<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
/X/ Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 1999
OR
/ / Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
Commission file number: 001-13417
HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
MARYLAND 13-3950486
(State or other Jurisdiction of ( I.R.S. Employer Identification No.)
Incorporation or Organization)
90 WEST STREET, SUITE 1508, NEW YORK, NY 10006
(Address of principal executive offices) (Zip Code)
(212) 732-5086
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
The registrant had 5,826,899 shares of common stock outstanding as of
May 11, 1999.
<PAGE> 2
HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
FORM 10-Q
For the Quarter Ended March 31, 1999
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Page No.
--------
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
March 31, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Operations for the Three
Months Ended March 31, 1999 and 1998 4
Condensed Consolidated Statement of Stockholders' Equity for
the Three Months Ended March 31, 1999 5
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1999 and 1998 6
Notes to Condensed Consolidated Financial Statements 7-23
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 24-43
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 44-45
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 46
Item 2. Changes in Securities 46
Item 3. Defaults Upon Senior Securities 46
Item 4. Submission of Matters to a Vote of Security Holders 46
Item 5. Other Information 46
Item 6. Exhibits and Reports on Form 8-K 46
Signatures 47
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item I. Financial Statements
HANOVER CAPITAL MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except as noted)
(unaudited)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
ASSETS 1999 1998
---- ----
<S> <C> <C>
Mortgage loans:
Held for sale $140,116 $256,833
Held to maturity -- 69,495
CMO collateral 138,504 -
Collateral for mortgage backed bonds 72,883 81,666
Mortgage securities:
Available for sale 67,854 74,000
Held to maturity 3,756 4,478
Cash and cash equivalents 21,994 11,837
Accrued interest receivable 3,496 3,940
Equity investments 6,612 7,489
Notes receivable from related parties 3,726 3,893
Due from related parties 365 313
Other receivables 1,813 1,621
Prepaid expenses and other assets 528 605
-------- --------
TOTAL ASSETS $461,647 $516,170
======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
LIABILITIES:
Reverse repurchase agreements $193,409 $370,090
CMO borrowing 130,095 --
Mortgage backed bonds 68,766 77,305
Accrued interest payable 1,871 1,394
Deferred income 592 --
Dividends payable -- 695
Due to related party 7 --
Accrued expenses and other liabilities 1,318 906
--------- ---------
Total liabilities 396,058 450,390
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.01
authorized, 10 million shares, issued
and outstanding, -0- shares
Common stock, par value $.01
authorized, 90 million shares, 6,126,899 and
6,321,899 shares outstanding at March 31, 1999
and December 31, 1998, respectively 65 65
Additional paid-in-capital 77,087 78,069
Retained (deficit) (9,219) (9,955)
Accumulated other comprehensive (loss) (2,344) (2,399)
-------- ---------
Total stockholders' equity 65,589 65,780
-------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $461,647 $516,170
======== =========
</TABLE>
See accompanying notes to condensed consolidated financial statements
3
<PAGE> 4
HANOVER CAPITAL MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1999 1998
---- ----
<S> <C> <C>
REVENUES:
Interest income $8,414 $9,332
Interest expense 6,363 7,173
------ ------
Net interest income 2,051 2,159
Loan loss provision 119 51
------ ------
Net interest income after loan loss provision 1,932 2,108
Gain on sale of servicing rights 342 --
Gain on sale of mortgage securities 163 --
------ ------
Total revenues 2,437 2,108
------ ------
EXPENSES:
Personnel 190 189
Management and administrative 194 161
Due diligence 63 175
Commissions -- 125
Legal and professional 224 80
Financing/commitment fees 76 61
Other 78 63
------ ------
Total expenses 825 854
------ ------
Operating income 1,612 1,254
Equity in (loss) of unconsolidated subsidiaries:
Operating (408) (6)
Mortgage finance (468) --
------ ------
NET INCOME $736 $1,248
====== ======
BASIC EARNINGS PER SHARE $0.12 $0.19
====== ======
DILUTED EARNINGS PER SHARE $0.11 $0.17
====== ======
</TABLE>
See accompanying notes to condensed consolidated financial statements
4
<PAGE> 5
HANOVER CAPITAL MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 1999
(in thousands except share data)
(unaudited)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
COMMON STOCK PAID-IN COMPREHENSIVE RETAINED COMPREHENSIVE
SHARES AMOUNT CAPITAL INCOME (DEFICIT) (LOSS) TOTAL
------ ------ ------- ------ --------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
DECEMBER 31, 1998 6,321,899 $65 $78,069 ($9,955) ($2,399) $65,780
Repurchase of common stock (195,000) (982) (982)
Comprehensive income:
Net income $736 736 736
Other comprehensive income
Unrealized income 55 55 55
----
Comprehensive income $791
--------- --- ------- ==== ------- ------- -------
BALANCE, MARCH 31, 1999 6,126,899 $65 $77,087 ($9,219) ($2,344) $65,589
========= === ======= ======= ======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements
5
<PAGE> 6
HANOVER CAPITAL MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $736 $1,248
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of net premium and deferred costs 747 1,036
Loan loss provision 119 51
Gain on sale of servicing rights (342) --
Gain on sale of mortgage securities (163) --
Equity in loss of unconsolidated subsidiaries 876 6
(Increase) decrease in accrued interest receivable 444 (3,749)
(Increase) decrease in loans to related parties 167 (901)
(Increase) in due from related parties (13) --
Decrease in other receivables 493 --
(Increase) decrease in prepaid expenses and other assets 77 (754)
Increase in accrued interest payable 477 1,692
Increase in deferred income 591 --
Increase (decrease) in due to related party 7 (489)
Increase in accrued expenses and other liabilities 76 3,754
-------- --------
Net cash provided by operating activities 4,292 1,894
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in mortgage loans 45,274 (222,781)
Principal payments received on collateral for 8,606 --
mortgage backed bonds
Principal payments received on mortgage securities 4,177 38,340
Proceeds from the sale of mortgage securities 2,249 --
Principal payments on CMO collateral 2,171 --
Proceeds from the sale of servicing rights 190 --
Purchase of mortgage securities -- (4,333)
-------- --------
Net cash provided by (used in) investing activities 62,667 (188,774)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net CMO borrowing 130,095 --
Payments on mortgage backed bonds (8,539) --
Net borrowings from (repayments for) reverse repurchase
agreements (176,681) 208,882
Repurchase of common stock (982) --
Payment of dividends (695) (1,035)
-------- --------
Net cash provided by (used in) financing activities (56,802) 207,847
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 10,157 20,967
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 11,837 4,022
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $21,994 $24,989
======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES
Operating activity - increase in dividends payable ($1,358) relating
to the declaration of dividends in March 1998
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Income taxes $1 $1
======== ========
Interest $5,886 $5,190
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
6
<PAGE> 7
HANOVER CAPITAL MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
GENERAL
Hanover Capital Mortgage Holdings, Inc. ("Hanover") was incorporated in Maryland
on June 10, 1997. Hanover has four wholly-owned bankruptcy remote limited
purpose finance subsidiaries organized to complete certain mortgage loan
securitization transactions in 1998 and 1999. Hanover is a real estate
investment trust ("REIT"), formed to operate as a specialty finance company. The
principal business strategy of Hanover and its wholly-owned subsidiaries,
(together referred to as the "Company") and its unconsolidated subsidiaries is
to (i) acquire primarily single-family mortgage loans that are at least twelve
months old or that were intended to be of certain credit quality but that do not
meet the originally intended market parameters due to errors or credit
deterioration, (ii) securitize the mortgage loans and retain interests therein,
(iii) acquire subordinated mortgage securities similar in nature to the retained
interests generated from internal securitizations and (iv) originate, hold, sell
and service multifamily mortgage loans and commercial loans. The Company's
principal business objective is to generate increasing earnings and dividends
for distribution to its stockholders. The Company acquires single-family
mortgage loans through a network of sales representatives targeting financial
institutions throughout the United States.
Listed below are the wholly-owned subsidiaries of Hanover:
Name Date Acquired
---- -------------
Hanover Capital SPC, Inc.(a) March 24, 1998
Hanover QRS-1 98-B, Inc. October 16, 1998
Hanover QRS-2 98-B, Inc. October 19, 1998
Hanover SPC-A, Inc. March 11, 1999
Listed below are the unconsolidated subsidiaries of Hanover:
Name Date Acquired
---- -------------
Hanover Capital Partners Ltd.(b) September 17, 1997
Hanover Capital Partners 2, Inc. October 7, 1998
(a) Hanover Capital Repo Corp. is a wholly-owned subsidiary of
Hanover Capital SPC, Inc.
(b) Hanover Capital Mortgage Corporation and Hanover Capital
Securities, Inc. are wholly-owned subsidiaries of Hanover Capital
Partners Ltd.
CAPITALIZATION
In September 1997, the Company raised net proceeds of approximately $79 million
in its initial public offering (the "IPO"). In the IPO, the Company sold
5,750,000 units (each unit consisting of one share of common stock, par value
$.01 and one stock warrant) at $15.00 per unit including 750,000 units sold
pursuant to the underwriters' over-allotment option, which was exercised in
full. Each warrant entitles the holder to purchase one share of common stock at
the original issue price - $15.00. The warrants became exercisable on March 19,
1998 and expire on September 15, 2000. The Company utilized substantially all of
the net proceeds of the IPO to fund leveraged purchases of mortgage loans. As of
March 31, 1999, there were 5,917,878 warrants outstanding, including 172,500
warrants issued pursuant to the underwriters over-allotment option.
7
<PAGE> 8
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements include the accounts of Hanover
Capital Mortgage Holdings, Inc. and its wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared by the management of the Company in accordance with generally accepted
accounting principles for interim financial information and in conformity with
the rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
The results of operations for the three months ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the full year.
For further information, refer to the audited financial statements and footnotes
included in the Company's 1998 Form 10-K.
METHOD OF ACCOUNTING
The condensed consolidated financial statements of the Company are prepared on
the accrual basis of accounting in accordance with generally accepted accounting
principles. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
INCOME TAXES
Hanover has elected to be taxed as a real estate investment trust ("REIT") and
intends to comply with the provisions of the Internal Revenue Code of 1986, as
amended (the "Code") with respect thereto. Accordingly, Hanover will not be
subject to Federal or state income tax to the extent that its annual
distributions to stockholders are equal to at least 95% of its taxable income
and as long as certain asset, income and stock ownership tests are met.
EARNINGS PER SHARE
Basic earnings per share excludes dilution and is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock that then shared in earnings.
Shares issued during the period and shares reacquired during the period are
weighted for the period they were outstanding.
8
<PAGE> 9
Calculations for earnings per share are shown below (dollars in thousands,
except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1999 MARCH 31, 1998
-------------- --------------
<S> <C> <C>
Earnings per share basic:
Net income [numerator] $736 $1,248
==== ======
Average common shares
outstanding [denominator] 6,244,955 6,466,677
========= =========
Per share $0.12 $0.19
===== =====
Earnings per share diluted:
Net income [numerator] $736 $1,248
==== ======
Average common shares
outstanding 6,244,955 6,466,677
--------- ---------
Add: Incremental shares from
assumed conversion of warrants 163,645 767,059
------- -------
Dilutive potential common shares 163,645 767,059
------- -------
Adjusted weighted average shares
[denominator] 6,408,600 7,233,736
========= =========
Per share $0.11 $0.17
===== =====
</TABLE>
3. MORTGAGE LOANS
The Company's policy is to classify each of its mortgage loans as held for sale
as they are purchased and each asset is monitored for a period of time,
generally four to nine months, prior to making a determination as to whether the
asset will be classified as held to maturity. At March 31, 1999 management had
made the determination that $140,116,000 of mortgage loans were held for sale.
No mortgage loans were designated as held to maturity, $140,662,000 of mortgage
loans were held as collateralized mortgage obligation ("CMO") collateral and
$72,883,000 of mortgage loans are held as collateral for mortgage backed bonds.
All mortgage loans designated as held for sale are reported at the lower of cost
or market, with unrealized losses reported as a charge to earnings in the
current period. Mortgage loans designated as held to maturity, CMO collateral
and collateral for mortgage backed bonds are reported at cost.
Premiums, discounts and certain deferred costs associated with the purchase of
mortgage loans are amortized into interest income over the lives of the mortgage
loans using the effective yield method adjusted for the effects of estimated
prepayments. Mortgage loan transactions are recorded on the date the mortgage
loans are purchased or sold. Purchases of new mortgage loans are recorded when
all significant uncertainties regarding the characteristics of the mortgage
loans are removed, generally on or shortly before settlement date. Realized
gains and losses on mortgage loan transactions are determined on the specific
identification basis.
The accrual of interest on impaired loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due. When
interest accrual is discontinued, all unpaid accrued interest income is
reversed. Interest income is subsequently recognized only to the extent cash
payments are received.
9
<PAGE> 10
Held for sale
The following table summarizes the Company's single-family mortgage loan pools,
held for sale which are carried at the lower of cost or market (dollars in
thousands):
<TABLE>
<CAPTION>
MARCH 31, 1999 DECEMBER 31, 1998
-------------- -----------------
Mortgage Loans Cost Mix Cost Mix
---- --- ---- ---
<S> <C> <C> <C> <C>
Fixed rate $47,302 34.24% $93,615 36.93%
Adjustable rate (2) 90,845 65.76% 159,901 63.07%
-------- ------ --------- ------
Subtotal 138,147 100.00% 253,516 100.00%
====== ======
Net premiums, discounts
and deferred costs 2,131 3,567
Loan loss provision (162) (250)
-------- --------
Carrying value $140,116 $256,833
======== ========
</TABLE>
The following table summarizes certain characteristics of the Company's
single-family fixed rate and adjustable rate mortgage loans, held for sale
portfolio (dollars in thousands):
<TABLE>
<CAPTION>
MARCH 31, 1999
------------------------------------------------------------------------------
Carrying Value Principal Weighted Weighted
of Mortgage Amount of Average Net Average
Loans Mortgage Loans Coupon Maturity (1)
----- -------------- ------ ------------
<S> <C> <C> <C> <C>
Fixed rate $48,681 $47,302 8.612% 144
Adjustable rate 91,435 90,845 7.319% 240
-------- -------- ----- ---
$140,116 $138,147 7.762% 207
======== ======== ===== ===
</TABLE>
The adjustable rate mortgage loans at March 31, 1999 had various reference rate
indexes with a weighted average 13 month repricing period and a weighted average
net life cap of 13.71%.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-------------------------------------------------------------------------------
Carrying Value Principal Weighted Weighted
of Mortgage Amount of Average Net Average
Loans Mortgage Loans Coupon Maturity (1)
----- -------------- ------ ------------
<S> <C> <C> <C> <C>
Fixed rate $95,763 $93,615 8.545% 187
Adjustable rate 161,070 159,901 7.542% 264
-------- -------- ----- ---
$256,833 $253,516 7.912% 235
======== ======== ===== ===
</TABLE>
The adjustable rate mortgage loans of December 31, 1998 had various reference
rate indexes with a weighted average 13 month repricing period and a weighted
average net life cap of 13.23%
(1) Weighted average maturity reflects the number of months until maturity.
(2) The adjustable rate mortgage loans include $25,060,489 and $31,856,949 of
hybrid mortgage loans which allow the coupon interest rate to change at one
specified time during the life of the loan.
10
<PAGE> 11
Held to maturity
The following table summarizes the Company's single-family mortgage loans, held
to maturity which are carried at cost (dollars in thousands):
<TABLE>
<CAPTION>
MARCH 31, 1999 DECEMBER 31, 1998
-------------- -----------------
<S> <C> <C>
Mortgage Loans
Fixed rate -- $67,515
Adjustable rate -- 144
--- -------
Subtotal -- 67,659
Net premiums and
deferred costs -- 1,878
Loan loss provision -- (42)
--- -------
Carrying value -- $69,495
=== =======
</TABLE>
The following table summarizes certain characteristics of the Company's
single-family fixed rate and adjustable rate mortgage loans, held to maturity
portfolio (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------
Carrying Value Principal Weighted Weighted
of Mortgage Amount of Average Net Average
Loans Mortgage Loans Coupon Maturity (1)
----- -------------- ------ ------------
<S> <C> <C> <C> <C>
Fixed rate $69,350 $67,515 8.707% 253
Adjustable rate 145 144 7.625% 302
------- ------- ------ ---
$69,495 $67,659 8.705% 253
======= ======= ====== ===
</TABLE>
The adjustable rate mortgage loans had a 1 year CMT based reference rate with a
12 month repricing period and a net life cap of 10.25%.
(1) Weighted average maturity reflects the number of months remaining until
maturity.
The average effective yield, which includes the amortization of net premium,
discounts and certain deferred costs for the three months ended March 31, 1999
on the total mortgage loan portfolio was 7.092%.
CMO collateral
In March 1999, the Company completed its first 1999 CMO securitization
transaction. $138,357,000 of single family fixed and adjustable rate residential
loans (par value) were assigned as collateral for the Company's CMO security.
The Company has limited exposure to credit risk retained on loans it has
securitized through the issuance of CMOs. All mortgage loans held as CMO
collateral are reported at cost. Premiums, discounts and all deferred costs
associated with the mortgage loans held as CMO collateral are amortized into
interest income over the lives of the mortgage loans using the effective yield
method adjusted for the effects of estimated prepayments.
The following table summarizes the Company's single-family fixed and adjustable
rate mortgage loan pools held as CMO collateral, which are carried at cost
(dollars in thousands):
11
<PAGE> 12
<TABLE>
<CAPTION>
March 31, 1999
--------------
<S> <C>
Mortgage Loans
Fixed rate $ 98,984
Adjustable rate 37,201
--------
Subtotal 136,185
Net premiums, discounts
and deferred costs 2,496
Loan loss provision (177)
--------
Carrying value $138,504
========
</TABLE>
The following table summarizes certain characteristics of the Company's
single-family fixed and adjustable rate mortgage loans held as CMO collateral
(dollars in thousands):
<TABLE>
<CAPTION>
Carrying Value Principal Amount Weighted Weighted
of CMO of CMO Average Average
Collateral Collateral Net Coupon Maturity(1)
-------------- ---------------- ---------- -----------
<S> <C> <C> <C> <C>
Fixed rate $100,670 $ 98,984 8.229% 246
Adjustable rate 37,834 37,201 7.147% 320
-------- -------- ----- ---
$138,504 $136,185 7.933% 266
======== ======== ===== ===
</TABLE>
The adjustable rate mortgage loans at March 31, 1999 had various reference
rate indexes with a weighted average 19 month repricing period and a weighted
average net life cap of 12.83%.
(1) Weighted average maturity reflects the number of months until maturity.
The average effective yield, which includes the amortization of net premiums,
discounts and certain deferred costs, for the three months ended March 31, 1999
on the CMO collateral was 7.054%.
Collateral for mortgage backed bonds
In April 1998 the Company issued its first REMIC (real estate mortgage
investment conduit) security. $102,977,000 of single family fixed rate
residential loans (par value) were assigned as collateral for the Company's
mortgage backed bond (REMIC) security. The Company has limited exposure to
credit risk retained on loans it has securitized through the issuance of
collateralized bonds. All mortgage loans held as collateral for mortgage backed
bonds are reported at cost. Premiums, discounts and all deferred costs
associated with the mortgage loans held as collateral for mortgage backed bonds
are amortized into interest income over the lives of the mortgage loans using
the effective yield method adjusted for the effects of estimated prepayments.
12
<PAGE> 13
The following table summarizes the Company's single-family fixed rate mortgage
loan pools held as collateral for mortgage backed bonds, which are carried at
cost (dollars in thousands):
<TABLE>
<CAPTION>
Mortgage loans MARCH 31, 1999 DECEMBER 31, 1998
-------------- -----------------
<S> <C> <C>
Fixed rate $71,207 $79,812
Net premiums and
deferred costs 1,771 1,934
Loan loss provision (95) (80)
------- -------
Carrying value $72,883 $81,666
======= =======
</TABLE>
The following table summarizes certain characteristics of the Company's
single-family fixed rate mortgage loans held as collateral for mortgage backed
bonds (dollars in thousands):
<TABLE>
MARCH 31, 1999
--------------
Carrying Value Principal Amount
of Collateral for of Collateral Weighted Weighted
Mortgage Backed for Mortgage Average Average
Bonds Backed Bonds Net Coupon Maturity (1)
----- ------------ ---------- ------------
<S> <C> <C> <C>
$72,883 $71,207 7.777% 228
======= ======= ====== ===
<CAPTION>
DECEMBER 31, 1998
-----------------
Carrying Value Principal Amount
of Collateral for of Collateral Weighted Weighted
Mortgage Backed for Mortgage Average Average
Bonds Backed Bonds Net Coupon Maturity (1)
----- ------------ ---------- ------------
<S> <C> <C> <C>
$81,666 $79,812 7.787% 231
======= ======= ====== ===
</TABLE>
(1) Weighted average maturity reflects the number of months remaining until
maturity.
The average effective yield, which includes amortization of net premiums,
discounts and deferred costs, for the three months ended March 31, 1999 was
6.680%.
4. MORTGAGE SECURITIES
The Company's policy is to generally classify its mortgage securities as
available-for-sale as they are acquired and each asset is monitored for a period
of time, generally three to six months, prior to making a determination whether
the asset will be classified as held to maturity. Management reevaluates the
classification of the mortgage securities on a quarterly basis. Mortgage
securities designated as available for sale are reported at fair value, with
unrealized gains and losses excluded from earnings and reported as a separate
component of stockholders' equity.
Mortgage securities classified as held to maturity are carried at the fair value
of the security at the time the designation is made. Any fair value adjustment
is reflected as a separate component of stockholders' equity and as a cost
adjustment of the mortgage security as of the date of the classification and is
amortized into interest income as a yield adjustment.
The Company makes periodic evaluations of all mortgage securities to determine
whether an other-than-temporary impairment is considered to have occurred. If a
decline in the fair value is judged to be other than temporary, the cost basis
of the mortgage security will be marked to fair value, resulting in a current
period loss in the consolidated statement of operations. The new cost basis
shall not be changed for further increase in market value; however, further
increases in market value will be reflected separately in the equity section of
the Company's balance sheet.
Premiums, discounts and certain deferred costs associated with the acquisition
of mortgage securities are amortized into interest income over the lives of the
securities using the effective
13
<PAGE> 14
yield method adjusted for the effects of estimated prepayments. Mortgage
securities transactions are recorded on the date the mortgage securities are
purchased or sold. Purchases of new issue mortgage securities are recorded when
all significant uncertainties regarding the characteristics of the securities
are removed, generally on or shortly before settlement date. Realized gains and
losses on mortgage securities transactions are determined on the specific
identification basis.
At March 31, 1999, the Company had $ 67,854,000 of fixed rate mortgage
securities classified as available for sale. These mortgage securities are
secured by fixed rate mortgage loans on single-family residential housing. The
following table summarizes the Company's mortgage securities classified as
available for sale which are carried at their fair value (dollars in thousands):
<TABLE>
<CAPTION>
March 31, 1999
--------------
Mix
---
<S> <C> <C>
Amortized cost:
FNMA certificates(a) $ 3,054 4.35%
FNMA certificates(b) 52,280 74.47%
Private placement notes(c) 14,864 21.18%
------- ------
Total amortized cost 70,198 100.00%
======
Gross unrealized loss (2,344)
-------
Fair value $67,854
=======
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
-----------------
Mix
---
<S> <C> <C>
Amortized cost:
FNMA certificate(a) $ 3,425 4.48%
FNMA certificate(b) 56,216 73.58%
Private placement notes(d) 16,758 21.94%
------- ------
Total amortized cost 76,399 100.00%
Gross Unrealized loss (2,399) ======
-------
Fair value $74,000
=======
</TABLE>
(a) Represents one FNMA certificate with a fixed coupon interest rate of 9.00%
purchased from a "Wall Street" dealer firm. This certificate generates
normal principal and interest remittances to the Company on a monthly
basis.
(b) Represents 31 fixed rate FNMA certificates that the Company received
(swapped) for a like amount of fixed rate mortgage loans in December 1998.
The coupon interest rates range from 6.00% to 10.50%. These certificates
generate normal principal and interest remittances to the Company on a
monthly basis.
(c) Represents six investment grade ("AA", "A" and "BBB") notes and six
interest only notes purchased from an affiliate, HCP-2, in a private
placement offering in October 1998. The interest rates on the
investment grade notes are fixed and range from 6.50% to 6.75%. These
notes generate normal principal and interest remittances to the Company
on a monthly basis. The interest only notes generate monthly interest
remittances to the Company (subject to the
14
<PAGE> 15
availability of funds) from the excess interest generated from the
underlying mortgages after deducting all service fees and the coupon
interest rate on the applicable notes. The interest rate on each of the
interest only notes is based on a notional amount (the principal balance of
those mortgage loans with an interest rate in excess of the related note
coupon interest rate). The notional amounts decline each month to reflect
the related normal principal amortization, curtailments and prepayments for
the related underlying mortgage loans. At March 31, 1999 the interest
only notes were divided into two major categories; the first group had
an effective weighted average interest rate of 1.145% on a notional
balance of $227,614,000 and the second group had an effective weighted
average interest rate of 0.25% on a notional balance of $124,532,000.
(d) Represents nine investment grade ("AA", "A" and "BBB") notes and six
interest only notes purchased from HCP-2 in a private placement
offering in October 1998. The interest rates on the investment grade
notes are fixed and range from 6.25% to 6.75%. These notes generate
normal principal and interest remittances to the Company on a monthly
basis. The interest only notes generate monthly interest remittances to
the Company (subject to the availability of funds) from the excess
interest generated from the underlying mortgages after deducting all
service fees and the coupon interest rate on the applicable notes. The
interest rate on each of the interest only notes is based on a notional
amount (the principal balance of those mortgage loans with an interest
rate in excess of the related note coupon interest rate). The notional
amounts decline each month to reflect the related normal principal
amortization, curtailments and prepayments for the related underlying
mortgage loans. At December 31, 1998 the interest only notes were
divided into two major categories; the first group had an effective
weighted average interest rate of 1.166% on a notional balance of
$259,861,000 and the second group had an effective weighted average
interest rate of 0.25% on a notional balance of $143,666,000.
Held to maturity
At March 31, 1999, the Company had $3,756,000 of fixed rate mortgage securities
classified as held to maturity. These mortgage securities are secured by fixed
rate mortgage loans on single-family residential housing. The following tables
summarize the Company's fixed rate mortgage securities classified as held to
maturity, which are carried at cost (dollars in thousands):
<TABLE>
<CAPTION>
MARCH 31, 1999
<S> <C>
Amortized cost:
Private placement notes(a) $3,846
Loan loss provision (90)
------
Total cost $3,756
======
<CAPTION>
DECEMBER 31, 1998
<S> <C>
Amortized cost:
Private placement notes(b) $4,478
======
</TABLE>
(a) Represents six below investment grade notes and three principal only notes
purchased from an affiliate, HCP-2, in October 1998. The coupon interest
rates on the below investment grade notes are fixed and range from 6.50% to
6.75%. These notes generate normal principal and interest remittances to
the Company on a monthly basis.
(b) Represents nine below investment grade notes and three principal only notes
purchased from an affiliate, HCP-2, in October 1998. The coupon interest
rates on the below investment
15
<PAGE> 16
grade notes are fixed and range from 6.25% to 6.75%. These notes generate
normal principal and interest remittances to the Company on a monthly
basis.
The average effective yield, which includes amortization of net premiums and
deferred costs, for the three months ended March 31, 1999 on the combined
available for sale and held to maturity mortgage securities portfolio was
8.784%.
The proceeds and gross realized gain from sales of mortgage securities in March
1999 was as follows (dollars in thousands):
<TABLE>
<CAPTION>
Realized
Proceeds Gain
-------- --------
<S> <C> <C>
Private placement notes (a) $2,249 $163
====== ====
</TABLE>
(a) Relates to the sale of six private placement notes acquired from HCP-2 in
October 1998.
5. LOAN LOSS PROVISION
The provision for loan loss charged to expense is based upon actual credit loss
experience and management's estimate and evaluation of potential losses in the
existing mortgage loan and mortgage securities portfolio, including the
evaluation of impaired loans. The following table summarizes the activity in the
loan loss provision for the following periods (dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
1999 1998
--------------- ---------------
<S> <C> <C>
Balance - beginning of period $373 $18
Loan loss provision 119 51
Transfers/sales 39 --
Charge-offs (6) --
--------------- ---------------
Balance - end of period $525 $69
=============== ===============
</TABLE>
6. EQUITY INVESTMENTS
Hanover records its investment in HCP and HCP-2 on the equity method.
Accordingly, Hanover records 97% of the earnings or losses of HCP and 99% of the
earnings or losses of HCP-2 through its ownership of all of the non-voting
preferred stock of HCP and HCP-2, respectively. Summarized financial information
for HCP and HCP-2 is detailed below:
16
<PAGE> 17
HANOVER CAPITAL PARTNERS LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except as noted)
(unaudited)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $360 $635
Receivables from related parties 187 517
Other current assets 851 672
------ ------
Total current assets 1,398 1,824
PROPERTY AND EQUIPMENT - Net 135 141
INCOME TAX RECEIVABLE -- 220
OTHER ASSETS 1,072 930
------ ------
TOTAL ASSETS $2,605 $3,115
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $521 $467
Note payable to related party 603 713
Other current liabilities 76 110
------ ------
Total current liabilities 1,200 1,290
------ ------
STOCKHOLDERS' EQUITY:
Preferred stock: $.01 par value, 100,000 shares
authorized, 97,000 shares outstanding 1 1
Common stock:
Class A: $.01 par value, 5,000 shares authorized,
3,000 shares outstanding -- --
Additional paid-in capital 2,840 2,840
Retained (deficit) (1,436) (1,016)
------ ------
Total stockholders' equity 1,405 1,825
------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,605 $3,115
====== ======
</TABLE>
17
<PAGE> 18
HANOVER CAPITAL PARTNERS LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 1999 MARCH 31, 1998
-------------- --------------
<S> <C> <C>
REVENUES:
Due diligence fees $ 884 $1,076
Mortgage sales and servicing 72 571
Loan brokering and other income 226 183
----- ------
Total revenues 1,182 1,830
----- ------
EXPENSES:
Personnel expense 1,287 1,288
General and administrative expense 155 165
Other expenses 266 292
Interest expense 14 31
Depreciation and amortization 20 28
----- ------
Total expenses 1,742 1,804
----- ------
INCOME (LOSS) BEFORE INCOME
TAX PROVISION (BENEFIT) (560) 26
INCOME TAX PROVISION (BENEFIT) (140) 14
----- ------
NET INCOME (LOSS) $(420) $12
===== ======
</TABLE>
HCP and its subsidiaries operate as a specialty finance company which is
principally engaged in performing due diligence, mortgage and investment banking
services. A wholly-owned subsidiary of HCP, Hanover Capital Mortgage
Corporation, is an originator and servicer of multifamily mortgage loans.
Another wholly-owned subsidiary of HCP, Hanover Capital Securities, Inc., is a
registered broker/dealer with the Securities and Exchange Commission.
18
<PAGE> 19
HANOVER CAPITAL PARTNERS 2, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands, except as noted)
(unaudited)
<TABLE>
<CAPTION>
ASSETS MARCH 31,
1999
----
<S> <C>
Mortgage loans:
Collateral for mortgage backed bonds $266,200
Accrued interest receivable 1,621
Deferred financing costs 2,956
--------
TOTAL ASSETS $270,777
========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Mortgage backed bonds $263,496
Accrued interest payable 1,621
Due to related parties 346
--------
Total liabilities 265,463
--------
STOCKHOLDERS' EQUITY
Preferred stock, par value $.01
authorized, 9,900 shares; issued
and outstanding, 9,900 shares --
Common stock, par value $.01
authorized, 100 shares; issued and
outstanding, 100 shares --
Additional paid-in-capital 14,319
Retained (deficit) (9,005)
--------
Total stockholders' equity 5,314
--------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $270,777
========
</TABLE>
19
<PAGE> 20
HANOVER CAPITAL PARTNERS 2, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands)
(unaudited)
THREE MONTHS
ENDED MARCH 31,
1999
---------------
REVENUES:
Interest income $4,827
Interest expense 5,299
------
Net interest expense (472)
EXPENSES:
Operating 1
------
NET (LOSS) $ (473)
======
Hanover Capital Partners 2, Inc. was formed to acquire single-family residential
mortgage loans from Hanover pursuant to its formation transaction and to finance
the purchase of these mortgage loans through a REMIC securitization. Hanover
SPC-2, Inc., a wholly owned subsidiary of Hanover, was incorporated for the sole
purpose of selling certain investment grade and subordinated securities to
certain wholly-owned subsidiaries of Hanover.
REVERSE REPURCHASE AGREEMENTS
Reverse repurchase agreements are accounted for as collateralized financing
transactions and recorded at their contractual amounts. At March 31, 1999 the
Company had a total of $365 million of committed and uncommitted mortgage asset
reverse repurchase agreement financing available pursuant to master reverse
repurchase agreements with three lenders. All borrowings pursuant to the master
repurchase agreements are secured by mortgage loans or other securities.
The reverse repurchase agreements collateralized by mortgage loans are short
term borrowings with interest rates that vary from LIBOR plus 70 basis points to
LIBOR plus 125 basis points. The lender will typically finance an amount equal
to 80% to 97% of the market value of the pledged collateral (mortgage loans)
depending on certain characteristics of the collateral (delinquencies, liens,
aging, etc.). The reverse repurchase agreement financing rates for mortgage
securities, accomplished through individual Public Securities Associates (PSA)
agreements, bear interest rates that vary from LIBOR to LIBOR plus 150 basis
points. The lender will typically finance an amount equal to 60% to 97% of the
market value of the mortgage securities, depending on the nature of the
collateral.
At March 31, 1999 the Company had outstanding borrowings on mortgage loans of
$134,508,000 under the above mentioned reverse repurchase agreements with a
weighted average borrowing rate of 5.883% and a weighted average remaining
maturity of less than one month. The reverse repurchase financing agreements at
March 31, 1999 were collateralized by mortgage loans with a cost basis of
$139,066,000.
The Company also uses the above repurchase agreement financing to finance a
portion of the collateral for mortgage backed bonds. At March 31, 1999, the
Company had outstanding borrowings on these mortgage assets of $1,631,000 with a
weighted average borrowing rate of 5.961% and a weighted average remaining
maturity of less than one month. The reverse
20
<PAGE> 21
repurchase financing agreements at March 31, 1999 were collateralized by
mortgage assets with a cost basis of $2,473,000.
At March 31, 1999, the Company had outstanding mortgage securities reverse
repurchase agreement financing of $57,270,000 with a weighted average borrowing
rate of 4.932% and a remaining maturity of less than one month. The repurchase
agreement financing at March 31, 1999 was collateralized by mortgage securities
with a cost basis of $59,558,000.
The table below details the scheduled maturities of the Company's committed and
uncommitted master reverse repurchase agreements at March 31, 1999:
<TABLE>
<CAPTION>
Committed Uncommitted Maturity Date
---------- ------------ -------------
<S> <C> <C>
-- $15 million (a)
$100 million 100 million March 2000
150 million -- June 1999
</TABLE>
(a) The lender did not extend the term of the master reverse repurchase
agreement at the maturity date (September 1998) but has agreed to continue
to provide uncommitted financing to the Company for an unspecified
short-term period.
Information pertaining to reverse repurchase agreement financing as of and for
the three months ended March 31, 1999 is summarized as follows (dollars in
thousands):
<TABLE>
<CAPTION>
Collateral
Mortgage for Mortgage Mortgage
Reverse Repurchase Agreements Loans (a) Backed Bonds Securities
- ----------------------------- --------- ------------ ----------
<S> <C> <C> <C>
Balance at end of period $134,508 $1,631 $57,270
Average balance during the period $225,836 $1,730 $60,458
Average interest rate during the period 6.337% 6.246% 5.060%
Maximum month-end balance during the
period $283,837 $1,739 $61,336
Collateral Underlying the Agreements
- ------------------------------------
Balance at end of period-carrying value $139,066 $2,473 $59,558
</TABLE>
8. COLLATERALIZED MORTGAGE OBLIGATION BORROWINGS
The Company issued its first CMO borrowing secured by fixed rate and adjustable
rate mortgage loans in March 1999. 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 obligations of the CMO are
payable solely from the underlying mortgage loans collateralizing the debt and
otherwise are non-recourse to the Company. The maturity of each class of CMO is
directly affected by principal prepayments on the related CMO collateral. Each
class of CMO is also subject to redemption according to specific terms of the
respective indenture agreements. As a result, the actual maturity of any class
of CMO is likely to occur earlier than its stated maturity.
Information pertaining to the CMO as of and for the three months ended March 31,
1999 is summarized as follows (dollars in thousands):
21
<PAGE> 22
<TABLE>
<CAPTION>
CMO
---
<S> <C>
Balance at end of period $130,095
Average balance during the period 27,465
Average interest rate during the period 6.894%
Interest rate at end of period 6.894%
Maximum month-end balance during
the period $132,253
CMO Collateral
- --------------
Balance at end of period - carrying balance $138,504
</TABLE>
9. MORTGAGE BACKED BONDS
The Company, through a wholly owned subsidiary, Hanover Capital SPC, Inc.,
issued non-recourse debt in the form of mortgage backed bonds in April 1999.
Borrower remittances received on the collateral for mortgage backed bonds are
used to make payments on the mortgage backed bonds. The obligations under the
mortgage backed bonds are payable solely from the collateral for mortgage backed
bonds and are otherwise non-recourse to the Company. The maturity of the bonds
is directly affected by the rate of principal prepayments on the related
collateral. The bonds are subject to redemption according to specific terms of
the respective indentures, generally when the remaining balance of the bonds
equals 20% or less of the original principal balance of the bonds. As a result,
the actual maturity of any class of mortgage backed bonds is likely to occur
earlier than its stated maturity.
Information pertaining to mortgage backed bond financing as of and for the three
months ended March 31, 1999 is summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
Mortgage
Backed Bonds
------------
<S> <C>
Balance at end of period $68,766
Average balance during the period $70,892
Average interest rate during period 6.924%
Interest rate at end of period 6.900%
Maximum month-end balance during the
period $72,754
Collateral for Mortgage Backed Bonds
Balance at end of period - carrying value $72,883
</TABLE>
10. AFFILIATED PARTY TRANSACTIONS
The Company engaged HCP pursuant to a Management Agreement to render among other
things, due diligence, asset management and administrative services. The
consolidated statement of operations of the Company for the three months ended
March 31, 1999 includes management and administrative expenses of $194,000 and
due diligence expenses of $63,000 relating to billings from HCP. The
consolidated statement of operations of the Company for the three months ended
March 31, 1998 included management and administrative expenses of $161,000, due
diligence expenses of $175,000 and commissions of $125,000 relating to billings
from HCP. At March 31, 1999 the consolidated balance sheet of the Company
included amounts due from HCP-2 and HCP of $346,000 and $19,000, respectively.
The consolidated balance sheet also reflected an amount payable to a subsidiary
of HCP of $7,000 at March 31, 1999.
Notes receivable from related parties are detailed below (dollars in thousands)
22
<PAGE> 23
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
<S> <C> <C>
Loans to principals(a)(b) $3,123 $3,180
Loans to HCP 603 713
--------- ------------
$3,726 $3,893
========= ============
</TABLE>
(a) The Principals are the four most senior officers/stockholders of Hanover.
(b) In March 1999, Hanover agreed to amend certain notes receivable (aggregating
$1,203,880 from the Principals that had a scheduled maturity date of
March 31, 1999, by extending the maturity date for two additional years. The
notes were also modified to provide for accelerated repayment by a Principal
in the event of such Principals' voluntary termination of employment.
11. COMMON STOCK REPURCHASES
In July 1998, the Board of Directors of the Company authorized a share
repurchase program pursuant to which the Company was authorized to repurchase up
to 646,880 shares of the Company's outstanding common stock. The repurchases
will be made from time to time in open market transactions. During the three
months ended March 31, 1999 the Company repurchased 195,000 shares of its common
stock at an average price of $5.04 for a total cost of $982,000. Through March
31, 1999 the Company had repurchased a total of 341,900 shares of its common
stock at an average price of $6.81 per share for a total cost of $2,328,000.
12. GAIN ON SALE OF SERVICING RIGHTS
On March 31, 1999 Hanover entered into an agreement to sell the servicing rights
on approximately $145 million of single-family mortgage loans. The total gain on
the sale of mortgage servicing rights was $574,000. A portion of the gain,
($342,000) relating to mortgage loans that were previously securitized, was
recognized in the first quarter of 1999. The balance of the gain ($232,000)
relating to mortgage loans classified as held for sale, was deferred and will be
amortized into interest income over the lives of the mortgage loans using the
effective yield method until the mortgage loans are either sold or securitized.
13. SUBSEQUENT EVENTS
On April 19, 1999 Hanover purchased an additional 300,000 shares of its common
stock at a cost of $1,253,000 ($4.18 per share) pursuant to the stock repurchase
program initiated in July 1998.
On April 22, 1999 the Board of Directors of Hanover declared a cash dividend of
$0.20 per share for the first quarter of 1999 payable on May 17, 1999 to
stockholders of record as of May 7, 1999.
On May 4, 1999 Hanover executed a $50 million committed master reverse
repurchase agreement with a new lender.
23
<PAGE> 24
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW
Hanover Capital Mortgage Holdings, Inc. ("Hanover") was incorporated in
Maryland on June 10, 1997. Hanover has four wholly-owned bankruptcy remote
limited purpose finance subsidiaries organized to complete certain mortgage loan
securitization transactions in 1998 and 1999. Hanover is a real estate
investment trust ("REIT"), formed to operate as a specialty finance company. The
principal business strategy of Hanover and its wholly-owned subsidiaries,
(together referred to as the "Company") and its unconsolidated subsidiaries is
to (i) acquire primarily single-family mortgage loans that are at least twelve
months old or that were intended to be of certain credit quality but that do not
meet the originally intended market parameters due to errors or credit
deterioration, (ii) securitize the mortgage loans and retain interests therein,
(iii) acquire subordinated mortgage securities similar in nature to the retained
interests generated from internal securitizations and (iv) originate, hold, sell
and service multifamily loans and commercial loans.
The Company's principal business objective is to generate increasing earnings
and dividends for distribution to its stockholders. The Company acquires
single-family mortgage loans through a network of sales representatives
targeting financial institutions throughout the United States. Hanover Capital
Mortgage Corporation ("HCMC") originates multifamily mortgage loans and
commercial mortgage loans for government sponsored and private mortgage
conduits. Hanover operates as a tax-advantaged REIT and is generally not subject
to Federal and state income tax to the extent that it distributes its earnings
to its stockholders and maintains its qualification as a REIT. Taxable
affiliates of Hanover, however, are subject to Federal and state income tax.
Hanover has engaged HCP to render due diligence, asset management and
administrative services pursuant to a Management Agreement.
Listed below are the wholly-owned subsidiaries of Hanover:
Name Date Acquired
---- -------------
Hanover Capital SPC, Inc. (a) March 24, 1998
Hanover QRS-1 98-B, Inc. October 16, 1998
Hanover QRS-2 98-B, Inc. October 19, 1998
Hanover SPC-A, Inc. March 11, 1999
Listed below are the unconsolidated subsidiaries of Hanover:
Name Date Acquired
---- -------------
Hanover Capital Partners Ltd. (b) September 17, 1997
Hanover Capital Partners 2, Inc. October 7, 1998
(a) Hanover Capital Repo Corp. is a wholly-owned subsidiary of
Hanover Capital SPC, Inc.
(b) Hanover Capital Mortgage Corporation and Hanover Capital
Securities, Inc. are wholly-owned subsidiaries of Hanover Capital
Partners Ltd.
The Company's generation of net income is dependent upon (i) the spread
between interest earned on its investment portfolio and the cost of borrowed
funds to finance the investment portfolio; and (ii) the aggregate amount of the
investment portfolio on the Company's balance sheet. The Company strives to
create a diversified portfolio of investments that in the aggregate generates
increasing net income in a variety of interest rate and prepayment rate
24
<PAGE> 25
environments and preserves the equity base of the Company. The Company's primary
strategy for its mortgage loan investment portfolio entails (1) efficient
acquisition pricing of mortgage loans, (2) financing in the short term by
reverse repurchase agreements or lines of credit, (3) hedging in the short term
to offset potential adverse effects of changes in interest rates, (4)
stratifying and segregating mortgage loans in securitizations to replace short
term financing with collateralized mortgage obligations (CMO), real estate
mortgage investment conduits (REMIC) or other types of long term debt financing,
thereby eliminating the majority of refinancing and interest rate risk and (5)
retaining certain residual interests of the securitization resulting in
increased yields .
.
Interest Rate Sensitivity
Mortgage Loan Assets
The Company's mortgage loan assets are classified into two
subcategories, fixed rate loans and adjustable rate loans, and further
classified as mortgages held for sale vs. mortgages held to maturity. The
financing of these assets during the initial period (the time period during
which management analyzes the loans in detail and corrects deficiencies where
possible before securitizing the loans) is accomplished with reverse repurchase
agreement ("repo") financing or with equity alone in certain instances. The
unsecuritized mortgage assets held by the Company at March 31, 1999 were a
combination of adjustable rate mortgage ("ARM") loans (65.8%) and fixed rate
mortgage loans (34.2%). The yield on the fixed rate mortgage loans would not be
affected by changes in interest rates. The ARM loans would be affected by
interest rate changes depending upon repricing frequencies, indexes and interest
caps. There were no significant coupon interest rate adjustments on the ARM
pools during the first quarter of 1999. The Company's greatest interest rate
volatility risk relates to its repo financing. The Company's repo financing
agreements at March 31, 1999 were indexed to LIBOR plus a spread of 70 to 125
basis points. This financing generally is rolled and matures every 30 to 90
days. Accordingly, any increases in LIBOR will tend to reduce net interest
income and any decreases in LIBOR will tend to increase net interest income.
Interest income on the mortgage portfolio is also negatively affected
by prepayments on mortgage loan pools purchased at a premium and positively
impacted by mortgage loan pools purchased at a discount. The Company assigns an
anticipated prepayment speed to each mortgage pool at the time of purchase and
records the appropriate amortization of the premium or discount over the
estimated life of the mortgage loan pool. To the extent the actual prepayment
speeds vary significantly from the anticipated prepayment speeds for an extended
period of time, the Company will adjust the anticipated prepayment speeds
accordingly. This will negatively (in the case of accelerated amortization of
premiums or decelerated amortization of discounts) or positively (in the case of
decelerated amortization of premiums or accelerated amortization of discounts)
impact net interest income. Based on management's evaluation of the prepayment
speeds relating to the mortgage loan pools, no such adjustment was deemed
necessary for the first quarter ended March 31, 1999. Increases in delinquency
rates and defaults by borrowers on their mortgages can also negatively impact
the Company's net interest income. The Company monitors delinquencies and
defaults in its mortgage loan portfolio in three categories: government,
conventional and uninsured. It adjusts its loan loss provision policy and
non-interest accrual policy in accordance with changes in the delinquency and
default trends.
Hedging gains and losses and other related hedging costs are deferred
and are recorded as an adjustment of the hedged assets or liabilities. The
hedging gains ("Hedging Gains") and losses ("Hedging Costs") along with the
other related hedging costs are amortized over the estimated life of the asset
or liability. The Company only hedges its fixed rate mortgage portfolio and
certain repo exposure. The hedging program in place at March 31, 1999 included
only the hedging of certain repo liabilities with interest rate caps. The
Company's customary hedging of fixed rate mortgage loan pools by selling short
similar duration matched Agency securities, usually for 30 to 60 day periods,
was deemed to be unnecessary at March 31, 1999 due to the
25
<PAGE> 26
relatively low principal balance of fixed rate mortgage loans held for sale.
This hedging of mortgage assets should, if properly executed, adjust the
carrying value of the fixed mortgage loan pools to reflect current market
pricing. The costs of the individual hedging transactions can vary greatly
depending upon the market conditions. Hedging Gains on fixed mortgage pools were
$83,000 in the first quarter of 1999. Total unamortized Hedging Costs on
mortgage loans held for sale at March 31, 1999 were $397,000. As of March 31,
1999 the estimated fair market value of these previously hedged assets was
slightly higher than the book value of these assets.
Securitized Mortgage Loan Assets
With respect to the match funding of assets and liabilities, the
collateral for mortgage backed bonds, which was accounted for as a financing
transaction for GAAP, was composed totally of fixed rate mortgage loans
($72,883,000) at March 31, 1999. The primary financing for this asset category
is the mortgage backed bonds ($68,766,000) and to a much lesser extent repo
agreements ($1,631,000). Only the repo financing, which is indexed to LIBOR, is
subject to interest rate volatility as the repo agreement matures and is
extended. The financing provided by the mortgage backed bonds locks in long-term
financing and thereby eliminates interest rate risk.
Fixed and adjustable rate mortgage loans of $138,504,000 collateralize
the CMO borrowing of $130,095,000 at March 31, 1999. The financing provided by
the CMO borrowing also locks in long-term financing and thereby eliminates
interest rate risk.
Mortgage Securities
At March 31, 1999 the Company owned certain fixed rate Agency and
private placement mortgage securities and certain interest only and principal
only private placement mortgage securities. The coupon interest rates on the
fixed rate mortgage securities would not be affected by changes in interest
rates. The interest only notes generate monthly interest generated from the
underlying mortgages after deducting all service fees and the coupon interest
rate on the applicable notes. The interest rate on each of the interest only
notes is based on a notional amount (the principal balance of those mortgage
loans with an interest rate in excess of the related note coupon interest rate).
The notional amounts decline each month to reflect the related normal principal
amortization, curtailments and prepayments for the related underlying mortgage
loans. Accordingly, net interest income on the mortgage securities portfolio
would be negatively affected by prepayments on mortgage loans underlying the
mortgage securities and would further be negatively affected to the extent that
higher rated coupon mortgage loans paid off more rapidly than lower rated coupon
mortgage loans.
Certain of the mortgage securities are financed with repo agreements
indexed to LIBOR at March 31, 1999, and as such any increase in LIBOR will tend
to reduce net interest income and any decreases in LIBOR will tend to increase
net interest income.
26
<PAGE> 27
RESULTS OF OPERATIONS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
---------
1999 1998
---- ----
<S> <C> <C>
Net interest income $2,051 $2,159
Loan loss provision (119) (51)
Gain on sale of servicing rights 342 --
Gain on sale of mortgage securities 163 --
------ ------
Total revenues 2,437 2,108
Expenses 825 854
------ ------
Operating income 1,612 1,254
Equity in (loss) of unconsolidated
subsidiaries (876) (6)
------ ------
Net income $ 736 $1,248
====== ======
Basic earnings per share $ 0.12 $ 0.19
====== ======
Dividends declared per share (a) $ 0.20 $0.21
====== =====
</TABLE>
(a) The dividends relating to the three months ended March 31, 1999 were
declared on April 22, 1999.
The Company recorded net income of $736,000 or $0.12 per share based on
6,244,955 weighted shares of common stock outstanding for the quarter ended
March 31, 999 compared to net income of $1,248,000 or $0.19 per share based on
6,466,677 weighted shares of common stock outstanding for the same period in
1998. Total revenues for the three months ended March 31, 1999 were $2,437,000
as compared to $2,108,000 for the three month period ended March 31, 1998 (an
increase of 15.6%). The first quarter 1999 revenues were bolstered by the gain
on sale of mortgage servicing rights ($342,000) and the gain on sale of mortgage
securities ($163,000).
Operating expenses for the first quarter of 1999 ($825,000) and the
first quarter of 1998 ($854,000) remained fairly constant in total but
fluctuated fairly significantly in certain expense categories (due diligence,
commissions and legal and professional).
The most significant difference between the first quarter of 1999 and
the first quarter of 1998 related to the amounts recorded as net loss from
unconsolidated subsidiaries. The net loss from unconsolidated subsidiaries was
$876,000 and $6,000 for the periods ended March 31, 1999 and 1998, respectively.
The table below highlights the Company's historical trends and
components of return on average equity.
27
<PAGE> 28
COMPONENTS OF ANNUALIZED RETURN ON AVERAGE EQUITY (1)
<TABLE>
<CAPTION>
Gain (loss) on Equity in
Net Interest Sale of Operating Earnings (Loss) Annualized
For the Income/ Assets/ Expenses/ of Subsidiaries/ Return on
Quarter Ended Equity Equity Equity Equity Equity
------------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
June 30, 1997 (2) 0.00% 0.00% 0.00% 0.00% 0.00%
September 30, 1997 (3) 4.85% 0.00% 3.59% 0.97% 2.23%
December 31, 1997 7.71% 0.18% 4.26% (1.41%) 2.22%
March 31, 1998 10.78% 0.00% 4.37% (0.03%) 6.38%
June 30, 1998 3.47% (0.25%) 5.00% (1.50%) (3.28%)
September 30, 1998 8.23% 0.00% 4.89% (1.52%) 1.82%
December 31, 1998 11.12% (32.76%) 7.55% (4.89%) (34.08%)
March 31, 1999 11.36% 2.97% 4.85% (5.15%) 4.33%
</TABLE>
(1) Average equity excludes unrealized loss on investments available for sale.
(2) The Company was organized on June 10, 1997, but did not begin operations
until September 19, 1997.
(3) Average equity is based on equity balance at September 19, 1997 (IPO date)
and equity balance at September 30, 1997, excluding unrealized loss on
investments available for sale.
The following table reflects the average balances for each major category
of the Company's interest earning assets as well as the Company's interest
bearing liabilities with the corresponding effective rate of interest annualized
for the periods shown below (dollars in thousands):
<TABLE>
<CAPTION>
QUARTER ENDED QUARTER ENDED
MARCH 31, 1999 MARCH 31, 1998
--------------------------------------------
Average Effective Average Effective
Balance Rate Balance Rate
------- --------- ------- ---------
<S> <C> <C> <C> <C>
Interest Earning Assets
Mortgage loans (1) $246,329 7.092% $216,275 7.410%
CMO collateral (2) 48,138 7.054%
Collateral for mortgage backed
bonds (2) 76,646 6.680%
Mortgage securities (2) 75,887 8.784% 334,722 6.116%
------------------------------------------
$447,000 7.304% $550,997 6.624%
==========================================
Interest Bearing Liabilities
Reverse repurchase borrowings on
mortgage loans $225,835 6.432% $166,881 6.318%
CMO borrowing 27,465 6.710%
Mortgage backed bonds 70,892 6.943%
Reverse repurchase borrowings on
CMO collateral 16,464 5.926%
Reverse repurchase borrowings on
collateral for mortgage
backed bonds 1,730 6.246%
Reverse repurchase borrowings on
mortgage securities 60,458 5.092% 324,305 5.597%
------------------------------------------
$402,844 6.318% $491,186 5.842%
Net Interest Earning Assets $44,156 $59,811
======== =======
Net Interest Spread 0.986% 0.782%
====== ======
Yield on Interest Earning Assets (3)(4) 16.303% 13.046%
====== ======
</TABLE>
(1) Includes mortgage loans held for sale and mortgage loans held to maturity.
Loan loss provisions are excluded in the above calculations.
(2) Loan loss provisions are excluded in the above calculations.
(3) Yield on Net Interest Earning Assets is computed by dividing the applicable
net interest income by the average daily balance of Net Interest Earning
Assets.
(4) This table does not reflect the Company's combined overall effective yield
and the Company's total investment in private placement mortgage
securities because the table does not reflect net interest income of and
equity employed by the Company's unconsolidated
28
<PAGE> 29
subsidiary, HCP-2. See the table on page 30 that reflects the Company's
combined overall yield.
NET INTEREST INCOME
Net interest income for the three months ended March 31, 1999 was
$2,051,000 compared to net interest income of $2,159,000 for the three months
ended March 31, 1998. The following table reflects net interest income generated
for each period (dollars in thousands):
<TABLE>
<CAPTION>
QUARTER QUARTER
ENDED ENDED
MARCH 31, MARCH 31,
1999 1998
--------- ---------
<S> <C> <C>
Mortgage loans $736 $1,371
CMO collateral 144 --
Collateral for mortgage backed bonds 22 --
Mortgage securities - Created 888 --
----- -----
Core business - subtotal 1,790 1,371
----- -----
-- --
Mortgage securities - Purchased 10 580
Other 251 208
------ ------
Total $2,051 $2,159
====== ======
</TABLE>
The following table reflects the average balances for each major category
of the Company's core business interest earning assets as well as the Company's
interest bearing liabilities with the corresponding effective rate of interest
annualized for the periods shown below (dollars in thousands):
29
<PAGE> 30
<TABLE>
<CAPTION>
QUARTER ENDED QUARTER ENDED
MARCH 31, 1999 MARCH 31,1998
---------------------------------------------------
Average Effective Average Effective
Balance Rate Balance Rate
------- ---- ------- ----
<S> <C> <C> <C> <C>
Interest Earning Assets
Mortgage loans $246,329 7.092% $216,275 7.410%
CMO collateral 48,138 7.054%
Collateral for mortgage 76,646 6.680%
backed bonds
Mortgage securities 72,619 8.902%
-------------------------------------------------
$443,732 7.313% $216,275 7.410%
=================================================
Interest Bearing Liabilities
Reverse repurchase borrowings on
mortgage loans $225,835 6.432% $166,881 6.318%
CMO borrowing 27,465 6.710%
Mortgage backed bonds 70,892 6.943%
Reverse repurchase borrowings on
CMO collateral 16,464 5.926%
Reverse repurchase borrowings on
collateral for mortgage
backed bonds 1,730 6.246%
Reverse repurchase borrowings on
mortgage securities 57,308 5.095%
-------------------------------------------------
$399,694 6.328% $166,881 6.318%
=================================================
Net Interest Earning Assets $ 44,038 $ 49,394
======= ========
Net Interest Spread 0.985% 1.092%
======= ======
Yield on Interest Earning Assets 16.250% 11.099%
======= ======
Yield on Interest Earning Assets
[after adjustment to include net
interest income and capital (net
interest earning assets) of HCP-2] 10.580% 11.099%
======= ======
</TABLE>
Core business - mortgage loans
Net interest income generated from investments in mortgage loans
(classified as held for sale and held to maturity) during the three months ended
March 31, 1999 and 1998, respectively, is detailed below (dollars in thousands):
30
<PAGE> 31
<TABLE>
<CAPTION>
QUARTER QUARTER
ENDED ENDED
MARCH 31, MARCH 31,
1999 1998
--------- ---------
<S> <C> <C>
Mortgage Loans
Average asset balance $246,329 $216,275
Average repo balance 225,835 166,881
-------- --------
Net interest earning assets $20,494 $49,394
======== ========
Average leverage ratio 91.680% 77.161%
======== ========
Effective interest income rate 7.092% 7.410%
Effective interest expense rate 6.432% 6.318%
-------- --------
Net interest spread 0.660% 1.092%
======== ========
Interest income $4,367 $4,006
Interest expense 3,631 2,635
-------- --------
Net interest income $ 736 $1,371
======== ========
Yield on net interest earning assets 14.369% 11.099%
======== ========
</TABLE>
The Company's core business of acquiring single-family seasoned mortgage
loans and holding the loans prior to making a determination as to whether the
mortgage loans will be securitized generated net interest income of $736,000 in
the first quarter of 1999 compared to $1,371,000 in the first quarter of 1998.
The Company did not purchase any mortgage loans in the first quarter of
1999. In the same period during 1998 the Company purchased $262 million (par
value) of mortgage loans. Hanover did, however, complete its third
securitization transaction (par value of $138,357,000) in March 1999; these
assets were thereafter classified as CMO collateral. The average leverage ratio
increased substantially from the first quarter of 1998 to the first quarter of
1999, as the Company had less available capital to use for the purchase and
holding of mortgage loans in 1999. The use of less leverage contributed to
greater net interest income generated in the first quarter of 1998 as compared
to the like period in 1999 and to a lower yield on the net interest earning
assets. The net interest spread decreased by 39.6% (from 1.092% to 0.660%). The
decrease in net interest spread is attributable to (i) higher prepayment speeds
(20% to 25% in the first quarter of 1999) resulting in increased amortization of
premiums, (ii) increase in non-accrual of interest income on delinquent mortgage
loans, (iii) securitizing higher rated coupon mortgage loans and (iv) the
effects of a short term reverse repurchase agreement financing source with
interest rates in excess of 8.0% for the period from January 1, 1999 through
early February when this credit line was refinanced.
Core business - CMO collateral
Net interest income generated from the CMO collateral during the first
quarter of 1999 is detailed below:
31
<PAGE> 32
<TABLE>
<CAPTION>
QUARTER
ENDED
MARCH 31,
CMO Collateral 1999
- -------------- ----
<S> <C>
Average asset balance $48,138
Average CMO borrowing balance 27,465
Average repo balance 16,464
-------
Net interest earning assets $ 4,209
=======
Average leverage ratio 91.256%
=======
Effective interest income rate 7.054%
Effective interest expense rate 6.416%
-------
Net interest spread 0.638%
=======
Interest income $849
Interest expense 705
-------
Net interest income $144
=======
Yield on net interest earning assets 13.711%
=======
</TABLE>
In March 1999, the Company securitized $138,537,000 (par value) of mortgage
loans. The securitization was accomplished in a grantor/owner trust format (CMO)
which entailed the creation of a wholly-owned subsidiary, Hanover SPC-A, Inc.
The transaction was accounted for as a financing for both book and tax
accounting purposes.
In a financing, the Company continues to record 100% of the interest
income, net of servicing and other fees, generated by the mortgage loans. The
sole source of financing for these mortgage loans was the CMO borrowing. This
financing represents the liability for certain investment grade mortgage notes
issued by the Company - $130,095,000 at March 31, 1999. The interest expense on
this financing represents the coupon interest amount to be paid to those note
holders.
Core business - collateral for mortgage backed bonds
Net interest income generated from collateral for mortgage backed bonds
during the first quarter of 1999 is detailed below (dollars in thousands):
32
<PAGE> 33
<TABLE>
<CAPTION>
QUARTER
ENDED
MARCH 31,
1999
--------
<S> <C>
Collateral for mortgage backed bonds
Average asset balance $ 76,646
Average mortgage backed bonds balance 70,892
Average repo balance 1,730
--------
Net interest earning assets $ 4,024
========
Average leverage ratio 94.749%
========
Effective interest income rate 6.680%
Effective interest expense rate 6.926%
--------
Net interest spread (0.246%)
========
Interest income $ 1,280
Interest expense 1,258
--------
Net interest income $ 22
========
Yield on net interest earning assets 2.234%
========
</TABLE>
In April 1998 the Company securitized $102,977,000 (par value) of mortgage
loans. This securitization was accomplished in a REMIC format, which was
accounted for as a financing for GAAP purposes and as a sale for tax purposes.
In a financing, the Company continues to record 100% of the interest
income, net of servicing fees, generated by the mortgage loans. The primary
source of financing for these mortgage loans is the mortgage backed bonds. This
financing represents the liability for the investment grade mortgage bonds
issued by the Company - $68,766,000 at March 31, 1999. The interest expense on
this financing represents the coupon interest amount to be paid to the
investment grade bond holders. The Company's net equity in the secured
transaction represents the non-investment grade, interest only and principal
only bonds. The Company's net equity investment in collateral for mortgage
backed bonds can also be leveraged through reverse repurchase financing. At
March 31, 1999 the Company had $1,631,000 of reverse repurchase financing on a
portion of the collateral for mortgage backed bonds ($2,473,000). The bonds,
except for the interest only and principal only bonds, have fixed coupon
interest rates of 6.75% and 7.00%. The interest only bonds generate monthly
interest from the excess interest generated on the underlying mortgages after
deducting all service fees and the coupon interest rate on the applicable bonds.
The interest rate on each of the interest only bonds is based on a notional
amount (the principal balance of those mortgage loans with an interest rate in
excess of the related bonds' coupon interest rate). The notional amounts decline
each month to reflect the related normal principal amortization, curtailments
and prepayments for the related underlying mortgage loans. Accordingly, the
effective interest rate will decline as prepayments on the underlying mortgages
with interest rates in excess of the coupon rates accelerate. The mortgage loans
collateralizing the mortgage backed bonds experienced prepayment speeds during
the first quarter of 1999 of approximately 25%.
Interest expense includes the interest on the mortgage backed bonds,
interest on the related reverse repurchase agreements and amortization of
certain deferred financing costs.
33
<PAGE> 34
Core-business - FNMA mortgage securities (swapped for the Company's mortgage
loans)
Net interest income generated from investments in FNMA mortgage securities
that were converted from the Company's mortgage loans during 1998 is detailed
below (dollars in thousands):
<TABLE>
<CAPTION>
QUARTER
ENDED
MARCH 31,
1999
-------
<S> <C>
FNMA mortgage securities (swapped)
Average asset balance $54,285
Average repo balance 53,270
-------
Net interest earning assets $ 1,015
=======
Average leverage ratio 98.130%
=======
Effective interest income rate 6.820%
Effective interest expense rate 5.068%
-------
Net interest spread 1.752%
=======
Interest income $ 926
Interest expense 675
-------
Net interest income $ 251
=======
Yield on net interest earning assets 98.751%
=======
</TABLE>
In December 1998, the Company exchanged $55.2 million of fixed rate
mortgage loans for a like amount of mortgage securities in the form of 31 FNMA
certificates. The mortgage loans securing the FNMA mortgage securities
experienced prepayment speeds of approximately 24% during the first quarter of
1999.
Core business - private placement mortgage securities (purchased from a related
party)
Net interest income generated from private placement securities purchased
from an affiliate, HCP-2, in October 1998 is detailed below (dollars in
thousands):
34
<PAGE> 35
<TABLE>
<CAPTION>
QUARTER
ENDED
MARCH 31,
1999 (1)
-------
<S> <C>
Private placement mortgage securities
Average asset balance $18,334
Average - repo balance 4,037
-------
Net interest earning assets $14,297
=======
Average leverage ratio 22.021%
=======
Effective interest income rate 15.069%
Effective interest expense rate 5.455%
-------
Net interest spread 9.614%
=======
Interest income $ 692
Interest expense 55
-------
Net interest income $ 637
=======
Yield on net interest earning assets 17.784%
=======
</TABLE>
(1) This table does not reflect the Company's combined overall effective yield
and the Company's total investment in private placement mortgage
securities because the table does not reflect net interest income of and
equity employed by the Company's unconsolidated subsidiary, HCP-2. See the
table on page 38 that reflects the Company's combined overall yield and
total net interest earning assets employed.
In October 1998, the Company completed its second private placement REMIC
securitization transaction through its newly organized unconsolidated
subsidiary, HCP-2. HCP-2 issued a REMIC mortgage security and sold all of the
REMIC securities except the "AAA" rated notes to two newly created wholly-owned
subsidiaries of the Company. The Company's investment at March 31, 1999 includes
six investment grade ("AA", "A" and "BBB") notes and six interest only notes.
The interest rates on the investment grade notes are fixed and range from 6.50%
to 6.75%. These notes generate normal principal and interest remittances to the
Company on a monthly basis. The interest only notes generate monthly interest
remittances to the Company (subject to the availability of funds) from the
excess interest generated from the underlying mortgages after deducting all
service fees and the coupon interest rate on the applicable notes. The interest
rate on each of the interest only notes is based on a notional amount (the
principal balance of those mortgage loans with an interest rate in excess of the
related note coupon interest rate). The notional amounts decline each month to
reflect the related normal principal amortization, curtailments and prepayments
for the related underlying mortgage loans. At March 31, 1999 the interest only
notes were divided into two major categories; the first group had an effective
weighted average interest rate of 1.145% on a notional balance of $227,614,000
and the second group had an effective weighted average interest rate of 0.250%
on a notional balance of $124,532,000.
The interest only notes will be adversely affected more than other notes
by higher than expected prepayment speeds on underlying mortgage loans with
interest rates in excess of the net coupon rate. In all likelihood, mortgages
with higher interest rates will be repaid more rapidly than mortgages with lower
interest rates. Accordingly, the effective yield generated by this portfolio is
expected to decrease over time. The underlying mortgage loans were prepaying at
an annualized speed of approximately 33% in the first three months of 1999,
somewhat higher than expected.
35
<PAGE> 36
Non-core business - purchased Agency mortgage securities
Net interest income (loss) generated from purchased Agency mortgage
securities in 1999 and 1998 is detailed below:
<TABLE>
<CAPTION>
QUARTER QUARTER
ENDED ENDED
MARCH 31, MARCH 31,
1999 1998
-------- --------
<S> <C> <C>
Purchased FNMA & FHLMC mortgage securities
Average asset balance $ 3,267 $334,722
Average repo balance 3,150 324,305
-------- --------
Net interest earning assets $ 117 $ 10,417
======== ========
Average leverage ratio 96.402% 96.888%
======== ========
Effective interest income rate 6.143% 6.116%
Effective interest expense rate 5.023% 5.597%
-------- --------
Net interest spread 1.120% 0.519%
======== ========
Interest income $ 50 $ 5,118
Interest expense 40 4,538
-------- --------
Net interest income $ 10 $ 580
======== ========
Yield on net interest earning assets 36.155% 22.273%
======== ========
</TABLE>
The Company invested a significant portion of its initial capital in
December 1997, shortly after the inception of the Company, in purchases of
Agency ARM securities from various "Wall Street" dealers and in March of 1998,
it purchased an additional fixed rate FNMA certificate from another dealer firm.
All of the ARM securities were subsequently sold in October 1998 at a loss of
$5,989,000. The Agency ARM securities experienced extremely high prepayment
speeds from March 1998 through October 1998, causing higher than anticipated
premium amortization write-offs, and accordingly were not contributing any
positive interest income to the Company. Because of the rapid prepayment
experienced and the Company's desire to increase liquidity the ARM securities
were sold in October 1998. At March 31, 1999 the Company owned only the fixed
rate FNMA mortgage security purchased in March 1998 that remits principal and
interest. This investment is fully leveraged with a PSA repo agreement that
typically matures every 30 days.
Other interest income
Interest income generated during the first three months of 1999 and 1998
from non-mortgage assets is detailed below (dollars in thousands):
<TABLE>
<CAPTION>
QUARTER QUARTER
ENDED ENDED
MARCH 31, MARCH 31,
1999 1998
---- ----
<S> <C> <C>
Overnight investing $199 $ 82
Related party notes 52 17
Cash margin -- 109
---- ----
$251 $208
==== ====
</TABLE>
Interest income on cash deposited as additional cash collateral (cash
margin) pursuant to reverse repurchase financing agreements with certain lenders
earned interest at the respective borrowing rate charged by the lender -
approximately 5.60%.
36
<PAGE> 37
Interest income recorded on overnight investing was generated for the most
part from investing excess cash in Federal Home Loan Bank discount notes with
interest rates ranging from 4.2% to 4.5%. Overnight investing also includes, to
a much lesser extent, investments in the highest rated commercial paper and
savings accounts.
Notes receivable due from HCP earn interest at 1.00% below prime. The
balance due from HCP at March 31, 1999 and 1998 was $603,000 and $900,000,
respectively. Notes receivable due from Principals earn interest at the lowest
applicable Federal rate in effect at the time of the loan. The balance due from
Principals at March 31, 1999 and 1998 was $3,124,000 and $483,000, respectively.
EXPENSES
The Company did not purchase any mortgage loans in the first quarter of
1999 and accordingly incurred little to no expenses for due diligence and
commission during this period. The due diligence costs incurred during the three
months ended March 31, 1999 ($63,000) related to additional costs identified on
mortgage loan purchases initiated in 1998 and subsequent mortgage loan file
documentation deficiency follow-up expenses. In the first quarter of 1998 the
Company recorded $175,000 and $125,000 of due diligence and commission expenses,
respectively, directly relating to the purchase of $263 million (par value) of
mortgage loans.
The Company experienced a significant increase in legal and professional
expenses from the first quarter of 1998 ($80,000) to the first quarter of 1999
($224,000). During the first three months of 1999 general corporate legal and
tax expenses increased greatly as the Company incurred additional costs relating
to new business opportunities, credit line negotiations, tax planning
strategies, regulatory matters, etc.
For the three months ended March 31, 1999 and 1998 the Company's ratio of
operating expenses to average assets was 0.69% and 0.44%, respectively. The
Company's first quarter 1999 and 1998 operating expenses did not include any
incentive bonus compensation. In order for the eligible participants to earn
incentive bonus compensation, the rate of return on shareholders' investment
must exceed the average ten-year U.S. Treasury rate during the year plus 4.0%.
EQUITY IN (LOSS) OF UNCONSOLIDATED SUBSIDIARIES
Hanover owns 100% of the non-voting preferred stock of HCP, which
represents a 97% ownership interest in HCP and its wholly-owned subsidiaries.
Hanover's investment in HCP is accounted for on the equity method. Hanover
recorded a loss for the first three months of 1999 and 1998 of $408,000 and
$6,000, respectively, from its equity investment in HCP. HCP revenues in the
first quarter of 1999 from due diligence services, loan sale advisory, loan
brokering and mortgage sales and service were disappointing, as the revenues in
total were insufficient to cover operating expenses. In the same period in 1998,
HCP operations came close to breaking-even as a result of a special consulting
assignment that generated $400,000 in revenues and the sale of a significant
portion of the mortgage servicing rights owned by Hanover Capital Mortgage
Corporation, a wholly-owned subsidiary of HCP, that resulted in a $350,000 gain.
In October 1998, the Company completed its second private placement REMIC
securitization transaction through its newly organized unconsolidated
subsidiary, HCP-2. Hanover contributed certain fixed rate mortgage loans,
subject to the related reverse repurchase agreement financing, to HCP-2 in
exchange for a 99% economic ownership of HCP-2 (representing a 100% ownership of
the non-voting preferred stock in HCP-2). HCP-2 issued a REMIC security and sold
all of the REMIC security except the "AAA" rated notes to two newly created
wholly-owned subsidiaries of Hanover. Hanover's investment in HCP-2 is accounted
for on the equity method. Hanover recorded a loss in the first quarter of 1999
from its equity investment in HCP-2 of $468,000.
37
<PAGE> 38
The loss generated by HCP-2 is a result of the unique securitization
transaction entered into in October 1998. The REMIC security transaction
effectively records all of the underlying mortgage loans as assets and the same
amount of mortgage backed bonds as a liability. Accordingly, the gross interest
income generated from the underlying mortgages will match exactly the interest
expense relating to the mortgage backed bonds. The net loss generated by HCP-2
relates to (1) the amortization of net premiums and deferred hedge costs,
reflected as a reduction of interest income, (2) the amortization of deferred
financing fees and (3) to a much lesser extent, certain administrative expenses.
It is expected that HCP-2 will continue to reflect decreasing losses in the
future.
Management believes that the net interest income calculated relating to
this securitization transaction should be adjusted to reflect the operating
activity recorded from the equity in loss of HCP-2 to more fully comprehend the
yield on the net interest earning assets. Accordingly, the table below reflects
the adjusted net interest income generated from the $318 million securitization
transaction:
<TABLE>
<CAPTION>
QUARTER
ENDED
MARCH 31,
1999
--------
<S> <C>
Private placement mortgage securities
Average asset balance (as adjusted) $ 24,243
Average repo balance 4,037
--------
Net interest earning assets (as adjusted) $ 20,206
========
Average leverage ratio (as adjusted) 16.653%
========
Effective interest income rate (as adjusted) 3.675%
Effective interest expense rate 5.455%
--------
Net interest spread (as adjusted) (1.780%)
========
Interest income (as adjusted) $ 224
Interest expense 55
--------
Net interest income (as adjusted) $ 169
========
Yield on net interest earning assets (as adjusted) 3.319%
========
</TABLE>
Hanover's taxable income for the three months ended March 31, 1999 is
estimated at $1,656,000. Taxable income exceeds GAAP net income recorded through
March 31, 1999 due to certain book/tax differences. The following table details
the major book/tax differences in arriving at the estimated taxable income for
the three months ended March 31, 1999 (dollars in thousands):
38
<PAGE> 39
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31,
1999
-------
<S> <C>
GAAP net income $ 736
Add: Equity in loss of unconsolidated
subsidiaries 876
Difference in gain recognition on sale
of mortgage servicing rights 248
Loan loss provision 119
Less: Additional tax amortization of net
premiums on mortgages, CMO
collateral and mortgage securities (163)
Capital loss carry forward to offset
gain on sale of mortgage securities (139)
Other (21)
-------
Estimated Taxable Income $ 1,656
=======
</TABLE>
As a REIT, Hanover is required to declare dividends amounting to 85% of
each year's taxable income by the end of each calendar year and to have declared
dividends amounting to 95% of Hanover's taxable income for each year by the time
Hanover files its Federal tax return. Therefore, a REIT generally passes through
substantially all of its earnings to shareholders without paying Federal income
tax at the corporate level.
LIQUIDITY
The Company expects to meet its short-term and long-term liquidity
requirements generally from its existing working capital, cash flow provided by
operations, sale of certain mortgage securities, sale of mortgage servicing
rights, reverse repurchase agreements and other possible sources of financing,
including CMOs and REMICs, additional equity generated by the exercise of some
or all of the Company's outstanding stock warrants and additional equity
offerings. The Company considers its ability to generate cash to be adequate to
meet operating requirements both short-term and long-term. However, if a
significant decline in the market value of the Company's investment portfolio
should occur, the Company's available liquidity from existing sources and
ability to access additional sources of credit may be reduced. As a result of
such a reduction in liquidity, the Company may be forced to sell certain
investments in order to maintain liquidity. If required, these sales could be
made at prices lower than the carrying value of such assets, which could result
in losses.
The Company had three reverse repurchase agreement lines of credit in
place at March 31, 1999. One of these lines of credit had been renewed in
December 1998, another line of credit was renewed in March 1999 and the third
line of credit (outstanding repo financing of $15,282,000 at March 31, 1999)
will not be renewed. A new committed $50 million line of credit facility was
closed in April 1999. Management may add additional lines of credit in the
second and third quarter of 1999.
In November 1998 Hanover entered into a short term financing arrangement
(that has since terminated) with Residential Funding Corporation ("RFC"). In
connection with such financing arrangement, Hanover in April 1999 executed a
Warrant Agreement to issue and deliver to RFC warrants to purchase 299,999
shares of Hanover's common stock exercisable at a price per share equal to the
closing price of Hanover's common stock on the American Stock Exchange on the
date of the November agreement, which was $4.00 per share. The warrants expire
after five years, in April 2004.
39
<PAGE> 40
Net cash provided by operating activities for the three months ended March
31, 1999 was $4,292,000. Cash flows from operating activities were generated by
net income of $736,000, adjusted for certain non-cash items of $1,237,000,
normal recurring changes in operating assets and liabilities ($2,152,000) and
net remittances on loans to related parties (Principals - $57,000 and HCP
- -$110,000).
Net cash provided by investing activities amounted to $62,667,000 during the
period from January 1, 1999 through March 31, 1999. The majority of cash
proceeds from investing activities was generated from regular principal
amortization payments, curtailment payments, payoffs of mortgage loans and the
resale of certain mortgage loans back to the original sellers for various
document deficiencies ($45,274,000). Additional proceeds were also received from
principal remittances on collateral for mortgage backed bonds ($8,606,000),
mortgage securities ($4,177,000) and CMO collateral ($2,171,000), the sale of
mortgage securities ($2,249,000) and mortgage servicing rights ($190,000).
Cash flows from financing activities used $56,802,000 during the three
months ended March 31, 1999. During the first quarter of 1999, the Company made
net repayments to its reverse repurchase lenders of $176,681,000 and repayments
on its REMIC liability of $8,539,000, offset by net proceeds received from the
Company's third securitization transaction completed in March 1999 of
$130,095,000. The Company also paid its fourth quarter dividends ($695,000) and
purchased an additional 195,000 shares of its common stock ($982,000) during
this three month period.
CAPITAL RESOURCES
The Company had no capital expenditure during the quarter ended March 31,
1999 and management does not anticipate the need for any material capital
expenditures in the near future.
YEAR 2000 (Y2K) DISCLOSURE
The Y2K issue is the result of computer systems that use two digits
rather than four to define the applicable year, which may prevent such
systems from accurately processing dates ending in the year 2000 and
thereafter. This could result in system failures or in miscalculations
causing disruption of operations, including, but not limited to, an
inability to process transactions, to send and receive electronic data, or
to engage in routine activities and operations.
The following information is provided relating to the Company's Y2K issues:
1. Y2K-Readiness- The Company has reviewed the status of all of its
information technology ("IT") systems and has determined that all of its
computer hardware is Y2K compliant. In addition, the Company has received
satisfactory certification from certain of its third party vendors and/or
verified to its satisfaction that their IT systems are Y2K compliant or
have indicated that they will be Y2K compliant prior to December 31, 1999.
The Company has prepared a detailed questionnaire for the remainder of the
Company's significant other third party relationships:
40
<PAGE> 41
<TABLE>
<CAPTION>
Certain Third Party Vendors Services Provided
--------------------------- -----------------
<S> <C>
Securities dealer firms Financing, facilitate purchase and
sale of mortgage assets,
etc.
Information processing firms Accounting, word processing, database
software systems
Mortgage loan servicers Mortgage loan servicing
Communications firms Telephone, modems, fax, financial software,
internet, postage
Facilities firms Office space, storage, security
General Legal and accounting, office supplies, etc.
</TABLE>
The Company has sent letters requiring verification of compliance with
Year 2000 matters and has followed up such letters with telephone calls as
appropriate. An evaluation of these questionnaires as well as other Y2K
readiness matters has been ongoing for several months. This process was
scheduled to be completed by March 31, 1999; however, because all
responses to the questionnaires have not been received, the completion of
the process has been postponed until June 30, 1999. After completion of
the evaluation, the Company will then determine the most cost-effective
method to remedy any third party non-compliance. The Company does not own
any non-IT systems (i.e. elevator systems, building air management
systems, security and fire control systems). The Company has received
confirmation that the non-IT systems located in the Company's principal
leased facilities are all Y2K compliant.
2. Y2K-Costs - The Company has not incurred any material costs related to
its Y2K issues and believes its total Y2K costs to date have been less
than $25,000. At this time it does not anticipate any material costs will
be incurred on as yet unidentified Y2K issues. The costs of these projects
and the dates on which the Company plans to complete modifications and
replacements are based on management's best estimates, the estimates of
third-party specialists, if any, who may assist the Company, the
modification plans of third parties and other factors. However, these
estimates of future Y2K related costs may change when the assessment of
third-party issues is complete and actual results could differ materially
from the above indication.
3. Y2K-Risks - Currently the Company's most reasonably likely worst case
scenario relating to the Y2K issue would occur if any of the companies
which service its mortgage portfolios had Y2K problems that prohibited
such companies from either (1) collecting and remitting funds or (2)
providing the related loan data to the Company on a timely basis. A
scenario of this type could, if existing for any significant length of
time, create liquidity problems for the Company and could result in
decreased net income through decreased net interest income and increased
operating expenses. If the Company does not receive borrower remittances
from its servicers on a timely basis it may have to (1) use existing
capital, (2) sell other mortgage assets or (3) try to secure additional
financing sources to satisfy lenders' margin calls. Although the
likelihood of such an occurrence seems remote, a total cessation of
borrower remittances to the Company could potentially lead to monetary
defaults by the Company on its repo lending obligations. Additionally, the
Company estimates that expenses would increase as a result of legal and
other actions taken to attempt to collect the funds due the Company. The
third-party questionnaire described in Item 1 above is intended to assess
these risks and the alternatives available to reduce or eliminate them.
While the Company believes the probability of the above occurrences to be
low, there can be no assurance at this time that the Company will not be
materially adversely affected by possible Y2K problems.
41
<PAGE> 42
4. Y2K-Contingency Plans- The development of contingency plans to handle
the most reasonably likely worst case Y2K scenario is dependent upon the
completion of the assessment of the third-party questionnaires described
above. The Company anticipates it will have such a contingency plan in
place by June 30, 1999. When completed, it is intended that the Company's
documented Y2K contingency plan will include identified "individuals"
within the Company to contact in the event of a Y2K problem, as well as
the availability of back-up systems. Due to the nature of the preliminary
open issues at this time, which involve only third-party issues, the
Company does not currently anticipate the need for any third-party
consultants for remediation efforts.
OTHER MATTERS
REIT Requirements
Hanover has elected to be taxed as a REIT under the Code. Hanover believes
that it was in full compliance with the REIT tax rules as of March 31, 1999 and
intends to remain in compliance with all REIT tax rules. If Hanover fails to
qualify as a REIT in any taxable year and certain relief provisions of the Code
do not apply, Hanover 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 Hanover fails to qualify as a REIT would not
be deductible by Hanover in computing its taxable income. As a result, Hanover
could be subject to income tax liability, thereby significantly reducing or
eliminating the amount of cash available for distribution to its stockholders.
Further, Hanover could also be disqualified from re-electing REIT status for the
four taxable years following the year during which it became disqualified.
IMPORTANT FACTORS RELATED TO FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
The preceding section, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and other sections of this Quarterly
Report contain various "forward-looking statements" within the meaning of
Section 27A of the Securities Exchange Act of 1933, as amended, and Section 21E
of the Securities Exchange Act of 1934, as amended. These forward-looking
statements represent the Company's expectations or beliefs concerning future
events, including, without limitation, statements containing the words
"believes," "anticipates," "expects" and words of similar import; and also
including, without limitation, the following: statements regarding the Company's
continuing ability to target and acquire mortgage loans; expected availability
of the master reverse repurchase agreement financing; the sufficiency of the
Company's working capital, cash flows and financing to support the Company's
future operating and capital requirements; results of operations and overall
financial performance; the expected dividend distribution rate; and the expected
tax treatment of the Company's operations. Such forward-looking statements
relate to future events and the future financial performance of the Company and
the industry and involve known and unknown risks, uncertainties and other
important factors which could cause actual results, performance or achievements
of the Company or industry to differ materially from the future results,
performance or achievements expressed or implied by such forward-looking
statements.
42
<PAGE> 43
Investors should carefully consider the various factors identified in
"Management's Discussion and Analysis of Financial Condition and Results of
Operation - Other Matters," and elsewhere in this Quarterly Report that could
cause actual results to differ materially from the results predicted in the
forward-looking statements. Further, the Company specifically cautions investors
to consider the following important factors in conjunction with the
forward-looking statements: the possible decline in the Company's ability to
locate and acquire mortgage loans; the possible adverse effect of changing
economic conditions, including fluctuations in interest rates and changes in the
real estate market both locally and nationally; the effect of severe weather or
natural disasters; the effect of competitive pressures from other financial
institutions, including other mortgage REITs; and the possible changes, if any,
in the REIT rules. Because of the foregoing factors, the actual results achieved
by the Company in the future may differ materially from the expected results
described in the forward-looking statements.
43
<PAGE> 44
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
During the first quarter of 1999 the Company used certain derivative
financial instruments (for purposes other than trading) as hedges of anticipated
transactions relating to its investment portfolio.
The Company from time to time enters into interest rate hedge mechanisms
(forward sales of Agency mortgage securities) to manage its exposure to market
pricing changes in connection with the purchase, holding of, securitization and
sale of its fixed rate mortgage loan portfolio. The Company generally closes out
the hedge position to coincide with the related loan sale or securitization
transactions and recognizes the results of the hedge transaction in determining
the amount of the related loan sale gain or loss for loans sold, or as a basis
adjustment to loans held to maturity.
At March 31, 1999 the Company did not have any forward sales of Agency
mortgage securities that had not yet settled.
The Company only hedges its fixed rate mortgage loan pools by selling
short similar coupon and duration matched Agency securities, usually for 30 to
60 day periods. This hedging of mortgage assets should, if properly executed,
adjust the carrying value of the hedged fixed mortgage loan pools to reflect
current market pricing. The costs or gains of the individual hedging
transactions can vary greatly depending upon market conditions. Net hedging
gains on the fixed rate mortgage pools were $83,000 in the first quarter of
1999. Management is satisfied that the Company's hedging program has been
utilized effectively as no charges relating to impairment of mortgage loans were
booked through March 31, 1999.
The primary risk associated with selling short Agency securities relates
to changes in interest rates. Generally, as market interest rates increase, the
market value of the hedged asset (fixed rate mortgage loans) will decrease. The
net effect of increasing interest rates will generally be a favorable or gain
settlement on the forward sale of the Agency security; this gain will result in
a negative basis adjustment to the hedged assets. Conversely, if interest rates
decrease, the market value of the hedged asset will increase. The net effect of
decreasing interest rates will generally be an unfavorable or loss settlement on
the forward sale of the Agency security; this loss should be offset by a
positive basis adjustment to the hedged assets. To mitigate interest rate risk
an effective matching of Agency securities with the hedged assets needs to be
monitored closely. Senior Management continually monitors the changes in
weighted average duration and coupons of the hedged assets and will
appropriately adjust the amount, duration and coupon of future forward sales of
Agency securities.
Mortgage loans that are identified for inclusion in future securitizations
are generally no longer hedged. The Company anticipates that it will have a
lower volume of forward sales of Agency security hedging activity in the future
as the Company plans to securitize mortgage loans on a more frequent basis.
The Company also enters into interest rate hedge mechanisms (interest rate
caps) to manage its interest rate exposure on certain reverse repurchase
agreement financing. The cost of the interest rate caps is amortized over the
life of the interest rate cap and is reflected as a portion of interest expense
in the consolidated statement of operations.
44
<PAGE> 45
At March 31, 1999 the Company had the following interest rate caps in
effect (dollars in thousands):
<TABLE>
<CAPTION>
Notional Amount Index Strike % Maturity Date
- -------------------------------------------------------------------------
<S> <C> <C> <C>
$33,480 3 Month LIBOR 5.75% March 31, 2001
32,770 3 Month LIBOR 5.75% April 30, 2001
-------
$66,250
</TABLE>
The primary risk associated with interest rate caps relates to interest
rate increases. The interest rate caps provide a cost of funds hedge against
interest rates that exceed 5.75%, subject to the limitation of the notional
amount of financing.
45
<PAGE> 46
PART II OTHER INFORMATION
Item 1. Legal Proceedings
During the first quarter of 1999, there were no material
developments with respect to legal proceedings to which the
Company or any of its affiliates have been a party.
Item 2. Changes in Securities
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits filed with this Form 10-Q
Ex.27 Financial Data Schedule
Ex. 10.34 Warehousing Credit and Security
Agreement between Hanover Capital Mortgage
Holdings, Inc., Hanover Capital Partners, Ltd. and
Bank United dated as of April 30, 1999
Ex. 10.35 Amendment Number One to the Amended and
Restated Master Loan and Security Agreement by and
among Hanover Capital Partners Ltd and Greenwich
Capital Financial Products, Inc. dated March 28, 1999
Ex. 10.36 Warrant Agreement by and between Hanover
Capital Mortgage Holdings, Inc. and Residential Funding
Corporation dated as of April 23, 1999
(b) Reports on Form 8-K
None
46
<PAGE> 47
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
By: /s/ John A. Burchett
Dated: May 17, 1999 ---------------------------------
------------
John A. Burchett
Chairman of the Board of Directors
Dated: May 17, 1999 By: /s/ Ralph F. Laughlin
------------
----------------------------------
Ralph F. Laughlin
Chief Financial Officer and
Principal Accounting Officer
47
<PAGE> 1
Exhibit 10.34
WAREHOUSING CREDIT AND SECURITY AGREEMENT
BETWEEN
HANOVER CAPITAL MORTGAGE HOLDINGS, INC.,
A MARYLAND CORPORATION,
HANOVER CAPITAL PARTNERS LTD.
A NEW YORK CORPORATION,
AND
BANK UNITED,
A FEDERAL SAVINGS BANK
DATED AS OF APRIL _____, 1999
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
1. DEFINITIONS. ............................................................ Page 1
1.1 Defined Terms. ............................................ Page 1
1.2 Other Definitional Provisions. ............................ Page 13
2. THE CREDIT. ............................................................. Page 14
2.1 The Commitment. ........................................... Page 14
2.2 Procedures for Obtaining Advances ......................... Page 15
2.3 Note. ..................................................... Page 17
2.4 Interest. ................................................. Page 17
2.5 Principal Payments. ....................................... Page 18
2.6 Expiration of Commitment. ................................. Page 19
2.7 Method of Making Payments. ................................ Page 19
2.8 Commitment Fee. ........................................... Page 19
2.9 Miscellaneous Charges. .................................... Page 20
2.10 Bailee. ................................................... Page 20
3. COLLATERAL. ............................................................. Page 20
3.1 Grant of Security Interest. ............................... Page 20
3.2 Security Interest in Mortgage-backed Securities. .......... Page 22
3.3 Delivery of Collateral Documents. ......................... Page 22
3.4 Delivery of Additional Collateral or Mandatory Prepayment.. Page 23
3.5 Right of Redemption from Pledge. .......................... Page 23
3.6 Collection. ............................................... Page 23
3.7 Return or Release of Collateral at End of Commitment. ..... Page 24
4. CONDITIONS PRECEDENT. ................................................... Page 24
4.1 Initial Advance. .......................................... Page 24
4.2 Each Advance. ............................................. Page 25
5. REPRESENTATIONS AND WARRANTIES. ......................................... Page 26
5.1 Organization; Good Standing; Subsidiaries. ................ Page 27
5.2 Authorization and Enforceability. ......................... Page 27
5.3 Financial Condition. ...................................... Page 27
5.4 Litigation. ............................................... Page 28
5.5 Compliance with Laws. ..................................... Page 28
5.6 Regulations G and U. ...................................... Page 28
5.7 Investment Company Act and Public Utility Holding Company
Act. ...................................................... Page 28
5.8 Agreements. ............................................... Page 28
5.9 Title to Properties. ...................................... Page 29
5.10 ERISA. .................................................... Page 29
5.11 Eligibility. .............................................. Page 29
5.12 Special Representations Concerning Collateral. ............ Page 30
5.13 RICO. ..................................................... Page 31
</TABLE>
Page i
<PAGE> 3
<TABLE>
<S> <C>
5.14 Proper Names. ............................................. Page 31
5.15 Direct Benefit From Loans. ................................ Page 32
5.16 Loan Documents Do Not Violate Other Documents. ............ Page 32
5.17 Consents Not Required. .................................... Page 32
5.18 Material Fact Representations. ............................ Page 32
5.19 Place of Business. ........................................ Page 32
5.20 Use of Proceeds; Business Loans. .......................... Page 33
5.21 No Undisclosed Liabilities. ............................... Page 33
5.22 Tax Returns and Payments. ................................. Page 33
5.23 Subsidiaries. ............................................. Page 33
5.24 Holding Company. .......................................... Page 34
6. AFFIRMATIVE COVENANTS. .................................................. Page 34
6.1 Payment of Note. .......................................... Page 34
6.2 Financial Statements and Other Reports. ................... Page 34
6.3 Maintenance of Existence; Conduct of Business. ............ Page 35
6.4 Compliance with Applicable Laws. .......................... Page 35
6.5 Inspection of Properties and Books. ....................... Page 35
6.6 Notice. ................................................... Page 35
6.7 Payment of Debt, Taxes, etc. .............................. Page 36
6.8 Insurance. ................................................ Page 36
6.9 Other Loan Obligations. ................................... Page 36
6.10 Use of Proceeds of Advances. .............................. Page 37
6.11 Special Affirmative Covenants Concerning Collateral. ...... Page 37
6.12 Cure of Defects in Loan Documents. ........................ Page 38
7. NEGATIVE COVENANTS. ..................................................... Page 38
7.1 Contingent Liabilities. ................................... Page 38
7.2 Merger; Acquisitions. ..................................... Page 38
7.3 Loss of Eligibility. ...................................... Page 38
7.4 Debt to Adjusted Tangible Net Worth Ratio. ................ Page 38
7.5 Minimum Adjusted Tangible Net Worth. ...................... Page 39
7.6 Minimum GAAP Net Worth. ................................... Page 39
7.7 Minimum Current Ratio. .................................... Page 39
7.8 Maximum Non-Investment Grade Securities to Adjusted
Tangible Net Worth Ratio. ................................. Page 39
7.9 Transactions with Affiliates. ............................. Page 39
7.10 Limits on Corporate Distributions. ........................ Page 39
7.11 RICO. ..................................................... Page 39
7.12 No Loans or Investments Except Approved Investments. ...... Page 39
7.13 Charter Documents and Business Termination. ............... Page 40
7.14 Changes in Accounting Methods. ............................ Page 40
7.15 No Sales, Leases or Dispositions of Property. ............. Page 40
7.16 Changes in Business or Assets. ............................ Page 41
7.17 Changes in Office or Inventory Location. .................. Page 41
7.18 Special Negative Covenants Concerning Collateral. ......... Page 41
</TABLE>
Page ii
<PAGE> 4
<TABLE>
<S> <C>
7.19 No Indebtedness. .......................................... Page 41
8. DEFAULTS; REMEDIES. ..................................................... Page 42
8.1 Events of Default. ........................................ Page 42
8.2 Remedies. ................................................. Page 45
8.3 Application of Proceeds. .................................. Page 47
8.4 Lender Appointed Attorney-in-Fact. ........................ Page 48
8.5 Right of Set-Off. ......................................... Page 48
9. NOTICES. ................................................................ Page 48
10. REIMBURSEMENT OF EXPENSES; INDEMNITY. ................................... Page 49
11. FINANCIAL INFORMATION. .................................................. Page 50
12. MISCELLANEOUS. .......................................................... Page 51
12.1 Terms Binding Upon Successors; Survival of
Representations. .......................................... Page 51
12.2 Assignment. ............................................... Page 51
12.3 Amendments. ............................................... Page 51
12.4 Governing Law. ............................................ Page 51
12.5 Participations. ........................................... Page 51
12.6 Relationship of the Parties. .............................. Page 51
12.7 Severability. ............................................. Page 52
12.8 Usury. .................................................... Page 52
12.9 Consent to Jurisdiction. .................................. Page 53
12.10 Arbitration. .............................................. Page 53
12.11 ADDITIONAL INDEMNITY. ..................................... Page 54
12.12 No Waivers Except in Writing. ............................. Page 55
12.13 WAIVER OF JURY TRIAL. ..................................... Page 55
12.14 Multiple Counterparts. .................................... Page 55
12.15 No Third Party Beneficiaries. ............................. Page 55
12.16 RELEASE OF LENDER LIABILITY. .............................. Page 55
12.17 ENTIRE AGREEMENT; AMENDMENT. .............................. Page 56
12.18 NO ORAL AGREEMENTS. ....................................... Page 56
EXHIBIT "A-1" ............................................................... Page 58
EXHIBIT "A-2" ............................................................... Page 60
ANNEX "A" TO EXHIBIT "A-2" .................................................. Page 61
EXHIBIT "B" ................................................................. Page 62
EXHIBIT "C" ................................................................. Page 63
EXHIBIT "D" ................................................................. Page 67
</TABLE>
Page iii
<PAGE> 5
<TABLE>
<S> <C>
EXHIBIT "E" ................................................................. Page 68
EXHIBIT "F" ................................................................. Page 70
ANNEX "A" TO EXHIBIT "F" .................................................... Page 71
EXHIBIT "G" ................................................................. Page 74
EXHIBIT "H" ................................................................. Page 75
EXHIBIT "I" ................................................................. Page 76
EXHIBIT "J-1" ............................................................... Page 77
EXHIBIT "J-2" ............................................................... Page 78
EXHIBIT "K" ................................................................. Page 79
EXHIBIT "L" ................................................................. Page 81
EXHIBIT "M" ................................................................. Page 82
EXHIBIT "N" ................................................................. Page 83
EXHIBIT "O" ................................................................. Page 84
</TABLE>
Page iv
<PAGE> 6
WAREHOUSING CREDIT AND SECURITY AGREEMENT
THIS WAREHOUSING CREDIT AND SECURITY AGREEMENT (this "Agreement"), is
dated as of April _____, 1999, by and among HANOVER CAPITAL MORTGAGE HOLDINGS,
INC., a Maryland corporation (the "Company") having its principal office at 90
West Street, Suite 1509, New York, New York, 10006, HANOVER CAPITAL PARTNERS
LTD., a New York corporation ("HCP"), having its principal office at 90 West
Street, Suite 1508, New York, New York 10006 (the Company and "HCP" being called
collectively, the "Borrowers" and individually, the "Borrower"), and BANK
UNITED, a federal savings bank (the "Lender"), having its principal office at
3200 Southwest Freeway, Suite 2700, Houston, Texas 77027.
WHEREAS, the Borrowers have requested the Lender to make certain loans to
the Borrowers to finance the purchase of Mortgage Loans (as that term is herein
defined) and for such other purposes specifically set forth herein which loans
are for the benefit of the Borrowers;
WHEREAS, the Lender is willing to make such loans as herein provided, upon
the terms, agreements and covenants and subject to the conditions hereinafter
set forth and in reliance on the representations and warranties herein made and
referred to; and
WHEREAS, the Borrowers and the Lender desire to set forth herein the terms
and conditions upon which the Lender shall provide warehouse financing to the
Borrowers;
NOW, THEREFORE, for good and valuable consideration, the amount and
sufficiency of which are hereby acknowledged by the parties hereto, to induce
the Lender to provide the warehouse financing facility to the Borrowers and in
reliance of the representations and warranties made herein, the parties hereto
hereby agree as follows:
10 DEFINITIONS.
1.1 Defined Terms. Capitalized terms defined below or elsewhere in this
Agreement (including the exhibits hereto) shall have the following meanings:
"Adjusted Tangible Net Worth" means, with respect to the Company at
any date, the Tangible Net Worth of the Company at such date plus one
percent (1%) of the sum of the outstanding principal balances of Mortgage
Loans as of such date for which Company owns the Servicing Rights less
Non-Investment Grade Securities, deferred financing fees and all other
intangible assets of any unconsolidated Subsidiary.
"Advance" means a disbursement by the Lender under the Commitment
pursuant to Article 2 of this Agreement.
"Advance Request" means (a) with respect to an Advance against
Eligible Mortgage Loans or Eligible Non-Conforming Mortgage Loans, EXHIBIT
"A-1" attached hereto and incorporated herein for all purposes and (b)
with respect to an Advance against
Page 1
<PAGE> 7
Investment Grade Securities, EXHIBIT "A-2" attached hereto and
incorporated herein for all purposes
"Affiliate" shall mean any Person controlling, controlled by or
under common control with any other Person. For purposes of this
definition "control" (including "controlled by" and "under common control
with") means the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of such
Person, whether through the ownership of voting securities, by contract,
or otherwise or owning or possessing the power to vote 10% or more of any
class of voting securities of any Person. Without limiting the generality
of the foregoing, for purposes of this Agreement, Company and each of its
respective Subsidiaries shall be deemed to be Affiliates of one another.
"Aged Mortgage Loans" means Eligible Mortgage Loans that have been
included in Collateral for a period of more than one hundred eighty (180)
days.
"Agreement" means this Warehousing Credit and Security Agreement,
either as originally executed or as it may from time to time be
supplemented, modified or amended.
"Applicable Law" shall mean the laws of the State of Texas and the
United States of America in effect from time to time and applicable to the
transactions between the Lender and the Company pursuant to this Agreement
and the other Loan Documents whichever permits the charging and collection
of the highest nonusurious rate of interest on such transactions. For
purposes of determining Texas law with respect to the highest nonusurious
rate of interest, the weekly rate ceiling permitted under Chapter 1D. of
the Texas Credit Title, as amended, shall be controlling.
"Approved Custodian" means a Person acceptable to the Lender from
time to time in its sole discretion, who possesses Mortgage Loans that
secure Mortgaged-backed Securities.
"Bailee Letter" has the meaning set forth in Section 3.3 hereof.
"Borrowers" has the meaning set forth in the first paragraph of
this Agreement.
"Business Day" means any day excluding Saturday, Sunday and any day
on which Lender is closed for business.
"Capitalized Lease" shall mean any lease under which rental payments
are required to be capitalized on a balance sheet of the lessee in
accordance with GAAP.
"Capitalized Rentals" shall mean the amount of aggregate rentals due
and to become due under all Capitalized Leases under which the Company is
a lessee that would be reflected as a liability on a balance sheet of the
Company.
"Chattel Paper" shall have the meaning assigned that term under the
UCC.
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"Collateral" has the meaning set forth in Section 3.1 hereof.
"Collateral Documents" means (a) with respect to Pledged Mortgages
and Pledged Securities all of the documents and other items described on
EXHIBIT "C" hereto and (b) with respect to Investment Grade Securities,
all of the documents and other items described on EXHIBIT "O".
"Collateral Value" means
(a) with respect to any Eligible Mortgage Loan, an amount
equal to the least of (i) the Par Value thereof, (ii) the amount
which the Investor has committed to pay for such Mortgage Loan
pursuant to a Purchase Commitment, or (iii) the Fair Market Value of
such Mortgage Loan, or (iv) the actual out-of-pocket cost of such
Mortgage Loan to the Company;
(b) with respect to any Eligible Non-Conforming Mortgage Loan,
an amount equal to the least of (i) the Par Value of such Mortgage
Loan, (ii) the Fair Market Value of such Mortgage Loan, (iii) the
amount which the Investor will pay for such Mortgage Loan pursuant
to a Purchase Commitment, or (iv) the actual out-of-pocket cost of
such Mortgage Loan to the Company;
(c) with respect to any Investment Grade Security, an amount
equal to the lesser of (i) the applicable Borrower's book value of
such Investment Grade Security or (ii) the market value of such
Investment Grade Security as determined by the Lender or such third
party acceptable to the Lender in its sole discretion;
(d) with respect to Collateral that is not described within
(a), (b) or (c) and that is pledged pursuant to Section 3.4 hereof,
Collateral Value shall equal an amount established by Lender in its
sole discretion;
(e) with respect to Collateral that is not described in (a),
(b), (c) or (d) the Collateral Value shall be equal to $0.00;
(f) with respect to any Mortgage Loan that is not or ceases to
be an Eligible Mortgage Loan or an Eligible Non-Conforming Mortgage
Loan, the Collateral Value thereof shall equal $0.00; and
(g) with respect to any Investment Grade Security that is
downgraded below an Investment Grade credit rating, the Collateral
Value thereof shall be equal to $0.00.
"Commitment" has the meaning set forth in Section 2.1(a) hereof.
"Commitment Fee" has the meaning set forth in Section 2.8 hereof.
"Company" has the meaning set forth in the first paragraph of
this Agreement.
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"Contracts" shall mean all contracts between any Borrower and one
or more additional parties.
"Contract Rights" shall mean all rights of any Borrower (including,
without limitation, all rights to payment) under each Contract.
"Conventional Mortgage Loan" means a Single-family Mortgage Loan,
other than an FHA Loan or VA Loan, that complies with all applicable
requirements for purchase under the FNMA or FHLMC standard form of
conventional mortgage purchase contract.
"Current Assets" means, with respect to any Person, those assets set
forth in the consolidated balance sheet of a Person prepared in accordance
with GAAP, as current assets, defined as those assets that are now cash or
will be by their terms or disposition be converted to cash within one year
of the date of calculation plus Mortgage-backed Securities of such Person
and Mortgage Loans held by such Person to maturity.
"Current Liabilities" means, with respect to any Person, those
liabilities set forth in the consolidated balance sheet of a Person
prepared in accordance with GAAP, as current liabilities, defined as those
liabilities due upon demand or within one year from the date of
calculation less non-recourse, Debt of such Person.
"Current Ratio" means, with respect to any Person, the sum of the
amounts set forth in the consolidated balance sheet of the Person,
prepared in accordance with GAAP, on the date of calculation as Current
Assets divided by the sum of the amounts set forth in such consolidated
balance sheet as Current Liabilities.
"Debt" means, with respect to any Person, at any date (a) all
indebtedness or other obligations of such Person which, in accordance with
GAAP, would be included in determining total liabilities as shown on the
liabilities side of a balance sheet of such Person at such date; and (b)
all indebtedness or other obligations of such Person for borrowed money or
for the deferred purchase price of property or services; provided that for
purposes of this Agreement, there shall be excluded from Debt at any date
loan loss reserves, deferred taxes arising from capitalized excess service
fees, and operating leases.
"Default" means the occurrence of any event or existence of any
condition which, but for the giving of notice, the lapse of time, or both,
would constitute an Event of Default.
"Default Rate" has the meaning set forth in Section 2.4(c) hereof.
"Delinquent Loans" means, collectively, Delinquent "30 - 59" Loans
and Delinquent "60 - 89" Loans.
"Delinquent "30 - 59" Loan" means, on any day, a Mortgage Loan that
satisfies the requirements of an Eligible Conforming Mortgage Loan, except
that it is at least 30
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days, but not more than 59 days, delinquent with respect to the payment of
principal or interest (without regard to applicable grace period) on the
date of any determination.
"Delinquent "60 - 89" Loan" means, on any day, a Mortgage Loan that
satisfies the requirements of an Eligible Conforming Mortgage Loan except
that it is at least 60 days, but not more than 89 days, delinquent with
respect to the payment of principal or interest (without regard to any
applicable grace period) on the date of any determination.
"Documents" shall have the meaning assigned that term under the
UCC.
"Electronic Request" has the meaning set forth in Section 2.2(a)
hereof.
"Eligible Mortgage Loan" means, at the time of any determination
thereof (a) a Mortgage Loan, that at such time (i) is, without
duplication, a Conventional Mortgage Loan, an FHA Loan, a VA Loan, or a
Jumbo Loan; (ii) is a First Mortgage Loan or a Second Mortgage Loan; (iii)
has a combined loan to value ratio of not greater than 100% (such ratio to
be based upon all loans, including, such Mortgage Loan, and all other
loans secured by the Mortgaged Property securing such Mortgage Loan; (iv)
is validly pledged to the Lender, subject to no other Liens; (v) is not
currently delinquent with respect to any payment due thereunder; (vi) is
covered by a Hedging Contract or (b) a Mortgage-backed Security that at
such time is validly pledged to Lender, subject to no other Liens.
"Eligible Mortgage Pool" means a pool of Mortgage Loans that will
secure a "mortgage related security", as defined in Section 3(a)(41) of
the Exchange Act administered or to be administered by a trustee
acceptable to Lender in its sole discretion where the Mortgage, Mortgage
Note and other documents relating to such Mortgage Loans are held or to be
held by an Approved Custodian.
"Eligible Non-Conforming Mortgage Loan" means, at the time of any
determination thereof, a Mortgage Loan that at such time (i) is, without
duplication, a Delinquent "30 - 59" Loan or a Delinquent "60 - 89" Loan,
(ii) is, without duplication, a First Mortgage Loan or a Second Mortgage
Loan; (iii) has a combined loan to value ratio of not greater than 100%
(such ratio to be based upon all loans, including, such Mortgage Loan, and
all other loans secured by the Mortgaged Property securing such Mortgage
Loan; (iv) is validly pledged to the Lender, subject to no other Liens;
and (v) is subject to a Purchase Commitment or is covered by a Hedging
Contract or is underwritten in accordance with standards approved by
Lender so that such Mortgage Loan is readily salable in the secondary
market or is eligible for securitization.
"ERISA" means the Employee Retirement Income Security Act of 1974
and all rules and regulations promulgated thereunder, as amended from time
to time and any successor statute.
"Event of Default" means any of the conditions or events set
forth in Section 8.1 hereof.
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"Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time and any successor statute.
"Fair Market Value" shall mean, at any date, with respect to:
(a) any Mortgage-backed Security, the bid rate reflected on
the Telerate screen for a Mortgage-backed Security with the closest
coupon rate that does not exceed that of the Mortgage-backed
Security in question multiplied by the original face amount of such
Mortgage-backed Security, and multiplied by the current pool factor
for such Mortgage-backed Security.
(b) any Mortgage Loan, the market rate reflected on the
Telerate screen for thirty (30) day mandatory future delivery of
such Mortgage Loan multiplied by the outstanding principal balance
thereof.
In the event Telerate ceases to publish either the market or bid
price referenced in (a) and (b) above, the average bid price quoted in
writing to the Lender as of the date of determination by any two
nationally recognized dealers selected by Lender that are making a market
in similar Mortgage Loans or Mortgaged-backed Securities shall be utilized
in lieu of the market or bid price, as the case may be.
"FHA" means the Federal Housing Administration and any successor
thereto.
"FHA Loan" means a Single-family Mortgage Loan, payment of which is
partially or completely insured by the FHA under the National Housing Act
or Title V of the Housing Act of 1949 or with respect to which there is a
current, binding and enforceable commitment for such insurance issued by
the FHA.
"FHLMC" means the Federal Home Loan Mortgage Corporation and any
successor thereto.
"FHLMC Guide" means the Freddie Mac Sellers' and Servicers' Guide,
dated September 17, 1984, applicable bulletins, the applicable MIDANET
Users Guide (or the MIDAPHONE User's Guide) and any particular purchase
documents as defined in the Sellers' and Servicers' Guide, as revised
prior to the date hereof.
"FICA" means the Federal Insurance Contributions Act.
"First Mortgage" means a mortgage or deed of trust which constitutes
a first Lien on the property covered thereby.
"First Mortgage Loan" means a Mortgage Loan secured by a First
Mortgage.
"Floating Rate" has the meaning set forth in Section 2.4(a)
hereof.
"FNMA" means the Federal National Mortgage Association and any
successor thereto.
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"FNMA Guide" means the FNMA Servicing Guide dated June 30, 1990, as
revised prior to the date hereof.
"Funding Account" means the non-interest bearing demand checking
account established with, maintained by, and pledged to Lender into which
shall be deposited the proceeds of Advances, the proceeds from any sale of
Collateral, and from which funds shall be disbursed for the acquisition of
Mortgage Loans.
"GAAP" means generally accepted accounting principles set forth in
the opinions and pronouncements of the Accounting Principles Board and the
American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such
other statements by such other entity as may be approved by a significant
segment of the accounting profession, which are applicable to the
circumstances as of the date of determination.
"GAAP Net Worth" means, with respect to any Person at any date, the
sum of the total shareholders' equity in such Person (including capital
stock, additional paid-in capital, and retained earnings, but excluding
treasury stock, if any), on a consolidated basis determined in accordance
with GAAP.
"General Intangibles" shall have the meaning assigned that term
under the UCC.
"GNMA" means the Government National Mortgage Association and any
successor thereto.
"GNMA Guide" means the GNMA I Mortgage-Backed Securities Guide,
Handbook GNMA 5500.1 REV. 6, as revised prior to the date hereof, and as
may be revised from time to time, and GNMA II Mortgage-Backed Securities
Guide Handbook GNMA 5500.2, as revised prior to the date hereof.
"HCP" means HANOVER CAPITAL PARTNERS LTD., a New York corporation.
"Hedging Contract" means a written contractual arrangement designed
to provide protection against fluctuations in interest rates with respect
to Mortgage Loans and commitments made to prospective Mortgage Loan
obligors to extend Mortgage Loans at specified rates of interest in each
case in accordance with guidelines acceptable to the Lender.
"HUD" means the Department of Housing and Urban Development and
any successor thereto.
"Indemnified Liabilities" has the meaning set forth in Article 10
hereof.
"Instrument" has the meaning assigned that term under the UCC.
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"Interest Rate Hedging Contract" means any interest rate swap
agreement, interest rate cap agreement, interest rate collar agreement,
interest rate insurance arrangement, future or option contract in respect
of US government securities or Mortgage-backed Securities or any other
agreement, arrangement or security position designed to provide protection
to the Borrower against fluctuations in interest rates.
"Interim Date" has the meaning set forth in Section 4.1(a)(5)
hereof.
"Internal Revenue Code" means the Internal Revenue Code of 1986, or
any subsequent federal income tax law or laws, as any of the foregoing
have been or may from time to time be amended.
"Investment Grade" means a credit rating of BBB or better, as
determined by S & P or a credit rating of Baa2 or better as determined by
Moody's.
"Investment Grade I-O Strips" means an Investment Grade Security
that provides for payment by the issuer to the holder of such security of
pass-through interest only.
"Investment Grade Securities" means, on any date of determination,
Mortgage-backed Securities that (a) have an Investment Grade credit rating
and (b) are validly pledged to the Lender, subject to no other Liens.
"Investor" means FNMA, FHLMC, GNMA, any of the Persons listed in
EXHIBIT "L" hereto, or a financially responsible institution which is
acceptable to Lender, in its sole discretion; provided that at any time by
written notice to the Borrowers Lender may disapprove any Investor in its
sole discretion, whether or not that Person is named as an Investor in
this definition or in EXHIBIT "L" or has been previously approved as an
Investor by Lender. Upon receipt of such notice, the Persons named in
Lender's notice shall no longer be Investors from and after the date of
the receipt of such notice.
"Jumbo Loan" means a Single-family Mortgage Loan (other than a FHA
Loan or VA Loan) that complies with all applicable requirements for
purchase under the FNMA or FHLMC standard form of conventional mortgage
purchase contract then in effect except that the amount of such Mortgage
Loan exceeds the maximum amount under those requirements, but in no event
shall the amount of such Single-family Mortgage Loan exceed $1,000,000.00.
"Lender" has the meaning set forth in the first paragraph of this
Agreement.
"LIBOR Rate" means a rate of interest equal to the London Interbank
Offered Rate for U. S. dollar deposits as quoted by Telerate, Bloomberg or
any other rate quoting service, selected by Lender in its sole discretion
for an interest period of one month. In the event such rate ceases to be
published, LIBOR Rate shall mean a comparable rate of interest reasonably
selected by Lender.
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"Lien" means any lien, mortgage, deed of trust, pledge, security
interest, charge or encumbrance of any kind (including any conditional
sale or other title retention agreement, any lease in the nature thereof,
and any agreement to give any security interest).
"Loan Documents" means this Agreement, the Note, the Guaranty, and
each other document, instrument or agreement executed by the Company,
"HCP" or any other Person in connection herewith or therewith, as any of
the same may be amended, restated, renewed or replaced from time to time.
"Margin Stock" has the meaning assigned to that term in Regulations
G and U of the Board of Governors of the Federal Reserve System as in
effect from time to time.
"Maximum Rate" shall mean the maximum lawful non-usurious rate of
interest (if any) that, under Applicable Law, the Lender may charge the
Borrowers on the Advances from time to time. To the extent that the
interest rate laws of the State of Texas are applicable and unless changed
in accordance with law, the applicable rate ceiling shall be the weekly
ceiling determined in accordance with Texas Credit Title, as amended.
"Monthly Average LIBOR Rate" means the average of all LIBOR Rates
quoted during a given month. In the event (i) the Note is paid in full and
the Commitment is terminated prior to a month end; or (ii) the initial
Advance hereunder occurs on a date other than the first day of that month
on which LIBOR Rates are quoted, the Monthly Average LIBOR Rate shall
mean, in the case of clause (i), the average of all LIBOR Rates quoted
that month up to and including the last Business Day prior to such payment
in full; or, in the case of clause (ii), the LIBOR Rates quoted on the
date of the initial Advance through the end of that month.
"Moody's" means Moody's Investors Service, Inc.
"Mortgage" means a First Mortgage or Second Mortgage on improved
real property.
"Mortgage-backed Securities" means FHLMC, GNMA or FNMA securities or
securities issued by such other Persons acceptable to Lender in its
reasonable discretion that are backed by Mortgage Loans.
"Mortgage Loan" means any loan evidenced by a Mortgage Note. A
Mortgage Loan, unless otherwise expressly stated herein, means a
Single-family Mortgage Loan.
"Mortgage Note" means a note secured by a Mortgage.
"Mortgage Note Amount" means, as of the date of determination, the
then outstanding unpaid principal amount of a Mortgage Note.
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"Mortgage Pool" means a pool of Mortgage Loans that were warehoused
with the Lender, on the basis of which there is to be issued a
Mortgage-backed Security.
"Mortgaged Property" means the property, real, personal, tangible or
intangible, securing a Mortgage Note.
"Multiemployer Plan" means a "multiemployer plan" as defined in
Section 4001(a)(3) of ERISA that is maintained for employees of any
Borrower or a Subsidiary of any Borrower.
"Net Investable Balances" means the average collected balances in
non-interest bearing deposit accounts controlled or maintained by the
Borrowers and its Subsidiaries in accounts at the Lender, less balances to
support float, activity charges, reserve requirements, Federal Deposit
Insurance Corporation insurance premiums and such other assessments as may
be imposed by governmental authorities from time to time.
"Non-Investment Grade Securities"means, on the date of any
determination, securities that do not have an Investment Grade credit
rating.
"Note" has the meaning set forth in Section 2.3 hereof.
"Notices" has the meaning set forth in Article 9 hereof.
"Obligations" shall mean any and all indebtedness, obligations and
liabilities of the Borrowers to the Lender (whether now existing or
hereafter arising, voluntary or involuntary, whether or not jointly owed
with others, direct or indirect, absolute or contingent, liquidated or
unliquidated, and whether or not from time to time decreased or
extinguished and later increased, created or incurred), arising out of or
related to the Loan Documents, or any of them.
"Officer's Certificate" means a certificate executed on behalf of
the Company or "HCP" by its chief financial officer or its treasurer or by
such other officer as may be designated herein, in the form of EXHIBIT "F"
hereto, as the case may be.
"OTS" means the Office of Thrift Supervision.
"Par Value" means, with respect to any Mortgage Loan at the time of
any determination, the unpaid principal balance of such Mortgage Loan on
such date.
"Participant" has the meaning set forth in Section 12.5 hereof.
"Person" means and includes natural persons, corporations, limited
partnerships, general partnerships, joint stock companies, joint ventures,
associations, companies, trusts, banks, trust companies, land trusts,
business trusts or other organizations, whether or not legal entities, and
federal and state governments and agencies or regulatory authorities and
political subdivisions thereof.
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"Plans" has the meaning set forth in Section 5.10 hereof.
"Pledged Mortgages" has the meaning set forth in Section 3.1(a)
hereof.
"Pledged Securities" has the meaning set forth in Section 3.1(b)
hereof.
"Proceeds" shall have the meaning assigned that term under the UCC
or under other relevant law and, in any event, shall include, but not be
limited to, (i) any and all proceeds of any insurance, indemnity or
warranty payable to the Lender or a Borrower from time to time with
respect to any of the Collateral, (ii) any and all payments (in any form
whatsoever) made or due and payable to the Debtor from time to time in
connection with any requisition, confiscation, condemnation, seizure or
forfeiture of all or any part of the Collateral by any governmental
authority (or any Person acting under color of governmental authority),
(iii) any and all securities issued with respect to any of the Collateral
(whether issued by GNMA, FNMA, FHLMC or otherwise) and (iv) any and all
other amounts from time to time paid or payable under or in connection
with any of the Collateral (including, without limitation, under any
Purchase Commitment, or guaranty or commitment for guaranty).
"Purchase Commitment" means a current binding and enforceable
written commitment, in form and substance satisfactory to the Lender,
issued in favor of a Borrower by an Investor pursuant to which that
Investor commits to purchase Mortgage Loans or Mortgage-backed Securities
of a particular type and yield owned by such Borrower at a committed
price, which commitment shall at all times be subject to approval by the
Lender as to terms and conditions.
"Receivables" shall mean any "account" as such term is defined in
the UCC, now or hereafter owned by a Borrower and, in any event, shall
include, but shall not be limited to, all rights to payment, whether now
in existence or arising from time to time hereafter, including, without
limitation, rights evidenced by an account, note, contract, security
agreement, chattel paper or other evidence of indebtedness of security,
together with (i) all security pledged, assigned, hypothecated or granted
to or held by a Borrower to secure the foregoing, (ii) all of a Borrower's
right, title and interest in and to any property or goods, the sale of
which give rise thereto, (iii) all guarantees, endorsements and
identifications on, or of, any of the foregoing, (iv) all powers of
attorney for the execution of any evidence of indebtedness or security or
underwriting in connection therewith, (v) all books, records, ledger
cards, data and invoices relating thereto, (vi) all evidences of the
filing of financing statements and other statements and the registration
of other instruments in connection therewith and amendments thereto,
notices to other creditors or secured parties and certificates from filing
or other registration officers, (vii) all credit information, reports,
memoranda relating thereto and (viii) all other writings related in any
way to the foregoing.
"Redemption Amount" has the meaning set forth in Section 3.5
hereof.
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"RICO" means the Racketeer Influenced and Corrupt Organizations
Act of 1970, as amended.
"Second Mortgage" means a mortgage or deed of trust which
constitutes a second Lien on the property covered thereby.
"Second Mortgage Loan" means a Single-family Mortgage Loan that is
underwritten in conformity with underwriting standards approved by the
applicable Investor and is secured by a Second Mortgage.
"Servicing Contract" means, with respect to any Person, the
arrangement, whether or not in writing, pursuant to which such Person has
the right to service Mortgage Loans.
"Servicing Rights" means (a) the rights, obligations, remedies,
powers, and responsibilities of a Person to service Mortgage Loans owned
by that Person, including without limitation the right to collect
principal and interest payments, administer escrow accounts, and the right
to own and possess loan files and all records, documents, and data
relating to such Mortgage Loans, and (b) the obligations, rights,
remedies, powers, privileges, benefits and responsibilities of a Person to
service Mortgage Notes for GNMA, FNMA or FHLMC under and in accordance
with the GNMA Guide, the FNMA Guide and the FHLMC Guide, respectively or
for any Investor under any Servicing Contract, including, without
limitation, (i) the right to receive servicing fees, termination fees, net
sales proceeds, late charges, insufficient fund fees, and other ancillary
income relating to the Mortgage Notes (ii) the right to hold and
administer the escrow accounts, and (iii) the right to all loan files,
insurance files, tax records, collection records, documents, ledgers,
computer printouts, computer tapes and other records, data or information
relating to the Mortgage Notes, the escrow accounts or the servicing or
otherwise necessary or proper to perform the obligations of servicer.
"Single-family Mortgage Loan" means a Mortgage Loan secured by a
Mortgage covering improved real property containing one to four family
residences (including, without limitation, condominium units but excluding
cooperative ownership interests).
"S & P" means Standard & Poor's Corporation.
"Statement Date" has the meaning set forth in Section 4.1(a)(5)
hereof.
"Subsidiary" means any corporation, association or other business
entity in which more than fifty percent (50%) of the total voting power or
shares of stock entitled to vote in the election of directors, managers or
trustees thereof is at the time owned or controlled, directly or
indirectly, by any Person or one or more of the other Subsidiaries of that
Person or a combination thereof.
"Tangible Net Worth" means, with respect to any Person at any date,
the sum of the total shareholders' equity in such Person (including
capital stock, additional paid-in capital, and retained earnings, but
excluding treasury stock, if any), on a consolidated
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basis; less the aggregate book value of all intangible assets of such
Person (as determined in accordance with GAAP), including without
limitation, goodwill, trademarks, trade names, service marks, copyrights,
patents, licenses, franchises, capitalized excess servicing fees. and
Servicing Rights, each to be determined in accordance with GAAP consistent
with those applied in the preparation of the financial statements referred
to in Section 5.3 hereof; provided that, for purposes of this Agreement,
there shall be excluded from total assets, advances or loans to
shareholders, officers or Affiliates, investments in Affiliates, assets
pledged to secure any liabilities not included in the Debt of such Person
and those other assets which would be deemed by HUD to be non-acceptable
in calculating adjusted net worth in accordance with its requirements in
the Audit Guide for Audit of Approved Non-Supervised Mortgagees", as in
effect as of such date.
"Termination Date" means April _____, 2000, or such earlier date
upon which Lender's obligation to fund shall be terminated pursuant to the
terms of this Agreement.
"Tribunal" means any court or governmental department, commission,
board, bureau, agency, or instrumentality of any state, commonwealth,
nation, territory, possession, county, parish, or municipality, whether
now or hereafter constituted and/or existing.
"UCC" means the Uniform Commercial Code as in effect on the date
hereof in the State of Texas or any other relevant jurisdiction, as
applicable.
"VA" means the Veterans Administration and any successor thereto.
"VA Loan" means a Single-family Mortgage Loan, payment of which is
partially or completely guaranteed by the VA under the Servicemen's
Readjustment Act of 1944 or Chapter 37 of Title 38 of the United States
Code or with respect to which there is a current binding and enforceable
commitment for such a guaranty issued by the VA.
1.2 Other Definitional Provisions.
(a) Accounting terms not otherwise defined herein shall have the
meanings given the terms under GAAP.
(b) Defined terms may be used in the singular or the plural, as the
context requires.
20 THE CREDIT.
2.1 The Commitment.
(a) Subject to the terms and conditions of this Agreement and
provided no Default or Event of Default has occurred and is continuing,
the Lender agrees, from time to time during the period from the date
hereof to and including the Termination Date, to make Advances to the
Borrowers, provided the sum of the total aggregate principal amount
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outstanding at any one time of all such Advances hereunder shall not
exceed FIFTY MILLION AND NO/100 DOLLARS ($50,000,000.00). The obligation
of the Lender to make Advances hereunder up to such limit is hereinafter
referred to as the "Commitment." Within the Commitment, the Borrowers may
borrow, repay and reborrow. All Advances under this Agreement shall
constitute a single indebtedness, and all of the Collateral shall be
security for the Note and for the performance of all the Obligations of
the Borrowers to the Lender.
(b) Advances shall be used by a Borrower solely for the purpose of
funding the acquisition of Eligible Mortgage Loans or Eligible
Non-Conforming Mortgage Loans or for working capital purposes with respect
to Advances against Investment Grade Securities, and none other, and shall
be made at the request of such Borrower in the manner hereinafter provided
in Section 2.2, against the pledge of such Mortgage Loans, Investment
Grade Securities, and such other collateral as is set forth in Section 3.1
hereof as Collateral therefor. Advances shall also be subject to the
following restrictions:
(1) No Advance shall be made against Mortgage Loans that are
not Eligible Mortgage Loans or Eligible Non-Conforming Mortgage
Loans.
(2) The aggregate amount of Advances outstanding at any one
time against Delinquent "30 - 59" Loans shall not exceed five
percent (5%) of the aggregate amount of all Advances outstanding at
the time of any determination.
(3) The aggregate amount of Advances outstanding at any one
time against Delinquent "60 - 89" Loans shall not exceed two percent
(2%) of the aggregate amount of all Advances outstanding at the time
of any determination.
(4) The aggregate amount of Advances against Second Mortgage
Loans outstanding at any one time shall not exceed five percent (5%)
of the aggregate amount of all Advances outstanding at the time of
any determination.
(5) The aggregate amount of Advances against Investment Grade
Securities outstanding at any one time shall not exceed FIFTEEN
MILLION AND NO/100 DOLLARS ($15,000,000.00) and of this amount, no
more than FIVE MILLION AND NO/100 DOLLARS ($5,000,000.00) may be
outstanding at any one time against Investment Grade I-O Strip
Securities.
(6) The aggregate amount of Advances against Aged Mortgage
Loans outstanding at any one time shall not exceed twenty-five
percent (25%) of the aggregate amount of all Advances outstanding at
the time of any determination.
(c) No Advance against an Eligible Mortgage Loan that is not a
Second Mortgage Loan shall exceed an amount equal to 95% of the Collateral
Value of such Mortgage Loan, to be determined as of the date such Mortgage
Loan is pledged to Lender.
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(d) No Advance against an Eligible Mortgage Loan that is a Second
Mortgage Loan shall exceed an amount equal to 90% of the Collateral Value
of such Mortgage Loan, to be determined as of the date such Mortgage Loan
is pledged to Lender.
(e) No Advance against a Delinquent "30 - 59" Loan shall exceed at
any time an amount equal to eighty-five percent (85%) of the Collateral
Value of such Mortgage Loan, to be determined as of the date such Mortgage
Loan is pledged to Lender.
(f) No Advance against a Delinquent "60 - 89" Loan shall exceed at
any time an amount equal to eighty percent (80%) of the Collateral Value
of such Mortgage Loan, to be determined as of the date such Mortgage Loan
is pledged to Lender.
(g) No Advance against an Investment Grade Security shall exceed the
following amount applicable to the investment rating for such Investment
Grade Security:
(i) For an Investment Grade Security with a rating of AA or
better, eighty percent (80%) of the Collateral Value of such
Investment Grade Security;
(ii) For an Investment Grade Security with a rating of A,
seventy-five percent (75%) of the Collateral Value of such
Investment Grade Security;
(iii) For an Investment Grade Security with a rating of BBB,
seventy percent (70%) of the Collateral Value of such Investment
Grade Security; and
(iv) For an Investment Grade I - O Strip, sixty-five percent
(65%) of the Collateral Value of such Investment Grade I - O Strip.
2.2 Procedures for Obtaining Advances.
(a) A Borrower may obtain an Advance hereunder against an Eligible
Mortgage Loan or an Eligible Non-Conforming Mortgage Loan, subject to the
satisfaction of the conditions set forth in Sections 4.1 and 4.2 hereof,
upon compliance with the procedures set forth in this Section 2.2 and in
EXHIBIT "C" attached hereto and made a part hereof. Requests for Advances
shall be initiated by a Borrower (i) by delivering to the Lender and its
designee, by telecopy (with original to be sent immediately thereafter by
overnight mail) a completed and signed Advance Request in the form of
EXHIBIT "A-1" attached hereto and made a part hereof, or (ii) by using the
electronic data transmission service provided by the Lender and its
licensor, MBMS Incorporated, to transmit to the Lender a request for
Advance ("Electronic Request"), which shall include all information
required by EXHIBIT "A-1" through the Warehouse Management System software
provided by the Lender and its licensor, MBMS Incorporated. The Lender
shall have the right, on not less than three (3) Business Days' prior
notice to the Borrowers, to modify the Advance Request, Electronic
Request, or any exhibits hereto to conform to current legal requirements
or Lender practices, and, as so modified, said Advance Request, Electronic
Request or exhibits shall be deemed a part hereof. In consideration of the
Lender permitting the Borrowers to make Electronic Requests for Advances
utilizing the Warehouse Management
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System software or Advance Requests by telecopy, each Borrower covenants
and agrees to assume liability for and to protect, indemnify and save the
Lender harmless from, any and all liabilities, obligations, damages,
penalties, claims, causes of action, costs, charges and expenses,
including attorneys' fees and expenses of employees, which may be imposed,
incurred by or asserted against the Lender by reason of any loss, damage
or claim howsoever arising or incurred because of, out of or in connection
with (i) any action of the Lender pursuant to Electronic Requests or
Advance Requests by telecopy, (ii) the breach of any provisions of this
Agreement by any Borrower, (iii) the transfer of funds pursuant to such
Electronic Requests or Advance Requests by telecopy, or (iv) the Lender's
honoring or failing to honor any Electronic Request or Advance Request by
telecopy for any reason or no reason whatsoever. The Lender is entitled to
rely upon and act upon Electronic Requests or Advance Requests by
telecopy, and the Borrowers shall be unconditionally and absolutely
estopped from denying (x) the authenticity and validity of any such
transaction so acted upon by the Lender once the Lender has advanced funds
and has deposited or transferred such funds as requested in any such
Electronic Request or Advance Request by telecopy, and (y) the Borrowers'
liability and responsibility therefor.
(b) A Borrower may obtain an Advance hereunder against Investment
Grade Securities subject to the satisfaction of the conditions set forth
on EXHIBIT "O" hereto and all other terms and conditions set forth in this
Agreement. Requests for Advances against Investment Grade Securities shall
be initiated by a Borrower delivering to the Lender a completed and signed
Advance Request in the form of EXHIBIT "A-2" attached hereto and made a
part hereof for all purposes.
(c) Before funding, the Lender and its designee shall have a
reasonable time to examine such Advance Request and the Collateral
Documents to be delivered prior to such requested Advance, as set forth in
the applicable Exhibit hereto, and may reject such of them as do not meet
the requirements of this Agreement or of the related Purchase Commitment.
The Advance Request and the Collateral Documents must be received by
Lender no later than 2:00 p.m. Houston, Texas time in order for funding to
occur the next Business Day. If the Advance Request and Collateral
Documents are received by Lender later than 2:00 p.m. Houston, Texas time
on any day, the funding shall occur on the second Business Day occurring
thereafter.
(d) To make an Advance, the Lender shall credit the Funding Account
with the Lender upon compliance by such Borrower with the terms of this
Agreement.
2.3 Note. The Borrowers' obligation to pay the principal of, and interest
on, all Advances made by the Lender shall be evidenced by a promissory note (the
"Note") of the Borrowers dated as of the date hereof, in form and substance of
EXHIBIT "N" hereto. The term "Note" shall include all extensions, renewals and
modifications of the Note and all substitutions therefor. All terms and
provisions of the Note are hereby incorporated herein.
2.4 Interest.
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(a) (1 The unpaid amount of each Advance outstanding against
Mortgage Loans that are not Aged Mortgage Loans shall bear interest
from the date of such Advance until paid in full, at a rate of
interest equal to the lesser of (i) the Maximum Rate, or (ii) a
floating rate of interest (the "Floating Rate") which is equal to
187.5 basis points (1.875%) per annum over the Monthly Average LIBOR
Rate.
(2 The unpaid amount of each Advance outstanding against
Mortgage Loans that are Aged Mortgage Loans shall bear interest from
the date such Mortgage Loans become Aged Mortgage Loans until such
Advance is paid in full at a rate of interest equal to the lesser of
(i) the Maximum Rate or (ii) a fluctuating rate of interest which is
equal to 237.5 basis points (2.375%) per annum over the Monthly
Average LIBOR Rate.
(3 The unpaid amount of each Advance outstanding against
Investment Grade Securities shall bear interest from the date of
such Advance until paid in full, at a rate of interest equal to the
lesser of (i) the Maximum Rate or (ii) a fluctuating rate of
interest which is equal to 287.5 basis points (2.875%) per annum
over the Monthly Average LIBOR Rate.
(4 Notwithstanding Section 2.4(a)(1), (2), and (3) above to
the contrary, the unpaid portion of Advances ("NIB Advances") equal
to Net Investable Balances shall bear interest at the following
rates in the following priority:
(i) First, NIB Advances against Mortgage Loans that
are not Aged Mortgage Loans shall bear interest at the rate of
1.875% per annum;
(ii) Second, NIB Advances against Aged Mortgage
Loans shall bear interest at the rate of 2.375% per annum;
and
(iii) Third, the balance, if any, of NIB Advances
against Investment Grade Securities shall bear interest at the
rate of 2.875% per annum.
(b65535 Interest and Commitment Fee shall be computed on the basis
of a 360-day year and applied to the actual number of days elapsed in each
interest calculation period and shall be payable monthly in arrears, on
the first day of each month, commencing with the first month following the
date of this Agreement, and ending on Termination Date.
(c65535 Obligations not paid when due (whether at stated maturity,
upon acceleration following the occurrence of an Event of Default or
otherwise) shall bear interest, from the date due until paid in full, at a
rate of interest ("Default Rate") at all times equal to the lesser of (i)
four percent (4) per annum over the Floating Rate; or (ii) the Maximum
Rate, said interest to be payable on demand by Lender.
65535.5 Principal Payments.
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(a) The outstanding unpaid principal amount of all Advances shall be
payable in full upon April _____, 2000.
(b) The Borrowers shall have the right to prepay the outstanding
Advances in whole or in part, from time to time, without premium or
penalty, subject to the Borrowers' obligation to pay the Commitment Fee
pursuant to Section 2.8 of this Agreement.
(c) The Borrowers shall be obligated to pay to the Lender, without
the necessity of prior demand or notice from the Lender, and each Borrower
authorizes the Lender to charge its accounts (excluding any monies held by
such Borrower in trust for third parties) in Lender's possession for the
amount of any outstanding Advance against a specific Mortgage Loan or
Investment Grade Security upon the earliest occurrence of any of the
following events:
(1 The expiration of one hundred eighty (180) days from the
date of any Advance for any Mortgage Loan (excluding Aged Mortgage
Loans);
(2 An Aged Mortgage Loan has been included in Collateral for
270 days (computed from the date such Aged Mortgage Loan was
originally pledged to the Lender).
(3 The expiration of thirty (30) days from the date the
Mortgage Loan was delivered to an Investor for examination and
purchase, without the purchase being made, or upon rejection of the
Mortgage Loan as unsatisfactory by an Investor;
(4 The expiration of forty-five (45) days from the date
Mortgage Loan is delivered to the certificating custodian acceptable
to the Lender for the issuance of a Mortgage-backed Security;
(5 The expiration of ten (10) Business Days from the date a
Collateral Document in connection with such Mortgage Loan was
delivered to a Borrower for correction or completion, without being
returned to the Lender, corrected or completed;
(6 The expiration of three (3) Business Days after the date on
which the related Purchase Commitment, if any, expires, is
terminated or otherwise canceled or no longer in full force and
effect and the specific Mortgage Loan was not delivered under the
Purchase Commitment prior to such termination, expiration or
cancellation;
(7 The Mortgage Loan is not or ceases to be an Eligible
Mortgage Loan or an Eligible Non-Conforming Mortgage Loan;
(8 Upon sale of the Mortgage Loan;
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(9 The expiration of three hundred sixty-four (364) days from
the date of any Advance against any Investment Grade Security; and
(10 The Investment Grade Security is downgraded below an
Investment Grade credit rating.
Upon receipt of such payment by the Lender, such Mortgage Loans or
Investment Grade Securities shall be considered to have been redeemed from
pledge, and the Collateral Documents relating thereto which have not been
delivered to the Investor or the pool custodian or pool trustee shall be
released by the Lender to the applicable Borrower.
65535.6 Expiration of Commitment. Unless extended or terminated earlier as
permitted hereunder, the Commitment shall expire of its own term, and without
the necessity of action by the Lender, at the close of business on the
Termination Date. However, the remainder of this Agreement shall remain in full
force and effect until all amounts due on the Obligations have been paid in
full. The Lender has not made, and does not hereby make, any commitment to
renew, extend, rearrange or otherwise refinance the outstanding and unpaid
principal of the Note or accrued interest thereon. In the event, however, the
Lender from time to time renews, extends, rearranges, increases and/or otherwise
refinances any portion or all of any Obligation and any accrued interest thereon
at any time, such refinancing shall be evidenced by an appropriate promissory
note in form and substance satisfactory to the Lender and, unless otherwise
noted or modified at such time or times by the terms of such promissory note or
any agreements executed in connection therewith, any such promissory note or
notes and refinancing evidenced thereby shall be governed in all respects by the
terms of this Agreement.
65535.7 Method of Making Payments. Except as otherwise specifically
provided herein, all payments hereunder shall be made to the Lender not later
than the close of business (Houston time) on the date when due unless such date
is a non-Business Day, in which case, such payment shall be due on the first
Business Day thereafter, and shall be made in lawful money of the United States
of America in immediately available funds.
65535.8 Commitment Fee. In consideration of Lender's agreement to make
Advances available to Borrower under the Commitment, subject to the terms of
this Agreement, Borrower shall pay to Lender, a commitment fee equal to
one-fourth of one percent (0.25%) per annum of the total amount available under
the Commitment pursuant to Section 2.1 hereof (the "Commitment Fee"). Lender
acknowledges that it has received from the Borrowers the sum of $62,500.00 as
payment against the Commitment Fee. The balance of the Commitment Fee shall be
due and payable at the execution and delivery of this Agreement. The Commitment
Fee shall be deemed fully earned and non-refundable upon the execution and
delivery of this Agreement by the parties, notwithstanding the Commitment is
never fully funded during the term of this Agreement.
65535.9 Miscellaneous Charges. At the end of each month during the term of
this Agreement, the Borrowers shall pay to the Lender in arrears on or before
five (5) days after the later of (a) the end of each calendar month or (b) the
Borrowers' receipt of the Lender's bill for
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such monthly period, a transaction fee equal to $15.00 per Pledged Mortgage and
per Pledged Security held by Lender during such month and for which Lender has
not previously received a transaction fee, for the handling and administration
of Advances and Collateral. For the purposes hereof, Borrowers shall, at their
sole cost and expense, pay all miscellaneous charges and expenses incurred by
the Lender in connection with the handling and administration of Advances and
Collateral, including, without limitation, all charges for security delivery
fees and charges for overnight delivery of Collateral to Investors and any
charges of an Approved Custodian in connection with Pledged Securities.
Miscellaneous charges are due when incurred, but shall not be delinquent if paid
within ten (10) days after receipt of an invoice or an account analysis
statement from the Lender.
65535.10 Bailee. Lender appoints each Borrower - and each Borrower shall
act - as its bailee to (i) hold in trust for Lender (A) the original recorded
copy of the mortgage, deed of trust, or trust deed securing each Pledged
Mortgage pledged by it, (B) a mortgagee policy of title insurance (or binding
unexpired and unconditional commitment to issue such insurance if the policy has
not yet been delivered to Company) insuring such Borrower's perfected, first
priority Lien created by that mortgage, deed of trust, or trust deed, (C) the
original insurance policies for each Pledged Mortgage pledged by it, and (D) all
other original documents relating to each Pledged Mortgage pledged by it,
including any promissory notes, any other loan documents and supporting
documentation, surveys, settlement statements, closing instructions, and
Mortgage-backed Securities, and (ii) deliver to Lender any of the foregoing
items as soon as reasonably practicable upon Lender's request.
0. COLLATERAL.
0.1 Grant of Security Interest. As security for the payment of the Note
and for the performance of all of the Obligations hereunder, each Borrower
hereby assigns and transfers all right, title and interest, now owned or
hereafter acquired, in and to and grants a security interest to the Lender in
the following described property, whether now owned or hereafter acquired (the
"Collateral"):
(a0 All Mortgage Loans including all Mortgage Notes and Mortgages
evidencing such Mortgage Loans which from time to time are delivered or
caused to be delivered to the Lender or its designee, come into the
possession, custody or control of the Lender for the purpose of assignment
or pledge or in respect of which an Advance has been made by the Lender
hereunder (the "Pledged Mortgages");
(b0 All Mortgage-backed Securities which are from time to time
delivered or caused to be delivered to, or are otherwise in the possession
of the Lender, or its designee, its agent, bailee or custodian as assignee
or pledged to the Lender, or for such purpose are registered by book-entry
in the name of the Lender, including, without limitation, all Investment
Grade Securities (the "Pledged Securities");
(c0 All private mortgage insurance and all commitments issued by the
FHA or VA to insure or guarantee any Mortgage Loans included in the
Pledged Mortgages; all guaranties related to Pledged Securities; all
Purchase Commitments held by such Borrower
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covering the Pledged Mortgages or the Pledged Securities and all proceeds
resulting from the sale thereof to Investors pursuant thereto; all
personal property, contract rights, servicing and servicing fees and
income or other proceeds, amounts and payments payable to such Borrower as
compensation or reimbursement, accounts and general intangibles of
whatsoever kind relating to the Pledged Mortgages, the Pledged Securities,
and all other documents or instruments relating to the Pledged Mortgages,
and the Pledged Securities, including, without limitation, any interest of
such Borrower in any fire, casualty or hazard insurance policies and any
awards made by any public body or decreed by any court of competent
jurisdiction for a taking or for degradation of value in any eminent
domain proceeding as the same relate to the Pledged Mortgages;
(d0 All General Intangibles, Instruments, Documents and Chattel
Paper evidencing, securing, supporting or relating to Pledged Mortgages or
Pledged Securities, including, without limitation, causes of action,
foreclosure suites and any judgments therein, relating thereto;
(e0 All Receivables, Contracts and Contract Rights relating to
Pledged Mortgages or Pledged Securities pursuant to this Warehouse Credit
Agreement, including, without limitation, (i) all Purchase Commitments,
(ii) all commitments to insure or guarantee and all guarantees, (iii) all
insurance policies and any claims thereunder, (iv) rights to maintain any
escrows, (v) rights under any agreement pursuant to which any Pledged
Mortgage or Pledged Security was purchased or issued, as the case may be,
and (vi) all escrow accounts and all monies; securities and instruments
deposited or required to be deposited in the escrow accounts;
(f0 All documents, instruments, files, surveys, certificates,
correspondence, appraisals, computer programs, tapes, discs, cards,
accounting records (including all information, records, tapes, data,
programs, discs and cards necessary or helpful in the administration or
servicing of the foregoing Collateral) and other information and data of
such Borrower relating to the foregoing Collateral;
(g0 All now existing or hereafter acquired cash delivered to or
otherwise in the possession of the Lender or its agent, bailee or
custodian or designated on the books and records of such Borrower as
assigned and pledged to the Lender;
(h0 All Hedging Contracts and Interest Rate Hedging Contracts
with respect to the Pledged Mortgages and Pledged Securities; and
(i0 All cash and non-cash Proceeds of the foregoing Collateral,
including all dividends, distributions and other rights in connection
with, and all additions to, modifications of and replacements for, the
foregoing Collateral, and all products and proceeds of the foregoing
Collateral, together with whatever is receivable or received when the
foregoing Collateral or proceeds thereof are sold, collected, exchanged or
otherwise disposed of, whether such disposition is voluntary or
involuntary, including, without limitation, all rights to payment with
respect to any cause of action affecting or relating to the foregoing
Collateral or proceeds thereof.
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0.2 Security Interest in Mortgage-backed Securities. A Borrower's ability
to convert Mortgage Loans pledged by it to Mortgage-backed Securities are
subject to the following conditions:
(a0 Pledged Mortgages that are to be transferred to a pool custodian
in connection with the issuance of Mortgage-backed Securities, shall be
released from the Lender's security interest only against payment to the
Lender of the amount due the Lender in connection with such Pledged
Mortgages as determined in accordance with Section 3.5 of this Agreement
or against the issuance of such Mortgage-backed Securities and the
continuation of the Lender's first priority, perfected security interest
in such Mortgage-backed Securities and the proceeds thereof until payment
due the Lender in respect of said Pledged Mortgages is made to the Lender.
(b0 In the case of Mortgage-backed Securities created from Pledged
Mortgages, the Lender shall have the exclusive right to the possession of
the Mortgage-backed Securities or, if the Mortgage-backed Securities are
not to be issued in certificated form, shall have the right to have the
book entries for the Mortgage-backed Securities issued in the Lender's
name or the name or names of its designees. Lender shall cause delivery of
the Mortgage-backed Securities to be made to the Investor or the book
entries registered in the name of the Investor or the Investor's designee
only against payment therefor. Each Borrower acknowledges that the Lender
may enter into one or more standing arrangements with other financial
institutions for the issuance of Mortgage-backed Securities in book entry
form in the name of such other financial institutions, as agent for the
Lender, and each Borrower agrees upon request of the Lender, to execute
and deliver to such other financial institutions its written concurrence
in any such standing arrangements.
0.3 Delivery of Collateral Documents. The Lender or its designee
exclusively shall deliver Pledged Mortgages or Pledged Securities to (a) an
Investor that has issued a Purchase Commitment with respect thereto for its
examination and purchase, or (b) an Approved Custodian for purposes of
examination or delivery in connection with the issuance of Mortgage-backed
Securities. In such cases where the Lender must deliver documents to an Investor
or Approved Custodian, the Lender must receive signed shipping instructions (in
the form of EXHIBIT "D" attached hereto), no later than 2:00 p.m. Houston, Texas
time one (1) Business Day prior to the expiration of the appended Purchase
Commitment, in addition to any other documents listed in Section II of EXHIBIT
"C" in respect of the issuance of Mortgage-backed Securities. If shipping
instructions are received by Lender before 2:00 p.m. Houston, Texas time of any
Business Day, Lender will ship the documents together with the Bailee Letter (in
form of EXHIBIT "K") to the Investor or Approved Custodian on the same Business
Day, otherwise Lender will ship the documents the next Business Day following
receipt of shipping instructions. In any case in which an Advance has been made
hereunder against Pledged Mortgages, based on the existence of a Purchase
Commitment covering such Pledged Mortgages, each Borrower agrees that such
Pledged Mortgages will not be placed in any mortgage pool other than an Eligible
Mortgage Pool, unless such Pledged Mortgages have been redeemed from pledge as
permitted hereunder or other arrangements, satisfactory to the Lender in its
sole discretion, have been made for the redemption of such Pledged Mortgages
from pledge hereunder. The Lender may deliver any document
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relating to the Collateral to a Borrower for correction or completion against a
trust receipt in the form of EXHIBIT "E" attached hereto executed by such
Borrower. Each Borrower hereby represents and warrants to the Lender that any
request by it for release of the Collateral consisting of or relating to
Mortgage Loans pledged by it shall be solely for the purposes of correcting
clerical or non-substantial documentation problems in preparation for returning
such Collateral to the Lender for ultimate sale or exchange; each Borrower shall
request such release in compliance with all of the terms and conditions of such
release set forth herein; and each Borrower will return to the Lender such
documentation released to it pursuant to this Section 3.3 within ten (10)
calendar days after such delivery.
0.4 Delivery of Additional Collateral or Mandatory Prepayment. At any time
that the aggregate Collateral Value of the Collateral then pledged hereunder is
less than the aggregate amount of the Advances then outstanding hereunder, the
Lender may request, and the Borrowers shall within ten (10) Business Days after
Notice by the Lender (a) deliver to the Lender or its designee for pledge
hereunder additional Mortgage Loans and/or cash, in aggregate amounts sufficient
to cover the difference between the Collateral Value of the Collateral pledged
and the aggregate amount of Advances outstanding hereunder, or (b) repay the
Advances in an amount sufficient to reduce the aggregate balance thereof
outstanding to an amount equal to or below the Collateral Value of the
Collateral pledged hereunder. If at any time the Collateral Value of any
Collateral is zero, Borrowers shall immediately pay to Lender the aggregate
balance of all Advances outstanding against such Collateral. If at any time the
limitations of Section 2.1(b) (2) - (6) are exceeded, Borrowers shall
immediately pay to Lender the amount of such excess.
0.5 Right of Redemption from Pledge. So long as no Event of Default has
occurred, a Borrower may redeem a Mortgage Loan or Mortgage-backed Security
pledged by it by notifying the Lender of its intention to redeem such Mortgage
Loan or Mortgage-backed Security from pledge and by paying, or causing an
Investor to pay, to the Lender, for application to prepayment of the principal
balance of the Note, an amount (the "Redemption Amount") equal to the amount of
the Advances made with respect to or relating to such Mortgage Loan or
Mortgage-backed Security to be released as of the date of such application.
0.6 Collection. So long as no Event of Default shall have occurred, each
Borrower shall be entitled to service and receive and collect directly all sums
payable to it in respect of the Collateral pledged by it other than proceeds of
any Purchase Commitment or proceeds of the sale of any Collateral. Following the
occurrence of any Event of Default, the Lender or its designee shall thereafter
be entitled to service and receive and collect all sums payable to each Borrower
in respect of the Collateral and in such case (a) the Lender or its designee in
its discretion may, in its own name or in the name of the applicable Borrower or
otherwise, demand, sue for, collect or receive any money or property at any time
payable or receivable on account of or in exchange for any of the Collateral,
but shall be under no obligation to do so, (b) each Borrower shall, if the
Lender so requests, forthwith pay to the Lender at its principal office all
amounts thereafter received by such Borrower upon or in respect of any of the
Collateral, advising the Lender as to the source of such funds, and (c) all
amounts so received and collected by the Lender shall be held by it as part of
the Collateral.
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0.7 Return or Release of Collateral at End of Commitment. If (a) the
Commitment shall have expired or been terminated, and (b) no Advances, interest
or other Obligations evidenced by the Loan Documents or due under this Agreement
shall be outstanding and unpaid, the Lender shall deliver or release all
Collateral in its possession to the Borrowers. The receipt of the Borrowers for
any Collateral released or delivered to the Borrowers pursuant to any provision
of this Agreement shall be a complete and full acquittance for the Collateral so
returned, and the Lender shall thereafter be discharged from any liability or
responsibility therefor.
1. CONDITIONS PRECEDENT.
1.1 Initial Advance. The obligation of the Lender to make the initial
Advance under this Agreement is subject to the satisfaction, in the sole
discretion of the Lender, on or before the date thereof, of the following
conditions precedent:
(a0 The Lender shall have received the following, all of which must
be satisfactory in form and content to the Lender, in its sole discretion:
(1 The Loan Documents dated as of the date hereof duly
executed by the Borrowers;
(2 Certified copies of each Borrower's articles of
incorporation and bylaws and certificates of good standing dated no
less recently than ninety (90) days prior to the date of this
Agreement and, with respect to each Borrower, a certification from
the taxing authority of the state of incorporation stating that the
applicable Borrower is in good standing with said taxing authority:
(3 An original resolution of the board of directors of each
Borrower, certified as of the date of this Agreement by its
corporate secretary, authorizing the execution, delivery and
performance of this Agreement and the other Loan Documents, and all
other instruments or documents to be delivered by such Borrower
pursuant to this Agreement;
(4 A certificate (in the form of EXHIBIT "J-1" OR "J-2", as
the case may be) of each Borrower's corporate secretary as to the
resolution of the board of directors of such Borrower authorizing
the execution, delivery and performance of this Agreement and the
other Loan Documents and the incumbency and authenticity of the
signatures of the officers of such Borrower executing this Agreement
and the other Loan Documents and each Advance Request and all other
instruments or documents to be delivered pursuant hereto (the Lender
being entitled to rely thereon until a new such certificate has been
furnished to the Lender);
(5 Financial statements of the Company (and its Subsidiaries,
on a consolidated basis) containing a balance sheet as of December
31, 1998 (the "Statement Date") and related statements of income,
changes in stockholders' equity and cash flows for the period ended
on the Statement Date and a balance sheet as of January 31, 1999
("Interim Date") and related statement of income for
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the period ended on the Interim Date, all prepared in accordance
with GAAP applied on a basis consistent with prior periods and in
the case of the statements as of the Statement Date, audited by
independent certified public accountants of recognized standing
acceptable to the Lender;
(6 A favorable written opinion of counsel to the Borrowers,
dated as of the date of this Agreement, to be in substantially the
form of EXHIBIT "M" hereto, and addressed to the Lender;
(7 A tax, lien and judgment search of the appropriate public
records for each Borrower, including a search of Uniform Commercial
Code financing statements, which search shall not have disclosed the
existence of any prior Lien on the Collateral other than in favor of
the Lender or as permitted hereunder;
(8 Copies of the certificates, documents or other written
instruments which evidence each Borrower's eligibility described in
Section 5.11 hereof, all in form and substance satisfactory to the
Lender;
(9 Copies of each Borrower's errors and omissions insurance
policy or mortgage impairment insurance policy and blanket bond
coverage policy, all in form and content satisfactory to the Lender,
showing compliance by such Borrower as of the date of this Agreement
with the related provisions of Section 6.8 hereof and showing Lender
as an additional loss payee on such policies;
(10 Executed financing statements in recordable form
covering the Collateral and ready for filing in all jurisdictions
required by the Lender;
(11 Evidence that the Funding Account has been
established with the Lender.
1.2 Each Advance. The obligation of the Lender to make the initial and
each subsequent Advance under this Agreement is subject to the satisfaction, in
the sole discretion of the Lender, as of the date of each such Advance, of the
following additional conditions precedent:
(a0 In connection with an Advance, the applicable Borrower shall
have delivered to the Lender the Advance Request or the Electronic
Request, Collateral Documents, and documents required under and shall have
satisfied the procedures set forth in Section 2.2 and EXHIBIT "C",
according to the type of Collateral to be financed through the requested
Advance. All items delivered to the Lender or its designee shall be
satisfactory to the Lender in form and content, and the Lender may reject
such of them as do not meet the requirements of this Agreement or of the
related Purchase Commitment or Purchase Agreement, as the case may be.
(b0 The Lender shall have received evidence satisfactory to it as to
the making and/or continuation of any book entry or the due filing and
recording in all appropriate offices of all financing statements and other
instruments as may be necessary to perfect the
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security interest of the Lender in the Collateral under the Uniform
Commercial Code of Texas or other applicable law.
(c0 The representations and warranties of the Borrowers contained in
Article 5 hereof shall be accurate and complete in all material respects
as if made on and as of the date of each Advance.
(d0 Each Borrower shall have performed all agreements to be
performed by it hereunder, and, as of the date of the Advance Request, and
after giving effect to the requested Advance, there shall exist no Default
or Event of Default hereunder.
(e0 Each Borrower shall not have incurred any material liabilities,
direct or contingent, except as approved by Lender pursuant to Section
7.20, since the date hereof.
(f0 The Lender shall have received from counsel for the Borrowers,
if requested by the Lender in its sole discretion, an updated opinion, in
form and substance satisfactory to the Lender, addressed to the Lender and
dated as of the date of such Advance, covering such of the matters as the
Lender may reasonably request.
(g0 Such additional documents, instruments, and information as
Lender or its legal counsel may require.
Acceptance of the proceeds of the requested Advance by the applicable
Borrower shall be deemed a representation by such Borrower that all conditions
set forth in this Article 4 shall have been satisfied as of the date of such
Advance.
2. REPRESENTATIONS AND WARRANTIES.
Each Borrower hereby represents and warrants to the Lender, as of the date
of this Agreement and (unless otherwise notified in writing by such Borrower and
Lender, in its sole discretion, approves in writing) as of the date of each
Advance Request and the making of each Advance, that:
2.1 Organization; Good Standing; Subsidiaries. Each Borrower and each
Subsidiary of such Borrower is a corporation duly organized, validly existing
and in good standing under the laws of the jurisdiction of its incorporation,
has the full legal power and authority to own its property and to carry on its
business as currently conducted and is duly qualified as a foreign corporation
to do business and is in good standing in each jurisdiction in which the
transaction of its business makes such qualification necessary, except in
jurisdictions, if any, where a failure to be in good standing has no material
adverse effect on the business, operations, assets or financial condition of
such Borrower or any such Subsidiary. For the purposes hereof, good standing
shall include qualification for any and all licenses and payment of any and all
taxes required in the jurisdiction of its incorporation and in each jurisdiction
in which each Borrower transacts business. The Borrowers have no Subsidiaries
except as set forth on EXHIBIT "G" hereto. EXHIBIT "G" sets forth with respect
to each such Subsidiary, its name, address, place of incorporation, each state
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in which it is qualified as a foreign corporation, and the percentage ownership
of the applicable Borrower in such Subsidiary.
2.2 Authorization and Enforceability. Each Borrower has all requisite
corporate power and authority to execute, deliver, create, issue, comply and
perform this Agreement, the Note and all other Loan Documents to which such
Borrower is party and to make the borrowings hereunder. The execution, delivery
and performance by each Borrower of this Agreement, the Note and all other Loan
Documents to which such Borrower is party and the making of the borrowings
hereunder and thereunder, have been duly and validly authorized by all necessary
corporate action on the part of such Borrower (none of which actions has been
modified or rescinded, and all of which actions are in full force and effect)
and do not and will not conflict with or violate any provision of law or of the
articles of incorporation or by-laws of such Borrower, conflict with or result
in a breach of or constitute a default or require any consent under any
contracts to which such Borrower is a party, or result in the creation of any
Lien upon any property or assets of such Borrower other than the Lien on the
Collateral granted hereunder, or result in or require the acceleration of any
Indebtedness of such Borrower pursuant to any agreement, instrument or indenture
to which such Borrower is a party or by which such Borrower or its property may
be bound or affected. This Agreement, the Note and all other Loan Documents
contemplated hereby or thereby constitute legal, valid, and binding obligations
of each Borrower, enforceable in accordance with their respective terms, except
as limited by bankruptcy, insolvency or other such laws affecting the
enforcement of creditors' rights generally.
2.3 Financial Condition. The balance sheet of the Company provided to
Lender pursuant to Section 4.1(a)(5) hereof (and if applicable, its
Subsidiaries, on a consolidating and consolidated basis) as at the Statement
Date, and the related statements of income, changes in stockholders' equity, and
cash flows for the fiscal year ended on the Statement Date, heretofore furnished
to the Lender, fairly present the financial condition of the Company and its
Subsidiaries as at the Statement Date and the Interim Date and the results of
its and their operations for the fiscal period ended on the Statement Date and
the Interim Date. The Company had, on the Statement Date and the Interim Date,
no known material liabilities, direct or indirect, fixed or contingent, matured
or unmatured, or liabilities for taxes, long-term leases or unusual forward or
long-term commitments not disclosed by, or reserved against in, said balance
sheet and related statements, and at the present time there are no material
unrealized or anticipated losses from any loans, advances or other commitments
of the Company except as heretofore disclosed to the Lender in writing. Said
financial statements were prepared in accordance with GAAP applied on a
consistent basis throughout the periods involved. Since the Statement Date,
there has been no material adverse change in the business, operations, assets or
financial condition of the Company or its Subsidiaries, nor is the Company aware
of any state of facts particular to the Company which (with or without notice or
lapse of time or both) would or could result in any such material adverse
change.
2.4 Litigation. Except as disclosed on EXHIBIT "H", there are no actions,
claims, suits or proceedings pending, or to the knowledge of the Borrowers,
threatened or reasonably anticipated against or affecting any Borrower or any
Subsidiary of any Borrower in any court or before any arbitrator or before any
government commission, board, bureau or other administrative agency which, if
adversely determined, may reasonably be expected to result in any material and
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adverse change in the business, operations, assets or financial condition of
such Borrower or any of its Subsidiaries, as a whole.
2.5 Compliance with Laws. To the knowledge of Borrowers, neither the
Borrowers nor any Subsidiary of the Borrowers is in violation of any provision
of any law, or of any judgment, award, rule, regulation, order, decree, writ or
injunction of any court or public regulatory body or authority which might have
a material adverse effect on the business, operations, assets or financial
condition of the Borrowers or any of Borrowers' Subsidiaries, as a whole.
2.6 Regulations G and U. No Borrower is engaged principally, or as one of
its important activities, in the business of extending credit for the purpose of
purchasing or carrying Margin Stock, and no part of the proceeds of any Advances
made hereunder will be used to purchase or carry any Margin Stock or to extend
credit to others for the purpose of purchasing or carrying any Margin Stock.
2.7 Investment Company Act and Public Utility Holding Company Act. Neither
the Borrowers nor any of their Subsidiaries is an "investment company" or
controlled by an "investment company" within the meaning of the Investment
Company Act of 1940, as amended. Neither the Borrowers nor any of their
Subsidiaries is subject to regulation under the Public Utility Holding Company
Act of 1935, as amended.
2.8 Agreements. Neither the Borrowers nor any Subsidiary of the Borrowers
is a party to any agreement, instrument or indenture, or subject to any
restriction, materially and adversely affecting its business, operations, assets
or financial condition, except as disclosed in the financial statements
described in Section 5.3 hereof. The Borrowers and each Subsidiary of the
Borrowers are not in default in the performance, observance or fulfillment of
any of the obligations, covenants or conditions contained in any agreement,
instrument, or indenture which default could have a material adverse effect on
the business, operations, properties or financial condition of the Borrowers as
a whole. No holder of any Indebtedness of any Borrower or of any of its
Subsidiaries has given notice of any alleged default thereunder or, if given,
the same has been cured or will be cured by such Borrower within the cure period
provided therein, and no liquidation or dissolution of any Borrower or any of
its Subsidiaries and no receivership, insolvency, bankruptcy, reorganization or
other similar proceedings relative to any Borrower or any of its Subsidiaries or
any of their respective properties is pending, or to the knowledge of the
Borrowers and each Subsidiary of the Borrowers, threatened.
2.9 Title to Properties. The Company and each Subsidiary of the Company
has good, valid, insurable (in the case of real property) and marketable title
to all of its properties and assets (whether real or personal, tangible or
intangible) reflected on the financial statements described in Section 5.3
hereof, free and clear of all Liens, except for liens not prohibited under this
Agreement, and all such properties and assets are free and clear of all Liens
except as disclosed in such financial statements.
2.10 ERISA. All plans ("Plans") of a type described in Section 3(3) of
ERISA in respect of which any Borrower or any Subsidiary of any Borrower is an
"Employer," as defined in Section
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3(5) of ERISA, are in substantial compliance with ERISA, and none of such Plans
is insolvent or in reorganization, has an accumulated or waived funding
deficiency within the meaning of Section 412 of the Internal Revenue Code, and
neither the applicable Borrower nor any Subsidiary of such Borrower has incurred
any material liability (including any material contingent liability) to or on
account of any such Plan pursuant to Sections 4062, 4063, 4064, 4201 or 4204 of
ERISA; and no proceedings have been instituted to terminate any such Plan, and
no condition exists which presents a material risk to such Borrower or a
Subsidiary of such Borrower of incurring a liability to or on account of any
such Plan pursuant to any of the foregoing Sections of ERISA. No Plan or trust
forming a part thereof has been terminated since December 1, 1974.
2.11 Eligibility. Each Borrower has all requisite corporate power and
authority and all necessary licenses, permits, franchises and other
authorizations to own and operate its property and to carry on its business as
now conducted. If approved now or hereafter as a lender or seller/servicer for
any one or more of the governmental agencies as set forth below, each Borrower
will remain at all times approved and qualified and in good standing and meet
all requirements applicable to such status:
(a0 FNMA approved seller/servicer of Mortgage Loans, eligible to
originate, purchase, hold, sell, and service Mortgage Loans to be sold to
FNMA.
(b0 FHLMC approved seller/servicer of Mortgage Loans, eligible to
originate, purchase, hold, sell, and service Mortgage Loans to be sold to
FHLMC.
(c0 GNMA approved seller/servicer of Mortgage Loans, eligible to
originate, purchase, hold, sell, and service Mortgage Loans to be sold to
GNMA.
(d0 HUD approved lender, eligible to originate, purchase, hold, sell
and service FHA-insured Mortgage Loans.
(e0 VA lender in good standing under the VA loan guarantee program
eligible to originate, purchase, hold, sell, and service VA-guaranteed
Mortgage Loans.
2.12 Special Representations Concerning Collateral. Each Borrower hereby
represents and warrants to the Lender, as of the date of this Agreement and as
of the date of each Advance, that:
(a0 Each Borrower is the legal and equitable owner and holder, free
and clear of all Liens (other than Liens granted hereunder), of the
Pledged Mortgages and the Pledged Securities pledged by it. All Pledged
Mortgages, Pledged Securities, and Purchase Commitments have been duly
authorized and validly granted or issued to the applicable Borrower, and
all of the foregoing items of Collateral comply with all of the
requirements of this Agreement, and have been validly pledged or assigned
to the Lender, subject to no other Liens.
(b0 Each Borrower has, and will continue to have, the full right,
power and authority to pledge the Collateral pledged and to be pledged by
it hereunder.
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(c0 Any Mortgage Loan and related documents included in the Pledged
Mortgages (1) as of the date of the Advance Request for such Mortgage
Loan, has been duly executed and delivered by the parties thereto at a
closing; (2) has been made in compliance with all requirements of the Real
Estate Settlement Procedures Act, Equal Credit Opportunity Act, the
federal Truth-In-Lending Act and all other applicable laws and
regulations; (3) is valid and enforceable in accordance with its terms,
without defense or offset; (4) has not been modified or amended except in
writing, which writing is part of the Collateral Documents, nor any
requirements thereof waived; and (5) complies with the terms of this
Agreement and, if applicable, with the related Purchase Commitment held by
the applicable Borrower. Each Mortgage Loan has been fully advanced in the
face amount thereof and each Mortgage creates a Lien on the premises
described therein.
(d0 No monetary default, nor, to the knowledge of the Borrowers, any
event which, with notice or lapse of time or both, would become a default,
has occurred and is continuing under any Mortgage Loan included in the
Pledged Mortgages; provided, however, that, with respect to Pledged
Mortgages which have already been pledged as Collateral hereunder, if any
such default or event has occurred, the pledging Borrower will promptly
notify the Lender and the same shall not have continued for more than
ninety (90) days.
(e0 Each Borrower has complied with all laws, rules and regulations
in respect of the FHA insurance or VA guarantee of each Mortgage Loan
included in the Pledged Mortgages designated by the Company as an FHA
insured or VA guaranteed Mortgage Loans, and such insurance or guarantee
is in full force and effect. All such FHA insured and VA guaranteed
Mortgage Loans comply in all respects with all applicable requirements for
purchase under the FNMA standard form of selling contract for FHA insured
and VA guaranteed loans and any supplement thereto then in effect.
(f0 All fire and casualty policies covering Mortgaged Property
encumbered by a Pledged Mortgage (1) name the applicable Borrower and its
successors and assigns as the insured under a standard mortgagee clause,
(2) are and will continue to be in full force and effect, and (3) afford
and will continue to afford insurance against fire and such other risks as
are usually insured against in the broad form of extended coverage
insurance from time to time available, as well as insurance against flood
hazards if the same is required by FHA or VA.
(g0 Pledged Mortgages encumbering Mortgaged Property located in a
special flood hazard area designated as such by the Secretary of HUD are
and shall continue to be covered by special flood insurance under the
National Flood Insurance Program.
(h0 Each FHA insured Mortgage Loan pledged hereunder meets all
applicable governmental requirements for such insurance. Each Mortgage
Loan, against which an Advance is made on the basis of a Purchase
Commitment meets all requirements of such Purchase Commitment. Each
Borrower shall assure that Mortgage Loans pledged pursuant to this
Agreement and intended to be used in the formation of Mortgage-backed
Securities
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shall comply, or prior to the formation of any such Mortgage-backed
Security, shall comply with the requirements of the governmental
instrumentality, department or agency guaranteeing such Mortgage-backed
Security.
(i0 For Pledged Mortgages which will be used to secure GNMA
Mortgage-backed Securities, the Company has received from GNMA a
Confirmation Notice or Confirmation Notices for Request Additional
Commitment Authority and for Request Pool Numbers, and there remains
available thereunder a commitment on the part of GNMA sufficient to permit
the issuance of GNMA Mortgage-backed Securities in an amount at least
equal to the amount of such Pledged Mortgages designated by the applicable
Borrower as the Mortgage Loans to be used to secure such GNMA
Mortgage-backed Securities; each such Confirmation Notice is in full force
and effect; each of such Pledged Mortgages has been assigned by the
applicable Borrower to one of such Pool Numbers and a portion of the
available GNMA Commitment has been allocated thereto by the applicable
Borrower, in an amount at least equal to the principal amount of each
Mortgage Note secured by such Pledged Mortgages; and each such assignment
and allocation has been reflected in the books and records of the
applicable Borrower.
(j0 Each Pledged Mortgage in excess of $250,000.00 is supported by
an appraisal that meets the appraisal requirements of FNMA or FHLMC (in
the case of "HCP" Mortgaged Property), or the Office of Thrift Supervision
for the type of Mortgaged Property securing that Pledged Mortgage; or,
alternatively, such Pledged Mortgage is eligible for purchase or is
guaranteed or insured by a U.S. Government agency or a U.S. Government
sponsored enterprise.
2.13 RICO. Each Borrower is not in violation of any laws, statutes or
regulations, including, without limitation, RICO, which contain provisions which
could potentially override Lender's security interest in the Collateral.
2.14 Proper Names. Each Borrower does not operate in any jurisdiction
under a trade name, division, division name or name other than those names set
forth on EXHIBIT "I" attached hereto and all such names included on EXHIBIT "I"
are utilized by the applicable Borrower only in the jurisdictions listed
therein.
2.15 Direct Benefit From Loans. Each Borrower has received, or, upon the
execution and funding thereof, will receive (a) direct benefit from the making
and execution of this Agreement and the other Loan Documents to which it is a
party, and (b) fair and independent consideration for the entry into, and
performance of, this Agreement and the other Loan Documents to which it is a
party. Contemporaneously with the disbursements of each Advance by the Lender to
a Borrower, all such proceeds will be used to finance the origination or
purchase of Eligible Mortgage Loans or for working capital purposes with respect
to Advances against Investment Grade Securities.
2.16 Loan Documents Do Not Violate Other Documents. Neither the execution
and delivery by the Borrowers of this Agreement or any other Loan Document to
which it is a party nor the consummation of the transactions herein and therein
contemplated, nor the performance
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of, or compliance with, the terms and provisions hereof and thereof, does or
will contravene, breach or conflict with any provision of either of its articles
of incorporation or by-laws, or any applicable law, statute, rule or regulation
or any judgment, decree, writ, injunction, franchise, order or permit applicable
to any Borrower or its assets or properties, or does or will conflict or be
inconsistent with, or does or will result in any breach or default of, any of
the terms, covenants, conditions or provisions of, or constitute a default
under, or result in the creation or imposition of any Lien upon any of the
property or assets of any Borrower pursuant to the terms of any indenture,
mortgage, deed of trust, loan agreement, or other instrument to which any
Borrower is a party or by which any Borrower or any of its property may be
bound, the contravention, conflict, inconsistency, breach or default of which
will have a materially adverse effect on such Borrower's condition, financial or
otherwise, or affect its ability to perform, promptly and fully, its obligations
hereunder or under any of the other Loan Documents.
2.17 Consents Not Required. Except for those consents that have already
been obtained and delivered to Lender or required as a condition to any Advance
hereunder, no consent of any Person and no consent, license, permit, approval,
or authorization of, exemption by, or registration or declaration with, any
Tribunal is required in connection with the execution, delivery, performance,
validity, or enforceability of this Agreement or any of the Loan Documents by
the Borrowers.
2.18 Material Fact Representations. Neither the Loan Documents nor any
other agreement, document, certificate, or written statement furnished to the
Lender by or on behalf of any Borrower in connection with the transactions
contemplated in any of the Loan Documents contains any untrue statement of a
material adverse fact. There are no material adverse facts or conditions
relating to the making of the Commitment, any of the Collateral, and/or the
financial condition and business of any Borrower known to any Borrower which
have not been fully disclosed, in writing, to the Lender, it being understood
that this representation is made as of, and shall be limited to the date of this
Agreement. All writings heretofore or hereafter exhibited or delivered to the
Lender by or on behalf of any Borrower are and will be genuine and what they
purport to be.
2.19 Place of Business. The principal place of business of the Company is
90 West Street, Suite 1508, New York, New York 10006, and the chief executive
office of the Company and the office where it keeps its respective financial
books and records relating to their property and all contracts relating thereto
and all accounts arising therefrom is located at the address set forth for the
Company in Section 9 hereof. The principal place of business of "HCP" is 90 West
Street, Suite 1508, New York, New York 10006, and the chief executive office of
"HCP" and the office where it keeps its respective financial books and records
relating to their property and all contracts relating thereto and all accounts
arising therefrom is located at the address set forth for "HCP" in Section 9
hereof.
2.20 Use of Proceeds; Business Loans. Each Borrower will use the proceeds
of the Advances made pursuant to the Commitment solely as follows, and for no
other purpose: finance the purchase of Eligible Mortgage Loans or Eligible
Non-Conforming Mortgage Loans or for working capital purposes with respect to
Advances against Investment Grade Securities. All loans evidenced by the Note
are and shall be "business loans", as such term is used in the Depository
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Institutions Deregulation and Monetary Control Act of 1980, as amended, and such
loans are for business or commercial purposes and not primarily for personal,
family, household or agricultural use, as such terms are used or defined in the
Texas Credit Title, Regulation Z promulgated by the Board of Governors of the
Federal Reserve System, and Titles I and V of the Consumer Credit Protection
Act. The provisions of the Texas Credit Title which regulate revolving loans and
revolving triparty accounts shall not apply to this Agreement.
2.21 No Undisclosed Liabilities. Other than as permitted in Section 7.19
hereof, each Borrower does not have any liabilities or Indebtedness, direct or
contingent, except for liabilities or Indebtedness which, in the aggregate, do
not exceed $25,000.00.
2.22 Tax Returns and Payments. All federal, state and local income,
excise, property and other tax returns required to be filed with respect to each
Borrower's operations and those of its Subsidiaries in any jurisdiction have
been filed on or before the due date thereof (plus any applicable extensions);
all such returns are true and correct; all taxes, assessments, fees and other
governmental charges upon each Borrower and its Subsidiaries and upon its
property, income or franchises, which are due and payable have been paid,
including, without limitation, all FICA payments and withholding taxes, if
appropriate, other than those which are being contested in good faith by
appropriate proceedings, diligently pursued and as to which such Borrower has
established adequate reserves determined in accordance with GAAP, consistently
applied. The amounts reserved, as a liability for income and other taxes
payable, in the financial statements described in Section 5.3 hereof are
sufficient for payment of all unpaid federal, state and local income, excise,
property and other taxes, whether or not disputed, of the Company and its
Subsidiaries, accrued for or applicable to the period and on the dates of such
financial statements and all years and periods prior thereto and for which
Company and its Subsidiaries may be liable in their own right or as transferee
of the assets of, or as successor to, any other Person.
2.23 Subsidiaries. Except as set forth in EXHIBIT "G" hereto, each
Borrower has not issued, and does not have outstanding, any warrants, options,
rights or other obligations to issue or purchase any shares of its capital stock
or other securities. The outstanding shares of capital stock of each Borrower
have been duly authorized and validly issued and are fully paid and
nonassessable. All Subsidiaries of each Borrower are listed on EXHIBIT "G",
attached hereto.
2.24 Holding Company. The Company is not a "holding company" or a
"subsidiary company" of a "holding company" within the meaning of the Public
Utility Holding Company Act of 1935, as amended.
3. AFFIRMATIVE COVENANTS.
Each Borrower hereby covenants and agrees that, so long as the Commitment
is outstanding or there remain any Obligations of any Borrower to be paid or
performed under this Agreement or under any other Loan Document, each Borrower
shall:
3.1 Payment of Note. Punctually pay or cause to be paid the principal of,
interest on and all other amounts payable hereunder and under the Note in
accordance with the terms thereof.
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3.2 Financial Statements and Other Reports. Deliver or caused to be
delivered to the Lender:
(a) As soon as available and in any event within thirty (30) days
after the end of each calendar month, statements of income, changes in
stockholders' equity, and cash flows of each Borrower and, if applicable,
such Borrower's Subsidiaries, on a consolidated and consolidating basis
for the immediately preceding month, and related balance sheet as at the
end of the immediately preceding month, all in reasonable detail, prepared
in accordance with GAAP applied on a consistent basis, and certified as to
the fairness of presentation by the president and chief financial officer
of each Borrower, subject, however, to year-end audit adjustments.
(b) As soon as available and in any event within ninety (90) days
after the close of each fiscal year: statements of income, changes in
stockholders' equity and cash flows of each Borrower, and, if applicable,
such Borrower's Subsidiaries, on a consolidated and consolidating basis
for such year, the related balance sheet as at the end of such year
(setting forth in comparative form the corresponding figures for the
preceding fiscal year), all in reasonable detail, prepared in accordance
with GAAP applied on a consistent basis throughout the periods involved,
and accompanied by an opinion in form and substance satisfactory to the
Lender and prepared by an accounting firm reasonably satisfactory to the
Lender, or other independent certified public accountants of recognized
standing selected by each Borrower and acceptable to the Lender, as to
said financial statements and a certificate signed by the president and
chief financial officer of each Borrower stating that said financial
statements fairly present the financial condition and results of
operations of each Borrower and, if applicable, such Borrower's
Subsidiaries as at the end of, and for, such year.
(c) Together with each delivery of financial statements required in
this Section 6.2, (i) an Officer's Certificate of Company in substantially
the form of EXHIBIT "F" hereto, (ii) a written summary of all Hedging
Contracts and Interest Rate Hedging Contracts maintained by Borrowers,
(iii) a written summary of each Borrower's delinquency experience with
respect to Pledged Mortgages, and (iv) a written static pool analysis
segregated by pledged or unpledged to the Lender and setting forth current
delinquency and prepayment status.
(d) Copies of all regular or periodic financial and other reports,
if any, which any Borrower shall file with the Securities and Exchange
Commission or any governmental agency successor thereto and copies of any
audits completed by GNMA, FHLMC, or FNMA. Copies of the Mortgage Bankers'
Financial Reporting Forms (FNMA Form 1002) which any
Borrower shall have filed with FNMA.
(e) From time to time, with reasonable promptness, such further
information regarding the business, operations, properties or financial
condition of any Borrower as the Lender may reasonably request.
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3.3 Maintenance of Existence; Conduct of Business. Preserve and maintain
its corporate existence in good standing and all of its rights, privileges,
licenses and franchises necessary in the normal conduct of its business,
including, without limitation, its eligibility as lender, seller/servicer and
issuer described under Section 5.11 hereof; conduct its business in an orderly
and efficient manner; and make no material change in the nature or character of
its business or engage in any business in which it was not engaged on the date
of this Agreement.
3.4 Compliance with Applicable Laws. Comply with the requirements of all
applicable laws, rules, regulations and orders of any governmental authority, a
breach of which could materially adversely affect its business, operations,
assets, or financial condition, except where contested in good faith and by
appropriate proceedings, and with sufficient reserves established therefor.
3.5 Inspection of Properties and Books. Permit authorized representatives
of the Lender to (a) discuss the business, operations, assets and financial
condition of such Borrower and its Subsidiaries with their officers and
employees and to examine their books of account, records, reports and other
papers and make copies or extracts thereof, and (b) inspect all of its property
and all related information and reports at Lender's expense, all at such
reasonable times as the Lender may request. Each Borrower will provide its
accountants with a copy of this Agreement promptly after the execution hereof
and will instruct its accountants to answer candidly any and all questions that
the officers of the Lender or any authorized representatives of the Lender may
address to them in reference to the financial condition or affairs of such
Borrower and its Subsidiaries. Such Borrower may have its representatives in
attendance at any meetings between the officers or other representatives of the
Lender and its accountants held in accordance with this authorization.
3.6 Notice. Give prompt written notice to the Lender of (a) any action,
suit or proceeding instituted by or against any Borrower or any of its
Subsidiaries in any federal or state court or before any commission or other
regulatory body (federal, state or local, domestic or foreign) which action,
suit or proceeding has at issue in excess of Twenty-Five Thousand Dollars
($25,000.00) (except for normal collection and foreclosure proceedings initiated
by any Borrower in connection with a Mortgage Loan or any other mortgage loan),
or any such proceedings threatened against any Borrower, or any of its
Subsidiaries in writing containing the details thereof, (b) the filing,
recording or assessment of any federal, state or local tax Lien against it, or
any of its assets or any of its Subsidiaries, (c) the occurrence of any Event of
Default hereunder or the occurrence of any Default and continuation thereof for
five (5) days, (d) the suspension, revocation or termination of any Borrower's
eligibility, in any respect, as approved lender, seller/servicer or issuer as
described under Section 5.11 hereof, (e) the transfer, loss or termination of
any Servicing Contract to which any Borrower is a party, or which is held for
the benefit of such Borrower, and the reason for such transfer, loss or
termination, if known to such Borrower, and (f) any other action, event or
condition of any nature which may lead to or result in a material adverse effect
upon the business, operations, assets, or financial condition of any Borrower or
its Subsidiaries or which, with or without notice or lapse of time or both,
would constitute a default under any other agreement instrument or indenture to
which any Borrower is a party or to which such Borrower, its properties or
assets may be subject.
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3.7 Payment of Debt, Taxes, etc. Pay and perform all of its obligations
and Indebtedness, and cause to be paid and performed all obligations and
Indebtedness of its Subsidiaries in accordance with the terms thereof and pay
and discharge or cause to be paid and discharged all taxes, assessments and
governmental charges or levies imposed upon it or its Subsidiaries, or upon
their respective income, receipts or properties before the same shall become
past due, 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, however, that such Borrower and its Subsidiaries
shall not be required to pay obligation, Indebtedness, taxes, assessments or
governmental charges or levies or claims for labor, materials or supplies for
which it or its Subsidiaries shall have obtained an adequate bond or adequate
insurance or which are being contested in good faith and by proper proceedings
which are being reasonably and diligently pursued if such proceedings do not
involve any likelihood of the sale, forfeiture or loss of any such property or
any interest therein while such proceedings are pending, and provided further
that book reserves adequate under generally accepted accounting principles shall
have been established with respect thereto and provided further that the owing
Person's title to, and its right to use, its property is not materially
adversely affected thereby.
3.8 Insurance. Maintain (a) errors and omissions insurance or mortgage
impairment insurance and blanket bond coverage, with such companies and in such
amounts as satisfy prevailing FNMA and FHLMC requirements applicable to a
qualified mortgage originating institution, and (b) liability insurance and fire
and other hazard insurance on its properties, with responsible insurance
companies approved by the Lender, in such amounts and against such risks as is
customarily carried by similar businesses operating in the same vicinity; and
(c) within thirty (30) days after notice from the Lender, obtain such additional
insurance as the Lender shall reasonably require, all at the sole expense of
such Borrower. Copies of such policies shall be furnished to the Lender without
charge upon obtaining such coverage or any renewal of or modification to such
coverage.
3.9 Other Loan Obligations. Perform all obligations under the terms of
each loan agreement, note, mortgage, security agreement or debt instrument by
which such Borrower is bound or to which any of its property is subject, and
promptly notify the Lender in writing of a declared default under or the
termination, cancellation, reduction or non-renewal of any of its other lines of
credit or financing agreements with any other lender. EXHIBIT "B" hereto is a
true and complete list of all such lines of credit or financing agreements as of
the date hereof.
3.10 Use of Proceeds of Advances. Use the proceeds of each Advance solely
for the purpose of financing or purchasing Eligible Mortgage Loans or Eligible
Non-Conforming Mortgage Loans or for working capital purposes with respect to
Advances against Investment Grade Securities.
3.11 Special Affirmative Covenants Concerning Collateral.
(a) Warrant and defend the right, title and interest of the Lender
in and to the Collateral against the claims and demands of all Persons
whomsoever.
(b) Service or cause to be serviced all Pledged Mortgages in
accordance with the standard requirements of the issuers of Purchase
Commitments covering the same and
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all applicable FHA and VA requirements, including without limitation
taking all actions necessary to enforce the obligations of the obligors
under such Mortgage Loans. Each Borrower shall service or cause to be
serviced all Mortgage Loans backing Pledged Securities pledged by it in
accordance with applicable governmental requirements and issuers of
Purchase Commitments covering the same. Each Borrower shall hold all
escrow funds collected in respect of Pledged Mortgages and Mortgage Loans
backing Pledged Securities pledged by it in trust, without commingling the
same with non-custodial funds, and apply the same for the purposes for
which such funds were collected.
(c) Execute and deliver to the Lender such Uniform Commercial Code
financing statements with respect to the Collateral as the Lender may
request. Each Borrower shall also execute and deliver to the Lender such
further instruments of sale, pledge or assignment or transfer, and such
powers of attorney, as required by the Lender to secure the Collateral,
and shall do and perform all matters and things necessary or desirable to
be done or observed, for the purpose of effectively creating, maintaining
and preserving the security and benefits intended to be afforded the
Lender under this Agreement. The Lender shall have all the rights and
remedies of a secured party under the Uniform Commercial Code of Texas, or
any other applicable law, in addition to all rights provided for herein.
(d) Notify the Lender within two (2) Business Days after receipt of
notice from an Investor of any default under, or of the termination of,
any Purchase Commitment relating to any Pledged Mortgage, Eligible
Mortgage Pool or Pledged Security pledged by it.
(e) Promptly comply in all respects with the terms and conditions of
all Purchase Commitments, and all extensions, renewals and modifications
or substitutions thereof or thereto. Each Borrower will cause to be
delivered to the Investor the Pledged Mortgages and Pledged Securities to
be sold under each Purchase Commitment not later than the expiration
thereof.
(f) Maintain, at its principal office or in a regional office
approved by the Lender, or in the office of a computer service bureau
engaged by such Borrower and approved by the Lender, and, upon request,
shall make available to the Lender the originals, or copies in any case
where the originals have been delivered to the Lender or to an Investor,
of its Mortgage Notes and Mortgages included in Pledged Mortgages,
Mortgage-backed Securities delivered to the Lender as Pledged Securities,
Purchase Commitments, and all related Mortgage Loan documents and
instruments, and all files, surveys, certificates, correspondence,
appraisals, computer programs, tapes, discs, cards, accounting records and
other information and data relating to the Collateral.
3.12 Cure of Defects in Loan Documents. Promptly cure and cause to be
promptly cured any defects in the creation, issuance, execution and delivery of
this Agreement and the other Loan Documents; and upon request of the Lender and
at its expense, each Borrower will promptly execute and deliver, and cause to be
executed and delivered, to the Lender or its designee, all such additional
documents, agreements and/or instruments in compliance with or in accomplishment
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of the covenants and agreements of this Agreement and the other Loan Documents,
and/or to create, perfect, preserve, extend and/or maintain any and all Liens
created pursuant hereto or pursuant to any other Loan Document as valid and
perfected Liens (of a priority as set forth in this Agreement) in favor of the
Lender to secure the Obligations, all as reasonably requested from time to time
by the Lender.
4. NEGATIVE COVENANTS.
Each Borrower hereby covenants and agrees that, so long as the Commitment
is outstanding or there remain any Obligations of any Borrower to be paid or
performed under this Agreement or any other Loan Document, each Borrower shall
not, either directly or indirectly, without the prior written consent of the
Lender:
4.1 Contingent Liabilities. Assume, incur, create, guarantee, endorse, or
otherwise become or be liable for the obligation of any Person other than a
co-Borrower except for such Borrower's endorsement of negotiable instruments for
deposit or collection in the ordinary course of business and with respect to
those Contingent Liabilities previously disclosed to and approved by the Lender
guaranteeing Indebtedness in amounts previously disclosed to and approved by
Lender to HCP.
4.2 Merger; Acquisitions. Liquidate, dissolve, consolidate or merge with,
or sell any substantial part of its assets or acquire any substantial part of
the assets of another, or permit any Subsidiary to do any of the foregoing or
engage in any business activities or operations substantially different from or
unrelated to those in which the Company or its Subsidiaries were engaged on the
date hereof except that any Subsidiary may merge with and into or transfer any
part of its assets to the Company and any Borrower may acquire the assets of
another business that is engaged in business activities or operations
substantially similar to such Borrower's and PROVIDED, FURTHER, that if after
giving effect thereto, no Event of Default or Default would exist hereunder.
4.3 Loss of Eligibility. Take any action that would cause such Borrower to
lose all or any part of its status as an eligible lender, seller/servicer and
issuer as described under Section 5.11 hereof.
4.4 Debt to Adjusted Tangible Net Worth Ratio. Permit the ratio of Debt to
Adjusted Tangible Net Worth of the Company (and their Subsidiaries, on a
consolidated basis) to exceed 7:1 computed as of the end of each calendar month.
For the purposes of this Section 7.5, Debt of the Company shall include only
recourse liabilities as determined in accordance with GAAP.
4.5 Minimum Adjusted Tangible Net Worth. Permit Adjusted Tangible Net
Worth of the Company (and its Subsidiaries, on a consolidated basis) to be less
than THIRTY MILLION AND NO/100 DOLLARS ($30,000,000.00), computed as of the end
of each calendar month.
4.6 Minimum GAAP Net Worth. Permit GAAP Net Worth of the Company (and its
Subsidiaries, on a consolidated basis) to be less than SIXTY MILLION AND NO/100
DOLLARS ($60,000,000.00), computed as of the end of each calendar month.
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4.7 Minimum Current Ratio. Permit the Current Ratio of the Company (and
its Subsidiaries, on a consolidated basis) to be less than 1.01 to 1.0 computed
as of the end of each calendar month.
4.8 Maximum Non-Investment Grade Securities to Adjusted Tangible Net Worth
Ratio. Permit the ratio of Non-Investment Grade Securities to Adjusted Tangible
Net Worth of the Company (and its Subsidiaries, on a consolidated basis) to
exceed 0.50:1 computed as of the end of each calendar month.
4.9 Transactions with Affiliates. Directly or indirectly enter into any
transaction, including, without limitation, any purchase, sale, lease or
exchange of property or the rendering of any service, with an Affiliate unless
such transaction is (a) otherwise permitted under this Loan Agreement, (b) in
the ordinary course of the Borrower's business and (c) upon fair and reasonable
terms no less favorable to the Borrower than it would obtain in a comparable
arm's length transaction with a Person who is not an Affiliate, or make a
payment that is not otherwise permitted by this Section 7.9 to any Affiliate. In
no event shall the Borrower pledge to the Lender hereunder any Mortgage Loan
acquired by the Borrower from an Affiliate of the Borrower.
4.10 Limits on Corporate Distributions. Pay, make or declare or incur any
liability to pay, make or declare any dividend (excluding stock dividends) or
other distribution, direct or indirect, on or on account of any shares of its
stock or any redemption or other acquisition, direct or indirect, of any shares
of its stock or of any warrants, rights or other options to purchase any shares
of its stock nor purchase, acquire, redeem or retire any stock or ownership
interest in itself whether now or hereafter outstanding except that so long as
no Default, Event of Default or violation of Sections 7.4, 7.5, 7.6, 7.7 and 7.8
hereof exists at such time, or would exist immediately thereafter, such Borrower
may declare and pay cash dividends to its shareholders.
4.11 RICO. Violate any laws, statutes or regulations, whether federal or
state, for which forfeiture of its properties is a potential penalty, including,
without limitations, RICO.
4.12 No Loans or Investments Except Approved Investments. Without the
prior written consent of Lender, make or permit to remain outstanding any loans
or advances to, or investments in, any Person, except that the foregoing
restriction shall not apply to:
(a) investments in marketable obligations maturing no later than 180
days from the date of acquisition thereof by such Borrower and issued and
fully guaranteed, directly, by the full faith and credit of the Government
of the United States of America or any agency thereof; and
(b) investments in certificates of deposit maturing no later than
180 days from the date of issuance thereof and issued by commercial banks
in the United States and such banks rated by Moody's Investor Service,
Inc. and receiving a rating of Prime-2 or higher on Moody's short term
debt rating or rated by Standard & Poor's Corporation and receiving a
rating of AA-/A1+ or higher on S&P's short term debt rating, or issued by
Lender, it being acknowledged and agreed that the foregoing requirements
shall pertain to
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certificates of deposit issued and/or received on a date on or after the
date of this Agreement);
(c) investments made in the ordinary and usual course of business;
(d) Mortgage Loans or Mortgage backed Securities originated or
acquired in the ordinary course of business; and
(e) advances to HCP made in the ordinary and usual course of
business.
4.13 Charter Documents and Business Termination.
(a) Amend or otherwise modify its corporate charter or otherwise
change its corporate structure in any manner which will have a materially
adverse effect on such Borrower's condition, financial or otherwise, or
which will have a material adverse effect upon such Borrower's ability to
perform, promptly and fully, its obligations hereunder or under any of the
other Loan Documents, or
(b) Take any action with a view toward its dissolution, liquidation
or termination, or, in fact, dissolve, liquidate or terminate its
existence.
4.14 Changes in Accounting Methods. Make any change in its accounting
method as in effect on the date of this Agreement or change its fiscal year
ending date from December 31, unless such changes (a) are required for
conformity with generally accepted accounting principles and, in such event,
such Borrower will give prior written notice of each such change to the Lender
or (b) or if not so required, are in conformity with generally accepted
accounting principles and have the prior written approval of the Lender which
approval shall not be unreasonably withheld.
4.15 No Sales, Leases or Dispositions of Property. Except in the ordinary
course of its business, sell, lease, transfer or otherwise dispose of all or any
material portion or portions or integral part of its properties or assets,
whether now owned or hereafter acquired (whether in a single transaction or in a
series of transactions), or enter into any arrangement, directly or indirectly,
with any person, whereby it shall sell or transfer any of its properties or
assets, whether now owned or hereafter acquired, and thereafter rent or lease as
lessee such property or any part thereof which it intends to use for
substantially the same purpose or purposes as the property sold or transferred.
4.16 Changes in Business or Assets. Make any substantial change (a) in the
nature of its business as now conducted, or (b) in the use of its property as
now used and proposed to be used.
4.17 Changes in Office or Inventory Location. Change the address and/or
location of its chief executive office or principal place of business or the
place where it keeps its books and records or its inventory to a location
outside the State of New York, as applicable, unless, prior to any such change,
such Borrower shall execute and cause to be executed such additional agreements
and/or lien instruments as the Lender may reasonably request to conform with the
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provisions hereof and the transactions and perfected Liens in the Collateral
contemplated under this Agreement and the other Loan Documents.
4.18 Special Negative Covenants Concerning Collateral.
(a) Amend or modify, or waive any of the terms and conditions of, or
settle or compromise any claim in respect of, any Pledged Mortgages or
Pledged Securities pledged by it. Notwithstanding, Borrower may waive,
modify or vary any terms of any Pledged Mortgages or consent to the
postponement of strict compliance with any such term or in any manner
grant indulgence to any mortgagor; provided, however, that (unless the
mortgagor is in default with respect to the Pledged Mortgage, or such
default is, in the judgment of the Borrower, imminent) the Borrower may
not permit any modification with respect to any Pledged Mortgage that
would change the mortgage interest rate, defer or forgive the payment of
any principal or interest, change the outstanding principal amount (except
for actual payments of principal), make any future advances or extend the
final maturity date, as the case may be, with respect to such Pledged
Mortgage or release any collateral securing such Pledged Mortgage.
(b) Sell, assign, transfer or otherwise dispose of, or grant any
option with respect to, or pledge or otherwise encumber (except pursuant
to this Agreement or as permitted herein) any of the Collateral or any
interest therein.
(c) Make any compromise, adjustment or settlement in respect of any
of the Collateral or accept other than cash in payment or liquidation of
the Collateral.
4.19 No Indebtedness. Except for the Indebtedness described in EXHIBIT "B"
hereto, without the prior written consent of Lender, incur, create, assume or
guarantee or in any manner become or be liable or permit to be outstanding any
Indebtedness (including obligations for the payment of rentals other than
provided for herein) nor guarantee any contract or other obligation, and will
not in any way become or be responsible for obligations of any Person, whether
by agreement to purchase the Indebtedness of any other Person or agreement for
the furnishing of funds to any other Person through the purchase of goods,
supplies or services (or by way of stock purchase, capital contribution, advance
or loan) for the purpose of paying or discharging the Indebtedness of any other
Person or otherwise, except that the foregoing restrictions shall not apply to:
(a) the Obligations;
(b) liabilities for taxes, assessments, governmental charges or
levies which are not yet due and payable or which are being contested in
good faith by appropriate proceedings diligently conducted if reserves
adequate under generally accepted accounting principles have been
established therefor;
(c) endorsements of negotiable instruments for collection in the
ordinary course of business;
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(d) Indebtedness incurred in the ordinary course of business in
connection with normal trade or business obligations which are payable
within 90 days of the occurrence thereof, provided, however, that no
Indebtedness shall be incurred by such Borrower to any Affiliate other
than in the ordinary course of business and upon substantially the same or
better terms as it could obtain in an arm's length transaction with a
Person who is not an Affiliate.
(e) Indebtedness of less than $50,000.00, in the aggregate, incurred
in the ordinary course of business.
(f) Indebtedness incurred in the ordinary course of business for the
purpose of leasing office space or equipment to be used in the conduct of
the business of such Borrower.
(g) Short-term lines of credit (not to exceed one year maturity)
incurred in the ordinary and usual course of business.
5. DEFAULTS; REMEDIES.
5.1 Events of Default. The occurrence of any of the following conditions
or events shall be an event of default ("Event of Default"):
(a) Failure to pay the principal of any Advance when due, whether at
stated maturity, by acceleration, or otherwise; or failure to pay any
installment of interest on any Advance or any other amount due under this
Agreement within ten (10) days after the due date; or failure to pay,
beyond any applicable grace period, the principal or interest on any other
indebtedness due the Lender; or
(b) Failure of any Borrower or any of its Subsidiaries to pay, or
any default in the payment of any principal or interest on, any other
Indebtedness or in the payment of any contingent obligation beyond any
period of grace provided; or breach or default with respect to any other
material term of any other Indebtedness of any loan agreement, mortgage,
indenture or other agreement relating thereto, if the effect of such
failure, default or breach is to cause, or to permit the holder or holders
thereof (or a trustee on behalf of such holder or holders) to cause,
Indebtedness of such Borrower or its Subsidiaries in the aggregate amount
of Fifty Thousand Dollars ($50,000.00) or more to become or be declared
due prior to its stated maturity (upon the giving or receiving of notice,
lapse of time, both, or otherwise) or failure of any Borrower to comply
with Section 6.11 hereof; or
(c) Any representations or warranties made or deemed made herein or
in any other Loan Document, or in any statement or certificate at any time
given by any Borrower in writing pursuant hereto or thereto shall be
inaccurate or incomplete in any materially adverse respect on the date as
of which made or deemed made; or
(d) The Borrowers shall default in the performance of or compliance
with any term or covenant contained in this Agreement and such default
shall not have been
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remedied or waived within thirty (30) days after receipt of notice from
the Lender of such default other than those referred to above in
Subsections 8.1(a), 8.1(b), or 8.1(c); or
(e) (1) A court having jurisdiction shall enter a decree or order
for relief in respect of any Borrower or any of its Subsidiaries in an
involuntary case under any applicable bankruptcy, insolvency or other
similar law now or hereafter in effect in respect of any Borrower or any
of its Subsidiaries, which decree or order is not stayed; or a filing of
an involuntary case under any applicable bankruptcy, insolvency or other
similar law in respect of any Borrower or any of its Subsidiaries has
occurred; or (2) any other similar relief shall be granted under any
applicable federal or state law; or a decree or order of a court having
jurisdiction for the appointment of a receiver, liquidator, sequestrator,
trustee, custodian or other officer having similar powers over any
Borrower or any of its Subsidiaries, or over all or a substantial part of
their respective property, shall have been entered; or the involuntary
appointment of an interim receiver, trustee or other custodian of any
Borrower or any of its Subsidiaries, for all or a substantial part of
their respective property; or the issuance of a warrant of attachment,
execution or similar process against any substantial part of the property
of any Borrower or any of its Subsidiaries, and the continuance of any
such events in Subsections (1) and (2) above for sixty (60) days unless
dismissed or discharged (provided, however, that Lender shall have no
obligation to make Advances during said sixty (60) day period); or
(f) Any Borrower or any of its Subsidiaries shall have an order for
relief entered with respect to it or commence a voluntary case under any
applicable bankruptcy, insolvency or other similar law now or hereafter in
effect, or shall consent to the entry of an order for relief in an
involuntary case, or to the conversion to an involuntary case, under any
such law, or shall consent to the appointment of or taking possession by a
receiver, trustee or other custodian for all or a substantial part of its
property; the making by any Borrower or any of its Subsidiaries of any
assignment for the benefit of creditors; or the failure of any Borrower or
any of its Subsidiaries, or the admission by any of them of its inability,
to pay its debts as such debts become due; or
(g) Any money judgment, writ or warrant of attachment, or similar
process involving in any case an amount in excess of Fifty Thousand
Dollars ($50,000.00) shall be entered or filed against any Borrower or any
of its Subsidiaries or any of their respective assets and shall remain
undischarged, unvacated, unbonded or unstayed for a period of thirty (30)
days or in any event no later than five (5) days prior to the date of any
proposed sale thereunder; or
(h) Any order, judgment or decree shall be entered against any
Borrower decreeing the dissolution or split up of such Borrower and such
order shall remain undischarged or unstayed for a period in excess of
twenty (20) days (provided, however, Lender shall not be obligated to make
Advances during said 20 day period); or
(i) Any Plan maintained by any Borrower or any of its Subsidiaries
shall be terminated within the meaning of Title IV of ERISA or a trustee
shall be appointed by an appropriate United States district court to
administer any Plan, or the Pension Benefit
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Guaranty Corporation (or any successor thereto) shall institute
proceedings to terminate any Plan or to appoint a trustee to administer
any Plan if as of the date thereof such Borrower's or any Subsidiary's
liability (after giving effect to the tax consequences thereof) to the
Pension Benefit Guaranty Corporation (or any successor thereto) for
unfunded guaranteed vested benefits under the Plan exceeds the then
current value of assets accumulated in such Plan by more than Fifty
Thousand Dollars ($50,000.00) (or in the case of a termination involving
such Borrower or any of its Subsidiaries as a "substantial employer" (as
defined in Section 4001(a)(2) of ERISA) the withdrawing employer's
proportionate share of such excess shall exceed such amount); or
(j) Any Borrower or any of its Subsidiaries as employer under a
Multiemployer Plan shall have made a complete or partial withdrawal from
such Multiemployer Plan and the plan sponsor of such Multiemployer Plan
shall have notified such withdrawing employer that such employer has
incurred a withdrawal liability in an annual amount exceeding Fifty
Thousand Dollars ($50,000.00); or
(k) Any Borrower shall purport to disavow its obligations hereunder
or shall contest the validity or enforceability hereof, or the Lender's
security interest on any portion of the Collateral shall become
unenforceable or otherwise impaired; provided that, subject to the
Lender's approval, no Event of Default shall occur as a result of such
impairment if all Advances made against any such Collateral shall be paid
in full within ten (10) days of the date of such impairment; or
(l) Any Borrower dissolves or terminates its existence, or
discontinues its usual business; or
(m) Any court shall find or rule, or any Borrower shall assert or
claim, (i) that the Lender does not have a valid, perfected, enforceable
Lien and security interest in the Collateral of the priority as
represented in this Agreement or in any other Loan Document, or (ii) that
this Agreement or any of the Loan Documents does not or will not
constitute the legal, valid, binding and enforceable obligations of the
party or parties (as applicable) thereto, or (iii) that any Person has a
conflicting or adverse Lien, claim or right in, or with respect to, the
Collateral and the Borrowers are unable within 10 days to have such
finding or ruling reversed or to have such adverse Lien, claim or right
removed; or
(n) Any Borrower shall have concealed, removed, or permitted to be
concealed or removed, any part of its property, with intent to hinder,
delay or defraud its creditors or any of them, or made or suffered a
transfer of any of its property which may be fraudulent under any
bankruptcy, fraudulent conveyance or similar law; or shall have made any
transfer of its property to or for the benefit of a creditor at a time
when other creditors similarly situated have not been paid; or shall have
suffered or permitted, while insolvent, any creditor to obtain a Lien upon
any of its property through legal proceedings or distraint or other
process which is not vacated within 60 days from the date thereof; or
(o) There shall be a material adverse change in the financial
condition, business or operations of the Company.
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5.2 Remedies.
(a) Upon the occurrence of any Event of Default described in
Sections 8.1(e) or 8.1(f), the Commitment shall be terminated and the
unpaid principal amount of and accrued and unpaid interest on the Note
shall automatically become due and payable, without presentment for
payment, demand, notice of non-payment, protest, notice of protest, notice
of intent to accelerate, notice of acceleration, maturity, or any other
notices or requirements of any kind of Lender to the Borrowers or any
other Person liable thereon or with respect thereto, all of which are
hereby expressly waived by each Borrower.
(b) Upon the occurrence of any Event of Default, other than those
described in Sections 8.1(e) or 8.1(f), the Lender may, by written notice
to the Borrowers, terminate the Commitment and/or declare all Obligations
of the Borrowers to be immediately due and payable, whereupon the same
shall forthwith become due and payable, together with all accrued interest
thereon, and the obligation of the Lender to make any Advances shall
thereupon terminate.
(c) Upon the occurrence of any Event of Default, the Lender may also
do any of the following:
(1) Foreclose upon or otherwise enforce its security interest
in and Lien on the Collateral to secure all payments and performance
of Obligations of the Borrowers in any manner permitted by law or
provided for hereunder.
(2) Notify all obligors in respect of the Collateral that the
Collateral has been assigned to the Lender and that all payments
thereon are to be made directly to the Lender or such other party as
may be designated by the Lender; settle, compromise, or release, in
whole or in part, any amounts owing on the Collateral, any such
obligor or any Investor or any portion of the Collateral, on terms
acceptable to the Lender; enforce payment and prosecute any action
or proceeding with respect to any and all Collateral; and where any
such Collateral is in default, foreclose on and enforce security
interests in, such Collateral by any available judicial procedure or
without judicial process and sell property acquired as a result of
any such foreclosure.
(3) Act, or contract with a third party to act, as servicer or
subservicer of each item of Collateral requiring servicing and
perform all obligations required in connection with Purchase
Commitments, such third party's fees to be paid by the Borrowers.
(4) Require any Borrower to assemble the Collateral and/or
books and records relating thereto and make such available to the
Lender at a place to be designated by the Lender.
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(5) Enter onto property where any Collateral or books and
records relating thereto are located and take possession thereof
with or without judicial process.
(6) Prior to the disposition of the Collateral, prepare it for
disposition in any manner and to the extent the Lender deems
appropriate.
(7) Exercise all rights and remedies of a secured creditor
under the Uniform Commercial Code of Texas or other applicable law,
including, but not limited to, selling or otherwise disposing of the
Collateral, or any part thereof, at one or more public or private
sales, whether or not such Collateral is present at the place of
sale, for cash or credit or future delivery, on such terms and in
such manner as the Lender may determine, including, without
limitation, sale pursuant to any applicable Purchase Commitment. If
notice is required under such applicable law, the Lender will give
the Borrowers not less than ten (10) days' notice of any such public
sale or of the date after which private sale may be held. Each
Borrower agrees that ten (10) days' notice shall be reasonable
notice. The Lender may, without notice or publication, adjourn any
public or private sale or cause the same to be adjourned from time
to time by announcement at the time and place fixed for the sale,
and such sale may be made at any time or place to which the same may
be so adjourned. In case of any sale of all or any part of the
Collateral on credit or for future delivery, the Collateral so sold
may be retained by the Lender until the selling price is paid by the
purchaser thereof, but the Lender shall not incur any liability in
case of the failure of such purchaser to take up and pay for the
Collateral so sold and, in case of any such failure, such Collateral
may again be sold upon like notice. The Lender may, however, instead
of exercising the power of sale herein conferred upon it, proceed by
a suit or suits at law or in equity to collect all amounts due upon
the Collateral or to foreclose the pledge and sell the Collateral or
any portion thereof under a judgment or decree of a court or courts
of competent jurisdiction, or both.
(8) Proceed against the Borrowers on the Note.
(d) The Lender shall incur no liability as a result of the sale or
other disposition of the Collateral, or any part thereof, at any public or
private sale or disposition. Each Borrower hereby waives (to the extent
permitted by law) any claims it may have against the Lender arising by
reason of the fact that the price at which the Collateral may have been
sold at such private sale was less than the price which might have been
obtained at a public sale or was less than the aggregate amount of the
outstanding Advances and the unpaid interest accrued thereon, even if the
Lender accepts the first offer received and does not offer the Collateral
to more than one offeree and none of the actions described herein shall
render Lender's disposition of the Collateral in such a manner as
commercially unreasonable.
(e) Each Borrower specifically waives (to the extent permitted by
law) any equity or right of redemption, all rights of redemption, stay or
appraisal which such
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Borrower has or may have under any rule of law or statute now existing or
hereafter adopted, and any right to require the Lender to (1) proceed
against any Person, (2) proceed against or exhaust any of the Collateral
or pursue its rights and remedies as against the Collateral in any
particular order, or (3) pursue any other remedy in its power. The Lender
shall not be required to take any steps necessary to preserve any rights
of such Borrower against holders of mortgages prior in lien to the Lien of
any Mortgage included in the Collateral or to preserve rights against
prior parties.
(f) The Lender may, but shall not be obligated to, advance any sums
or do any act or thing necessary to uphold and enforce the Lien and
priority of, or the security intended to be afforded by, any Mortgage
included in the Collateral, including, without limitation, payment of
delinquent taxes or assessments and insurance premiums. All advances,
charges, costs and expenses, including reasonable attorneys' fees and
disbursements, incurred or paid by the Lender in exercising any right,
power or remedy conferred by this Agreement, or in the enforcement hereof,
together with interest thereon, at the Default Rate, from the time of
payment until repaid, shall become a part of the principal balance
outstanding hereunder and under the Note.
(g) No failure on the part of the Lender to exercise, and no delay
in exercising, any right, power or remedy provided hereunder, at law or in
equity shall operate as a waiver thereof; nor shall any single or partial
exercise by the Lender of any right, power or remedy provided hereunder,
at law or in equity preclude any other or further exercise thereof or the
exercise of any other right, power or remedy. Without intending to limit
the foregoing, all defenses based on the statute of limitations are hereby
waived by each Borrower to the extent permitted by law. The remedies
herein provided are cumulative and are not exclusive of any remedies
provided at law or in equity.
5.3 Application of Proceeds. The proceeds of any sale, disposition or
other enforcement of the Lender's security interest in all or any part of the
Collateral shall be applied by the Lender:
First, to the payment of the costs and expenses of such sale or
enforcement, including reasonable compensation to the Lender's agents and
counsel, and all expenses, liabilities and advances made or incurred by or
on behalf of the Lender in connection therewith;
Second, to the payment of any other amounts due (other than
principal and interest) under the Note or this Agreement;
Third, to the payment of interest accrued and unpaid on the Note;
Fourth, to the payment of the outstanding principal balance of
the Note; and
Finally, to the payment to the Borrowers, or to its successors or
assigns, or as a court of competent jurisdiction may direct, of any
surplus then remaining from such proceeds.
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If the proceeds of any such sale, disposition or other enforcement are
insufficient to cover the costs and expenses of such sale, as aforesaid, and the
payment in full of all Obligations of the Borrowers, the Borrowers shall remain
liable for any deficiency, except as otherwise provided herein.
5.4 Lender Appointed Attorney-in-Fact. The Lender is hereby appointed the
attorney-in-fact of each Borrower, with full power of substitution, for the
purpose of carrying out the provisions hereof and taking any action and
executing any instruments which the Lender may deem necessary or advisable to
accomplish the purposes hereof, which appointment as attorney-in-fact is
irrevocable and coupled with an interest. Without limiting the generality of the
foregoing, the Lender shall have the right and power to give notices of its
security interest in the Collateral to any Person, either in the name of the
applicable Borrower or in its own name, to endorse all Pledged Mortgages or
Pledged Securities payable to the order of the applicable Borrower, to change or
cause to be changed the book-entry registration or name of subscriber or
Investor on any Pledged Security, or to receive, endorse and collect all checks
made payable to the order of the Company representing any payment on account of
the principal of or interest on, or the proceeds of sale of, any of the Pledged
Mortgages or Pledged Securities and to give full discharge for the same.
5.5 Right of Set-Off. If the Borrowers shall default in the payment of the
Note, any interest accrued thereon, or any other sums which may become payable
hereunder when due, or in the performance of any other Obligations under this
Agreement, the Lender, shall have the right, at any time and from time to time,
without notice, to set-off and to appropriate or apply any and all property or
indebtedness of any kind at any time held or owing by the Lender to or for the
credit of the account of the Borrowers or any one of them (excluding any monies
held by the Borrowers or any one of them in trust for third parties) against and
on account of the Obligations, irrespective of whether or not the Lender shall
have made any demand hereunder and whether or not said Obligations shall have
matured; provided, however, that the Lender shall not be allowed to set-off
against funds in accounts with respect to which (i) any Borrower is a trustee or
an escrow agent in respect of bona fide third parties other than Affiliates, and
(ii) such trust or escrow arrangement was so denominated at the time of the
creation of such account.
6. NOTICES.
All notices, demands, consents, requests and other communications required
or permitted to be given or made hereunder (collectively, "Notices") shall,
except as otherwise expressly provided hereunder, be in writing and shall be
delivered in person or mailed, first class, return receipt requested, postage
prepaid, or delivered by overnight courier, addressed to the respective parties
hereto at their respective addresses hereinafter set forth or, as to any such
party, at such other address as may be designated by it in a Notice to the
other. All Notices shall be conclusively deemed to have been properly given or
made when duly delivered, in person or by overnight courier, or if mailed on the
third Business Day after being deposited in the mails, addressed as follows:
If to Company: HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
Attn: Joyce S. Mizerak
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90 West Street, Suite 1509
New York, New York 10006
Tel: (212) 732-5086
Fax: (212) 732-4728
Email: [email protected]
If to "HCP": HANOVER CAPITAL PARTNERS LTD.
Attn: Joyce S. Mizerak
90 West Street, Suite 1509
New York, New York 10006
Tel: (212) 732-5086
Fax: (212) 732-4728
Email: [email protected]
If to the Lender: Bank United
Attn: John D. West
Regional Director, Mortgage Banker Finance
400 Colony Square, Suite 200
Atlanta, Georgia 30361
Tel: (404) 877-9192
Fax: (404) 877-9195
Email: [email protected]
with a copy to: Bank United
Attn: Jonathon K. Heffron
General Counsel
3200 Southwest Freeway, Suite 2600
Houston, Texas 77027
Tel: (713) ______________
Fax: (713) 543-6469
Email: ________________
7. REIMBURSEMENT OF EXPENSES; INDEMNITY.
The Borrowers shall: (a) pay all out-of-pocket costs and expenses of the
Lender, including, without limitation, reasonable attorneys' fees, in connection
with the preparation, negotiation, documentation, enforcement, and
administration of this Agreement, the Note, and other Loan Documents and the
making and repayment of the Advances and the payment of interest thereon;
provided that Lender's reasonable attorney's fees for the preparation of the
Loan Documents shall not exceed $5,000.00 plus the reasonable costs and expenses
of counsel; (b) pay, and hold the Lender and any holder of the Note harmless
from and against, any and all present and future stamp, documentary and other
similar taxes with respect to the foregoing matters and save the Lender and the
holder or holders of the Note harmless from and against any and all liabilities
with respect to or resulting from any delay or omission to pay such taxes; (c)
INDEMNIFY, PAY AND HOLD HARMLESS THE LENDER AND ANY OF ITS OFFICERS, DIRECTORS,
EMPLOYEES OR AGENTS AND ANY SUBSEQUENT HOLDER OF
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THE NOTE FROM AND AGAINST ANY AND ALL LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES,
PENALTIES, JUDGMENTS, SUITS, COSTS, EXPENSES AND DISBURSEMENTS OF ANY KIND
WHATSOEVER (THE "INDEMNIFIED LIABILITIES") WHICH MAY BE IMPOSED UPON, INCURRED
BY OR ASSERTED AGAINST THE LENDER OR SUCH HOLDER IN ANY WAY RELATING TO OR
ARISING OUT OF THIS AGREEMENT, THE NOTE, OR ANY OTHER LOAN DOCUMENT OR ANY OF
THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY TO THE EXTENT THAT ANY SUCH
INDEMNIFIED LIABILITIES RESULT (DIRECTLY OR INDIRECTLY) FROM ANY CLAIMS MADE, OR
ANY ACTIONS, SUITS OR PROCEEDINGS COMMENCED OR THREATENED, BY OR ON BEHALF OF
ANY CREDITOR (EXCLUDING THE LENDER AND THE HOLDER OR HOLDERS OF THE NOTE),
SECURITY HOLDER, SHAREHOLDER, CUSTOMER (INCLUDING, WITHOUT LIMITATION, ANY
PERSON HAVING ANY DEALINGS OF ANY KIND WITH ANY BORROWER), TRUSTEE, DIRECTOR,
OFFICER, EMPLOYEE AND/OR AGENT OF ANY BORROWER ACTING IN SUCH CAPACITY, ANY
BORROWER OR ANY GOVERNMENTAL REGULATORY BODY OR AUTHORITY. THE FOREGOING
INDEMNITY SHALL NOT APPLY TO THE EXTENT THE INDEMNIFIED LIABILITIES RESULT FROM
THE NEGLIGENCE OR WILLFUL MISCONDUCT OF THE LENDER OR LENDER'S OWN VIOLATIONS OF
REGULATIONS APPLICABLE TO IT. THE AGREEMENT OF THE BORROWERS CONTAINED IN THIS
SUBSECTION (C) SHALL SURVIVE THE EXPIRATION OR TERMINATION OF THIS AGREEMENT AND
THE PAYMENT IN FULL OF THE NOTE. ATTORNEYS' FEES AND DISBURSEMENTS INCURRED IN
ENFORCING, OR ON APPEAL FROM, A JUDGMENT PURSUANT HERETO SHALL BE RECOVERABLE
SEPARATELY FROM AND IN ADDITION TO ANY OTHER AMOUNT INCLUDED IN SUCH JUDGMENT,
AND THIS CLAUSE IS INTENDED TO BE SEVERABLE FROM THE OTHER PROVISIONS OF THIS
AGREEMENT AND TO SURVIVE AND NOT BE MERGED INTO SUCH JUDGMENT.
8. FINANCIAL INFORMATION.
All financial statements and reports furnished to the Lender hereunder
shall be prepared in accordance with GAAP, applied on a basis consistent with
that applied in preparing the financial statements as at, and for the period
ended, the Statement Date (except to the extent otherwise required to conform to
good accounting practice).
9. MISCELLANEOUS.
9.1 Terms Binding Upon Successors; Survival of Representations. The terms
and provisions of this Agreement shall be binding upon and inure to the benefit
of the parties hereto and their respective successors and assigns. All
representations, warranties, covenants and agreements herein contained on the
part of each Borrower shall survive the making of any Advance and the execution
of the Note, and shall be effective so long as the Commitment is outstanding
hereunder or there remain any Obligations of the Company hereunder or under the
Note to be paid or performed.
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9.2 Assignment. This Agreement may not be assigned by the Borrowers. The
Lender may assign, at any time, in whole or in part, its rights and delegate its
obligations under this Agreement and the other Loan Documents, along with the
Lender's security interest in any or all of the Collateral, and any assignee
thereof may enforce this Agreement and the other Loan Documents, and such
security interest.
9.3 Amendments. Except as otherwise provided in this Agreement, this
Agreement may not be amended, modified or supplemented unless such amendment,
modification or supplement is set forth in a writing signed by the parties
hereto.
9.4 Governing Law. This Agreement and the other Loan Documents shall be
governed by the laws of the State of Texas, without reference to its principles
of conflicts of laws.
9.5 Participations. The Lender may at any time sell, assign or grant
participations in, or otherwise transfer to any other Person (a "Participant"),
all or part of the Obligations under this Agreement. Without limitation of the
exclusive right of the Lender to collect and enforce such Obligations, each
Borrower agrees that each disposition will give rise to a debtor-creditor
relationship of such Borrower to the Participant, and such Borrower authorizes
each Participant, upon the occurrence of an Event of Default, to proceed
directly by right of setoff, banker's lien, or otherwise, against any assets of
such Borrower which may be in the hands of such Participant. Each Borrower
authorizes the Lender to disclose to any prospective Participant and any
Participant any and all information in the Lender's possession concerning such
Borrower, this Agreement and the Collateral.
9.6 Relationship of the Parties. This Agreement provides for the making of
Advances by the Lender, in its capacity as a lender, to each Borrower, in its
capacity as a borrower, and for the payment of interest, repayment of principal
by the Borrowers to the Lender, and for the payment of certain fees by the
Borrowers to the Lender. The relationship between the Lender and the Borrowers
is limited to that of creditor/secured party, on the one hand, and debtor, on
the other hand. The provisions herein for compliance with financial covenants
and delivery of financial statements are intended solely for the benefit of the
Lender to protect its interests as lender in assuring payments of interest and
repayment of principal and payment of certain fees, and nothing contained in
this Agreement shall be construed as permitting or obligating the Lender to act
as a financial or business advisor or consultant to the Borrowers, as permitting
or obligating the Lender to control the Borrowers or to conduct the Borrowers'
operations, as creating any fiduciary obligation on the part of the Lender to
the Borrowers, or as creating any joint venture, agency, or other relationship
between the parties hereto other than as explicitly and specifically stated in
this Agreement. Each Borrower acknowledges that it has had the opportunity to
obtain the advice of experienced counsel of its own choosing in connection with
the negotiation and execution of this Agreement and to obtain the advice of such
counsel with respect to all matters contained herein, including, without
limitation, the provision for waiver of trial by jury. Each Borrower further
acknowledges that it is experienced with respect to financial and credit matters
and has made its own independent decisions to apply to the Lender for credit and
to execute and deliver this Agreement.
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9.7 Severability. If any provision of this Agreement shall be declared to
be illegal or unenforceable in any respect, such illegal or unenforceable
provision shall be and become absolutely null and void and of no force and
effect as though such provision were not in fact set forth herein, but all other
covenants, terms, conditions and provisions hereof shall nevertheless continue
to be valid and enforceable.
9.8 Usury. It is the intent of Lender and the Borrowers in the execution
and performance of this Agreement and the Note or any Loan Document to remain in
strict compliance with Applicable Law from time to time in effect. In
furtherance thereof, Lender and the Borrowers stipulate and agree that none of
the terms and provisions contained in the Note, this Agreement or any Loan
Document shall ever be construed to create a contract to pay for the use,
forbearance or detention of money with interest at a rate or in an amount in
excess of the Maximum Rate or amount of interest permitted to be charged under
Applicable Law. For purposes of this Agreement, the Note and any other Loan
Document, "interest" shall include the aggregate of all charges which constitute
interest under Applicable Law that are contracted for, taken, charged, reserved,
or received under this Agreement, the Note or any other Loan Document. The
Borrowers shall never be required to pay unearned interest or interest at a rate
or in an amount in excess of the Maximum Rate or amount of interest that may be
lawfully charged under Applicable Law, and the provisions of this paragraph
shall control over all other provisions of this Agreement and the Note or any
Loan Document, which may be in actual or apparent conflict herewith. If the Note
is prepaid, or if the maturity of the Note is accelerated for any reason, or if
under any other contingency the effective rate or amount of interest which would
otherwise be payable under the Note would exceed the Maximum Rate or amount of
interest Lender or any other holder of the Note is allowed by Applicable Law to
charge, contract for, take, reserve or receive, or in the event Lender or any
holder of the Note shall charge, contract for, take, reserve or receive monies
that are deemed to constitute interest which would, in the absence of this
provision, increase the effective rate or amount of interest payable under the
Note to a rate or amount in excess of that permitted to be charged, contracted
for, taken, reserved or received under Applicable Law then in effect, then the
principal amount of the Note or the amount of interest which would otherwise be
payable under the Note or both shall be reduced to the amount allowed under
Applicable Law as now or hereinafter construed by the courts having
jurisdiction, and all such moneys so charged, contracted for, taken, reserved or
received that are deemed to constitute interest in excess of the Maximum Rate or
amount of interest permitted by Applicable Law shall immediately be returned to
or credited to the account of the Borrowers upon such determination. Lender and
the Borrowers further stipulate and agree that, without limitation of the
foregoing, all calculations of the rate or amount of interest contracted for,
charged, taken, reserved or received under the Note which are made for the
purpose of determining whether such rate or amount exceeds the Maximum Rate,
shall be made to the extent not prohibited by Applicable Law, by amortizing,
prorating, allocating and spreading during the period of the full stated term of
the Note, all interest at any time contracted for, charged, taken, reserved or
received from the Borrowers or otherwise by Lender or any other holder of the
Note.
9.9 Consent to Jurisdiction. Subject to the provisions of Section 12.10 of
this Agreement, the Company hereby agrees that any action or proceeding under
this Agreement, the Note or any document delivered pursuant hereto may be
commenced against it in any court of competent jurisdiction within the State of
Texas, by service of process upon the Company by first
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class registered or certified mail, return receipt requested, addressed to the
Company at its address last known to the Lender. The Company agrees that any
such suit, action or proceeding arising out of or relating to this Agreement or
any other such document may be instituted in Harris County, State District Court
or in the United States District Court for the District of Texas at the option
of the Lender; and the Company hereby waives any objection to the venue, or any
claim as to inconvenient forum, of any such suit, action or proceeding. Nothing
herein shall affect the right of the Lender to accomplish service of process in
any other manner permitted by law or to commence legal proceedings or otherwise
proceed against the Company in any other jurisdiction or court.
9.10 Arbitration. To the maximum extent not prohibited by law, any
controversy, dispute or claim arising out of, in connection with, or relating to
the Commitment or the Loan Documents or any transaction provided for therein,
including but not limited to any claim based on or arising from an alleged tort
or an alleged breach of any agreement contained in any of the Loan Documents,
shall, at the request of any party to the Loan Documents (either before or after
the commencement of judicial proceedings), be settled by arbitration pursuant to
Title 9 of the United States Code, which the parties hereto acknowledge and
agree applies to the transaction involved herein, and in accordance with the
Commercial Arbitration Rules of the American Arbitration Association (the
"AAA"). If Title 9 of the United States Code is inapplicable to any such claim,
dispute or controversy for any reason, such arbitration shall be conducted
pursuant to the Texas General Arbitration Act and in accordance with the
Commercial Arbitration Rules of the AAA. In any such arbitration proceeding: (i)
all statutes of limitations which would otherwise be applicable shall apply; and
(ii) the proceeding shall be conducted in Houston, Texas, by a single
arbitrator, if the amount in controversy is $1,000,000.00 or less, or by a panel
of three arbitrators if the amount in controversy is over $1,000,000.00. All
arbitrators shall be selected by the process of appointment from a panel
pursuant to Section 13 of the AAA Commercial Arbitration Rules and each
arbitrator shall be either an active attorney, a mortgage banker or retired
judge with an AAA acknowledged expertise in the subject matter of the
controversy, dispute or claim. Any award rendered in any such arbitration
proceeding shall be final and binding, and judgment upon any such award may be
entered in any court having jurisdiction.
If any party to any Loan Document files a proceeding in any court to
resolve any such controversy, dispute or claim, such action shall not constitute
a waiver of the right of such party or a bar to the right of any other party to
seek arbitration under the provisions of this Section of that or any other
claim, dispute or controversy, and the court shall, upon motion of any party to
the proceeding, direct that such controversy, dispute or claim be arbitrated in
accordance with this Section.
Notwithstanding any of the foregoing, the parties hereto agree that no
arbitrator or panel of arbitrators shall possess or have the power to (i) assess
punitive damages, (ii) dissolve, rescind or reform (except that the arbitrator
may construe ambiguous terms) any Loan Document, (iii) enter judgment on the
debt, (iv) exercise equitable powers or issue or enter any equitable remedies
with respect to matters submitted to arbitration, or (v) allow discovery of
attorney/client privileged information. The Commercial Arbitration Rules of the
AAA are hereby modified to this extent for the purpose of arbitration of any
dispute, controversy or claim arising out of, in connection with, or relating to
the Loan or any Loan Document. The parties hereby further agree to waive,
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each to the other, any claims for punitive damages and agree neither an
arbitrator nor any court shall have the power to assess such damages.
No provision of, or the exercise of any rights under, this Section shall
limit or impair the right of any party to any Loan Document before, during or
after any arbitration proceeding to: (i) exercise self-help remedies such as
setoff or repossession; (ii) foreclose (judicially or otherwise) any Lien on or
security interest in any real or personal Collateral; or (iii) obtain emergency
relief from a court of competent jurisdiction to prevent the dissipation,
damage, destruction, transfer, hypothecation, pledging or concealment of assets
or of Collateral securing any Indebtedness, obligation or guaranty referenced in
any Loan Document. Such emergency relief may be in the nature of, but is not
limited to: pre-judgment attachments, garnishments, sequestrations, appointments
of receivers, or other emergency injunctive relief to preserve the status quo.
9.11 ADDITIONAL INDEMNITY. IN ADDITION TO THE INDEMNITY PROVIDED IN
SECTION 10, THE BORROWERS SHALL INDEMNIFY AND HOLD THE LENDER, ITS SUCCESSORS,
ASSIGNS, AGENTS, AND EMPLOYEES, HARMLESS FROM AND AGAINST ANY AND ALL CLAIMS,
ACTIONS, SUITS, PROCEEDINGS, COSTS, EXPENSES, DAMAGES, FINES, PENALTIES, AND
LIABILITIES, INCLUDING, WITHOUT LIMITATION, ATTORNEYS' FEES AND COSTS, ARISING
OUT OF, CONNECTED WITH, OR RESULTING FROM (A) THE OPERATION OF THE BORROWERS'
BUSINESSES, (B) THE LENDER'S PRESERVATION OR ATTEMPTED PRESERVATION OF
COLLATERAL, AND (C) ANY FAILURE OF THE SECURITY INTERESTS AND LIENS IN THE
COLLATERAL GRANTED TO THE LENDER PURSUANT TO THIS AGREEMENT TO BE OR TO REMAIN
PERFECTED OR TO HAVE THE PRIORITY AS CONTEMPLATED THEREIN. THIS INDEMNITY SHALL
NOT APPLY TO THE EXTENT THE SUBJECT OF THE INDEMNIFICATION IS CAUSED BY OR
ARISES OUT OF THE NEGLIGENCE OR WILLFUL MISCONDUCT OF THE LENDER. AT THE
LENDER'S REQUEST, THE BORROWERS SHALL, AT THEIR OWN COST AND EXPENSE, JOINTLY
AND SEVERALLY, DEFEND OR CAUSE TO BE DEFENDED ANY AND ALL SUCH ACTIONS OR SUITS
THAT MAY BE BROUGHT AGAINST THE LENDER AND, IN ANY EVENT, SHALL SATISFY, PAY,
AND DISCHARGE ANY AND ALL JUDGMENTS, AWARDS, PENALTIES, COSTS, AND FINES THAT
MAY BE RECOVERED AGAINST THE LENDER IN ANY SUCH ACTION, PLUS ALL ATTORNEYS' FEES
AND COSTS RELATED THERETO TO THE EXTENT PERMITTED BY APPLICABLE LAW; PROVIDED,
HOWEVER, THAT THE LENDER SHALL GIVE THE BORROWERS (TO THE EXTENT THE LENDER
SEEKS INDEMNIFICATION THEREFOR FROM THE COMPANY UNDER THIS SECTION 12.11)
WRITTEN NOTICE OF ANY SUCH CLAIM, DEMAND, OR SUIT AFTER THE LENDER HAS RECEIVED
WRITTEN NOTICE THEREOF, AND THE LENDER SHALL NOT SETTLE ANY SUCH CLAIM, DEMAND,
OR SUIT, IF THE LENDER SEEKS INDEMNIFICATION THEREFOR FROM THE BORROWERS,
WITHOUT FIRST GIVING NOTICE TO THE BORROWERS OF THE LENDER'S DESIRE TO SETTLE
AND OBTAINING THE CONSENT OF THE BORROWERS TO THE SAME, WHICH CONSENT THE
BORROWERS HEREBY AGREE NOT TO UNREASONABLY WITHHOLD. ALL OBLIGATIONS OF THE
BORROWERS UNDER THIS SECTION 12.11 SHALL SURVIVE THE PAYMENT OF THE NOTE AND THE
OBLIGATIONS.
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9.12 No Waivers Except in Writing. No failure or delay on the part of the
Lender in exercising any power or right hereunder or under any other Loan
Document shall operate as a waiver thereof, nor shall any single or partial
exercise of any such right or power, or any abandonment or discontinuance of
steps to enforce such a right or power, preclude any other or further exercise
thereof or the exercise of any other right or power. No notice to or demand on
any Borrower or any other Person in any case shall entitle such Borrower or such
other Person to any other or further notice or demand in similar or other
circumstances.
9.13 WAIVER OF JURY TRIAL. EACH BORROWER HEREBY EXPRESSLY WAIVES ANY RIGHT
TO A TRIAL BY JURY IN ANY ACTION OR LEGAL PROCEEDING ARISING OUT OF OR RELATING
TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT FOR THE TRANSACTIONS CONTEMPLATED
HEREBY OR THEREBY.
9.14 Multiple Counterparts. This Agreement may be executed in any number
of counterparts, all of which, taken together, shall constitute one and the same
instrument.
9.15 No Third Party Beneficiaries. This Agreement is for the sole and
exclusive benefit of the Borrowers and Lender. This Agreement does not create,
and is not intended to create, any rights in favor of or enforceable by any
other Person. This Agreement may be amended or modified by the agreement of the
Borrowers and Lender, without any requirement or necessity for notice to, or the
consent of or approval of any other Person.
9.16 RELEASE OF LENDER LIABILITY. TO THE MAXIMUM EXTENT NOT PROHIBITED BY
LAW FROM TIME TO TIME IN EFFECT, EACH BORROWER HEREBY KNOWINGLY, VOLUNTARILY AND
INTENTIONALLY (AND AFTER IT HAS CONSULTED WITH ITS OWN ATTORNEY) IRREVOCABLY AND
UNCONDITIONALLY AGREES THAT NO CLAIM MAY BE MADE BY IT AGAINST THE LENDER OR ANY
OF ITS DIRECTORS, OFFICERS, EMPLOYEES, ATTORNEYS, ACCOUNTANTS, AGENTS OR
INSURERS, OR ANY OF ITS OR THEIR SUCCESSORS AND ASSIGNS, FOR ANY SPECIAL,
INDIRECT, CONSEQUENTIAL OR PUNITIVE DAMAGES IN RESPECT OF ANY BREACH OR WRONGFUL
CONDUCT (WHETHER THE CLAIM IS BASED ON CONTRACT OR TORT OR DUTY IMPOSED BY LAW)
ARISING OUT OF, OR RELATED TO, THE TRANSACTIONS CONTEMPLATED BY ANY OF THIS
AGREEMENT, THE NOTE, OR ANY OTHER LOAN DOCUMENTS, OR ANY ACT, OMISSION, OR EVENT
OCCURRING IN CONNECTION HEREWITH OR THEREWITH. IN FURTHERANCE OF THE FOREGOING,
EACH BORROWER HEREBY WAIVES, RELEASES AND AGREES NOT TO SUE UPON ANY CLAIM FOR
ANY SUCH DAMAGES, WHETHER OR NOT ACCRUED AND WHETHER OR NOT KNOWN OR SUSPECTED
TO EXIST IN ITS FAVOR.
9.17 ENTIRE AGREEMENT; AMENDMENT. THIS AGREEMENT, THE NOTE, AND THE OTHER
LOAN DOCUMENTS REFERRED TO HEREIN EMBODY THE FINAL, ENTIRE AGREEMENT AMONG THE
PARTIES HERETO AND SUPERSEDE ANY AND ALL PRIOR COMMITMENTS, AGREEMENTS,
REPRESENTATIONS, AND UNDERSTANDINGS, WHETHER WRITTEN OR ORAL, RELATING TO THE
SUBJECT MATTER HEREOF. THE PROVISIONS OF THIS AGREEMENT AND THE OTHER
Page 55
<PAGE> 61
LOAN DOCUMENTS TO WHICH THE COMPANY IS A PARTY MAY BE AMENDED OR WAIVED ONLY BY
AN INSTRUMENT IN WRITING SIGNED BY THE PARTIES HERETO.
12.18 NO ORAL AGREEMENTS. THE WRITTEN LOAN DOCUMENTS REPRESENT THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
BORROWERS:
HANOVER CAPITAL MORTGAGE HOLDINGS, INC.,
a Maryland corporation
By___________________________________
Name: Joyce S. Mizerak
Title: Managing Director
HANOVER CAPITAL PARTNERS LTD.,
a New York corporation
By:____________________________________
Name: Joyce S. Mizerak
Title: Managing Director
LENDER:
BANK UNITED
By:______________________________________
JOHN D. WEST, Regional Director,
Mortgage Banker Finance
Page 56
<PAGE> 62
EXHIBITS:
A-1 - Advance Request
A-2 - Advance Request
B - Existing Company Indebtedness
C - Procedures and Documentation for Warehousing Single-family
Mortgage Loans
D - Shipping Instructions
E - Trust Receipt
F - Officer's Certificate
G - Subsidiaries
H - Litigation
I - Trade Names
J-1 - Secretary's Certificate
J-2 - Secretary's Certificate
K - Bailee Letter
L - Investors
M - Legal Opinion
N - Note
O - Pledge of Investment Grade Securities
Page 57
<PAGE> 1
Exhibit 10.35
AMENDMENT NUMBER ONE
to the
Amended and Restated Master Loan and Security Agreement
dated as of November 23, 1998
by and among
HANOVER CAPITAL MORTGAGE HOLDINGS, INC.,
HANOVER CAPITAL PARTNERS, LTD.
and
GREENWICH CAPITAL FINANCIAL PRODUCTS, INC.
This AMENDMENT is made this 28th day of March, 1999, by and
among HANOVER CAPITAL MORTGAGE HOLDINGS, INC., HANOVER CAPITAL PARTNERS, LTD.,
each having an address at 90 West Street, Suite 1508, New York, New York 10006
(each, a "Borrower" and collectively, the "Borrowers") and GREENWICH CAPITAL
FINANCIAL PRODUCTS, INC., having an address at 600 Steamboat Road, Greenwich,
Connecticut 06830 (the "Lender"), to the Amended and Restated Master Loan and
Security Agreement, dated as of November 23, 1998, by and among the Borrowers
and the Lender (the "Agreement"). Capitalized terms used but not otherwise
defined herein shall have the meanings assigned to such terms in the Agreement.
1. Effective as of March 28, 1999, Section 1 of the Agreement is hereby
amended as follows:
(a) The definition of Applicable Collateral Percentage is
hereby deleted in its entirety and replaced with the following:
"Applicable Collateral Percentage" shall mean, either (i) for
the first 180 days following the date such Eligible Asset
first becomes subject to the terms of this Agreement, with
respect to all Eligible Mortgage Loans (other than Delinquent
Mortgage Loans), 95%, with respect to Eligible Bonds that are
Investment Grade Bonds which are rated AA- or better by S&P
and Aa3 or better by Moody's, 75%, with respect to Eligible
Bonds that are Investment Grade Bonds which are rated A- or
better by S&P and A3 or better by Moody's, 70%, with respect
to Eligible Bonds that are Investment Grade Bonds which are
rated BBB- or better by S&P and Baa3 or better by Moody's,
60%, with respect to Eligible Bonds that are Non-Investment
Grade Bonds, 60%, with respect to Thirty Day Delinquent
Mortgage Loans, 90%, with respect to Sixty Day Delinquent
Mortgage Loans 85%, with respect to Pledged Stock, the
percentage applicable to the Underlying Eligible Bonds owned
by the applicable Eligible Entity, and with respect to
Participation Certificates, 95% multiplied by the Ownership
Percentage or (ii) thereafter, 0%."
(b) The definition of Applicable Margin is hereby amended by
substituting "1.25%" for ".70%" after the term "Tranche A Advances",
"1.55%" for "1.00%" after the term "Tranche B Advances" and "1.80%" for
"1.25%" after the term "Tranche C Advances".
<PAGE> 2
(c) The definition of Collateral Value is hereby amended as
follows:
(i) Subclause (iii) thereof is hereby amended by
substituting "$10,000,000" for "$2,000,000" in the
fifth line thereof and by substituting "5%" for "1%"
in the sixth line thereof.
(ii) Subclause (iv)(J) thereof is hereby amended to read
in its entirety as follows:
"(J) which has a Material Exception with respect
thereto which was not otherwise waived by
Lender:"
(iii) The following subclause (v) is hereby added to the
end thereof:
"(v) the aggregate Collateral Value of all
Non-Investment Grade Bonds shall not at any time
exceed $15,000,000."
(d) The definition of Interest Period is hereby deleted in its
entirety and replaced with the following:
"Interest Period" shall mean, with respect to any Advance, (i)
initially, the period commencing on the Funding Date with
respect to such Advance and ending on the calendar day prior
to the Payment Date of the next succeeding month, and (ii)
thereafter, each period commencing on the Payment Date of a
month and ending on the calendar day prior to the Payment Date
of the next succeeding month. Notwithstanding the foregoing,
no Interest Period may end after the Termination Date."
(e) The definition of Investment Grade is hereby amended by
substituting "Baa3" for "Baa2" in the second line thereof.
(f) The definition of Market Value is hereby amended as
follows:
(i) by adding the following sentence before the last sentence
thereof:
"The Lender shall have the right to mark to market
the Eligible Assets on a daily basis.";
(ii) by adding the following to the end thereof:
"The Borrowers acknowledges that the Lender's
determination of Market Value is for the limited
purpose of determining Collateral Value for lending
purposes hereunder without the ability to perform
customary purchaser's due diligence and is not
necessarily equivalent to a determination of the fair
market value of the Eligible Assets achieved by
obtaining competing bids in an orderly market in
which the Borrowers are not in default and the
2
<PAGE> 3
bidders have adequate opportunity to perform
customary loan and servicing due diligence."
(g) The definition of Termination Date is hereby amended by
substituting "March 27, 2000" for "March 28, 1999" in the first line
thereof.
2. Effective as of March 28, 1999, Section 2.04(b) of the Agreement is
hereby amended by deleting the penultimate sentence of such section and the
immediate preceding sentence and inserting in their place the following:
Accrued interest on each Advance as calculated in this Section
2.05(b) shall be payable monthly on each Payment Date and on
the Termination Date, except that interest payable at the
Post-Default Rate shall accrue daily and shall be payable
promptly upon receipt of invoice.
3. Effective as of March 28, 1999, Section 2.07 of the Agreement is
hereby deleted in its entirety and replaced with the following:
"2.07 Optional Prepayments.
(a) The Advances are prepayable without premium or penalty, in
whole or in part on each Payment Date or after providing not
less than two (2) Business Days prior notice. The Advances are
prepayable at any other time, in whole or in part, in
accordance herewith and subject to clause (b) below. Any
amounts prepaid shall be applied to repay the outstanding
principal amount of any Advances (together with interest
thereon) until paid in full. Amounts repaid may be reborrowed
in accordance with the terms of this Loan Agreement. If the
Borrowers intend to prepay an Advance in whole or in part from
any source, the Borrowers shall give two (2) Business Days'
prior written notice thereof to the Lender. If such notice is
given, the amount specified in such notice shall be due and
payable on the date specified therein, together with accrued
interest to such date on the amount prepaid. Partial
prepayments shall be in an aggregate principal amount of at
least $100,000.
(b) If the Borrowers make a prepayment of the Advances other
than as provided in Section 2.07(a) above, the Borrowers shall
indemnify the Lender and hold the Lender harmless from any
actual loss or expense which the Lender may sustain or incur
arising from (a) the deployment of funds obtained by the
Lender to maintain the Advances hereunder or from (b) fees
payable to terminate the deposits from which such funds were
obtained, in either case, which actual loss or expense shall
be equal to an amount equal to the excess, as reasonably
determined by the Lender, of (i) its cost of obtaining funds
for such Advances for the period from the date of such payment
through the earlier of (x) the second Business Day following
receipt of such payment or (y) the following Payment Date over
(ii) the amount of interest likely to be realized by such
Lender in redeploying the funds not utilized by reason of such
payment for such period. This Section 2.07 shall survive
termination of this Agreement and payment of the Note."
3
<PAGE> 4
4. Effective as of March 28, 1999, Section 3 of the Agreement is hereby
amended by adding the following Subsections to the end thereof:
"3.05 Non-usage Fee. The Borrowers agree to pay to the Lender,
on each Commitment Fee Payment Date, in addition to any
Commitment Fee then payable, a non-usage fee equal to (a) 12.5
basis points (0.125%) multiplied by (b)(i) the number of days
from and including March 27, 1999 or the previous Commitment
Fee Payment Date up to but not including the related
Commitment Fee Payment Date or the Termination Date, as
applicable, during which the unused portion of the Maximum
Committed Amount exceeded $50,000,000, divided by (ii) 360,
multiplied by (c) the average daily amount of the entire
unused portion of the Maximum Committed Amount for the
applicable days on which the unused portion of the Maximum
Committed Amount exceeded $50,000,000, such payment to be made
in Dollars, in immediately available funds, without deduction,
set-off, or counterclaim. The Lender may, in its sole
discretion, net such non-usage fee from the proceeds of any
Advance made to a Borrower hereunder.
3.06 Facility Fee. On the Termination Date, the Borrowers
shall pay to the Lender a facility fee equal to the excess, if
any, of (i) $500,000 over (ii) the total amount of any
underwriting fees earned by the Lender during the period from
March 28, 1999 through March 27, 2000, in connection with the
securitization of any Eligible Assets (excluding for purposes
of this clause (ii) any underwriting fees earned pursuant to
the letter agreement among the Borrowers and the Lender dated
as of February 23, 1999 (the "Letter Agreement"). In addition,
the Lender shall be paid a fee equal to 12/32 times the
principal amount of the Eligible Assets which are securitized
as described in the Letter Agreement upon the earlier to occur
of (i) the closing date for such securitization or (ii) July
31, 1999 (if such securitization has not occurred on or before
such date with the Lender acting as co-lead manager)."
5. Effective as of March 28, 1999, Section 5.01 of the Agreement is
hereby amended by adding the following subclause (r) to the end thereof:
"(r) Year 2000 Compliance. The Lender shall have
satisfactorily completed its due diligence of the Year 2000
Program of each Borrower and shall have determined that the
Year 2000 Issues will not have a material adverse effect on
the Borrowers' or the Subservicer's operations or financial
condition."
6. Effective as of March 28, 1999, Section 6.01(a) of the Agreement is
hereby amended to read in its entirety as follows:
(a) The unaudited consolidated balance sheet of Hanover
Capital Holdings and its consolidated Subsidiaries as of
December 31, 1998, reported thereon by Deloitte & Touche, a
copy of which has heretofore been furnished to the Lender, is
complete and correct and presents fairly the consolidated
financial condition of Hanover
4
<PAGE> 5
Capital Holdings and its consolidated Subsidiaries as at such
dates and the consolidated results of their operations and
their consolidated cash flows for the fiscal year then ended.
7. Effective as of March 28, 1999, Section 6.02 of the Agreement is
hereby amended to read in its entirety as follows:
"6.02 No Change. Since December 31, 1998, there has been no
development or event nor any prospective development or event
which has had or should reasonably be expected to have a
Material Adverse Effect."
8. Effective as of March 28, 1999, Section 7.09 of the Agreement is
hereby amended to read in its entirety as follows:
7.09 Financial Condition Covenants.
(a) Maintenance of Tangible Net Worth. Hanover Capital
Holdings shall at all times maintain Tangible Net Worth of not
less than $60,000,000.
(b) Maintenance of Ratio of Indebtedness to Tangible Net
Worth. With respect to Hanover Capital Holdings or its
Subsidiaries, the ratio of Indebtedness to Tangible Net Worth
shall not at any time be greater than 10:1.
(c) Maintenance of Liquidity. Hanover Capital Holdings shall
ensure that, as of the end of each calendar month, it has Cash
Equivalents in an amount of not less than $2,500,000.
9. Effective as of March 28, 1999, Subsection 7.16 of the Agreement is
hereby amended by inserting "and shall not liquidate the Collateral on a
servicing released basis" after the word "Assets" in the second line thereof.
10. Effective as of March 28, 1999, Subsection 7.27 of the Agreement is
hereby amended by inserting "(a)" before the word "The" in the first line
thereof and by adding the following clause (b) to the end thereof:
"(b) By September 1, 1999, each Borrower shall be required to
provide written assurance to the Lender that it is year 2000
compliant. If satisfactory assurance can not be made on such
date, the Lender shall have no obligation to make any
additional Advances under this Agreement. In addition, the
failure of any Borrower to provide satisfactory assurance of
year 2000 compliance by September 30, 1999 shall constitute an
Event of Default under this Agreement."
11. Effective as of March 28, 1999, Section 8(a) of the Agreement is
hereby amended to read in its entirety as follows:
5
<PAGE> 6
(a) Borrower Default in the Payment of any Advance or Fee.
Either Borrower shall default in the payment of any principal
of or interest on any Advance when due (whether at stated
maturity, upon acceleration or at mandatory payment) or in the
payment of any fee due under Section 3.03, 3.05 or 3.06; or
12. Effective as of March 28, 1999, Section 8(d)(ii) of the Agreement
is hereby amended by deleting the word "or" before "7.08" and inserting "or
7.16" after "7.08" in the second line thereof.
13. Effective as of March 28, 1999, Section 11.03(b) of the Agreement
is hereby amended as follows:
(a) by deleting the words "which amounts shall be paid
promptly by the Borrowers or may be netted out of any
Advances made by Lender" in the ninth line thereof.
(b) by inserting "and (iii) initial and ongoing fees and
expenses incurred by the custodian and any trustee
with respect to the Collateral under this Agreement"
after the word "hereof" in the last line thereof.
(c) by inserting "All of the foregoing amounts shall be
paid promptly by the Borrowers or may be netted out
of any Advances made by Lender hereunder." at the end
thereof.
14. Effective as of March 28, 1999, the telecopier number for notices
to the Lender as listed on the signature page of the Agreement is hereby amended
to read "(203) 618-2135."
15. This amendment shall be construed in accordance with the laws of
the State of New York and the obligations, rights, and remedies of the parties
hereunder shall be determined in accordance with such laws without regard to
conflict of laws doctrine applied in such state.
16. This amendment may be executed in any number of counterparts, each
of which shall constitute an original and all of which, taken together, shall
constitute one instrument.
17. Except as amended above, the Agreement shall continue in full force
and effect in accordance with its terms.
6
<PAGE> 7
IN WITNESS WHEREOF, the Borrowers and the Lender have caused
this amendment to be executed and delivered by their duly authorized officers as
of the day and year first above written.
HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
(Borrower)
By:
------------------------------------------
Name:
----------------------------------------
Title:
---------------------------------------
HANOVER CAPITAL PARTNERS, LTD.
(Borrower)
By:
------------------------------------------
Name:
----------------------------------------
Title:
---------------------------------------
GREENWICH CAPITAL FINANCIAL PRODUCTS, INC.
(Lender)
By:
------------------------------------------
Name:
----------------------------------------
Title:
---------------------------------------
<PAGE> 1
EXHIBIT 10.36
WARRANT AGREEMENT
by and between
HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
and
RESIDENTIAL FUNDING CORPORATION
Dated as of April ___, 1999
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Section 1 Issuance and Delivery .......................................................................................... 1
Section 2 Additional Agreements of the Company ........................................................................... 1
2A. Registration Rights Agreement ............................................................................. 1
2B. Securities Law Compliance ................................................................................. 1
2C. Opinions of the Company's Counsel ......................................................................... 1
2D. Issuance Documents ........................................................................................ 2
2E. Proceedings ............................................................................................... 2
2F. Expenses .................................................................................................. 2
Section 3 Covenants ...................................................................................................... 2
3A. Information ............................................................................................... 2
3B. Inspection ................................................................................................ 3
3C. Compliance with Agreements and Resolutions ................................................................ 3
3D. Current Public Information ................................................................................ 3
3E. Reservation of Common Stock ............................................................................... 3
3F. Repricing of Excluded Warrants ............................................................................ 4
3G. Cooperation ............................................................................................... 4
Section 4 Transfer of Restricted Securities .............................................................................. 4
4A. General Provisions ........................................................................................ 4
4B. Opinion Delivery .......................................................................................... 4
4C. Rule 144A ................................................................................................. 4
4D. Legend Removal ............................................................................................ 4
Section 5 Representations and Warranties of the Company .................................................................. 5
5A. Organization and Corporate Power .......................................................................... 5
5B. Capital Stock and Related Matters ......................................................................... 5
5C. Authorization; No Breach .................................................................................. 6
5D. Brokerage ................................................................................................. 7
5E. Governmental Consent, etc ................................................................................. 7
5F. Closing Time .............................................................................................. 7
5G. Reports Filed with the Securities and Exchange Commission ................................................. 7
5H. Knowledge ................................................................................................. 7
Section 6 Definitions .................................................................................................... 7
6A. Definitions ............................................................................................... 7
Section 7 Miscellaneous .................................................................................................. 9
7A. Expenses .................................................................................................. 9
7B. Remedies .................................................................................................. 10
7C. Investment Representations ................................................................................ 10
7D. Consent to Amendments ..................................................................................... 10
7E. Survival of Representations and Warranties ................................................................ 11
7F. Successors and Assigns .................................................................................... 11
7G. Severability .............................................................................................. 11
7H. Counterparts .............................................................................................. 11
7I. Descriptive Headings; Interpretation ...................................................................... 11
7J. Governing Law ............................................................................................. 11
</TABLE>
-i-
<PAGE> 3
<TABLE>
<CAPTION>
<S> <C>
7K. Notices ................................................................................................... 11
7L. No Strict Construction .................................................................................... 12
7M. Indemnification ........................................................................................... 12
</TABLE>
-ii-
<PAGE> 4
Schedules and Exhibits
List of Exhibits
List of Disclosure Schedules
i
<PAGE> 5
WARRANT AGREEMENT
THIS AGREEMENT is made as of April ___, 1999, by and between Hanover
Capital Mortgage Holdings, Inc., a Maryland corporation (the "Company"), and
Residential Funding Corporation, a Delaware corporation ("Investor"). Except as
otherwise indicated herein, capitalized terms used herein are defined in Section
6 hereof.
WHEREAS, the Company and Investor are parties to that certain Purchase
Price and Terms Letter, dated as of November 10, 1998 (the "Letter Agreement")
whereby the Investor confirmed its intent to purchase certain mortgage loans
from the Company; and
WHEREAS, as additional consideration for Investor to enter into the
Letter Agreement, the Company agreed in Section 9 of the Letter Agreement to
issue the Warrant (as defined below) to Investor;
NOW, THEREFORE, in consideration of the premises and the
representations, warranties, covenants and agreements contained herein, and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, and intending to be legally bound hereby, the parties
hereto agree as follows:
Section 1. Issuance and Delivery. The Company shall issue and
deliver to Investor an instrument evidencing a Stock Purchase Warrant to acquire
an aggregate of 299,999 shares of the Company's Common Stock (as defined in the
Warrant) containing the terms and conditions and in the form set forth in
Exhibit A attached hereto, registered in the name of Investor or its nominee's
name, at the offices of Kirkland & Ellis at 10:00 a.m. on April __, 1999 (the
"Closing Time"), or at such other place or at such other time and on such other
date as may be mutually agreeable to the Company and Investor, but in no event
later than April __, 1999. For purposes of this Agreement, "Warrant" shall mean
the Stock Purchase Warrant initially issued hereunder and any Stock Purchase
Warrant representing a portion of the rights under such initially issued Stock
Purchase Warrant.
Section 2. Additional Agreements of the Company. The Company
hereby agrees as follows:
2A. Registration Rights Agreement. At or prior to the Closing Time,
the Company shall enter into a registration rights agreement in form and
substance as set forth in Exhibit B attached hereto (the "Registration Rights
Agreement").
2B. Securities Law Compliance. At or prior to the Closing Time, the
Company shall make all filings under all applicable federal and state securities
laws necessary to consummate the issuance of the Warrant pursuant to this
Agreement in compliance with such laws.
2C. Opinions of the Company's Counsel. At or prior to the Closing
Time, the Company shall cause to be delivered to Investor opinions from Piper &
Marbury, L.L.P. and Cadwalader, Wickersham & Taft, counsel for the Company, with
respect to the respective
<PAGE> 6
matters set forth in Exhibit C attached hereto, which shall be addressed to
Investor, dated the date of the Closing Time and in form and substance
satisfactory to Investor.
2D. Issuance Documents. At or prior to the Closing Time, the Company
shall deliver to Investor all of the following documents:
(i) an Officer's Certificate, dated the date of the Closing
Time, stating that the Company has fully complied with the agreements
specified in Section 1 and paragraphs 2A through 2F, inclusive;
(ii) certified copies of the resolutions duly adopted by the
Company's board of directors (A) authorizing the execution, delivery
and performance of this Agreement, the Registration Rights Agreement
and each of the other agreements contemplated hereby and (B)
authorizing the issuance of the Warrant, the reservation for issuance
upon exercise of the Warrant of an aggregate of 299,999 shares of
Common Stock and the consummation of all other transactions
contemplated by this Agreement;
(iii) certified copies of the Company's Articles of
Incorporation (the "Charter") and the Company's Bylaws (the "Bylaws"),
each as in effect at the Closing Time;
(iv) copies of all third party and governmental consents,
approvals and filings required in connection with the consummation of
the transactions hereunder (including, without limitation, all blue sky
law filings and waivers of all preemptive rights and rights of first
refusal); and
(v) such other documents relating to the transactions
contemplated by this Agreement as Investor or its special counsel may
reasonably request.
2E. Proceedings. At or prior to the Closing Time, the Company shall
take all corporate and other proceedings required to be taken by the Company in
connection with the transactions contemplated hereby, and all documents incident
thereto shall be satisfactory in form and substance to Investor and its special
counsel.
2F. Expenses . At the Closing Time, the Company shall reimburse
Investor for the fees and expenses of its counsel as provided in paragraph 7A
hereof.
Section 3. Covenants.
3A. Information. The Company shall deliver to Investor (so long as
Investor holds the lesser of 25,000 shares or 25% of the Underlying Common
Stock) and to each holder of at least 25% of the Underlying Common Stock:
(i) within five days after transmission thereof, copies of all
financial statements, proxy statements, reports and any other general
written communications which the Company sends to its stockholders and
copies of all press releases and other statements made available
generally by the Company to the public concerning material developments
in the Company's and its Subsidiaries' businesses; and
-2-
<PAGE> 7
(ii) with reasonable promptness, such other information and
financial data concerning the Company and its Subsidiaries as any
Person entitled to receive information under this paragraph 3A may
reasonably request.
For purposes of this Agreement and the Registration Rights Agreement, all
holdings of Underlying Common Stock by Persons who are Affiliates of each other
shall be aggregated for purposes of meeting any threshold tests under this
Agreement and Registration Rights Agreement.
3B. Inspection. The Company shall permit Investor and any
representative designated by Investor (so long as Investor holds the lesser of
25,000 shares or 25% of the Underlying Common Stock) or any holder of at least
25% of the Underlying Common Stock and any representative designated by any such
holder to (i) visit and inspect any of the properties of the Company and its
Subsidiaries and (ii) examine the corporate and financial records of the Company
and its Subsidiaries and make copies thereof, in each such case to the same
extent as stockholders of the Company are so permitted under the applicable
provisions of the Corporations Code.
3C. Compliance with Agreements and Resolutions. The Company shall
perform and observe (i) all of its obligations to each holder of the Underlying
Common Stock set forth in the Charter or the Bylaws, (ii) all of its obligations
to each holder of a Warrant set forth therein and (iii) all of its obligations
to each holder of Registrable Securities set forth in the Registration Rights
Agreement.
3D. Current Public Information. The Company shall file all reports
required to be filed by it under the Securities Act and the Securities Exchange
Act and the rules and regulations adopted by the Securities and Exchange
Commission thereunder and shall take such further action as any holder or
holders of Restricted Securities may reasonably request, all to the extent
required to enable such holders to sell Restricted Securities pursuant to (i)
Rule 144 adopted by the Securities and Exchange Commission under the Securities
Act (as such rule may be amended from time to time) or any similar rule or
regulation hereafter adopted by the Securities and Exchange Commission or (ii) a
registration statement on Form S-11 or S-3 or any similar registration form
hereafter adopted by the Securities and Exchange Commission. Upon request, the
Company shall deliver to any holder of Restricted Securities a written statement
as to whether it has complied with such requirements.
3E. Reservation of Common Stock. The Company shall at all times
reserve and keep available out of its authorized but unissued shares of Common
Stock, solely for the purpose of issuance upon the exercise of the Warrant(s),
such number of shares of Common Stock issuable upon the exercise of all
outstanding Warrants. All shares of Common Stock which are so issuable shall,
when issued, be duly and validly issued, fully paid and nonassessable and free
from all taxes, liens and charges. The Company shall take all such actions as
may be necessary to assure that all such shares of Common Stock may be so issued
without violation of any applicable law or governmental regulation or any
requirements of any domestic securities exchange upon which shares of Common
Stock may be listed (except for official notice of issuance which shall be
immediately transmitted by the Company upon issuance).
-3-
<PAGE> 8
3F. Repricing of Excluded Warrants. The Company shall not adjust the
exercise price of the Excluded Warrants, other than pursuant to Section 8 of the
Warrant Agreement dated as of September 19, 1997 between the Company and State
Street Bank and Trust Company as Warrant Agent or Section 8 of the
Representatives Warrant Agreement dated as of September 19, 1997 between the
Company and State Street Bank and Trust Company as Warrant Agent.
3G. Cooperation. In addition to any other agreements or covenants of
the Company hereunder or under the Warrant or the Registration Rights Agreement,
the Company shall take all appropriate action in connection with any transfer or
proposed transfer of the Warrant (or any portion thereof) or any Underlying
Common Stock as Investor, the Investor Entities and any successors or assigns of
Investor or the Investor Entities may reasonably request.
Section 4. Transfer of Restricted Securities.
4A. General Provisions. Restricted Securities are transferable only
pursuant to (i) public offerings registered under the Securities Act, (ii) Rule
144 or Rule 144A of the Securities and Exchange Commission (or any similar rule
or rules then in force) if such rule is available and (iii) subject to the
conditions specified in paragraph 4B below, any other legally available means of
transfer.
4B. Opinion Delivery. In connection with the transfer of any
Restricted Securities (other than a transfer described in paragraph 4A(i) or
(ii) above), the holder thereof shall deliver written notice to the Company
describing in reasonable detail the transfer or proposed transfer, together with
an opinion of counsel which (to the Company's reasonable satisfaction) is
knowledgeable in securities law matters to the effect that such transfer of
Restricted Securities may be effected without registration of such Restricted
Securities under the Securities Act. In addition, if the holder of the
Restricted Securities delivers to the Company an opinion of counsel that no
subsequent transfer of such Restricted Securities shall require registration
under the Securities Act, the Company shall promptly upon such contemplated
transfer deliver new certificates for such Restricted Securities which do not
bear the Securities Act legend set forth in paragraph 7C. If the Company is not
required to deliver new certificates for such Restricted Securities not bearing
such legend, the holder thereof shall not transfer the same until the
prospective transferee has confirmed to the Company in writing its agreement to
be bound by the conditions contained in this paragraph and paragraph 7C.
4C. Rule 144A. Upon the request of Investor, the Company shall
promptly supply to Investor or its prospective transferees all information
regarding the Company required to be delivered in connection with a transfer
pursuant to Rule 144A of the Securities and Exchange Commission.
4D. Legend Removal. If any Restricted Securities become eligible for
sale pursuant to Rule 144(k), the Company shall, upon the request of the holder
of such Restricted Securities, remove the legend set forth in paragraph 7C from
the certificates for such Restricted Securities.
-4-
<PAGE> 9
Section 5. Representations and Warranties of the Company . The Company
hereby represents and warrants as follows:
5A. Organization and Corporate Power. The Company is a corporation
duly organized, validly existing and in good standing under the laws of Maryland
and is qualified to do business in every jurisdiction in which its ownership of
property or conduct of business requires it to qualify, except where failure to
so qualify would not be reasonably expected to have a material adverse effect on
its business or financial condition. The Company possesses all requisite
corporate power and authority and all material licenses, permits and
authorizations necessary to own and operate its properties, to carry on its
businesses as now conducted and presently proposed to be conducted, except where
the lack of such licenses, permits and authorizations would not be reasonably
expected to have a material adverse effect on its properties, business or
financial condition, and to carry out the transactions contemplated by this
Agreement. The copies of the Charter and the Bylaws which have been furnished to
Investor's special counsel reflect all amendments made thereto at any time prior
to the date of this Agreement and are correct and complete.
5B. Capital Stock and Related Matters.
(i) As of November 10, 1998, the authorized capital stock of
the Company consisted of (a) 10,000,000 shares of Preferred Stock (none
of which were issued and outstanding) and (b) 90,000,000 shares of
Common Stock, of which 6,321,899 shares were issued and outstanding. As
of November 10, 1998, neither the Company nor any of its Subsidiaries
had outstanding any stock or securities convertible or exchangeable for
any shares of the Company's capital stock or containing any profit
participation features, nor did it have outstanding any rights or
options to subscribe for or to purchase the Company's capital stock or
any stock or securities convertible into or exchangeable for the
Company's capital stock or any stock appreciation rights or phantom
stock plans, except as set forth on the attached "November 10
Capitalization Schedule." The November 10 Capitalization Schedule
accurately sets forth the following information with respect to all
outstanding options and rights to acquire the Company's capital stock
(both before and after giving effect to the issuance of this Warrant):
the holder, the number of shares covered, the exercise price and the
expiration date. As of November 10, 1998, neither the Company nor any
of its Subsidiaries was subject to any obligation (contingent or
otherwise) to repurchase or otherwise acquire or retire any shares of
the Company's capital stock or any warrants, options or other rights to
acquire the Company's capital stock, except as set forth on the
November 10 Capitalization Schedule. As of November 10, 1998, all of
the outstanding shares of the Company's capital stock were validly
issued, fully paid and nonassessable.
(ii) As of the Closing Time and immediately thereafter, the
authorized capital stock of the Company shall consist of (a) 10,000,000
shares of Preferred Stock (none of which shall be issued and
outstanding) and (b) 90,000,000 shares of Common Stock, of which
6,126,899 shares shall be issued and outstanding, and 299,999 shares
shall be reserved for issuance upon exercise of the Warrant. As of the
Closing Time, neither the Company nor any of its Subsidiaries shall
have outstanding any stock or securities convertible or exchangeable
for any shares of the Company's capital stock or containing
-5-
<PAGE> 10
any profit participation features, nor shall it have outstanding any
rights or options to subscribe for or to purchase the Company's capital
stock or any stock or securities convertible into or exchangeable for
the Company's capital stock or any stock appreciation rights or phantom
stock plans, except for the Warrants and except as set forth on the
attached "Closing Time Capitalization Schedule." The Closing Time
Capitalization Schedule accurately sets forth the following information
with respect to all outstanding options and rights to acquire the
Company's capital stock: the holder, the number of shares covered, the
exercise price and the expiration date. As of the Closing Time, neither
the Company nor any of its Subsidiaries shall be subject to any
obligation (contingent or otherwise) to repurchase or otherwise acquire
or retire any shares of the Company's capital stock or any warrants,
options or other rights to acquire the Company's capital stock, except
as set forth on the Closing Time Capitalization Schedule. As of the
Closing Time, all of the outstanding shares of the Company's capital
stock shall be validly issued, fully paid and nonassessable.
(iii) There are no statutory or contractual stockholders
preemptive rights or rights of refusal with respect to the issuance of
the Warrants hereunder or the issuance of the Common Stock upon
exercise of the Warrants or any other issuance of Common Stock (or
options, warrants or rights to acquire any shares of Common Stock). The
Company has not violated any applicable federal or state securities
laws in connection with the offer, sale or issuance of its capital
stock, and the offer, sale and issuance of the Warrants hereunder do
not require registration under the Securities Act or any applicable
state securities laws. There are no agreements between the Company and
its stockholders with respect to the registration of shares of the
Company's stock under the Securities Act (other than any agreements
under which no further registrations of shares are required), except
for the Principals' Registration Rights Agreement. To the best of the
Company's knowledge, there are no agreements between the Company's
stockholders with respect to the voting or transfer of the Company's
capital stock or with respect to any other aspect of the Company's
affairs.
5C. Authorization; No Breach. The execution, delivery and performance
of this Agreement, the Registration Rights Agreement, the Warrant and all other
agreements and instruments contemplated hereby to which the Company is a party
have been duly authorized by the Company. This Agreement, the Registration
Rights Agreement, the Warrant and all other agreements and instruments
contemplated hereby to which the Company is a party each constitutes a valid and
binding obligation of the Company, enforceable in accordance with its terms. The
execution and delivery by the Company of this Agreement, the Registration Rights
Agreement, the Warrant and all other agreements and instruments contemplated
hereby to which the Company is a party, the offering, sale and issuance of the
Warrant hereunder, the issuance of the Common Stock upon exercise of the
Warrant(s) and the fulfillment of and compliance with the respective terms
hereof and thereof by the Company, do not and shall not (i) conflict with or
result in a breach of the terms, conditions or provisions of, (ii) constitute a
default under, (iii) result in the creation of any lien, security interest,
charge or encumbrance upon the Company's or any Subsidiary's capital stock or
assets pursuant to, (iv) give any third party the right to modify, terminate or
accelerate any obligation under, (v) result in a violation of, or (vi) require
any authorization, consent, approval, exemption or other action by or notice or
declaration to, or filing with, any court or administrative or governmental body
or agency
-6-
<PAGE> 11
pursuant to, the charter or bylaws of the Company or any of its Subsidiaries, or
any law, statute, rule or regulation to which the Company or any of its
Subsidiaries is subject, or any agreement, instrument, order, judgment or decree
to which the Company or any of its Subsidiaries is subject.
5D. Brokerage. There are no claims for brokerage commissions, finders'
fees or similar compensation in connection with the transactions contemplated by
this Agreement based on any arrangement or agreement binding upon the Company or
any of its Subsidiaries. The Company shall pay, and hold Investor harmless
against, any liability, loss or expense (including, without limitation,
reasonable attorneys' fees and out-of-pocket expenses) arising in connection
with any such claim.
5E. Governmental Consent, etc. No permit, consent, approval or
authorization of, or declaration to or filing with, any governmental authority
is required in connection with the execution, delivery and performance by the
Company of this Agreement or the other agreements contemplated hereby, or the
consummation by the Company of any other transactions contemplated hereby or
thereby, except as expressly contemplated herein or in the exhibits hereto.
5F. Closing Time. The representations and warranties of the Company
contained in this Section 5 and elsewhere in this Agreement and all information
contained in any exhibit, schedule or attachment hereto or in any certificate or
other writing delivered by, or on behalf of, the Company to Investor shall be
true and correct in all material respects on the date of the Closing Time as
though then made, except as affected by the transactions expressly contemplated
by this Agreement.
5G. Reports Filed with the Securities and Exchange Commission. The
Company has furnished Investor with complete and accurate copies of its annual
report on Form 10-K for its most recent fiscal year, all other reports or
documents required to be filed by the Company pursuant to Section 13(a) or 15(d)
of the Securities Exchange Act since the end of its most recent fiscal year and
its most recent annual report to its stockholders. Such reports and filings do
not contain any untrue statement of a material fact and do not omit to state any
material fact necessary in order to make the statements set forth therein, in
light of the circumstances under which they were made, not misleading. The
Company has advised Investor, however, that the SEC has requested that
amendments be made to the Company's 1997 Form 10-K and its 1998 third quarter
Form 10-Q and the Company filed draft amendments in this regard with the SEC on
March 5, 1999.
5H. Knowledge. As used in this Section 5, the terms "knowledge" or
"aware" shall mean and include the actual knowledge or awareness of the
Company's Chairman, President and Chief Executive Officer, John A. Burchett, its
Chief Financial Officer, Ralph F. Laughlin, and its Managing Directors Joyce S.
Mizerak, Irma N. Tavares and George J. Ostendorf.
Section 6. Definitions.
6A. Definitions. For the purposes of this Agreement, the following
terms have the meanings set forth below:
-7-
<PAGE> 12
"Affiliate" of any particular Person means any other Person
controlling, controlled by or under common control with such particular Person,
where "control" means the possession, directly or indirectly, of the power to
direct the management and policies of a Person whether through the ownership of
voting securities, contract or otherwise.
"Excluded Warrants" means the 5,917,878 outstanding warrants
issued in connection with the Company's September 1997 initial public offering,
each of which allows for the purchase of one share of Common Stock at a price of
$15.00 per share and expires in September 2000.
"Officer's Certificate" means a certificate signed by the
Company's president or its chief financial officer, stating that (i) the officer
signing such certificate has made or has caused to be made such investigations
as are necessary in order to permit him to verify the accuracy of the
information set forth in such certificate and (ii) to such officer's knowledge,
such certificate does not misstate any material fact and does not omit to state
any fact necessary to make the certificate not misleading.
"Person" means an individual, a partnership, a corporation, a
limited liability company, an association, a joint stock company, a trust, a
joint venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
"Principals" means John A. Burchett, Joyce S. Mizerak, Irma N.
Tavares and George J. Ostendorf.
"Restricted Securities" means (i) the Warrant issued hereunder
and any Warrants representing portions of the rights under the Warrant issued
hereunder, (ii) the Common Stock issued upon exercise of the Warrant(s) and
(iii) any securities issued with respect to the securities referred to in
clauses (i) or (ii) above by way of a stock dividend or stock split or in
connection with a combination of shares, recapitalization, merger, consolidation
or other reorganization. As to any particular Restricted Securities, such
securities shall cease to be Restricted Securities when they have (a) been
effectively registered under the Securities Act and disposed of in accordance
with the registration statement covering them, (b) been distributed to the
public through a broker, dealer or market maker pursuant to Rule 144 (or any
similar provision then in force) under the Securities Act or become eligible for
sale pursuant to Rule 144(k) (or any similar provision then in force) under the
Securities Act or (c) been otherwise transferred and new certificates for them
not bearing the Securities Act legend set forth in paragraph 7C have been
delivered by the Company in accordance with Section 4. Whenever any particular
securities cease to be Restricted Securities, the holder thereof shall be
entitled to receive from the Company, without expense, new securities of like
tenor not bearing a Securities Act legend of the character set forth in
paragraph 7C.
"Securities Act" means the Securities Act of 1933, as amended,
or any similar federal law then in force.
"Securities and Exchange Commission" includes any governmental
body or agency succeeding to the functions thereof.
-8-
<PAGE> 13
"Securities Exchange Act" means the Securities Exchange Act of
1934, as amended, or any similar federal law then in force.
"Subsidiary" means, with respect to any Person, any
corporation, limited liability company, partnership, association or other
business entity of which (i) if a corporation, a majority of the total voting
power of shares of stock entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees thereof
is at the time owned or controlled, directly or indirectly, by that Person or
one or more of the other Subsidiaries of that Person or a combination thereof,
or (ii) if a limited liability company, partnership, association or other
business entity, a majority of the partnership or other similar ownership
interest thereof is at the time owned or controlled, directly or indirectly, by
any Person or one or more Subsidiaries of that Person or a combination thereof.
For purposes hereof, a Person or Persons shall be deemed to have a majority
ownership interest in a limited liability company, partnership, association or
other business entity if such Person or Persons shall be allocated a majority of
limited liability company, partnership, association or other business entity
gains or losses or shall be or control any managing director or general partner
of such limited liability company, partnership, association or other business
entity.
"Underlying Common Stock" means (i) the Common Stock issued or
issuable upon exercise of any Warrant and (ii) any Common Stock issued or
issuable with respect to the securities referred to in clause (i) above by way
of stock dividend or stock split or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization. For purposes of
this Agreement, any Person who holds a Warrant shall be deemed to be the holder
of the Underlying Common Stock obtainable upon exercise of such Warrant in
connection with the transfer thereof or otherwise regardless of any restriction
or limitation on the exercise of such Warrant, such Underlying Common Stock
shall be deemed to be in existence, and such Person shall be entitled to
exercise the rights of a holder of Underlying Common Stock hereunder. As to any
particular shares of Underlying Common Stock, such shares shall cease to be
Underlying Common Stock when they have been (a) effectively registered under the
Securities Act and disposed of in accordance with the registration statement
covering them, (b) distributed to the public through a broker, dealer or market
maker pursuant to Rule 144 under the Securities Act (or any similar provision
then in force) or (c) repurchased by the Company or any of its Subsidiaries
thereof.
Section 7. Miscellaneous.
7A. Expenses. The Company shall pay, and hold each of
Investor, the Investor Entities and all other holders of Warrants and Underlying
Common Stock harmless against liability for the payment of, (i) the fees and
expenses of their counsel arising in connection with the negotiation and
execution of this Agreement, the Warrant and the agreements and instruments
contemplated hereby and the consummation of the transactions contemplated hereby
which shall be payable at the Closing Time or, if not then paid, upon demand,
subject to the $50,000 ceiling set forth in the Letter Agreement, (ii) the fees
and expenses incurred with respect to any amendments or waivers (whether or not
the same become effective) under or in respect of this Agreement, the Warrant(s)
and the agreements and instruments contemplated hereby, (iii) stamp and other
taxes which may be payable in respect of the execution and delivery of this
Agreement or the issuance, delivery or acquisition of any
-9-
<PAGE> 14
Warrant or any shares of Common Stock issuable exercise of the Warrant(s), (iv)
the fees and expenses incurred with respect to the enforcement of the rights
granted under this Agreement, the Warrants, the agreements or instruments
contemplated hereby and the Charter and (v) the fees and expenses incurred by
each such Person in any filing with any governmental agency with respect to its
investment in the Company or in any other filing with any governmental agency
with respect to the Company which mentions such Person.
7B. Remedies. Each holder of Underlying Common Stock shall have all
rights and remedies set forth in this Agreement, the Warrants and all rights and
remedies which such holders have been granted at any time under any other
agreement or contract and all of the rights which such holders have under any
law. Any Person having any rights under any provision of this Agreement shall be
entitled to enforce such rights specifically (without posting a bond or other
security), to recover damages by reason of any breach of any provision of this
Agreement and to exercise all other rights granted by law.
7C. Investment Representations. Investor hereby represents that it is
acquiring the Restricted Securities purchased hereunder or acquired pursuant
hereto for its own account with the present intention of holding such securities
for purposes of investment, and that it has no intention of selling such
securities in a public distribution in violation of the federal securities laws
or any applicable state securities laws; provided that nothing contained herein
shall prevent Investor and subsequent holders of Restricted Securities from
transferring such securities in compliance with the provisions of Section 4
hereof. Each certificate or instrument representing Restricted Securities shall
be imprinted with 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 transfer of the securities
represented by this certificate is subject to the
conditions specified in the Warrant Agreement, dated
as of April ___, 1999, and as amended and modified
from time to time, between the issuer (the "Company")
and the initial holder hereof, and the Company
reserves the right to refuse the transfer of such
securities until such conditions have been fulfilled
with respect to such transfer. A copy of such
conditions shall be furnished by the Company to the
holder hereof upon written request and without
charge."
7D. Consent to Amendments. Except as otherwise expressly provided
herein, the provisions of this Agreement may be amended and the Company may take
any action herein prohibited, or omit to perform any act herein required to be
performed by it, only if the Company has obtained the written consent of the
holders of a majority of the Underlying Common Stock. No other course of dealing
between the Company and the holder of any Warrant or Underlying Common Stock or
any delay in exercising any rights hereunder or under the Warrant(s) or the
Charter shall operate as a waiver of any rights of any such holders. For
purposes of this Agreement, Warrants or Underlying Common Stock held by the
Company or any Subsidiaries shall not be deemed to be outstanding. If the
Company pays any consideration to any holder of Underlying Common Stock for such
holder's consent to any amendment, modification or waiver
-10-
<PAGE> 15
hereunder, the Company shall also pay each other holder granting its consent
hereunder equivalent consideration computed on a pro rata basis.
7E. Survival of Representations and Warranties. All representations
and warranties contained herein or made in writing by any party in connection
herewith shall survive the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby, regardless of any
investigation made by Investor or on its behalf.
7F. Successors and Assigns. Except as otherwise expressly provided
herein, all covenants and agreements contained in this Agreement by or on behalf
of any of the parties hereto shall bind and inure to the benefit of the
respective successors and assigns of the parties hereto whether so expressed or
not. In addition, and whether or not any express assignment has been made, the
provisions of this Agreement which are for Investor's benefit as a holder of the
Warrant(s) or Underlying Common Stock are also for the benefit of, and
enforceable by, any subsequent holder of any such Warrant or Underlying Common
Stock.
7G. Severability. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of this Agreement.
7H. Counterparts. This Agreement may be executed simultaneously in two
or more counterparts, any one of which need not contain the signatures of more
than one party, but all such counterparts taken together shall constitute one
and the same Agreement.
7I. Descriptive Headings; Interpretation. The descriptive headings of
this Agreement are inserted for convenience only and do not constitute a
substantive part of this Agreement. The use of the word "including" in this
Agreement shall be by way of example rather than by limitation.
7J. Governing Law. The corporate law of the State of Maryland shall
govern all issues and questions concerning the relative rights and obligations
of the Company and its stockholders. All other issues and questions concerning
the construction, validity, enforcement and interpretation of this Agreement and
the exhibits and schedules hereto shall be governed by, and construed in
accordance with, the laws of the State of New York, without giving effect to any
choice of law or conflict of law rules or provisions (whether of the State of
New York or any other jurisdiction) that would cause the application of the laws
of any jurisdiction other than the State of New York.
7K. Notices. All notices, demands or other communications to be given
or delivered under or by reason of the provisions of this Agreement shall be in
writing, shall be delivered personally, sent by reputable overnight courier
service (charges prepaid) or sent by registered or certified mail, return
receipt requested, postage prepaid, and shall be deemed to have been given when
personally delivered, the first business day after being sent by reputable
overnight courier service or the fifth business day after being deposited in the
U.S. Mail (i) to the Company, at its principal executive offices and (ii) to
Investor at the address indicated below:
-11-
<PAGE> 16
Residential Funding Corporation
8400 Normandale Lake Boulevard
Bloomington, MN 55437
Attention: Kevin Miller
with copies to:
GMAC Mortgage Group, Inc.
c/o General Motors Corporation Legal Staff
3031 West Grand Boulevard
Detroit, MI 48202
Attention: General Counsel
and
Residential Funding Corporation
8400 Normandale Lake Boulevard
Bloomington, MN 55437
Attention: Office of the General Counsel
or to such other address or to the attention of such other person as the
recipient party (including any successors or assigns of the Company or Investor)
has specified by prior written notice to the sending party.
7L. No Strict Construction. The parties hereto have participated
jointly in the negotiation and drafting of this Agreement. In the event an
ambiguity or question of intent or interpretation arises, this Agreement shall
be construed as if drafted jointly by the parties hereto, and no presumption or
burden of proof shall arise favoring or disfavoring any party by virtue of the
authorship of any of the provisions of this Agreement.
7M. Indemnification. In consideration of Investor's execution and
delivery of this Agreement hereunder and in addition to all of the Company's
other obligations under this Agreement, the Company shall defend, protect,
indemnify and hold harmless each of Investor and each other holder of Warrants
and Underlying Common Stock, and all of their officers, directors, employees and
agents (including, without limitation, those retained in connection with the
transactions contemplated by this Agreement) (collectively, the "Indemnitees")
from and against any and all actions, causes of action, suits, claims, losses,
costs, penalties, fees, and liabilities and damages, and expenses in connection
therewith (irrespective of whether any such Indemnitee is a party to the action
for which indemnification hereunder is sought), including reasonable attorneys'
fees (including, but not limited to, allocated costs of internal counsel) and
disbursements (the "Indemnified Liabilities"), incurred by the Indemnitees or
any of them as a result of, or arising out of, or relating to, directly or
indirectly (including in connection with any other transaction or event), the
execution, delivery, performance or enforcement of this Agreement, the Letter
Agreement (to the extent a result of, arising out of, or relating to Section 9
thereof), the Warrant and any other instrument, document or agreement executed
pursuant hereto or in connection herewith, the acquisition or exercise of the
Warrant (or any portion thereof), the ownership of the Warrant or the Underlying
Common Stock. To the extent that the foregoing
-12-
<PAGE> 17
undertaking by the Company may be unenforceable for any reason, the Company
shall make the maximum contribution to the payment and satisfaction of each of
the Indemnified Liabilities which is permissible under applicable law.
* * * * * *
-13-
<PAGE> 18
IN WITNESS WHEREOF, the parties hereto have executed this
Warrant Agreement on the date first written above.
HANOVER CAPITAL MORTGAGE
HOLDINGS, INC.
By: _________________________________
Name: _________________________________
Its: _________________________________
RESIDENTIAL FUNDING CORPORATION
By: _________________________________
Name: _________________________________
Its: _________________________________
<PAGE> 19
LIST OF EXHIBITS
Exhibit A Form of Warrant
Exhibit B Registration Rights Agreement
Exhibit C Opinions of Counsel
<PAGE> 20
LIST OF DISCLOSURE SCHEDULES
November 10 Capitalization Schedule
Closing Time Capitalization Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE HANOVER
CAPITAL MORTGAGE HOLDINGS, INC'S QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD
FROM JANUARY 1, 1999 TO MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRELY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 21,994
<SECURITIES> 423,113
<RECEIVABLES> 5,309
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 461,647
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 461,647
<CURRENT-LIABILITIES> 197,197<F1>
<BONDS> 198,861
0
0
<COMMON> 65
<OTHER-SE> 65,524<F2>
<TOTAL-LIABILITY-AND-EQUITY> 461,647
<SALES> 0
<TOTAL-REVENUES> 8,414
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 825
<LOSS-PROVISION> 119
<INTEREST-EXPENSE> 6,363
<INCOME-PRETAX> 736
<INCOME-TAX> 0
<INCOME-CONTINUING> 736
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 736
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0.11
<FN>
<F1>As a Real Estate Investment Trust our balance sheet is not classified.
<F2>Includes Retained Earnings and Paid in Capital.
</FN>
</TABLE>
