate granted thereby, only if
exercised in strict compliance with this Article. Tenant may, subject to the
provisions of this Article, exercise the Termination Option so as to end the
Term of the Lease, as amended, as the following dates (the "TERMINATION
DATE(S)").
(i) June 30, 1997;
(ii) June 30, 1998;
(iii) June 30, 1999;
(iv) June 30, 2000;
(v) June 30, 2001.
In order to exercise the Termination Option, Tenant must do the following:
(1) Tenant must exercise the Termination Option by the giving of
advanced written notice thereof (the "TERMINATION NOTICE") to Landlord in the
manner provided in Article 28 of the Lease, with a copy by regular first class
mail, at the address indicated above, or at such other address as Landlord shall
designate in the future by written notice, not later than the following dates,
time being of the essence, ("EXERCISE DATES") for the following Termination
Dates:
<TABLE>
<CAPTION>
EXERCISE DATE TERMINATION DATE TERMINATION PAYMENT
<S> <C> <C>
(i) December 31, 1996 for June 30, 1997; $7,632.20
(ii) December 31, 1997 for June 30, 1998; $5,904.15
(iii) December 31, 1998 for June 30, 1999; $4,176.11
(iv) December 31, 1999 for June 30, 2000; $2,448.06
(v) December 31, 2000 for June 30, 2001; $ 720.02
</TABLE>
(2) Tenant must deliver with the written Termination Notice a
certified check made payable to the Landlord in the agreed and liquidated
amounts set forth above, representing reimbursement to Landlord for the
unamortized costs of Landlords work, commissions, legal fees and other expenses
and as consideration to Landlord for the
7
<PAGE> 35
acceptance of such early termination ("TERMINATION PERIOD"). The Termination
Payment shall not be credited to Tenant as a payment of Fixed Annual Rent or
Additional Rent.
(B) In event that Tenant strictly complies with the provisions hereof,
the Lease, as amended, and the term and estate thereby granted (unless the same
shall have expired sooner pursuant to the provisions of the Lease, as amended,
or of the law) shall terminate on the corresponding Termination Date with the
same effect as if such date were the date hereinbefore specified as the
expiration date of the Lease, as amended. The failure by Tenant to timely make
the Termination Payment or to otherwise fail to comply with the provisions of
this Article shall, at Landlords' option, invalidate the termination of the
Lease, as amended, and, in such event, this Article shall be void and of no
further force and effect.
8. Landlord hereby lets unto Tenant the Storage Space, as hereinbefore
described, and as further depicted on Exhibit "A" hereto, which shall
constitute a part of the Demised Premises, and otherwise be governed by the
terms of the Lease, as amended, except that the Storage Space shall be rented
on a month to month basis subject to the terms of this Article. Tenant shall
pay rent as and for the Storage Space ("STORAGE SPACE RENT"), in addition to
fixed annual rent and all items of additional rent required to be paid under
the Lease, as amended, the sum of $95.83 monthly on the first of each month
commencing on the Effective Date hereof and to continue on a month to month
basis. Tenant may, at any time, on thirty (30) days prior notice to Landlord,
quit and surrender possession of the Storage Space. In addition to all other
rights and remedies contained in the Lease and provided by Law, Landlord may,
at any time, (i) demand the removal of and surrender of possession by Tenant of
the Storage Space within thirty (30) days; (ii) increase the Storage Space Rent
to any amount, regardless of the market conditions, upon thirty (30) days prior
notice to Tenant (iii) treat the Storage Space Rent as additional rent under
the Lease (iv) change the locks on the Storage Space entrance upon Tenant's
failure to timely vacate and surrender possession of the Storage Space under
the terms hereof. Tenant shall be considered to be in possession of the Storage
Space so long as any item of personal property remains therein.
9. As modified and amended by this First Amendment of Lease, all of
the terms, covenants and conditions of the Lease are hereby ratified and
confirmed and shall continue to be and remain in full force and effect
throughout the remainder of the term thereof.
<PAGE> 36
IN WITNESS WHEREOF, the parties hereto have caused this First
Amendment of Lease to be executed as of the day and year first above written.
LANDLORD:
FGP 90 WEST STREET INC.
By: Enda J. Bracken
----------------------
Enda J. Bracken
Vice President
TENANT:
HANOVER CAPITAL PARTNERS, LTD.
By: Joyce Mizerak
----------------------
Name: Joyce Mizerak
Title: Managing Director
Federal I.D. No. 13-3508242
---------------------------
9
<PAGE> 37
CORPORATE TENANT
STATE OF NEW JERSEY)
)SS.:
COUNTY OF MIDDLESEX)
On this 3rd day of October, 1996, before me personally come to me
known, who being by me duly sworn, did depose and say he resides in
that _he is the
of the corporation described in and which executed the foregoing instrument as
TENANT; that _he knows the seal of said corporation; that the seal affixed to
said instrument is such corporate seal; that it was so affixed by order the
Board of Directors of said corporation, and that _he signed h__ name thereto by
like order.
Emanuele R. Minardi
----------------------------------
NOTARY PUBLIC
EMANUELE R. MINARDI
NOTARY PUBLIC OF NEW JERSEY
My Commission Expires Nov. 15, 1999
10
<PAGE> 1
Exhibit 10.13
TABLE OF CONTENTS
-----------------
Page
----
ARTICLE 1 TERM 1
ARTICLE 2 FIXED RENT 2
ARTICLE 3 PROPORTIONATE SHARE 2
ARTICLE 4 INSURANCE 4
ARTICLE 5 COMMON AREAS AND PREMISES 4
ARTICLE 6 REPAIRS 4
ARTICLE 7 COMPLIANCE WITH LAW 5
ARTICLE 8 ALTERATIONS AND IMPROVEMENTS 5
ARTICLE 9 MECHANICS LIENS 6
ARTICLE 10 WASTE 6
ARTICLE 11 INSPECTION BY LANDLORD 7
ARTICLE 12 ASSIGNMENT AND SUBLETTING 7
ARTICLE 13 HOLD HARMLESS AND INDEMNIFICATION 9
ARTICLE 14 CASUALTY 9
ARTICLE 15 CONDEMNATION/EMINENT DOMAIN 10
ARTICLE 16 BANKRUPTCY/INSOLVENCY AND
DEFAULT OF TENANT 12
ARTICLE 17 SERVICES FURNISHED BY LANDLORD 14
ARTICLE 18 ADDITIONAL RENT 15
ARTICLE 19 ELECTRIC CHARGES 18
ARTICLE 20 NOTICE 20
ARTICLE 21 LESSER AMOUNT RENT 20
ARTICLE 22 QUIET ENJOYMENT 21
ARTICLE 23 ARBITRATION 21
ARTICLE 24 LIMITATION OF LANDLORD'S LIABILITY 21
ARTICLE 25 ESTOPPEL NOTICE 22
ARTICLE 26 REMEDIES 22
ARTICLE 27 BROKERAGE COMMISSION 22
ARTICLE 28 UNAVOIDABLE DELAYS 23
-ii-
<PAGE> 2
ARTICLE 29 SUBORDINATION 23
ARTICLE 30 SIGNS 24
ARTICLE 31 NOTICES OF DEFAULT 24
ARTICLE 32 USE 24
ARTICLE 33 LANDLORD'S RIGHT TO MODIFY 25
ARTICLE 34 LATE CHARGES 25
ARTICLE 35 LANDLORD'S RULES AND REGULATIONS 25
ARTICLE 36 CONDITION OF PREMISES 26
ARTICLE 37 ENVIRONMENTAL LAWS 26
ARTICLE 38 INITIAL LEASEHOLD IMPROVEMENTS 28
ARTICLE 39 SECURITY DEPOSIT 28
ARTICLE 40 HOLDING OVER 29
ARTICLE 41 AUTHORITY OF LEASE SIGNATORIES 29
ARTICLE 42 MISCELLANEOUS 29
EXHIBIT A DIAGRAM OF PREMISES 31
EXHIBIT B BUILDING RULES AND REGULATIONS 32
EXHIBIT C HVAC PERFORMANCE STANDARDS 35
EXHIBIT D CLEANING MAINTENANCE SERVICES 36
EXHIBIT E HOLIDAY SCHEDULE 37
-iii-
<PAGE> 3
LEASE SUMMARY
-------------
Any reference in this Lease to the following subjects shall incorporate the data
below stated.
LANDLORD: METROPLEX ASSOCIATES,
a New Jersey Partnership
LANDLORD'S ADDRESS: c/o Atlantic Realty Development
90 Woodbridge Center Drive
Woodbridge, New Jersey 07095
TENANT: HANOVER CAPITAL MORTGAGE CORP.,
a Missouri Corporation
TENANT'S ADDRESS: 90 West Street
New York, New York 10006
PREMISES: A portion of the third (3rd) floor
of the Building known as Metroplex
Corporate Center I.
GROSS RENTABLE AREA OF PREMISES: +/- 5,834 square feet, subject to
final measurement
NET USEABLE AREA OF PREMISES: +/- 5,060 square feet, subject to
final measurement
LEASE TERM: Three (3) years
ANNUAL BASE RENT: See Article 2 - Fixed Rent
TENANT'S PROPORTIONATE SHARE: 4.64 %, subject to adjustment
PERMITTED USE: General offices
BUILDING ADDRESS: 100 Metroplex Drive
Edison, New Jersey 08817
TENANT'S S.I.C. NUMBER:
-iv-
<PAGE> 4
OFFICE LEASE AGREEMENT
----------------------
THIS AGREEMENT, made this 01 day of March, 1994 by and between:
METROPLEX ASSOCIATES, a New Jersey partnership, with offices at c/o
Atlantic Realty Development, 90 Woodbridge Center Drive, Woodbridge,
New Jersey, 07095 (hereinafter referred to as "Landlord"),
and
HANOVER CAPITAL MORTGAGE CORP., a New Jersey corporation, with
office at 90 West Street, New York, New York 10006 (hereinafter
referred to as "Tenant").
W I T N E S S E T H:
- - - - - - - - - -
THAT Landlord, for and in consideration of the rentals, covenants
and agreements hereinafter reserved, mentioned and contained on the part of
Tenant, its successors and assigns to be paid, kept and performed, has demised
and leased, and by these presents does demise and lease, unto Tenant, and Tenant
does hereby take and hire from Landlord upon and subject to the conditions
hereinafter set forth, the certain premises (the "Premises") constituting a
portion of the third (3rd) floor of the building (the "Building") known as
Metroplex Corporate Center I, 100 Metroplex Drive, Edison, New Jersey 08817. The
Building contains 125,812 square feet of gross rentable area and is located on
certain land (the "Lot") designated as Lot 21 in Block 4A on the Tax Map of
Edison, New Jersey. The Premises have a gross rentable area of approximately
5,834 square feet of floor area and a net usable area of approximately 5,060
square feet of floor area. In addition, Tenant and its agents, employees and
invitees shall have the right, in common with Landlord and other tenants of the
Building, and their respective agents, employees and invitees, to use the common
areas and facilities located at the Building and Lot as provided in Article 5 of
this Lease. A diagram of the Premises is annexed hereto as Exhibit A. * Space
removed as marked on Plan. Rent start the same.
TO HAVE AND TO HOLD premised unto Tenant, its successors and
assigns, for a term of three (3) years commencing on the Commencement Date and
expiring on the Expiration Date as provided in Article 1 hereof.
IT IS FURTHER understood and agreed by and between the parties
hereto as follows:
A R T I C L E 1.
- - - - - - - -
TERM
----
The term hereof shall commence on the date (the "Commencement Date")
Landlord delivers possession of the Premises and a Certificate of Occupancy
therefor to Tenant with the Work (as hereinafter defined in Article 38),
exclusive of "punch list" items, substantially completed. To the extent a
Certificate of Occupancy cannot be obtained, or the Work cannot be substantially
completed, or should there be a delay incurred by Landlord in connection
therewith, by reason of (i) Tenant's failure to complete any of its work, (ii)
Tenant's failure to prepare and submit plans required hereunder in a timely
manner, (iii) changes in the Work requested by Tenant, (iv) unavailability of
materials or improvements selected by Tenant, or (v) any other act or omission
of Tenant, the term of this Lease shall nonetheless commence on a date which is
the earlier of (i) the date when said Certificate of Occupancy is obtained and
the Work substantially completed as herein provided and (ii) the date when said
Certificate of
<PAGE> 5
Occupancy would have been obtained and the Work would have been substantially
completed but for the occurrence of any event referred to above. The said term
shall expire at 6:00 p.m. on the date (the "Expiration Date") which is the day
before the Commencement Date, three (3) years thereafter. If, however, the
Commencement Date is other than the first day of a month, the term shall include
the balance of the month in which the Commencement Date occurs and the
Expiration Date shall be the last day of the month in which the Commencement
Date occurs, three (3) years thereafter. Tenant agrees to execute and deliver to
Landlord a written agreement setting forth the Commencement Date and Expiration
Date of this Lease determined in accordance with the foregoing.
A R T I C L E 2.
- - - - - - - --
FIXED RENT
----------
SECTION 1. Subject to the provisions of Section 3 of this Article,
Tenant covenants to pay to Landlord for and during each lease year of the term
hereof a minimum annual basic rental (hereinafter referred to as the "Fixed
Rent") in the aggregate amount of Two Hundred Thirty Four Thousand ($234,000.00)
Dollars, at the rate of Seventy Eight Thousand ($78,000.00) Dollars per annum
($6,500.00 per month).
SECTION 2. Fixed Rent shall be payable in equal monthly
installments, as aforesaid, in advance on the first day of each and every
calendar month of the term hereof in lawful money of the United States of
America at the office of Landlord or at such other place as may hereafter be
designated by Landlord. If the Commencement Date shall be other than the first
day of a calendar month, Tenant shall pay, on the Commencement Date, the
proportionate amount of Fixed Rent for the balance of such month. One full
monthly installment of Fixed Rent shall be due and payable upon execution of
this Lease by Tenant. Fixed Rent shall be paid to Landlord without notice or
demand and without deduction, set-off or other charge therefrom or against the
same.
A R T I C L E 3.
- - - - - - - --
PROPORTIONATE SHARE
-------------------
Wherever this Lease shall require Tenant to pay "its Proportionate
Share" of any item of expenditure or of any sum, Tenant's Proportionate Share
shall be deemed to be 4.64% of the total amount of such item or sum applicable
to the Building or the Lot, which Proportionate Share reflects the agreed upon
ratio of the gross rentable area of the Premises to the total gross rentable
area of the Building as stipulated between the parties. Tenant's Proportionate
Share shall be adjusted (i) if the gross rentable area of the Premises shall be
more or less than 5,834 square feet, (ii) from time to time if Landlord shall
make additions to or subtractions from the square footage of the floor area of
the Building or the Premises, (iii) if Landlord shall construct additional
buildings on the Lot or (iv) as set forth in Article 33 hereof.
A R T I C L E 4.
- - - - - - - --
INSURANCE
---------
SECTION 1. Tenant at its own cost and expense, throughout the term
of this Lease, for its own benefit and for the benefit of Landlord as an
additional named insured thereunder, shall maintain (or reimburse Landlord for
maintaining, if such be the case) general public liability insurance against
claims for personal injury, death, or property damage occurring upon, in or
about the Premises, the Building, or in or about the adjoining streets,
sidewalks, parking areas and passageways, such insurance to afford protection to
the limit of not less than One Million ($1,000,000.00) Dollars in respect to
injury or death to a single person, and to the limit of not less than One
Million ($1,000,000.00) Dollars in respect to any one accident, and to the limit
of not less than One Million ($1,000,000.00) Dollars in respect to property
damage. Such
-2-
<PAGE> 6
policies shall name Landlord as an additional insured and shall be primary and
non-contributing with any other insurance carried by Landlord.
SECTION 2. In addition to the insurance required to be carried by
Tenant pursuant to Section 1 of this Article 4, Tenant shall provide Landlord,
at its own cost and expense, and keep in force during the term of this Lease,
(i) fire and casualty insurance with broad form extended coverage, including,
but not limited to, coverage for vandalism and malicious mischief in the amount
of the full replacement cost, from time to time, of Tenant's trade fixtures,
equipment, inventory and other contents of the Premises, and (ii) Worker's
Compensation insurance in accordance with the requirements of the State of New
Jersey.
SECTION 3. In the event that Tenant fails to provide any insurance
policy or coverage as required or provided for in this Article 4 and Landlord
elects to obtain same, Tenant shall immediately upon demand reimburse Landlord
for the cost thereof required to be paid by Tenant, and shall thereafter pay to
Landlord in equal monthly installments in advance together with regularly
accruing installments of Fixed Rent, one-twelfth (1/12) of the estimated annual
cost of the premium(s) for such insurance coverage required to be paid by
Tenant, which sums shall be payable by Tenant to Landlord as additional rent.
The monthly sums required to be paid by Tenant to Landlord thereafter as
provided in this Section 3, shall be employed by Landlord as a fund to replace
such insurance policies as same expire.
SECTION 4. All policies of insurance obtained by Tenant with respect
to the Premises and its use and occupancy thereof and all policies of insurance
required by this Lease shall be written by reputable companies authorized to do
business in New Jersey and shall be acceptable to Landlord and to Landlord's
mortgagee. Such policies shall, if same are procured by Tenant, be delivered to
Landlord and endorsed "premium paid" by the company or agency issuing the same
or shall be accompanied by other evidence satisfactory to Landlord that the
premiums thereon have been paid not less than thirty (30) days prior to the
expiration of any then current policy. All policies obtained by Tenant shall
provide that none of same shall be cancelable unless Landlord shall have
received at least thirty (30) days prior written notice of such cancellation. It
is the intention of the parties that Landlord shall at all times during the term
of this Lease be in possession of paid up policies of insurance which are in
full force and effect.
SECTION 5. Neither Landlord, its servants, agents or employees, nor
any mortgagee of the Premises shall be liable or responsible for, and Tenant
hereby releases Landlord, its servants, agents or employees and any such
mortgagee of the Premises from, all liability and responsibility to Tenant and
any person claiming by, through or under Tenant, by way of subrogation or
otherwise, for any injury, loss or damage to any person or property in or around
the Premises or to Tenant's business irrespective of the cause of such injury,
loss or damage, and Tenant shall require its insurers to include in all of
Tenant's insurance policies which could give rise to a right of subrogation
against Landlord, its servants, agents or employees, or any mortgagee of the
Premises a clause or endorsement whereby the insurer waives any rights of
subrogation against Landlord, its servants, agents or employees and any such
mortgagee of the Premises or permits the insured, prior to any loss, to agree
with a third party to waive any claim it may have against said third party
without invalidating the coverage under the insurance policy. If such waiver of
subrogation shall not be, or shall cease to be, obtainable without additional
charge or at all, the Tenant shall so notify Landlord promptly after learning
thereof. In such case, if the Landlord shall so elect and shall pay the
insurer's additional charge therefor, such waiver of subrogation shall be
included in the policy.
SECTION 6. Landlord shall throughout the term of this Lease maintain
fire insurance policies with full extended coverage provisions with respect to
the Building, which insurance coverage shall be in such amounts as shall be
required by Landlord's first mortgagee.
-3-
<PAGE> 7
A R T I C L E 5.
- - - - - - - --
COMMON AREAS AND PREMISES
-------------------------
SECTION 1. Tenant shall have the nonexclusive right to use, in
common with Landlord and other tenants of the Building (subject to reasonable
rules from time to time made by Landlord), the common lobbies, entrances, exits,
restrooms, elevators of the Building and the parking areas, walkways, sidewalks
and driveways constructed on the Lot (the "Common Areas"). Attached hereto as
Exhibit B are the current Rules and Regulations applicable to the Premises and
the Building.
SECTION 2. Landlord reserves the following rights in and to the
Common Areas, the Building and the Premises: (a) the right to install, use,
maintain, remove, repair, and replace pipes, ducts, conduits, wires and
appurtenant meters and equipment (hereinafter collectively "Pipes") serving any
part of the Building to be located above ceiling surfaces, below floor surfaces,
within walls, or in central core areas. Landlord reserves the right to relocate
any Pipes whether located within or outside of the Premises; (b) the right to
alter or relocate any of the Common Areas and to make such changes in,
alterations of or deletions from the Common Areas as Landlord may determine to
do, provided, that no such alteration, relocation or change shall unreasonably
interfere with Tenant's use of the Premises; and (c) the right to use and grant
easements on, over or under the Lot and to dedicate for public use portions
thereof without Tenant's consent, provided that no such grant or dedication
shall unreasonably interfere with Tenant's use of the Premises.
SECTION 3. Tenant shall also have the non-exclusive right to use in
common with Landlord and other tenants of the Building and their employees and
invitees, on a first come first serve basis, the parking area provided by
Landlord for the parking of passenger automobiles other than parking spaces
designated as "Handicapped Parking", "Loading Area" or as may be otherwise
reserved or allocated (the "Excluded Parking Areas"). Landlord may issue
parking permits, install a gate system, and impose any other system as Landlord
deems necessary for the use of the parking area. Tenant agrees that it and its
employees and invitees shall not park their automobiles in any Excluded Parking
Areas, and shall comply with such rules and regulations for use of the parking
area as Landlord may from time to time prescribe. Landlord shall not be
responsible for any damage or theft of any vehicle in the parking area, and
shall not be required to keep parking spaces clear of unauthorized vehicles or
to otherwise supervise the use of the parking area. Landlord reserves the right
to change any existing or future parking area, roads or driveways, or increase
or decrease the size thereof and make any repairs or alterations it deems
necessary to the parking area, roads and driveways and to temporarily revoke or
modify the parking rights granted to Tenant hereunder.
A R T I C L E 6.
- - - - - - - --
REPAIRS
-------
SECTION 1. Tenant shall take good care of the Premises and fixtures
and appurtenances therein, and at its own cost and expense make all
non-structural repairs thereto as and when needed to preserve them in good
working order and condition, reasonable wear and tear and damage from the
elements and casualty excepted. Notwithstanding the foregoing, all damage or
injury to the Premises or to any other part of the Building or the Lot, or to
its fixtures or appurtenances, whether requiring structural or non-structural
repairs, caused by the negligence or improper conduct of Tenant, or its
employees, invitees, licensees or agents, shall be repaired promptly by Tenant
at its sole cost and expense or, at Landlord's election, may be repaired by
Landlord in which event Tenant shall, promptly upon demand, reimburse Landlord
for any costs and expenses incurred.
SECTION 2. All alterations, changes, additions or improvements to
the Premises installed by Tenant (or by Landlord at Tenant's request) shall be
preserved in good working order and repair (and replaced as required) by Tenant
at its sole cost and expense.
-4-
<PAGE> 8
SECTION 3. All repairs and replacements and all other property
attached to the Premises or the Building by or on behalf of Tenant shall,
immediately upon the expiration or earlier termination of the term hereof, be
and become the property of Landlord without payment therefor by Landlord and
shall be surrendered to Landlord upon the expiration or earlier termination of
the term hereof. Upon the expiration or earlier termination of the term hereof,
Tenant shall surrender the Premises to Landlord in good order, condition and
repair, subject to reasonable wear and tear resulting from the Permitted Use.
A R T I C L E 7.
- - - - - - - --
COMPLIANCE WITH LAW
-------------------
SECTION 1. Tenant covenants throughout the term of this Lease at
Tenant's sole cost and expense, promptly to comply with all laws and ordinances
and the orders, rules, regulations and requirements of all federal, state and
municipal governments and appropriate departments, commissions, boards and
officers thereof and the orders, rules and regulations of any Board of Fire
Underwriters or similar body or agency where the Premises are situated, or any
body, now or hereafter constituted, exercising similar functions, foreseen or
unforeseen, ordinary or extraordinary, relating to Tenant's use and occupancy of
the Premises.
SECTION 2. Tenant will observe and comply with the requirements of
the carders of any policy of insurance respecting the Premises and/or the
Building and the requirements of all policies of public liability, fire,
casualty and all other policies of insurance at any time in force with respect
to the Premises and/or the Building and the equipment and contents thereof.
Tenant shall not do, or permit anything to be done in the Premises, or bring or
keep anything therein, which shall, in any way, increase the cost of fire
insurance covering the Premises and/or the Building.
SECTION 3. In the event that Tenant shall fail or neglect to comply
with the aforesaid laws, ordinances, rules, orders, regulations and
requirements, or any of them, or in case Tenant shall fail or neglect to make
any necessary repairs as and to the extent required of Tenant pursuant to this
Lease, then Landlord or its agents may, without any obligation so to do, enter
the Premises and make said repairs and comply with any and all of the said laws,
ordinances, rules, orders, regulations and requirements at the cost and expense
of Tenant, and in case of Tenant's failure to pay therefor, the said cost and
expense shall be added to the next month's rent, together with interest at 15%
per annum, (or the maximum amount permitted by law, whichever shall be less) and
shall be due and payable as such.
A R T I C L E 8.
- - - - - - - --
ALTERATIONS AND IMPROVEMENTS
----------------------------
SECTION 1. Tenant shall make no structural alterations, changes or
improvements, in, to or about the Premises, without the prior written consent of
Landlord which shall not be unreasonably withheld. Tenant may, at Tenant's
expense, without Landlord's consent but otherwise subject to the provisions of
this Article, make alterations, changes or improvements to the Premises which
are non-structural and which do not affect utility service or plumbing or
electrical lines. In making any alterations, changes or improvements, Tenant
shall, subject to Section 2 of this Article, use contractors or mechanics first
approved in writing by Landlord. If Landlord shall consent to any structural
alteration, change or improvement, working drawings for all work shall be
submitted to Landlord for approval before any such work is performed. Promptly
after completion of any alteration, change or improvement (structural or
non-structural), Tenant shall provide to Landlord "as built" plans showing all
work performed. Without limiting the foregoing, all alterations, changes and
improvements when completed shall be of such a character so that same shall not:
(i) adversely affect the value of the Premises; or (ii) reduce the size of the
Premises or the cubic content thereof; or (iii) change the character of the
Premises. No alteration, change, or improvement shall be undertaken until Tenant
shall have procured and paid for, so far as the same may be required from time
to time, all permits and
-5-
<PAGE> 9
authorizations of the various governmental agencies having jurisdiction
thereover, and Landlord agrees to join in the application for such permits or
authorizations whenever such action is necessary.
SECTION 2. Landlord hereby reserves the right, itself, to make or to
cause to be made all alterations, changes or improvements required by Tenant, on
behalf of Tenant, and, with respect to all such alterations, changes or
improvements other than those which are part of the Work, Tenant shall pay
Landlord the actual cost thereof together with ten (10%) percent for overhead
and ten (10%) percent for profit. If Tenant is permitted to perform the work on
its own behalf Landlord shall be entitled to receive ten (10%) percent of the
cost thereof for general supervision. All alterations, changes or improvements
(other than Tenant's trade fixtures) installed in the Premises shall be and
become the property of Landlord without payment therefor by Landlord, and shall
be surrendered to Landlord upon the expiration or sooner termination of the term
of this Lease. Landlord shall have the right, however, by notice to Tenant prior
to the expiration of the term hereof, to require Tenant to remove any or all of
such alterations, changes and improvements (except those which are part of the
Work), in which event the same shall be removed from the Premises by Tenant, at
its expense, prior to the expiration or sooner termination of the Lease, and
Tenant shall restore the Premises to the condition it was in prior to the
installation of the said alteration, change or improvement. Provided that Tenant
shall not be in default of any of its obligations hereunder, and that all prior
defaults shall have been fully cured at the termination of the term hereof,
Tenant shall have the fight to remove its trade fixtures and personal property
from the Premises; provided, however, that Tenant shall, at its own cost and
expense, repair any damage caused by such removal and shall restore the Premises
to the condition that it was in prior to the installation of Tenant's said trade
fixtures and personal property.
SECTION 3. Except as above specifically contemplated, Tenant shall
not in any manner make or suffer to be made any alterations, changes, additions
or improvements to or of the Premises or the Building.
A R T I C L E 9.
- - - - - - - --
MECHANICS LIENS
---------------
Tenant shall not suffer or permit any liens, mechanics' liens,
mechanics' notices of intention, or the like to be filed against the Premises or
the Building or any part thereof by reason of work, labor, services, equipment
or materials supplied or claimed to have been supplied to or on behalf of Tenant
or anyone holding the Premises or the Building or any part thereof through
Tenant. If any such liens, mechanics' liens, mechanics' notices of intention, or
the like shall at any time be filed against the Premises or the Building, Tenant
shall cause the same to be discharged of record within ten (10) days after the
date of filing the same, or if Landlord shall by written agreement with Tenant
permit same to remain undischarged, Tenant may, in lieu of discharging same
within said ten (10) days, post an insurance company surety bond providing for
and securing due payment thereof and saving Landlord harmless and indemnifying
it with respect thereto. Tenant shall not have any right whatsoever to subject
the interests of Landlord in the Premises or the Building or in the fee simple
title thereto to any mechanics' liens or other liens whatsoever and nothing
contained in this Lease shall be deemed to operate as an express or implied
consent to Tenant to subject the interests of Landlord to any such lien or
liens. All work performed by or on behalf of Tenant shall be performed solely
upon Tenant's credit.
A R T I C L E 10.
- - - - - - - ---
WASTE
-----
Tenant covenants not to permit the Premises to fall into disrepair
or to do or suffer any waste or damage, disfigurement or injury to the Premises,
the Building or the Lot,
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<PAGE> 10
or the fixtures and equipment thereof, or permit or suffer any stationary
overloading of the floors thereof.
A R T I C L E 11.
- - - - - - - ---
INSPECTION BY LANDLORD
----------------------
SECTION 1. Tenant agrees to permit Landlord and the authorized
representatives of Landlord to enter the Premises at all reasonable times for
the purpose of inspecting the same, for the purpose of performing cleaning
services and making electrical surveys, and if Landlord so elects, but without
any obligation so to do, for the purpose of making any necessary repairs to the
Premises or the Building and performing any work therein that may be necessary
to comply with any laws, ordinances, rules, regulations or requirements of any
public authority or of the Board of Fire Underwriters or any similar body, or
which Landlord may deem necessary to prevent waste or deterioration in
connection with the Premises or the Building or for the purpose of performing
any work required to be performed in connection with any provision of this
Lease. Nothing herein shall imply any duty upon the part of Landlord to do any
work which, under any provision of this Lease, Tenant may be required to
perform, and the performance thereof by Landlord shall not constitute a waiver
by Landlord of Tenant's default in failing to perform the same. Landlord may,
during the progress of any work in the Premises or the Building, keep and store
upon the Premises all necessary materials, tools and equipment. Landlord shall
not in any event be liable for inconvenience, annoyance, disturbance, loss of
business or other damage to Tenant by reason of making repairs or the
performance of any work in the Premises or the Building, or on account of
bringing materials, supplies and equipment into or through the Premises during
the course thereof, and the obligations of Tenant under this Lease shall not
thereby be affected in any manner whatsoever.
SECTION 2. Landlord is hereby given the right at any time during
usual business hours to enter the Premises and to exhibit the same for the
purposes of sale or mortgage and during the final six (6) months of the term
Landlord shall be entitled to display on the Premises in such manner as not
unreasonably to interfere with Tenant's business the usual "For Sale" or "To
Let" signs and Tenant agrees that such signs may remain, unmolested, upon the
Premises.
A R T I C L E 12.
- - - - - - - ---
ASSIGNMENT AND SUBLETTING
-------------------------
SECTION 1. Provided that this Lease shall be in good standing and
that Tenant shall not be in default of any of its obligations hereunder, Tenant
may, without Landlord's consent, assign this Lease to (a) any corporation or
entity resulting from a merger or consolidation of the Tenant entity, provided
that the total assets and net worth of such assignee, after such consolidation
or merger, shall be at least equal to that of Tenant immediately prior to such
consolidation or merger; or (b) to Tenant's parent company, or to any wholly
owned subsidiary of Tenant or Tenant's parent company; and provided further that
such successor shall execute an instrument in writing reasonably satisfactory to
Landlord's counsel fully assuming all of the obligations and liabilities imposed
upon Tenant hereunder and shall deliver the same to Landlord. No such assignment
shall operate to relieve Tenant from any liability hereunder.
SECTION 2. Except as set forth in Section 1 above, Tenant shall not,
either voluntarily or involuntarily, directly or indirectly, by operation of law
or otherwise, assign, transfer, mortgage or otherwise encumber this Lease, or
sublet the whole or any part of the Premises, or permit the Premises or any part
thereof to be used or occupied by others, without the prior written consent of
Landlord, which consent shall not be unreasonably withheld or delayed. The
giving of such consent by Landlord shall apply only to the specific transaction
thereby authorized, and shall not be construed to relieve Tenant from obtaining
Landlord's consent to any other or subsequent such assignment, transfer,
mortgage or other encumbrance, subletting, use or occupancy, or as modifying or
limiting Landlord's rights under this Article 12.
-7-
<PAGE> 11
SECTION 3. Notwithstanding the occurrence of any transaction
contemplated by Section 1 or 2 of this Article, Tenant shall, nevertheless,
remain primarily liable to perform all covenants and conditions of this Lease.
In addition, Tenant shall not be released or discharged from such liability by
reason of any modification, amendment or supplement of this Lease agreed to by
Landlord and any assignee or subtenant or by reason of Landlord's failure to
enforce any of its rights or remedies hereunder against any such assignee or
subtenant. At least ten (10) days prior to the effective date thereof, Tenant
shall furnish Landlord with a conformed copy of any such assignment or sublease,
together with an agreement in writing executed by any such assignee or subtenant
to assume the obligations imposed by this Lease upon the Tenant and to perform
the same in accordance with the terms hereof, and pursuant to which any
subtenant agrees that if this Lease shall be terminated by reason of Tenant's
default hereunder or otherwise, at Landlord's option, to be exercised by notice
to the subtenant, such sublease shall continue in full force and effect and the
subtenant will attorn to Landlord. If this Lease be assigned, or if the Premises
or any part thereof be sublet, used or occupied by anybody other than Tenant,
Landlord may collect Fixed Rent and additional rent from the assignee, subtenant
or occupant, and apply the net amount collected to the Fixed Rent and/or
additional rent reserved hereunder, but no such collection shall be deemed a
waiver of this covenant, or the acceptance of the assignee, subtenant or
occupant as tenant, or a release of Tenant from the further performance by
Tenant of the terms, covenants and conditions of this Lease on the part of the
Tenant to be performed. Any violation of any provision of this Lease, whether by
act or omission, by any assignee, subtenant or occupant, shall be deemed a
violation of such provision by Tenant, it being the intention and meaning of the
parties hereto that Tenant shall assume and be liable to Landlord for any and
all acts and omissions of any and all assignees, subtenants and/or other
occupants.
SECTION 4. Notwithstanding, and without limiting, any other
provisions of this Article, in the event that Tenant shall request landlord's
consent to an assignment of this Lease or a subletting of all or any portion of
the Premises, Landlord shall have the option, in lieu of granting or refusing
any such consent, to cancel and terminate this Lease, such option to cancel and
terminate to be exercised not later than sixty (60) days after Landlord receives
from Tenant a notice containing Tenant's request for Landlord's consent to an
assignment or subletting. Any such notice containing a request for consent shall
contain the following information: (1) The name and business address of the
proposed assignee or subtenant; (2) The consideration to be paid by the proposed
assignee or sublessee to Tenant for such assignment or subletting; (3) all other
business terms and conditions of the proposed assignment or subletting
transaction; and (4) such further and additional information as Landlord may
request. If Landlord shall exercise its said option to cancel and terminate this
Lease, Fixed Rent, additional rent and all other amounts payable by Tenant to
Landlord shall be adjusted as of the date any such assignee or sublessee enters
into a direct lease with Landlord, accepts possession of the Premises and
thereafter commences the payment of rent.
SECTION 5. Without limiting the foregoing, in the event that this
Lease shall be assigned or all or any of the portion of the Premises shall be
sublet, then and in that event, one hundred (100%) percent of the net proceeds,
avails and profits of any such assignment and/or sublease shall be paid by
Tenant and shall constitute the sole and exclusive property of Landlord. In
calculating the net proceeds, avails and profits of any sublease of less than
the entire Premises hereof, the rentals payable pursuant hereto and the rentals
payable pursuant to any such sublease shall be equitably allocated to the
portion of the Premises so being sublet and the net proceeds, avails and profits
shall be determined accordingly. In connection with any assignment of this
Lease, the said net proceeds, avails and profits shall include any amounts paid
to Tenant as the purchase price or other consideration for the transfer of any
of Tenant's trade fixtures, equipment or inventory in excess of the then
reasonable fair market value thereof. Nothing herein shall be construed as
relieving Tenant, in the event of an assignment of this Lease or a subletting of
all or a portion of the Premises, of the primary liability to Landlord for the
full and faithful performance of the covenants and agreements contained in this
Lease.
SECTION 6. In the event Tenant requests Landlord to approve any
assignment of this Lease, or subletting (or other form of occupancy by a third
party) of the Premises, Tenant shall pay Landlord a reasonable fee to cover
Landlord's costs for the preparation and/or review
-8-
<PAGE> 12
of said assignment or sublease, or documents ancillary thereto, credit checks,
business checks and other like items.
A R T I C L E 13.
- - - - - - - ---
HOLD HARMLESS AND INDICATION
----------------------------
SECTION 1. This Lease is made upon the express condition that Tenant
agrees to and shall keep, save and hold Landlord free and harmless from and
indemnify it against all liability, penalties, losses, damages, costs, expenses,
causes of action, claims and/or judgments arising by reason of any injury in or
about the Premises to any person or persons, including without limitation,
Tenant, its servants, agents and employees, and damage in or about the Premises
to any property of any kind whatsoever, and to whomsoever belonging, including
without limitation, damage to property of Tenant, its servants, agents and
employees, and other parties, which such injury to persons or damage to property
occurs as a result of or from any cause or causes whatsoever, including, without
limitation, damage from water and/or steam leakage into or upon the Premises (or
from the Premises), or its appurtenances, or damage or injury occurring on or
about the common areas, sidewalks or parking areas adjacent thereto, during the
term of this Lease or any occupancy hereunder. Tenant hereby covenants and
agrees to indemnify, protect and save Landlord harmless from all liability,
judgments, claims, loss, costs and obligations on account of or arising out of
any such injuries and damages however occurring, except to the extent occasioned
by Landlord's willful misconduct or gross negligence, provided always, however,
that if and to the extent that Tenant receives any proceeds from applicable
policies of insurance with respect to same, then the amount of such proceeds
shall be credited against any amounts payable by Landlord to Tenant hereunder.
SECTION 2. Tenant, as a material part of the consideration to be
rendered to Landlord, hereby waives all claims against Landlord for damages to
goods, equipment, improvements, wares and merchandise in, upon or about the
Premises and for injuries to Tenant, its servants, agents, employees or third
persons in or about the Premises from any cause arising at any time, except to
the extent occasioned by Landlord's willful misconduct or gross negligence,
provided always, however, that if and to the extent that Tenant receives any
proceeds from applicable policies of insurance with respect to same, then the
amount of such proceeds shall be credited against any amounts payable by
Landlord to Tenant hereunder.
SECTION 3. Except as otherwise specifically set forth in this Lease,
each party shall bear the cost of its own counsel incurred in connection with
this Lease and Tenant's use and occupancy of the Premises.
A R T I C L E 14.
- - - - - - - ---
CASUALTY
--------
SECTION 1. In case of any damage to the Building on the Lot by fire
or other casualty occurring during the term of this Lease or previous thereto,
which renders the Premises wholly untenantable so that the same cannot be
repaired within one hundred twenty (120) days from the happening of such damage,
then the term hereby created shall, at the option of the Landlord, terminate
from the date of such damage. In the event the Landlord elects to terminate the
Lease for any reason which is due to the inability to restore the same within
the one hundred twenty (120) day period, Landlord shall so notify the Tenant
within thirty (30) days of the happening of the fire or casualty, and in such
event the Tenant shall immediately surrender the Premises and shall pay rent
only to the time of such damage and the Landlord may re-enter and repossess the
Premises free and clear of any fights of Tenant under this Lease. In the event
the Landlord can restore the Premises within one hundred twenty (120) days, it
shall so notify Tenant within thirty (30) days after the happening of the fire
or casualty and the Lease shall remain in full force and effect during the
period of Landlord's restoration, except that rent shall abate while the repairs
and restoration are being made, but the rent shall recommence upon restoration
of the Premises and delivery of the same by the Landlord to the Tenant. Landlord
-9-
<PAGE> 13
agrees that it will undertake reconstruction and restoration of the damaged
Premises with due diligence and reasonable speed and dispatch.
SECTION 2. If the Building shall be damaged, but the damage is
repairable in Landlord's estimation, within one hundred twenty (120) days,
Landlord agrees to repair the same with reasonable promptness. In such event,
the rent accrued and accruing shall not abate, except for that portion of the
Premises that has been rendered untenantable and as to that portion the rent
shall abate based on equitable adjustments as reasonably determined by Landlord.
If any damage to the Building is not repairable in Landlord's estimation within
one hundred twenty (120) days, or if the cost to repair same shall exceed 15 %
of the replacement of the Building, Landlord may at its option terminate this
Lease upon serving written notice of such election upon Tenant. Notwithstanding
anything in this Lease to the contrary, Landlord shall have the option of
terminating this Lease, and shall not be required to repair any damage caused by
any fire or other casualty, if said fire or other casualty occurs during the
last year of the term hereof.
SECTION 3. In connection with Landlord's restoration as hereinafter
referred to, in determining what constitutes reasonable promptness consideration
shall be given to delays caused by acts of God, strikes, and other causes of
Force Majeure beyond the landlord's control.
SECTION 4. The Tenant shall immediately notify the Landlord in case
of fire or other damage to the Premises.
SECTION 5. Notwithstanding anything contained in this Article 14, if
repairs are not completed within one hundred fifty (150) days of the date of
damage, subject to delays due to Force Majeure, Tenant shall have the fight
prior to the completion of such work or Tenant's taking possession of the
Premises to terminate this Lease, in which event Landlord and Tenant shall
thereupon be released of liability one to the other (with the exception,
however, of any unpaid Fixed Rent and/or additional rent accrued through the
date of termination, which shall remain the responsibility of Tenant), and the
within Lease shall be deemed null and void.
SECTION 6. Anything contained in the within Lease Agreement to the
contrary notwithstanding, it is understood and agreed by and between the parties
hereto that in no event shall Landlord be obligated to expend any funds in
connection with any repair or restoration work in excess of the proceeds of
insurance policy payments which are made available to Landlord by insurance
carders and by any mortgagee of the Premises and the Building. Landlord's
obligations in connection with such repair and/or restoration work shall and are
hereby strictly limited to the replacement of the basic Building area as demised
by Landlord to Tenant as of the Commencement Date of the term hereof (including
the Work) and in no event shall Landlord be obligated to replace, repair or
restore any improvements to the Premises or alterations thereof installed
therein by or on behalf of Tenant nor shall Landlord be obligated in any event
whatsoever to replace, repair or restore Tenant's leasehold improvements,
personal property, furniture, fixtures, equipment or the like.
A R T I C L E 15.
- - - - - - - ---
CONDEMNATION/EMINENT DOMAIN
---------------------------
SECTION 1. This Lease and the term hereof shall terminate: (1) if
the entire Premises shall be taken by condemnation or eminent domain; or (2) at
the option of Tenant (exercisable by notice given to Landlord within thirty (30)
days after the date after formal institution of the taking proceedings by the
filing of a Complaint or Declaration of Taking) if a material part of the
Premises shall be taken in any condemnation or eminent domain proceeding(s). A
taking of a "material part of the Premises", as such quoted words are used
herein, shall mean the condemnation or taking by eminent domain of so much of
the Premises, in excess of 15 9'0 of the area thereof, as shall materially and
adversely prevent Tenant from operating its business in the Premises for the
purposes for which the Premises were leased to Tenant or for the purposes for
which the Premises were being used at the date of such taking; or (3) at the
option of Landlord (exercisable by notice given to Tenant within three (3)
months
-10-
<PAGE> 14
after the date of taking), if more than 15% of the Lot or if more than 15% of
the Building shall be taken by condemnation or eminent domain.
SECTION 2. Any termination of this Lease Agreement pursuant to the
provisions of this Article shall be effective upon the date of transfer of
possession in connection with the taking proceedings, and, upon such
termination, Tenant shall be liable only for the payment of Fixed Rent,
additional rent, impositions and other charges herein, pro-rated to the date of
such termination, and Landlord shall refund any payment in excess thereof to
Tenant. Tenant may, if permitted by law, make any independent application by
separate proceedings apart from the proceeding in which Landlord shall be
prosecuting its claim, to any condemning authority, for any award which might be
independently payable to it in connection with Tenant's moving expenses,
business dislocation damages or for the taking of Tenant's leasehold
improvements, provided that no such application or any award rendered pursuant
thereto shall operate to diminish any award which would otherwise be payable to
Landlord. Tenant waives its fight to and agrees that it shall not (i) make any
claim in or with respect to any condemnation or eminent domain proceedings
whatsoever or otherwise except as hereinabove specifically provided, or (ii)
make any claim against Landlord in any other action for the value of the
unexpired portion of this lease or the term hereof. Except as above specifically
provided, the total amount of all condemnation awards shall be the sole and
exclusive property of the Landlord, and Tenant shall not participate therein or
in the negotiation thereof or have any rights whatsoever with respect to the
awards or the proceeds of any such proceedings.
SECTION 3. In the event that any part of the Premises is taken in
any condemnation or eminent domain proceedings and this Lease is not terminated
pursuant to Section 1 hereof, then this Lease shall remain in full force and
effect as to such remaining portion, except that from and after the effective
date of any such taking, Tenant shall be entitled to an equitable reduction in
the Fixed Rent required to be paid hereunder in accordance with the value of the
leasehold before and after any such condemnation, due regard being given to any
reduction in square foot area of the Premises caused by such taking, the
location of the areas which were taken in such proceedings, and the uses to
which the Premises might reasonably be put subsequent to the date of such
taking. If Landlord and Tenant do not agree on the amount of such reduced rent,
the same shall be determined by arbitration as herein provided. Subject to the
approval and consent of any then mortgagee of the Premises and the Building and
to the terms and conditions of any mortgage upon the Premises and the Building
and subject to the availability of the proceeds of any award for reconstruction
and restoration and the agreement of any mortgagee to make such proceeds
available, Landlord shall promptly reconstruct and restore the portion of the
Premises remaining after such taking to a complete architectural unit. Except as
set forth herein, any rebuilding or restoration by Landlord shall be strictly
limited to the basic building structure as initially demised hereunder. In no
event shall Landlord be obligated to expend any sums for such rebuilding or
restoration in excess of the amount of money actually paid to and received by
Landlord, net of all expenses, from any condemning authority and/or from any
mortgagee of the Premises and the Building to whom any such award may have been
paid by such condemning authority. The payment of any award by any condemning
authority to Landlord's mortgagee and the application of such payment on account
of Landlord's mortgage shall not be deemed to constitute receipt or constructive
receipt of payment by Landlord. All condemnation proceeds shall be subject to
the requirements of any mortgagee of the Premises and the Building that same be
applied in reduction of such mortgage balance (in which event Landlord shall not
be obligated to restore the Premises) and the remaining portion of any award, if
any, not so applied shall at all times be available to Landlord for construction
and restoration purposes and shall be the sole and exclusive property of
Landlord. The balance of any such proceeds shall, after completion of
restoration and reconstruction, be retained by Landlord. Monies paid "into
Court" shall not be deemed to constitute payment of such award to Landlord until
Landlord agrees to accept the same and until such monies are physically
delivered to Landlord by the condemning authority and by landlord's mortgagee,
if any.
-11-
<PAGE> 15
A R T I C L E 16.
- - - - - - - ---
BANKRUPTCY/INSOLVENCY AND DEFAULT OF TENANT
-------------------------------------------
SECTION 1. If during the term of this Lease, (a) Tenant shall make
an assignment for the benefit of creditors, or (b) a voluntary petition be filed
by Tenant under any law having for its purpose the adjudication of Tenant a
bankrupt, or the extension of time of payment, composition, adjustment,
modifIcation, settlement or satisfaction of the liabilities of Tenant or the
reorganization or liquidation of Tenant, or (c) a receiver be appointed for the
property of Tenant by reason of the insolvency or alleged insolvency of Tenant,
or if (d) any department of the state or federal government or any officer
thereof or duly authorized Trustee or Receiver shall take possession of the
business or property of Tenant by reason of the insolvency or alleged insolvency
of Tenant, or if (e) an involuntary petition be fried against Tenant under any
law having for its purpose the adjudication of Tenant a bankrupt, or for the
liquidation of Tenant; and except with respect to items (a) and (b), SUPRA, of
this Section 1, which shall be non-curable events of default, if Tenant shall
not within sixty (60) days thereafter, remove, have dismissed and/or cure any of
the foregoing, then Landlord may give Tenant notice of a default under this
Lease and if, within thirty (30) days after such notice, Tenant shall still have
not removed and/or cured any of the foregoing; or if (f) any
Debtor-in-Possession ("so-called"), Receiver or Trustee pursuant to any
bankruptcy or insolvency law whether Federal or State shall attempt to assign
this Lease to any party or attempt to sublet all or any part of the Premises,
then the occurrence of any such event shall be deemed a breach of this Lease and
this Lease shall, IPSO FACTO, upon the happening of any of said events and at
the election of Landlord, be terminated and the same shall expire as if the day
of the happening of such event were the date herein specifically fixed for the
expiration of the term, and Tenant (or such Debtor-in-Possession, Receiver or
Trustee as the case may be) will then quit and surrender the Premises to
Landlord, but Tenant shall remain liable as hereinafter provided. If any of the
aforesaid events occur prior to the Commencement Date hereof, this Lease shall
be IPSO FACTO terminated. Landlord reserves the fight to file a claim against
any assignee, receiver or trustee of or for the Premises for damages and for
loss of rent, for the full term of the lease or otherwise, which Landlord may
suffer, as a result of the foregoing.
SECTION 2. If, during the term of this Lease, Tenant shall default
in performance of any of the covenants of this Lease (other than the covenants
for the payment of Fixed Rent and additional rent), or if any executions or
attachments shah be issued against Tenant or any of Tenant's property whereupon
the Premises shah be taken or occupied by someone other than Tenant, then in any
such event Landlord may give to Tenant notice of any default or of the happening
of any contingency in this Article referred to, and if at the expiration of
thirty (30) days after such notice the default or the contingency upon which
said notice was based shall continue to exist, or, in the event said default or
contingency cannot be cured within thirty days, if, at the expiration of thirty
days after such notice, Tenant has not commenced to cure said default or
contingency and shall not thereafter be diligently prosecuting said cure to
completion. Landlord, at its option, may terminate this Lease, and upon such
termination Tenant will quit and surrender the Premises to Landlord, but Tenant
shall nonetheless remain liable under the terms and conditions hereof as herein
provided.
SECTION 3. If Tenant shall default in the payment of the Fixed Rent
and/or additional Rent, or any part of the same, and if such default shall
continue for ten (10) days without the need of any notice thereof from Landlord,
Landlord may immediately thereafter terminate this Lease and accelerate the
payment of all Fixed Rent, additional rent and other monetary charges reserved
hereunder so that all of same shall be immediately due and payable, but Tenant
shah nonetheless remain liable under the terms and conditions hereof as herein
provided.
SECTION 4. Upon any termination of this Lease, Landlord or
Landlord's agents and/or servants may immediately or at any time thereafter
re-enter the Premises and remove all persons and all or any property therefrom
either by summary dispossess proceedings or by any suitable action or
proceedings at law and may repossess said Premises together with all additions,
alterations and improvements thereto, without such re-entry and repossession
working a forfeiture or waiver of the rents to be paid and the covenants to be
performed by Tenant
-12-
<PAGE> 16
during the full term hereof. In the event of termination of this Lease by reason
of the occurrence of any of the events described in this Article, or in the
event of the termination of this Lease by summary dispossess proceedings or
under provisions of law now or at any time hereafter in force by reason of or
based upon or arising out of a default under or breach of this 1.ease on the
part of Tenant, or upon Landlord's recovering possession of the Premises in any
circumstances whatsoever, whether with or without legal proceedings, by reason
of or based upon or arising out of a default under or breach of this Lease on
the part of Tenant, Landlord may, at its option, at any time and from time to
time re-let the Premises, or any part or parts thereof, for the account of
Tenant or otherwise, and receive and collect the rents therefor, applying the
same first to the payment of such expenses as Landlord may have incurred in
recovering possession of the Premises, including the legal expenses and
reasonable attorneys' fees, and expenses of putting the same into good order or
condition and preparing or altering the same for re-rental and all other
expenses, commissions and charges paid, assumed or incurred by Landlord in
re-letting the Premises or in connection with a termination of this Lease by
reason of Tenant's default and then to the payment of monthly Fixed Rent and
additional rent hereunder. Any such re-letting herein provided for may be, at
Landlord's option, for the remainder of the term of this Lease or for a longer
or shorter period and/or for a higher or lower rent and/or with the granting of
concessions. In any such case and whether or not the Premises, or any part
thereof be re-let, Tenant shall pay to Landlord the Fixed Rent, additional
rent and all other charges required to be paid by Tenant pursuant to this Lease
up to the time of such termination of this Lease, or of such recovery of
possession of the Premises by Landlord, as the case may be, together with such
expenses as Landlord may incur for attorneys' fees, brokerage fees and the cost
of putting the Premises in good order or for preparing same for re-rental, and
thereafter Tenant covenants and agrees, if required by Landlord, to pay to
Landlord until the expiration date of the term of this Lease, as herein
provided, as and for liquidated damages the equivalent of the amount of all the
Fixed Rent reserved herein, additional rent and all other charges required to be
paid by Tenant, less the net avails of re-letting, if any, and the same shall be
due and payable by Tenant to Landlord on the several rent days herein specified,
that is to say, upon each of such rent days, Tenant shall pay to Landlord the
amount of the deficiency then existing (any deficiency in Fixed Rent and
additional rent to be computed separately for each month). In computing such
liquidated damages there shall be added to the said deficiency such expenses as
Landlord may incur in connection with re-letting, such as legal expenses,
attorneys' fees, brokerage, advertising, and for keeping the Premises in good
order or for preparing the same for re-letting. Nothing herein contained shall
imply or impose upon Landlord any duty to relet the Premises in order to
mitigate damages. Landlord shall not have any such duty to mitigate damages.
Landlord shall be entitled to retain any overage received as a result of its
re-letting of the Premises and Tenant shall have no rights therein or thereto.
SECTION 5. No expiration or termination of the Lease term pursuant
to Sections 1, 2, 3 or 6 of this Article 16 or by operation of law, or otherwise
(except as expressly provided herein), and no repossession of the Premises or
any part thereof pursuant to Section 4 of this Article 16, or otherwise, shall
relieve Tenant of its liabilities and obligations hereunder, all of which shall
survive such expiration, termination or repossession.
SECTION 6. Without limiting Landlord's rights and remedies under the
preceding Sections of this Article, if Tenant shall fail to make any payment, or
perform any act on its part to be made or performed, as in this Lease provided,
Landlord may (but shall not be obligated to do so), without waiving or releasing
Tenant from any obligation of Tenant contained in this Lease, make any such
payment or perform any such act on the part of Tenant to be made and performed,
as in this Lease provided, in such manner and to such extent as Landlord may
deem desirable, and in exercising any such rights Landlord may pay necessary and
incidental and reasonable costs and expenses, employ counsel and incur and pay
reasonable attorneys' fees. All sums so paid by Landlord and all necessary and
incidental costs and expenses incurred by Landlord in connection with the
performance of any such act by Landlord, together with interest computed thereon
at the rate which shall be two (2%) percent per annum in excess of the
prevailing interest rate charged by Chase Manhattan Bank, N.A. to its most
credit worthy customers ("Prime"), which interest rate is to be adjusted as
Prime fluctuates from time to time (or the maximum legal rate of interest then
prevailing, whichever shall be less), from the date of the making of such
expenditure by Landlord shall be deemed additional rent hereunder and, unless
otherwise expressly provided, shall be payable to Landlord upon demand or at the
option
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<PAGE> 17
of Landlord, may be added to Fixed Rent or additional rent then due or
thereafter becoming due under this Lease, and Tenant covenants to pay any such
sum or sums, with interest as aforesaid, within five (5) days after demand, and
Landlord shall have, in addition to any other right or remedy, the same rights
and remedies in the event of nonpayment thereof by Tenant as in the case of
default by Tenant in the payment of Fixed Rent.
SECTION 7. If this Lease shall terminate by reason of the
occurrence of any default of Tenant or any contingency mentioned in this
Article, landlord shall at its option and election be entitled, notwithstanding
any other provision of this Lease, or any present or future law, to recover from
Tenant or Tenant's estate (in lieu of all claims against Tenant relating to
unpaid Fixed Rent or additional rent), as damages for loss of the bargain and
not as a penalty, a lump sum which at the time of such termination of this Lease
equals the then present worth of the Fixed Rent and all other charges payable by
Tenant hereunder that were unpaid or would have accrued for the balance of the
term, less the fair and reasonable rental value of the Premises for the balance
of such term, such lump sum being discounted to the date of termination at the
rate of six (6%) percent per annum, unless any statute or rule of law governing
the proceeding in which such damages are to be proved shall limit the amount of
such claim capable of being so proved, in which case Landlord shall be entitled
to prove as and for liquidated damages by reason of such breach and termination
of this Lease, the maximum amount which may be allowed by or under any such
statute or rule of law. If the Premises or any part thereof shall be re-let by
the Landlord for a period including the unexpired term of this Lease or any
part thereof, before the presentation of proof of such liquidated damages to any
court, commission, or tribunal, the amount of rent reserved on such re-letting
shall be deemed to be the fair and reasonable rental value for the part or the
whole of the Premises so re-let during the term of the re-letting. Nothing
herein contained shall limit or prejudice Landlord's fight to prove and obtain
as liquidated damages arising out of such breach or termination the maximum
amount to be allowed by or under any such statute or rule of law which may
govern the proceedings in which such damages are to be proved whether or not
such amount be greater, equal to, or less than the amount of the excess of the
Fixed Rent over the rental value referred to above.
SECTION 8. No receipt of payment by Landlord from Tenant, after the
termination of this Lease, as herein provided, shall reinstate, continue or
extend the term or operate as a waiver of the right of landlord to recover
possession of the Premises, it being agreed that, upon termination, any and all
payments collected shall be on account of Tenant's obligations hereunder.
SECTION 9. Tenant hereby expressly waives the service of notice of
intention to re-enter as provided for in any statute, or the necessity to
institute legal proceedings to that end, and also waives any and all right or
redemption in case Tenant shall be dispossessed from the Premises or this Lease
shall be terminated. The terms "enter", "re-enter", "entry", or "re-entry", as
used in this Lease are not restricted to their technical legal meaning.
A R T I C L E 17.
- - - - - - - ---
SERVICES FURNISHED BY LANDLORD
------------------------------
SECTION 1. As long as Tenant is not in default under any provision
of this Lease, Landlord shall furnish the following services to Tenant during
Normal Business Hours (as hereinafter defined):
(a) Passenger elevator service;
(b) Heat, ventilation and air conditioning, which heating and air
conditioning systems shall be provided by systems designed to produce in
accordance with the performance standards set forth on Exhibit C annexed hereto
and made a part hereof, (Tenant agrees to keep peripheral windows closed and at
all times to cooperate with Landlord and observe all regulations which Landlord
may prescribe for the proper functioning and protection of the heating,
ventilation and air conditioning system). For and during that portion of each
lease year between October 15 and May 15, Landlord shall provide heat to the
Premises as climatic
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<PAGE> 18
conditions shall require, and for and during the portion of each lease year
between May 16 and October 14, Landlord shall provide air conditioning to the
Premises as climatic conditions shall require. Notwithstanding anything
contained in this Lease to the contrary, Landlord shall not be obligated to
provide air conditioning or any climate control system(s) of any type to any
area(s) within the Premises used as and for "computer room(s)" or the like;
(c) Water for ordinary drinking and lavatory purposes, but if
Tenant uses water for any other purposes or in unusual quantities, Landlord may
install a water meter at Tenant's expense and Tenant shall pay for water
consumed, as shown by said meter as additional rent as bills therefor are
rendered;
(d) Cleaning services with respect to the office area of the
Premises which cleaning services shall be as described and set forth on Exhibit
D annexed hereto and made a part hereof, on days of Normal Business Hours.
Tenant shall pay to Landlord the cost of removal of any of Tenant's excess
rubbish. Landlord shall not be required to clean or exterminate any areas of the
Premises which are used for the preparation or dispensing of food or beverages
or for storage, shipping or similar purposes.
SECTION 2. For the purposes of this Lease, "Normal Business Hours"
shall mean the period between 8 A.M. and 6 P.M. on Monday through Friday, and
between 8 A.M. and 1 P.M. on Saturday, of each week, excluding legal holidays
and other days which may be designated holidays in labor contracts with trades
providing services to the Premises or as may be designated as legal holidays in
the State of New Jersey. Current Building Holidays are set forth on Exhibit E.
Notwithstanding the foregoing, Tenant shall have access to the Premises twenty
four (24) hours a day, three hundred sixty five (365) days a year. However, in
the event that Tenant occupies the Premises at any tune other than during Normal
Business Hours, Tenant shall pay to Landlord as additional rent, within ten (10)
days after demand for same, the sum of Forty and 00/100 ($40.00) Dollars per
hour for each hour during which Tenant shall so occupy the Premises, which sum
shall be deemed to be the cost of providing services to the Premises for such
periods. The aforesaid hourly charge of $40.00 per hour shall be subject to an
appropriate increase by Landlord in the amount thereof, in the event that, and
to the extent that there shall be an increase from time to time in the cost of
providing services to the Premises for such periods. Except as herein otherwise
provided, Landlord shall in no event be required to supply central heating or
air conditioning other than during Normal Business Hours.
SECTION 3. Landlord shall not be liable for full or partial stoppage
or interruption of the above services or utilities caused by any factors beyond
Landlord's reasonable control and Landlord shall not be liable for consequential
damages in any event. No such stoppage shall operate to constitute a
constructive eviction of Tenant.
A R T I C L E 18.
- - - - - - - --
ADDITIONAL RENT
---------------
SECTION 1. It is expressly agreed that Tenant shall pay, in addition
to the Fixed Rent, and as additional rent hereunder, in each lease year of the
term hereof, its Proportionate Share, of all "Operating Costs" and "Real Estate
Taxes" (as said terms are hereinafter defined) of the Building and the Lot which
shall exceed those applicable to the "Base Year". For the purposes of this
Lease, the term "Base Year" shall mean the calendar year 1994.
SECTION 2. For the purposes of this Article 18, "Operating Costs"
shall mean the following expenses paid or incurred by Landlord in connection
with the Building and the Lot:
A. Wages, salaries, fees and other compensation and payments and
payroll taxes and contributions to any social security, unemployment insurance,
welfare, pension or similar fund and payments for other fringe benefits required
by law or by union agreement (or, if the employees of any of them are non-union,
then payments for benefits comparable to those generally required by union
agreement in first class office buildings in the Middlesex County Area which are
unionized) made to or on behalf of all employees of landlord performing
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<PAGE> 19
services rendered in connection with the operation and maintenance of the
Building and the Lot, including, without limitation, elevator operators,
elevator starters, window cleaners, porters, janitors, maids, miscellaneous
handymen, watchmen, persons engaged in patrolling and protecting the Building
and the Lot, carpenters, engineers, firemen, mechanics, electricians, plumbers,
persons engaged in the operation and maintenance of the Building and Property,
Building superintendent and assistants, Building manager, and clerical and
administrative personnel.
B. The uniforms of all employees, and the cleaning, pressing and
repair thereof.
C. Cleaning costs for the Building and Lot, including the windows
and sidewalks, all snow and rubbish removal (including separate contracts
therefor) and the costs of all labor, supplies, equipment and materials
incidental thereto.
D. Premiums and other charges incurred by Landlord with respect
to all insurance relating to the Building and the Lot and the operation and
maintenance thereof, including, without limitation: fire and extended coverage
insurance, including windstorm, flood, hail, explosion, riot, rioting attending
a strike, civil commotion, aircraft, vehicle and smoke insurance; public
liability; elevator; workmen's compensation; boiler and machinery; rent; use and
occupancy; health, accident and group life insurance of all employees; and
casualty rent insurance.
E. The cost of electricity, heat, water and sewer and any and all
other utility services used in connection with the operation and maintenance of
the Building and the Lot (excluding electricity and other utility services, if
any, which are paid directly by tenants). For the purpose of this Section, "cost
of electricity" shall include the cost of electricity for common areas
attributable to Building operation [i.e. mechanical equipment operation, common
area electricity usage, exterior lighting and, in general, all other electric
utility usage mutually enjoyed by all tenants (based upon the electricity rate
to be adjusted for summer and winter as applicable, and inclusive of demand
charge, energy charge and energy adjustment charge in effect as of the
Commencement Date)] reduced by amounts due from tenants for special electrical
usage in conjunction with elapsed time recorded usage for overtime operation of
the Building mechanical systems actually paid to Landlord pursuant to Article 17
hereof, as said Article pertains to electrical usage only.
F. Costs incurred for operation, service, maintenance,
inspection, repair and alteration of the Building, the Lot, and the heating,
air-conditioning, ventilating, plumbing, electrical and elevator systems of the
Building (including any separate contract therefor) and the costs of labor,
materials, supplies and equipment used in connection with all of the aforesaid
items.
G. Sales and excise taxes and the like upon any of the expenses
enumerated herein.
H. Management fees of the managing agent for the Building, if
any. If there shall be no managing agent, or if the managing agent shall be a
company affiliated with Landlord, the management fees that would customarily be
charged for the management of the Building by an independent, first-class agent
in the Middlesex County Area.
I. The cost of replacements for tools and equipment used in the
operation and maintenance of the Building and the Lot.
J. The cost of repainting or otherwise redecorating any part of
the Building other than premises demised to tenants in the Building.
K. Decoration for the lobby and other public portions of the
Building.
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<PAGE> 20
L. The cost of telephone service, postage, office supplies,
maintenance and repair of office equipment and similar costs related to
operation of the Building Superintendent's office.
M. The cost of licenses, permits and similar fees and charges
related to operation, repair and maintenance of the Building.
N. Auditing fees necessarily incurred in connection with the
maintenance and operation of the Building, and accounting fees incurred in
connection with the preparation and certification of a real estate tax
escalation and the Operating Cost escalation statements pursuant to this Article
18.
O. All costs incurred by landlord to retrofit any portion or all
of the Building to comply with a change in existing legislation, whether
Federal, State or Municipal; repairs, replacements and improvements which are
appropriate for the continued operation of the Building as a first-class
building.
P. All expenses associated with the installation of any energy or
cost saving devices.
Q. The pro rata share of all costs and expenses relating to the
Property and its maintenance, operation and repair of any common facilities
including, but not limited to, snow removal, landscaping and similar services.
R. Any and all other expenditures of Landlord in connection with
the operation, repair or maintenance of the Lot or the Building which are
properly expensed in accordance with sound accounting principles.
If Landlord shall purchase any item of capital equipment or make any capital
expenditure as described in subsections O and P above, or otherwise, then the
costs for the same shall be included in Operating Costs in the year of
installation and in subsequent years amortized on a straight-line basis over an
appropriate period (but not more than ten (10) years) with an interest factor
equal to the prime interest rate charged by The Chase Manhattan Bank, N.A., to
its most favored borrowers, plus 2%. If Landlord shall lease such item of
capital equipment, then the rentals or other operating costs paid pursuant to
such leasing shall be included in Operating Cost for each year in which they are
incurred. Operating Costs for the Base Year shall be projected and interpolated
as if the Building were 95% occupied during said year.
SECTION 3. (a) Tenant shall also pay, as additional rent, its
Proportionate Share of real estate taxes, assessments, sewer rents, rates and
charges, state and local taxes, transit taxes or any other governmental charge,
general, special, ordinary or extraordinary (hereinafter collectively called
"taxes") (but not including income or franchise taxes or any other taxes imposed
upon or measured by the Landlord's income or profits, except if in substitution
for real estate taxes as hereinafter provided) which may now or hereafter be
levied or assessed against the Lot and upon the Building (hereinafter
collectively called the "Real Property") attributable to any tax year which is
in excess of the amount of taxes on the Real Property attributable to the Base
Year. The taxes for the Base Year shall be the product of the tax rate in effect
as of the Base Year times the assessment for the calendar year in which the
Building shall be fully assessed as a completed building. The Landlord shall
take the benefit of the provisions of any statute or ordinance permitting any
assessment to be paid over a period of tune, and Tenant shall be obligated to
pay its Proportionate Share, of the installments of any such assessment
applicable to the term of this Lease or any renewal hereof. Any amount due to
the Landlord under the provisions hereof shall be paid within ten (10) days
after the Landlord shall have submitted a statement to Tenant showing in detail
the computation of the amount due to Landlord. The amount of taxes for the Base
Year, against which Tenant's liability for additional rent in subsequent years
is determined, shall be the amount thereof finally determined to be legally
payable by legal proceedings or otherwise. In the event the amount of taxes for
the Base Year has not been finally determined by legal proceedings or otherwise
at the time of payment of taxes for any subsequent year, the actual amount of
taxes paid by Landlord for the Base Year shall be used in the statement provided
by Landlord as the basis for Tenant's liability hereunder
-17-
<PAGE> 21
with respect to such subsequent year. Upon final determination of the amount of
taxes for the Base Year by legal proceedings or otherwise, Landlord shall
deliver to Tenant a statement setting forth the amount of taxes for the Base
Year as finally determined and showing in reasonable detail the computation of
any adjustment due to Landlord by reason thereof. Any payment due to Landlord by
reason of such adjustment shall be paid as hereinbefore provided.
(b) If Landlord shall receive any tax refund or rebate in respect
of any tax year following the Base Year, Landlord may deduct from such tax
refund any reasonable expense incurred in obtaining such tax refund, and out of
the remaining balance of such tax refund, Landlord shah credit against Tenant's
obligations under this Section, Tenant's Proportionate Share thereof provided
that Tenant shall have paid the Landlord all taxes due under this Lease for the
tax year to which such refund or rebate is allocable and for the tax year in
which such refund or rebate shall have been received.
(c) If the tax year for real estate taxes shall be changed, then
an appropriate adjustment shall be made in the computation of the additional tax
due to Landlord or any amount due to Tenant. The computation shall be made in
accordance with sound accounting principles.
(d) If the last year of the term of this Lease ends on any day
other than the last day of a tax year, any payment due to Landlord or to Tenant
by reason of any increase or decrease in taxes shall be pro-rated and Tenant
shall pay any amount due to Landlord within ten (10) days after being billed
therefor, and Landlord shall pay any amount due to Tenant. This covenant shall
survive the expiration or termination of this Lease.
(e) If at any time during the term of this Lease the method or
scope of taxation prevailing at the commencement of the Lease term shall be
altered, modified or enlarged so as to cause the method of taxation to be
changed, in whole or in part, so that in substitution for, or as a supplement
to, the real estate taxes now assessed there is, a capital levy or other
imposition based on the value of the Building or Lot or the rents received
therefrom, or some other form of assessment, tax or imposition based in whole or
in part on some other valuation of the Real Property or any portion thereof, as
if the Real Property were the only property owned by the Landlord, then and in
such event, such substituted or supplemental tax, assessment or imposition shall
be deemed included in "taxes" for purposes of this Article 18.
SECTION 4. For and during each lease year of the term of this Lease
Agreement, except the first lease year of the term hereof only, Tenant agrees to
pay to Landlord, at Landlord's option and at the same time as each monthly
payment of Fixed Rent and in addition thereto, an amount equal to one-twelfth
(1/12) of Tenant's Proportionate Share of the increase in the Operating Costs
and Real Estate Taxes applicable to the current year based upon the amount by
which the prior lease year is in excess of the Base Year. Said sum shall be held
by Landlord and shall be employed in connection with the payment of such
Operating Costs and Real Estate Taxes as same become due and payable. Tenant
further agrees to make such further payments in such amounts and at such times
as Landlord may reasonably require to account for any deficiency in the reserve
funds held by Landlord so as to enable Landlord to satisfy the increase in the
Operating Costs and Real Estate Taxes for the particular lease year in full,
which sums Tenant shall furnish Landlord as additional rent hereunder.
Notwithstanding the foregoing provisions, if at any time Landlord incurs such
costs at a higher rate Landlord shall have the fight to bill Tenant for its
Proportionate Share of said excess and to continue to collect same in advance on
a monthly basis as above provided.
A R T I C L E 19.
- - - - - - - ---
ELECTRIC CHARGES
----------------
SECTION 1. Tenant shall pay Landlord for its use of electric energy
in the Premises whether for the electric lighting fixtures provided to Tenant by
Landlord, Tenant's electric equipment, such as electric typewriters, calculators
and other small office machines, or otherwise. Tenant's total electrical demand
shall not exceed two (2) volt-amperes connected load per square foot (nor shall
any single electric office machine or any fixture requiring electric
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<PAGE> 22
energy in excess of 1800 volt-amperes including but not limited to large copying
machines and computers, be installed or operated in the Premises) without
Landlord's prior written consent, which consent Landlord covenants shall not be
unreasonably withheld; provided always, however, that the electrical system
installed in the Premises shall have sufficient capacity to accommodate same and
further provided that any additional costs attributable to such high energy use,
including any additional air conditioners required by such use, shall be paid
for by Tenant.). The Tenant shall not install, maintain or operate in the
Premises electric lighting fixtures or electric equipment whose total per square
foot electrical demand exceeds the aforementioned limitation of two (2)
volt-amperes connected load per square foot without making a written request for
Landlord's prior consent thereto. If a separate meter is provided for the
Premises (which Landlord shall have the right to so provide), Tenant shall apply
for electric service directly form the utility company servicing the Building
and arrange for the direct billing of utility consumption to Tenant. If Landlord
shall install a submeter to measure electric energy consumption in the Premises
(which Landlord shall have the right to install), Tenant shall pay for electric
energy based on such submeter within ten (10) days after monthly (or other)
billing by Landlord. If gas service is required, Tenant shall make all
arrangements with the utility company for direct service and shall install all
lines and meters required therefor. Landlord shall have the right to approve the
proposed installation of such service.
SECTION 2. In the event that during the term of the Lease there
shall be an increase in the rate schedule of the public utility for the supply
of electric energy to the Building not directly billed to Tenant by the utility
company, Tenant shall pay the resulting increase for electric energy consumed in
the Premises.
SECTION 3. In the event that any tax is imposed upon Landlord with
respect to electric energy furnished to the Building by any federal, state,
county or municipal authority, Tenant shall pay to Landlord, on demand, Tenant's
Proportionate Share of such taxes so assessed against the Building.
SECTION 4. Except as otherwise specifically provided in this Lease,
the Landlord shall have no responsibility for failure to supply the electric
energy when prevented from doing so by strikes, repairs, alterations or
improvements, or by reason of the failure of the public utility to furnish the
electric energy, or for any cause beyond the Landlord's reasonable control, or
by order or regulation of any federal, state, county or municipal authority.
Except as otherwise specifically provided in this Lease, the Landlord's
obligation to furnish electricity shall not be breached nor shall there be any
abatement in rent or any liability on the part of Landlord to Tenant for failure
to furnish electricity for the reasons herein set forth. In no event shall
Landlord be obligated to increase the existing electrical capacity of any
portion of the Building's system, nor to provide any additional wiring or
capacity to meet the Tenant's additional requirements.
SECTION 5. Landlord shall not be liable in any way to Tenant for any
loss, damage or expense which the Tenant may sustain or incur if either the
quantity or character of electric service furnished to the Premises is changed
or is no longer available or suitable for Tenant's requirements.
SECTION 6. The failure of Landlord to furnish any service hereunder
shall not be construed as a constructive eviction of Tenant and shall not excuse
Tenant from failing to perform any of its obligations hereunder and shall not
give Tenant any claim against Landlord for damages for failure to furnish such
service.
SECTION 7. The Tenant covenants and agrees that at all times, its
use of electric energy shall never exceed the capacity of the existing feeders
to the Building or the risers of wiring installation. Any riser or risers to
supply the Tenant's electrical requirements upon written request of the Tenant
shall be installed by the Landlord at the sole cost and expense of the Tenant,
if, in the Landlord's sole judgment, the same are necessary and will not cause
or create a dangerous or hazardous condition or entail excess or unreasonable
alterations, repairs or expense or interfere with or disrupt other tenants or
occupants. In addition to the installation of such riser or risers, the Landlord
will also at the sole cost and expense of Tenant, install all
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<PAGE> 23
other equipment proper and necessary in connection therewith subject to the
aforesaid terms and conditions.
SECTION 8. Tenant shall be responsible, at its cost and expense, for
replacing all light bulbs, fluorescent lamps, non-building standard lamps and
bulbs and all ballasts employed by Tenant in the Premises after the Commencement
Date.
SECTION 9. If electric energy consumed in the Premises is not
separately metered, either by the utility company or by Landlord as aforesaid,
and billed to Tenant, Tenant shall pay Landlord for such electric energy the sum
of $7,292.50 per annum (i.e., $1.25 per square foot of gross rentable area of
the Premises) in equal monthly installments of $607.71 each on the first day of
each month during the term of this Lease commencing on the Commencement Date.
Such sum of $7,292.50 shall be subject to increase in accordance with increases
in electric charges payable by Landlord. In addition, either Landlord or Tenant
may, at any time, at its sole cost and expense, engage a electrical consultant,
approved by Landlord, to make a survey of the electric energy demand properly
qualified in the Premises and to determine the average monthly electric
consumption in the Premises. The findings of the said consultant as to the
average monthly electric consumption of the Tenant shall be deemed conclusive
and binding upon the parties. From and after said consultant has submitted its
report, Tenant shall pay to Landlord, as additional rent, on the first day of
each month during the balance of the term hereof (or until another such survey
is performed or a separate electric meter is installed for the Premises), in
advance, the amount set forth in the survey as the monthly electric consumption.
The Landlord is hereby granted the right from time to time, to inspect the
electric lighting fixtures and electric equipment in the Premises.
A R T I C L E 20.
- - - - - - - ---
NOTICES
-------
All notices, demands and requests which may be or are required to be
given by either party to the other shall be in writing and shall be served by
personal service or by certified mail, return receipt requested or by overnight
courier which obtains delivery receipts (e.g. Federal Express). All notices,
demands and requests by Landlord to Tenant shall be sent to Tenant at the
Premises or at such other place as Tenant may from time to time designate in a
written notice to Landlord. Notices shall be deemed given and effective on the
earlier of the date of delivery and the date of attempted delivery. A notice
from the attorney for Landlord or Tenant shall be effective as if given by the
party represented by such attorney. All notices, demands, and requests by Tenant
to the Landlord shall be sent to Landlord at 90 Woodbridge Center Drive,
Woodbridge, New Jersey, with a copy to Lasser, Hochman, Marcus, Guryan and
Kuskin, 75 Eisenhower Parkway, Roseland, New Jersey 07068, attention: Richard C.
Stewart, Esq., or at such other place or to such other parties as Landlord may
from time to time designate in a written notice to Tenant.
A R T I C L E 21.
- - - - - - - ---
LESSER AMOUNT OF RENT
---------------------
No payment by Tenant or receipt by Landlord of a lesser amount than
the monthly Fixed Rent and additional rent herein stipulated shall be deemed to
be other than on account of the earliest Fixed Rent or additional rent, nor
shall any endorsement or statement on any check or any letter accompanying any
check or payment as rent be deemed an accord and satisfaction, and Landlord may
accept such check or payment without prejudice to Landlord's right to recover
the balance of such rent or pursue any other remedy in this Lease or at law
provided.
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<PAGE> 24
A R T I C L E 22.
- - - - - - - ---
QUIET ENJOYMENT
---------------
SECTION 1. Landlord covenants and agrees that it has and will have
at the commencement of the term of this Lease full right and power to execute
and perform this Lease and to grant the estate demised herein. Tenant's rights
hereunder are and shall be subject to presently existing and future easements
for storm and sanitary sewers, drainage ditches, public utilities, mortgages,
liens of real estate taxes and all other matters of record. Tenant has accepted
its leasehold estate subject to the present and future liens of the foregoing
items.
SECTION 2. Landlord covenants and warrants that subject to the
provisions of Section 1, SUPRA, and to the items therein contemplated and
referred to, Tenant, upon paying the Fixed Rent, additional rent and all charges
herein provided for and observing and keeping the covenants, agreements and
conditions of this Lease on its part to be kept, shall lawfully and quietly
hold, occupy and enjoy the Premises during the term of this Lease, without
hindrance or molestation of Landlord or of any person or persons claiming under
Landlord, and Landlord covenants and agrees that it will defend Tenant in such
peaceful and quiet use and possession of the Premises against the claims of all
such persons.
A R T I C L E 23.
- - - - - - - ---
ARBITRATION
-----------
In any case where this Lease provides for the settlement of a
dispute by arbitration, the same shall be settled in Newark, New Jersey by
arbitration under the auspices of the American Arbitration Association. The
rules of the American Arbitration Association from time to time in effect shall
apply (to the extent appropriate). Any award shall be enforceable by proper
proceedings in any court having jurisdiction. The arbitrators, regardless how
appointed, may determine how the expenses of the arbitration, including
reasonable attorneys' fees, and disbursements of the successful party, shall be
borne as between Landlord and Tenant.
A R T I C L E 24.
- - - - - - - ---
LIMITATION OF LANDLORD'S LIABILITY
----------------------------------
SECTION 1. The term "Landlord" as used in this Lease, so far as
covenants and/or obligations on the part of Landlord are concerned, shall be
limited to mean and include only the owner or owners at the time in question of
the fee of the Premises and in the event of any transfer or transfers of the
title to such fee Landlord herein named (and in the case of any subsequent
transfers or conveyances, the then grantor) shall be automatically freed and
relieved from and after the date of such conveyance or transfer of all liability
for the performance of any covenants or obligations on the part of Landlord
contained in this Lease thereafter to be performed, provided that any funds in
the hands of such Landlord or the then grantor at the time of such transfer, in
which Tenant has an interest, shall be turned over to the grantee and any amount
then due and payable to Tenant by Landlord or the then grantor under any
provisions of this Lease, shall be paid to Tenant, it being intended hereby that
the covenants and obligations contained in this Lease on the part of Landlord
shall be binding on Landlord, its successors and assigns, only during and in
respect of their respective successive periods of ownership.
SECTION 2. Anything contained in this Lease to the contrary
notwithstanding, Tenant agrees that it shall look solely to the estate and
property of Landlord in the Premises and the Building for the collection of any
judgment (or other judicial process) requiring the payment of money by Landlord
or requiring the performance by Landlord of any covenant or obligation of this
Lease in the event of any default or breach by Landlord with respect to any of
the terms, covenants or conditions of this Lease to be observed and/or performed
by Landlord (subject always, however, to the prior fights of any mortgagee of
the Premises and the Building), and
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<PAGE> 25
no other assets of Landlord whatsoever shall be subject to levy, execution or
other procedures for the satisfaction of Tenant's remedies.
SECTION 3. Without in any manner limiting the generality of the
foregoing, it is specifically understood and agreed by and between the parties
hereto that no officer, director, stockholder or agent of any corporate entity
landlord shall have personal or individual liability pursuant hereto nor shall
any partner of a partnership landlord have any personal or individual liability
pursuant hereto nor shall the individual proprietor of any individual
proprietorship landlord have any personal or individual liability pursuant
hereto.
A R T I C L E 25.
- - - - - - - ---
ESTOPPEL NOTICES
----------------
Tenant agrees at any time and from time to time upon not less than
ten (10) days' prior written request by Landlord to execute, acknowledge and
deliver to Landlord a statement in writing certifying that this Lease is
unmodified and in full force and effect (or if there have been modifications
that the same is in full force and effect as modified and stating the
modifications), the Commencement Date of the term hereof and the dates to which
the Fixed Rent, additional rent and other charges have been paid in advance, if
any, it being intended that any such statement delivered pursuant to this
Article may be relied upon by any third party, including but not limited to any
prospective purchaser of Landlord's interests herein, the fee, or by any
mortgagee or assignee of any mortgage upon Landlord's interest in the Premises
and/or the Building.
A R T I C L E 26.
- - - - - - - ---
REMEDIES
--------
The specified remedies to which Landlord and Tenant may resort under
the terms of this Lease are cumulative and are not intended to be exclusive of
any other remedies or means of redress to which Landlord or Tenant may be
lawfully entitled in case of any breach or threatened breach by Landlord or
Tenant of any provisions of this Lease. The failure of Landlord or Tenant to
insist in any one or more cases upon the strict performance of any of the
covenants of the Lease or to exercise any option herein contained shall not be
construed as a waiver or a relinquishment for the future of such covenant or
option. A receipt by Landlord of rent with knowledge of the breach of any
covenant hereof shall not be deemed a waiver of such breach, and no waiver of
such breach, and no waiver by Landlord or Tenant of any provision of this Lease
shall be deemed to have been made unless expressed in writing and signed by
Landlord or Tenant (as the case may be). In addition to the other remedies in
this Lease provided, Landlord or Tenant shall be entitled to the restraint by
injunction of the violation or attempted or threatened violation, of any of the
covenants, or provisions of this Lease.
A R T I C L E 27.
- - - - - - - ---
BROKERAGE COMMISSION
--------------------
Tenant warrants and represents that it has not dealt or negotiated
with any real estate broker or salesman in connection with this Lease other than
Cushman & Wakefield (the "Broker") or representatives thereof. Tenant shall and
hereby does indemnify and hold Landlord harmless from and against any real
estate commissions, fees, charges or the like, or claims therefor, including any
and all costs incurred in connection therewith, arising out of the within
transaction payable to any party other than the Broker except to the extent any
such claim or commission is based solely upon Landlord's acts.
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<PAGE> 26
A R T I C L E 28.
- - - - - - - --
UNAVOIDABLE DELAYS
------------------
In the event that either Landlord or Tenant shall be delayed or
prevented from performing any of its obligations pursuant to the provisions of
this Lease due to governmental action, or lack thereof, or due to shortages of
or unavailability of materials and/or supplies, labor disputes, strikes, slow
downs, job actions, picketing, secondary boycotts, fire or other casualty,
delays in transportation, acts of God, failure to comply or inability to comply
with any orders or request of any governmental agencies or authorities, acts of
declared or undeclared war, public disorder, riot or civil commotion, or due to
any other cause beyond the reasonable control of Landlord or Tenant, as the case
may be (collectively "Force Majeure"), such party shall in any or all such
events be excused from its obligation to perform and comply with such provisions
of this Lease for a period of time commensurate with any delay so caused,
without any liability to the other therefor whatsoever, and all time periods
provided for herein for performance of any such obligations shall be extended
for a period of time commensurate with any such delay. Notwithstanding the
foregoing, the provisions of this Article shall not apply to, and shall permit
any delay in (i) the payment of any installment of Fixed Rent or additional rent
and (ii) the exercise by Tenant of any option contained in this Lease.
A R T I C L E 29.
- - - - - - - ---
SUBORDINATION
-------------
SECTION 1. Tenant covenants that its rights under this Lease are now
and will be subordinate to the operation and effect of any mortgage(s) or ground
lease(s) now existing or hereafter placed upon the Premises, the Building and/or
the Lot or any part or portion thereof without any further written document from
Tenant; provided, however, Tenant agrees to execute any instrument required by
Landlord to effectuate the provisions hereof and hereby constitutes Landlord as
Tenant's Attorney-in-Fact to execute any such instrument in the name of Tenant.
In the event that any mortgagee of the Premises and/or the Building shall
succeed to the interests of the Landlord under the within Lease, it is
understood and agreed that said mortgagee shall not in any event be or become
liable for any act or omission of any prior landlord (including the Landlord);
or be subject to any offsets or defenses which Tenant might have against any
prior landlord (including the Landlord); or be bound by any rent or additional
rent which Tenant might have paid for more than the current month to any prior
landlord (including the Landlord); or be bound by any amendment or modification
of the within Lease made without its consent; or be bound to return any security
deposit under the within Lease unless the same shall actually come into
possession of said mortgagee.
SECTION 2. Tenant agrees to comply with such reasonable conditions
and requirements for modifications hereof made by any existing, future or
prospective bona fide institutional mortgagee of the Premises and/or the
Building, which conditions and requirements shall not materially and adversely
affect the basic business terms hereof, and Tenant further agrees to execute
such further documents and modifications of the terms hereof as may be
reasonably requested by such institutional mortgage lender.
SECTION 3. Tenant shall, upon the request of Landlord or Landlord's
mortgagee, at any time during the term hereof, furnish to Landlord or to any
such mortgagee, the most recent financial statements of Tenant duly certified by
a certified public accountant.
SECTION 4. Tenant further agrees that neither the cancellation nor
the termination of any ground or underlying lease, nor the foreclosure of any
mortgage affecting the fee title of the Premises, the Building and/or the Lot,
nor any foreclosure of a leasehold mortgage, nor any proceedings brought by the
holder of any such mortgage to recover possession of the Premises or the
Building shall, by operation of law or otherwise, result in the cancellation or
termination of this Lease or the obligations of Tenant hereunder, and Tenant
covenants and agrees to attorn to any successor to Landlord's interest in this
Lease and/or in the Premises and/or the Building or to the holder of any such
mortgage or ground or underlying lease or to the purchaser of the
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<PAGE> 27
Premises and/or the Building (or Landlord's interests therein) at any
foreclosure sale, provided that in any such case this Lease and Tenant's
interest shall not be disturbed and shall be recognized by any successor to
Landlord's interests hereunder or by any such mortgagee or purchaser for the
period(s) in which this Lease remains in good standing.
SECTION 5. If any act or omission of Landlord would give Tenant the
right, immediately or after lapse of a period of time, to cancel or terminate
this Lease, or to claim a partial or total eviction, Tenant shall not exercise
such right (a) until it has given written notice of such act or omission to
Landlord and each mortgagee of the Premises whose name and address shall
previously have been furnished to Tenant, and (b) until a reasonable period for
remedying such act or omission shall have elapsed following the giving of such
notice and following the time when such mortgagee of the Premises shall have
become entitled under such mortgage to remedy the same (which reasonable period
shall in no event be less than the period to which Landlord would be entitled
under this Lease or otherwise, after similar notice, to effect such remedy),
provided such mortgagee of the Premises shall with due diligence give Tenant
notice of intention to, and commence and continue to, remedy such act or
omission.
A R T I C L E 30.
- - - - - - - ---
SIGNS
-----
The Tenant shall only be permitted to install signage at the
Premises in accordance with standards established by Landlord for the Building,
at such designated locations as Landlord shall direct and in accordance with all
governmental laws, orders, rules and regulations. The Tenant shall not have the
right to put any identifying signs on the exterior of the Building or roof
hereof. Subject to the foregoing Tenant shall, at Tenant's cost and expense, be
identified on any building directory sign maintained by Landlord for all the
tenants of the Building, and may identify itself, at its cost and expense, by
name only, on the entrance door of the Premises leading to the interior Common
Areas. Said name shall be of such shape, size and design as shall be approved by
Landlord. Without limiting the foregoing, Tenant shall be solely responsible, at
its cost and expense, for obtaining any and all governmental permits and
approvals required for the installation of any and all signs installed by
Tenant. Tenant shall, at its cost and expense, remove all signs at the
expiration or earlier termination of the Lease and Tenant shall, at its cost and
expense, repair all damage caused by such removal.
A R T I C L E 31.
- - - - - - - ---
NOTICES OF DEFAULT
------------------
Tenant agrees that any default notice served upon Landlord shall
also be served upon any mortgagee (or underlying Ground Lessor) of the Premises
and the Building, the name(s) of which Landlord shall have furnished to Tenant
theretofore. Tenant further agrees that Landlord's mortgagee(s) (or such Ground
Lessor(s)) shall have and be deemed to have the same period of time to cure any
of Landlord's defaults pursuant to the provisions of this Lease as Landlord
shall be granted pursuant to the provisions of this Lease.
A R T I C L E 32.
- - - - - - - ---
USE
---
SECTION 1. The Premises may be used only for executive and general
office purposes and for no other purpose whatsoever. Without expanding any use
to which the Premises may be put as hereinbefore set forth, it is specifically
understood and agreed that no part of the Premises shall, at any time, be used
for the sale or preparation of food or beverages. No part of the Premises shall
be used or employed for any purpose which shall emit or produce loud noises,
vibrations, noxious fumes or odors or for any purpose which shall constitute a
nuisance, or which shall be, or shall cause Landlord, the Premises or the
Building to be violative of any governmental rule, law or regulation.
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<PAGE> 28
SECTION 2. Tenant represents and warrants that its Standard
Industrial Classification Number ("S.I.C." Number) under the Standard Industrial
Classification Manual published by the Executive Office of the President, Office
of Management and Budget is as set forth in the Lease Summary included in this
Lease.
A R T I C L E 33.
- - - - - - - ---
LANDLORD'S RIGHT TO MODIFY
--------------------------
Anything contained in the within Lease to the contrary
notwithstanding, it is specifically understood and agreed by and between the
parties hereto that Landlord retains the sole and uncontrolled right and
discretion to vary, modify or alter the size of the Lot and/or the Building, to
add thereto or to subtract therefrom, or, having constructed the Building, to
make any modifications thereto, additions thereto, deletions therefrom or
expansion thereof as Landlord may in its sole discretion elect to do; provided
always, however, that no such variation, modification, or alteration shall
operate so as to affect the Premises in such a way as would vary, modify or
alter the size thereof or as would materially and adversely affect Tenant's use
and enjoyment thereof or of the common areas associated therewith. Landlord
retains and shall retain in its sole discretion the fight to enlarge or diminish
the common areas. No diminution of the size of any portion of the Lot shall
operate to reduce parking below legal minimum requirements unless reasonably
acceptable substitute parking in sufficient amounts is then made available.
A R T I C L E 34.
- - - - - - - ---
LATE CHARGES
------------
In the event that any installment of Fixed Rent, additional rent,
impositions or the like shall be delinquent and overdue for a period in excess
of ten (10) days, a "late charge" of five cents ($.05) for each dollar ($1.00)
so delinquent and overdue may be charged to Tenant by the Landlord for the
purpose of defraying the Landlord's expenses incident to handling such
delinquent payment. This charge shall be in addition to, and not in lieu of, any
other remedy which the Landlord may have and is in addition to any reasonable
fees and charges of any attorney which the Landlord may employ to enforce the
Landlord's remedies in connection with any default hereunder, whether such
remedy(ies) shall be authorized herein, or by law. Such "late charges", if not
previously paid, shall, at the option of the Landlord, be paid at the same time
as the next succeeding monthly installment of Fixed Rent to be made under the
Lease.
A R T I C L E 35.
- - - - - - - ---
LANDLORD'S RULES AND REGULATIONS
--------------------------------
The rules and regulations regarding the Building and the Lot affixed
to this Lease, as Exhibit B, as well as any other and further reasonable rules
and regulations which shall be made by the Landlord, shall be observed by the
Tenant and by the Tenant's employees, agents and invitees. The Landlord reserves
the right to rescind any presently existing rules applicable to the Building and
the Lot and to make such other and further reasonable rules and regulations as,
in its judgment, may from time to time be desirable for the safety, care and
cleanliness of the Building and the Lot and for the preservation of good order
therein, which rules, when so made and reasonable notice thereof given to the
Tenant, shall have the same force and effect as if originally made a part of
this Lease. Such other and further rules shall not, however, be inconsistent
with the proper and rightful enjoyment by the Tenant of the Premises.
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<PAGE> 29
A R T I C L E 36.
- - - - - - - ---
CONDITION OF PREMISES
---------------------
It is expressly understood and agreed by and between the parties
hereto that except as specifically provided for herein to the contrary, the
Premises are being leased by Landlord to Tenant, and shall be delivered to
Tenant, in their present condition "as is" and Landlord shall not be obligated
to perform any additional work of any type or nature whatsoever in connection
with said Premises in order to prepare same for Tenant's use or occupancy.
A R T I C L E 37.
- - - - - - - ---
ENVIRONMENTAL LAWS
------------------
SECTION 1. (a) As used in this Article 37, the term "Occupant" shall
mean any person or entity other than Tenant using and/or occupying all or any
portion of the Premises.
(b) Notwithstanding any other provision of this Lease to the
contrary, Tenant agrees that it shall, at its sole cost and expense, fulfill,
observe and comply with, and shall take all necessary steps to cause any and all
Occupants to fulfill, observe and comply with, all of the terms and provisions
of the Industrial Site Recovery Act, N.J.S.A 13:1K-6 ET SEQ., ("ISRA") the Spill
Compensation and Control Act, N.J.S.A. 58:10-23.11 ET SEQ., (the "Spill Act"),
and all other federal, state and local environmental laws now in effect or
hereinafter enacted, as any of the same may be amended from time to time, and
all rules, regulations, ordinances, opinions, orders and directives issued or
promulgated pursuant thereto or in connection therewith.
(c) Without limiting the foregoing, upon Landlord's request
therefor, and in all events no later than sixty (60) days prior to "closing
operations" or "transferring ownership or operations" (as said terms are defined
in ISRA) by Tenant and/or any one or more of the Occupants, Tenant, at its sole
cost and expense, shall provide Landlord with a certified true copy of:
(i) An opinion letter from the New Jersey Department of
Environmental Protection and Energy ("NJDEPE") (or such other agency or body as
shall then have jurisdiction over ISRA matters) in a form satisfactory to
Landlord's counsel, stating that ISRA does not then apply to: Tenant; the use
and occupancy of the Premises and the closing of operations or transferring of
ownership or operations of all or any portion of the Premises; or
(ii) A "No further action letter" (as said term is defined in
ISRA) duly and finally approved by NJDEPE or such other agency or body as shall
then have jurisdiction over ISRA matters; or
(iii) A "Remedial action workplan" (as said term is defined in
ISRA) duly and finally approved by NJDEPE or such other agency or body as shall
then have jurisdiction over ISRA matters.
Nothing in this Section 1(c) of Article 37 shall be construed as
limiting Tenant's obligation to otherwise comply with ISRA.
(d) In the event Tenant complies with Section 1(c) of Article 37,
by obtaining an approved final Remedial action workplan, Tenant further agrees
that it shall, at its sole cost and expense:
(i) Post or cause to be posted any financial guarantee or
other bond required to secure implementation and completion of said Remedial
action workplan, and
(ii) Promptly implement and prosecute to completion or cause
to be so implemented and prosecuted said Remedial action workplan, in accordance
with the schedules contained in said Remedial action workplan or as may be
otherwise ordered or directed by
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<PAGE> 30
NJDEPE or such other agency or body as shall then have jurisdiction over said
Remedial action workplan. Tenant expressly understands and acknowledges that
Tenant's compliance with the provisions of this Section 1(d) of Article 37 may
require Tenant to expend funds or do acts after the expiration or termination of
one or more subleases or contracts between Tenant and one or more Occupants.
Tenant agrees that it shall expend such funds and do such acts and shall not be
excused therefrom even though the term of said subleases shall have previously
expired or been terminated.
(e) Within ten (10) days after written request by Landlord,
Tenant, shall deliver to Landlord a duly executed and acknowledged affidavit of
Tenant and of the chief executive officers of such Occupants as Landlord may,
from time to time, require, certifying:
(i) The proper four digit Standard Industrial Classification
number relating to Tenant and/or said Occupant's then current use of the demised
premises (said Standard Industrial Classification number to be obtained by
reference to the then current Standard Industrial Classification Manual prepared
and published by the Executive Office of the President, Office of Management and
Budget or the successor to such publication); and
(ii) (A) That Tenant's and/or said Occupant's then current
use of the Premises does not involve the generation, manufacture, refining,
transportation, treatment, storage, handling, or disposal of hazardous
substances or hazardous wastes (as hazardous substances and hazardous wastes are
defined in ISRA) on site, above ground or below ground (all of the foregoing
being hereinafter collectively referred to as the Presence of Hazardous
Substances), or, (B) that Tenant's and/or said Occupant's then present use does
involve the Presence of Hazardous Substances, in which event, said affidavit
shall describe in detail that portion of Tenant's and/or said Occupant's
operations which involves the Presence of Hazardous Substances. Said description
shall, INTER ALIA, identify each Hazardous Substance and describe the manner in
which it is generated, handled, manufactured, refined, transported, treated,
stored, and/or disposed of. Tenant and/or said Occupant shall supply Landlord
with such additional information relating to said Presence of Hazardous
Substances as Landlord may request.
(f) Without limiting the foregoing, Tenant agrees,
(i) at its sole cost and expense, to promptly discharge and
remove any lien or other encumbrance against the Premises arising from or in
connection with Tenant's failure or inability, for any reason whatsoever, to
observe or comply with ISRA and/or the provisions of this Article 37; and
(ii) to indemnify and hold Landlord harmless from and against
any and all liability, penalties, losses, expenses, damages, costs, claims,
causes of action, judgments and/or the like, of whatever nature, including, but
not limited to, reasonable attorneys' fees, to the extent said lien,
encumbrance, liability, penalty, loss, expense, damage, cost, claim, cause of
action, judgment and/or the like arise from or in connection with Tenant's
failure or inability, for any reason whatsoever, to observe or comply with ISRA
and/or the provisions of this Article 37.
(g) Tenant further represents, covenants and agrees that the
Premises shall not, without the prior written consent of Landlord having been
obtained, at any time during the term of this Lease, contain any underground or
above-ground tanks for the storage of fuel oil, gasoline and/or other petroleum
products or by-products.
(h) Tenant agrees that each of the foregoing provisions of this
Article 37 shall survive the expiration or earlier termination of the term of
this Lease.
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<PAGE> 31
A R T I C L E 38.
- - - - - - - ---
INITIAL LEASEHOLD IMPROVEMENTS
------------------------------
SECTION 1. Landlord shall, at its expense, perform the work
(the "Work") at the Premises, as described in the Blueprints found in Exhibit A
attached hereto.
Landlord shall perform the Work using building standard materials. Except for
the Work, Tenant agrees to take possession of the Premises "as is" and Landlord
shall have no obligation or responsibility to make any improvements,
modifications, changes, repairs or alterations to the Premises in connection
with the Tenant's initial occupancy thereof.
SECTION 2. Tenant agrees that it shall not interfere with Landlord's
completion of the Work and that any labor, which may be employed in connection
with the installation of Tenant's trade fixtures, furniture or other items not
in the Work shall be compatible with labor forces employed by Landlord. To the
extent Tenant causes a delay in the completion of the Work whether by reason of
a change in the Work, non-compatibility of labor or otherwise, the Commencement
Date of this Lease shall be accelerated by the period of such delay.
SECTION 3. Within thirty (30) days after the substantial completion
of the Work, Tenant shall prepare and deliver to Landlord a "punch list" of all
items which are not fully completed, or which are defective, and Landlord agrees
to complete or correct same as quickly thereafter as is reasonably practical
under the circumstances. Except as set forth on said punch list, Tenant shall be
deemed to have accepted the Work.
A R T I C L E 39.
- - - - - - - ---
SECURITY DEPOSIT
----------------
SECTION 1. Upon execution of this Lease, the Tenant shall deposit
with the Landlord the sum of $6,500.00 as security for the full and faithful
performance of all obligations under this Lease upon the part of the Tenant to
be performed. Upon expiration of the term of this Lease, and providing the
Tenant is not in default hereunder and has performed all of the conditions of
this Lease, the Landlord shall return the balance of the security deposit to the
Tenant. Tenant covenants and agrees that it will not assign, pledge,
hypothecate, mortgage or otherwise encumber the aforementioned security during
the term of this Lease. It is expressly understood and agreed that the right to
co-mingle the security funds with its general funds and said security funds with
its general funds and said security shall not be required to be segregated.
SECTION 2. In the event of the failure of Tenant to keep and perform
any of the terms, covenants and conditions of this Lease to be kept and
performed by Tenant, then at the option of Landlord said Landlord may, after
terminating this Lease, appropriate and apply said entire deposit, or so much
thereof as may be necessary to compensate the Landlord for all loss or damage
sustained or suffered by Landlord due to such breach on the part of Tenant.
Should the entire deposit, or any portion thereof, be appropriated and applied
by Landlord for the payment of overdue rent or other sums due and payable to
Landlord by Tenant hereunder, or
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<PAGE> 32
damage sustained or suffered by Landlord due to such breach on the part of
Tenant. Should the entire deposit, or any portion thereof, be appropriated and
applied by Landlord for the payment of overdue rent or other sums due and
payable to Landlord by Tenant hereunder, or should there be any increase in the
Fixed Rent then Tenant shall, upon the written demand of Landlord, forthwith
remit to Landlord a amount equal to the portion appropriated or applied by
Landlord as above provided, and/or the amount of any increase in the Fixed Rent,
as the case may be, and Tenant's failure to do so within five (5) days after
receipt of such demand shall constitute a breach of this Lease.
SECTION 3. Landlord may deliver the funds deposited hereunder by
Tenant to the purchaser of Landlord's reversionary interest in the Premises, in
the event that such reversionary interest be sold and thereupon Landlord shall
be discharged from any further liability with respect to such deposit.
A R T I C L E 40.
- - - - - - - ---
HOLDING OVER
------------
The failure of the Tenant to surrender the Premises after the
expiration or sooner termination of this lease term, and the subsequent holding
over by the Tenant with or without the consent of the Landlord, shall only
result in the creation of a month-to-month tenancy. Such holding over shall not
result in a renewal or extension of this Lease, and the month-to-month tenancy
so created may be terminated by either party hereto upon thirty (30) days'
written notice to the other. All other terms and conditions of this Lease shall
remain in full force during any month-to-month tenancy, except that the Fixed
Rent for any such hold over term shall be two hundred (200%) percent of the
amount of all rent payable by Tenant for the immediately preceding lease period;
provided, always, however, that if Tenant shall have failed to surrender or
vacate the Premises to Landlord on or before the expiration date of the term of
this Lease, or any renewal thereof, or if Tenant shall have held over and
Landlord shall have given notice to Tenant to vacate and surrender the Premises,
and Tenant shall have failed to vacate and surrender the same to the Landlord on
or before the date indicated in said notice, Tenant shall in all such events be
liable for all damages suffered by Landlord as a result thereof.
A R T I C L E 41.
- - - - - - - ---
AUTHORITY OF LEASE SIGNATORIES
------------------------------
If Tenant is a corporation or a partnership, each person signing
this Lease on behalf of Tenant represents that he has full authority to do so
and that this Lease binds the corporation or partnership, as the case may be.
A R T I C L E 42.
- - - - - - - ---
MISCELLANEOUS
-------------
(a) The covenants and agreements herein contained shall bind and
inure to the benefit of Landlord and Tenant, their heirs, executors,
administrators, successors and assigns.
(b) If any provision of this Lease or the application thereof to
any person or circumstance shall be invalid or unenforceable, the remainder of
this Lease shall not be affected thereby.
(c) Whenever herein the singular number is used, the same shall
include the plural, and the masculine gender shall include the feminine and
neuter genders.
(d) The enumeration anywhere in this Lease of any right or remedy
of either party shall not be construed as an exclusion or substitution of any
other rights or remedies conferred under this Lease or applicable by law.
-29-
<PAGE> 33
(e) This Lease shall not be modified or canceled except by a
writing subscribed to by the parties.
(f) The submission of this Lease for examination does not
constitute a reservation of or option for the premises and this Lease becomes
effective as a lease only upon execution and delivery thereof by Landlord and
Tenant.
(g) This Lease shall not be recorded. Any recordation by Tenant
shall constitute a material default entitling Landlord to terminate this Lease.
(h) This Lease shall be governed by and in accordance with the
laws of the State of New Jersey.
(i) Landlord shall have, with respect to any payment of additional
rent or other charge to be paid by Tenant pursuant to this Lease, the same
rights and remedies under this Lease and at law and in equity as are available
to Landlord for non-payment of Fixed Rent.
IN WITNESS WHEREOF these presents have been signed sealed and
delivered the day and year first above written.
WITNESS: METROPLEX ASSOCIATES
(Landlord)
By: /s/ SAM HALPERN
- -------------------------------- ------------------------------
SAM HALPERN, Partner
ATTEST: HANOVER CAPITAL MORTGAGE CORP.
(Tenant)
By: /s/ JOHN BURCHETT
- -------------------------------- ------------------------------
, Secretary JOHN BURCHETT, President
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<PAGE> 34
EXHIBIT A
---------
DIAGRAM OF PREMISES
-------------------
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<PAGE> 35
EXHIBIT B
---------
BUILDING RULES AND REGULATIONS
------------------------------
1. Tenant shall not obstruct or permit its agents, clerks or
servants to obstruct, in any way, the sidewalks, entry passages, corridors,
halls, stairways or elevators of the Building, or use the same in any other way
than as a means of passage to and from the offices of Tenant; bring in, store,
test or use any materials in the Building which could cause a fire or an
explosion or produce any fumes or vapor; make or permit any improper noises in
the Building; smoke in the elevators; throw substances of any kind out of the
windows or doors, or down the passages of the Building, or in the halls or
passageways; sit on or place anything upon the window sills; or clean the
windows.
2. Waterclosets and urinals shall not be used for any purpose
other than those for which they are constructed; and no sweepings, rubbish,
ashes, newspaper, paper towels or any other substances of any kind shall be
thrown into them. Waste and excessive or unusual use of electricity or water is
prohibited.
3. The windows, doors, partitions and lights that reflect or
admit light into the halls or other places of the Building shall not be
obstructed. NO SIGNS, ADVERTISEMENTS OR NOTICES SHALL BE INSCRIBED, PAINTED,
AFFIXED OR DISPLAYED IN, ON, UPON OR BEHIND ANY WINDOWS, except as may be
required by law or agreed upon by the parties; and no sign, advertisement or
notice shall be inscribed painted or affixed on any doors, partitions or other
part of the inside of the Building, without the prior written consent of
Landlord. If such consent be given by Landlord, any such sign, advertisement, or
notice shall be inscribed, painted or affixed by Landlord, but the cost of the
same shall be charged to and be paid by Tenant, and Tenant agrees to pay the
same promptly, on demand. Landlord agrees that Tenant shall be suitably
identified.
4. No contract of any kind with any supplier or towels, water,
toilet articles, waxing, rug shampooing, venetian blind washing, furniture,
polishing, lamp servicing, cleaning of electrical fixtures, removal of waste
paper, rubbish or garbage, or other like service shall be entered by Tenant, nor
shall any vending machine of any kind be installed in the Building, without the
prior written consent of Landlord.
5. When electric wiring of any kind is introduced, it must be
connected as directed by Landlord, and no stringing or cutting of wires will be
allowed, except with the prior written consent of Landlord, and shall be done
only by contractors approved by Landlord. The number and location of telephones,
telegraph instruments, electric appliances, call boxes, etc., shall be approved
by Landlord. No tenant shall lay linoleum or other similar floor covering so
that the same shall be in direct contact with the floor of the Premises; and if
linoleum or other similar floor covering is desired to be used, an inter-lining
of builder's deadening felt shall be first affixed to the floor by a paste or
other removable material, the use of cement or other similar adhesive material
being expressly prohibited.
6. Landlord shall have the right to prescribe the weight, size
and position of all safes and other bulky or heavy equipment and all freight
brought into the Building by the Tenant; and also the times of moving the same
in and out of the Building; and all such moving must be done under the
supervision of the Landlord. Landlord will not be responsible for loss of or
damage to any such equipment or freight from any cause; but all damage done to
the Building by moving or maintaining any such equipment or freight shall be
repaired at the expense of Tenant. All safes shall stand on a base of such size
as shall be designated by the Landlord. The Landlord reserves the right to
inspect all freight to be brought into the building and to exclude from the
building all freight which violates the lease.
7. No machinery of any kind or articles of unusual weight or size
will be allowed in the Building without the prior written consent of Landlord.
Business machines and
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<PAGE> 36
mechanical equipment shall be placed and maintained by Tenant, at Tenant's
expense, in settings sufficient in Landlord's judgment to absorb and prevent
vibration, noise and annoyance.
8. No additional lock or locks shall be placed by Tenant on any
door in the Building, without prior written consent of Landlord. Two keys will
be furnished Tenant by Landlord; two additional keys will be supplied to Tenant
by Landlord, upon request, without charge; any additional keys requested by
Tenant shall be paid for by Tenant. Tenant, its agents and employees, shall not
change any locks. All keys to doors and washrooms shall be returned to Landlord
at the termination of the tenancy, and in the event of loss of any keys
furnished, Tenant shall pay Landlord the cost thereof.
9. Tenant shall not employ any person or persons other than
landlord's janitors for the purpose of cleaning the premises, without prior
written consent of Landlord. Landlord shall not be responsible to Tenant for any
loss due to theft or vandalism from the Demised Premises however occasioned.
10. No animals of any kind shall be brought into or kept in or
about the Premises.
11. The requirements of Tenant will be attended to only upon the
application at the office of the Building. Employees of Landlord shall not
perform any work for Tenant or do anything outside of their regular duties,
unless under special instructions from the office of the Landlord. Landlord
agrees to keep Tenant advised at all times of how to contact the Building
Manager.
12. The Premises shall not be used for lodging or sleeping
purposes, and cooking therein is prohibited. Vending machines for coffee and
rolls are permitted, only upon written consent of Landlord, which consent shall
not be unreasonably withheld.
13. Tenant shall not conduct, or permit any other person to
conduct any auction on the premises. The Tenant shall not store goods, wares or
merchandise upon the Premises, except for the storage of usual supplies and
inventory to be used by Tenant in the conduct of its business; permit the
Premises to be used for gambling, make any unusual noises in the Building;
permit to be played any musical instrument in the premises; permit to be played
any radio, television, recorded or wire music in such a loud manner so as to
disturb or annoy other tenants; or permit any unusual odors to be produced upon
the Premises.
14. No awnings or other projections shall be attached to the
outside walls of the Building. No curtains, blinds, shades or screens shall be
attached or hung in, or used in connection with any window or door of the
Premises, without the prior written consent of Landlord. Such curtains, blinds
and shades must be of a quality, type, design, and color and attached in a
manner approved by Landlord.
15. Canvassing, soliciting and peddling in the Building are
prohibited, and Tenant shall cooperate to prevent the same.
16. There shall not be used in the Premises or in the Building,
either by Tenant or by others, in the delivery or receipt of merchandise, any
hand trucks except those equipped with rubber tires and side guards, and no hand
trucks will be allowed in passenger elevators.
17. Each Tenant, before closing and leaving the Premises, shall
ensure that all windows are closed and all entrance doors locked.
18. Landlord shall have the right to prohibit any advertising by
Tenant which in Landlord's opinion tends to impair the reputation of the
Building or its desirability as a building for offices, and upon written notice
from Landlord, Tenant shall refrain from or discontinue such advertising.
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<PAGE> 37
19. Landlord hereby reserves to itself any and all rights not
granted to Tenant hereunder, including, but not limited to, the following rights
which are reserved to Landlord for its purposes in operating the Building.
(a) the exclusive right to the use of the name of the Building for
all purposes, except that Tenant may use the name as its business address and
for no other purpose;
(b) the right to change the name or address of the Building
without incurring any liability to Tenant for so doing;
(c) the right to install and maintain a sign or signs on the
exterior of the building;
(d) the exclusive right to use or dispose of the use of the roof
of the building;
(e) the right to limit the space on the directory of the Building
to be allotted to Tenant;
(f) the right to grant to anyone the right to conduct any
particular business or undertaking in the Building.
20. Tenant shall provide Landlord with a list of all employees and
a description of all motor vehicles, including make, model, color and license
plate number, used thereby or by Tenant within 10 days of the Commencement Date
and periodically thereafter as and when there is a change in employees or in
employee or Tenant vehicles.
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<PAGE> 38
EXHIBIT C
---------
HVAC PERFORMANCE STANDARDS
--------------------------
Summer - 95(degree) drybulb; 75(degree) wetbulb.
Indoor - 75(degree) drybulb; 50(degree) wetbulb.
Winter - 0(degree) Outdoor - 70(degree) Indoor.
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<PAGE> 39
EXHIBIT D
---------
CLEANING MAINTENANCE SERVICE
----------------------------
NIGHTLY: (Between the hours of 5:30 p.m. and 8:00 a.m., Monday
through Friday, legal holidays excepted)
1. Clean Common Area Lavatories as follows:
(a) All lavatory floors to be swept and washed with disinfectant
nightly.
(b) Wash and polish all mirrors, powder shelves, bright work and
enamel surfaces.
(c) Wash and disinfect all basins, bowls and urinals.
(d) Hand dust all partitions, tile walls, towel, paper and
sanitary napkin dispensers, and receptacles, and wash as required.
(e) Empty and clean paper towel and sanitary disposal receptacles.
(f) Fill toilet tissue holders, soap dispensers and towel
dispensers, material to be furnished by Landlord.
2. Empty and clean all waste receptacles and ash trays.
3. Furniture will be dusted and desk tops will be wiped clean.
However, desks with loose papers on the top will not be cleaned. Window sills
and baseboards to be dusted and washed when necessary.
4. Remove all rubbish and trash from premises. The Tenants will
remove all extraordinary rubbish and trash.
5. Carpets will be swept daily and vacuumed weekly.
6. All uncarpeted areas will be swept daily.
7. Damp mop and/or vacuum floors in entrance foyers, elevator
lobbies, and public corridors, if applicable.
8. Keep locker, storage and slop sink rooms in a clean and
orderly manner.
WEEKLY:
-------
1. Remove all finger marks and smudges from paneled vestibule
surfaces whenever and wherever practicable.
MONTHLY:
--------
1. High Dusting: Dust clean all exposed pipes, air conditioning
louvers, ducts and other areas not reached in nightly cleaning.
SEMI-ANNUALLY:
--------------
1. Wash interior of all windows.
ANNUALLY:
---------
1. Wash exterior of all windows.
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<PAGE> 40
EXHIBIT E
---------
HOLIDAY SCHEDULE
----------------
NEW YEAR'S DAY
WASHINGTON'S BIRTHDAY
GOOD FRIDAY
MEMORIAL DAY
INDEPENDENCE DAY
LABOR DAY
THANKSGIVING DAY
CHRISTMAS DAY
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<PAGE> 41
FIRST MODIFICATION AND EXTENSION OF LEASE AGREEMENT
This First Modification and Extension of Lease Agreement
("Agreement"), made this 28th day of February, 1997, by and between Metroplex
Associates, a New Jersey partnership, having an address c/o of Atlantic Realty
Development Corp., 90 Woodbridge Center Drive, Woodbridge, New Jersey 07095 (the
"Landlord"), and Hanover Capital Mortgage Corp., a Missouri corporation, having
an address at Metroplex Corporate Center I, 100 Metroplex Drive, Edison, New
Jersey 08817 (the "Tenant").
W I T N E S S E T H:
WHEREAS, by lease dated March 9, 1994 (the "Lease"), Landlord leased
to Tenant and Tenant hired from Landlord certain premises (the "Premises")
constituting a portion of the third floor of the building (the "Building") known
as Metroplex Corporate Center I, 100 Metroplex Drive, Edison, New Jersey 08817;
and
WHEREAS, Landlord and Tenant desire to modify and extend the Lease
as hereinafter provided;
NOW, THEREFORE, for and in consideration of the above premises, the
mutual covenants hereinafter contained, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
Landlord and Tenant hereby agree as follows:
1. TERM. (a) Landlord and Tenant agree to extend the term of the
Lease for a period of five (5) years and four (4) months, commencing on March 1,
1997 and expiring at 6:00 p.m. on June 30, 2002 (the "Renewal Period").
(b) Tenant shall have, and is hereby granted, one (1) additional
option to further renew and extend the term of this Lease from the date upon
which it would otherwise expire, for one (1) additional renewal period which
shall be for a period of five (5) years (the "Additional Renewal Period"). The
Additional Renewal Period shall follow consecutively upon the expiration of the
Renewal Period as hereinabove provided and such Additional Renewal Period shall,
upon commencement thereof, be deemed included in references to "the term of this
Lease" and "the full term of this Lease". Tenant's said option with respect to
the Additional Renewal Period shall be exercised by Tenant giving written notice
to Landlord of Tenant's exercise of same not later than nine (9) months prior to
the expiration date of the Renewal Period. Time is of the essence with respect
to such notice, and failure of Tenant to give such notice at least nine (9)
months prior to the expiration of the Renewal Period shall constitute a binding
and conclusive waiver of Tenant's option with respect to such Additional Renewal
Period. The option to renew and extend the term of this Lease as hereinabove
provided shall not be deemed validly exercised unless Tenant shall not be in
default at the time of either the exercise of such renewal option or the
commencement of the Additional Renewal Period. If Tenant elects to exercise said
renewal option, the full term of this Lease shall be automatically extended for
the Additional Renewal Period without the need for the execution of an extension
or renewal lease. The Additional Renewal Period shall be on all of the same
terms and conditions as are in effect hereunder immediately preceding the
commencement date of the Additional Renewal Period, except that the Fixed Rent
during the Additional Renewal Period shall be as provided in subparagraph (c) of
Paragraph 2 hereinbelow. All provisions for the payment of additional rent shall
continue to apply without limitation except as otherwise provided. Tenant shall
have no further right or option to renew the term of this Lease after the
expiration of the Additional Renewal Period.
2. FIXED RENT. (a) The words "[S]ubject to the provisions of
Section 3 of this Article," are hereby deleted from Article 2, Section 1 of the
Lease.
(b) Tenant covenants to pay to Landlord for and during each lease
year of the Renewal Period, Fixed Rent at the rate of Seventy Four Thousand
Three Hundred Eighty Three and 50/100 ($74,383.50) Dollars per annum ($6,198.63
per month).
<PAGE> 42
(c) If Tenant exercises its option to extend the term of the Lease
for the Additional Renewal Period, the Fixed Rent for the Additional Renewal
Period shall be the greater of: (i) the annual amount determined by multiplying
the gross rentable area of the Premises by $14.66 per square foot, or (ii) the
then existing fair market rental value of the Premises determined in accordance
with the provisions of subparagraph (d) of this Paragraph
(d) The fair market rental, as contemplated by subparagraph (c) of
this Paragraph 2, shall be determined as follows: Promptly after receipt by
Landlord of Tenant's notice of Tenant's exercise of its option to renew and
extend the term of this Lease pursuant to the provisions of subparagraph (b) of
Paragraph 1 hereinabove, Landlord shall notify Tenant of the fair market rental
for the Premises as of the commencement date of the Additional Renewal Period.
Tenant shall have the right, by notice to Landlord given within twenty (20) days
after receiving Landlord's notice of the fair market rental to object to the
amount thereof. Failure by Tenant to give notice of objection within such twenty
(20) day period (time being of the essence) shall constitute an acceptance by
Tenant of the rental as determined by Landlord. If Tenant shall so object,
Tenant shall, at its cost and expense, engage an appraiser who is a member of
the appraisal institute and who has at least five (5) years experience in the
appraisal of office buildings in the Middlesex County, New Jersey area, to
determine the fair market rental for the Premises as of the commencement of the
Additional Renewal Period. Such appraiser shall render his or her report to
Landlord and Tenant not later than thirty (30) days after the date of Tenant's
notice of objection to the fair market rental as determined by Landlord. If such
appraiser shall fail to render such report within such thirty (30) day period
(time being of the essence), Tenant's objection to the fair market rental as
determined by Landlord shall conclusively be deemed to have been waived and the
rental for the Additional Renewal Period shall be as determined by Landlord. If
the appraiser shall render his or her report within' such thirty (30) day period
and the rental value so determined shall not be acceptable to Landlord, Landlord
shall have the right to so notify Tenant, and Landlord shall then, at its cost
and expense, engage an appraiser (having the same qualifications as those set
forth above) to determine the fair market rental for the Premises. In the event
that the two appraisers shall determine a fair market rental which shall not
differ by more than ten (10%) percent, the fair market rental shall be deemed to
be the average of the two appraisals. If the two appraisals shall differ by more
than such ten (10 %) percent amount, then the two appraisers shall select a
third appraiser with similar qualifications, with Landlord and Tenant each to
pay one-half of the cost of such third appraiser, and the fair market rental for
the Premises as determined by such third appraiser shall be binding and
conclusive upon Landlord and Tenant. The appraiser for Landlord and the
appraiser for Tenant shall select such third appraiser within ten (10) days
after Landlord notifies Tenant that such third appraisal is required. The said
third appraiser shall be instructed to render his or her report to Landlord and
Tenant not later than thirty (30) days after the date of his or her engagement.
Notwithstanding anything to the contrary contained herein, in no event shall the
annual Fixed Rent for any lease year of the Additional Renewal Period be less
than the annual amount determined by multiplying the gross rentable area of the
Premises by $14.66 per square foot.
3. COMMON AREAS AND PREMISES. Within ten (10) days after the date
hereof, Landlord shall provide Tenant with 36 parking stickers for Tenant and
Tenant's employees and invitees. Notwithstanding the foregoing, at no time shall
Tenant be permitted to park more automobiles in the parking areas at the
Property than the total number determined by multiplying the gross rentable area
of the Premises by four (4).. Notwithstanding the foregoing, attached hereto as
Exhibit A is a parking plan outlining an expanded area at the Property to be
used for parking (the "Expanded Parking Area"). Tenant shall have the
nonexclusive right to use the Expanded Parking Area, in common with Landlord and
other tenants of the Building, on a first come first serve basis and in
accordance with the terms and provisions of Article 5 of the Lease.
4. ADDITIONAL RENT. From and after March 1, 1997, the Base Year,
as defined in Article 18, Section 1 of the Lease shall mean either the calendar
year 1994 or the calendar year 1997 determined as follows: The Operating Costs
and taxes (as said terms are defined in Article 18 of the Lease) shall be
determined for each of the calendar years 1994 and 1997, and the Base Year for
Operating Costs shall be the calendar year in which the Operating Costs are
greater, and the Base Year for taxes shall be the calendar year in which the
taxes are greater. Operating Costs and taxes for the calendar year 1997 are not
capable of being determined as of March 1, 1997. When the Operating costs and
taxes for the calendar year 1997 are calculated, Landlord shall notify Tenant of
the same, and an appropriate adjustment, if any, shall be made for any sum of
money due to or from Tenant with respect to Tenant's obligations pursuant to
Article 18 of the Lease as modified by this Paragraph 4. Tenant and Landlord
understand and agree that regardless of the Base Year for Operating Costs and
taxes that is determined, Tenant will not be responsible for any Proportionate
Share of Operating Costs and taxes for the period March 1, 1997 through December
31, 1997. Accordingly Tenant will not be billed (on a monthly basis for) any
Proportionate Share for Operating Costs and expenses for the period March 1,
1997 through December 31, 1997.
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<PAGE> 43
5. BROKERAGE COMMISSION. Tenant warrants and represents that it
has not dealt or negotiated with any real estate broker or salesman in
connection with this Agreement other than Cushman & Wakefield of New Jersey,
Inc. and Edward S. Gordon Company (collectively the "Broker") or representatives
thereof. Tenant shall and hereby does indemnify and hold Landlord harmless from
and against any real estate commissions, fees, charges or the like, or claims
therefor, including any and all costs incurred in connection therewith, arising
out of the within transaction payable to any party other than the Broker except
to the extent any such claim or commission is based solely upon Landlord's acts.
Landlord shall pay any commission due to the Broker pursuant to a separate
agreement.
6. LANDLORD'S WORK. Landlord shall, at its cost and expense (not
to exceed the sum of $5.00 per gross rentable square foot of the Premises)
perform the work (the "Landlord's Work") set forth on the plans and
specifications, approved by Landlord and Tenant, and attached hereto as Exhibit
B. Landlord's Work shall be substantially completed by Landlord within a
reasonable period of time after the date hereof. Any changes in Landlord's Work
desired by Tenant ("Tenant's Changes") shall be submitted in writing (with plans
and specifications where applicable), and shall be subject to Landlord's
approval. Tenant agrees to pay for all Tenant's Changes based on Landlord's cost
therefor, together with ten (10%) percent of such costs for overhead and ten
(10%) percent of such costs for profit ("Landlord's Charges"). Tenant shall pay
to Landlord Landlord's Charges for Tenant's Changes within ten (10) days of
Landlord's demand therefor, but in any event prior to the commencement of
Tenant's Changes. Tenant agrees that it shall not interfere with Landlord's
completion of Landlord's Work and that any labor which may be employed in
connection with the installation of Tenant's trade fixtures, furniture or other
items not included in Landlord's Work shall be compatible with labor forces
employed by Landlord. Within thirty (30) days after the substantial completion
of Landlord's Work, Tenant shall prepare and deliver to Landlord a "punch list"
of all items which are not fully completed, or which are defective, and Landlord
agrees to complete or correct same as quickly thereafter as is reasonably
practical under the circumstances. Except as set forth on said punch list,
Tenant shall be deemed to have accepted Landlord's Work. All of Landlord's Work
shall, at Landlord's request, be removed from the Premises by Tenant, with all
damage resulting from its removal properly repaired, at Tenant's expense prior
to the expiration or earlier termination of this Lease. Any Landlord's Work not
so removed shall be deemed abandoned, but the cost of removal and repair
incurred by Landlord shall be borne by Tenant. Landlord may request Tenant to
leave all or any portion of Landlord's Work in place in which event same shall
be delivered to Landlord with the Premises in good working order and repair upon
the expiration or earlier termination of this Lease. Absent any notification
from Landlord to the contrary, all Landlord's Work shall remain. The provisions
of this Paragraph 6 shall survive the expiration or earlier termination of this
Lease.
7. RIGHT OF FIRST NOTIFICATION. Landlord agrees to give written
notice to Tenant if any space on the third floor of the Building, contiguous to
the Premises, becomes available for lease during the term of the Lease. Such
notice shall contain the terms upon which Landlord is willing to lease such
contiguous space to Tenant. Provided Tenant is not then in default under the
terms of this Lease, Tenant shall have the option to lease such contiguous space
on the terms and conditions set forth in Landlord's notice. Notice of Tenant's
election , to lease such space must be given by Tenant to Landlord within ten
(10) days after receipt of Landlord's notice. If Tenant elects to lease such
space, the Lease shall be deemed modified to add such space to the Lease on such
terms and conditions as set forth in Landlord's notice, and a lease modification
shall be executed by the parties. If Tenant does not so notify Landlord within
such ten (10) day period, this provision shall be null and void and Landlord
shall be free to lease such contiguous space to any other tenant on such terms
and conditions as shall be
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<PAGE> 44
agreed upon. If Tenant does not exercise the right to lease such contiguous
space, this provision shall no longer be deemed to be included in the Lease.
8. TENANT'S CANCELLATION OPTION. Tenant shall have the one (1)
time option to cancel and terminate the Lease (the "Cancellation Option")
effective as of June 30, 2000 (the "Termination Date"), provided the following
conditions are satisfied:
(a) Tenant shall give Landlord written notice of its election to
exercise the Cancellation Option no later than September 30, 1999. Time is of
the essence with respect to such notice, and failure of Tenant to give such
notice to Landlord by September 30, 1999 shall constitute a binding and
conclusive waiver of the Cancellation Option. Upon the occurrence of the
Termination Date, the Lease shall cease, terminate and expire as if such date
had been originally fixed for the expiration of the term of the Lease, and all
accrued Fixed Rent and additional rent shall be paid, and all of Tenant's other
obligations under the Lease shall be performed, up to and including the
Termination Date.
(b) Tenant shall not be in default under the provisions of the
Lease either at the time of exercise of the Cancellation Option or on the
Termination Date.
(c) Upon the exercise of the Cancellation Option as aforesaid,
Tenant shall pay Landlord a lease termination fee (the "Lease Termination Fee")
equal to the total of the following:
(i) The sum of Eighteen Thousand Five Hundred Ninety Five
and 88/100 ($18,595.88).
(ii) The unamortized cost of all brokerage commissions
payable ($11,107.24) by Landlord with respect to this Agreement, which
unamortized cost shall be determined on. straight-line amortization over a
period of five (5) years.
9. DEFINED TERMS. The terms used in this Agreement and not
defined herein shall have the respective meanings indicated in the Lease, unless
the context requires otherwise.
10. NO OTHER CHANGES. The intent of this Agreement is only to
modify and amend those provisions of the Lease as herein specified. Except as
herein specifically modified, changed and amended, all of the terms and
conditions of the Lease shall remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have duly executed this First
Modification and Extension of Lease as of the day and year first above written.
WITNESS: METROPLEX ASSOCIATES
(Landlord)
By: /s/ David Halpern
- ----------------------------- ----------------------------------
David Halpern, Partner
ATTEST: HANOVER CAPITAL MORTGAGE CORP.
(TENANT)
/s/ ???? By: /s/ Ralph F. Laughlin
- ----------------------------- ----------------------------------
Ralph F. Laughlin, Vice President
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<PAGE> 1
Exhibit 10.14
Form 36 STORE LEASE Perfection Legal Forms & Printing Co., Rockford, Ill
- --------------------------------------------------------------------------------
THIS INDENTURE, Made this 28th day of June A.D. 1993
By and between Lessor LaSALLE NATIONAL TRUST N.A. , SUCCESSOR TRUSTEE TO
LaSALLE National Bank as Trustee
as trustee and not personally under trust 7115 & 51414
and Lessee HANOVER CAPITAL PARTNERS, LTD.
WITNESSETH, that Lessor, does hereby demise and lease unto Lessee, who does
hereby rent and take the Store Room(s) 3,905 sq. ft., described throughout lease
known and designated as its address which is 7138-40 West Higgins Avenue in the
City of Chicago in the State of Illinois, to be used as a Mortgage Finance Co.
and for no other purpose from July 1, 1993 to June 30, 1999 at and for the sum
of SEE RIDER PARAGRAPH # 33 Dollars, for the said term, payable as follows: BASE
RENT PLUS ADDITIONAL PARTICIPATION the FIRST day of each month, RENTAL
SECURITY DEPOSIT FROM LESSEE IN THE AMOUNT OF $7,500.00
($ XXXXXXXXXX) on the XXXXXXXXXXXXXXX day of each and every succeeding month in
the term, or of any renewal or extension thereof, at the office of Lessor.
AND ALSO RENT SHALL BE PAID TO:
Twin Oaks Realty
Hazel B. Andros, Agent
P.O. BOX 926
BENTON, IL 62812-0926
AND THE SAID LESSOR ALSO AGREES. That
AND THE SAID LESSEE. In consideration of said demise, does hereby covenant and
agree with The said Lessor, as follows:--
FIRST.-- That he will take, and hereby does take, the said premises above
described, for the said term, at and for the said price, and on the terms of
payment above stipulated and pay the same promptly at the time and place above
specified, and at the termination of this lease by limitation or otherwise, he
will deliver all the keys of the premises at the office of the lessor or agent
where the rent above stipulated is to be paid or to such other person and at
such other place as the Lessor may direct.
SECOND.-- That the Lessee has examined and knows the condition of said
premises and has received the same in good order and repair, except as herein
otherwise specified, and that no representations as to the condition or repair
thereof have been made by the Lessor, or the agent of said party prior to,
or at the execution of this lease that are not herein expressed or endorsed
hereon and upon the termination or this lease in any way, will yield up said
premises to the Lessor in as good condition as the reasonable use thereof will
permit with all the keys of the same, and shall not make any alterations in the
demised premises without the written consent of the Lessor; and all alterations
which may be made by either party hereto upon the demised premises except
movable furniture and fixtures, put in at the expense or the Lessee shall be the
property of the Lessor, and shall remain upon and be surrendered with the
demised premises as a part thereof at the termination of this lease.
THIRD.-- That the demised premises or any part thereof, shall not be
assigned, sub-let or permitted to be used for any purpose other than the above
mentioned without the written consent of the Lessor.
FOURTH.-- That the said Lessee will not allow said premises to be used for
any purpose that will increase the rate of insurance thereon, nor be occupied in
whole or in part by any other person, and will not assign this lease, without in
each case the written consent of the Lessor first had and will not permit any
transfer, by operation of law, or the interest in said premises acquired through
this lease; and will not permit said premises to be used for any unlawful or
immoral purpose or purpose that will injure the reputation or the same or or the
building of which they are a part, or disturb the tenants of such building or
the neighborhood.
FIFTH.-- That said Lessor shall not be liable for any damage occasioned by
failure to keep said premises in repair, and shall not be liable for any damage
done or occasioned by or from plumbing, gas, water, steam, or other pipes,
electric wires or sewage, or the bursting, leaking or running of any cistern,
tank, wash-stand, water-closet or wastepipe, in, above, upon or about said
building or premises, nor for damage occasioned by water, snow or ice being upon
or coming through the roof, sky-light, trap-door, entrance, yard, or otherwise;
nor for any damage arising from acts or neglect of co-tenants or other occupants
or the same building, or any owners or occupants or adjacent or contiguous
property.
SIXTH.-- To allow the Lessor free access to the premises hereby leased for
the purpose of examining or exhibiting the same, or to make any needful repairs
or alterations of said premises which said Lessor may see fit to make.
SEVENTH.-- That if the Lessee shall fail to pay the rent at the times,
place and in the manner above provided and same shall remain unpaid five days
after the day whereon the same should be paid as aforesaid, the Lessor or
agents, by reason thereof, are authorized to declare the term ended, and
re-enter, and re-possess the demised premises either with or without process of
Law, and expel the Lessee, and those claiming under the Lessee and remove his,
her or their effects, forcibly if necessary. Or in case the demised premises
shall be abandoned, deserted or vacated, and remain unoccupied five days
consecutively, the Lessee hereby authorizes and requests the Lessor as Lessees'
agent or attorney to re-enter the demised premises and remove all articles found
therein, place the same in a storage warehouse, or store the same in any other
suitable place at Lessees's risk and expense, proceed to re-rent the demised
premises at the Lessor's option and discretion, and apply all money so received
after paying the expenses of the aforesaid removal, toward the rent accruing
under this indenture. This request shall not in any way be construed as
requiring any compliance therewith on part of the Lessor.
EIGHTH.-- At the termination of this lease, by lapse of time or otherwise,
said Lessee agrees to yield up immediate possession to said Lessor, and failing
so to do, to pay as liquidated damages, for the whole time such possession is
withheld, the sum of 200 Dollars per day: but the provisions of this clause
shall not be held as a waiver by said Lessor of any right of re-entry as
hereinafter set forth: nor shall the receipt of said rent or any part thereof,
or any other act in apparent affirmance of the tenancy, operate as a waiver of
the right to forfeit this lease and the term hereby granted for the period still
unexpired for any breach of any of the covenants herein.
NINTH.-- IT IS FURTHER. COVENANTED AND AGREED, by said Lessee, that there
shall not be kept or used on or near said premises any volatile, noxious, or
explosive matter, including but not limited to the following: naphtha, benzine,
benzols, gasoline, varnish, or any product in whole or in part of either or
gunpowder, fireworks, nitro-glycerine, phosphorus, nitrate of soda, camphene,
spirit-gas or any burning fluid or chemical without the written permission of
the Lessor.
TENTH.-- That Lessee will not permit anything to be thrown out of the
windows, or down the halls or passageways in said building; that no
objectionable or unsightly pictures, goods, wares, merchandise and advertising
matter, or signs shall be kept within, in front of or about said premises. That
no birds or animals shall be kept therein, and that the halls and stairways and
the porches shall not be used for the storage of furniture, merchandise or other
articles.
ELEVENTH.-- Said Lessee agrees to pay all of the water rents or bills
assessed against the said buildings and all gas and electric bills against the
premises hereby leased promptly as they shall become due and in case Lessee
shall fail to pay the same, Lessor may at his or her option pay the same, and
the amount of such bills together with seven per cent, interest thereon from
date of such payment add to the next payment of rent due under the terms hereof
without notice or demand.
TWELFTH.-- And for the consideration aforesaid, the said Lessee further
covenants and agrees with said Lessor, to take good care of the store room
demised and the fixtures, and commit and suffer no waste therein; that no
changes or alterations of the premises shall be made, or partitions erected,
without the consent in writing of said Lessor and that Lessee will make all
repairs required to the walls, ceilings, paint, plastering, plumbing, pipes and
fixtures belonging to said rooms and paint the front and wood work when needed,
also repair and decorate the walls and ceiling thereof. Said Lessee, and those
occupying under said Lessee, shall not interfere with the water pipes or meter,
heating apparatus, or the gas or electric service of said building which are not
within the premises hereby demised, nor with the control of any of the public
portions of said building; that the said Lessee and those occupying under said
Lessee will conform to all reasonable rules and regulations that the Lessor may
make for the protection of the building or the general welfare and comfort of
the occupants thereof.
<PAGE> 2
IT IS EXPRESSLY AGREED, Between the parties hereto, that if default be made
in the payment of the rent above reserved, or any part thereof, or in any of the
covenants and agreements herein contained, to be kept by the Lessee, it shall be
lawful for the Lessor or the legal representative of said Lessor, at any time
thereafter, at the election of Lessor or the legal representatives thereof,
without notice, or demand of rent, to declare the said term ended, and to
re-enter the demised premises, or any part thereof, either with or without
process of law, and to expel, remove and put out all the contents thereof as
well as the Lessee and any person(s) or firm(s) occupying the same, using such
force as may be necessary so to do, and to re-possess and enjoy the said
premises as before this demise, without prejudice to any remedies which might
otherwise be used for arrears of rent or preceding breach of covenants, and
Lessee further covenants and agrees that the Lessor or the representative or
assigns of said party, shall have at all times the right to distrain for rent
due, and shall have a valid and preferred first lien upon all property of Lessee
as security for the payment of rent herein reserved.
The Lessee hereby irrevocably constitutes any attorney of any Court of
Record of this State, attorney for him and in his name to enter his appearance
in any Court of Record, waive process and services thereof, and trial by
jury, and confess judgment against him in favor of said Lessor, or his assigns,
from time to time, for any rent which may be due to said Lessor, or his assigns,
by the terms of this lease, with costs and reasonable attorneys fees, and to
waive all errors and all right of appeal from said judgment and judgments, and
to file a consent in writing that writ of execution may be issued immediately;
said Lessee hereby expressly waiving all right to any notice or demand under any
statute in this State, relating to forcible entry and detainer or landlord and
tenant and agrees that the Lessor, his agents or assigns may begin suit for
possession or rent without notice or demand. Notice of election to terminate
this lease, or notice of any election hereunder, is hereby expressly waived by
Lessee.
IT IS FURTHER AGREED, By the parties hereto, that after the service of
notice, or the commencement of a suit, or after final judgment for the
possession of said premises, the Lessor may receive and collect rent due, and
the payment of rent shall not waive or affect said notice, said suit or said
judgment.
In case said premises shall be rendered untenantable by fire or other
casualty, the Lessor may at his option terminate this lease, or repair said
premises within 270 days, and failing so to do or upon the destruction of said
premises by fire, the term hereby created shall cease and determine.
IT IS FURTHER COVENANTED AND AGREED, By Lessee that he will pay and
discharge all reasonable costs, attorney's fees and expenses that shall be made
and incurred by Lessor in enforcing the covenants and agreements of this Lease;
and such costs, fees and expenses may be taxed as costs in any suit or
proceedings that may be brought to enforce any of such covenants or agreements.
Miscellaneous:
(a) Provisions typed on this lease and all riders attached to this lease
and signed by Lessor and Lessee are hereby made a part of this lease.
(b) Lessee shall keep and observe such reasonable rules and regulations now
or hereafter required by Lessor, which may be necessary for the proper and
orderly care of the building of which the Premises are a part.
(c) All covenants, promises, representations and agreements herein
contained shall be binding upon, apply and inure to the benefit of Lessor and
Lessee and their respective heirs, legal representatives, successors and
assigns.
(d) The rights and remedies hereby created are cumulative and the use of
one remedy shall not be taken to exclude or waive the right to the use of
another.
(e) If any clause, phrase, provision or portion of this lease or the
application thereof to any person or circumstance shall be invalid, or
unenforceable under applicable law, such event shall not affect, impair or
render invalid or unenforceable the remainder of this lease nor any other
clause, phrase, provision or portion hereof, nor shall it affect the application
of any clause, phrase, provision or portion hereof to other persons or
circumstances.
SEE RIDER ATTACHED HERETO AND MADE A PART HEREOF.
IT IS HEREBY FURTHER EXPRESSLY STIPULATED AND AGREED, By and between the
parties hereto, that the words "Lessor" and "Lessee" wherever herein occurring
and used, shall be construed to mean "Lessors" and "Lessees" in case more than
one person constitutes either party to this lease; that the pronouns "he", "him"
or "his" when referring to the "Lessor or Lessee" shall be construed in the
feminine, neuter or plural appropriately and that all the covenants and
agreements herein contained shall be binding upon, and inure to, their
respective successors, heirs, executors, administrators and assigns, and be
exercised by his or their agent or attorney.
IN WITNESS WHEREOF, The parties have hereunto set their hands and
seals, this day and year first above written.
HANOVER CAPITAL PARTNERS LTD /s/ (SEAL)
-------------------------------
HANOVER CAPITAL PARTNERS LTD By: /s/ (SEAL)
-------------------------------
<PAGE> 3
Rent Record____________ Page_________ RECEIVED on the within the sums set
===================================== opposite the following months for the
years 19__ and 19__
LEASE
=====================================
FROM 19__ May ______________ $ ___________
________________________________
- ------------------------------------- June _____________ $ ___________
________________________________
- -------------------------------------
TO July _____________ $ ___________
________________________________
- -------------------------------------
August ___________ $ ___________
- ------------------------------------- ________________________________
September ________ $ ___________
No. ----------------------------- St.
===================================== ________________________________
October __________ $ ___________
- -------------------------------------
________________________________
Annual Rental $______________
December _________ $ ___________
Monthly in Advance $______________
________________________________
Expires____________________ A.D. 19__
19__ January __________ $ ___________
=====================================
________________________________
February _________ $ ___________
________________________________
March ____________ $ ___________
________________________________
April ____________ $ ___________
________________________________
GUARANTY
For value received _____ hereby guarantee the payment of the Rent and the
performance of the covenants by the lessee in the within Lease covenanted and
agreed, in manner and form as in said Lease provided.
WITNESS _____ hand and seal this _______ day of _________________, 19__.
____________________ (SEAL)
ASSIGNMENT AND ACCEPTANCE
For value received ______ hereby assign all ______ rights, title and interest
in and to the within Lease unto _____________________________________ heirs and
assigns, and in consideration of the consent to this assignment by the
lessor______________________ guarantee the performance by said _______________
of all the covenants on the part of the lessee in said Lease mentioned.
In consideration of the above assignment and the written consent of the party
of the first part hereto, ____________ hereby assume and agree to make all the
payments and perform all the covenants and conditions of the within Lease, by
said lessee to be made and performed.
WITNESS _____ hand and seal this _______ day of _________________, 19__.
____________________ (SEAL)
____________________ (SEAL)
CONSENT TO ASSIGNMENT
The undersigned lessor hereby consent to the assignment of the within Lease
to ________________________ on the express condition, however, that the assignor
shall remain liable for the prompt payment of the rent and performance of the
covenants on the part of the lessee as therein mentioned, and that no further
assignment of said Lease or subletting of the premises or any part thereof shall
be made without __________ written assent first had thereto.
WITNESS _____ hand and seal this _______ day of _________________, 19__.
____________________ (SEAL)
LESSOR'S ASSIGNMENT
In consideration of One Dollar, to __________ in hand paid, _______________
hereby transfer, assign and set over _________________________________ heirs and
assigns ______________ interest in the within Lease, and the rent thereby
secured _______________________________________________________________________
_______________________________________________________________________________
WITNESS _____ hand and seal this _______ day of _________________, 19__.
____________________ (SEAL)
<PAGE> 4
RIDER
18. Lessor will pay the real estate taxes or special assessments assessed
against the Building and adjacent land, and Lessee agrees to pay as additional
rent, a proportionate share of those taxes and assessments. Lessee's
proportionate share shall be computed on the basis that the total area of the
Premises bears to the rentable area of the Building which is 35.90%; which share
shall be prorated from the date of commencement of this lease to the date on
which the same shall terminate. Lessee's prorata share of such taxes shall be
based upon the real estate tax bills paid during a particular year even though
they relate to a prior year's tax assessment so that Lessee's payment of such
share shall commence with the 1992 real estate tax bill payable in 1993. This
covenant shall survive the expiration of the lease term. The entire amount of
any increase in the real estate taxes by reason of capital improvements,
non-standard or special assessments, alteration or fixtures made by or for the
benefit of Lessee shall be paid fully by the Lessee. Real estate taxes as herein
used shall include all taxes or assessments whether special or general, of any
nature whatsoever, which may be now or hereafter levied or assessed upon the
Premises or any part thereof, or upon the interest of Landlord under this Lease
or the rental therefrom. Lessor agrees to elect installment payment of all
special assessments to the extent available.
19. Lessor may obtain a policy or policies of fire and extended coverage
insurance with public liability coverage on the Building in amounts not less
than the full insurable or replacement value thereof. Lessee agrees to pay as
additional rent, his share of the cost of such insurance computed on the basis
that the total area of the Premises bears to the total rentable area of the
Building. Lessee also agrees to pay the entire amount of any increase in
insurance premiums occasioned by Lessee's particular use of the Premises or its
activities. This covenant shall survive the expiration of the lease term.
20. Lessee shall pay his share of the aforesaid taxes, assessments and
insurance premiums by depositing with the agent for the beneficiaries of the
Lessor on the first day of each month during the term hereof, a sum equal to
one-twelfth (1/12) of the estimated amount of such taxes, assessments and
insurance premiums. The amount of such deposits shall be determined from time to
time by Lessor on the basis of such information it deems appropriate, including,
but not limited to, insurance premiums and tax bills adjusted for anticipated
rate or assessment increases. Lessor's determination of the amount of such
deposits shall be conclusive for all purposes. Such deposits shall be used by
the agent for the beneficiaries of the Lessor to pay the taxes and costs of
insurance when due. Said agent shall be entitled to intermingle such deposits
with its own funds and to use them for such purposes as it may determine. Lessee
shall not be entitled to any interest on such deposits. If the total deposits by
Tenant shall be insufficient to pay Lessee's share of the taxes or insurance
premiums for any year, Lessee shall promptly pay such insufficiency to the agent
when billed. If Lessee's deposits are in excess of its share, such excess shall
be remitted after the payment of the applicable tax bill or insurance premium.
21. Lessee shall also pay his proportionate share, computed in accordance
with paragraph 18 hereof, of any and all fees or expenses which may be incurred
by the agent for the beneficiaries of Lessor for the protesting or settling of
any real estate tax assessment, rate or bill pertaining to the Building.
<PAGE> 5
22. Lessee agrees that all compensation awarded in any condemnation
proceedings shall be the Lessor's, and Lessee hereby assigns to Lessor all of
Lessee's right, title and interest to any such compensation, except any separate
award made to Lessee for cost and removal of his stock or fixtures.
23. The rights and interest of Lessee under this Lease shall be subject and
subordinate to any mortgage, deed of trust, ground or underlying lease, or any
method of financing or refinancing now or hereafter placed against the land
and/or the Premises, and to any and all advances to be made thereunder, and to
the interest to be paid thereon, and all extensions and modifications thereof.
24. Lessee agrees that at all times during the term hereof, he will
maintain at his sole cost and expense, comprehensive General Liability Insurance
with minimum limits in the amount of Five Hundred Thousand Dollars ($500,000.00)
for bodily injury, personal injury or death and property damage, which insurance
shall cover Lessee's contractual liability under the indemnity provisions of
this Lease. All such policies of insurance or certificates therefor shall be
delivered to Lessor or the agent for its beneficiaries, accompanied by evidence
that the premiums thereon have been paid not less than ten (10) days prior to
the expiration of any then current policy. All such policies shall contain a
provision that such insurance may not be cancelled or amended without ten (10)
days written notice to Lessor.
25. Lessee agrees to indemnify and save Lessor, its beneficiaries, their
agents, and the Premises, harmless against and from all liabilities, liens,
claims, suits, fines, damages, penalties, losses, fees, costs and expenses
(including reasonable attorney's fees) which may be imposed upon, incurred by or
asserted by reason of: (a) any work or thing to be done in, on or about the
Premises or any part thereof; (b) any use, occupation, condition, operation of
the Premises or any part thereof, or any occurrence on the same; (c) any action
or omission on the part of lessee or any sub-lessee or any of his or their
agents, contractors, servants, employees, licensees, or invitees, or (d) any
accident, injury (including death) or damage, regardless of the cause thereof,
to any person or property incurring in, on or about the Premises or any part
thereof. The provisions of this paragraph shall survive the expiration or
earlier termination of this Lease. The indemnity contained in this paragraph
shall not apply to any matter occasioned or resulting from the negligence of
Lessor, its beneficiaries, or their agents or employees.
26. Lessor shall be excused for the period of any delay in the performance
of any obligation hereunder including the delivery of possession as herein
provided, when prevented from so doing by cause or causes beyond Lessor's
control which shall include, without limitation, acts of other tenants, all
labor disputes, civil commotion, sabotage, governmental regulations or controls,
fire or other casualty, or inability to obtain any material, labor, services or
financing or through acts of God.
27. All of Lessee's improvements or alterations to the Premises shall be in
accordance with the requirements of applicable ordinances and must be approved
by lessor or the agent for its beneficiaries in writing prior to the
commencement of such work. All of such improvements and alterations shall remain
for the benefit of Lessor as part of the Premises and shall not be removed by
the Lessee at any time during the term of this Lease or thereafter. Any such
improvements shall at the sole election of Lessor be removed upon the expiration
of the Lease or shall remain as part of the Premises as herein provided. Lessee
shall repair, and restore and save the Lessor and the Premises harmless from all
damage to the Premises caused by such removal. Lessee, at this sole cost and
expense shall maintain and take good care of and make all necessary repairs or
replacements of any nature whatsoever to the interior and exterior of the
<PAGE> 6
Premises, the plumbing and sewage facilities, the roofing, and all lighting,
heating and air conditioning equipment. Lessee shall be required to furnish the
Lessor or the agent for its beneficiaries all warranties applicable to necessary
repairs or replacements completed on said Premises.
28. Lessee agrees to pay Lessor one-half (50%) of the annual premium on a
prorata basis for A/C-heating maintenance insurance coverage upon demand of
Lessor for the full term of the lease. Abrogation of this agreement may be made
only by mutual consent of Lessor.
29. Lessee is hereby given the privilege of the utilization of the existing
electric sign and awnings and if so desired installation at his own cost and
expense any other electric sign advertising his business on the exterior of the
Premises. Such sign shall comply in all respects with the requirements of city
ordinances and authorities, and shall be approved in writing by Lessor or the
agent for its beneficiaries, as to size, location and method and manner of
installation.
30. Lessor shall secure plate glass insurance for the Premises and Lessee
agrees to reimburse Lessor for the premium paid for said insurance on demand.
31. Lessee agrees to operate in the entire Premises during the entire term
of this Lease and to conduct his business at all times in good faith, in a high
grade and reputable manner during the regular and customary hour for such type
of business and on all business days.
32. This Lease may be changed, waived, discharged or terminated only by an
instrument in writing signed by the Lessor. No modification, termination or
surrender of the Lease or surrender of the Premises or any part thereof or any
interest therein by Lessee shall be valid or effective unless agreed to and
accepted in writing by Lessor, and no act by any representative or agent of
Lessor or its beneficiaries other than a written agreement shall constitute
acceptance thereof.
33. Base Rent payable under the lease shall be the sum of Thirty-Two
Thousand Five-Hundred and Twenty-Eight Dollars and Sixty-Five Cents ($32,528.65)
annually from July 1, 1993 through June 30, 1995; Thirty-Five Thousand
Eight-Hundred and Forty-Seven Dollars and Fifty Cents ($35,847.50) annually from
July 1, 1995 through June 30, 1997; Thirty-Nine Thousand Five-Hundred
Fifty-Seven Dollars and Sixty-Five Cents ($39,557.65) annually from July 1, 1997
through June 30, 1999 in equal monthly installments due on the first day of the
month during the lease term.
34. Provided all necessary licenses or permits are obtained, Lessee shall
have the right to conduct a mortgage related business from the premises.
35. Every installment of Basic Monthly Rent, Additional Rent or other sums
due under this Lease if not paid when due shall bear interest from the date the
same were due at the rate of twelve (12%) per annum, computed on a per diem
basis, until paid.
36. In the event of any sublease of the premises or assignment of this
Lease, Lessee shall pay Hazel B. Andros, agent of Twin Oaks Realty, a sum equal
to (a) any rent or other consideration paid to Lessee by any such sublessee or
assignee in excess of the rent for the premises then being paid by Lessee
pursuant to the terms of this Lease; and (b) any other profit or gain realized
by Lessee from such subletting or assignment. All such sums payable hereunder
shall be paid to Hazel B. Andros, agent of Twin Oaks Realty, as additional rent
immediately upon Lessee s receipt thereof. Lessee will pay and discharge all
reasonable costs, attorney's fees and expenses that shall be made and incurred
by Lessor in the event of any sublease of the Premises or assignment of this
Lease agreed upon by Lessor.
<PAGE> 7
37. Lessee will allow Lessor to have placed upon the Premises at all times
notices of "For Sale" and/or "For Rent," and Lessee will not interfere with the
same.
38. Obligations of Lessor under this Lease are contingent upon:
(a) Lessor promptly, if not precedent to the execution of this Lease,
installing:
(1) a new drop ceiling,
(2) adequate florescent lighting,
(3} two (2) five (5) ton HVAC units servicing the Premises,
(b) Lessor, within a reasonable period of time, promptly installing
in the 1350 sq. ft. back addition:
(1) a new drop ceiling,
(2) adequate florescent lighting,
(3) one (1) five (5) ton HVAC unit servicing the area,
(4} two (2) windows of reasonable size and location as specified
by lessee.
(5) dry wall and electrical outlets throughout perimeter of
exterior walls.
(c) Lessor providing thirty (30) days free rent commencing from date
of possession of Premises.
39. Obligations of Lessee under this Lease are contingent upon:
(a) Lessee obtaining any necessary licenses or permits for the
conduct of its business on the Premises.
(b) Lessee remodeling Premises which includes trim work, painting and
decorating walls, and flooring areas,
(c) Lessee providing proof of financial security and responsibility
including financial statements displaying sworn statements and/or
the Corporate Seal of the Company.
If after making every reasonable effort, Lessee is unable to satisfy
the foregoing contingency(ies) by August 1993 and so notifies Lessor thereof in
writing, this Lease shall become null and void. If Lessee fails to provide the
notice as aforesaid, the foregoing contingency(ies) shall be deemed satisfied
and this Lease shall remain in full force and effect. If the foregoing
contingency(ies) are not satisfied by August 1, 1993 the payment of Base Monthly
Rent, and additional rental payments as provided for under this Lease shall
abate on a per diem basis until the earlier of the satisfaction of the foregoing
contingency(ies) or August 15, 1993. Once the foregoing licenses have been
procured, if such licenses or permits are lost, or if Lessee's use of the
Premises for the purposes herein authorized shall at any time during the term of
the Lease be otherwise prohibited by law, ordinance, governmental regulation, or
prevented by injunction or otherwise, this Lease shall notthereby be terminated
nor shall Lessee be entitled by reason thereof to surrender the Premises or to
any abatement or reduction of rent, nor shall the respective obligations of the
parties hereto be otherwise affected.
<PAGE> 8
This Rider, consisting of paragraphs 18 through 39, is hereby incorporated
by reference and made a part of a certain lease dated June 28, 1993 by and
between the undersigned.
SEE RIDER ATTACHED HERETO AND MADE A PART HEREOF.
LaSALLE NATIONAL TRUST NA Successor Trustee to
HANOVER CAPITAL PARTNERS, LTD., LASALLE NATIONAL BANK, LESSOR,
LESSEE not personally but solely as Trustee
/s/ ?????? By: /s/ ??????
- ------------------------------- -----------------------------------
MANAGING DIRECTOR
Its VICE PRESIDENT
-----------------------------------
Attest Nancy A Stack
/s/ Meghan A. McLaughlin --------------------------------
- -------------------------------
Meghan A. McLaughlin Its Assistant Secretary 7/22/93
Secretary -----------------------------------
RIDER ATTACHED TO AND MADE A PART OF LEASE DATED 6/28/93
-------
This LEASE is executed by LA SALLE NATIONAL TRUST, N.A., not personally but as
Trustee as aforesaid, in the exercise of the power and authority conferred upon
and vested in it as such TRUSTEE, and under the express direction of the
beneficiaries of a certain TRUST AGREEMENT date 9/21/48 & 10/1/76 and known as
TRUST NO. 7115 & 51414 at LA SALLE NATIONAL TRUST, N.A., to all provisions of
which TRUST AGREEMENT this LEASE is expressly made subject. It is expressly
understood and agreed that nothing herein or in said LEASE contained shall be
construed as creating any liability whatsoever against said TRUSTEE personally,
and in particular without limiting the generality of the foregoing, there shall
be no personal liability to pay any indebtedness accruing hereunder or to
perform any covenants, either express or implied, herein contained, or to keep,
preserve or sequester any property of said TRUST, and that all personal
liability of said TRUSTEE of very sort, if any, is hereby expressly waived by
said LESSEE, and that so far as said TRUSTEE is concerned the solely to the
premises hereby leased for the payment thereof. It is further understood and
agreed that said TRUSTEE has no agents or employees and merely holds naked
legal title to the property herein described; that said TRUSTEE has no control
over, and under this LEASE assumes no responsibility for (1) the management or
control of such property, (2) the upkeep, inspection, maintenance or repair of
such property (3) the collection of rents or rental of such property, or (4)
the conduct of any business which is carried on upon such premises. TRUSTEE
does not warrant, indemnify, defend title nor is it responsible for any
environmental damage.
<PAGE> 9
LEASE AMENDMENT
PARTIES:
The parties to this agreement are LaSalle National Trust, N.A. as
Trustee, and not individually, under Trust No's. 7115 and 51414 (hereinafter the
"Lessor") and Hanover Capital Partners, Ltd., a New York Corporation
(hereinafter the "Lessee").
RECITALS:
1. Lessor and Lessee entered into a written lease agreement dated
June 28, 1993 (hereinafter the "Lease") for certain store rooms
in Lessor's building known as 7138-40 West Higgins Avenue,
Chicago, Illinois.
2. Lessor and Lessee desire by this agreement to amend the Lease
subject to the conditions and provisions hereinafter contained.
TERMS:
In consideration of the mutual agreement herein contained the parties
hereby agree as follows:
1. Lessee shall lease from Lessor a store front for an additional
One-Thousand Two-Hundred and Eighty-Five (1,285) square feet
known as 7142 West Higgins Avenue, Chicago, Illinois for the
remaining term of the Lease expiring June 30, 1999.
2. Lessee shall have the option to terminate the amended portion of
the Lease to be exercised through written notification to Lessor
on or before March 30, 1996 and on or before each March 30th
thereafter through March 30, 1998 for the additional store front
at 7142 West Higgins Avenue, Chicago, Illinois.
3. Additional Base Rent payable for the store front 7142 West
Higgins Avenue, Chicago, Illinois shall be the sum of
Eleven-Thousand Seven-Hundred Ninety-Six Dollars and Thirty Cents
($11,796.30) annually from September 1, 1995 through June 30,
1997; Thirteen-Thousand Seventeen Dollars and Five Cents
($13,017.05) annually from July 1, 1997 through June 30, 1999 in
equal monthly installments due on the first day of each month
during the Lease term.
4. Lessee agrees to pay Lessor as additional rent the proportionate
share of the properties real estate taxes or special assessments
and insurance premium costs to be computed on the basis that the
total area of the premises at 7142 West Higgins Avenue bears to
the rentable area of the Building which is presently 11.81%
(Lease--Rider 18 and 19)
5. Lessee's monthly rental payment for the store front 7142 West
Higgins Avenue shall be paid concurrently with the monthly rental
payment for the store front 7138-40 West Higgins Avenue.
Thereupon, Lessee's delinquent or deficient monthly rental
payments shall be considered by Lessor to be in default of rental
payments for the entire premises subjecting Lessee to immediate
eviction from the entire premises known as 7138-42 West Higgins
Avenue, Chicago, Illinois.
<PAGE> 10
Page 2
6. Lessor shall provide Lessee, within a reasonable period of time,
110 volt (strip wiring) electric outlets every twelve (12) feet
along the perimeter of the east and west walls of the store
(approximately ten (10) outlets).
7. Lessee, in all other respects, shall accept the store front 7142
West Higgins Avenue, Chicago, Illinois on an "as is" basis.
Thereupon, Lessee at his own cost and expense is hereby
authorized by Lessor to renovate an existing opening between the
adjacent store fronts 7138-40 and 7142 West Higgins Avenue and to
provide any other reasonable lease hold improvements consistent
with his business operation.
8. Lessee shall be totally responsible for all other improvements to
the store front as well as renovating the same upon vacating the
premises at the termination of the amended portion of the Lease.
9. Except as otherwise expressly modified herein all of the terms
and provisions of the Lease not inconsistent with the foregoing
amendment shall remain in full force and effect for the entire
term of the Lease.
This Lease amendment has been entered into by the parties on this the
23rd day of August, 1995.
Hanover Capital Partners, Ltd. LaSalle National Trust, NA as
Trustee under Trust No's.
7115 and 51414 AND NOT PERSONALLY
By: /s/ ????? By: /s/ Nancy A. Stack
----------------------------- -----------------------------
Title: VICE PRESIDENT Title: ASSISTANT SECRETARY
--------------------------- ---------------------------
Date: 11/13/95 Date: 12/22/95
---------------------------- ----------------------------
By: /s/ ?????
-----------------------------
Title: Secretary
---------------------------
Date: 11/13/95
----------------------------
This instrument is executed by LaSALLE NATIONAL TRUST, N.A., not personally but
solely as Trustee, as aforesaid, in the exercise of the power and authority
conferred upon and vested in it as such Trustee. All the terms, provisions,
stipulations, covenants and conditions to be performed by LaSALLE NATIONAL TRUST
N.A., are undertaken by it solely as Trustee, as......???...........[COPY
ILLEGIBLE]
CORPORATE SEAL
<PAGE> 1
EXHIBIT 10.15
BONHOMME PLACE
OFFICE BUILDING LEASE
BONHOMME PLACE ASSOCIATES, INC.
LANDLORD
HANOVER CAPITAL MORTGAGE CORPORATION
TENANT
<PAGE> 2
BONHOMME PLACE
OFFICE BUILDING LEASE
This Lease, made and entered into as of the 5th day of February, 1993 by
and between Bonhomme Place Associates, Inc., a Missouri limited partnership,
hereinafter called ("Landlord"), and Hanover Capital Mortgage Company, a
Missouri Corporation (hereinafter called "Tenant").
Landlord, for and in consideration of the rents, covenants and agreements
hereinafter mentioned and hereby agreed to be paid, kept and performed by
Tenant, does hereby lease to Tenant, and Tenant does hereby lease from Landlord,
the premises described herein on the terms and conditions contained herein.
1. PREMISES
--------
The premises hereby leased (hereinafter called the "Premises") are
designated on the floor plan attached hereto as Exhibit A and consist of
3,188 rentable square feet on the fourth (4th) floor of the office building
(hereinafter called the "Building") known as Bonhomme Place in the County
of St. Louis and State of Missouri, the Premises being more concisely
described as follow:
SUITE NUMBER: 475 FLOOR NUMBER: FOUR
BUILDING NAME: Bonhomme Place
ADDRESS: 7700 Bonhomme Avenue, Clayton, Missouri 63105
2. TERM
----
The term of this Lease (hereinafter called the "Term") shall be for three
(3) years commencing on the first day of March, 1993 (hereinafter called
the "Commencement Date") and ending on the last day of February, 1996, both
dates inclusive, unless earlier terminated as provided herein, provided
that if Tenant, with Landlord's permission, occupies the Premises prior to
the Commencement Date, then the Term shall include, and the obligations of
the parties shall be effective during, the period from the date of such
occupancy to the Commencement Date with no effect on the expiration date of
the Term.
3. POSSESSION
----------
In the event the Premises shall not be completed and ready for occupancy on
the Commencement Date, or in the event Landlord is unable to deliver
possession on such date by reason of the holding over or retention of
possession by any tenant or occupant, this Lease shall nevertheless
continue in full force and effect, but Rent (as hereinafter defined) shall
abate until the Premises are ready for occupancy or until Landlord is able
to deliver possession, as the case may be, and Landlord shall have no
other liability whatsoever on account thereof; provided, however, there
shall be no abatement of Rent if the Premises are not ready for occupancy
because of the failure to complete the installation of special equipment,
fixtures or material ordered by Tenant or because of any delays resulting
from Tenant's failure to promptly submit plans in accordance with the Work
Letter attached hereto as Exhibit B or resulting from changes or additions
to Tenant's plans after the initial submission thereof. The Premises shall
not be deemed incomplete or not ready for occupancy if only insubstantial
details of construction, decoration or mechanical adjustments remain to be
done. The determination of Landlord's architect or interior space planner
for the Building shall be final and conclusive on Tenant as to whether the
Premises are completed and ready for occupancy. Under no circumstances
shall the occurrence of any of the events described in this Section 3 be
deemed to accelerate or defer the expiration date of the Term.
4. BASE RENT
---------
Tenant shall pay to Landlord at the address set forth in Section 27 hereof
in United States currency Rent as set forth in paragraph 1 of the Addendum
to Lease.
5. ADDITIONAL RENT FOR EXCESS OPERATING EXPENSES AND TAXES
-------------------------------------------------------
5.1 In addition to paying the Base Rent specified in Section 4 hereof, Tenant
shall pay as "Additional Rent" for excess Operating Expenses and excess
Taxes the amounts determined as hereinafter set forth. The Base Rent and
Additional Rent are sometimes herein collectively called the "Rent". All
amounts due under this Section as Additional Rent shall be payable for the
same periods and in the same manner, time and place as the Base Rent. The
Additional Rent shall be payable for the same periods and in the same
manner, time and place as the Base Rent. The Additional Rent described in
this Section and in Section 8 hereof shall be payable during any period of
occupancy free of Base Rent which may be granted by landlord. The
obligations of Tenant to pay the Additional Rent provided for in this
Section 5 shall survive the expiration of the Term. For any partial
Calendar Year, Tenant shall be obligated to pay only a pro rata share of
the Additional Rent based on the number of the days of the Term falling
within such Calendar Year.
1
<PAGE> 3
5.2 As used in this Section 5, the term:
(a) "Base Amount" is the amount of Operating Expenses and Taxes included
in and a part of the Base Rent and for the purposes of this Lease
shall be the amount spent for operating expenses and taxes for the
calendar year 1992.
(b) "Calendar Year" shall mean each calendar year in which any part of the
Term fails, through and including the year in which the Term expires.
(c) "Tenant's Proportionate Share" shall mean Three and 13/100 percent
(3.13%) being the percentage calculated by dividing 101,864 sq. ft.
(being the total rentable area of the Building) into the rentable area
contained in the Premises, rentable area to be determined by landlord
on a uniform basis for all tenants of the Building. The rentable area
of the Premises and the Building shall be computed using the standards
of the Building Owners and Managers Association International and
shall allocate to each leased premises in the Building a pro rata
portion of the ground floor common area lobby.
(d) "Taxes" shall mean all real estate taxes and assessments, special or
otherwise, and trustees' assessments levied or assessed upon or with
respect to the land and/or Building and ad valorem taxes for any
personal property used in connection therewith. Should the State of
Missouri or any political subdivision thereof or any other
governmental authority having jurisdiction over the land and/or the
Building: (i) impose a tax, assessment, charge or fee or increase a
then-existing tax, assessment, charge or fee which landlord shall be
required to pay, either by way of substitution for such real estate
taxes and ad valorem personal property taxes or in addition to such
real estate taxes and ad valorem personal property taxes; or (ii)
impose an income or franchise tax or a tax on rents in substitution
for or as a supplement to a tax levied against the land and/or the
Building and/or the personal property used in connection with the land
and/or the Building, all such taxes, assessments, fees or charges
shall be deemed to constitute Taxes hereunder. Taxes shall include all
fees and costs incurred by landlord in seeking to obtain a reduction
of or a limit on the increase in any Taxes, regardless of whether any
reduction or limitation is obtained. Taxes shall not include any
inheritance, estate, succession, transfer, gift, franchise, net income
or capital stock tax.
(e) "Operating Expenses" shall mean all expenses, costs and disbursements
(other than Taxes) of every kind and nature (determined for the
applicable Calendar Year on an accrual basis) paid or incurred by
landlord in connection with the ownership, management, operation and
repair of the land and Building, including the following:
(i) the wages and salaries of all employees engaged in the operation,
management and maintenance of the Building, including employees'
Social Security taxes and any other taxes which may be levied on
such wages and salaries;
(ii) All janitorial labor supplied and materials used in the
operation and maintenance of the Building;
(iii)The cost of water and power, sewer service, heating, lighting,
ventilating, electricity and air conditioning of the Building;
(iv) The cost of all maintenance and service agreements on equipment,
including security systems, window cleaning, elevator
maintenance, mechanical equipment maintenance and electrical
systems maintenance;
(v) Insurance premiums; and
(vi) The cost of repairs (including plate glass) and general
maintenance of the Building and Land; but excluding the
following:
(A) Costs of alterations of any tenant's premises;
(B) Principal or interest payments on loans secured by mortgages
or trust deeds on the Building and/or on the land;
(C) Costs of capital improvements, except that Operating
Expenses shall include: (a) the cost during the Term, as
reasonably amortized by landlord with interest at the rate
of fifteen percent (15%) on the unamortized amount of any
capital improvement which reduces any component cost
included within the Operating Expenses; and (b) the cost of
any capital improvements which are necessary to keep the
Land and/or Building in compliance with all governmental
rules and regulations applicable from time to time thereto.
(D) Real estate brokers' leasing commissions.
2
<PAGE> 4
5.3 Tenant shall pay to landlord as Additional Rent an amount ("Expense
Adjustment Amount") equal to Tenant's Proportionate Share of the amount by
which the combined total (as such total may be adjusted pursuant to Section
5.2 hereof) of Taxes paid during each Calendar Year and Operating Expenses
incurred with respect to each Calendar Year exceeds the Base Amount. In the
event the Building is not fully occupied or should Landlord not be
providing services to all tenants of the Building at the level required by
this Lease during any year during the Term, Landlord shall add to the
Operating Expenses actually incurred by Landlord during such year those
additional expenses which it reasonably determines it would have incurred
during such year had the Building been fully occupied and the services
performed at the level required by this Lease. The Expense Adjustment
Amount with respect to each Calendar Year shall be paid in monthly
installments in an amount estimated from time to time by Landlord and
communicated by written notice to Tenant. Landlord shall cause to be kept
books and records showing Operating Expenses and Taxes in accordance with
an appropriate system of accounts and accounting practices consistently
maintained. As promptly as practicable following the close of each Calendar
Year, Landlord shall cause a firm of independent public accountants to
review such books and records (and to do such other work as may be
necessary to enable such firm to give the certificate hereinafter required)
and to deliver to landlord its certificate specifying the amount of
Operating Expenses and Taxes for such Calendar Year for the Building. Alter
receipt of such certificate, Landlord shall cause the amount of the Expense
Adjustment Amount for such Calendar Year to be computed based on Operating
Expenses and Taxes for such Calendar Year for the Building as specified in
such firm's certificate, and Landlord shall deliver to Tenant a statement
of such amount and Tenant shall pay any deficiency to Landlord as shown by
such statement within thirty (30) days after receipt of such statement. The
certificate of such independent accounting firm as to the amount of
Operating Expenses and Taxes for such Calendar Year for the Building shall
constitute a determination which is final and conclusive and binding on
Landlord and Tenant. If the total of the estimated monthly installments
paid by Tenant during any Calendar Year exceeds the actual Expense
Adjustment Amount due from Tenant for such Calendar Year, at Landlord's
option such excess shall be either credited against payments next due
hereunder or refunded by landlord, provided that Tenant is not then in
default hereunder. The amount of any refund of Taxes received by Landlord
shall be credited against Taxes for the year in which such refund is
received. In determining the amount of Taxes for any year, the amount of
special assessments to be included shall be limited to the amount of the
installments (plus any interest payable thereon) of such special
assessments required to be paid during such year computed as if Landlord
had elected to have such special assessments paid over the maximum period
of time permitted by law even if Landlord shall not have made such
election. All references to Taxes "for" a particular year shall be deemed
to refer to Taxes payable during such year without regard to when such
Taxes are assessed or levied.
6. SECURITY DEPOSIT
----------------
Tenant concurrently with its execution of this Lease has deposited with
Landlord the Security Deposit to be held to guarantee the faithful
performance by Tenant of all of its obligations under this Lease. Any
interest earned thereon shall be the property of Landlord. Landlord may
deposit such Security Deposit in its general funds, and shall not be
required to keep the Security Deposit in a separate account. Unless and
until Tenant is in default with respect to any provision hereof, the
Security Deposit shall be the property of Tenant. If Tenant defaults with
respect to any provision of this Lease, Landlord may expend the whole or
any part of the Security Deposit for the payment of any amount which
Landlord may expend by reason of such default. If any portion or all of the
Security Deposit is so used, Tenant shall, within ten (10) days after
demand therefor, deposit cash with Landlord in a amount sufficient to
restore the security deposit to its original amount and failure to do so
shall be a breach of this Lease. If Tenant shall not default under this
Lease, the Security Deposit shall be returned to Tenant at the end of the
Term; provided that Landlord may retain the Security Deposit until such
time as all amounts due from Tenant hereunder have been paid in full. In
the event of a transfer of the Building, Landlord may pay over the Security
Deposit to Landlord's transferee to be held under the terms of this Lease
and Landlord shall be released from all liability for the return of the
Security Deposit. Under no circumstances shall the Security Deposit be
interpreted as being part of the Rent.
7. PERMITTED USE
-------------
Tenant shall use and occupy the Premises for general office purposes and no
other use or purpose, and Tenant agrees for itself and its employees,
agents, clients, customers, invitees and guests to comply with the Building
Rules attached hereto as Exhibit C and with such reasonable modifications
thereof and additions thereto as Landlord may make for the Building, it
being agreed that Landlord shall not be liable for any nonobservance
thereof by any other tenant. Tenant shall not make or permit to be made any
use of the Premises which, directly or indirectly, is forbidden by law,
ordinance or governmental regulation or which may be dangerous to persons
or property of which may invalidate or increase the premium cost of any
policy of insurance carried on the Building or covering its operations, nor
shall Tenant do or permit to be done any act or thing upon the Premises
which will be in conflict with fire insurance policies covering the
Building.
8. SERVICES
--------
Landlord shall furnish:
(a) Heat and air conditioning to provide a seasonable temperature (subject
to governmental regulations) for normal occupancy and use of the
Premises under normal business operations daily from 8:00 a.m. to 6:00
p.m., Saturdays from 8:00 a.m. to 12:30 p.m., Sundays and holidays
excepted ("Normal Business
3
<PAGE> 5
Hours"). Whenever heat-generating machines or equipment are used by Tenant
in the Premises, Landlord reserves the right to install supplementary air
conditioning units for the Premises, and the cost of installation,
operation and maintenance thereof shall be paid by Tenant to Landlord as
Additional Rent at rates fixed by Landlord. If heat, ventilation or air
conditioning is requested by Tenant outside of Normal Business Hours, the
cost of the provision thereof shall be paid by Tenant at rates set by
landlord as Additional Rent.
(b) Cold water from St. Louis County Water Company mains for drinking, lavatory
and toilet purposes drawn through fixtures installed by Landlord (or by
Tenant with Landlord's written consent) and hot water for lavatory purposes
from regular Building supply. If Tenant shall require water in excess of
that usually furnished or supplied for the use of the Premises as general
office space, Tenant shall first procure the written consent of Landlord
for the use thereof and Landlord may cause a water meter to be installed
for the Premises to measure the amount of water consumed. The cost of the
meter and of installation, maintenance and repair thereof shall be paid by
Tenant and Tenant agrees to pay to Landlord promptly upon demand, as
Additional Rent hereunder for all such water consumed as shown by said
meter at the rate charged for such water by the utility company serving the
Building. If a separate meter is not installed, the excess cost of such
water will be established by a survey made by an independent engineer
selected by Landlord.
(c) Janitor service and customary cleaning in and about the Premises (kitchens,
private restrooms and eating areas excluded), Monday through Friday
(holidays excepted) comparable to standard janitor service furnished by
other St. Louis area office buildings. Tenant shall not provide any janitor
or cleaning services without Landlord's consent and then only subject to
supervision of Landlord and at Tenant's sole responsibility and by janitor
contractor or employees at all times satisfactory to Landlord.
(d) Adequate operator-less passenger elevator service in common with other
tenants at reasonable times. Freight elevator service shall be made
available by Landlord as necessary upon reasonable notice by Tenant.
(e) Window washing of all windows in the Premises, both inside and out, at
reasonable intervals.
(f) Electricity for Building standard lighting during Normal Business Hours.
(g) Electricity allowance of 1.5 watts of power per rentable square foot per
hour during Normal Business Hours for business machines, telephone
equipment, non-standard Building lighting, and other energy consuming
devices. In the event that the total electric energy required to operate
all business machines, telephone equipment, non-standard Building lighting
and other energy consuming devices located within the Premises exceeds the
electricity allowance defined above, Tenant agrees to pay to Landlord,
promptly upon demand, as Additional Rent hereunder for said excess
electricity at the average unit rate in effect of the utility company
serving the Building. The amount of excess electrical energy shall be
determined by (1) utilizing the services of an independent consulting
engineer to conduct a survey of the Premises and calculate the amount of
excess electrical energy; or (2) installation of power monitoring device(s)
to measure the amount of electrical energy used. The cost of power
monitoring devices and the installation, maintenance and repair thereof
and/or the cost of consulting engineering services used for determining
excess electrical consumption shall be paid by Tenant.
(h) Tenant shall not, without the prior written consent of Landlord, install or
use any apparatus or device in the Premises, including, but without
limitation, electronic data processing machines, mainframe computer
equipment or other devices using other than standard duplex outlets or
consuming electricity in excess of the amount set forth in subsection (g)
above.
In the event that landlord furnishes any additional services, such services
shall be paid for by Tenant at rates fixed by Landlord. A failure to pay for
such services within ten (10) days after notice shall authorize Landlord, in
Landlord's sole and exclusive discretion and without any further notice, to
discontinue such additional services or to terminate such additional services as
Landlord shall determine. Any sums which may be due for such additional services
shall be deemed Additional Rent due hereunder and the same shall be subject to
all of the provisions pertaining to the payment of Rent. Landlord does not
warrant that any service will be free from interruptions occasioned in whole or
in part by repairs, renewals or improvements; by any strike, lockout or other
labor disturbance; by inability to secure water, electricity, gas or other
materials at the Building after reasonable effort to do so; by any accident or
casualty whatsoever; by the act or omission of Tenant or other parties or by any
other cause or causes beyond the reasonable control of Landlord. Any such
interruption of service shall never be deemed an eviction or disturbance of
Tenant's use and possession of the Premises or any part thereof or render
Landlord liable to Tenant for damages or relieve Tenant from performance of
Tenant's obligations hereunder.
4
<PAGE> 6
9. SUBLETTING AND ASSIGNMENT
-------------------------
Tenant shall not by operation of law or otherwise, have the right to
assign, sublet, hypothecate, mortgage, encumber or convey this Lease or any
interest under it without the written consent of Landlord which shall not
be unreasonably withheld. For the purposes of this Section any transfer of
the stock in a corporate tenant or any transfer of an interest in a
partnership tenant in which a transfer of control of the corporation or
partnership is effected shall be deemed to be an assignment of this Lease.
10. QUIET POSSESSION AND SUBORDINATION
----------------------------------
Landlord covenants and agrees with Tenant that upon Tenant's paying the
Rent and Additional Rent and observing and performing all of the terms,
covenants and conditions on Tenant's part to be observed and performed,
Tenant shall peaceably and quietly enjoy the Premises throughout the Term
of this Lease without hinderance or molestation by anyone claiming through
or under Landlord, subject, however, to the terms and conditions of this
Base and any ground or underlying leases and mortgages or deeds of trust on
the land or Building. This Cease is subject and subordinate to all present
or future ground or underlying leases of the land or Building and to the
lien of any mortgages or deeds of trust now or hereafter in force against
the land and Building or either and to all renewals, extensions,
modifications, consolidations and replacements thereof and to all advances
made or hereafter to be made upon the security thereof. Such subordination
shall be self-executing without further act on the part of Landlord or
Tenant; provided, however, that Tenant shall at any time hereafter, on the
demand of Landlord or any lienholder, execute any instruments, releases or
other documents that may be required by any lienholder for the purpose of
confirming the subordination of this Lease to the lien of such lienholder.
Tenant hereby irrevocably authorize Landlord to execute and deliver in the
name of Tenant any such instrument or instruments if Tenant falls to do so.
In the event that any mortgagee through foreclosure of any mortgage or deed
of trust to which this Lease is subordinated (or by deed in lieu thereof),
or any ground or underlying lessor through termination of any ground or
underlying lease, or any purchaser at a foreclosure sale becomes the owner
of the Premises, Tenant will attorn to and recognize such entity's becoming
such owner for all purposes in place of the Landlord named in this Lease;
provided that there shall be no credit given by such entity to Tenant for
any Rent or Additional Rent which has been prepaid to Landlord named
herein.
11. LANDLORD'S RESERVED RIGHTS
--------------------------
Landlord reserves the following rights: (a) to change the name or street
address of the Building; (b) to install, affix and maintain a sign on the
exterior of the Building; (c) to designate all sources furnishing sign
painting and lettering, drinking water, catering, food, toilet supplies,
lamps and bulbs, background music or other services used on the Premises,
and in general, to designate, limit, restrict and control any business or
any service in or to the Building and its tenants; (d) to display "For
Rent" signs on and to exhibit, decorate, remodel, repair, alter or
otherwise prepare for re-occupancy the Premises during the last six (6)
months of the Term of this Lease or any part thereof if during or prior to
that time Tenant vacates the Premises; (e) to retain at all times and to
use in appropriate instances passkeys to all doors within and into the
Premises (no locks shall be changed without the prior consent of Landlord);
(f) to grant to anyone the exclusive right to conduct any particular
business or underlying in the Building; (g) to close the Building after
regular working hours and on legal holidays; subject, however, to Tenant's
right to admittance under such reasonable regulations as Landlord may
prescribe from time to time which may include, by way of example but not of
limitation, that persons entering or leaving the Building identity
themselves to a watchman or employee of Landlord by registration or
otherwise and that said persons establish their right to enter or leave the
Building; (h) to approve the weight, size and location of safes or other
heavy equipment or articles, which articles may be moved in, about or out
of the Building or Premises only at such times and in such manner as
Landlord shall direct and in all events, however, at Tenant's sole risk and
responsibility; (i) to take any and all measures, including inspections,
repairs, alterations, decorations, additions and improvements to the
Premises or to the Building as may be necessary or desirable for the
safety, protection or preservation of the Premises or the Building or
Landlord's interest therein or as may be necessary or desirable in the
operation of the Building; (j) to decorate or make repairs, alterations,
additions or improvements, whether structural or otherwise, in and about
the Building or any part thereof and for such purposes to enter upon the
Premises and during the continuance of any said work to temporarily close
doors, entry-ways, public spaces and corridors in the Building and to
interrupt or temporarily suspend Building, services and facilities upon
advance reasonable notice and so as to not unreasonably interfere with
Tenant's use and enjoyment of the Premises; and (k) to designate and
approve prior to installation all types of window shades, blinds, drapes,
awnings, window ventilators and similar equipment, and to control all
internal lighting and objects which may be visible from the exterior of the
Building. Landlord may enter upon the Premises and may exercise any or all
of the foregoing rights hereby reserved without being deemed guilty of an
eviction or disturbance of Tenant's use or possession and without being
liable in any manner to Tenant and without abatement of Rent or affecting
any of Tenant's obligations hereunder.
12. CONDITION OF PREMISES
---------------------
Tenant's taking possession of any portion of the Premises shall be
conclusive evidence that such portion of the Premises was in good order and
satisfactory condition when Tenant took possession, except as to latent
defects and excluding damage caused by Tenant or its agents, independent
contractors or suppliers. Landlord or its agents have made no
representation respecting the condition of the Premises or any future work
or improvements to be done or made thereto except as expressly provided in
this Lease.
5
<PAGE> 7
13. ALTERATIONS AND IMPROVEMENTS
----------------------------
Tenant shall not, without the prior written consent of Landlord, make any
alterations, improvements or additions to the Premises. If Landlord
consents to such alterations, improvements or additions, it may impose such
conditions with respect thereto a Landlord deems appropriate, including,
without limitation, requiting Tenant to furnish Landlord with security for
the payment of all costs to be incurred in connection with such work,
insurance against liabilities which may arise out of such work and the
plans and specifications together with all permits necessary for such work.
The work necessary to make any alterations, improvements or additions to
the Premises shall be done at Tenant's expense by employees of or
contractors hired by Landlord except to the extent Landlord gives its prior
written consent to Tenant's hiring contractors. Tenant shall promptly pay
to Landlord or to Tenant's contractors, as the case may be, when due, the
cost of all such work and of all decorating required by reason thereof.
Tenant shall also pay to Landlord a percentage of the cost of such work
(such percentage to be established on a uniform basis for the Building)
sufficient to reimburse Landlord for all overhead, general conditions, fees
and other costs and expenses arising from Landlord's involvement with such
work. Upon completion of such work, Tenant shall deliver to Landlord, if
payment is made directly to contractors, evidence of payment, contractors'
affidavits and full and final waivers of all liens for labor, services or
materials. Tenant shall defend and hold Landlord and the Land and Building
harmless from all costs, damages, liens and expenses related to such work.
All work done by Tenant or its contractors shall be done in a first-class,
workmanlike manner using only good grades of materials and shall comply
with all insurance requirements and all applicable laws and ordinances and
rules and regulations of governmental departments or agencies. All
alterations, improvements and additions to the Premises, whether temporary
or permanent in character, made or paid for by Landlord or Tenant shall
without compensation to Tenant become Landlord's property at the
termination of this Lease by lapse of time or otherwise and shall, unless
Landlord requests their removal, be relinquished to Landlord in good
condition, ordinary wear excepted. Landlord agrees to install at its cost
and expense the items listed in the Work Letter attached hereto as Exhibit
B, which such Work Letter specifies the improvements to be made at the cost
and expense of Landlord. Landlord hereby approves of those alterations, if
any, listed in said Exhibit B to be performed at Tenant's expense.
14. REPAIRS AND REPLACEMENTS
------------------------
Landlord, at its expense, shall maintain and keep in good condition the
Premises and the Building, except as otherwise specified in this Section.
Tenant shall, at its own expense, keep the Premises in a safe and
tenantable condition during the Term of this Lease except as otherwise
provided in Section 15 of this Lease, and Tenant shall promptly and
adequately repair all damages to the Premises occasioned by Tenant's use or
occupancy of the Premises and replace or repair all damaged or broken
glass, fixtures and appurtenances, under the supervision and with the
approval of Landlord and within any reasonable period of time specified by
Landlord. If Tenant does not do so, Landlord may (but need not) make such
repairs and replacements, and Tenant shall pay Landlord the cost thereof
forthwith upon being billed for same. Landlord may, but shall not be
required to, enter the Premises at all reasonable times to make such
repairs, alterations, improvements and additions, including ducts and all
other facilities for air conditioning service as Landlord shall desire or
deem necessary, to the Premises or to the Building or as Landlord may be
required to do by any governmental authority.
15. DESTRUCTION OR DAMAGE
---------------------
If a substantial portion of the Premises be rendered untenantable by fire
or other casualty or if by reason of fire or other casualty affecting some
other portion of the Building a substantial portion of the Premises is
rendered inaccessible or unsafe, and if it is reasonably anticipated that
even though undertaken and pursued with all due diligence it will require
more than six (6) months to repair, restore or rehabilitate the damaged
area, Landlord may terminate this Lease as of the date of the fire or
casualty by notice to Tenant within sixty (60) days after such occurrence.
If in any such event Landlord does not elect to terminate this Lease,
Landlord shall proceed with all due diligence to repair, restore and
rehabilitate the Premises or the Building at Landlord's expense and this
Lease shall not terminate. In the event the Lease is not terminated
pursuant to this Section, Base Rent shall equitably abate on a per diem
basis during the period of untenantability of the Premises. In the event of
the termination of this Lease pursuant to this Section, Rent shall be
apportioned on a per diem basis and paid to the date of the fire or other
casualty. In the event that the Premises are partially damaged by fire or
other insured casualty but are not rendered substantially untenantable,
then Landlord shall, except during the last year of the Term and except if
the Building has been substantially damaged and Landlord has elected not to
restore the Premises, proceed with all due diligence to repair and restore
the Premises, and the Base rent shall equitably abate in proportion with
the non-usability of the Premises during the period of untenantability;
provided, however, that if such partial damage is occasioned by an
uninsured casualty, Landlord at its option may terminate this Lease as of
the date of such occurrence by written notice to Tenant within sixty (60)
days thereafter. If a portion of the Premises is made untenantable as
aforesaid during the last year of the Term, Landlord or Tenant shall have
the right to terminate this Lease as of the date of the fire or casualty by
giving written notice thereof to the other party within thirty (30) days
after the date of fire or other casualty, in which event the Rent shall be
apportioned on a per diem basis and paid to the date of such fire or other
casualty.
6
<PAGE> 8
16. EMINENT DOMAIN
--------------
In the event that the whole of the Building or the whole of the Premises
shall be taken by the exercise of the power of eminent domain or pursuant
to any agreement in lieu of the exercise of such power (hereinafter called
a "Condemnation Proceeding") then in such case this Lease shall terminate
as of the date of the taking of possession by or the vesting of title in
the condemning authority (said date being hereinafter called the "Taking
Date"). If less than the whole of the Building or less than the whole of
the Premises shall be taken in a Condemnation Proceeding, Tenant may at its
option terminate this Lease as of the Taking Date by giving notice of its
exercise of such option within sixty (60) days after the Taking Date,
provided that as a result of such taking the Premises (or the remaining
portion thereof) may no longer be adequately used for the purpose
contemplated by this Lease as hereinbefore set forth. If a portion of the
Premises shall be so taken and Tenant shall not exercise its option to
terminate this Lease or if such taking shall not give rise to such option
to terminate as aforesaid, then this Lease shall terminate on the Taking
Date only as to that portion of the Premises so taken but shall remain in
full force and effect with respect to that portion of the Premises not so
taken, and the Rent and other charges payable by Tenant to Landlord
hereunder shall be abated and reduced in the ratio which the diminution in
the total floor space of the Premises following such Condemnation
Proceeding shall bear to the total floor space thereof immediately prior to
such Condemnation Proceeding. All income, rent, awards or interest derived
from any Condemnation Proceeding shall belong to and be the property of
Landlord.
17. HOLDING OVER
------------
If Tenant retains possession of the Premises or any part thereof after the
termination of the Term or any extension thereof by lapse of time or
otherwise, Tenant shall pay Landlord Rent at a rate equal to two hundred
fifty percent (250%) of the Rent payable for the month immediately
preceding the commencement of said holding over (including any Additional
Rent) computed on a per month basis for each month or part thereof (without
reduction for any such partial month) that Tenant remains in possession;
and in addition thereto, Tenant shall pay Landlord all damages
consequential as well as direct, sustained by reason of Tenant's retention
of possession. Except as otherwise provided in this Section, such retention
of possession shall constitute a tenancy at sufferance and not a
month-to-month lease. Alternatively, at the election of Landlord expressed
in a notice to Tenant and not otherwise, such retention of possession shall
constitute a renewal of this Lease for one (1) year. The provisions of this
Section shall not exclude Landlord's right of reentry or any other right
hereunder. If Landlord has not elected to renew this Lease for one (1)
year, nothing herein contained shall preclude Landlord from terminating
such retention of possession as provided by law. The acceptance by Landlord
of any payment of Rent subsequent to the commencement of such retention of
possession by Tenant shall not be deemed to constitute a waiver by Landlord
of any of the provisions of this Section.
18. SURRENDER OF POSSESSION
-----------------------
Upon the expiration of the Term or any extension thereof or upon the
termination of Tenant's right of possession whether by lapse of time or at
the option of Landlord as herein provided, Tenant shall forthwith surrender
the Premises to Landlord in good order, repair and condition, ordinary wear
excepted. Any interest of Tenant in the alterations, improvements and
additions to the Premises (including without limitation all carpeting and
floor covering) made or paid for by Landlord or Tenant shall without
compensation to Tenant become Landlord's property), at the termination of
this Lease by lapse of time or otherwise, and such alterations,
improvements and additions shall be relinquished to Landlord in good
condition, ordinary wear excepted. At the termination of the Term or of
Tenant's right of possession, Tenant agrees to remove the following items
of Tenant's property: office furniture, trade fixtures, office equipment
and all other items of Tenant's property on the Premises. Tenant shall pay
to Landlord upon demand the cost of repairing any damage to the Premises
and to the Building caused by any such removal. If Tenant shall fail or
refuse to remove any such property from the Premises, Tenant shall be
conclusively presumed to have abandoned the same, and title thereto shall
thereupon pass to Landlord without any cost (by set-off, credit, allowance
or otherwise), and Landlord may at its option accept the title to such
property or at Tenant's expense may (a) remove the same or any part
thereof in any manner that Landlord may choose, repairing any damage to the
Premises caused by such removal, and (b) store, destroy or otherwise
dispose of the same without incurring liability to Tenant or any other
person.
19. LANDLORD'S REMEDIES
-------------------
If default shall be made in the payment of the Rent or any installment
thereof or in the payment of any other sum required to be paid by Tenant
under this Lease and such default shall continue for five (5) days after
payment thereof is due, or if default shall be made in the observance or
performance of any of the other covenants or conditions in this Lease which
Tenant is required to observe and perform and such default shall continue
for thirty (30) days after written notice to Tenant [provided that if the
nature of Tenant's default is such that more than thirty (30) days is
reasonably required for its cure, Tenant will not be deemed to be in
default if: (a) Tenant commences such cure within such thirty (30) day
period, (b) Tenant diligently prosecutes such cure to completion, (c) the
interest of Landlord in the Land and/or the Building will not be adversely
affected by such delay, and (d) the delay does not increase the Operating
Expenses], or if a default involves a hazardous condition and is not cured
by Tenant immediately upon written notice to Tenant, or if the interest of
Tenant in this Lease shall be levied on under execution or other legal
process, or if any voluntary petition in bankruptcy or for corporate
reorganization or any similar relief shall be filed by Tenant, or if any
involuntary petition in bankruptcy shall be filed against Tenant under
7
<PAGE> 9
any federal or state bankruptcy or insolvency act and shall not have been
dismissed within thirty (30) days of the filing thereof, or if a receiver
shall be appointed for Tenant or any of the property of Tenant by any court
and such receiver shall not have been dismissed thirty (30) days from the
date of his appointment, or if Tenant shall make an assignment for the
benefit of creditors, or if Tenant shall admit in writing Tenant's
inability to meet Tenant's debts as they mature, or if Tenant shall abandon
or vacate the Premises, then Landlord may treat the occurrence of any one
or more of the foregoing events as a breach of this Lease and thereupon at
its option may, with or without notice or demand of any kind to Tenant or
any other person, have any one or more of the following described remedies
in addition to all other rights and remedies provided at law or in equity
or elsewhere herein:
(a) Landlord may terminate this Lease and the estate created hereby, in
which event Landlord may forthwith repossess the Premises and be
entitled to recover forthwith, in addition to any other sums or
damages for which Tenant may be liable to Landlord as damages, an
amount, if any, equal to the Rent which would have been payable during
any period of rent-free occupancy provided to Tenant by this Lease,
the cost of all leasing commissions paid by Landlord in connection
with this Lease, the cost to Landlord of the initial leasehold
improvements to the Premises, and all other amounts paid to or on
behalf of Tenant in connection with Tenant's entry into this Lease and
occupancy of the Premises (including without limitation any moving
cost allowance, payments on lease(s) assumed by Landlord, payment for
preparation of floor plans and the like), including Landlord's
interest expense thereon, together with a sum of money equal to the
excess of the value of the Rent provided to be paid by Tenant for the
balance of the Term over the fair market rental value of the Premises,
after deduction of all anticipated expenses of reletting for said
period. Should the fair market rental value of the Premises after
deduction of all anticipated expenses of reletting for the balance of
the then-existing term of this Lease exceed the value of the Rent to
be paid by Tenant for the balance of the then-existing term of this
Lease, Landlord shall not be obligated to pay to Tenant the excess or
any part thereof or to credit such excess or any part thereof against
any other sums or damages for which Tenant may be liable to Landlord.
(b) Landlord may terminate Tenant's right of possession and may repossess
the Premises by forcible entry or unlawful detainer suit, by taking
peaceful possession or otherwise without terminating this Lease, in
which event Landlord may, but shall be under no obligation to, relet
the same for the account of Tenant, for such rent and upon such terms
as shall be satisfactory to Landlord. For the purpose of such
reletting, Landlord is authorized to decorate, repair, remodel or
alter the Premises. If Landlord shall fail to relet the Premises,
Tenant shall pay to Landlord as damages a sum equal to the amount of
the Rent reserved in this Lease for the balance of the then existing
Term of this Lease. If the Premises are relet and a sufficient sum
shall not be realized from such reletting after paying all of the
costs and expenses of all decoration, repairs, remodeling, alterations
and additions and the expenses of such reletting to satisfy the Rent
provided for in this Lease, and the amounts recoverable by Landlord
from Tenant pursuant to subparagraph (a) of this paragraph, Tenant
shall satisfy and pay the same upon demand therefor from time to time.
Landlord may file suit to recover any sums falling due form time to
time and no suit or recovery of any portion due Landlord hereunder
shall be any defense to any subsequent action brought for any amount
not theretofore reduced to judgment in favor of Landlord.
20. BANKRUPTCY
----------
If a petition is filed by or against Tenant for relief under Title 11 of
the United States Code, as amended (the "Bankruptcy Code"), and the Tenant
(including for purposes of this section Tenant's successor in bankruptcy,
whether a trustee or Tenant as debtor in possession) assumes and proposes
to assign, or proposes to assume and assign, this Lease pursuant to the
provisions of the Bankruptcy Code to any person or entity who has made or
accepted a bona fide offer to accept an assignment of this Lease on terms
acceptable to Tenant, then notice of the proposed assignment setting forth
(a) the name and address of the proposed assignee, (b) all of the terms and
conditions of the offer and proposed assignment, and (c) the adequate
assurance to be furnished by the proposed assignee of its future
performance under the Lease, shall be given to Landlord by Tenant no later
than twenty (20) days after Tenant has made or received such offer, but in
no event later than ten (10) days prior to the date on which Tenant applies
to a court of competent jurisdiction for authority and approval to enter
into the proposed assignment. Landlord shall have the prior right and
option, to be exercised by notice to Tenant given at any time prior to the
date on which the court order authorizing such assignment becomes final and
non-appealable, to receive an assignment of this Lease upon the same terms
and conditions, and for the same consideration, if any, as the proposed
assignee, less any brokerage commissions which may otherwise be payable out
of the consideration to be paid by the proposed assignee for the assignment
of this Lease. If this Lease is assigned pursuant to the provisions of the
Bankruptcy Code, Landlord: (i) may require from the assignee a deposit or
other security for the performance of its obligations under the Lease in an
amount substantially the same as would have been required by Landlord upon
the initial leasing to a tenant similar to the assignee; and (ii) shall be
entitled to receive, as additional rent, any sums received by Tenant in
connection with such assignment. Any person or entity to which this Lease
is assigned pursuant to the provisions of the Bankruptcy Code shall be
deemed without further act or documentation to have assumed all of the
Tenant's obligations arising under this Lease on and after the date of such
assignment. Any such assignee shall upon demand execute and deliver to
Landlord an instrument confirming such assumption. No provision of this
Lease shall be deemed a waiver of Landlord's rights or remedies under the
Bankruptcy Code to oppose any assumption and/or assignment of this Lease,
to require a timely performance of Tenant's obligations
8
<PAGE> 10
under this Lease, or to regain possession of the Premises if this Lease has
neither been assumed nor rejected within sixty (60) days after the date of
the order for relief or within such additional time as a court of competent
jurisdiction may have fixed. Notwithstanding anything in this Lease to the
contrary, all amounts payable by Tenant to or on behalf of Landlord under
this Lease, whether or not expressly denominated as rent, shall constitute
rent for the purposes of Section 502(b)(6) of the Bankruptcy Code.
21. EXPENSES OF ENFORCEMENT
-----------------------
Tenant shall pay upon demand all of Landlord's costs, charges and expenses,
including the reasonable fees of counsel, agents and others retained by
Landlord, incurred in enforcing Tenant's obligations hereunder or incurred
by Landlord in any litigation, arbitration, negotiation or transaction in
which Tenant causes Landlord to become involved or concerned as a result of
the relationship created hereby. Tenant hereby covenants and agrees that in
order to secure the payment of Rent hereunder and all of Tenant's other
obligations hereunder, Landlord shall and does have a first lien upon any
rents from any subtenant of Tenant (subject to the provisions of Section 9
hereof) as well as upon the interest of Tenant in all personal property
located upon the Premises.
22. INTEREST
--------
Any Rent due Landlord under this Lease shall be considered past due for
purposes hereof on the tenth day of any month and shall incur a service
charge of two percent (2%) per month or portion thereof for that and each
subsequent month or portion thereof past due unless a lesser rate shall
then be the maximum rate permissible by law, in which event such lesser
rate shall be charged. Any other amounts payable to Landlord under this
Lease, with the exception of Rent, shall be considered past due fifteen
(15) days from Landlord's billing date and shall incur a service charge of
two percent (2%) per month or portion thereof for that and each subsequent
month past due unless a lesser rate shall then be the maximum rate
permissible by law in which event such lesser rate shall be charged.
23. LIABILITY OF LANDLORD AND TENANT
--------------------------------
Landlord and Tenant hereby mutually waive any and all right of recovery
against one another based upon the negligence of either Landlord or Tenant
or their agents or employees for real or personal property loss or damage
occurring to the Premises or the Building or any part thereof or any
personal property located therein from perils insured against in standard
fire and extended coverage, vandalism and malicious mischief and sprinkler
leakage insurance contracts (commonly referred to as "all risk") issued in
the State of Missouri (whether or not such insurance is carried). Landlord
and Tenant shall request that their respective insurance carriers consent
to a waiver of all rights of subrogation against each other by inclusion of
such a clause in their respective policies or by endorsements thereto.
Tenant shall defend and indemnify Landlord and save it harmless from and
against any and all claims by or on behalf of any person or persons, firm
or firms or corporation or corporations, arising from Tenant's use of the
Premises or the conduct of its business or from any activity, work or thing
done, permitted or suffered by Tenant in or about the Premises, and will
further indemnify and save Landlord harmless against the performance of any
covenant or agreement on Tenant's part to be performed pursuant to the
terms of this Lease or arising from any act or negligence of Tenant or any
of its agents, contractors, servants, employees or licensees, and from and
against all costs, counsel fees, expenses and liabilities incurred in or
about any such claim or action or proceeding brought thereon; and in case
any action or proceeding be brought Landlord by reason of any such claim,
Tenant, upon notice from Landlord, covenants to resist or defend at
Tenant's expense such action or proceeding by counsel reasonably
satisfactory to Landlord; provided that the foregoing provision shall not
be construed to make Tenant responsible for loss, damage, liability or
defense resulting from injuries to third parties caused solely by the
negligence of Landlord or any officer, contractor, licensee, agent,
servant, employee, guest, invitee or visitor of Landlord. It is expressly
understood and agreed that none of Landlord's covenants, undertakings and
agreements under this Lease are made or intended as personal covenants,
undertakings or agreements by Landlord, and any liability for damage or
breach or non-performance by Landlord shall be collectible only out of
Landlord's interest in the Building, and no personal liability is assumed
by or at any time may be asserted against Landlord or its agents.
24. INSURANCE
---------
Tenant shall at all times during the Term of this Lease maintain in full
force and effect with respect to the Premises public liability insurance
having combined single limits of One Million Dollars ($1,000,000.00) in the
standard form generally in use in the State of Missouri and in companies
satisfactory to Landlord. The amount of such insurance shall be subject to
increase upon the reasonable request of Landlord. Such insurance shall name
Landlord as an additional insured for the full amount of the insurance
herein required with respect to the operations and activities of Tenant or
in connection with the Premises and shall be subject to modification or
cancellation only upon ten (10) days notice to each insured. With respect
to each policy of such insurance and each renewal thereof, if requested,
Tenant, at the beginning of the Term of this Lease and thereafter not less
than thirty (30) days prior to the expiration of any such policy, shall
furnish Landlord with a certificate of insurance of such coverage.
9
<PAGE> 11
25. RESTRICTION ON ANNOUNCEMENTS
----------------------------
Any and all information conveyed to the media and/or the business
community, whether in the form of informal or formal discussions, press
releases, direct mail or other broadly distributed announcements regarding
discussions, negotiations, lease signing, occupancy by Tenant or any
subsequent agreements between Tenant and Landlord shall be conveyed
EXCLUSIVELY by Landlord. This includes any and all contact with print or
broadcast reports as well as paid advertising.
26. SUBSTITUTE PREMISES
-------------------
If the Premises contain an area of 2,500 rentable square feet or less,
Landlord shall have the right at any time during the term hereof, upon
giving Tenant not less than sixty (60) days prior written notice, to
provide and furnish Tenant with space elsewhere in the Building of
approximately the same size as the Premises and remove and place Tenant in
such space, with Landlord to pay all reasonable costs and expenses incurred
as a result of such relocation of Tenant. Should Tenant refuse to permit
Landlord to move Tenant to such new space at the end of said sixty (60) day
period, Landlord shall have the right to cancel and terminate this Lease
effective ninety (90) days from the date of original notification by
Landlord. If Landlord moves Tenant to such new space, this Lease and each
and all of its terms, covenants and conditions shall remain in full force
and effect and be deemed applicable to such new space, and such new space
shall thereafter be deemed to be the Premises as though Landlord and Tenant
entered into an express written amendment of this Lease with respect
thereto.
27. NOTICES
-------
Any notice, demand, consent, permission or other communication which either
party hereto is required or desires to give or communicate to the other
party shall be in writing and shall be given personally or communicated by
U.S. registered or certified mail, postage prepaid, return receipt
requested, address:
(i) in the case of Landlord, to:
Bonhomme Place Associates, Inc.
c/o Sweeney-Finn Corporation
744 Office Parkway
St. Louis, MO 63105
(i) in the case of Tenant, to:
Hanover Capital Mortgage Corporation
7700 Bonhomme Avenue
St. Louis, MO 63105
Attn: Richard F. Weeks
Any such notice or other communication so sent shall be deemed to have been
given on the first business day following the date the same was deposited in the
U.S. Mail as registered or certified matter with postage fully prepaid thereon.
Either party may change its address for notices by notice to the other party in
the manner provided in this Section.
28. BUILDING SECURITY
-----------------
Landlord and its agents, within their sole discretion, may exercise such
security measures as, but not be limited to, the search of all persons
entering or leaving the Building, the evacuation of the Building for cause,
suspected cause or for drill purposes, the denial of any access to the
Building and other similar related actions that it deems necessary to
prevent any threat of property damage or bodily injury. The exercise of
such security measures by Landlord and the resulting interruption or
cessation of Tenant's business, if any, shall never be deemed an eviction
or disturbance of Tenant's use and possession of the Premises or any part
thereof or render Landlord liable to Tenant for any resulting damages or
relieve Tenant from Tenant's obligations under this Lease.
29. TRANSFER OF LANDLORD'S INTEREST
-------------------------------
Tenant acknowledges that Landlord has the right to transfer its interest in
the Land and Building and in this Lease, and Tenant agrees that in the
event of any such transfer Landlord shall automatically be released from
all liability under this Lease, and Tenant agrees to look solely to such
transferee for the performance of Landlord's obligations hereunder. Tenant
further acknowledges that Landlord may assign its interest in this Lease to
a mortgage lender as additional security and agrees that such an assignment
shall not release Landlord from its obligations hereunder and that Tenant
shall continue to look solely to Landlord for the performance of Landlord's
obligations hereunder.
30. DEFINITION OF TENANT
--------------------
The term "Tenant" shall include Tenant's representatives and successors in
interest and shall also include Tenant's assignees and subtenants if this
Lease shall be validly assigned or sublet.
10
<PAGE> 12
31. ENTIRE AGREEMENT
----------------
This Lease, together with the Exhibits scheduled below, constitutes the
entire agreement between the parties with respect to the subject matter
hereof, and no representation or agreement, oral or otherwise, not
contained herein shall be binding upon the parties or otherwise have any
force and effect. The following are Exhibits to this Lease and are
incorporated herein by reference:
Exhibit A - Floor Plan
Exhibit B - Construction Plan
Exhibit C - Building Rules
Exhibit D - Estoppel Certificate
Exhibit E - Right of First Refusal Space
32. HEADINGS
--------
Headings and captions are for convenience of reference only.
33. GENDER
------
All terms used in this Lease shall be deemed to refer to the masculine,
feminine or neuter, singular or plural, as the context may require.
34. GOVERNING LAW
-------------
This Lease shall be governed by and enforced in accordance with the laws of
the State of Missouri.
35. BROKERS
-------
Tenant hereby confirms its prior understanding that Sweeney-Finn
Corporation is the broker acting on behalf of Landlord, that any commission
payable to such broker will be paid by Landlord, and that any information
given to such broker may be disclosed to Landlord.
Each of the parties hereto warrants to the other that it has not obligated
the other party for any finders', brokers' or other agents' fees in
connection with this Lease (and Tenant shall indemnify and hold Landlord
harmless from and against any and all claims for such fees) except for
Commercial Realty Group, Inc. and:
36. PERFORMANCE OF TENANT'S OBLIGATIONS
-----------------------------------
If Tenant shall at any time fail to perform any act to be performed by
Tenant under this Lease and such default shall continue for a period beyond
the time provided for cure thereof in Section 19 hereof, or without notice
if any emergency exists, Landlord, without waiving or releasing Tenant from
any obligation hereunder, may (but shall be under no obligation to) perform
such act and enter upon the Premises for such purpose and take any and all
other actions as may be necessary with respect thereto. All sums paid by
Landlord and all costs and expenses incurred by Landlord pursuant to this
Section, together with interest thereon at the annual rate of fifteen
percent (15%) or the highest lawful rate, whichever is lesser, from the
respective dates of the payment of such sums or incurring such costs or
expenses, shall be paid by Tenant to Landlord upon demand.
37. WAIVER
------
No waiver of any default by Tenant shall be implied from any omission by
Landlord to take any action on account of said default if such default
persists or be repeated, and no express waiver shall affect any default
other than the default specified in the express waiver and then only for
the time and to the extent therein stated. No failure of Landlord to
exercise any power given Landlord hereunder or to insist upon strict
compliance of any obligation hereunder and no custom or practice of the
parties at variance with the terms hereof shall constitute a waiver of
Landlord's right to demand exact compliance with the terms hereof.
38. SEVERABILITY
------------
The invalidity or unenforceability of any provision of this Lease shall not
affect or impair any other provision.
39. ESTOPPEL CERTIFICATE
--------------------
Tenant agrees that from time to time, upon not less than ten (10) days
prior request by Landlord, Tenant will deliver to Landlord a duly executed
Lease Estoppel Certificate in the form attached hereto as Exhibit D.
11
<PAGE> 13
40. RECORDING
---------
Neither party shall record this Lease. A memorandum of lease may be
recorded only if approved and signed by Landlord and Tenant.
41. FORCE MAJEURE
-------------
Any prevention, delay or stoppage due to strikes, lockouts, labor disputes,
acts of God, inability to obtain labor or materials or reasonable
substitutes therefor, governmental restrictions, governmental regulations,
governmental controls, enemy or hostile government action, civil commotion,
fire or other casualty or other causes beyond the reasonable control of the
party obligated to perform shall excuse the performance by such party for a
period equal to any such prevention, delay or stoppage, except for the
obligations imposed with regard to Rent and other charges to be paid by
Tenant pursuant to this Lease.
42. NO MERGER
---------
This Lease may be terminated only in accordance with its terms, and no
unilateral termination by Tenant or voluntary surrender of the estate
hereby created in Tenant shall be effective unless such termination or
surrender shall be accepted by Landlord in writing; and in no event shall
any such unilateral termination or voluntary surrender cause a merger of
the estates hereby created in Landlord until acceptance by Landlord as
aforesaid.
43. RELATIONSHIP
------------
Nothing contained in this Lease shall be deemed to constitute or be
construed to create the relationship of principal and agent, partners,
joint venturers or any other relationship between the parties hereto other
than that of landlord and tenant.
44. CORPORATE TENANT
----------------
Tenant, in the event that it is a corporation, hereby covenants and
warrants that: (a) it is duly incorporated (and duly qualified if foreign)
and authorized to do business in the State of Missouri; (b) the persons
executing this Lease on behalf of Tenant are officers of Tenant; (c) such
officers were duly authorized by Tenant to sign and execute this Lease on
its behalf; (d) this Lease is a valid and binding obligation of Tenant,
enforceable in accordance with its terms; and (e) the execution and
performance of this Lease by Tenant does not conflict or result in a breach
of Tenant's certificate or articles of incorporation, Tenant's by-laws or
any other agreement which affects the property or assets of Tenant.
45. DELIVERY FOR EXAMINATION
------------------------
Submission of the form of this Lease for examination shall not bind
Landlord in any manner, and no lease or other obligations of Landlord shall
arise until this instrument is signed by both Landlord and Tenant and
delivery is made to each.
46. NO AIR RIGHTS
-------------
No rights to any view or to light or air over any property, whether
belonging to Landlord or any other person, are granted to Tenant by this
Lease.
47. MODIFICATION OF LEASE
---------------------
If a lender requires as a condition to its lending funds, the repayment of
which is to be secured by a mortgage or deed of trust on the Land and
Building or either, that certain modifications be made to this Lease, which
modifications will not require Tenant to pay any additional amounts or
otherwise materially change the rights or obligations of Tenant hereunder;
Tenant shall, upon Landlord's request, execute appropriate instruments
effecting such modifications.
48. APPLICATION OF PAYMENTS
-----------------------
Landlord shall have the right to apply payments received form Tenant
pursuant to this Lease (regardless of Tenant's designation of such
payments) to satisfy obligations of Tenant hereunder in such order and
amounts as Landlord in its sole discretion may elect.
49. PARKING
-------
Landlord shall make available for Tenant's use on a reserved basis, two (2)
parking spaces in the Building garage during Normal Business Hours (as set
forth in Section 8(a) hereof) and upon payment of the fee therefor which is
initially $75.00 per month per parking space and which fee may be adjusted
upon thirty (30) days notice from Landlord to Tenant, Landlord may from
time to time publish and/or post rules pertaining to the use of the parking
areas and Tenant shall be responsible for enforcing compliance with such
rules by Tenant's employees, agents,
12
<PAGE> 14
contractors and visitors. Landlord may revoke Tenant's parking privileges
in the event of noncompliance with such rules after written notice of such
noncompliance is given to Tenant, a reasonable cure period is afforded, and
such noncompliance persists. All parking spaces shall be used only for the
personal automobiles of Tenant and its employees and guests (no trucks,
motor homes and the like). Overnight parking is not permitted without in
each case Landlord's prior consent. Upon Landlord's request, Tenant
promptly shall furnish Landlord the names, vehicle descriptions and vehicle
license numbers of each authorized user of Tenant's parking spaces. Tenant
shall be liable for all costs and expenses suffered or incurred by Landlord
in the towing of illegally parked vehicles of Tenant, its employees,
agents, contractors or guests. Landlord may institute a system using cards
for entering/exiting the garage and such cards shall remain the property of
Landlord at all times (and will be subject to a replacement charge for lost
cards (initially Ten Dollars ($10.00)). Landlord will also permit visitor
parking in the garage for a fee and will institute arrangements to permit
Tenant to pay such fees, if desired by Tenant, by token or other similar
means. Tenant acknowledges that the nominal clearance height in the parking
garage is seven feet (7'); however, actual clearance height in certain
portions of the parking garage may be less than seven feet (7').
50. DAMAGE TO PROPERTY
------------------
Notwithstanding any other provision hereof the contrary, Landlord or its
agents shall not be liable for any damage to property entrusted to
employees or agents of Landlord, nor for loss of or damage to any property
by theft or otherwise, nor for any injury or damage to persons or property
resulting from fire, explosion, falling plaster, steam, gas, electricity,
water or rain which may leak from any part of the Building or from the
pipes, appliances or plumbing works therein or from the roof, street or
sub-surface or from any other place or resulting from dampness or any other
cause whatsoever. Landlord or its agents shall not be liable for
interference with the light or other incorporeal hereditaments, nor shall
Landlord be liable for any latent defect in the Premises or in the
Building. Tenant shall give prompt notice to Landlord in case of fire or
accidents in the Premises or in the Building or of defects therein or in
the fixtures or equipment. In no event shall Landlord be liable for any
consequential damages based on or resulting from any act or omission of
Landlord relative to this Lease and its obligations under this Lease.
Tenant assumes responsibility for taking reasonable and necessary measures
to protect its property from theft, robbery and pilferage.
IN WITNESS WHEREOF, the undersigned have caused this Lease to be signed,
sealed and delivered on their behalf as of the day and year first above written.
TENANT: LANDLORD:
HANOVER CAPITAL MORTGAGE CORPORATION BONHOMME PLACE ASSOCIATES, INC.
a Missouri corporation
By: /s/ By: /s/
- ----------------------------------- ---------------------------------
Title: Vice-President - Managing Director Title: President
- ----------------------------------- ---------------------------------
Date: 2/5/93 Date: 3/10/93
- ----------------------------------- ---------------------------------
GUARANTY
--------
The undersigned, having a financial interest in the Tenant named in the
foregoing Lease, hereby unconditionally and irrevocably (and jointly and
severally if there be more than one) guaranties the prompt and complete
performance by Tenant of all of the obligations and covenants of Tenant as set
forth in the Lease. This guaranty shall remain in full force and effect until
all of the obligations of Tenant have been fully performed or otherwise
discharged. No waiver of default or extension of time by Landlord shall effect
the liability of the undersigned. Landlord shall not be required to exhaust its
remedies under the Lease before proceeding under this guaranty. This guaranty
shall be binding on the successors, assigns, heirs and personal representatives
of the undersigned and shall inure to the benefit of all successors and assigns
of Landlord. The rights of Landlord under this guaranty shall not be subject to
the exercise by Landlord of any remedy which it may have against Tenant. The
Lease may be modified without notice to the undersigned and without release of
the undersigned from its liability hereunder and the undersigned waives notice
of acceptance or of non-performance or non-payment by the Tenant.
HANOVER CAPITAL PARTNERS, LTD.
By:
--------------------------------
Title:
--------------------------------
Date:
--------------------------------
13
<PAGE> 15
EXHIBIT "A"
[DIAGRAM FLOOR PLAN-FOURTH FLOOR]
<PAGE> 16
EXHIBIT "B"
[DIAGRAM FLOOR PLAN-PARTIAL FOURTH FLOOR]
<PAGE> 17
92378.21
11/23/92
Rev. #1 - 1-25-93
GENERAL NOTES
- -------------
1. Provide demolition and new construction as shown on plan.
2. All dimensions are approximate and must be field verified.
3. All plants, furniture and equipment shown is by Tenant.
4. Provide new recessed tenant entry as shown on plan to include glass
sidelight, 12"x12" granite tile and wall sconces (match building standard
entry detail).
5. Provide new building standard carpet and inset at Reception as shown on
plan.
6. Provide wallcovering at all walls of New Reception (allow $1.25 SF material
only).
7. Match building standard carpet at new Private Office. Finish at new walls
to match existing walls. Contractor to verify.
8. Provide (5) new 24" deep paint grade shelves at existing Closet as shown
on plan.
9. Provide new 24" plastic laminate counter, backsplash, base cabinets and
overhead cabinets to include stainless steel sink and space for tenant
supplied under counter refrigerator and ice maker at Supplies/Break Room as
shown on plan. Match existing laminate.
10. Provide new 54"H partial height partition with plastic laminate top cap at
New Reception as shown on plan.
11. Provide 7 total duplex outlets at New Open Office for tenant supplied
workstations.
12. Provide 7 total additional duplex outlets at New and Existing Private
Offices.
13. Provide 1 dedicated outlet at copier in Existing Supplies/Break Room.
14. Provide 3 additional duplex outlets at Existing Open Office.
15. Relocate existing door to Existing Office adjacent to New Reception as
shown on plan.
EXHIBIT "B"
<PAGE> 18
EXHIBIT C
---------
BUILDING RULES
Tenant's use of the Building and Premises shall be governed by the following
rules which Landlord shall enforce on a uniform basis. Landlord reserves the
right to unilaterally amend or add to the Building Rules, and such amendments
and additions shall be effective when notice of the same is given to Tenant in
the manner provided in the Lease.
1. Nothing shall be displayed, inscribed, painted or affixed by Tenant on any
part of the exterior or interior of the Building (except within the
Premises), without the prior consent of Landlord, and then only of such
color, size, style and material as shall be first approved by Landlord.
2. No additional locks shall be placed upon any door of the Premises, and
Tenant shall not permit duplicate keys to be made. Additional keys shall be
procured from Landlord and paid for by Tenant. Tenant shall be solely
responsible for the security of keys to the Premises and Building furnished
to it by Landlord. All keys furnished to Tenant shall be surrendered to
Landlord at the termination or expiration of the Lease.
3. If Tenant desires telephone or other communication system connections,
Landlord shall direct the electricians as to where the wires are to be
introduced, and without such direction, no boring or cutting for wires
shall be permitted.
4. Unless Landlord gives advance consent in each and every instance, Tenant
shall not install or operate any steam or internal combustion engine,
boiler, machinery, refrigerating or heating device or air conditioning
apparatus in or about the Premises, or carry on any mechanical business
therein, or use the Premises for housing accommodations or lodging or
sleeping purposes, or do any cooking therein or install or permit the
installation of any vending machines, or use any illumination other than
electric light, or use or permit to be brought into the Building any
inflammable oils or fluids such as gasoline, kerosene, naphtha and benzene,
or any explosive or other articles hazardous to persons or property.
5. The sidewalks, passages, lobbies, corridors, elevators and stairways shall
not be obstructed by Tenant, or used in any way except for ingress and
egress to and from offices or store rooms. Tenant shall place no objects
outside the Premises.
6. The doors, skylights, windows and transoms that reflect or admit light into
passageways or into any, place in the Building, shall not be covered or
obstructed by Tenant. The restroom fixtures shall not be used for purposes
other than those for which they were constructed. The cost of repairing any
damage caused by Tenant resulting from misuse of such fixtures shall be
borne by Tenant.
7. Nothing shall be thrown out of the windows or doors, or into the common
areas of the Building.
8. Tenant shall not make noises, cause disturbances or vibrations, or use or
operate any electrical or electronic devices or other devices that emit
sound or other waves or disturbances, or create odors, any of which may be
offensive to other tenants and occupants of the Building or which would
interfere with the operation of any device or equipment or radio or
television broadcasting or reception from or within the Building or
elsewhere, and shall not place or install any musical instrument or
equipment or any similar devices inside or outside of the Premises without,
in each and every instance, prior approval by Landlord. The use thereof, if
permitted, shall be subject to control by Landlord to the end that others
shall not be disturbed or annoyed.
9. Tenant shall not waste electricity, water or air conditioning, and shall
cooperate fully, with Landlord to assure the most effective operation of
the Building's heating and air conditioning, and shall not adjust any
controls other than room thermostats installed for Tenant's use. Tenant
shall keep corridor doors closed. Tenant shall not tie, wedge or otherwise
fasten open any water faucet or outlet.
10. Tenant assumes full responsibility for protecting its space from theft,
robbery and pilferage, which includes keeping doors locked and other means
of entry to the Premises closed and secured.
II. No animals, birds, bicycles or other vehicles shall be allowed in any
part of the Building without the prior written consent of Landlord.
12. Any person or persons, other than the janitor of Landlord, who shall be
employed for the purpose of cleaning or maintaining the Premises, shall
be employed at Tenant's cost, and Landlord shall be in no way responsible
for any loss of property on or from the Premises, however occurring, by a
janitor. Tenant shall report any, deficiency in the services provided by
Landlord or its agent.
13. Tenant shall not accumulate or store in the Premises any wastepaper,
discarded records, books, paper files, sweepings, rags, rubbish or other
combustible matter.
14. Tenant shall not make any room-to-room canvass to solicit business from
other tenants in the Building, and shall not exhibit, sell or offer to
sell, use, rent or exchange any item or service in or from the Premises
unless ordinarily
<PAGE> 19
embraced with Tenant's use of the Premises specified in the Lease.
15. Landlord reserves the right to exclude from the Building all drunken and
disorderly persons, idlers and peddlers, solicitors, and generally persons
of a character or conduct to create disturbance, and persons entering in
crowds or in such unusual numbers as to cause inconvenience to the tenants
of the Building.
16. All moving of furniture or equipment into or out of the Building by Tenant,
its agents or contractors shall be done at such time and in such manner as
described by Landlord or its managing agent. All moving companies used for
the purpose of moving furnishings or equipment into or out of the Building
shall be licensed, bonded and insured commercial movers. No moving
activities related to tenants moving into or out of the Building shall be
conducted during the hours of 8:00 a.m. through 5:00 p.m., Monday through
Friday (holidays excepted).
17. The Building and Tenant are subject to the City of Clayton's Smoking
Ordinance No. 4645, as amended by Ordinance No. 4647. Landlord hereby
reserves the right to designate common areas of the Building as no smoking
areas (i.e, restrooms, corridors). Landlord shall have no responsibility to
provide a smoking area in the Building.
<PAGE> 20
EXHIBIT D
---------
LEASE ESTOPPEL CERTIFICATE
Lease Date: ,19
- ----------- ----------------------------- ---
Landlord: Bonhomme Place Associates, Inc. ("Landlord")
- --------
Tenant:
- ------- --------------------------------------------
Premises:
- --------- --------------------------------------------
Net Rentable
- ------------
Area: Sq. Ft.
---- ------------------------------------ -------
Mortgagee:
- ---------- --------------------------------------------
The undersigned Tenant of the above Lease hereby certifies to Mortgagee and
to Landlord as follows:
1. That the term of the Lease commended on __________, 19__ and Tenant is in
full and complete possession of the premises demised under the Lease and
has commenced full occupancy and use of the premises, such possession
having been delivered by the Landlord and having been accepted by Tenant.
2. That the Lease calls for monthly Base Rent installments of $___________ to
date and that the Tenant is paying monthly installments of Additional
Rent of $______________ which commenced to accrue on the ___ day
of ______, 19___.
3. That no advance rental or other payment has been made in connection with
the Lease, except rental for the current month and the rent has been paid
to and including ____________________________, 19____.
4. That the Tenant is entitled to no free rent periods or other concessions
except:
---------------------------------------------------------------------------
---------------------------------------------------------------------------
5. That a security deposit in the amount of $______________ is being held by
Landlord, which amount is not subject to any set off or reduction or to
any increase for interest or other credit due to Tenant.
6. That all obligations and conditions under said Lease to be performed to
date by Landlord or Tenant have been satisfied, free of defenses and
set-offs including all construction work in the demised premises.
7. That the Lease is a valid lease in full force and effect and represents the
entire agreement between the parties; that there is no existing default on
the part of Landlord or Tenant in any of the terms and conditions thereof
and no event has occurred which, with the passing of time or giving of
notice or both, would constitute an event of default; and that said lease
has: (initial one)
(_______________) not been amended, supplemented, extended, renewed or
assigned.
(_______________) been amended, modified, supplemented, extended, renewed
or assigned as follows by the following described agreements:
---------------------------------------------------------------------------
---------------------------------------------------------------------------
---------------------------------------------------------------------------
<PAGE> 21
8. That the Lease provides for a primary term of ____ months; the term of the
lease expires on the _______ day of _____________________, 19___; and
that: (initial one)
(_________) neither the lease nor any the documents listed in Paragraph 7
(if any) contain an option for any additional term of terms.
(_________) the lease and/or the documents listed under paragraph 7, above,
contain an option for ____________________ additional term(s) of
year(s) and ____ month(s) (each) at a rent to be determined as follows:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
9. That there are no actions, voluntary or involuntary, pending against Tenant
under the bankruptcy laws of the United States or any state thereof.
10. That this certification is made knowing that Mortgagee and Landlord are
relying upon the representations herein made.
Tenant
- ------------------------------------------------------
By:
------------------------------------------
Typed Name:
------------------------------------------
Title:
------------------------------------------
Dated:
------------------------------------------
Attest:
------------------------------------------
Typed Name:
------------------------------------------
Title:
------------------------------------------
Dated:
------------------------------------------
<PAGE> 22
EXHIBIT "E"
[GRAPHIC: DIAGRAM OF FLOOR PLAN - FOURTH FLOOR]
<PAGE> 23
BONHOMME PLACE
SUMMARY OF BASIC LEASE PROVISIONS
The following is a summary of the terms and conditions of a particular
office lease (the "Lease") entered into as of the 5th day of February, 1993, by
and between Bonhomme Place Associates, Inc., a Missouri limited partnership (the
"Landlord") and Hanover Capital Mortgage Company, a Missouri Corporation (the
"Tenant") covering certain premises (the "Premises") situated in Bonhomme Place,
Clayton, Missouri.
Building Name
- -------------
And Address: Bonhomme Place
- ----------- 7700 Bonhomme Avenue
Clayton, Missouri 63105
Premises: 3,188 rentable square feet located on the fourth (4th) floor
- --------- of the Building and numbered as Suite 475.
Term: 3 Years and 0 months commencing on March 1, 1993 and ending
- ----- on February 29, 1996.
Base Rent: First Year - $54,384 per year payable $4,532.00 per month
- --------- Second Year - $67,140.00 per year payable $5,595.00 per month
Third Year - $79.896 per year payable $6,658.00 per month
Expense Stop: Base year - 1992
- ------------
Proportionate
- -------------
Share: 3.13% of the Building
- -----
Security Deposit: $6,658.00
- ----------------
Permitted Use: General Office
- -------------
Parking: Two reserved spaces.
- --------
Addresses for Notices:
- ----------------------
Landlord: Bonhomme Place Associates, Inc.
c/o Sweeney-Finn Corporation
7700 Bonhomme Avenue
Clayton, MO 63105
Tenant: Hanover Capital Mortgage Corporation
Suite 475
7700 Bonhomme Avenue
Clayton, MO 63105
Exhibits included as part of the Lease:
- ---------------------------------------
Exhibit A - Floor Plan
Exhibit B - Construction Plan
Exhibit C - Building Rules
Exhibit D - Estoppel Certificate
Exhibit E - Right of First Refusal space
<PAGE> 24
BONHOMME PLACE
SUMMARY OF BASIC LEASE PROVISIONS
The following is a summary of the terms and conditions of a particular
office lease (the "Lease") entered into as of the 5th day of February, 1993, by
and between Bonhomme Place Associates, Inc., a Missouri limited partnership (the
"Landlord") and Hanover Capital Mortgage Company, a Missouri Corporation (the
"Tenant") covering certain premises (the "Premises") situated in Bonhomme Place,
Clayton, Missouri.
Building Name
- -------------
And Address: Bonhomme Place
- ----------- 7700 Bonhommme Avenue
Clayton, Missouri 63105
Premises: 3,188 rentable square feet located on the fouth (4th) floor of
- --------- the Building and numbered as Suite 475.
Term: 3 Years and 0 months commencing on March 1, 1993 and ending
- ----- on February 29, 1996.
Base Rent: First Year - $54,384 per year payable $4,532.00 per month
- --------- Second Year - $67,140.00 per year payable $5,595.00 per month
Third Year - $79.896 per year payable $6,658.00 per month
Expense Stop: Base year - 1992
- ------------
Proportionate
- -------------
Share: 3.13% of the Building
- -----
Security Deposit: $6,658.00
- ----------------
Permitted Use: General Office
- -------------
Parking: Two reserved spaces.
- --------
Addresses for Notices:
- ----------------------
Landlord: Bonhomme Place Associates, Inc.
c/o Sweeney-Finn Corporation
7700 Bonhomme Avenue
Clayton, MO 63105
Tenant: Hanover Capital Mortgage Corporation
Suite 475
7700 Bonhomme Avenue
Clayton, MO 63105
Exhibits included as part of the Lease:
- ---------------------------------------
Exhibit A - Floor Plan
Exhibit B - Construction Plan
Exhibit C - Building Rules
Exhibit D - Estoppel Certificate
Exhibit E - Right of First Refusal space
<PAGE> 25
LEASE AMENDMENT #1
THIS LEASE AMENDMENT #1 made and entered into as of this 1st day of
December, 1993, by and between BONHOMME PLACE ASSOCIATES, INC., a Missouri
Corporation, (hereinafter designated as "Landlord"), and HANOVER CAPITAL
MORTGAGE COMPANY, a Missouri Corporation (hereinafter designated as "Tenant"):
WITNESSETH:
WHEREAS, Landlord and Tenant have entered into a certain Lease of even date
herewith (which Lease is sometimes hereinafter referred to as "said Lease")
demising certain premises therein described in Landlord's building located in
St. Louis County, Missouri, and having an address of 7700 Bonhomme Avenue,
Clayton, Me 63105,
WHEREAS, as part of the inducement to each other of executing this Lease
Amendment #1, Landlord and Tenant have agreed upon the mutual covenants herein,
which shall be incorporated into said Lease as a part thereof,
WHEREAS, Landlord and Tenant have agreed that said Lease and this Lease
Amendment #1 shall be read and construed collectively as one Lease Agreement,
and accordingly, said Lease and this Lease Amendment #1 are sometimes
hereinafter referred to as "this Lease,"
NOW THEREFORE, for and in consideration of the foregoing, the execution by
Landlord and Tenant of said Lease, and the mutual covenants herein, the parties
hereto stipulate, covenant, and agree as follows:
1. Tenant shall expand its premises (Suite 475) by 567 rentable square feet
as designated on the floor plan (Exhibit A) as the "Right of First Refusal
Space".
2. The term of this expansion to the premises shall be for two (2) years
and three (3) months commencing on the first day of December, 1993, and ending
on the last day of February, 1996, both dates inclusive, unless earlier
terminated as provided herein.
3. As Base Rental for the term of this expansion of the premises, Tenant
shall pay to Landlord Base Rental in addition to the base rental amounts set
forth in Section 1 of the Addendum to Lease, at the annual rate as follows,
payable in equal monthly installments on the first day of each and every
calendar month of said period, in advance, without setoff or deduction, at the
office of Landlord or its duly appointed representative:
(i) For the period December 1, 1993, through February 28, 1994, Annual
Base Rental in the amount of Nine Thousand Six Hundred Seventy Two and
no/100 Dollars ($9,672.00) per annum, payable in equal monthly installments
of Eight Hundred Six and no/100 Dollars ($806.00).
(ii) For the period March 1, 1994, through February 28, 1995, Annual
Base Rental in the amount of Eleven Thousand Nine Hundred Forty and no/100
Dollars
<PAGE> 26
($11,940.00) per annum, payable in equal monthly installments of Nine
Hundred Ninety Five and no/100 Dollars ($995.00).
(iii) For the period March 1, 1995, through February 29, 1996, Annual
Base Rental in the amount of Fourteen Thousand Two Hundred Eight and no/100
Dollars ($14,208.00) per annum, payable in equal monthly installments of
One Thousand One Hundred Eighty Four and no/100 Dollars ($1,184.00).
4. Landlord and Tenant agree that Landlord, at its sole cost and expense,
shall prepare the Premises for Tenant's occupancy in accordance with the plan
attached hereto and made a part hereof by reference and marked as Exhibit "B".
5. "Tenant's Proportionate Share" as it relates to Section 5.1 (c) shall be
increased from 3.13% to 3.69% calculated by dividing the sum total of the
Premises 3,755 rentable square feet (3,188 rentable square feet as defined in
the Lease plus the 567 rentable square feet defined in this Lease Amendment #1)
by 101,864 (being the total rentable area of the Building).
6. All other terms and conditions.of the Lease not herein modified shall
remain in full force and effect until the effective date of the termination of
the Lease.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease Amendment
#1 as of the day and year first above written.
LANDLORD:
BONHOMME PLACE ASSOCIATES, INC.
a Missouri Corporation
By: /s/ ????
------------------------------
Title: Vice President
--------------------------
TENANT:
HANOVER CAPITAL MORTGAGE COMPANY
a Missouri Corporation
By: /s/ R. F. Weeks
------------------------------
Title: Senior Vice President
---------------------------
<PAGE> 27
EXHIBIT A
[DIAGRAM OF FLOOR PLAN - FOURTH FLOOR]
<PAGE> 28
ADDENDUM TO LEASE
THIS ADDENDUM TO LEASE made and entered into as of this ___ day of January,
1993, by and between BONHOMME PLACE ASSOCIATES, INC., a Missouri Corporation
(hereinafter designated as "Landlord"), and HANOVER CAPITAL MORTGAGE
CORPORATION, a Missouri Corporation, (hereinafter designated as "Tenant"):
WITNESSETH:
WHEREAS, Landlord and Tenant have entered into a certain Lease of even
date herewith (which Lease is sometimes hereinafter referred to as "said
Lease") demising certain premises therein described in Landlord's building
located in St. Louis County, Missouri, and having an address of 7700 Bonhomme
Avenue, Clayton, Missouri 63105,
WHEREAS, Landlord and Tenant have agreed that said Lease and this Addendum
to Lease shall be read and construed collectively as one Lease Agreement, and
accordingly, said Lease and this Addendum to Lease are sometimes hereinafter
referred to as "this Lease,"
NOW THEREFORE, for an in consideration of the foregoing, the execution by
Landlord and Tenant of said Lease, and the mutual covenants herein, the parties
hereto stipulate, covenant, and agree as follows:
1. As Base Rental for the three (3) years of the term of this Lease, Tenant
shall pay to Landlord for said leased premises, Base Rental at the annual rate
as follows, payable in equal monthly installments, on the first day of each and
every calendar month of said period, in advance, without setoff or deduction, at
the office of Landlord or its duly appointed representative:
(i) For the period March 1, 1993, through February 28, 1994, Annual Base
Rental in the amount of Fifty-Four Thousand Three Hundred Eighty Four Dollars
($54,384.00) per annum, payable in equal monthly installments of Four Thousand
Five Hundred Thirty Two Dollars ($4,532.00).
(ii) For the period March 1, 1994, through February 28, 1995, Annual Base
Rental in the amount of Sixty Seven Thousand One Hundred Forty Dollars
($67,140.00) per annum, payable in equal monthly installments of Five Thousand
Five Hundred Ninety Five Dollars ($5,595.00).
(iii) For the period March 1, 1995 through February 29, 1996, Annual Base
Rental in the amount of Seventy Nine Thousand Eight Hundred Ninety Six Dollars
($79,896) per annum, payable in equal monthly installments of Six Thousand Six
Hundred Fifty Eight Dollars ($6,658.00).
2. Provided that this Lease is in full force and effect and that Tenant is
not in default under this Lease, Tenant shall have the option to extend the Term
of this Lease for one (I) renewal term of two (2) years upon the same terms and
conditions of this Lease, except the Annual Base Rental for the extended term
shall be Seventy Six Thousand Five Hundred Twelve Dollars ($76,512.00) per
annum, payable in equal monthly installments of Six Thousand Three Hundred
Seventy Six Dollars ($6,376.00).
<PAGE> 29
3.Provided that this Lease is in full force and effect and that Tenant is
not in default hereunder, Landlord agrees that Tenant shall have the right of
first refusal from time to time to lease contiguous space outlined on Exhibit
"A" attached hereto prior to leasing said space and/or upon the expiration or
prior termination of any leases entered into by Landlord for said space.
Landlord shall notify Tenant as to the availability of said space and of the
market rent therefor which Landlord shall determine in good faith. Tenant will
have seven (7) days to exercise said right from the date Landlord notifies
Tenant of the availability of said space and the rental applicable thereto. Said
right is to be exercised by Tenant by giving to Landlord a written notice of
exercise and acceptance of the space within seven (7) days of the receipt of
Landlord's notice. In the event Tenant does not exercise said option with
respect to said space, Landlord shall have the right to lease said space to any
other tenant at such rental and upon such terms and conditions as Landlord may
choose in Landlord's sole discretion. In the event Tenant elects to include in
the leased premises said space as hereinbefore provided, the Base Rent under
this Lease shall be increased commencing upon the date of Tenant's occupancy of
such space in the leased premise and for the remainder of the Term of this
Lease, Also, the percentage for Tenant's Share of Taxes and Operating Expenses
pursuant to Paragraph 5.2(c) of said Lease shall be increased accordingly from
the date of occupancy.
4. Landlord and Tenant agree that Landlord, at its cost and expenses, shall
prepare the Premises for Tenant's occupancy in accordance with the plan attached
hereto and made a part hereof by reference and marked as Exhibit "B".
IN WITNESS WHEREOF, Landlord and Tenant have executed this Addendum to
Lease as of the day and year first above written.
LANDLORD:
BONHOMME PLACE ASSOCIATES, INC.,
a Missouri Corporation
By: /s/ ????
--------------------------------------
Title: President
-----------------------------------
TENANT:
HANOVER CAPITAL MORTGAGE CORPORATION,
a Missouri Corporation
By: /s/ ????
--------------------------------------
Title: Vice President - Managing Director
-----------------------------------
<PAGE> 30
Re: Bonhomme Place
7700 Bonhomme Avenue
Clayton, Missouri
--------------------
SECOND AMENDMENT AND
EXTENSION OF LEASE
------------------
THE STATE OF MISSOURI [Section]
[Section] KNOW ALL MEN BY THESE PRESENTS:
COUNTY OF ST. LOUIS [Section]
THIS SECOND AMENDMENT AND EXTENSION OF LEASE (this "AMENDMENT") has
been executed as of this 1st day of March, 1996, by GATEWAY FRONTIER
PROPERTIES, INC., a California corporation ("LANDLORD") and HANOVER CAPITAL
MORTGAGE CORPORATION, a Missouri corporation ("Tenant").
R E C I T A L S:
- - - - - - - -
A. Bonhomme Place Associates, Inc. ("PRIOR LANDLORD") and Tenant
have heretofore executed that certain Office Building Lease (together with
Addendum thereto) dated as of February 5, 1993, as amended by Lease Amendment
#1 dated as of December 1, 1993 (such Office Building Lease, as so amended, is
hereinafter called the "LEASE"), pursuant to which Tenant leased from Prior
Landlord approximately 3,755 square feet in that certain office building and
related land and improvements located at 7700 Bonhomme Avenue, Clayton,
Missouri and more particularly described in the Lease (the "BUILDING"). Unless
otherwise defined herein, all initially capitalized terms have the meanings
assigned thereto in the Lease.
B. Landlord has acquired title to, among other property, the
Building and all of Prior Landlord's interest under the Lease.
C. Landlord and Tenant desire to execute this Amendment in order
to evidence their agreement to (i) extend the term of the Lease; and (ii) make
certain other amendments to the Lease, all as more particularly set forth in
this Amendment.
NOW THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Landlord and Tenant agree as follows:
SECOND AMENDMENT - Page 1 of 3
----------------
<PAGE> 31
Article I
CERTAIN AMENDMENTS
------------------
SECTION 1.01. LEASE TERM. The term of the Lease is hereby extended
for an additional twenty-four (24) months and, unless otherwise terminated in
accordance with its express terms, the term of the Lease will expire on
February 28, 1998. Tenant has no further renewal options or rights of first
refusal under the Lease.
SECTION 1.02. BASE RENT. Landlord and Tenant agree that, commencing
March 1, 1996, Base Rent will be due and payable by Tenant under the Lease in
accordance with the following schedule:
<TABLE>
<CAPTION>
Annual Rate Monthly
Period Per R.S.F. Amount
------ ----------- -------
<S> <C> <C>
3/01/96 - 02/28/98 $24.00 $7,510.00
</TABLE>
Landlord and Tenant further agree that the calendar year for computing the Base
Amount for Operating Expenses and Taxes will remain calendar year 1992.
SECTION 1.03. PARKING. Tenant and Landlord acknowledge that the
current charge for reserved parking is $85 per space per month and the current
charge for non-reserved parking is $65 per space per month.
SECTION 1.04. STORAGE SPACE. Landlord and Tenant agree that during the
extended term Tenant may continue to lease the storage space covered by, and in
accordance with the terms of, that certain Storage Space Lease Addendum, except
that rent for such space will be payable at an annual rate of $12.00 per
square foot.
SECTION 1.05. FURTHER AMENDMENTS. Landlord and Tenant further agree
that the Lease shall be and hereby is further amended wherever necessary, even
though not specifically referred to herein, in order to give effect to the
terms of this Amendment.
Article II
MISCELLANEOUS
-------------
SECTION 2.01. RATIFICATION. The Lease, as amended hereby, is hereby
ratified, confirmed and deemed in full force and effect in accordance with its
terms. Each party represents to
SECOND AMENDMENT - Page 2 of 3
----------------
<PAGE> 32
the other that such party (a) is currently unaware of any default by the other
party under the Lease; and (b) has full power and authority to execute and
deliver this Amendment and this Amendment represents a valid and binding
obligation of such party enforceable in accordance with its terms. Each party
agrees to indemnify the other from and against any claims for brokerage or
similar commissions owed as a result of the acts of such party.
SECTION 2.02. NOTICES. All notices to be delivered to Landlord under
the lease or otherwise with respect to the Premises shall, unless Landlord
otherwise notifies Tenant, be delivered to Landlord in accordance with Section
27 of the Lease to the following address:
c/o TA Realty Corporation
45 Milk Street
Boston, Massachusetts 02109
Attention: Dale Valicenti
SECTION 2.03. GOVERNING LAW. This Amendment shall be governed by and
construed in accordance with the laws of the State of Missouri.
SECTION 2.04. COUNTERPARTS. This Amendment may be executed in multiple
counterparts each of which is deemed an original but together constitute one
and the same instrument.
IN WITNESS WHEREOF, this Amendment has been executed as of (but not
necessarily on) the date and year first above written.
LANDLORD:
--------
Date: , 1996 GATEWAY FRONTIER PROPERTIES, INC.,
------------------ a California corporation
By:
------------------------------------
Name:
Title:
TENANT:
------
Date: , 1996 HANOVER CAPITAL MORTGAGE CORPORATION,
------------------ a Missouri corporation
By:
------------------------------------
John A. Burchett,
President
SECOND AMENDMENT - Page 3 of 3
----------------
<PAGE> 1
Exhibit 10.16
CALIFORNIA
OFFICE LEASE AND SERVICE AGREEMENT
THIS LEASE, dated, for reference purposes only, AUGUST 28, 1995 by and between
Federal Deposit Insurance Corporation Receiver for Merchants Bank dba:
California Workspace, hereinafter called "Lessor" and HANOVER CAPITOL PARTNERS
LTD., hereinafter called "Lessee".
WlTNESSETH
That for and in consideration of the payment of the rent and the performance of
the covenants contained herein on the part of Lessee in the manner herein
specified. Lessor does hereby demise to Lessee, and Lessee leases from Lessor,
the premises, hereinafter called the "premises" shown outlined in red on the
attached plans marked Exhibit "B", hereinafter referred to as the "building",
commonly known as 3050 Fire Circle, Sacramento, CA. 95827.
That the terms of this lease shall be for a ONE YEAR term, commencing on the
11TH day of SEPTEMBER, 1995, and ending on the 10TH day of SEPTEMBER, 1996. That
Lessee shall pay to Lessor as rental for the premises the sum of FIVE HUNDRED
SIXTY-FIVE Dollars ($565.00) per month. Said rent shall be payable monthly in
advance on the first day of each month in lawful money of the United States. If
the term shall not commence on the first day of the month, rental for the first
fractional month shall be prorated and shall be payable together with the first
full month's rental. Said rent shall be payable at the office of Lessor in the
manager's office or to any agent designated by Lessor, without any deduction or
offset and without any notice or demand. Lessee shall pay a late charge of five
(5%) percent of any amount that is due hereunder and has not been paid to Lessor
within five (5) days after such amount has become due to Lessor. Lessor and
Lessee agree that such late charges are fair and reasonable compensation for
costs incurred by Lessor in the event of a default in payment of rent due under
this lease. Such costs are extremely difficult to estimate and ascertain, but
such costs include processing and accounting charges. Notwithstanding payment of
such late charge, Lessee shall not be excused from any default. No waiver of any
future default of Lessee shall act as a waiver of any future default of Lessee.
The failure under the terms of this lease shall not act as waiver of any
existing or future default of Lessee hereunder.
IT IS FURTHER MUTUALLY AGREED BETWEEN THE PARTIES AS FOLLOWS:
1. Lessee agrees to pay the rent as herein stipulated promptly at
the times and manner herein specified.
2. If Lessor is unable to deliver possession of the premises at the
time herein agreed, Lessor shall not be liable for any damage
caused thereby nor shall this lease be void or voidable, but
Lessee shall not be liable for any rent until such time as Lessor
can deliver possession.
3. Provided Lessee shall not be in default hereunder, Lessor agrees
to furnish in reasonable quantities and during reasonable hours
to be determined by Lessor of generally recognized business days
and subject to the Rules and Regulations of the building,
electric current for lighting and normal office use only, common
restroom facilities with hot and cold water, and heating and/or
air conditioning. Lessor shall not be liable for any damage or
failure to furnish such services as specified above if such
failure is caused by breakage, repairs, strikes, lockouts,
1
<PAGE> 2
or by any other cause, similar or dissimilar, beyond the
reasonable control of Lessor; nor shall Lessor be liable under
any circumstances for loss or injury to persons or property,
however, occurring, through or in connection with or incidental
to the furnishing of any of the foregoing or any other service
including those referred to in Paragraph 6 hereof by Lessor to
Lessee; nor shall any such failure relieve Lessee from the duty
to pay the full amount of rent herein reserved or constitute or
be construed as constructive or other eviction of Lessee.
4. Lessee shall not vacate or abandon the demised premises at any
time during the term hereof; and, if Lessee shall abandon, vacate
or surrender said premises, or be dispossessed by the process of
law, or otherwise, any personal property belonging to Lessee and
left on said premises shall be deemed to be abandoned at the
option of Lessor, or Lessor may store the same in the name and at
the cost and without notice to Lessee.
5. Should Lessee hold over the term hereby created with the consent
of Lessor, the term of this lease shall be deemed to be and be
extended at the rental herein above provided and otherwise
continue upon the covenants and conditions set forth in this
lease until either party hereto serviced upon the other thirty
(30) days written notice of termination, reciting therein the
effective date of cancellation. Upon said cancellation date this
lease, as so extended, shall terminate and if the termination
occurs at other than the last day of any rental month, then any
unearned, prepaid rental shall, following the surrender of the
demised premises by Lessee, be refunded to it.
6. As long as this lease remains in effect and provided Lessee is
not in default hereunder, Lessor agrees to provide reception,
telephone answering and announcing services.
All charges for the services described herein shall be listed in
the Lessor's current published price schedule unless specifically
mentioned above.
a) Telephone Secretary 100 messages per month free, $.40
per message thereafter
b) Telephone 1 unit at $ Free per month
-----
NOTE: Any allowance listed in this Paragraph 6 not utilized
in one month may not be carried forward for use in
succeeding months.
7. Lessee will not alter, damage or deface the walls, floors,
ceilings, or any other part of the premises, or drill holes for
the hanging of pictures, or make or suffer to be made any waste
or unlawful, improper or offensive use of the said premises,
obstruct hallways and other common areas, or commit any act which
may alter or damage the structural parts of the building or
disturb the quiet enjoyment of any other tenant in the building.
Lessee further agrees to provide, at Lessee's expenses, plastic
chair mats of the type normally used to protect carpet under
movable desks and chairs and to use said chair mats at all times;
damage to carpeting resulting from failure to use said chair mats
shall not be considered normal wear and tear, and Lessee shall be
responsible for such damages up to and including the cost of
replacement of the entire carpet in the
2
<PAGE> 3
demised premises. Upon termination or expiration of this lease,
Lessee agrees to return possession of the premises to Lessor in
as good a condition as the premises were in at the commencement
of the term of this lease, normal wear and tear excepted.
8. Lessor shall have the right at all times to enter the premises to
inspect the same and to make such repairs and alterations as
Lessor shall see fit, or (within thirty days prior to termination
of the lease) to show the leased premises to prospective tenants
in a manner so as not to unreasonably disturb Lessee.
9. In the event one party hereto should institute any suit against
the other party for the violation of any of the covenants or
conditions of this lease or for the recovery of the possession of
the demised premises, or should intervene in any action or
proceeding wherein such other party is a party in order to
enforce or protect the intervening party's interest or rights
hereunder, the unsuccessful party agrees to pay unto the
successful party reasonable attorney's fees and costs of suite to
be determined by the court.
10. Neither Lessee nor anyone claiming by, through or under Lessee
shall mortgage or assign this lease or sublet the premises or any
part thereof or permit the use of the premises by any person
other than the Lessee without prior written consent of Lessor,
said consent not to be unreasonably withheld.
11. The Policy Booklet for the building attached hereto as Exhibit
"A" are expressly made a part of this lease by reference, and
Lessee hereby expressly approves, adopts and agrees to abide by
the said Policy Booklet, as well as such reasonable modifications
thereof given by Lessor. Lessor shall have no responsibility to
Lessee for the violation or non-performance by any other tenant
of said building of any of the said Policies.
12. All notices by Lessor to Lessee, or by Lessee to Lessor, shall be
in writing. Notices to Lessee/Lessor shall be deemed to be duly
given if mailed by registered mail, postage prepaid, to the
addresses listed below:
LESSOR: Federal Deposit Insurance
Corporation Receiver for
Merchants Bank
dba: California Workspace
3050 Fite Circle, Suite 101
Sacramento, CA 95827
LESSEE: Hanover Capitol Partners Ltd.
90 West Street, Suite 1508
New York, NY 10006
13. All terms, covenants and conditions of this lease shall inure to
the benefit of and be binding upon the heirs, personal
representatives, successors and assigns of Lessor and (subject to
the restrictions on assignment herein contained) the heirs,
personal representatives, successors and assigns of Lessee to the
same extend as said terms, covenants and conditions inure to
the benefit of and are binding upon
3
<PAGE> 4
Lessor and Lessee respectively.
14. Upon the execution of this lease, Lessee has deposited with
Lessor or its agent FIVE HUNDRED SIXTY-FIVE Dollars ($565.00)
(receipt of which is hereby acknowledged by Lessor) as security
for the full and faithful performance of each and every term,
condition, covenant and provision of this lease on Lessee's part
to be performed. In the event Lessee defaults in the performance
of any of the terms hereof, or abandons the premises, Lessor may
use, apply or retain the whole, or any part, of such security for
the payment of any rent or any other payment to be made by Lessee
hereunder which is in default, for the payment or reimbursement
of any other sum which Lessor may spend or be required to spend
by reason of Lessee's default, or as compensation for other
reasonable damages suffered by Lessor on account of Lessee's
default, including reasonable attorney's fees. If Lessee shall,
at the end of the term hereof, have fully and faithfully complied
with all of the terms and provisions of this lease (but not
otherwise) the security, or balance thereof, shall then be
returned to Lessee. Lessee shall not be entitled to interest on
any such security deposit.
15. Time shall be of the essence of this lease and all of the terms
and covenants hereof are conditions, and upon the breach of
Lessee of any of the same Lessor may, at its option, terminate
this lease, in which event Lessor shall have the immediate right
of re-entry and may remove all persons and property from the
premises.
16. The failure of Lessee to make payment of any rent or other
payment of any kind hereunder to Lessor when due, or the failure
of Lessee to timely and faithfully perform any of its duties,
covenants or other obligations of any kind under the lease, shall
constitute a default hereunder by Lessee.
17. Lessee acknowledges that Lessor will answer all incoming phone
calls during normal business hours or regular business days.
Therefore, Lessee agrees that no ringing devices (bells) are
required on Lessee's phones during such hours to indicate
incoming calls. Lessee shall install or shall permit Lessor to
install, such switches at Lessee's expense as are necessary, so
that any ringing devices for indicating incoming calls may be
turned off. Lessee further agrees to keep said ringing devices
turned off during the hours when Lessor's employees are available
to answer Lessee's calls.
18. If Lessee is a Corporation, Partnership, Trust or other entity
not a natural person, then and in that event, the undersigned
individuals executing this Lease on behalf of said Corporation,
Partnership, Trust or other entity hereby represent and covenant
that they have been duly authorized and empowered to execute this
Lease on behalf of said organization.
19. As a material consideration for Lessor's execution of this Lease,
all terms and conditions of this Lease including but not limited
to the performance by Lessee of the covenants relating to the
payment of rent and services, shall be individually guaranteed by
the persons whose names and signatures are set forth below.
4
<PAGE> 5
LESSOR: Federal Deposit Insurance
Corporation Receiver for
Merchants Bank
dba: California Suites
BY:
--------------------------------
TITLE:
DATE:
--------------------------------
LESSEE: Hanover Capitol Partners Ltd.
--------------------------------
BY: /s/ John A. Burchett
--------------------------------
John A. Burchett
TITLE:
--------------------------------
President
DATE: 8/29/95
--------------------------------
5
<PAGE> 6
POLICY BOOKLET
Welcome to CALIFORNIA SUITES. We would like to take this opportunity to advise
you of our policies and provide you with some basic information. If you should
have any questions or suggestions, please let us know. We are here to provide
you and your clients with the finest service possible.
RECEPTIONIST
The receptionist is on duty Monday through Friday, 8:00 a.m. to 5:30 p.m. When
the receptionist answers your telephone and takes a message because you are not
available or not in, a message unit is recorded. Please assist the receptionist
by informing her when you leave your office, and when you expect to return. This
not only applies when you are leaving several hours, but also when you step out
for a few moments.
SECRETARIAL SERVICES
If you are in need of secretarial services, it is necessary to fill out a
Secretarial Instruction Sheet. These sheets can be obtained from the Secretary.
There are many different sections on the instruction sheet, and it is necessary
that the appropriate areas be filled out in detail. The completed sheet, along
with the attachment, should be given to the Secretary. If the job is a RUSH,
please state this when filling out the form. It is also good practice to bring
RUSH projects to our attention. The turnaround time for secretarial and word
processing work depends on the daily work load, but not any longer than 24
hours. Please reference your Services Price sheet for individual costs.
MAIL SERVICE
Generally, incoming mail is delivered between 11:00 a.m. and 2:00 p.m., Monday
through Friday. Outgoing mail should be placed in the designated box in the
receptionist area BEFORE 4:00 P.M. Please mark your mail so we can record
postage to your account. All mail for the day is taken out each evening and
deposited in a local mail box. If you have mass mailings, please notify us in
advance. Federal Express and UPS Next Day mail, if received before 4:00 p.m.,
will be delivered to appropriate boxes. Federal Express and UPS boxes are
located outside the leasing office for your convenience.
EXHIBIT "A"
<PAGE> 7
PHOTOCOPYING
Two photocopy machines are available for your use on a 24 hour basis. When you
wish to make photocopies, please use the code which was assigned to you.
Photocopies used will appear on your monthly billing statement.
FACSIMILES
If you are in need of a facsimile machine, our Secretary is available to receive
and/or transmit your documents. Please reference your Services Price sheet for
individual costs.
CONFERENCE ROOMS
The Conference Rooms are available by reservation only. Reservations can be made
through the Receptionist. If you are unable to keep the reserved time, please
notify the Receptionist of the change within one hour of your schedule time and
there will be no charge. If notification regarding cancellation is not given,
you will be charged for the time you had the room reserved. Please reference
your Services Price sheet for individual costs.
DELIVERIES
Deliveries will be accepted at CALIFORNIA SUITES. If a package arrives C.O.D.,
we cannot accept it unless prior arrangements have been made. All UPS deliveries
are accepted by the Receptionist and a note will be placed in your box to inform
you that something has arrived for your office.
KITCHEN FACILITIES
CALIFORNIA SUITES offers you many kitchen facilities to use on a daily basis
- - 24 hours a day. We have a refrigerator, stove, micro-wave oven, dishwasher and
coffee service available. We ask that you keep the kitchen area neat and clean,
and not to use anything in the refrigerator that has not been placed there by
you or your staff. Also, at the end of every week, the refrigerator is cleaned.
If you have anything perishable in the refrigerator at that time, please
remove it.
SMOKING POLICIES
It is the policy of CALIFORNIA SUITES to offer a clean smoke free environment.
We have established a NO SMOKING rule throughout the premises. Ash trays have
been provided outside the suites and are available to those who wish to use
them.
EXHIBIT "A"
<PAGE> 8
JANITORIAL SERVICE
Your office is cleaned on a daily basis Sunday through Thursday in the evenings.
If any problems should occur in this regard, please notify the Property Manager.
PARKING
There is ample parking in front of the building for both tenants and visitors.
It is important that all vehicles be parked facing into the parking space. This
prevents damage to the plants and grass areas. We suggest that as a tenant you
park on the west side of the parking lot, and leave the spaces in front for your
visitors.
MONTHLY STATEMENTS
The monthly billing statements are issued the first of each month. The statement
will reflect charges which have accumulated over the month. The rental charge
for your office is shown on the statement for the coming month and the charge
for services are shown for the previous month. Payment is due by the 10th of the
month. If not received by that date, a late charge of 5% of the past due
balance will be added to the balance. A $10.00 charge will be added for all
returned checks.
OFFICE SERVICES
We would like to remind you of the many services that are offered at CALIFORNIA
SUITES:
RECEPTIONIST
PERSONAL SECRETARY
MAIL SERVICE
TWO FULLY-EQUIPPED CONFERENCE ROOMS
PHOTOCOPYING
FACSIMILE MACHINE
LAUNDRY SERVICE
EXHIBIT "A"
<PAGE> 9
EXECUTIVE SERVICES
PRICE SHEET
ADMINISTRATIVE/SUPPORT SERVICES
- Production Work $20.00/hour
- Wordprocessing $25.00/hour
- Personal Secretarial Services $35.00/hour
(includes light bookkeeping services)
- Rush orders (4 hour turnaround) + 35%
(24 hour turnaround: billed in 15 minute increments)
EQUIPMENT/OTHER SERVICES
- Messages (first 100 free) $.40 each
- Photocopies (1-300) $.13 copy
(300 +) $.10 copy
- Postage Cost + 20%
- Facsimile (per individual transmission)
Incoming - (1 - 5 pages) (Sender) $1.75/page
(6 + pages) $ .50/page
Outgoing (1 - 5 pages) (Receiver) $2.00/page
(6 + pages) $ .50/page
- Personal Coffee Service By Quotation
- Local/Overnight Delivery Service Cost + 20%
- Transportation Service $10/hour + $.25/ml.
- Part-time Office or Large Conf. Room $15.00/hour
$40.00/half day
$60.00/full day
- Small Conference Room No Charge
- Catering for meetings/training sessions By Quotation
- Plant & Flower Service By Quotation
- Furniture Rental By Quotation
- Office Supplies Cost + 20%
OFFICE DEPOSITS/MISCELLANEOUS
- Office deposit = one month rent
- Telephone set rental $40.00/month
- Telephone/Fax installation $70.00/hour
Effective July 1, 1994
EXHIBIT "A"
<PAGE> 10
[GRAPHIC: CALIFORNIA SUITES]
EXHIBIT "B"
<PAGE> 1
Exhibit 10.17
- --------------------------------------------------------------------------------
AGREEMENT OF LEASE
6 WEST FIFTH STREET
- --------------------------------------------------------------------------------
This AGREEMENT OF LEASE ("Lease") is made and entered into as of January 8,
1997 by and between SAINT PAUL EXECUTIVE OFFICE SUITES, INC. d.b.a. Les Work
Inc. ("Lessor") and, Hanover Capital Partners, LTD. ("Tenant").
NOW, THEREFORE, THE TITLE PARTIES AGREE AS FOLLOWS:
1. THE LEASED PREMISES.
Lessor leases to Tenant, and Tenant rents of and from Lessor, part of 6
West Fifth Street, as described and shown on Exhibit A, attached hereto and made
a part hereof. Said portion of 6 West Fifth Street, is referred to herein as the
"Leased Premises".
2. TERM.
The term of this lease shall be for a period of approximately 6 months
commencing February 1, 1997, or the date of Tenant occupancy, whichever occurs
earlier, and terminating July 31, 1997, unless terminated earlier as provided
herein.
3. MONTHLY RENT.
Commencing February 1, 1997, Tenant shall pay to Lessor, payable at the
address designated in this Lease for service of notice upon Lessor, or at such
other place as Lessor may designate in writing to Tenant, exclusive of any other
charge to be paid by Tenant, the following, payable in equal consecutive monthly
installments, in advance, on or before the 10th day of each month through and
including July, the sum of: $595.00 ($425.00 rent; $130.00 phones; $40.00
fax/modem) per month.
4. SECURITY DEPOSIT.
On or before February 1, 1997, Tenant shall pay to Lessor the sum of
$595.00 ($425.00 rent; $130.00 phones; $40.00 fax/modem) as damage deposit. Upon
termination of this lease, deposit will be refunded upon TENANT(S) vacating the
premises, less any past due balances and/or the cost of repairs due to damage
above and beyond reasonable wear and tear. This deposit may not be used as last
month's rent.
5. USE OF LEASED PREMISES.
Tenant, and its approved sublessee, shall use the Leased Premises for
general office purposes only.
Tenant may have not more than 1 person 'officed' out of Leased Premises.
6. USE OF COMMON AREAS.
Tenant shall have the non-exclusive use, in common with others entitled to
use the same, of the common areas of 6 West Fifth Street. "Common areas" shall
include, without limitation, access facilities, walkways, stairways, elevators,
hallways and public restrooms.
7. RULES AND REGULATIONS.
Tenant's exclusive use of the Leased Premises and non-exclusive use of the
common areas shall be subject to the terms and conditions of this Lease and
all reasonable rules and regulations
1
<PAGE> 2
prescribed by Lessor from time to time with respect to the operation of 6 West
Fifth Street, Suite 700 and its common areas.
8. UTILITIES AND SERVICES.
Provided Tenant is not in default under any of the terms or conditions of
this Lease, Lessor shall furnish such heat and air conditioning, electricity,
water, sewage and elevator service in and about the Leased Premises as shall be
necessary for the comfortable use and occupancy of the Leased Premises, at all
times.
9. ALTERATIONS AND IMPROVEMENTS BY TENANT.
Tenant shall not make any material changes, additions, or improvements to
the Leased Premises without the prior written consent of Lessor.
10. MECHANICS LIEN.
Tenant shall pay timely for labor and material furnished to Tenant or
claimed to have been furnished to Tenant in connection with work of any
character performed or claimed to have been performed on the Leased Premises, at
the direction or with the consent of Tenant. Tenant shall not permit any
mechanics or similar liens to remain upon the Leased Premises incident to the
foregoing. However, Tenant may contest the validity of such lien or claims,
provided, Tenant shall give to Lessor, if required by Lessor, reasonable
security to insure payment and to prevent any sale, foreclosure or forfeiture of
the Leased Premises by reason of such non-payment. Upon a final determination of
the validity of any such lien or claim, Tenant shall immediately pay any
judgment or decree rendered against Tenant or Lessor, including but not limited
to, all proper costs and charges, and shall cause such lien to be released of
record without costs to Lessor.
11. LESSOR'S ACCESS.
Lessor, its agent, employees and/or contractors, shall have the right to
enter the Leased Premises at all reasonable times for the purpose of inspection,
cleaning, repairing or improving the Leased Premises or other premises in the
Building, including, not limited to, the right, but not the obligation, to
install, maintain, use, repair, and replace the pipes, ducts, conduits, and
wires leading through the Leased Premises, provided, that such entry shall be
accomplished in a manner that will cause as little interference with and
inconvenience to the Tenant's use as is reasonable under the circumstances. Any
interference with or inconvenience to the Tenant arising out of the exercise by
Lessor of the rights set forth in this paragraph shall not constitute a breach
by Lessor of any of its agreements in this Lease, and shall not result in any
diminution of rent or liability on the part of Lessor by reason of
inconvenience, annoyance or injury to Tenant's business. Lessor, or its agents,
shall have the right to exhibit the Leased Premises to prospective tenants or to
prospective purchasers at any time upon reasonable notice to Tenant.
12. DAMAGE BY FIRE OR OTHER CASUALTY.
If the Leased Premises are damaged or destroyed by fire or other casualty,
and such damage or destruction is certified within a reasonable period of time
thereafter, in writing, by a licensed contractor to be repairable within thirty
(30) days after the date of such occurrence, this Lease shall remain in full
force and effect, and Lessor, subject to the provisions hereinafter set forth,
shall proceed with due diligence to repair such damage or destruction, at its
expense, and in that event, there shall be a proportionate abatement of rent and
all other charges for so much of the Leased Premises as may be untenantable
until repair or restoration.
2
<PAGE> 3
If the Leased Premises are damaged or destroyed as above stated and cannot
be repaired within thirty (30) days, either Tenant or Lessor may terminate this
Lease.
13. ASSIGNMENT OR SUBLEASE.
Tenant may not, voluntarily or by operation of law, assign or transfer this
Lease, or sublease the whole or any part of the Leased Premises, without the
prior written consent of Lessor, which consent will not be unreasonably
withheld.
14. NOVATION IN THE EVENT OF A SALE BY LESSOR.
In the event of the sale of the Leased Premises, Lessor shall be and hereby
is relieved of all of the covenants and obligations created hereby and such sale
shall result automatically in the purchasers assuming and agreeing to carry out
all the covenants and obligations of Lessor herein; provided, however, that
Lessor shall not be released from any claim resulting from a default of Lessor
occurring prior to the date of such sale.
15. REMEDIES OF LESSOR.
In the event that during the term of this Lease any of the following occur:
1. Tenant shall have failed to pay any installment of rent or any
other charge provided herein, or any portion thereof, when the
same shall be due and payable, and the same shall remain unpaid
for a period of ten (10) days after the same is due; or
2. Tenant shall have failed to comply with any other provision of
this Lease, and shall not have cured such failure within thirty
(30) days after Lessor, by written notice, has informed Tenant of
such noncompliance; provided, however, in the case of a default
within a period of thirty (30) days, Tenant shall have such
additional time to cure such default as may be reasonably
necessary, provided Tenant proceeds promptly and with due
diligence to cure such default after receipt of said notice;
the Lessor upon written notice to Tenant may elect either (i) to cancel and
terminate this Lease, and this Lease shall not be treated as an asset of
Tenant's estate, or (ii) to terminate Tenant's right to possession only without
canceling and terminating Tenant's continued liability under this Lease.
Notwithstanding the fact that initially Lessor elects under (ii) to terminate
Tenant's right to possession only, Lessor shall have the continuing right to
cancel and terminate this Lease by serving ten (10) days written notice on
Tenant of such further election, and shall have the right to pursue any remedy
at law or in equity that may be available to Lessor.
16. DEFAULT BY LESSOR.
Lessor shall not be deemed to be in default under this Lease until Tenant
has given Lessor written notice specifying the nature of the default which
Lessor is obligated to cure, and Lessor does not cure such default within ten
(10) days after receipt of such notice; provided, however, in the case of
default which cannot be cured, with due diligence, within a period of ten (10)
days, Lessor shall have such additional time to cure default as may be
reasonably necessary, provided Lessor proceeds promptly and with due diligence
to cure such default after receipt of said notice.
3
<PAGE> 4
17. SIGNS; WINDOW COVERINGS.
Tenant shall not place or cause to be placed any sign or lettering on the
exterior of the Building, in the halls or other common areas, or on the Leased
Premises without the prior written consent of Lessor. Tenant shall have the
right to place a sign or lettering on the entrance to the Leased Premises, and
on any sign directory provided by Lessor, provided the location, style, text,
size and color are first approved in writing by Lessor. Any sign or lettering
not so approved may be removed by Lessor at Tenant's expense.
18. CONDITION OF LEASED PREMISES AND LESSOR'S PROPERTY AT TERMINATION.
At termination of this Lease, Tenant shall vacate and deliver the Leased
Premises, all partitions, improvements, alterations and other property of Lessor
to Lessor in as good order and condition as the same were in on the commencement
date, reasonable wear and tear excepted.
19. NOTICES.
All notices and communications of similar legal import from either Lessor
or Tenant to the other shall be in writing and shall be considered to have been
duly given or served if sent by first class mail, postage prepaid, or hand
delivered to the party or parties at its address set forth below, or to such
other address as such party may hereafter designate by written notice to the
other party or parties.
If to Lessor, to:
Les Work, Inc.
6 West Fifth Street
Suite 700
Saint Paul, Minnesota 55102
If to Tenant, to: CC to:
Ralph Laughlin Herb Lethert
Chief Financial Officer The St. Paul Building
Hanover Capital Partners, LTD. 6 West Fifth Street
100 Metroplex Drive Suite 700
Suite 301 St. Paul, MN 55102
Edison, NJ 08817
20. GOVERNING LAW.
This Lease shall be subject to and governed by the laws of the State of
Minnesota, and all questions concerning the meaning and intention of the terms
of this Lease and concerning the validity hereof and questions relating to
performance hereunder shall be adjudicated and resolved in accordance with the
laws of that state, notwithstanding the fact that one or more of the parties now
is or may hereafter become a resident of a different state.
21. SHORT FORM LEASE.
Neither party shall record this Lease without the written consent of the
other party; however, upon the request of either Lessor or Tenant, the other
party shall join in the execution of a memorandum or so-called "short form" of
this Lease for the purpose of recordation. Said memorandum or short form of this
Lease shall describe the parties, the Leased Premises, the term of this Lease,
any special provisions, and shall incorporate this Lease by reference. Any fees
4
<PAGE> 5
required to be paid in order to record such memorandum or short form of this
Lease shall be paid by the party desiring to record such memorandum or short
form of this lease.
22. SERVICES.
Lessor shall contract with a person or entity to provide to Tenant on a
fee-for-services basis, secretarial and word processing services, postage
machine use based on actual Tenant usage, fax sending and receiving, delivery
and pick-up, long distance telephone based on actual usage, second line
telephone answering and photocopying, and the current rates for said services
are set forth in Exhibit B attached hereto.
Lessor shall also provide a telephone answering service for Tenant and a
receptionist during normal weekday business hours as prescribed by the Lessor.
Lessor owns the telephones and telephone system used at 6 West Fifth Street.
Lessor shall maintain the telephones and telephone system during the term of
this Lease and shall provide one telephone in each office. Lessor shall provide
telephone services as listed on Exhibit C at an additional charge as set forth
in Exhibit C.
Each additional person "officed" out of Leased Premises will be provided
answering services during normal weekday business hours, and 1 additional
telephone and voice messaging box for the additional fee as set forth in Exhibit
C.
Lessor shall provide photocopying equipment during the term of the Lease
for use in common by other tenants. Lessor shall provide a mail box, cleaning
and janitorial service, a lobby office directory, name plates for the exterior
door of the Leased Premises and blinds for office windows.
Tenant shall not install, or have installed, any telephone lines, for the
purpose of fax, modem, telephone usage, '800' numbers or any other purpose,
without prior written consent by Lessor. Lessor has the option to install or
provide such services, for the Tenant, using Lessor's telephone vendor, at an
additional charge as set forth by Lessor. All Long Distance calls placed by
Tenant, on Lessor's telephone system, shall be made through Lessor's Long
Distance Vendor.
The parties hereto have duly executed this Agreement of Lease effective as
of the date and year first above written.
LESSOR:
Saint Paul Executive Office Suites Inc.
BY: /s/ Mark J. Stenglein
---------------------------------------
Mark J. Stenglein
ITS: President
TENANT:
BY: /s/ Joyce Mizerak
---------------------------------------
Joyce Mizerak
ITS: Managing Director
5
<PAGE> 6
[LOGO]
EXECUTIVE SUITES & EXHIBIT A
BUSINESS SUPPORT
6 WEST FIFTH STREET
THE SAINT PAUL BUILDING, SUITE 700
SAINT PAUL, MINNESOTA 55102
[Seventh Floor Layout]
[Eighth Floor layout]
[Ninth Floor Layout]
<PAGE> 7
EXHIBIT B
<TABLE>
PRICING GUIDELINE
<S> <C> <C> <C>
COMPUTER SERVICES
- -----------------
Word Processing $25.00/hr.
Enhanced W.P. $32.50/hr. Spiral binding
Desktop Pub. $40.00/hr. Binding only $1.95
Minimum for $15.00 Cardstock/vinyl cover $1.00
designing letterhead Velo binding
Mail Merge $2.50/name Binding Only $2.25
Includes Typing address, merging,
printing, stuffing, sealing & sticking
labels on env. Postage not included.) LASER PRINTING
--------------
Letter size (8 1/2" x 11") $1.00
CLERICAL SERVICES Legal size (8 1/2" x 14") $1.00
- ----------------- Color Laser Prints $2.95
General Clerical $18.00 Labels, env. $.50
Folding, Stuffing Env. $.05/each
Postage Cost + 20%
PHOTO COPIES & SUPPLIES
-----------------------
FAXING SERVICES Letter (8 1/2" x 11") $.07
- --------------- Legal (8 1/2" x 14") $.07
Sending Colored paper (as available) $.20
Local $1.00/page Cardstock (as available) $1.00
Long Distance $2.00/page Bond Paper $.25
International $4.00/page Bond Envelope $.20
Receiving Business envelopes $.10
Local/Long Distance $1.00/page Transparencies
(B&W + Printing) $2.00
SERVICES Color Copies $.60
- -------- Color Transparencies
Page of labels $2.00 (+ Printing) $3.00
Page of labels & printing $3.00 Large Env. $1.00
Outputting data to disk $3.00 Manila Folders $1.00
One page resume $35.00
(Includes 1 laser copy and 10 copies)
Two page resume $45.00 CONFERENCE ROOMS
(Includes 1 laser copy and 10 copies) ----------------
Three page resume All locations available:
(Includes 1 laser copy and 10 copies) $55.00 Tenants $10.00/hr.
Non-tenants $15.00/hr.
</TABLE>
FOR YOUR PROTECTION...Les Work utilizes Industry Production Standard guidelines
published by the National Association of Secretarial Services and Executive
Suite Network for computing time charged for document production and
non-keyboarding services.
Industry Production Standards are based on average time required in the
performance of specific duties for project production by a professional
wordprocessing operator.
By accepting work performed or services agreed upon, client assumes full
responsibility for proofreading and accuracy of documents. Any errors or
omissions found hereafter are not the responsibility of Les Work. Prices
subject to change with a 60 day notice.
*Services subject to priority rate if less than 24 hour notice.
<PAGE> 8
EXHIBIT C
- --------------------------------------------------------------------------------
LES WORK TELECOMMUNICATIONS
SERVICE AGREEMENT
- --------------------------------------------------------------------------------
This Telecommunication Service Agreement is made between Saint Paul Executive
Office Suites d.b.a. Les Work Executive Suites & Business Support ("Lessor") and
Hanover Capital Partners, LTD. ("Tenant"). This Telecommunication Service
Agreement covers the basic telecommunications package as listed below and will
run concurrent with Hanover Capital Partners, LTD.'s lease.
1. BASIC PHONE PACKAGE
Total # 1
Telephone Answering
Voice Messaging Box
Phones (1 person) $130.00 INCLUDED IN LEASE
------- RATE
ADDITIONAL SERVICES
Remote call transferring -------
Additional DID lines -------
Hunting -------
Pink Slip Messaging and Message Pass-on -------
Fax &/or Modem Line $ 40.00
-------
Calling Cards -------
TOTAL ADDITIONAL CHARGES: $ 40.00
Charges to Tenant for services will be billed monthly and are payable on or
before the 10th day of the month. If payment is not received by Lessor on
or before the 10th day of each month, the Tenant will pay a late charge of
18%, however, in the event this rate exceeds the maximum interest rate
allowed by law, then the rate charge will be the highest rate permitted
under the law.
Prices subject to change with addition or deletion of lines/hardware. Any
increases due to change of pricing/services involving phone vendors or long
distance carriers would be with 60 days notice.
2. TELECOMMUNICATIONS PACKAGE
Lessor will make available to Tenant, a telecommunications package which
will consist of some combination of telephone numbers, lines, optional
features such as voice mail, long distance, calling cards, and directory
listing. All components of the telecommunications package including any
telephone numbers used by Tenant will remain at all times the property of
Lessor and Tenant will acquire no rights in the components beyond the terms
<PAGE> 9
specified by Lessor. All equipment will be covered under maintenance paid
by Lessor unless damage is caused by Tenant's negligence. In the event that
any toll fraud is traceable to telecommunications services employed by
Tenant, Tenant will reimburse Lessor for all charges associated with the
toll fraud. This may include, but is not limited to, unauthorized use of
calling cards or telephone lines. Lessor accepts no responsibility for
Tenant's Yellow Pages advertising.
Tenant shall not install, or have installed, any telephone lines, for the
purpose of fax, modem, telephone usage, '800' numbers or any other purpose,
without prior written consent by Lessor. Lessor has the option to install
or provide such services, for the Tenant, using Lessor's telephone vendor,
at an additional charge as set forth by Lessor. All Long Distance calls
placed by Tenant on Lessor's telephone system, shall be made through
Lessor's Long Distance Vendor.
3. RETURNED CHECK
If a check is returned for any reason at all, Tenant will pay an additional
charge of $25.00 per returned check. If a check is returned, then, for the
purposes of calculating late charges or events of default, it will be as if
the payment represented by the check had never been made.
4. TENANT CONTACT
The person specified here: Ralph Laughlin and Herb Lethert are the Tenant
contacts. In the event of a corporate dissolution, partnership dissolution,
or internal Tenant dispute, all mail, telephone messages, Tenant Property,
etc., will be delivered to the Tenant contact only.
ALL PARTIES HAVE READ THE ABOVE PAGES AND
AGREE TO ALL TERMS AND PROVISIONS.
ST. PAUL EXECUTIVE OFFICE SUITES, INC. (LES WORK INc.)
TENANT: LANDLORD: LES WORK INC.
HANOVER CAPITAL PARTNERS, LTD.
By: /s/ Joyce Mizerak By: /s/ Mark Stenglein
---------------------------------- ----------------------------
Joyce Mizerak Mark Stenglein
Its: Its:
---------------------------------- ----------------------------
Managing Director President
2
<PAGE> 10
PARKING ADDENDUM
----------------
This is Addendum I to the lease dated January 8, 1997 by and between
Hanover Capital Partners, LTD. (Tenant) and St. Paul Executive Office Suites
(d.b.a. LesWork, Inc.) (Lessor).
Lessor agrees to provide 1 parking space in the Lowry Parking Garage no
later than February 1, 1997. The price shall be $145.00 per month. (This price
is subject to change upon notification by the Garage to Lessor of any rate
increases.)
Failure to provide this parking spot shall render the foregoing Lease null
and void at the Tenant's discretion.
TENANT LESSOR
- ------ ------
Hanover Capital Partners, LTD. St. Paul Executive Office Suites, Inc.
By: /s/ Joyce Mizerak By: /s/ Mark Stenglein
--------------------------- ---------------------------------
Joyce Mizerak Mark Stenglein
Its: Managing Director Its: President
<PAGE> 1
Exhibit 10.18
REVOLVING CREDIT AGREEMENT
--------------------------
AGREEMENT made this 10th day of December, 1996, by and between FLEET
NATIONAL BANK, a national banking association with an office located at 111
Westminster Street, Providence, Rhode Island (the "Lender") and HANOVER CAPITAL
PARTNERS, LTD.., a New York corporation with its principal place of business
located at 90 West Street, New York, New York (the "Borrower").
I. DEFINITIONS
--------------
1.01. CERTAIN DEFINED TERMS. In addition to the definitions contained in
the foregoing recital clause, the following terms shall have the meanings
provided below:
"ADVANCE" OR "ADVANCES" means the loans and advances made under this
Agreement on a revolving basis according to the Borrowing Base.
"AGREEMENT" means this Agreement, as amended from time to time.
"BORROWING BASE" means Receivables under One Hundred Twenty (120)
days, Contracts in Progress and Selected Contracts in Progress.
"BORROWING BASE FORMULA" means Eighty percent (80%) of the advance
rate of the Receivables under One Hundred Twenty (120) days, Forty percent (40%)
of the advance rate of the Contracts in Progress and Fifty-Five percent (55%) of
the advance rate of the Selected Contracts in Progress.
"BURCHETT" means John A. Burchett.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COLLATERAL" shall have the meaning ascribed to such term in the
Security Agreement.
"CONTRACTS IN PROGRESS" means contracts of the Borrower less than Five
Hundred Thousand Dollars ($500,000.00).
"DEFAULT" means any of the events specified in Article VII hereof
which with the passage of time or giving of notice or both would constitute an
Event of Default.
"EVENT OF DEFAULT" means an Event of Default described in Article VII
hereof.
<PAGE> 2
"GAAP" means generally accepted accounting principles in the United
States.
"GUARANTORS" shall mean John A. Burchett, Hanover Capital Securities,
Inc., Hanover Capital Mortgage Corporation, Hanover Joint Ventures, Inc.,
Hanover Capital Advisors, Inc. and Hanover Capital Mortgage Fund, Inc.
"GUARANTY." shall mean the Guaranty of each of the Guarantors dated of
even date.
"INDEBTEDNESS" means, for the Borrower (i) all indebtedness or other
obligations of the Borrower for borrowed money or for the deferred purchase
price of property or services, (ii) all indebtedness or other obligations of any
other Person for borrowed money or for the deferred purchase price of property
or services the payment or collection of which the Borrower has guaranteed
(except by reason of endorsement for collection in the ordinary course of
business) or in respect of which the Borrower is liable, contingently or
otherwise, including, without limitation, liable by way of agreement to
purchase, to provide funds for payment, to supply funds to or otherwise to
invest in such other Person; or otherwise to assure a creditor against loss,
(iii) all indebtedness or other obligations of any other Person for borrowed
money or for the deferred purchase price of property or services secured by (or
for which the holder of such indebtedness has an existing right, contingent or
otherwise, to be secured by) any mortgage, deed of trust, pledge, lien, security
interest or other charge or encumbrance upon or in property (including, without
limitation, accounts and contract rights) owned by the Borrower, whether or not
the Borrower has assumed or become liable for the payment of such indebtedness
or obligations and (iv) capitalized lease obligations of the Borrower.
"LOAN ACCOUNT" means the account evidencing the Advances into which
the Lender shall record all appropriate debits and credits.
"NOTE" shall mean the Borrower's reducing revolver note in the form
attached hereto as Exhibit A, which Note is hereby incorporated herein by
reference and made a part hereof.
"NOTICE OF BORROWING," means a notice substantially in the form of
EXHIBIT B attached hereto.
"OBLIGATIONS" means all obligations and all liabilities of the
Borrower under this Agreement, the Note and the Security Documents.
"PERMITTED ENCUMBRANCES" shall mean those encumbrances, if any,
permitted by the Lender on the property of the Borrower as set forth in EXHIBIT
C attached hereto and incorporated herein by reference.
2
<PAGE> 3
"PERSON" means and includes an individual, a partnership, a joint
venture, a corporation, a trust, an unincorporated organization and a government
or any department or agency thereof.
"RECEIVABLES" means all accounts, contract rights, instruments,
documents, chattel paper and general intangibles (including, without limitation,
choses in action, tax refunds, and insurance proceeds) of the Borrower; any
other obligations or indebtedness owed to the Borrower from whatever source
arising; all rights of the Borrower to receive any payments in money or kind;
and all of the foregoing, whether now existing or hereafter created or acquired
or in which the Borrower may now have or hereafter acquire an interest.
"REVOLVING LOAN CEILING" means an amount equal to the LESSER of the
Borrowing Base subject to the Borrowing Base Formula or: (i) Two Million Dollars
($2,000,000.00) from the date hereof through December 31, 1996, (ii) One Million
Eight Hundred Fifty Thousand Dollars ($1,850,000.00) from January 1,1997 through
June 30,1997, (iii) One Million Seven Hundred Thousand Dollars ($1,700,000.00)
from July 1,1997 through December 31, 1997, (iv) One Million Five Hundred Fifty
Thousand Dollars ($1,550,000.00) from January 1,1998 through June 30,1998, (v)
One Million Four Hundred Thousand Dollars ($1,400,000.00) from July 1,1998
through December 31, 1998, (vi) One Million Two Hundred Fifty Thousand Dollars
($1,250,000.00) from January 1,1999 through June 30,1999, and (vii) One Million
One Hundred Thousand Dollars ($1,100,000.00) from July 1,1999 through December
31, 1999.
"SECURITY AGREEMENT" means the Security Agreement by and between the
Borrower and the Lender dated even date.
"SECURITY DOCUMENTS" means the Security Agreement, the Guaranty and
any other agreement or instrument now or hereafter securing the Note.
"SUBSIDIARIES" means Hanover Capital Securities, Inc., Hanover Capital
Mortgage Corporation, Hanover Joint Ventures, Inc., Hanover Capital Advisors,
Inc. and Hanover Capital Mortgage Fund, Inc.
"SELECTED CONTRACTS IN PROGRESS" means contracts of the Borrower
evidenced in writing and in excess of Five Hundred Thousand Dollars
($500,000.00), and approved by the Lender.
"TARGET BALANCE AGREEMENT" shall mean the target balance agreement in
the form attached hereto as EXHIBIT D, which Target Balance Agreement is hereby
3
<PAGE> 4
incorporated herein by reference and made a part hereof.
1.02. ACCOUNTING TERMS. All accounting terms not specifically defined
herein shall be construed in accordance with GAAP consistent with those applied
in the preparation of all financial data submitted pursuant to this Agreement
and prepared in accordance with GAAP.
II. GENERAL TERMS
-----------------
2.01. REVOLVING LOAN. During the term of this Agreement, the Lender agrees
to make Advances in amounts which in the aggregate at any single time during
said term shall not exceed the Revolving Loan Ceiling; provided that the
Lender's agreement to make Advances shall terminate immediately and all future
Advances shall be at the sole discretion of the Lender if (a) there shall have
occurred or there shall exist an event that constitutes a Default or an Event of
Default or (b) there exists a default under any other agreement between the
Lender and the Borrower. The Advances shall be evidenced by the Borrower's Loan
Account, in which the Lender shall record all appropriate debits and credits as
provided herein, and by the Note.
2.02. LOAN ACCOUNT. Within the limit of the Revolving Loan Ceiling, upon
request by the Borrower for Advances, which include funds advanced under the
Target Balance Agreement (which will be in multiples of One Thousand Dollars
($1,000.00) or the unadvanced balance of the maximum amount of the then-existing
Revolving Loan Ceiling, whichever is less), the Lender will enter such Advances
when made to the Borrower as debits in the Borrower's Loan Account. The Lender
will also record in the Loan Account, in accordance with customary accounting
practice, all other charges, expenses and other items properly chargeable to the
Borrower, all payments by the Borrower and other appropriate debits and credits.
The debit balance in the Loan Account shall reflect the amount of the Borrower's
indebtedness to the Lender, and whatever interest or charges may be due from
time to time. The Loan Account shall be prima facie evidence as to all such
indebtedness and other amounts; PROVIDED, HOWEVER, that the failure of the
Lender to record any amount shall not limit or otherwise affect the obligations
of the Borrower to repay each Advance made or effected hereunder together with
interest thereon.
2.03. STATEMENTS. The Lender shall render a monthly statement of account to
the Borrower which shall be considered correct, accepted by and binding on the
Borrower, unless it notifies the Lender of any changes or corrections within
thirty (30) days of the sending of such statement.
2.04. REPAYMENTS OF PRINCIPAL AND INTEREST. The Borrower promises to repay
4
<PAGE> 5
to the Lender the Advances, together with interest thereon, in the amount and
according to the payment schedule set forth in the Note.
2.05. FORM OF PAYMENTS. All payments (including prepayments) by the
Borrower on account of principal, interest or any other fee, reimbursement or
other charge due under this Agreement shall be made to the Lender at its
principal place of business prior to 2:00 p.m., on the date of payment in
immediately available funds.
2.06. TERMINATION. This Agreement shall terminate on December 31, 1999, and
as of the close of business on that date, the then outstanding debit balance in
the Borrower's Loan Account shall automatically become due and payable unless
this Agreement shall be extended by the Lender in writing.
2.07. BORROWING PROCEDURE. In the event that the Target Balance Agreement
is NOT in effect during any portion of this Agreement, then whenever the
Borrower desires to borrow under this Agreement, it shall deliver to the Lender
a Notice of Borrowing (which may be telephonic confirmed promptly in writing) no
later than 11:00 a..m. (Providence, Rhode Island time). The Notice of Borrowing
shall specify (a) the proposed funding date and (b) the amount of the proposed
Advance. The Lender shall not incur any liability to the Borrower in acting upon
any telephonic notice referred to above which the Lender believes in good faith
to have been given by a duly authorized officer or other person authorized to
borrow on behalf of the Borrower or for otherwise acting in good faith and, upon
the funding of an Advance by the Lender in accordance with this Agreement
pursuant to any telephonic notice, the Borrower shall have borrowed such Advance
hereunder. Notwithstanding the foregoing, it shall be agreed by and between the
parties that the terms of the Target Balance Agreement shall be in effect
simultaneous with the execution of this Agreement.
2.08. DISBURSEMENT OF FUNDS. Promptly after receipt of a Notice of
Borrowing pursuant to Section 2.07 hereof (or a telephonic notice in lieu
thereof) with respect to an Advance, the Lender shall, subject to Section 2.01
hereof, make the Advance available to the Borrower on such funding date by
causing an amount of same day funds equal to such Advance to be credited to the
account of the Borrower at the office of the Lender.
2.09. USE OF PROCEEDS. The borrowing under this Agreement shall be used
primarily for Borrower's short-term working capital requirements.
2.10. SECURITY FOR THE NOTE. The Note shall be secured by the Security
Documents and by such additional security as shall be agreed to by the Lender
and the Borrower from time to time.
5
<PAGE> 6
2.11. PARTICIPATIONS. The Lender reserves the right without notice to the
Borrower to sell participations in the Advances, in whole or in part, provided
that the Borrower's rights under this Agreement will not be modified thereby.
Furthermore, the Lender shall have the right to make available to actual or
potential participants all financial information, public or non-public, that the
Lender receives from the Borrower.
III. REPRESENTATIONS AND WARRANTIES
-----------------------------------
To induce the Lender to enter into this Agreement and make the Advances,
the Borrower represents and warrants to the Lender (which representations and
warranties shall survive the delivery of the Note and the making of the
Advances) that:
3.01. FINANCIAL STATEMENTS. All financial statements previously furnished
by the Borrower to the Lender have been prepared in accordance with GAAP applied
on a basis consistent with that of preceding periods, are complete and correct,
and fully and accurately reflect the financial condition of the Borrower as of
said dates, and the results of its operations for the periods stated. To the
best of the Borrower's knowledge and belief, the Borrower does not have any
contingent obligations, liabilities for taxes, unusual long-term commitments or
lease commitments except as specifically mentioned in such financial statements
or the notes thereto. Since the date of the most recent financial statements
submitted to Lender there has been no material adverse change in the financial
condition of the Borrower, and since that date no dividends or other
distributions have been declared or paid or made to the stockholders of the
Borrower.
3.02. ORGANIZATION AND QUALIFICATION. The Borrower (i) is duly organized,
validly existing and in good standing under the laws of its state of
incorporation, (ii) has the corporate power and authority to own its properties
and to carry on business as now being conducted and is qualified to do business
in every jurisdiction where such qualification is necessary and (iii) has the
corporate power to execute and deliver this Agreement, to borrow hereunder and
to execute and deliver to the Lender the Note, the Security Documents and any
other instruments required hereunder.
3.03. NO CONFLICT. (a) The Borrower has taken all necessary corporate
action to authorize the borrowings on the terms and conditions of this Agreement
and to authorize the execution, delivery and performance of this Agreement, the
Note, the Security Documents and any other agreements referred to herein or
related to the Advances.
6
<PAGE> 7
(b) All consents, licenses, approvals or authorizations of, or
registrations or declarations with, any governmental authority, bureau or agency
which are required in connection with the execution, delivery, performance,
validity or enforceability of this Agreement, the Note and any other agreements
referred to herein have been duly obtained and are in full force and effect.
(c) The execution, delivery and performance of this Agreement, the
Note, the Security Documents and any other agreement referred to herein will not
be in conflict with, result in a breach of, or constitute (with due notice or
lapse of time or both) a default under, any provision of any existing law or
regulation or of any order or decree of any court or governmental authority,
bureau or agency or of the Articles of Incorporation or By-laws of the Borrower
or of any mortgage, indenture, contract or other agreement to which the Borrower
is a party or which purports to be binding upon it or upon any of its properties
or assets, and will not result in the creation or imposition of any lien, charge
or encumbrance on, or security interest in, any of its properties or assets,
except in favor of the Lender.
3.04. LITIGATION. There is no action, suit or proceeding at law or in
equity or by or before any governmental instrumentality or other agency now
pending or, to the knowledge of the Borrower, threatened against or affecting
the Borrower which, if adversely determined, would have a material adverse
effect on the business operations, properties, assets or condition (financial or
otherwise) of the Borrower. The Borrower is not in default with respect to any
order of any court, arbitrator or governmental body arising out of any action,
suit or proceeding under any statute or other law.
3.05. NO DEFAULT. The Borrower is not a party to any agreement or
instrument or subject to any restriction adversely affecting its business,
properties or assets, operations or conditions, financial or otherwise. The
Borrower is not in default in the performance, observance or fulfillment of any
of the obligations, covenants or conditions contained in any agreement or
instrument to which it is a party or by which its assets may be bound, and no
Default or Event of Default as hereinafter specified has occurred and is
continuing hereunder.
3.06. PROPERTIES. The Borrower has good title to, or valid leasehold
interests in, all of its properties and assets, real and personal, free and
clear of all mortgages, liens and encumbrances, except for the Permitted
Encumbrances.
3.07. CAPITALIZATION. EXHIBIT E attached hereto correctly describes the
authorized capital stock of the Borrower, and correctly sets forth the name of
each stockholder of the Borrower and the number of shares owned by each such
stockholder for each class of stock of the Borrower.
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<PAGE> 8
3.08. TAXES. The Borrower has filed or caused to be filed all tax returns
required to be filed, and has paid all taxes shown to be due and payable on said
returns or on any assessments made against it, and no tax liens have been filed
and no claims are being asserted, or proposed or threatened to be asserted, with
respect to any taxes which are not reflected in the financial statements
referred to in Section 3.01 hereof, and the Borrower is currently providing
adequate reserves for all current taxes.
3.09. NO PENDING INSOLVENCY. Any funds advanced to the Borrower under this
Agreement do not and will not render the Borrower insolvent; the Borrower is not
contemplating either the filing of a petition under any state or federal
bankruptcy or insolvency laws or the liquidation of all or a major portion of
its property and the Borrower has no knowledge of any Person contemplating the
filing of any such petition against it, and none of such properties and assets
owned by the Borrower is subject to any mortgage, security interest, pledge,
lien, charge, encumbrance or title retention or other security agreement or
arrangement of any nature whatsoever, except for the Permitted Encumbrances.
3.10. STATEMENTS. No statement of fact made by or on behalf of the Borrower
in this Agreement or in any certificate or schedule furnished to the Lender
pursuant hereto, contains any untrue statement of a material fact or omits to
state any material fact necessary to make the statements contained therein or
herein not misleading. There is no fact presently known to the Borrower which
has not been disclosed to the Lender which materially affects adversely nor as
far as the Borrower can foresee, will materially affect adversely the property,
business, prospects or condition (financial or otherwise) of the Borrower.
3.11. LEGALLY ENFORCEABLE AGREEMENT. This Agreement, the Note, the Security
Documents and any other documents executed by the Borrower in connection with
the Advances, are the legal, valid and binding obligations of the Borrower,
enforceable against the Borrower in accordance with their respective terms,
except to the extent that such enforcement may be limited by applicable
bankruptcy, insolvency and similar laws affecting creditors' rights generally
and except as certain remedies thereunder may be subject to equitable
principles.
3.12. REGULATION U. The Borrower is not engaged principally, or as one of
the Borrower's important activities, in the business of extending credit for the
purpose of purchasing or carrying margin stock (within the meaning of Regulation
U of the Board of Governors of the Federal Reserve System), and will not use the
proceeds of the Advances so as to violate Regulation U as it may be amended or
interpreted from time to time by the Board of Governors of the Federal Reserve
System.
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3.13. PATENTS, ETC. The Borrower possesses all franchises, patents, patent
applications, patent licenses, copyrights, trademarks, service marks,
tradenames, licenses and permits, and rights in respect of the foregoing,
necessary for the conduct of its business substantially as now conducted without
any known conflict with any rights of others.
3.14. BROKERAGE COMMISSIONS. The making of the Advances or the Lender's
acquisition of the Note or any of the Security Documents will not subject the
Lender to any claim for a brokerage commission.
IV. CONDITIONS OF MAKING ADVANCES
---------------------------------
The obligation of the Lender to make the Advances hereunder is subject to
the following conditions precedent:
4.01. REPRESENTATIONS. The representations and warranties set forth in
Article III hereof shall be true and correct on and as of the date hereof and
the date each Advance is made.
4.02. CERTIFICATION. The Borrower shall have executed and delivered to the
Lender, upon the execution of this Agreement, the following: (a) A certificate
of the Secretary of the Borrower certifying to the incumbency of the officers of
the Borrower and the votes of the Borrower's Board of Directors authorizing the
execution and delivery of this Agreement, the Note, the Security Documents and
any other documents related to the Advances, and (b) such other supporting
documents as the Lender may reasonably request.
4.03. GOOD STANDING. The Lender shall have received for the Borrower, upon
the execution of this Agreement, Certificates of Good Standing from the New York
Secretary of State and Division of Taxation.
4.04. LEGAL MATTERS. All legal matters incident to the transactions hereby
contemplated shall be satisfactory to counsel for the Lender.
4.05. NO DEFAULT. No Default or Event of Default shall have occurred.
4.06. COMMITMENT LETTER. There shall be compliance with all terms of the
commitment letter of the Lender to the Borrower dated October 18, 1996, as
amended.
V. AFFIRMATIVE COVENANTS
------------------------
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The Borrower covenants and agrees that, from the date hereof and until
payment in full of the principal of, and interest on, the Note and any other
Indebtedness of the Borrower to the Lender, whether now existing or arising
hereafter, unless the Lender shall otherwise consent in writing, the Borrower
will:
5.01. MAINTENANCE OF PROPERTIES; INSURANCE. (a) Do or cause to be done all
things necessary to preserve, renew and keep in full force and effect its
rights, licenses, permits and franchises and comply with all laws and
regulations applicable to it; at all times maintain, preserve and protect all
franchises and trade names and preserve all the remainder of its property used
or useful in the conduct of its business and keep the same in good repair,
working order and condition, and from time to time, make, or cause to be made,
all needful and proper repairs, renewals, replacements, betterments and
improvements thereto, so that the business carried on in connection therewith
may be properly and advantageously conducted at all times; and maintain
insurance in accordance with the requirements of the Security Documents.
(b) Comply with all applicable laws and regulations, whether now in
effect or hereafter enacted or promulgated by any governmental authority having
jurisdiction over the property which is the subject of the Security Documents.
5.02. PAYMENT OF OBLIGATIONS AND TAXES. Pay and discharge or cause to be
paid and discharged all of its obligations and liabilities and all taxes,
assessments and governmental charges or levies imposed upon it or upon its
respective income and profits or upon any of its property, real, personal or
mixed, or upon any part thereof, before the same shall become in default, as
well as all lawful claims for labor, materials and supplies or otherwise, which,
if unpaid, might become a lien or charge upon such properties or any part
thereof; provided that the Borrower shall not be required to pay and discharge
or cause to be paid and discharged any such tax, assessment, charge, levy or
claim so long as the validity thereof shall be contested in good faith by
appropriate proceedings and it shall have set aside on its books adequate
reserves with respect to any such tax, assessment, charge, levy or claim, so
contested; and provided, further, that payment with respect to any such tax,
assessment, charge, levy or claim shall be made within ten (10) days after entry
of final judgment and before any of its property shall be seized or sold in
satisfaction thereof.
5.03. LEGAL PROCEEDINGS. Give prompt written notice to the Lender of any
proceedings instituted against it in any Federal or state court or before any
commission or other regulatory body, Federal, state or local, which, if
adversely determined, would have an adverse effect upon its business,
operations, properties, assets, or condition, financial or otherwise.
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<PAGE> 11
5.04. BOOKS, RECORDS AND REPORTS. At all times keep proper books of record
and accounts in which full, true and correct entries will be made of its
transactions in accordance with GAAP and in a manner satisfactory to the Lender.
The Borrower hereby authorizes the Lender to make or cause to be made, at the
Borrower's expense and in such reasonable manner and at such reasonable times as
the Lender may require inspections and audits of any books, records and papers
in the custody or control of the Borrower or others, relating to the Borrower's
financial or business conditions, including the making of copies thereof and
extracts therefrom.
5.05. FINANCIAL STATEMENTS. Furnish to the Lender:
(a) Within one hundred twenty (120) days of the end of each fiscal
year, consolidated audited balance sheets and statements of profit and loss and
retained earnings and cash flows, each prepared in accordance with GAAP,
consistently applied, in reasonable detail and certified without qualification
by independent certified public accountants selected by it and acceptable to the
Lender, the form of certification to be also satisfactory to the Lender, showing
its financial condition at the close of such fiscal year, and the results of
operations during such year.
(b) Within forty-five (45) days after the end of each quarter in each
such fiscal year, consolidated balance sheets and statements of profit and loss
and retained earnings, each prepared in reasonable detail in accordance with
GAAP, consistently applied, and consistent in format with the financial
statements furnished under the preceding subparagraph (a), certified by the
President or Chief Financial Officer of the Borrower and of each of the
Subsidiaries as fairly representing the consolidated financial position of the
Borrower and each of the Subsidiaries, such balance sheets to be as of the close
of such quarter and such other statements to be for the period from the
beginning of the then current fiscal year to the end of such quarter in each
case subject to audit and year-end adjustments.
(c) Within twenty (20) days after the end of each month during the
term of this Agreement, an aged analysis of all outstanding Receivables in form
and substance satisfactory to the Lender.
(d) Within twenty (20) days after the end of each month during the
term of this Agreement, a listing of the Contracts in Progress in form and
substance satisfactory to the Lender.
(e) Within twenty (20) days after the end of each month during the
term of this Agreement, a borrowing base certificate in form and substance
satisfactory to the Lender.
(f) Within thirty (30) days of the prior year's anniversary of
receipt, the
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personal financial statement of Burchett, in form and substance satisfactory to
the Lender.
(g) Promptly, from time to time, such other information regarding its
operations, assets, business, affairs and financial condition, as the Lender
may reasonably request.
5.06 ADVERSE CHANGES. Promptly advise the Lender of (a) all litigation and
proceedings affecting the Borrower in which the amount involved is Twenty-Five
Thousand Dollars ($25,000.00) or more and is not covered by insurance; (b) any
material adverse change in its condition, financial or otherwise, or (c) any
Default described in Article VI hereof or of the occurrence of any event which
upon notice or lapse of time or both would constitute such an Event of Default.
5.07. ACCOUNTING. Maintain a standard system of accounting in accordance
with GAAP.
5.08. DEPOSITORY/CASH MANAGEMENT ACCOUNT. Use the Lender as the principal
bank of account of the Borrower's funds. Further, establish a cash management
(target balance) account with the Lender.
5.09. ADDITIONAL INSTRUMENTS. Promptly execute and deliver or cause to be
executed and delivered to the Lender all such additional and/or supplemental
other instruments and documents from time to time as the Lender deems necessary
or appropriate for the performance of the Borrower's obligations under this
Agreement, so long as such additional instruments do not create any additional
liabilities or obligations of the Borrower.
5.10. SUBORDINATION OF DEBT. Subordinate all officer and shareholder debt
to each Advance, pledge all such debt to the Lender as security for the
Advances and not make any payments on account of such debt without the prior
written consent of the Lender.
5.11. FINANCIAL COVENANTS. Maintain (i) maximum debt to worth ratio, as
that ratio is determined by the Lender, of 3.0xl.0 as of December 31, 1996 and
thereafter for the term of this Agreement, which ratio shall be tested annually
as of the Borrower's fiscal year-end, (ii) minimum debt service coverage ratio,
as that ratio is determined by the Lender, of 1.25xl.0 as of December 31, 1996
and thereafter for the term of this Agreement, which ratio shall be tested
quarterly on a rolling four-quarters basis, (iii) maximum down-streaming from
the Borrower to any or all of the Subsidiaries of no more than One Hundred
Thousand Dollars ($100,000.00) in the aggregate, which amount shall be tested
annually at the Borrower's fiscal year-end.
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<PAGE> 13
VI. NEGATIVE COVENANTS
----------------------
The Borrower covenants and agrees that, until payment in full of the
principal of, and interest on, the Note and any other Indebtedness of the
Borrower to the Lender, whether now existing or arising hereafter, unless the
Lender shall otherwise consent in writing, it will not, directly or indirectly:
6.01. INDEBTEDNESS. Incur, create, assume, become or be liable in any
manner with respect to, or permit to exist, any Indebtedness, liability or lease
commitment, except upon such terms and conditions as may be mutually agreed upon
in advance by the Borrower and the Lender and except:
(a) Indebtedness under this Agreement and/or any of the Security
Documents and/or evidenced by the Note;
(b) Indebtedness with respect to trade obligations and other normal
accruals in the ordinary course of business not yet due and payable in
accordance with customary trade terms or with respect to which the Borrower is
contesting in good faith the amount or validity thereof by appropriate
proceedings and then only to the extent the Borrower has set aside on its books
adequate reserves therefor;
(c) Indebtedness described in the financial statements and existing on
the date hereof; provided that such Indebtedness is paid in accordance with its
stated terms without renewal, extension or modification;
(d) Other Indebtedness in the aggregate not in excess of Twenty-Five
Thousand Dollars ($25,000.00).
6.02. LIENS. Create, incur, make, assume or suffer to exist any assignment,
mortgage, pledge, lien, charge, security interest or other encumbrance of any
nature whatsoever on any of its property or assets, now or hereafter owned,
other than in favor of the Lender or other than:
(a) liens securing the payment of taxes, either not yet due or the
validity of which is being contested in good faith by appropriate proceedings,
and as to which there shall have been set aside on its books adequate reserves
or other provisions made in accordance with GAAP;
(b) liens securing the Note;
(c) the Permitted Encumbrances;
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<PAGE> 14
(d) liens imposed by law, such as carriers', warehousemen's and
mechanics' liens, bankers' set off rights and other similar liens arising in the
ordinary course of business for sums not yet due or being contested in good
faith and by appropriate proceedings diligently conducted and for which proper
reserve or other provision has been made in accordance with GAAP;
(e) liens arising in the ordinary course of business out of pledges or
deposits under worker's compensation laws, unemployment insurance, old age
pensions, or other social security or retirement benefits, or similar
legislation;
(f) liens incurred as purchase money liens or other liens of a
conditional vendor or refundings thereof on property acquired or held by the
Borrower to secure the purchase price of such property; provided that the liens
permitted by this clause (f) shall at all times be confined solely to the
property so purchased and shall secure Indebtedness which does not exceed the
lower of the fair market value on the date of purchase or the cost of the
property so purchased and that any such obligations shall not otherwise be
prohibited by the terms of this Agreement;
(g) liens arising from or upon any judgment or award, provided that
such judgment or award is being contested in good faith by proper appeal
proceedings and only so long as execution thereon shall be stayed;
(h) liens securing Indebtedness in the aggregate not in excess of
Twenty-Five Thousand Dollars ($25,000.00).
6.03. FUNDAMENTAL CHANGES. Dissolve, liquidate, consolidate with, or merge
with, or otherwise acquire all or substantially all of the assets or properties
of, any other corporation, or make any substantial change in its executive
management, or permit any change in its ownership, or engage, directly or
indirectly, in any business substantially different from the business now being
conducted.
6.04. DIVIDENDS. Declare or pay any dividends, or make any distribution of
cash or property, or both, to holders of shares of its capital stock, or
directly or indirectly, redeem, purchase or otherwise acquire for consideration,
any shares of its capital stock, of any class.
6.05. ACCELERATION OF OTHER INDEBTEDNESS. Accelerate the maturity of any
Indebtedness now or hereafter outstanding to any other bank, supplier, or other
third party, or repay the same otherwise than in accordance with its regular
amortization.
6.06. TRANSFER OF INTERESTS. Permit the direct or indirect transfer of any
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interest in the Borrower by any of its present shareholders or the direct or
indirect dilution of the percentage interest in the Borrower currently held by
any present shareholder without the prior written consent of the Lender.
VII. DEFAULTS AND REMEDIES
--------------------------
7.01. EVENTS OF DEFAULT. The following shall constitute Events of Default:
(a) any representation or warranty made herein, or in any report,
certificate, financial statement or other instrument furnished in connection
with this Agreement, or the borrowing hereunder, shall prove to be false or
misleading in any material respect on or as of the date made or deemed made;
(b) default in the payment of any installment of the principal of,
or fees or interest on, the Note after the date when the same shall become due
and payable, whether at the due date thereof or at a date fixed for prepayment
or by acceleration or otherwise;
(c) default, after the expiration of any applicable grace periods,
in the payment of any installment of the principal of, or fees or interest on,
any other Indebtedness of the Borrower to the Lender after the date when the
same shall become due and payable;
(d) default in the due observance or performance of any covenant,
condition or agreement contained in Articles III, IV, V or VI hereof, in the
Note (other than payment) or in the Security Documents, and the continuance of
such default for a period of five (5) business days after the date of
notification from Lender to borrower in writing that such performance or
observance was due;
(e) default in the due observance or performance of any other
covenant, condition or agreement, on the part of the Borrower to be observed or
performed pursuant to the terms hereof, and the continuance of such default for
a period of five (5) business days after the date of notification from Lender
to borrower in writing that such performance or observance was due;
(f) default, after the expiration of any applicable grace periods,
in the due observance or performance of any covenant, promise or provision
contained in any other agreement of the Borrower in favor of the Lender,
including without limitation, any other loan agreement, mortgage deed or
security document;
(g) default with respect to any evidence of Indebtedness of the
Borrower (other than the Note), if the effect of such default is to accelerate
the maturity of such Indebtedness or to permit the holder thereof to cause such
Indebtedness to
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become due prior to the stated maturity thereof, or if any Indebtedness of the
Borrower is not paid, when due and payable, whether at the due date thereof or a
date fixed for prepayment or otherwise;
(h) the Borrower shall (i) apply for or consent to the appointment
of a receiver, trustee or liquidator of it or any of its property, (ii) admit in
writing inability to pay its debts as they mature, (iii) make a general
assignment for the benefit of creditors, (iv) be adjudicated a bankrupt or
insolvent or (v) file a voluntary petition in bankruptcy, or a petition or an
answer seeking reorganization or an arrangement with creditors or to take
advantage of any bankruptcy, reorganization, insolvency, readjustment of debt,
dissolution or liquidation law or statute, or an answer admitting the material
allegations of a petition filed against it in any proceeding under any such law
or if corporate action shall be taken for the purpose of effecting any of the
foregoing;
(i) an order, judgment or decree shall be entered, without the
application, approval or consent of the Borrower by any court of competent
jurisdiction, approving a petition seeking reorganization of the Borrower or
appointing a receiver, trustee or liquidator of the Borrower or of all or a
substantial part of the assets of the Borrower, provided, however, with respect
to such involuntary proceedings, the Borrower shall have thirty (30) days from
the date of such order, judgment or decree to discharge the same;
(j) final judgment for the payment of money in excess of an
aggregate of Ten Thousand Dollars ($10,000.00) shall be rendered against the
Borrower and the same shall remain undischarged for a period of thirty (30)
consecutive days, during which execution shall not be effectively stayed;
(k) the occurrence of any attachment of any deposits or other
property of the Borrower in the hands or possession of the Lender, or the
occurrence of any attachment of any other property of the Borrower in an amount
exceeding Ten Thousand Dollars ($10,000.00) which shall not be discharged within
thirty (30) days of the date of such attachment;
(1) any Event of Default shall occur and be continuing under the
Guaranty;
(m) loss, theft, damage or destruction of any material portion of
the Collateral for which there is either no insurance coverage or for which, in
the opinion of the Lender, there is insufficient insurance coverage;
(n) the occurrence of any adverse change described in Section 5.06
hereof; or
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(o) the Security Documents shall at any time after their execution
and delivery and for any reason cease (i) to create a valid and perfected
mortgage and/or security interest in and to the property purported to be the
subject thereof and/or in the priority agreed to by the parties thereto; or (ii)
to be in full force and effect or shall be declared null and void, or the
validity or enforceability thereof shall be contested by the Borrower, or the
Borrower shall deny it has any further liability or obligation under the
Security Documents.
7.02. ACCELERATION. Upon the occurrence of any such Event of Default and at
any time thereafter during the continuance of such Event of Default, the Lender
may, by written notice to the Borrower, declare the entire principal amount of
the Note, and any and all other Indebtedness of the Borrower to the Lender,
forthwith to be due and payable, whereupon the Note and/or such other
Indebtedness shall become forthwith due and payable, both as to principal and
interest, without presentment, demand, protest or notice of any kind, all of
which are hereby expressly waived, anything contained herein or in the Note or
other evidence of such Indebtedness to the contrary notwithstanding and any
obligation of the Lender to extend further credit pursuant to any of the terms
hereof shall immediately terminate.
7.03. SET-OFF. The Borrower hereby grants to the Lender the right at any
time after the occurrence of an Event of Default to set off or otherwise apply
by the Lender against the payment of all amounts owing in respect to this
Agreement or of any other liabilities, Obligations and Indebtedness of the
Borrower, or any part thereof, whether or not due, in such order as it shall
determine, all tangible and intangible personal property, credits, accounts,
claims and balances of whatever nature of the Borrower at any time in the
possession or control of or owing by the Lender or its agents (remittances and
property to be deemed in possession of the Lender as soon as put in transit to
it) including, without limitation, any balances on deposit in any account of the
Borrower.
7.04. OTHER REMEDIES. The Lender may look to, utilize, and realize upon any
item or portion of any security held by it hereunder or under the Security
Documents, or other instrument securing the Advances or any other Indebtedness,
liabilities, or Obligations of the Borrower to the Lender, whether now existing
or hereafter contracted or acquired, in any order it may elect without
obligation to equalize the burden between or among the separate items of
security or portions thereof or between or among the owners thereof, or to
marshal the same in any way, and the Lender may apply any proceeds of any
security in such order as it shall determine, and after all Indebtedness,
liabilities, and Obligations now or hereafter of the Borrower to the Lender have
been paid in full, the Lender shall account for any security then remaining or
any surplus proceeds of any security
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then remaining to the owner of such security.
VIII. MISCELLANEOUS
-------------------
8.01. SURVIVAL OF REPRESENTATIONS. This Agreement and all covenants,
agreements, representations and warranties made herein and in the certificates
delivered pursuant hereto, shall survive the making by the Lender of the
Advances, the execution and delivery to the Lender of the Note and the Security
Documents, and shall continue in full force and effect so long as the Note and
any other Indebtedness of the Borrower to the Lender is outstanding and unpaid.
8.02. SUCCESSORS AND ASSIGNS. Whenever in this Agreement any of the parties
hereto is referred to, such reference shall be deemed to include the successors
and assigns of such party; and all covenants, promises and agreements in this
Agreement contained, by or in behalf of the Borrower shall inure to the benefit
of the respective successors and assigns of the Lender, provided that the
Borrower may not transfer or assign any of its respective rights hereunder
without the prior written consent of the Lender.
8.03. LENDER'S EXPENSES/FEES/ANNUAL RENEWAL FEES. The Borrower will
reimburse the Lender upon demand for all out-of-pocket costs, charges and
expenses of the Lender (including reasonable fees and disbursements of counsel
to the Lender) in connection with (i) the preparation, execution and delivery of
this Agreement, the Note, the Security Documents and any other agreements
hereunder, (ii) any amendments, modifications, consents, or waivers in respect
thereof, (iii any enforcement thereof and (iv) any enforcement of the Lender's
rights with respect to, or the administration, supervision, preservation,
protection of, or realization upon, any property securing the Note and/or this
Agreement. Further, pursuant to this Section and simultaneous with the execution
hereof, Borrower shall tender Lender in cash or certified funds One Thousand
Dollars ($1,000.00) pursuant to the terms of the commitment letter between the
Borrower and Lender, and an annual renewal fee on January 1st of each year
during the term hereof of Two Hundred Fifty Dollars ($250.00).
8.04. GOVERNING LAW. This Agreement, the Note and the Security Documents
(unless otherwise specified therein) shall be construed in accordance with and
governed by the internal laws (and not the law of conflicts) of the State of
Rhode Island.
8.05. NO WAIVER. No modification or waiver of any provision of this
Agreement or the Note nor consent to any departure by the Borrower therefrom,
shall in any event be effective unless the same shall be in writing, and then
such waiver or consent shall be effective only in the specific instance, and for
the
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purpose, for which given. No notice to, or demand on, the Borrower, in any case,
shall entitle the Borrower to any other or future notice or demand in the same,
similar or other circumstances. Neither any failure nor delay on the part of the
Lender in exercising any right, power or privilege hereunder, or under the Note,
or any other instrument given as security therefor, shall operate as a waiver
thereof, nor shall a single or partial exercise thereof preclude any other or
future exercise, or the exercise of any other right, power or privilege.
8.06. CAPTIONS. The captions and other headings contained in this Agreement
are for reference only and shall not affect the meaning or interpretation of
this Agreement.
8.07. NOTICES. All communications provided for hereunder shall be in
writing, sent by U.S. Mail, postage prepaid, to the respective parties at the
addresses set forth below:
If to the Lender: Fleet National Bank
111 Westminster Street
Providence, Rhode Island 02903
Attention: Anthony A. Botelho,
Vice President
With a copy to: William J. Delaney, Esquire
Roberts, Carroll, Feldstein &
Peirce Incorporated
10 Weybosset Street
Providence, Rhode Island 02903
If to the Borrower: Hanover Capital Partners, Ltd.
90 West Street
New York, New York 10006
Attention: John A. Burchett,
President
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With a copy to: Charles A. Wry, Jr., Esq.
Morse Barnes-Brown &
Pendleton, P.C.
Reservoir Place
1601 Trapelo Road
Waltham, MA 02154
Each party by notice duly given in accordance herewith may specify a different
address for the purposes hereof.
8.08. MAXIMUM PAYMENTS. Notwithstanding any other terms or conditions
hereof, in no event shall the amount paid or agreed to be paid to the Lender
hereunder exceed the maximum permissible under applicable law. If, for any
reason, fulfillment of any obligation of Borrower shall involve the exceeding of
such maximum, then such obligation, automatically and without action or notice
by Lender, shall be reduced to such maximum valid amount and any amount received
by Lender in excess thereof shall be applied to the reduction of principal
outstanding and not to interest.
8.09. JURISDICTION. The Borrower, to the extent that it may lawfully do so,
hereby consents to the jurisdiction of the courts of the State of Rhode Island
and the United States District Court for the District of Rhode Island as well as
to the jurisdiction of all courts from which an appeal may be taken from such
courts, for the purpose of any suit, action or other proceeding arising out of
any of its obligations arising hereunder or with respect to the transactions
contemplated hereby, and expressly waives any and all objections it may have as
to venue in any of such courts.
8.10. SEVERABILITY. Any provision of this Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof or affecting the validity or enforceability of such
provision in any other jurisdiction.
8.11. GENDER. Words of the masculine gender shall mean and include
correlative words of the feminine and neuter genders and words importing the
singular number shall mean and include the plural number and vice versa.
8.12. ARM'S-LENGTH TRANSACTION. The Borrower recognizes, stipulates and
agrees that the Lender's actions and relationships with the parties hereto,
including,
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<PAGE> 21
but not limited to, those relationships created or referenced by or in this
Agreement, the Note and the Security Documents, have been and constitute arm's-
length commercial transactions and that such actions and relationships shall at
all times in the future continue to constitute arm's-length commercial
transactions and that the Lender or the Lender's attorneys shall not at any time
act, be obligated to act, or otherwise be construed or interpreted as acting as
or being the agent, attorney, partner, employee or fiduciary of any such
parties.
8.13. NEGOTIATIONS. The Borrower stipulates and agrees that neither the
Lender nor any other party has exerted or attempted to induce, through threats
or otherwise, the execution or delivery of this Agreement, the Note or the
Security Documents. Without in any way limiting the foregoing, the Borrower
stipulates and agrees that at all times during the course of the negotiations
surrounding the execution and delivery of this Agreement, the Note and the
Security Documents, it has, to the extent deemed necessary or advisable in its
sole discretion, been advised and assisted by competent counsel of its own
choosing, that counsel has been present and actively participated in the
negotiations surrounding this Agreement, the Note and the Security Documents,
and that it has been fully advised by counsel of its choosing of the effect of
each term, condition, provision and stipulation contained herein and therein.
8.14. NO OFFER. Neither the negotiations to date nor the preparation of
this Agreement, the Note or the Security Documents shall be deemed an offer by
any of the parties to the other. No such instrument, document or agreement shall
be deemed binding on any party until such party has executed and delivered the
same in writing.
8.15. AGREEMENTS RELATING TO CONSIDERATION. The Borrower hereby
acknowledges and agrees that the covenants and agreements of the Lender under
this Agreement constitute full and fair consideration for the obligations,
covenants and agreements of the Borrower under this Agreement and that, by
virtue of such consideration, the Borrower has received reasonably equivalent
value in exchange for the covenants and agreements hereunder and thereunder.
8.16. NO JOINT VENTURE. Notwithstanding anything to the contrary contained
herein, in the Note and/or in the Security Documents, the Lender, by entering
into this Agreement with the Borrower, will not be deemed a partner or joint
venturer with the Borrower and the Borrower agrees to hold the Lender harmless
from any damages and expenses resulting from such construction of the
relationship of the parties or any exertion thereof.
8.17. INTEGRATION. This Agreement and the Security Documents contain the
entire agreement between the parties relating to the subject matter hereof and
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<PAGE> 22
thereof and supercede all oral statements and prior writings with respect
thereto.
8.18. JURY WAIVER. Each party to this Agreement hereby expressly WAIVES ANY
RIGHT TO TRIAL BY JURY of any claim, demand, action or cause of action (a)
arising under this Agreement or any other instrument, document or agreement
executed or delivered in connection herewith, (b) in any way connected with or
incidental to the dealings of the parties hereto or any of them with respect to
this Agreement or any other instrument, document or agreement executed or
delivered in connection herewith, or the transactions related hereto or thereto,
in each case whether now existing or hereafter arising and whether sounding in
contract or tort or otherwise; AND EACH PARTY HEREBY AGREES AND CONSENTS THAT
ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY A COURT
TRIAL WITHOUT A JURY AND THAT ANY PARTY TO THIS AGREEMENT MAY FILE AN ORIGINAL
COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE
CONSENT OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.
IN WITNESS WHEREOF, the Borrower and the Lender have caused this
Agreement to be duly executed all as of the day and year first above written.
WITNESS: Hanover Capital Partners, Ltd.
/s/ ????????????? By: /s/ John A. Burchett
- ---------------------------- ------------------------------
Title President
Fleet National Bank
By: /s/ Anthony A. Botelho
------------------------------
Anthony A. Botelho
Vice President
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<PAGE> 23
SECURITY AGREEMENT
------------------
THIS SECURITY AGREEMENT ("Agreement"), dated as of December 10th, 1996
("Date of Agreement"), is entered into by and between FLEET NATIONAL BANK, a
national banking association ("Secured Party"), the office of which is located
at 111 Westminster Street, Providence, Rhode Island 02903 ("Secured Perry's
Address") , and HANOVER CAPITAL PARTNERS, LTD. ("Debtor"), with an office
located at 90 West Street, New York, New York 10066 ("Debtor's Address").
In consideration of any loans made or to be made by Secured Party to Debtor
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties agree as follows:
1. DEFINITIONS
-----------
1.1 "Collateral" means:
1.1 (a) Receivables, Inventory and Equipment (all as
hereinafter defined);
1.1(b) All ledger sheets, files, records, documents and
instruments (including, without limitation, computer programs, tapes and related
electronic data processing software) evidencing an interest in or relating to
the other Collateral;
1.1(c) All instruments, documents, securities, cash,
property and the proceeds of any of the foregoing, now owned or hereafter
acquired by Debtor or in which Debtor now has or may hereafter acquire an
interest, which now or hereafter are at any time in possession or control of
Secured Party or in transit by mail or carrier to or from Secured Party or in
the possession of any third party acting on behalf of Secured Party, without
regard to whether Secured Party received the same in pledge, for safekeeping, as
agent for collection or transmission or otherwise or whether Secured Party had
conditionally released the same; and
1.1(d) Any and all municipal, state or federal licenses and
permits on which Debtor now is or may hereafter be named or in which Debtor now
has or may hereafter have an interest.
1.2 "Equipment" means all machinery and equipment and
furniture and fixtures of Debtor including automotive equipment now owned or
hereafter acquired by Debtor, and used or acquired
<PAGE> 24
for use in the business of Debtor, together with all accessions thereto and all
substitutions and replacements thereof and parts therefor; all cash and non-cash
proceeds.
1.3 "Event of Default" means the occurrence of an Event of
Default under this Agreement, a loan agreement of even date herewith between
Debtor and the Secured Party, as the same may be amended and/or restated from
time to time ("Loan Agreement") and all of those documents executed in
connection therewith (collectively, the "Documents").
1.4 "Inventory" means all goods, merchandise and other
personal property now owned or hereafter acquired by Debtor which are held for
sale or lease, or are furnished or to be furnished under any contract of service
or are raw materials, work-in-process, supplies or materials used or consumed in
Debtor's business, and all products thereof, and all substitutions,
replacements, additions or accessions therefor and thereto; all cash or non-cash
proceeds of all of the foregoing, including insurance proceeds.
1.5 "Obligations" means all indebtedness, obligations and
liabilities of Debtor to Secured Party of every kind and description, direct or
indirect, secured or unsecured, joint or several, absolute or contingent, due or
to become due, whether for payment or performance, now existing or hereafter
arising, regardless of how the same arise or by what instrument, agreement or
book account they may be evidenced, or whether evidenced by any instrument,
agreement or book account including, without limitation, those referenced in the
Loan Agreement and/or the Documents, all loans (including any loan by renewal,
modification or extension), all indebtedness, all undertakings to take or
refrain from taking any action, all indebtedness, liabilities or obligations
owing from Debtor to others which Secured Party may have obtained by purchase,
negotiation, discount, assignment or otherwise, and all interest, taxes, fees,
charges, expenses and attorneys' fees chargeable to Debtor or incurred by
Secured Party under this Agreement, or any other document or instrument
delivered in connection herewith.
1.6 "Receivables" means all accounts, contract rights
(excluding non-assignable governmental contracts arising in connection with the
business of Debtor), instruments, documents, chattel paper, general intangibles
(including, without limitation, choses in action, tax refunds, insurance
proceeds and the name and any trade names of Debtor); any other obligations or
indebtedness owed to Debtor from whatever source arising; all rights of Debtor
to receive any payments in money or kind; all guarantees of Receivables and
security therefor; all cash or non-cash proceeds of all of the foregoing; all of
the right, title and interest of Debtor in and with respect to the goods,
services or other property which gave rise to or which secure any of the
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<PAGE> 25
Receivables and insurance policies and proceeds relating thereto, and all of the
rights of Debtor as an unpaid seller of goods or services, including, without
limitation, the rights of stoppage in transit, replevin, reclamation and resale,
and all of the foregoing, whether now existing or hereafter created or acquired.
To the extent not defined in this Section 1, unless the context otherwise
requires, all other terms contained in this Agreement shall have the meanings
attributed to them by Article 9 of the Uniform Commercial Code in force in the
State of Rhode Island on the Date of Agreement, to the extent the same are used
or defined therein.
2. REPRESENTATIONS AND WARRANTIES
------------------------------
Debtor represents and warrants to Secured Party, and such
representations and warranties shall survive and shall be deemed to be
continuing representations and warranties so long as any Obligations shall
remain outstanding, as follows:
2.1 Debtor is in good standing and is duly qualified under the laws of
those jurisdictions where the conduct of its business or the ownership of its
properties requires qualification; Debtor has the power and authority to own the
Collateral, to enter into and perform this Agreement and any other document or
instrument delivered in connection herewith and to incur the Obligations.
2.2 Debtor utilizes no trade names in the conduct of its business,
except as set forth in Section 10 of this Agreement; has not acquired any
business, or changed the location of its chief place of business or main office
or the location of its records with respect to Receivables or the location of
any returns of the Inventory; or changed the location of any of the Inventory;
or changed the location of the Equipment; except as set forth in Section 10
hereof.
2.3 The execution and performance of this Agreement and any other
document or instrument delivered in connection herewith will not result in the
creation or imposition of any lien or encumbrance upon any of the Collateral
(immediately, with the passage of time, or with the giving of notice and the
passage of time), except in favor of Secured Party pursuant hereto.
2.4 This Agreement and any document or instrument delivered in
connection herewith and the transactions contemplated hereby or thereby have
been duly authorized, and/or executed and delivered, as appropriate; and this
Agreement and such other documents and instruments constitute valid and legally
binding obligations of Debtor and are enforceable against Debtor in accordance
with their respective terms.
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<PAGE> 26
2.5 Debtor is the owner of the Collateral free and clear of all
security interests, encumbrances or liens, except liens which arise by operation
of law with respect to obligations of Debtor which are not yet due and payable
and except as may be specifically set forth in Section 10 hereof; and Debtor
will defend the Collateral against all claims and demands of all persons at any
time claiming an interest therein.
2.6 Debtor has filed all federal, state and local tax returns and
other reports it is required to file and has paid or made adequate provision
for payment of all such taxes, assessments and other governmental charges.
2.7 No representation, warranty or statement by Debtor contained
herein or in any certificate or other document furnished or to be furnished by
Debtor pursuant hereto contains or at the time of delivery shall contain any
untrue statement of material fact, or omits, or shall omit at the time of
delivery, to state a material fact necessary to make it not misleading.
3. FURTHER SPECIFIC REPRESENTATIONS, WARRANTIES AND COVENANTS
----------------------------------------------------------
Debtor hereby further represents and warrants to and covenants with
Secured Party, as follows:
3.1 With respect to Inventory:
3.1.1 All Inventory is in possession of Debtor at Debtor's
Address and/or all of Debtor's job sites, either existing or hereafter arising,
and all records of Debtor pertaining thereto are kept at Debtor's Address,
except as set forth in Section 10 hereof, and Debtor shall notify Secured Party
in writing no later than thirty (30) days prior to any change of any location
where the Inventory is or may be kept.
3.1.2 Debtor shall not sell, lease or otherwise transfer any
interest in the Inventory except that Debtor may, until an Event of Default
occurs, hold, process, sell, use or consume Inventory in the ordinary course of
Debtor's business, excluding, however, any sale or transfer made in partial or
total satisfaction of a debt.
3.1.3 Debtor shall keep current stock, cost and sales
records of the Inventory, accurately itemizing and describing the types and
quantities of Inventory, and the cost and selling price thereof and all books,
records and documents relating to the Inventory are and will be genuine,
complete and correct.
3.1.4 None of the Inventory is, or at any time or times
hereafter will be, stored with a bailee (including, without
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<PAGE> 27
limitation, a public warehouseman) without the prior written consent of Secured
Party.
3.1.5 Debtor shall, at Secured Party's request, deliver to
Secured Party any and all evidence of ownership of, certificates of title to, or
other documents evidencing any interest in any and all of the Inventory.
3.2 With respect to Equipment:
3.2.1 The Equipment is in the possession of Debtor at
Debtor's Address or at the location(s) set forth in Section 10 hereof and that
said location(s), if not owned by Debtor, are leased by Debtor as set forth in
Section 10; if Equipment is or shall be affixed to any real estate, including
any buildings owned or leased by Debtor or used by Debtor in the operation of
its business, Debtor shall provide Secured Party with disclaimers and waivers
necessary to make the security interest in the Equipment valid against Debtor
and other persons holding an interest in such real estate.
3.2.2 Debtor shall keep and maintain all Equipment in good
operating condition and repair, make all necessary repairs thereto and
replacement of parts thereof so that the value and operating efficiency thereof
shall at all times be maintained and preserved; and Debtor shall keep complete
and accurate books and records with respect to the Equipment, including
maintenance records.
3.2.3 Debtor shall not, without the prior written consent of
Secured Party, sell, offer to sell, lease or in any other manner dispose of any
Equipment in excess of Ten Thousand Dollars ($10,000.00).
3.2.4 Debtor shall notify Secured Party in writing no later
than thirty (30) days prior to any change of any location where the Equipment is
or may be kept.
3.2.5 Debtor owns no motor vehicle except as disclosed in
Section 10 and each such motor vehicle is registered in the jurisdiction in
which it is required to be registered.
3.3 With respect to Receivables:
3.3.1 The location of the Debtor's main office where the
person directly responsible for the Receivables ("Main Office") may be found is
Debtor's Address. Debtor has no other places of business except as set forth in
Section 10 hereof. All records pertaining to the Receivables (including computer
records) and all returns of Inventory are kept at Debtor's Address, except as
set forth in Section 10 hereof; and Debtor will notify Secured Party, no later
than thirty (30) days prior
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<PAGE> 28
to any change in address of the Main Office or chief place of business of Debtor
or of the change of the location where records pertaining to Receivables or
returns of Inventory are kept.
3.3.2 All books, records and documents relating to any of
the Receivables (including computer records) are and will be genuine and in all
respects what they purport to be and the amount of each of the Receivables shown
on the books and records of Debtor is and will be the correct amount actually
owing or to be owing at maturity of such of the Receivables.
3.3.3 Until Secured Party directs otherwise, Debtor shall
collect the Receivables, subject to the direction and control of Secured Party
at all times. Any proceeds of Receivables collected by Debtor shall not be
commingled with other funds of Debtor and shall, upon the request of Secured
Party, be immediately delivered to Secured Party in the form received, except
for necessary endorsements to permit collection; Secured Party may, in its sole
discretion, allow Debtor to use such funds to such extent and for such periods,
if any, as Secured Party elects.
3.3.4 Debtor shall notify Secured Party if any Receivables
arise out of contracts with the United States or any department, agency or
instrumentality thereof, and Debtor shall execute any instruments and take any
steps to perfect the assignment of the rights of Debtor to Secured Party as
required under the Federal Assignment of Claims Act or any similar act or
regulation.
3.3.5 Debtor shall provide Secured Party, at its request,
from time to time with: confirmatory assignment schedules; copies of all
invoices relating to the Receivables, evidence of shipment or delivery of
Inventory; and such further information and/or schedules as Secured Party may
reasonably require, all in a form satisfactory to Secured Party.
4. GRANT OF SECURITY INTEREST
--------------------------
To secure the payment and performance of the Obligations, Debtor
hereby pledges, assigns and transfers to Secured Party, and grants to Secured
Party, a valid first lien of record and a first continuing security interest in
and to all of the Collateral.
5. GENERAL COVENANTS
-----------------
Debtor covenants and agrees that so long as any Obligations remain
outstanding Debtor shall:
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<PAGE> 29
5.1 Not mortgage, pledge, grant or permit to exist a security interest
in, or lien or encumbrance upon, any of the collateral except in favor of
Secured Party;
5.2 Permit Secured Party, through its authorized attorneys,
accountants and representatives, to inspect and examine the Collateral and the
books, accounts, records, ledgers and assets of every kind and description of
Debtor with respect thereto at all reasonable times;
5.3 Promptly notify Secured Party of any condition or event which
constitutes, or would constitute with the passage of time or giving of notice or
both, an Event of Default under this Agreement, and promptly inform Secured
Party of any events or change in the financial condition of Debtor occurring
since the date of the last financial statements of Debtor delivered to Secured
Party, which individually or cumulatively when viewed in light of prior
financial statements, may result in a material adverse change in the financial
condition of Debtor;
5.4 Remain in good standing in the jurisdiction qualified to do
business and in those jurisdictions where Debtor is required to be qualified;
5.5 If Debtor shall now or hereafter maintain an employee benefit plan
covered by Section 4021(a) of the Employee Retirement Income Security Act of
1974 (hereinafter referred to as "ERISA") relating to plan termination
insurance, promptly: (a) notify Secured Party of the filing of notice with the
Pension Benefit Guaranty Corporation (hereinafter referred to as the "PBGC")
pursuant to Section 4041 of ERISA that the plan is to be terminated; and (b)
notify Secured Party of the institution of proceedings by the PBGC under Section
4042 of ERISA;
5.6 Pay or deposit promptly when due all sales, use, excise, personal
property, income, withholding, corporate, franchise and other taxes, assessments
and governmental charges upon or relating to its ownership or use of any of the
Collateral and submit to Secured Party proof satisfactory to Secured Party that
such payments and/or deposits have been made;
5.7 At any time and from time to time upon request of Secured Party,
execute and deliver to Secured Party, in form and substance satisfactory to
Secured Party, such documents as Secured Party shall deem reasonably necessary
or reasonably desirable to perfect or maintain perfected the security interest
of Secured Party in the Collateral or which may be necessary to comply with the
provisions of the law of the State of Rhode Island or the law of any other
jurisdiction in which Debtor may then be conducting business or in which any of
the Collateral may be located; and
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<PAGE> 30
5.8 Maintain casualty insurance coverage on the Collateral in such
amounts and of such types as may be reasonably requested by Secured Party, and
in any event, as are ordinarily carried by similar businesses; and, in the case
of all policies insuring property in which Secured Party shall have a security
interest of any kind whatsoever, all such insurance policies shall provide that
the proceeds thereof shall be payable to Debtor and Secured Party, as their
respective interests may appear. Debtor has a right of free choice of agent and
insurer through or by which such insurance is to be placed, subject only to the
requirements that insurer be authorized to do business in each state where the
Collateral is located and have a licensed resident agent therein and that such
insurer's financial condition is reasonably satisfactory to Secured Party. All
said policies or certificates thereof, including all endorsements thereof and
those required hereunder, shall be deposited with Secured Party; and such
policies shall contain provisions that no such insurance may be canceled or
decreased without thirty (30) days prior written notice to Secured Party; and,
in the event of acquisition of additional insurable Collateral, Debtor shall
cause such insurance coverage to be increased or amended in such manner and to
such extent as prudent business judgment would dictate. If Debtor shall at any
time or times hereafter fail to obtain and/or maintain any of the policies of
insurance required herein, or fail to pay any premium in whole or in part
relating to any such policies, Secured Party may, but shall not be obligated to,
obtain and/or cause to be maintained insurance coverage with respect to the
Collateral, including, at Secured Party's option, the coverage provided by all
or any of the policies of Debtor and pay all or any part of the premium
therefor, without waiving any Event of Default by Debtor, and any sums so
disbursed by Secured Party shall be additional obligations of Debtor to Secured
Party payable on demand. Secured Party shall have the right to settle and
compromise any and all claims under any of the policies required to be
maintained by Debtor hereunder and Debtor hereby appoints Secured Party as its
attorney-in-fact, with power to demand, receive and receipt for all monies
payable thereunder, to execute in the name of Debtor or Secured Party or both
any proof of loss, notice, draft or other instruments in connection with such
policies or any loss thereunder and generally to do and perform any and all acts
as Debtor, but for this appointment, might or could perform.
6. EVENT OF DEFAULT AND ACCELERATION
---------------------------------
If any Event of Default shall occur hereunder or under the Loan
Agreement or the Documents or both, then or at any time thereafter, the Secured
Party may, at the Secured Party's sole discretion, declare all Obligations to be
due and payable in full, without notice, protest, presentment or demand, all of
which are hereby expressly waived by Debtor.
8
<PAGE> 31
7. RIGHTS AND REMEDIES
-------------------
Secured Party shall have, by way of example and not of limitation, all
of the rights and remedies enumerated herein after the occurrence of an Event of
Default:
7.1 Secured Party, and any officer or agent of Secured Party is hereby
constituted and appointed as true and lawful attorney-in-fact of Debtor with
power: (i) to notify or require Debtor to notify any and all account debtors or
parties against which Debtor has a claim that the Receivables have been assigned
to Secured Party and/or that Secured Party has a security interest therein and
that all payments should be made to Secured Party; (ii) to endorse the name of
Debtor upon any instruments of payment (including payments made under any policy
of insurance) that may come into possession of Secured Party in full or part
payment of any amount owing to Secured Party; (iii) to sign and endorse the name
of Debtor upon any invoice, freight or express bill, bill of lading, storage or
warehouse receipt, drafts against account debtors or other obligors and to sign
and endorse the name of Debtor on any assignments, verifications and notices in
connection with Receivables, and any instrument or document relating thereto or
to rights of Debtor therein; (iv) to notify the post office authorities to
change the address for delivery of mail of Debtor to an address designated by
Secured Party and to receive, open and dispose of all mail addressed to Debtor;
(v) to send requests for verification to account debtors or other obligors; and
(vi) to sell, assign, sue for, collect or compromise payment of all or any part
of the Collateral in the name of Debtor or in its own name, or make any other
disposition of Collateral, or any part thereof, which disposition may be for
cash, credit or any combination thereof, and Secured Party may purchase all or
any part of the Collateral at public or, if permitted by law, private sale, and
in lieu of actual payment of such purchase price, may set-off the amount of such
price against the Obligations; granting to Secured Party, as the
attorney-in-fact of Debtor, full power of substitution and full power to do any
and all things necessary to be done in and about the premises as fully and
effectually as Debtor might or could do but for this appointment, and hereby
ratifying all that said attorney-in-fact shall lawfully do or cause to be done
by virtue hereof. Neither Secured Party nor its agents shall be liable for any
acts or omissions or for any error of judgment or mistake of fact or law in its
capacity as such attorney-in-fact. This power of attorney is coupled with an
interest and shall be irrevocable so long as any Obligations shall remain
outstanding.
7.2 Secured Party shall have the right to enter and/or remain upon the
premises of Debtor, without any obligation to pay rent to Debtor or others, or
any other place or places where any of the Collateral is located and kept and:
(a) remove Collateral therefrom to the premises of Secured Party or agent of
Secured
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<PAGE> 32
Party, for such time as Secured Party may desire, in order to maintain, collect,
sell and/or liquidate the Collateral; or (b) use such premises, together with
materials, supplies, books and records of Debtor, to maintain possession and/or
the condition of the Collateral, and to prepare the Collateral for selling,
liquidating or collecting. Secured Party may require Debtor to assemble the
Collateral and make it available to Secured Party at a place to be designated by
Secured Party which is reasonably convenient to both parties.
7.3 Secured Party shall have the right to set-off, without notice to
Debtor, any and all deposits or other sums at any time or times credited by or
due from Secured Party to Debtor, whether in a special account or other account
or represented by a certificate of deposit (whether or not matured) which
deposits and other sums shall at all times constitute additional security for
the Obligations.
7.4 Secured Party shall have, in addition to any other rights and
remedies contained in this Agreement, and any other agreements, guarantees,
notes, instruments and documents heretofore, now or at any time or times
hereafter executed by Debtor and delivered to Secured Party, all of the rights
and remedies of a secured party under the Uniform Commercial Code in force in
the State of Rhode Island, all of which rights and remedies shall be cumulative,
and none exclusive, to the extent permitted by law.
7.5 Any notice required to be given by Secured Party of a sale or
other disposition or other intended action by Secured Party with respect to any
of the Collateral, or otherwise, made in accordance with the terms of this
Agreement at least five (5) days prior to such proposed action, shall constitute
fair and reasonable notice to Debtor of any such action. In the event that any
of the Collateral is used in conjunction with any real estate, the sale of the
Collateral in conjunction with and as one parcel with any such real estate shall
be deemed to be a commercially reasonable manner of sale. The net proceeds
realized by Secured Party upon any such sale or other disposition, after
deduction of the expenses of retaking, holding, preparing for sale, selling or
the like and reasonable attorneys' fees and any other expenses incurred by
Secured Party, shall be applied toward satisfaction of the Obligations
hereunder. Secured Party shall account to Debtor for any surplus realized upon
such sale or other disposition and Debtor shall remain liable for any
deficiency. The commencement of any action, legal or equitable, shall not affect
the security interest of Secured Party in the Collateral until the Obligations
hereunder or any judgment therefor are fully paid.
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<PAGE> 33
8. GENERAL PROVISIONS
------------------
8.1 The failure of Secured Party at any time or times hereafter to
require strict performance by Debtor of any of the provisions, warranties, terms
and conditions contained in this Agreement or in any other agreement, guaranty,
note, instrument or document now or at any time or times hereafter executed by
Debtor and delivered to Secured Party shall not waive, affect or diminish any
right of Secured Party at any time or times hereafter to demand strict
performance thereof; and, no rights of Secured Party hereunder shall be deemed
to have been waived by any act or knowledge of Secured Party, its agents,
officers or employees, unless such waiver is contained in an instrument in
writing signed by an officer of Secured Party and directed to Debtor specifying
such waiver. No waiver by Secured Party of any of its rights shall operate as a
waiver of any other of its rights or any of its rights on a future occasion.
8.2 Any demand or notice required or permitted to be given hereunder
shall be deemed effective when deposited in the United States mail, and sent by
certified mail, return receipt requested, postage prepaid, addressed to Secured
Party at Secured Party's Address or to Debtor at Debtor's Address, as
applicable, or to such other address as may be provided by the party to be
notified, on five (5) days prior written notice to the other party.
8.3 This Agreement contains the entire understanding between the
parties hereto with respect to the transactions contemplated herein and such
understanding shall not be modified except in writing signed by or on behalf of
the parties hereto. The Debtor acknowledges that each of them approves the terms
herein, and further acknowledges that they have each executed this Agreement
voluntarily, freely and without duress.
8.4 Wherever possible, each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable law;
should any portion of this Agreement be declared invalid for any reason in any
jurisdiction, such declaration shall have no effect upon the remaining portions
of this Agreement. Furthermore, the entirety of this Agreement shall continue in
full force and effect in all other jurisdictions and said remaining portions of
this Agreement shall continue in full force and effect in the subject
jurisdiction as if this Agreement had been executed with the invalid portions
thereof deleted.
8.5 In the event Secured Party seeks to take possession of any or all
of the Collateral by court process, Debtor hereby irrevocably waives any bonds
and any surety or security relating thereto required by any statute, court rule
or otherwise as an incident to such possession, and waives any
11
<PAGE> 34
demand for possession prior to the commencement of any suit or action to recover
with respect thereto.
8.6 The provisions of this Agreement shall be binding upon and shall
inure to the benefit of the heirs, administrators, successors and assigns of
Secured Party and Debtor, provided, however, Debtor may not assign any of its
rights or delegate any of its obligations hereunder without the prior written
consent of Secured Party.
8.7 This Agreement is and shall be deemed to be a contract entered
into and made pursuant to the laws of the State of Rhode Island and shall in all
respects be governed, construed, applied and enforced in accordance with the
laws of said state; and any cause of action arising between the parties, whether
under this Agreement or otherwise, shall be brought only in a court having
jurisdiction and venue at Secured Party's Address (the term "Secured Party"
shall include the Secured Party's successors, endorsees and assigns); DEBTOR
CONSENTS TO AND CONFERS PERSONAL JURISDICTION OVER DEBTOR BY SUCH COURT OR
COURTS AND AGREES THAT SERVICE OF PROCESS MAY BE MADE UPON DEBTOR BY MAILING A
COPY OF THE SUMMONS TO DEBTOR AT DEBTOR'S ADDRESS; AND IN ANY ACTION HEREUNDER
DEBTOR WAIVES THE RIGHT TO DEMAND A TRIAL BY JURY.
8.8 If, prior hereto and/or at any time or times hereafter, Secured
Party shall employ counsel in connection with the execution and consummation of
the transactions contemplated by this Agreement or to commence, defend or
intervene, file a petition, complaint, answer, motion or other pleadings, or to
take any other action in or with respect to any suit or proceeding (bankruptcy
or otherwise) relating to this Agreement, the Collateral or any other agreement,
guaranty, note, instrument or document heretofore, now or at any time or times
hereafter executed by Debtor and delivered to Secured Party, or to protect,
collect, lease, sell, take possession of or liquidate any of the Collateral, or
to attempt to enforce or to enforce any security interest in any of the
Collateral, or to enforce any rights of Secured Party hereunder, whether before
or after the occurrence of any Event of Default, or to collect any of the
Obligations, then in any of such events, all of the reasonable attorneys' fees
arising from such services, and any expenses, costs and charges relating
thereto, shall be part of the Obligations, payable on demand and secured by the
Collateral.
8.9 This Agreement may be executed in any number of counterparts, each
of which shall be deemed to be an original, but all of which together shall
constitute but one and the same instrument.
8.10 Each reference herein to Secured Party shall be deemed to include
its successors and assigns, and each reference
12
<PAGE> 35
to Debtor and any pronouns referring thereto as used herein shall be construed
in the masculine, feminine, neuter, singular or plural, as the context may
require, and shall be deemed to include the legal representatives, successors
and assigns of Debtor, all of whom shall be bound by the provisions hereof.
8.11 The section headings herein are included for convenience only and
shall not be deemed to be a part of this Agreement.
9. ASSIGNMENT BY SECURED PARTY
---------------------------
Secured Party may, from time to time, without notice to the Debtor,
sell, assign, transfer or otherwise dispose of all or any part of the
Obligations and/or the Collateral therefor. In such event, each and every
immediate and successive purchaser, assignee, transferee or holder of all or any
part of the Obligations and/or the Collateral shall have the right to enforce
this Agreement, by legal action or otherwise, for its own benefit as fully as if
such purchaser, assignee, transferee or holder were herein by name specifically
given such rights. Secured Party shall have an unimpaired right to enforce this
Agreement for its benefit with respect to that portion of the Obligations
Secured Party has not sold, assigned, transferred or otherwise disposed of.
10. ADDITIONAL INFORMATION
----------------------
Information, if any, required to be set forth herein by paragraphs
2.2, 2.5, 3.1.1, 3.2.1, 3.2.6 and/or 3.3.1 hereof, as applicable, shall be
inserted in the following spaces:
2.2 (Debtor's trade names, prior names, predecessor in merger,
businesses acquired and/or other locations):
2.5 (Debtor's other security interests, encumbrances and liens):
A. Term Note payable to George Ostendorf in the amount of
$42,560.13, due December 31, 1996.
B. Demand Note payable to ABH-1 in the amount of $94,636.00.
3.1.1 (Location of Inventory or records with respect
thereto, other than at Debtor's Address):
100 Metroplex Drive, Suite 301
Edison, NJ 08817
13
<PAGE> 36
3.2.1 (Address of other places of business of Debtor
and of the location of Equipment other than at Debtor's Address and owner and
description of all leased premises):
100 Metroplex Drive, Suite 301
Edison, NJ 08817
3.2.6 (Motor Vehicles):
NONE
3.3.1 (Address of other place(s) of business of Debtor and place(s)
where records (including computer records) with respect to Receivables or
returns of Inventory are kept other than Debtor's Address):
100 Metroplex Drive, Suite 301
Edison, NJ 08817
IN WITNESS WHEREOF, the Debtor and the Secured Party have caused this
Agreement to be executed by their duly authorized representatives as of the day
and year first above written.
WITNESS: Hanover Capital Partners, Ltd.
/s/ ????????????? By: /s/ John A. Burchett
- ---------------------------- ------------------------------
Its: President
WITNESS: Fleet National Bank
/s/ Alisa M. Moretti By: /s/ Anthony A. Botelho
- ---------------------------- ------------------------------
Anthony A. Botelho
Its: Vice President
14
<PAGE> 37
STATE OF NJ
COUNTY OF Middlesex
In Edison, on the 10th day of December, 1996, before me personally
appeared John Burchett, President 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 in said capacity and the free act and deed of Hanover Capital Partners,
Ltd.
[STAMP: Kacey C. Grogan
Notary Public, State of NJ
My Commission Expires 11/22/99]
/s/ Kacey Grogan
------------------------------
Notary Public
My commission expires: 11/22/99
STATE OF RHODE ISLAND
COUNTY OF PROVIDENCE
In Providence, on the 10th day of December, 1996, 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.
/s/ Vincenza D. Williams
------------------------------
Notary Public
My commission expires:
--------
[STAMP: Vincenza D. Williams
Notary Public
My Commission Expires
June 26, 1997]
<PAGE> 1
EXHIBIT 10.19
GUARANTY
--------
THIS GUARANTY ("Guaranty") is made as of the 10th day of December, 1996, by
JOHN A. BURCHETT, having an address at c/o Hanover Capital Partners, Ltd., 90
West Street, New York, New york 10006 (as used herein, "the Guarantor"), to and
with FLEET its NATIONAL BANK, a national banking association, having its
principal office at 111 Westminster, Providence, Rhode Island 02903 (the
"Lender").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, contemporaneously herewith, subject to certain terms and
conditions, Lender has agreed to enter into a revolving credit agreement (the
"Loan Agreement"), with Hanover Capital Partners, Ltd. (the "Obligor"),
regarding certain indebtedness due and owing Lender evidenced by that certain
promissory note (the "Note") executed by the Obligor in favor of Lender of even
date herewith in the original principal amount of $2,000,000.00 (the
"Obligations"); and
WHEREAS, Guarantor is a shareholder, officer and director of the Obligor
and thus the Guarantor has a substantial interest in Obligor; and
WHEREAS, Lender has advised Guarantor that it will not enter into the Loan
Agreement with the Obligor unless all of the Obligations and certain other
agreements as hereinafter referenced, including without limitation the punctual
payment of both principal and interest of the Obligations to be paid, is
guaranteed by the Guarantor; and
WHEREAS, Guarantor is willing and has agreed to guarantee the payment of
the Obligations of the Obligor, as hereinafter provided.
NOW THEREFORE, in order to induce Lender to enter into the Loan Agreement
and for other good and valuable consideration, the receipt of which is hereby
acknowledged by the Guarantor, the Guarantor agrees as follows:
1. Guarantor hereby unconditionally and irrevocably, guarantees: (i) the
due and punctual payment in full (and not merely the collectability) of the
principal of the Obligations and the interest thereon, in each case when due and
payable, according to the terms of the Loan Agreement, and the Note; (ii) the
due and punctual payment in full (and not merely the collectability) of all
other sums and charges which may at any time be due and payable in accordance
with, or under the terms of, the Loan Agreement and the Note; (iii) the accuracy
of the representations and warranties made by the Obligor in the Loan Agreement
and the Note; and (iv) the due and punctual performance and observance of all of
the other terms, covenants, and
<PAGE> 2
conditions contained in the Loan Agreement, the Note and any other security
instruments and agreements relating to the Obligations now or hereafter existing
on the part of the Obligor to be performed or observed (the Loan Agreement, the
Note and all security instruments and all related agreements are collectively
referred to herein as the "Documents").
2. Guarantor expressly agrees that Lender may, in its sole absolute
discretion, without notice to or further assent of Guarantor, and without in any
way releasing, affecting or impairing the obligations and liabilities of
Guarantor under this Guaranty: (i) waive compliance with, or any default under,
or grant any other indulgences with respect to, the Documents; (ii) modify,
amend, or change any provisions of the Documents; (iii) agree to the
substitution, exchange, release or other disposition of the Guarantor or any
part of the collateral securing the Obligations; (iv) make advances for the
purpose of performing any term or covenant contained in the Documents, with
respect to which the Obligor shall be deemed by the Lender to be in default; (v)
assign or otherwise transfer the Documents, including without limitation this
Guaranty, or any interest therein or herein; and (vi) deal in all respects with
the Obligor as if this Guaranty were not in effect. The obligations of Guarantor
under this Guaranty shall be unconditional, irrespective of the genuineness,
validity, regularity or enforceability of the Documents or any other
circumstances which might otherwise constitute a legal or equitable discharge of
a surety or guarantor.
3. The liability of Guarantor under this Guaranty shall be primary,
direct, and immediate, and not conditional or contingent upon pursuit by Lender
of any remedies it may have against the Obligor or any other party with respect
to the Documents, whether pursuant to the terms thereof or otherwise. No
exercise or nonexercise by Lender of any right given to it hereunder or under
the Documents, and no change, impairment, or suspension of any right or remedy
of Lender shall in any way affect the Guarantor's obligations hereunder or give
the Guarantor any recourse against Lender. Without limiting the generality of
the foregoing, Lender shall not be required to make any demand on the Obligor
and/or any other party, before, simultaneously with or after, enforcing its
rights and remedies hereunder against Guarantor. Any one or more successive
and/or concurrent actions may be brought hereon against Guarantor, either in the
same action, if any, brought against the Guarantor and/or any other party, or in
separate actions, as often as Lender, in its sole discretion, may deem
advisable.
4. As to the Obligations, Guarantor hereby expressly waives: (i)
presentment and demand for payment and protest of nonpayment; (ii) notice of
acceptance of this Guaranty and of presentment, demand and protest; (iii) notice
of any default hereunder or under the Documents and of all indulgences; (iv)
2
<PAGE> 3
demand for observance or performance of, or enforcement of, any terms or
provisions of this Guaranty or the Documents; (v) all other notices and demands
otherwise required by law which Guarantor may lawfully waive; (vi) the right to
assert in any action or proceeding hereupon by Lender, or in the event that an
action or proceeding has not been commenced, any set-off, counterclaim or other
claim which it may have against Lender or Obligor; (vii) all rights of
indemnity, reimbursement, contribution, or subrogation from the Obligor; and
(viii) the benefit of all other principles or provisions of law, statutory or
otherwise, which are or might be in conflict with the terms hereof; and (ix)
notice of set-off against any property of the Guarantor in the possession of the
Lender.
5. If Guarantor shall advance any sums to Obligor, its successors or
assigns, or if the Obligor, its successors or assigns shall be or shall
hereafter become indebted to Guarantor such sums and indebtedness shall be
subordinate in all respects to the amounts then or thereafter due and owing to
Lender. Nothing herein contained shall be construed to give Guarantor, any right
of subrogation in and to the rights of Lender under the Documents until all
amounts owing to Lender under the Obligations have been paid in full.
6. Any notice, demand, request, or other communication given hereunder or
in connection herewith (hereinafter "Notices") shall be deemed sufficient if in
writing and sent by certified mail, postage prepaid, return receipt requested,
addressed to the party to receive such Notice at its address first above set
forth or at such other address as the Guarantor may hereafter designate by
Notice given in like fashion. Notices to the Lender shall be sent Attention:
Anthony A. Botelho, Vice President. Notices shall be deemed given when mailed.
7. Any payments made by Guarantor under the provision of this Guaranty
shall, if made to Lender be made at its principal office at its address first
set forth above, unless some other address is hereafter designated by Lender.
8. All rights and remedies afforded to Lender by reason of this Guaranty
and the Documents, or by law are separate and cumulative and the exercise of one
shall not in any way limit or prejudice the exercise of any other such rights or
remedies. No delay or omission by Lender in exercising any such right or remedy
shall operate as a waiver thereof. No waiver of any rights and remedies
hereunder, and no modification or amendment hereof, shall be deemed made by
Lender unless in writing and duly executed. Any such written waiver shall apply
only to the particular instance specified therein and shall not impair the
further exercise of such right or remedy or of any other right or remedy of
Lender, and no single or partial exercise of any right
3
<PAGE> 4
or remedy hereunder shall preclude further exercise of any other right or
remedy.
9. The obligations of Guarantor to make payment in accordance with the
terms of this Guaranty shall not be impaired, modified, changed, released, or
limited in any manner whatsoever by any impairment, modification, change,
release or limitation of the liability of the Obligor or its respective estates
in bankruptcy or reorganization resulting from the operation of any present or
future provision of the Federal Bankruptcy Code or other statute or from the
decision of any court. Guarantor agrees that in the event any amounts referred
to herein are paid in whole or in part by the Obligor or by the Guarantor,
Guarantor's liability hereunder shall continue and remain in full force and
effect in the event that all or any part of any such payment is recovered from
Lender as a preference, fraudulent transfer or similar payment under any
bankruptcy, insolvency, or similar law. Guarantor further agrees that the
Obligations of the Guarantor under this Guaranty shall include, but not be
limited to, the costs incurred by Lender in defending any claim or suit seeking
such recovery further including, but not limited to, reasonable attorneys' fees.
10. The Guarantor hereby covenants and agrees not to dispose of all or any
substantial part of his assets nor cause nor suffer any substantial diminution
of his net worth as the same exists on the date hereof, and that any of the
foregoing shall, at the option of Lender, its successors and assigns, be void
and of no effect. Lender shall be entitled, without limiting any other rights
which Lender may have under this Guaranty, to enjoin any breach or threatened
breach of this paragraph.
11. Guarantor represents and warrants that Guarantor is not now insolvent
and the Guarantor's obligations under this Guaranty do not render Guarantor
insolvent; Guarantor is not contemplating either the filing of a petition by
Guarantor under any state or federal bankruptcy or insolvency laws and the
liquidation of all or a major portion of the Guarantor's property; and the
Guarantor has no knowledge of any person contemplating the filing of any such
petition against Guarantor.
12. Guarantor hereby covenants and agrees to provide a personal financial
statement to Lender within thirty (30) days of the prior year's anniversary of
receipt of his personal financial statement.
13. GUARANTOR HEREBY IRREVOCABLY AND UNCONDITIONALLY (A) SUBMITS TO
JURISDICTION IN THE STATE OF RHODE ISLAND OVER ANY SUIT, ACTION OR PROCEEDING
ARISING OUT OF OR RELATING TO THIS GUARANTY, AND (B) WAIVES ANY AND ALL RIGHTS
UNDER THE LAWS OF ANY STATE (I) TO THE RIGHT, IF ANY, TO TRIAL BY JURY, (II) TO
OBJECT
4
<PAGE> 5
TO JURISDICTION WITHIN THE STATE OF RHODE ISLAND OR VENUE IN ANY PARTICULAR
FORUM WITHIN THE STATE OF RHODE ISLAND, AND (III) TO THE RIGHT, IF ANY, TO CLAIM
OR RECOVER ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES OR ANY
DAMAGES OTHER THAN ACTUAL DAMAGES. GUARANTOR AGREES THAT, IN ADDITION TO ANY
METHODS OF SERVICE OF PROCESS PROVIDED FOR UNDER APPLICABLE LAW, ALL SERVICE OF
PROCESS IN ANY SUCH SUIT, ACTION OR PROCEEDING MAY BE MADE BY CERTIFIED MAIL,
RETURN RECEIPT REQUESTED, DIRECTED TO THE GUARANTOR AT THE ADDRESS SET FORTH
ABOVE, AND SERVICE SO MADE SHALL BE DEEMED COMPLETE FIFTEEN (15) DAYS AFTER THE
SAME SHALL BE SO MAILED. NOTHING CONTAINED HEREIN, HOWEVER, SHALL PREVENT LENDER
FROM BRINGING ANY SUIT, ACTION OR PROCEEDING OR EXERCISING ANY RIGHTS, INCLUDING
SET-OFF, AGAINST ANY SECURITY IN POSSESSION OF LENDER WHICH RIGHTS TO NOTICE THE
GUARANTOR EXPRESSLY WAIVES AND AGAINST GUARANTOR, AND AGAINST ANY PROPERTY OF
GUARANTOR, IN ANY OTHER STATE. INITIATING SUCH SUIT, ACTION OR PROCEEDING OR
SETTING-OFF AGAINST THE GUARANTOR'S PROPERTY IN POSSESSION OF THE LENDER OR
TAKING SUCH ACTION IN ANY STATE, INCLUDING, BUT NOT LIMITED TO RHODE ISLAND,
SHALL IN NO EVENT CONSTITUTE A WAIVER OF THE AGREEMENT CONTAINED HEREIN. THE
LAWS OF THE STATE OF RHODE ISLAND SHALL GOVERN THE RIGHTS AND OBLIGATIONS OF
GUARANTOR AND LENDER HEREUNDER OR THE SUBMISSION HEREIN MADE BY GUARANTOR TO
JURISDICTION WITHIN THE STATE OF RHODE ISLAND. GUARANTOR AGREES THAT IN THE
EVENT THIS GUARANTY SHALL BE ENFORCED BY SUIT OR OTHERWISE, OR IF LENDER SHALL
EXERCISE OR ENDEAVOR TO EXERCISE ANY OF ITS REMEDIES UNDER THE DOCUMENTS,
GUARANTOR WILL REIMBURSE LENDER, UPON DEMAND, FOR ALL EXPENSES AND DAMAGES
INCURRED IN CONNECTION THEREWITH, INCLUDING, WITHOUT LIMITATION, REASONABLE
ATTORNEYS' FEES. AT THE LENDER'S SOLE DISCRETION, THE GUARANTOR HEREBY
IRREVOCABLY DESIGNATES AND APPOINTS CHARLES A. WRY, JR., ESQ., HAVING AN ADDRESS
AT MORSE BARNES-BROWN & PENDLETON, P.C., RESERVOIR PLACE, 1601 TRAPELO ROAD,
WALTHAM, MA 02154, AS GUARANTOR'S ATTORNEY-IN-FACT TO RECEIVE SERVICE OF PROCESS
IN ANY SUIT, ACTION, OR PROCEEDING ARISING OUT OF GUARANTOR'S OBLIGATIONS UNDER
OR WITH RESPECT TO THIS GUARANTY, IT BEING EXPRESSLY STIPULATED AND AGREED BY
GUARANTOR THAT SERVICE UPON SUCH ATTORNEY-IN-FACT SHALL CONSTITUTE SERVICE UPON
GUARANTOR. CONCURRENTLY, WITH THE SERVICE OF PROCESS UPON EITHER SUCH
ATTORNEY-IN-FACT, COPIES OF THE PAPERS SO SERVED SHALL BE SENT CERTIFIED MAIL,
POSTAGE PREPAID, RETURN RECEIPT REQUESTED, TO GUARANTOR AT ITS ADDRESS FIRST
ABOVE SET FORTH OR AT SUCH OTHER ADDRESS AS THE GUARANTOR MAY HEREAFTER
DESIGNATE BY NOTICE.
14. This Guaranty shall be construed in accordance with the laws of the
State of Rhode Island. All words herein of singular number shall extend to and
include words of the plural number; reference to the masculine gender shall
extend to and include the female gender as well as corporate and neuter status.
15. The Guarantor represents and warrants that he approves the terms and
conditions herein, which the Guarantor has read, fully understands and finds to
be fair and equitable. Further,
5
<PAGE> 6
the Guarantor acknowledges he is executing this Guaranty voluntarily, freely and
without duress.
16. This Guaranty shall inure to the benefit of, and be enforceable by,
Lender and its successors and assigns, and shall be binding upon, and
enforceable against, Guarantor and his respective heirs, administrators,
executors and assigns.
17. In case any one or more of the provisions contained herein shall for
any reason be held to be invalid, illegal, or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect any other provision
hereof but this Guaranty shall be construed as if such invalid, illegal, or
unenforceable provision had never been included.
IN WITNESS WHEREOF, Guarantor has executed this Guaranty as of the day and
year first above written.
WITNESS:
/s/ /s/ John A Bruchett
- ------------------------- -----------------------------------
John A Bruchett
6
<PAGE> 1
EXHIBIT 10.20
GUARANTY
--------
THIS GUARANTY ("Guaranty") is made as of the 10th day of December, 1996, by
HANOVER CAPITAL MORTGAGE CORPORATION, having an address at c/o Hanover Capital
Partners, Ltd., 90 West Street, New York, New York 10006 (as used herein, "the
Guarantor"), to and with FLEET NATIONAL BANK, a national banking association,
having its principal office at 111 Westminster, Providence, Rhode Island 02903
(the "Lender").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, contemporaneously herewith, subject to certain terms and
conditions, Lender has agreed to enter into a revolving credit agreement (the
"Loan Agreement"), with Hanover Capital Partners, Ltd.(the "Obligor"), regarding
certain indebtedness due and owing Lender evidenced by that certain promissory
note (the "Note") executed by the Obligor in favor of Lender of even date
herewith in the original principal amount of $2,000,000.00 (the "Obligations");
and
WHEREAS, Guarantor is a subsidiary of the Obligor and thus the Guarantor
has a substantial interest in Obligor; and
WHEREAS, Lender has advised Guarantor that it will not enter into the Loan
Agreement with the Obligor unless all of the Obligations and certain other
agreements as hereinafter referenced, including without limitation the punctual
payment of both principal and interest of the Obligations to be paid, is
guaranteed by the Guarantor; and
WHEREAS, Guarantor is willing and has agreed to guarantee the payment of
the Obligations of the Obligor, as hereinafter provided.
NOW THEREFORE, in order to induce Lender to enter into the Loan Agreement
and for other good and valuable consideration, the receipt of which is hereby
acknowledged by the Guarantor, the Guarantor agrees as follows:
1. Guarantor hereby unconditionally and irrevocably, guarantees: (i) the
due and punctual payment in full (and not merely the collectability) of the
principal of the Obligations and the interest thereon, in each case when due and
payable, according to the terms of the Loan Agreement, and the Note; (ii) the
due and punctual payment in full (and not merely the collectability) of all
other sums and charges which may at any time be due and payable in accordance
with, or under the terms of, the Loan Agreement and the Note; (iii) the accuracy
of the representations and warranties made by the Obligor in the Loan Agreement
and the Note; and (iv) the due and punctual performance and observance of all of
the other terms, covenants, and conditions contained in the Loan Agreement, the
Note and any
<PAGE> 2
other security instruments and agreements relating to the Obligations now or
hereafter existing on the part of the Obligor to be performed or observed (the
Loan Agreement, the Note and all security instruments and all related agreements
are collectively referred to herein as the "Documents").
2. Guarantor expressly agrees that Lender may, in its sole and absolute
discretion, without notice to or further assent of Guarantor, and without in any
way releasing, affecting or impairing the obligations and liabilities of
Guarantor under this Guaranty: (i) waive compliance with, or any default under,
or grant any other indulgences with respect to, the Documents; (ii) modify,
amend, or change any provisions of the Documents; (iii) agree to the
substitution, exchange, release or other disposition of the Guarantor or any
part of the collateral securing the .obligations; (iv) make advances for the
purpose of performing any term or covenant contained in the Documents, with
respect to which the Obligor shall be deemed by the Lender to be in default; (v)
assign or otherwise transfer the Documents, including without limitation this
Guaranty, or any interest therein or herein; and (vi) deal in all respects with
the Obligor as if this Guaranty were not in effect. The obligations of Guarantor
under this Guaranty shall be unconditional, irrespective of the genuineness,
validity, regularity or enforceability of the Documents or any other
circumstances which might otherwise constitute a legal or equitable discharge of
a surety or guarantor.
3. The liability of Guarantor under this Guaranty shall be primary,
direct, and immediate, and not conditional or contingent upon pursuit by Lender
of any remedies it may have against the Obligor or any other party with respect
to the Documents, whether pursuant to the terms thereof or otherwise. No
exercise or nonexercise by Lender of any right given to it hereunder or under
the Documents, and no change, impairment, or suspension of any right or remedy
of Lender shall in any way affect the Guarantor's obligations hereunder or give
the Guarantor any recourse against Lender. Without limiting the generality of
the foregoing, Lender shall not be required to make any demand on the Obligor
and/or any other party, before, simultaneously with or after, enforcing its
rights and remedies hereunder against Guarantor. Any one or more successive
and/or concurrent actions may be brought hereon against Guarantor, either in the
same action, if any, brought against the Guarantor and/or any other party, or in
separate actions, as often as Lender, in its sole discretion, may deem
advisable.
4. As to the Obligations, Guarantor hereby expressly waives: (i)
presentment and demand for payment and protest of nonpayment; (ii) notice of
acceptance of this Guaranty and of presentment, demand and protest; (iii) notice
of any default hereunder or under the Documents and of all indulgences; (iv)
demand for observance or performance of, or enforcement of, any
2
<PAGE> 3
terms or provisions of this Guaranty or the Documents; (v) all other notices and
demands otherwise required by law which Guarantor may lawfully waive; (vi) the
right to assert in any action or proceeding hereupon by Lender, or in the event
that an action or proceeding has not been commenced, any set-off, counterclaim
or other claim which it may have against Lender or the Obligor; (vii) all rights
of indemnity, reimbursement, contribution, or subrogation from the Obligor; and
(viii) the benefit of all other principles or provisions of law, statutory or
otherwise, which are or might be in conflict with the terms hereof; and (ix)
notice of set-off against any property of the Guarantor in the possession of the
Lender.
5. If Guarantor shall advance any sums to Obligor, its successors or
assigns, or if the Obligor, its successors or assigns shall be or shall
hereafter become indebted to Guarantor such sums and indebtedness shall be
subordinate in all respects to the amounts then or thereafter due and owing to
Lender. Nothing herein contained shall be construed to give Guarantor, any right
of subrogation in and to the rights of Lender under the Documents until all
amounts owing to Lender under the Obligations have been paid in full.
6. Any notice, demand, request, or other communication given hereunder or
in connection herewith (hereinafter "Notices") shall be deemed sufficient if in
writing and sent by certified mail, postage prepaid, return receipt requested,
addressed to the party to receive such Notice at its address first above set
forth or at such other address as the Guarantor may hereafter designate by
Notice given in like fashion. Notices to the Lender shall be sent Attention:
Anthony A. Botelho, Vice President. Notices shall be deemed given when mailed.
7. Any payments made by Guarantor under the provision of this Guaranty
shall, if made to Lender be made at its principal office at its address first
set forth above, unless some other address is hereafter designated by Lender.
8. All rights and remedies afforded to Lender by reason of this Guaranty
and the Documents, or by law are separate and cumulative and the exercise of one
shall not in any way limit or prejudice the exercise of any other such rights or
remedies. No delay or omission by Lender in exercising any such right or remedy
shall operate as a waiver thereof. No waiver of any rights and remedies
hereunder, and no modification or amendment hereof, shall be deemed made by
Lender unless in writing and duly executed. Any such written waiver shall apply
only to the particular instance specified therein and shall not impair the
further exercise of such right or remedy or of any other right or remedy of
Lender, and no single or partial exercise of any right or remedy hereunder shall
preclude further exercise of any other right or remedy.
3
<PAGE> 4
9. The obligations of Guarantor to make payment in accordance with the
terms of this Guaranty shall not be impaired, modified, changed, released, or
limited in any manner whatsoever by any impairment, modification, change,
release or limitation of the liability of the Obligor or its respective estates
in bankruptcy or reorganization resulting from the operation of any present or
future provision of the Federal Bankruptcy Code or other statute or from the
decision of any court. Guarantor agrees that in the event any amounts referred
to herein are paid in whole or in part by the Obligor or by the Guarantor,
Guarantor's liability hereunder shall continue and remain in full force and
effect in the event that all or any part of any such payment is recovered from
Lender as a preference, fraudulent transfer or similar payment under any
bankruptcy, insolvency, or similar law. Guarantor further agrees that the
Obligations of the Guarantor under this Guaranty shall include, but not be
limited to, the costs incurred by Lender in defending any claim or suit seeking
such recovery further including, but not limited to, reasonable attorneys' fees.
10. The Guarantor hereby covenants and agrees not to dispose of all or any
substantial part of its assets nor cause nor suffer any substantial diminution
of its net worth as the same exists on the date hereof, and that any of the
foregoing shall, at the option of Lender, its successors and assigns, be void
and of no effect. Lender shall be entitled, without limiting any other rights
which Lender may have under this Guaranty, to enjoin any breach or threatened
breach of this paragraph.
11. Guarantor represents and warrants that Guarantor is not now insolvent
and the Guarantor's obligations under this Guaranty do not render Guarantor
insolvent; Guarantor is not contemplating either the filing of a petition by
Guarantor under any state or federal bankruptcy or insolvency laws and the
liquidation of all or a major portion of the Guarantor's property; and the
Guarantor has no knowledge of any person contemplating the filing of any such
petition against Guarantor.
12. GUARANTOR HEREBY IRREVOCABLY AND UNCONDITIONALLY (A) SUBMITS TO
JURISDICTION IN THE STATE OF RHODE ISLAND OVER ANY SUIT, ACTION OR PROCEEDING
ARISING OUT OF OR RELATING TO THIS GUARANTY, AND (B) WAIVES ANY AND ALL RIGHTS
UNDER THE LAWS OF ANY STATE (I) TO THE RIGHT, IF ANY, TO TRIAL BY JURY, (II) TO
OBJECT TO JURISDICTION WITHIN THE STATE OF RHODE ISLAND OR VENUE IN ANY
PARTICULAR FORUM WITHIN THE STATE OF RHODE ISLAND, AND (III) TO THE RIGHT, IF
ANY, TO CLAIM OR RECOVER ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL
DAMAGES OR ANY DAMAGES OTHER THAN ACTUAL DAMAGES. GUARANTOR AGREES THAT, IN
ADDITION TO ANY METHODS OF SERVICE OF PROCESS PROVIDED FOR UNDER APPLICABLE LAW,
ALL SERVICE OF PROCESS IN ANY SUCH SUIT, ACTION OR PROCEEDING MAY BE MADE BY
CERTIFIED MAIL, RETURN RECEIPT REQUESTED, DIRECTED TO
4
<PAGE> 5
THE GUARANTOR AT THE ADDRESS SET FORTH ABOVE, AND SERVICE SO MADE SHALL BE
DEEMED COMPLETE FIFTEEN (15) DAYS AFTER THE SAME SHALL BE SO MAILED. NOTHING
CONTAINED HEREIN, HOWEVER, SHALL PREVENT LENDER FROM BRINGING ANY SUIT, ACTION
OR PROCEEDING OR EXERCISING ANY RIGHTS, INCLUDING SET-OFF, AGAINST ANY SECURITY
IN POSSESSION OF LENDER WHICH RIGHTS TO NOTICE THE GUARANTOR EXPRESSLY WAIVES
AND AGAINST GUARANTOR, AND AGAINST ANY PROPERTY OF GUARANTOR, IN ANY OTHER
STATE. INITIATING SUCH SUIT, ACTION OR PROCEEDING OR SETTING-OFF AGAINST THE
GUARANTOR'S PROPERTY IN POSSESSION OF THE LENDER OR TAKING SUCH ACTION IN ANY
STATE, INCLUDING, BUT NOT LIMITED TO RHODE ISLAND, SHALL IN NO EVENT CONSTITUTE
A WAIVER OF THE AGREEMENT CONTAINED HEREIN. THE LAWS OF THE STATE OF RHODE
ISLAND SHALL GOVERN THE RIGHTS AND OBLIGATIONS OF GUARANTOR AND LENDER HEREUNDER
OR THE SUBMISSION HEREIN MADE BY GUARANTOR TO JURISDICTION WITHIN THE STATE OF
RHODE ISLAND. GUARANTOR AGREES THAT IN THE EVENT THIS GUARANTY SHALL BE ENFORCED
BY SUIT OR OTHERWISE, OR IF LENDER SHALL EXERCISE OR ENDEAVOR TO EXERCISE ANY OF
ITS REMEDIES UNDER THE DOCUMENTS, GUARANTOR WILL REIMBURSE LENDER, UPON DEMAND,
FOR ALL EXPENSES AND DAMAGES INCURRED IN CONNECTION THEREWITH, INCLUDING,
WITHOUT LIMITATION, REASONABLE ATTORNEYS' FEES. AT THE LENDER'S SOLE DISCRETION,
THE GUARANTOR HEREBY IRREVOCABLY DESIGNATES AND APPOINTS CHARLES A. WRY, JR.,
ESQ., HAVING AN ADDRESS AT MORSE BARNES-BROWN & PENDLETON, P.C., RESERVOIR
PLACE, 1601 TRAPELO ROAD, WALTHAM, MA 02154, AS GUARANTOR'S ATTORNEY-IN-FACT TO
RECEIVE SERVICE OF PROCESS IN ANY SUIT, ACTION, OR PROCEEDING ARISING OUT OF
GUARANTOR'S OBLIGATIONS UNDER OR WITH RESPECT TO THIS GUARANTY, IT BEING
EXPRESSLY STIPULATED AND AGREED BY GUARANTOR THAT SERVICE UPON SUCH
ATTORNEY-IN-FACT SHALL CONSTITUTE SERVICE UPON GUARANTOR. CONCURRENTLY, WITH THE
SERVICE OF PROCESS UPON EITHER SUCH ATTORNEY-IN-FACT, COPIES OF THE PAPERS SO
SERVED SHALL BE SENT CERTIFIED MAIL, POSTAGE PREPAID, RETURN RECEIPT REQUESTED,
TO GUARANTOR AT ITS ADDRESS FIRST ABOVE SET FORTH OR AT SUCH OTHER ADDRESS AS
THE GUARANTOR MAY HEREAFTER DESIGNATE BY NOTICE.
13. This Guaranty shall be construed in accordance with the laws of the
State of Rhode Island. All words herein of singular number shall extend to and
include words of the plural number; reference to the masculine gender shall
extend to and include the female gender as well as corporate and neuter status.
14. The Guarantor represents and warrants that it approves the terms and
conditions herein, which the Guarantor has caused to be read, fully understands
and finds to be fair and equitable. Further, the Guarantor acknowledges it is
causing this Guaranty to be executed voluntarily, freely and without duress.
15. This Guaranty shall inure to the benefit of, and be enforceable by,
Lender and its successors and assigns, and shall be binding upon, and
enforceable against, Guarantor and its respective successors and assigns.
5
<PAGE> 6
16. In case any one or more of the provisions contained herein shall for
any reason be held to be invalid, or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect any other provision
hereof but this Guaranty shall be construed as if such invalid, illegal, or
unenforceable provision had never been included.
IN WITNESS WHEREOF, Guarantor has caused his Guaranty to be executed by its
duly representative as of the day and year first above written.
WITNESS: HANOVER CAPITAL MORTGAGE CORPORATION
By: /s/
- ------------------------- -----------------------------------
Its: President
-----------------------------------
6
<PAGE> 1
EXHIBIT 10.21
GUARANTY
--------
THIS GUARANTY ("Guaranty") is made as of the 10th day of December, 1996, by
HANOVER CAPITAL MORTGAGE FUND INC., having an address at c/o Hanover Capital
Partners, Ltd., 90 West Street, New York, New York 10006 (as used herein, "the
Guarantor"), to and with FLEET NATIONAL BANK, a national banking association,
having its principal office at 111 Westminster, Providence, Rhode Island 02903
(the "Lender").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, herewith, subject to certain terms and conditions, Lender has
agreed to enter into a revolving credit agreement (the "Loan Agreement"), with
Hanover Capital Partners, Ltd.(the "Obligor"), regarding certain indebtedness
due and owing Lender evidenced by that certain promissory note (the "Note")
executed by the Obligor in favor of Lender of even date herewith in the original
principal amount of $2,000,000.00 (the "Obligations"); and
WHEREAS, Guarantor is a subsidiary of the Obligor and thus the Guarantor
has a substantial interest in Obligor; and
WHEREAS, Lender has advised Guarantor that it will not enter into the Loan
Agreement with the Obligor unless all of the Obligations and certain other
agreements as hereinafter referenced, including without limitation the punctual
payment of both principal and interest of the Obligations to be paid, is
guaranteed by the Guarantor; and
WHEREAS, Guarantor is willing and has agreed to guarantee the payment of
the Obligations of the Obligor, as hereinafter provided.
NOW THEREFORE, in order to induce Lender to enter into the Loan Agreement
and for other good and valuable consideration, the receipt of which is hereby
acknowledged by the Guarantor, the Guarantor agrees as follows:
1. Guarantor hereby unconditionally and irrevocably, guarantees: (i) the
due and punctual payment in full (and not merely the collectability) of the
principal of the Obligations and the interest thereon, in each case when due and
payable, according to the terms of the Loan Agreement, and the Note; (ii) the
due and punctual payment in full (and not merely the collectability) of all
other sums and charges which may at any time be due and payable in accordance
with, or under the terms of, the Loan Agreement and the Note; (iii) the accuracy
of the representations and warranties made by the Obligor in the Loan Agreement
and the Note; and (iv) the due and punctual performance and observance of all of
the other terms, covenants, and conditions contained in the Loan Agreement, the
Note and any
<PAGE> 2
other security instruments and agreements relating to the Obligations now or
hereafter existing on the part of the Obligor to be performed or observed (the
Loan Agreement, the Note and all security instruments and all related agreements
are collectively referred to herein as the "Documents").
2. Guarantor expressly agrees that Lender may, in its sole and absolute
discretion, without notice to or further assent of Guarantor, and without in any
way releasing, affecting or impairing the obligations and liabilities of
Guarantor under this Guaranty: (i) waive compliance with, or any default under,
or grant any other indulgences with respect to, the Documents; (ii) modify,
amend, or change any provisions of the Documents; (iii) agree to the
substitution, exchange, release or other disposition of the Guarantor or any
part of the collateral securing the Obligations; (iv) make advances for the
purpose of performing any term or covenant contained in the Documents, with
respect to which the Obligor shall be deemed by the Lender to be in default; (v)
assign or otherwise transfer the Documents, including without limitation this
Guaranty, or any interest therein or herein; and (vi) deal in all respects with
the Obligor as if this Guaranty were not in effect. The obligations of Guarantor
under this Guaranty shall be unconditional, irrespective of the genuineness,
validity, regularity or enforceability of the Documents or any other
circumstances which might otherwise constitute a legal or equitable discharge of
a surety or guarantor.
3. The liability of Guarantor under this Guaranty shall be primary,
direct, and immediate, and not conditional or contingent upon pursuit by Lender
of any remedies it may have against the Obligor or any other party with respect
to the Documents, whether pursuant to the terms thereof or otherwise. No
exercise or nonexercise by Lender of any right given to it hereunder or under
the Documents, and no change, impairment, or suspension of any right or remedy
of Lender shall in any way affect the Guarantor's obligations hereunder or give
the Guarantor any recourse against Lender. Without limiting the generality of
the foregoing, Lender shall not be required to make any demand on the Obligor
and/or any other party, before, simultaneously with or after, enforcing its
rights and remedies hereunder against Guarantor. Any one or more successive
and/or concurrent actions may be brought hereon against Guarantor, either in the
same action, if any, brought against the Guarantor and/or any other party, or in
separate actions, as often as Lender, in its sole discretion, may deem
advisable.
4. As to the Obligations, Guarantor hereby expressly waives: (i)
presentment and demand for payment and protest of nonpayment; (ii) notice of
acceptance of this Guaranty and of presentment, demand and protest; (iii) notice
of any default hereunder or under the Documents and of all indulgences; (iv)
demand for observance or performance of, or enforcement of, any
2
<PAGE> 3
terms or provisions of this Guaranty or the Documents; (v) all other notices and
demands otherwise required by law which Guarantor may lawfully waive; (vi) the
right to assert in any action or proceeding hereupon by Lender, or in the event
that an action or proceeding has not been commenced, any set-off, counterclaim
or other claim which it may have against Lender or Obligor; (vii) all rights of
indemnity, reimbursement, contribution, or subrogation from the Obligor; and
(viii) the benefit of all other principles or provisions of law, statutory or
otherwise, which are or might be in conflict with the terms hereof; and (ix)
notice of set-off against any property of the Guarantor in the possession of the
Lender.
5. If Guarantor shall advance any sums to Obligor, its successors or
assigns, or if the Obligor, its successors or ns shall be or shall hereafter
become indebted to Guarantor such sums and indebtedness shall be subordinate in
all respects to the amounts then or thereafter due and owing to Lender. Nothing
herein contained shall be construed to give Guarantor, any right of subrogation
in and to the rights of Lender under the Documents until all amounts owing to
Lender under the Obligations have been paid in full.
6. Any notice, demand, request or other communication given hereunder or
in connection herewith (hereinafter "Notices") shall be deemed sufficient if in
writing and sent by certified mail, postage prepaid, return receipt requested,
addressed to the party to receive such Notice at its address first above set
forth or at such other address as the Guarantor may hereafter designate by
Notice given in like fashion. Notices to the Lender shall be sent Attention:
Anthony A. Botelho, Vice President. Notices shall be deemed given when mailed.
7. Any payments made by Guarantor under the provision of this Guaranty
shall, if made to Lender be made at its principal office at its address first
set forth above, unless some other address is hereafter designated by Lender.
8. All rights and remedies afforded to Lender by reason of this Guaranty
and the Documents, or by law are separate and cumulative and the exercise of one
shall not in any way limit or prejudice the exercise of any other such rights or
remedies. No delay or omission by Lender in exercising any such right or remedy
shall operate as a waiver thereof. No waiver of any rights and remedies
hereunder, and no modification or amendment hereof, shall be deemed made by
Lender unless in writing and duly executed. Any such written waiver shall apply
only to the particular instance specified therein and shall not impair the
further exercise of such right or remedy or of any other right or remedy of
Lender, and no single or partial exercise of any right or remedy hereunder shall
preclude further exercise of any other right or remedy.
3
<PAGE> 4
9. The obligations of Guarantor to make payment in accordance with the
terms of this Guaranty shall not be impaired, modified, changed, released, or
limited in any manner whatsoever by any impairment, modification, change,
release or limitation of the liability of the Obligor or its respective estates
in bankruptcy or reorganization resulting from the operation of any present or
future provision of the Federal Bankruptcy Code or other statute or from the
decision of any court. Guarantor agrees that in the event any amounts referred
to herein are paid in whole or in part by the Obligor or by the Guarantor,
Guarantor's liability hereunder shall continue and remain in full force and
effect in the event that all or any part of any such payment is recovered from
Lender as a preference, fraudulent transfer or similar payment under any
bankruptcy, insolvency, or similar law. Guarantor further agrees that the
Obligations of the Guarantor under this Guaranty shall include, but not be
limited to, the costs incurred by Lender in defending any claim or suit seeking
such recovery further including, but not limited to, reasonable attorneys' fees.
10. The Guarantor hereby covenants and agrees not to dispose of all or any
substantial part of its assets nor cause nor suffer any substantial diminution
of its net worth as the same exists on the date hereof, and that any of the
foregoing shall, at the option of Lender, its successors and assigns, be void
and of no effect. Lender shall be entitled, without limiting any other rights
which Lender may have under this Guaranty, to enjoin any breach or threatened
breach of this paragraph.
11. Guarantor represents and warrants that Guarantor is not now insolvent
and the Guarantor's obligations under this Guaranty do not render Guarantor
insolvent; Guarantor is not contemplating either the filing of a petition by
Guarantor under any state or federal bankruptcy or insolvency laws and the
liquidation of all or a major portion of the Guarantor's property; and the
Guarantor has no knowledge of any person contemplating the filing of any such
petition against Guarantor.
12. GUARANTOR HEREBY IRREVOCABLY AND UNCONDITIONALLY (A) SUBMITS TO
JURISDICTION IN THE STATE OF RHODE ISLAND OVER ANY SUIT, ACTION OR PROCEEDING
ARISING OUT OF OR RELATING TO THIS GUARANTY, AND (B) WAIVES ANY AND ALL RIGHTS
UNDER THE LAWS OF ANY STATE (I) TO THE RIGHT, IF ANY, TO TRIAL BY JURY, (II) TO
OBJECT TO JURISDICTION WITHIN THE STATE OF RHODE ISLAND OR VENUE IN ANY
PARTICULAR FORUM WITHIN THE STATE OF RHODE ISLAND, AND (III) TO THE RIGHT, IF
ANY, TO CLAIM OR RECOVER ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL
DAMAGES OR ANY DAMAGES OTHER THAN ACTUAL DAMAGES. GUARANTOR AGREES THAT, IN
ADDITION TO ANY METHODS OF SERVICE OF PROCESS PROVIDED FOR UNDER APPLICABLE LAW,
ALL SERVICE OF PROCESS IN ANY SUCH SUIT, ACTION OR PROCEEDING MAY BE MADE BY
CERTIFIED MAIL, RETURN RECEIPT REQUESTED, DIRECTED TO
4
<PAGE> 5
THE GUARANTOR AT THE ADDRESS SET FORTH ABOVE, AND SERVICE SO MADE SHALL BE
DEEMED COMPLETE FIFTEEN (15) DAYS AFTER THE SAME SHALL BE SO MAILED. NOTHING
CONTAINED HEREIN, HOWEVER, SHALL PREVENT LENDER FROM BRINGING ANY SUIT, ACTION
OR PROCEEDING OR EXERCISING ANY RIGHTS, INCLUDING SET-OFF, AGAINST ANY SECURITY
IN POSSESSION OF LENDER WHICH RIGHTS TO NOTICE THE GUARANTOR EXPRESSLY WAIVES
AND AGAINST GUARANTOR, AND AGAINST ANY PROPERTY OF GUARANTOR, IN ANY OTHER
STATE. INITIATING SUCH SUIT, ACTION OR PROCEEDING OR SETTING-OFF AGAINST THE
GUARANTOR'S PROPERTY IN POSSESSION OF THE LENDER OR TAKING SUCH ACTION IN ANY
STATE, INCLUDING, BUT NOT LIMITED TO RHODE ISLAND, SHALL IN NO EVENT CONSTITUTE
A WAIVER OF THE AGREEMENT CONTAINED HEREIN. THE LAWS OF THE STATE OF RHODE
ISLAND SHALL GOVERN THE RIGHTS AND OBLIGATIONS OF GUARANTOR AND LENDER HEREUNDER
OR THE SUBMISSION HEREIN MADE BY GUARANTOR TO JURISDICTION WITHIN THE STATE OF
RHODE ISLAND. GUARANTOR AGREES THAT IN THE EVENT THIS GUARANTY SHALL BE ENFORCED
BY SUIT OR OTHERWISE, OR IF LENDER SHALL EXERCISE OR ENDEAVOR TO EXERCISE ANY OF
ITS REMEDIES UNDER THE DOCUMENTS, GUARANTOR WILL REIMBURSE LENDER, UPON DEMAND,
FOR ALL EXPENSES AND DAMAGES INCURRED IN CONNECTION THEREWITH, INCLUDING,
WITHOUT LIMITATION, REASONABLE ATTORNEYS' FEES. AT THE LENDER'S SOLE DISCRETION,
THE GUARANTOR HEREBY IRREVOCABLY DESIGNATES AND APPOINTS CHARLES A. WRY, JR.,
ESQ., HAVING AN ADDRESS AT MORSE BARNES-BROWN & PENDLETON, P.C., RESERVOIR
PLACE, 1601 TRAPELO ROAD, WALTHAM, MA 02154, AS GUARANTOR'S ATTORNEY-IN-FACT TO
RECEIVE SERVICE OF PROCESS IN ANY SUIT, ACTION, OR PROCEEDING ARISING OUT OF
GUARANTOR'S OBLIGATIONS UNDER OR WITH RESPECT TO THIS GUARANTY, IT BEING
EXPRESSLY STIPULATED AND AGREED BY GUARANTOR THAT SERVICE UPON SUCH
ATTORNEY-IN-FACT SHALL CONSTITUTE SERVICE UPON GUARANTOR. CONCURRENTLY, WITH THE
SERVICE OF PROCESS UPON EITHER SUCH ATTORNEY-IN-FACT, COPIES OF THE PAPERS SO
SERVED SHALL BE SENT CERTIFIED MAIL, POSTAGE PREPAID, RETURN RECEIPT REQUESTED,
TO GUARANTOR AT ITS ADDRESS FIRST ABOVE SET FORTH OR AT SUCH OTHER ADDRESS AS
THE GUARANTOR MAY HEREAFTER DESIGNATE BY NOTICE.
13. This Guaranty shall be construed in accordance with the laws of the
State of Rhode Island. All words herein of singular number shall extend to and
include words of the plural number; reference to the masculine gender shall
extend to and include the female gender as well as corporate and neuter status.
14. The Guarantor represents and warrants that it approves the terms and
conditions herein, which the Guarantor has caused to be read, fully understands
and finds to be fair and equitable. Further, the Guarantor acknowledges it is
causing this Guaranty to be executed voluntarily, freely and without duress.
15. This Guaranty shall inure to the benefit of, and be enforceable by,
Lender and its successors and assigns, and shall be binding upon, and
enforceable against, Guarantor and its respective successors and assigns.
5
<PAGE> 6
16. In case any one or more of the provisions contained herein shall for
any reason be held to be invalid, illegal, or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect any other provision
hereof but this Guaranty shall be construed as if such invalid, illegal, or
unenforceable provision had never been included.
IN WITNESS WHEREOF, Guarantor has caused this Guaranty to be executed by
its duly representative as of the day and year first above written.
WITNESS: HANOVER CAPITAL MORTGAGE FUND, INC.
By: /s/
- ------------------------- --------------------------------------
Its: President
--------------------------------------
6
<PAGE> 1
EXHIBIT 10.22
GUARANTY
--------
THIS GUARANTY ("Guaranty") is made as of the 10th day of December, 1996, by
HANOVER CAPITAL ADVISORS, INC., having an address at c/o Hanover Capital
Partners, Ltd., 90 West Street, New York, New York 10006 (as used herein, "the
Guarantor"), to and with FLEET NATIONAL BANK, a national banking association,
having its principal office at 111 Westminster, Providence, Rhode Island 02903
(the "Lender").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, contemporaneously herewith, subject to certain terms and
conditions, Lender has agreed to enter into a revolving credit agreement (the
"Loan Agreement"), with Hanover Capital Partners, Ltd.(the "Obligor"), regarding
certain indebtedness due and owing Lender evidenced by that certain promissory
note (the "Note") executed by the Obligor in favor of Lender of even date
herewith in the original principal amount of $2,000,000.00 (the "Obligations");
and
WHEREAS, Guarantor is a subsidiary of the Obligor and thus the Guarantor
has a substantial interest in Obligor; and
WHEREAS, Lender has advised Guarantor that it will not enter into the Loan
Agreement with the Obligor unless all of the Obligations and certain other
agreements as hereinafter referenced, including without limitation the punctual
payment of both principal and interest of the Obligations to be paid, is
guaranteed by the Guarantor; and
WHEREAS, Guarantor is willing and has agreed to guarantee the payment of
the Obligations of the Obligor, as hereinafter provided.
NOW THEREFORE, in order to induce Lender to enter into the Loan Agreement
and for other good and valuable consideration, the receipt of which is hereby
acknowledged by the Guarantor, the Guarantor agrees as follows:
1. Guarantor hereby unconditionally and irrevocably, guarantees: (i) the
due and punctual payment in full (and not merely the collectability) of the
principal of the Obligations and the interest thereon, in each case when due and
payable, according to the terms of the Loan Agreement, and the Note; (ii) the
due and punctual payment in full (and not merely the collectability) of all
other sums and charges which may at any time be due and payable in accordance
with, or under the terms of, the Loan Agreement and the Note; (iii) the accuracy
of the representations and warranties made by the Obligor in the Loan Agreement
and the Note; and (iv) the due and punctual performance and observance of all of
the other terms, covenants, and conditions contained in the Loan Agreement, the
Note and any
<PAGE> 2
other security instruments and agreements relating to the Obligations now or
hereafter existing on the part of the Obligor to be performed or observed (the
Loan Agreement, the Note and all security instruments and all related agreements
are collectively referred to herein as the "Documents").
2. Guarantor expressly agrees that Lender may, in its sole and absolute
discretion, without notice to or further assent of Guarantor, and without in any
way releasing, affecting or impairing the obligations and liabilities of
Guarantor under this Guaranty: (i) waive compliance with, or any default under,
or grant any other indulgences with respect to, the Documents; (ii) modify,
amend, or change any provisions of the Documents; (iii) agree to the
substitution, exchange, release or other disposition of the Guarantor or any
part of the collateral securing the Obligations; (iv) make advances for the
purpose of performing any term or covenant contained in the Documents, with
respect to which the Obligor shall be deemed by the Lender to be in default; (v)
assign or otherwise transfer the Documents, including without limitation this
Guaranty, or any interest therein or herein; and (vi) deal in all respects with
the Obligor as if this Guaranty were not in effect. The obligations of Guarantor
under this Guaranty shall be unconditional, irrespective of the genuineness,
validity, regularity or enforceability of the Documents or any other
circumstances which might otherwise constitute a legal or equitable discharge of
a surety or guarantor.
3. The liability of Guarantor under this Guaranty shall be primary,
direct, and immediate, and not conditional or contingent upon pursuit by Lender
of any remedies it may have against the Obligor or any other party with respect
to the Documents, whether pursuant to the terms thereof or otherwise. No
exercise or nonexercise by Lender of any right given to it hereunder or under
the Documents, and no change, impairment, or suspension of any right or remedy
of Lender shall in any way affect the Guarantor's obligations hereunder or give
the Guarantor any recourse against Lender. Without limiting the generality of
the foregoing, Lender shall not be required to make any demand on the Obligor
and/or any other party, before, simultaneously with or after, enforcing its
rights and remedies hereunder against Guarantor. Any one or more successive
and/or concurrent actions may be brought hereon against Guarantor, either in the
same action, if any, brought against the Guarantor and/or any other party, or in
separate actions, as often as Lender, in its sole discretion, may deem
advisable.
4. As to the Obligations, Guarantor hereby expressly waives: (i)
presentment and demand for payment and protest of nonpayment; (ii) notice of
acceptance of this Guaranty and of presentment, demand and protest; (iii) notice
of any default hereunder or under the Documents and of all indulgences; (iv)
demand for observance or performance of, or enforcement of, any
2
<PAGE> 3
terms or provisions of this Guaranty or the Documents; (v) all other notices and
demands otherwise required by law which Guarantor may lawfully waive; (vi) the
right to assert in any action or proceeding hereupon by Lender, or in the event
that an action or proceeding has not been commenced, any set-off, counterclaim
or other claim which it may have against Lender or the Obligor; (vii) all rights
of indemnity, reimbursement, contribution, or subrogation from the Obligor; and
(viii) the benefit of all other principles or provisions of law, statutory or
otherwise, which are or might be in conflict with the terms hereof; and (ix)
notice of set-off against any property of the Guarantor in the possession of the
Lender.
5. If Guarantor shall advance any sums to Obligor, its successors or
assigns, or if the Obligor, its successors or assigns shall be or shall
hereafter become indebted to Guarantor such sums and indebtedness shall be
subordinate in all respects to the amounts then or thereafter due and owing to
Lender. Nothing herein contained shall be construed to give Guarantor, any right
of subrogation in and to the rights of Lender under the Documents until all
amounts owing to Lender under the Obligations have been paid in full.
6. Any notice, demand, request, or other communication given hereunder or
in connection herewith (hereinafter "Notices") shall be deemed sufficient if in
writing and sent by certified mail, postage prepaid, return receipt requested,
addressed to the party to receive such Notice at its address first above set
forth or at such other address as the Guarantor may hereafter designate by
Notice given in like fashion. Notices to the Lender shall be sent Attention:
Anthony A. Botelho, Vice President. Notices shall be deemed given when mailed.
7. Any payments made by Guarantor under the provision of this Guaranty
shall, if made to Lender be made at its principal office at its address first
set forth above, unless some other address is hereafter designated by Lender.
8. All rights and remedies afforded to Lender by reason of this Guaranty
and the Documents, or by law are separate and cumulative and the exercise of one
shall not in any way limit or prejudice the exercise of any other such rights or
remedies. No delay or omission by Lender in exercising any such right or remedy
shall operate as a waiver thereof. No waiver of any rights and remedies
hereunder, and no modification or amendment hereof, shall be deemed made by
Lender unless in writing and duly executed. Any such written waiver shall apply
only to the particular instance specified therein and shall not impair the
further exercise of such right or remedy or of any other right or remedy of
Lender, and no single or partial exercise of any right or remedy hereunder shall
preclude further exercise of any other right or remedy.
3
<PAGE> 4
9. The obligations of Guarantor to make payment in accordance with the
terms of this Guaranty shall not be impaired, modified, changed, released, or
limited in any manner whatsoever by any impairment, modification, change,
release or limitation of the liability of the Obligor or its respective estates
in bankruptcy or reorganization resulting from the operation of any present or
future provision of the Federal Bankruptcy Code or other statute or from the
decision of any court. Guarantor agrees that in the event any amounts referred
to herein are paid in whole or in part by the Obligor or by the Guarantor,
Guarantor's liability hereunder shall continue and remain in full force and
effect in the event that all or any part of any such payment is recovered from
Lender as a preference, fraudulent transfer or similar payment under any
bankruptcy, insolvency, or similar law. Guarantor further agrees that the
Obligations of the Guarantor under this Guaranty shall include, but not be
limited to, the costs incurred by Lender in defending any claim or suit seeking
such recovery further including, but not limited to, reasonable attorneys' fees.
10. The Guarantor hereby covenants and agrees not to dispose of all or any
substantial part of its assets nor cause nor suffer any substantial diminution
of its net worth as the same exists on the date hereof, and that any of the
foregoing shall, at the option of Lender, its successors and assigns, be void
and of no effect. Lender shall be entitled, without limiting any other rights
which Lender may have under this Guaranty, to enjoin any breach or threatened
breach of this paragraph.
11. Guarantor represents and warrants that Guarantor is not now insolvent
and the Guarantor's obligations under this Guaranty do not render Guarantor
insolvent; Guarantor is not contemplating either the filing of a petition by
Guarantor under any state or federal bankruptcy or insolvency laws and the
liquidation of all or a major portion of the Guarantor's property; and the
Guarantor has no knowledge of any person contemplating the filing of any such
petition against Guarantor.
12. GUARANTOR HEREBY IRREVOCABLY AND UNCONDITIONALLY (A) SUBMITS TO
JURISDICTION IN THE STATE OF RHODE ISLAND OVER ANY SUIT, ACTION OR PROCEEDING
ARISING OUT OF OR RELATING TO THIS GUARANTY, AND (B) WAIVES ANY AND ALL RIGHTS
UNDER THE LAWS OF ANY STATE (I) TO THE RIGHT, IF ANY, TO TRIAL BY JURY, (II) TO
OBJECT TO JURISDICTION WITHIN THE STATE OF RHODE ISLAND OR VENUE IN ANY
PARTICULAR FORUM WITHIN THE STATE OF RHODE ISLAND, AND (III) TO THE RIGHT, IF
ANY, TO CLAIM OR RECOVER ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL
DAMAGES OR ANY DAMAGES OTHER THAN ACTUAL DAMAGES. GUARANTOR AGREES THAT, IN
ADDITION TO ANY METHODS OF SERVICE OF PROCESS PROVIDED FOR UNDER APPLICABLE LAW,
ALL SERVICE OF PROCESS IN ANY SUCH SUIT, ACTION OR PROCEEDING MAY BE MADE BY
CERTIFIED MAIL, RETURN RECEIPT REQUESTED, DIRECTED TO
4
<PAGE> 5
THE GUARANTOR AT THE ADDRESS SET FORTH ABOVE, AND SERVICE SO MADE sHALL BE
DEEMED COMPLETE FIFTEEN (15) DAYS AFTER THE SAME SHALL BE SO MAILED. NOTHING
CONTAINED HEREIN, HOWEVER, SHALL PREVENT LENDER FROM BRINGING ANY SUIT, ACTION
OR PROCEEDING OR EXERCISING ANY RIGHTS, INCLUDING SET-OFF, AGAINST ANY SECURITY
IN POSSESSION OF LENDER WHICH RIGHTS TO NOTICE THE GUARANTOR EXPRESSLY WAIVES
AND AGAINST GUARANTOR, AND AGAINST ANY PROPERTY OF GUARANTOR, IN ANY OTHER
STATE. INITIATING SUCH SUIT, ACTION OR PROCEEDING OR SETTING-OFF AGAINST THE
GUARANTOR'S PROPERTY IN POSSESSION OF THE LENDER OR TAKING SUCH ACTION IN ANY
STATE, INCLUDING, BUT NOT LIMITED TO RHODE ISLAND , SHALL IN NO EVENT CONSTITUTE
A WAIVER OF THE AGREEMENT CONTAINED HEREIN. THE LAWS OF THE STATE OF RHODE
ISLAND SHALL GOVERN THE RIGHTS AND OBLIGATIONS OF GUARANTOR AND LENDER HEREUNDER
OR THE SUBMISSION HEREIN MADE BY GUARANTOR TO JURISDICTION WITHIN THE STATE OF
RHODE ISLAND. GUARANTOR AGREES THAT IN THE EVENT THIS GUARANTY SHALL BE ENFORCED
BY SUIT OR OTHERWISE, OR IF LENDER SHALL EXERCISE OR ENDEAVOR TO EXERCISE ANY OF
ITS REMEDIES UNDER THE DOCUMENTS, GUARANTOR WILL REIMBURSE LENDER, UPON DEMAND,
FOR ALL EXPENSES AND DAMAGES INCURRED IN CONNECTION THEREWITH, INCLUDING,
WITHOUT LIMITATION, REASONABLE ATTORNEYS' FEES. AT THE LENDER'S SOLE DISCRETION,
THE GUARANTOR HEREBY IRREVOCABLY DESIGNATES AND APPOINTS CHARLES A. WRY, JR.,
ESQ., HAVING AN ADDRESS AT MORSE BARNES-BROWN & PENDLETON, P.C., RESERVOIR
PLACE, 1601 TRAPELO ROAD, WALTHAM, MA 02154, AS GUARANTOR'S ATTORNEY-IN-FACT TO
RECEIVE SERVICE OF PROCESS IN ANY SUIT, ACTION, OR PROCEEDING ARISING OUT OF
GUARANTOR'S OBLIGATIONS UNDER OR WITH RESPECT TO THIS GUARANTY, IT BEING
EXPRESSLY STIPULATED AND AGREED BY GUARANTOR THAT SERVICE UPON SUCH
ATTORNEY-IN-FACT SHALL CONSTITUTE SERVICE UPON GUARANTOR. CONCURRENTLY, WITH THE
SERVICE OF PROCESS UPON EITHER SUCH ATTORNEY-IN-FACT, COPIES OF THE PAPERS SO
SERVED SHALL BE SENT CERTIFIED MAIL, POSTAGE PREPAID, RETURN RECEIPT REQUESTED,
TO GUARANTOR AT ITS ADDRESS FIRST ABOVE SET FORTH OR AT SUCH OTHER ADDRESS AS
THE GUARANTOR MAY HEREAFTER DESIGNATE BY NOTICE.
13. This Guaranty shall be construed in accordance with the laws of the
State of Rhode Island. All words herein of singular number shall extend to and
include words of the plural number; reference to the masculine gender shall
extend to and include the female gender as well as corporate and neuter status.
14. The Guarantor represents and warrants that it approves the terms and
conditions herein, which the Guarantor has caused to be read, fully understands
and finds to be fair and equitable. Further, the Guarantor acknowledges it is
causing this Guaranty to be executed voluntarily, freely and without duress.
15. This Guaranty shall inure to the benefit of, and be enforceable by,
Lender and its successors and assigns, and shall be binding upon, and
enforceable against, Guarantor and its respective successors and assigns.
5
<PAGE> 6
16. In case any one or more of the provisions contained herein shall for
any reason be held to be invalid, illegal, or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect any other provision
hereof but this Guaranty shall be construed as if such invalid, illegal, or
unenforceable provision had never been included.
IN WITNESS WHEREOF, Guarantor has caused this Guaranty to be executed by
its duly representative as of the day and year first above written.
WITNESS: HANOVER CAPITAL ADVISORS, INC.
/s/ By: /s/
- -------------------------------- -----------------------------------
Its: President
-----------------------------------
6
<PAGE> 1
EXHIBIT 10.23
GUARANTY
--------
THIS GUARANTY ("Guaranty") is made as of the 10th day of December, 1996, by
HANOVER CAPITAL SECURITIES, INC.,having an address at c/o Hanover Capital
Partners, Ltd., 90 West Street, New York, New York 10006 (as used herein, "the
Guarantor"), to with FLEET NATIONAL BANK, a national banking association, having
its principal office at 111 Westminster, Providence, Rhode Island 02903 (the
"Lender").
W I T N E S S T H:
- - - - - - - - -
WHEREAS, contemporaneously herewith, subject to certain terms and
conditions, Lender has agreed to enter into a revolving Credit agreement (the
"Loan Agreement"), with Hanover Capital Partners, Ltd. (the "Obligor"),
regarding certain indebtedness due and owing Lender evidenced by that certain
promissory note (the "Note") executed by the Obligor in favor of Lender of even
date herewith in the original principal amount of $2,000,000.00 (the
"Obligations"); and
WHEREAS, Guarantor is a subsidiary of the Obligor and thus the Guarantor
has a substantial interest in Obligor; and
WHEREAS, Lender has advised Guarantor that it will not enter into the Loan
Agreement with the Obligor unless all of the Obligations and certain other
agreements as hereinafter referenced, including without limitation the punctual
payment of both principal and interest of the Obligations to be paid, is
guaranteed by the Guarantor; and
WHEREAS, Guarantor is willing and has agreed to guarantee the payment of
the Obligations of the Obligor, as hereinafter provided.
NOW THEREFORE, in order to induce Lender to enter into the Loan Agreement
and for other good and valuable consideration, the receipt of which is hereby
acknowledged by the Guarantor, the Guarantor agrees as follows:
1. Guarantor hereby unconditionally and irrevocably, guarantees: (i) the
due and punctual payment in full (and not merely the collectability) of the
principal of the Obligations and the interest thereon, in each case when due and
payable, according to the terms of the Loan Agreement, and the Note; (ii) the
due and punctual payment in full (and not merely the collectability) of all
other sums and charges which may at any time be due and payable in accordance
with, or under the terms of, the Loan Agreement and the Note; (iii) the accuracy
of the representations and warranties made by the Obligor in the Loan Agreement
and the Note; and (iv) the due and punctual performance and observance of all of
the other terms, covenants, and conditions contained in the Loan Agreement, the
Note and any
<PAGE> 2
other security instruments and agreements relating to the Obligations now or
hereafter existing on the part of the Obligor to be performed or observed (the
Loan Agreement, the Note and all security instruments and all related agreements
are collectively referred to herein as the "Documents").
2. Guarantor expressly agrees that Lender may, in its sole absolute
discretion, without notice to or further assent of Guarantor, and without in any
way releasing, affecting or impairing the obligations and liabilities of
Guarantor under this Guaranty: (i) waive compliance with, or any default under,
or grant any other indulgences with respect to, the Documents; (ii) modify,
amend, or change any provisions of the Documents; (iii) agree to the
substitution, exchange, release or other disposition of the Guarantor or any
part of the collateral securing the Obligations; (iv) make advances for the
purpose of performing any term or covenant contained in the Documents, with
respect to which the Obligor shall be deemed by the Lender to be in default; (v)
assign or otherwise transfer the Documents, including without limitation this
Guaranty, or any interest therein or herein; and (vi) deal in all respects with
the Obligor as if this Guaranty were not in effect. The obligations of Guarantor
under this Guaranty shall be unconditional, irrespective of the genuineness,
validity, regularity or enforceability of the Documents or any other
circumstances which might otherwise constitute a legal or equitable discharge of
a surety or guarantor.
3. The liability of Guarantor under this Guaranty shall be primary,
direct, and immediate, and not conditional or contingent upon pursuit by Lender
of any remedies it may have against the Obligor or any other party with respect
to the Documents, whether pursuant to the terms thereof or otherwise. No
exercise or nonexercise by Lender of any right given to it hereunder or under
the Documents, and no change, impairment, or suspension of any right or remedy
of Lender shall in any way affect the Guarantor's obligations hereunder or give
the Guarantor any recourse against Lender. without limiting the generality of
the foregoing, Lender shall not be required to make any demand on the Obligor
and/or any other party, before, simultaneously with or after, enforcing its
rights and remedies hereunder against Guarantor. Any one or more successive
and/or concurrent actions may be brought hereon against Guarantor, either in the
same action, if any, brought against the Guarantor and/or any other party, or in
separate actions, as often as Lender, in its sole discretion, may deem
advisable.
4. As to the Obligations, Guarantor hereby expressly waives: (i)
presentment and demand for payment and protest of nonpayment; (ii) notice of
acceptance of this Guaranty and of presentment, demand and protest; (iii) notice
of any default hereunder or under the Documents and of all indulgences; (iv)
demand for observance or performance of, or enforcement of, any
2
<PAGE> 3
terms or provisions of this Guaranty or the Documents; (v) all other notices and
demands otherwise required by law which Guarantor may lawfully waive; (vi) the
right to assert in any action or proceeding hereupon by Lender, or in the event
that an action or proceeding has not been commenced, any set-off, counterclaim
or other claim which it may have against Lender or the Obligor; (vii) all rights
of indemnity, reimbursement, contribution, or subrogation from the Obligor; and
(viii) the benefit of all other principles or provisions of law, statutory or
otherwise, which are or might be in conflict with the terms hereof; and (ix)
notice of set-off against any property of the Guarantor in the possession of the
Lender.
5. If Guarantor shall advance any sums to Obligor, its successors or
assigns, or if the Obligor, its successors or assigns shall be or shall
hereafter become indebted to Guarantor such sums and indebtedness shall be
subordinate in all respects the amounts then or thereafter due and owing to
Lender. Nothing herein contained shall be construed to give Guarantor, any right
of subrogation in and to the rights of Lender under the Documents until all
amounts owing to Lender under the Obligations been paid in full.
6. Any notice, demand, request, or other communication given hereunder or
in connection herewith (hereinafter "Notices") [.shall be deemed sufficient if
in writing and sent by certified mail, postage prepaid, return receipt
requested, addressed to the party to receive such Notice at its address first
above set forth or at such other address as the Guarantor may hereafter
designate by Notice given in like fashion. Notices to the Lender shall be sent
Attention: Anthony A. Botelho, Vice President. Notices shall be deemed given
when mailed.
7. Any payments made by Guarantor under the provision of this Guaranty
shall, if made to Lender be made at its principal office at its address first
set forth above, unless some other address is hereafter designated by Lender.
8. All rights and remedies afforded to Lender by reason of this Guaranty
and the Documents, or by law are separate and cumulative and the exercise of one
shall not in any way limit or prejudice the exercise of any other such rights or
remedies. No delay or omission by Lender in exercising any such right or remedy
shall operate as a waiver thereof. No waiver of any rights and remedies
hereunder, and no modification or amendment hereof, shall be deemed made by
Lender unless in writing and duly executed. Any such written waiver shall apply
only to the particular instance specified therein and shall not impair the
further exercise of such right or remedy or of any other right or remedy of
Lender, and no single or partial exercise of any right or remedy hereunder shall
preclude further exercise of any other right or remedy.
3
<PAGE> 4
9. The obligations of Guarantor to make payment in accordance with the
terms of this Guaranty shall not be impaired, modified, changed, released, or
limited in any manner whatsoever by any impairment, modification, change,
release or limitation of the liability of the Obligor or its respective estates
in bankruptcy or reorganization resulting from the operation of any present or
future provision of the Federal Bankruptcy Code or other statute or from the
decision of any court. Guarantor agrees that in the event any amounts referred
to herein are paid in whole or in part by the Obligor or by the Guarantor,
Guarantor's liability hereunder shall continue and remain in full force and
effect in the event that all or any part of any such payment is recovered from
Lender as a preference, fraudulent transfer or similar payment under any
bankruptcy, insolvency, or similar law. Guarantor further agrees that the
Obligations of the Guarantor under this Guaranty shall include, but not be
limited to, the costs incurred by Lender in defending any claim or suit seeking
such recovery further including, but not limited to, reasonable attorneys' fees.
10. The Guarantor hereby covenants and agrees not to dispose of all or any
substantial part of its assets nor cause nor suffer any substantial diminution
of its net worth as the same exists on the date hereof, and that any of the
foregoing shall, at the option of Lender, its successors and assigns, be void
and of no effect. Lender shall be entitled, without limiting any other rights
which Lender may have under this Guaranty, to enjoin any breach or threatened
breach of this paragraph.
11. Guarantor represents and warrants that Guarantor is not now insolvent
and the Guarantor's obligations under this Guaranty do not render Guarantor
insolvent; Guarantor is not contemplating either the filing of a petition by
Guarantor under any state or federal bankruptcy or insolvency laws and the
liquidation of all or a major portion of the Guarantor's property; and the
Guarantor has no knowledge of any person contemplating the filing of any such
petition against Guarantor.
12. GUARANTOR HEREBY IRREVOCABLY AND UNCONDITIONALLY (A) SUBMITS TO
JURISDICTION IN THE STATE OF RHODE ISLAND OVER ANY SUIT, ACTION OR PROCEEDING
ARISING OUT OF OR RELATING TO THIS GUARANTY, AND (B) WAIVES ANY AND ALL RIGHTS
UNDER THE LAWS OF ANY STATE (I) TO THE RIGHT, IF ANY, TO TRIAL BY JURY, () TO
OBJECT TO JURISDICTION WITHIN THE STATE OF RHODE ISLAND OR VENUE IN ANY
PARTICULAR FORUM WITHIN THE STATE OF RHODE ISLAND, AND (III) TO THE RIGHT, IF
ANY, TO CLAIM OR RECOVER ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL
DAMAGES OR ANY DAMAGES OTHER THAN ACTUAL DAMAGES. GUARANTOR AGREES THAT, IN
ADDITION TO ANY METHODS OF SERVICE OF PROCESS PROVIDED FOR UNDER APPLICABLE LAW,
ALL SERVICE OF PROCESS IN ANY SUCH SUIT, ACTION OR PROCEEDING MAY BE MADE BY
CERTIFIED MAIL, RETURN RECEIPT REQUESTED, DIRECTED TO
4
<PAGE> 5
THE GUARANTOR AT THE ADDRESS SET FORTH ABOVE, AND SERVICE SO MADE SHALL BE
DEEMED COMPLETE FIFTEEN (15) DAYS AFTER THE SAME SHALL BE SO MAILED. NOTHING
CONTAINED HEREIN, HOWEVER, SHALL PREVENT LENDER FROM BRINGING ANY SUIT, ACTION
OR PROCEEDING OR EXERCISING ANY RIGHTS, INCLUDING SET-OFF, AGAINST ANY SECURITY
IN POSSESSION OF LENDER WHICH RIGHTS TO NOTICE THE GUARANTOR EXPRESSLY WAIVES
AND AGAINST GUARANTOR, AND AGAINST ANY PROPERTY OF GUARANTOR, IN ANY OTHER
STATE. INITIATING SUCH SUIT, ACTION OR PROCEEDING OR SETTING-OFF AGAINST THE
GUARANTOR'S PROPERTY IN POSSESSION OF THE LENDER OR TAKING SUCH ACTION IN ANY
STATE, INCLUDING, BUT NOT LIMITED TO RHODE ISLAND, SHALL IN NO EVENT CONSTITUTE
A WAIVER OF THE AGREEMENT CONTAINED HEREIN. THE LAWS OF THE STATE OF RHODE
ISLAND SHALL GOVERN THE RIGHTS AND OBLIGATIONS OF GUARANTOR AND LENDER HEREUNDER
OR THE SUBMISSION HEREIN MADE BY GUARANTOR TO JURISDICTION WITHIN THE STATE OF
RHODE ISLAND. GUARANTOR AGREES THAT IN THE EVENT THIS GUARANTY SHALL BE ENFORCED
BY SUIT OR OTHERWISE, OR IF LENDER SHALL EXERCISE OR ENDEAVOR TO EXERCISE ANY OF
ITS REMEDIES UNDER THE DOCUMENTS, GUARANTOR WILL REIMBURSE LENDER, UPON DEMAND,
FOR ALL EXPENSES AND DAMAGES INCURRED IN CONNECTION THEREWITH, INCLUDING,
WITHOUT LIMITATION, REASONABLE ATTORNEYS' FEES. AT THE LENDER'S SOLE DISCRETION,
THE GUARANTOR HEREBY IRREVOCABLY DESIGNATES AND APPOINTS CHARLES A. WRY, JR.,
ESQ., HAVING AN ADDRESS AT MORSE BARNES-BROWN & PENDLETON, P.C., RESERVOIR
PLACE, 1601 TRAPELO ROAD, WALTHAM, MA 02154, AS GUARANTOR'S ATTORNEY-IN-FACT TO
RECEIVE SERVICE OF PROCESS IN ANY SUIT, ACTION, OR PROCEEDING ARISING OUT OF
GUARANTOR'S OBLIGATIONS UNDER OR WITH RESPECT TO THIS GUARANTY, IT BEING
EXPRESSLY STIPULATED AND AGREED BY GUARANTOR THAT SERVICE UPON SUCH
ATTORNEY-IN-FACT SHALL CONSTITUTE SERVICE UPON GUARANTOR. CONCURRENTLY, WITH THE
SERVICE OF PROCESS UPON EITHER SUCH ATTORNEY-IN-FACT, COPIES OF THE PAPERS SO
SERVED SHALL BE SENT CERTIFIED MAIL, POSTAGE PREPAID, RETURN RECEIPT REQUESTED,
TO GUARANTOR AT ITS ADDRESS FIRST ABOVE SET FORTH OR AT SUCH OTHER ADDRESS AS
THE GUARANTOR MAY HEREAFTER DESIGNATE BY NOTICE.
13. This Guaranty shall be construed in accordance with the laws of the
State of Rhode Island. All words herein of singular number shall extend to and
include words of the plural number; reference to the masculine gender shall
extend to and include the female gender as well as corporate and neuter status.
14. The Guarantor represents and warrants that it approves the terms and
conditions herein, which the Guarantor has caused to be read, fully understands
and finds to be fair and equitable. Further, the Guarantor acknowledges it is
causing this Guaranty to be executed voluntarily, freely and without duress.
15. This Guaranty shall inure to the benefit of, and be enforceable by,
Lender and its successors and assigns, and shall be binding upon, and
enforceable against, Guarantor and its respective successors and assigns.
5
<PAGE> 6
16. In case any one or more of the provisions contained herein shall for
any reason be held to be invalid, illegal, or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect any other provision
hereof but this Guaranty shall be construed as if such invalid, illegal, or
unenforceable provision had never been included.
IN WITNESS WHEREOF, Guarantor has caused this Guaranty to be executed by
its duly representative as of the day and year first above written.
WITNESS: HANOVER CAPITAL SECURITIES, INC.
By: /s/
- -------------------------- -----------------------------------
Its: President
-----------------------------------
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 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, 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
JULY 31, 1997
