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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10 -K
/X/ Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the year ended December 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 2210, NEW YORK, NY 10006
(Address of principal executive offices) (Zip Code)
(212) 732-5086
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.01 Par Value per Share - American Stock Exchange
Warrants - American Stock Exchange
Units - American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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
---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
The aggregate market value of common stock held by nonaffiliates of the
registrant as of March 17, 2000 was approximately $20,394,000 (based on closing
sales price of $3.50 per share of common stock as reported for the American
Stock Exchange) on March 17, 2000.
The registrant had 5,826,899 shares of common stock outstanding as of
March 17, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to shareholders in
connection with the Annual Meeting of Shareholders to be held May 18, 2000 are
incorporated by reference into Part III.
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HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
FORM 10-K ANNUAL REPORT
FOR THE YEAR ENDED DECEMBER 31, 1999
INDEX
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PART I PAGE
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<S> <C>
Item 1. Business.................................................................................. 2
Item 2. Properties................................................................................ 27
Item 3. Legal Proceedings......................................................................... 27
Item 4. Submission of Matters to a Vote of Security Holders....................................... 27
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..................... 28
Item 6. Selected Financial Data................................................................... 30
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..... 31
Item 7a. Quantitative and Qualitative Disclosure About Market Risk................................. 51
Item 8. Financial Statements and Supplementary Data............................................... 54
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures..... 54
PART III
Item 10. Directors and Executive Officers of the Registrant........................................ 55
Item 11. Executive Compensation.................................................................... 55
Item 12. Security Ownership of Certain Beneficial Owners and Management............................ 55
Item 13. Certain Relationships and Related Transactions............................................ 55
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................... 56
Signatures ......................................................................................... 57
</TABLE>
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PART I
ITEM 1: BUSINESS
GENERAL
Hanover Capital Mortgage Holdings, Inc. ("Hanover") is a real estate investment
trust (also referred to as a "REIT") which is focused on the single-family
mortgage market. Hanover invests in single-family mortgage loan pools and
subordinate mortgage-backed securities and provides consulting and due diligence
services through its unconsolidated subsidiary, Hanover Capital Partners Ltd.
("HCP"). Additionally, Hanover is developing an internet-based mortgage whole
loan trading exchange through its unconsolidated subsidiary, HanoverTrade.com,
Inc. ("HTC"). Hanover is a Maryland corporation formed on June 10, 1997. Hanover
owns a 97% ownership interest (representing a 100% ownership of non-voting
preferred stock) in each of HCP and HTC.
The principal business strategy of Hanover and its wholly-owned subsidiaries
(together referred to as the "Company") 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 subordinated interests therein and
(iii) acquire subordinated mortgage backed securities ("MBS") similar in nature
to the retained interests generated from internal securitizations. The Company
acquires single-family mortgage loans through a network of sales representatives
targeting financial institutions throughout the United States.
The principal business strategy of the Company's primary unconsolidated
subsidiary, HCP, is to generate consulting and other fee income by (i)
performing loan file due diligence reviews for third parties, (ii) performing
loan sale advisory services, (iii) brokering and trading portfolios of loans,
and (iv) providing mortgage loan assignment services for third parties. Until
June 30, 1999, HCP was also engaged in the business of originating multifamily
and commercial loans. This business was discontinued in the quarter ended June
30, 1999 and substantially all charges associated with its discontinuance were
recognized in the quarter.
The principal business strategy of HanoverTrade.com, Inc. ("HTC") is to leverage
HCP's market position as a broker of whole-loan mortgage portfolios to develop a
real-time, internet-based trading exchange through which major participants in
the secondary mortgage market will be able to trade bulk pools of mortgage loans
among themselves.
The Company's third unconsolidated subsidiary, Hanover Capital Partners 2, Inc.
("HCP-2") was formed in October 1998 in connection with a securitization
transaction. The Company wrote off its investment in HCP-2 in September, 1999
and does not expect any material future revenue or expenses associated with
HCP-2.
The Company's principal business objective is to generate net interest income on
its portfolio of mortgage loans and mortgage securities, and to generate fee
income through HCP and HTC.
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The Company's principal executive offices are located at 90 West Street, Suite
2210, New York, New York 10006.
INVESTMENT PORTFOLIO
General
The primary business of the Company is investing, generally on a long-term
basis, in first lien single-family mortgage loans and mortgage-backed securities
secured by or representing an interest in mortgage loans. While the Company has
not done so to date, it may in the future also invest in multifamily mortgage
loans and commercial mortgage loans (single-family mortgage loans, mortgage
securities, multifamily mortgage loans and commercial mortgage loans
collectively referred to as the "Investment Portfolio"). The percentage of the
Company's mortgage-related assets which is invested in various sectors of the
Investment Portfolio may vary significantly from time to time depending upon the
availability of mortgage loans and mortgage securities.
The Company believes that its sales and due diligence organization and its
mortgage industry expertise gives it certain advantages over other mortgage
market participants. The Company uses its sales force to source mortgage loan
pools, and uses its due diligence organization to analyze the credit risk
characteristics of those pools. In addition, the Company acquires subordinate
mortgage backed securities that bear the credit risk of specific mortgage loan
pools. The Company uses its due diligence organization and industry expertise to
analyze the credit risk characteristics of these mortgage loan pools in order to
price these securities efficiently.
Trends and Recent Developments
Purchase of Subordinate MBS. As a result of the continued evolution of the
mortgage loan and MBS markets in which the Company operates, market conditions
in 1999 dictated a shift in the Company's strategy of acquiring mortgage loans
and mortgage-backed securities, as compared to 1997 and 1998. Whereas the
Company had previously focused primarily on acquiring seasoned mortgage loans,
in 1999 the Company focused primarily on acquiring subordinate MBS with
characteristics similar to the subordinate MBS that the Company created in its
first four securitizations.
Prior to 1999, the Company had primarily invested its funds in mortgage whole
loans, which were subsequently securitized. When the mortgage whole loans were
securitized, the Company retained a subordinate interest in the loans. These
subordinate interests are referred to as subordinate MBS. Other issuers also
create subordinate MBS, and these subordinate MBS trade in organized markets.
Historically, the Company invested only in subordinate MBS that were created by
the Company.
The market for subordinate MBS changed dramatically at the end of 1998 and in
early 1999, resulting in a substantial buying opportunity for the Company. As a
result of the market disruption, the Company found that it could purchase
subordinate MBS created by third party securitizers at very attractive yields.
In some cases these yields were higher than the yields the Company could obtain
by its previous practice of purchasing whole loans, securitizing them and
retaining the resulting subordinate MBS. Additionally, the Company's costs to
acquire
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subordinate MBS created by other issuers is substantially lower than the cost of
creating its own subordinate MBS.
As a result of these changes in the market, the Company attempted to take
advantage of the new market dynamic by curtailing its purchase of mortgage whole
loans and purchasing existing subordinate MBS instead. In 1999, the Company
purchased 12 subordinate MBS with an aggregate principal balance of $6,155,000,
at a net purchase price of $3,668,000. In addition, the Company's affiliate,
HCP, purchased 17 subordinate MBS with an aggregate principal balance of
$33,518,000, at a net purchase price of $14,123,000. The Company receives 97% of
the income attributable to the subordinate MBS purchased by its affiliate.
Third Quarter Charges. The Company also recognized $14,061,000 of charges and
expenses in the third quarter of 1999, the majority of which was the result of a
securitization transaction that the Company executed during substantial market
turmoil in October 1998. These charges are detailed in Note 17 to the financial
statements. The Company believes that these charges primarily resulted from the
unusual market conditions of October 1998.
Portfolio Composition
At December 31, 1999, the Company had invested $270,084,000 or 73.9% of the
Company's total assets in single-family mortgage loans classified as held for
sale, held to maturity and collateral for collateralized mortgage obligations
("CMOs"), and $62,686,000 or 17.2% of its total assets in single-family
mortgage-backed securities classified as available for sale, held to maturity or
held for trading. The composition of the investment portfolio is described in
detail in Notes 3 and 4 to the Company's audited financial statements. The
revenues, operating profit and loss from the Company's investing activity is
reflected on the Company's consolidated statement of operations.
In 1999, the Company experienced $58,000 of mortgage loan losses on its mortgage
loan portfolio (held for sale, held to maturity and collateral for CMOs), and
the Company did not experience any mortgage loan credit losses on its
mortgage-backed securities portfolio (available for sale, held to maturity and
trading). The Company experienced no mortgage loan losses during 1998.
Notwithstanding the low level of losses actually incurred, the Company recorded
a provision of $446,000 and $356,000 in 1999 and 1998.
In December 1997, the Company purchased 15 government agency adjustable rate
mortgage ("Agency ARM") securities from various "Wall Street" dealers and in
March of 1998 purchased a fixed rate FNMA certificate from another dealer firm.
The ARM securities were purchased at a price of 103.72% of par value or
$349,186,000 and the FNMA fixed rate mortgage security was purchased at a price
of 105.125% of par or $4,333,000. In October 1998, due to (1) market
dislocation, (2) desire to increase liquidity and decrease leverage and (3)
rapid prepayments experienced on the Agency ARM securities, the Company sold all
of its Agency ARM securities at a loss of $5,989,000. As of December 31, 1999,
the Company has not invested in any agency ARM securities.
The mortgage loans, created mortgage securities and, to a lesser extent, the
purchased mortgage securities held in the Investment Portfolio generally will be
held on a long-term basis, so that the returns will be earned over the lives of
the mortgage loans and mortgage securities rather than from sales of the
investments.
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Securitization Activity
In March 1999, the Company completed its third securitization transaction, the
"1999-A" securitization, and thereby transferred $138,357,000 (par value) of
mortgage loans to CMO collateral. In August 1999, the Company completed its
fourth securitization transaction, the "1999-B" securitization, and thereby
transferred $111,575,000 (par value) of mortgage loans to CMO collateral.
In April 1998, the Company completed its first securitization, the "1998-A"
securitization, and thereby transferred $103 million (par value) of mortgage
loans to CMO collateral. In August 1998, the Company converted approximately $17
million (par value) of adjustable rate mortgage loans into FNMA mortgage
securities, and in October and December the Company converted $56 million and
$55 million (par value) of fixed rate mortgage loans into FNMA mortgage
securities. In October 1998, the Company completed a $318 million (par value)
securitization accomplished as a real estate mortgage investment conduit
("REMIC") structure through a taxable subsidiary of the Company, HCP-2.
Simultaneously, the Company acquired from HCP-2 in exchange for all of the
preferred stock of HCP-2, through two newly created REIT qualified subsidiaries,
all of the investment grade securities, (except for the "AAA" rated securities),
the unrated securities, the interest-only securities and the principal only
securities from the security transaction.
The table below summarizes the Company's securitization transactions (dollars in
thousands):
SECURITIZATION TRANSACTIONS
<TABLE>
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Mortgage Principal Mortgage
Month Balance on Transaction Security
Completed Transaction Date Type Created
<S> <C> <C> <C>
April 1998 $102,977 CMO structured as a REMIC Private Placement
August 1998 17,404 Swap FNMA
October 1998 317,764 REMIC Private Placement
October 1998 55,650 Swap FNMA
December 1998 55,208 Swap FNMA
March 1999 138,357 CMO Private Placement
August 1999 111,575 CMO Private Placement
</TABLE>
Subordinate Mortgage Backed Securities Purchases
In analyzing subordinate MBS for purchase, the Company focuses primarily on
subordinated interests ("tranches") in pools of whole single-family mortgage
loans that do not fit into the large government-sponsored (FHA, FHLMC or GNMA)
conduits, typically because the principal balance of the mortgages exceeds the
maximum amount permissible in a government-agency guaranteed MBS. The Company
generally purchases subordinate MBS collateralized by "A" quality mortgages
originated by several of the largest non-government mortgage conduits in the
market. All of the Company's acquisitions of subordinate MBS to date have been
fixed rate.
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The subordinate tranches that the Company purchases are generally structured so
that they will absorb the credit losses resulting from a specified pool of
mortgages. Since these tranches could potentially absorb credit losses, the
tranches of securities the Company purchases are generally either not rated or
are rated below investment grade (generally "BB" or "B"). These tranches are
generally purchased at a substantial discount to their principal balance. This
discount provides a cushion against potential future losses, and, to the extent
that losses on the mortgage loans are less than the discount, the discount
provides a yield enhancement.
The Company primarily purchases subordinate MBS from "Wall Street" dealer firms,
although the Company also is attempting to develop direct relationships with the
larger issuers of subordinate MBS. For the foreseeable future, the Company
believes that there will be an adequate supply of subordinate MBS available in
the market.
At December 31, 1999, the Company (together with its affiliate, HCP) had
purchased since inception in excess of $39,673,000 (principal balance) of
subordinate MBS from third parties, representing subordinate interests in
approximately $6,887,000,000 (principal balance) of single-family mortgage loan
pools. The aggregate purchase price of these MBS was $17,781,000.
One of the Company's unconsolidated subsidiaries, HCP, has a due diligence and
consulting staff, located in Edison, New Jersey, consisting of approximately
thirty-four full-time employees and access to a part-time pool of employees in
excess of 600. The due diligence staff contributes to the subordinate MBS
acquisition process by providing expertise in the analysis of many
characteristics of the underlying single-family mortgage loans.
Because there are a number of regular issuers of subordinate MBS, the Company is
not dependent upon any one source. Note 5 to the financial statements describes
the concentration of the Company's portfolio by issuer. Management believes that
the loss of any single financial institution from which the Company purchases
subordinate MBS would not have any detrimental effect on the Company.
Prior to making an offer to purchase a subordinate MBS, HCP employees conduct an
extensive investigation and evaluation of the loans collateralizing the
security. This examination typically consists of analyzing the information made
available by the seller (generally, an outline of the portfolio with the credit
and collateral files for each loan in the pool), reviewing other relevant
material that may be available, analyzing the underlying collateral (including
reviewing the Company's single-family mortgage loan database which contains,
among other things, listings of property values and loan loss experience in
local markets for similar assets), and in certain instances obtaining opinions
of value from third parties. The Company's senior management determines the
amount to be offered for the security using a proprietary stratification and
pricing system which focuses on, among other things, rate, term, location,
credit scores and types of the loans. The Company also reviews information on
the local economy and real estate markets (including the amount of time and
procedures legally required to foreclose on real property) where the loan
collateral is located.
By examining the mortgage pool loan data, a prepayment speed is selected based
primarily upon the gross coupons and seasoning of the subject pool. The Company
also determines a "base case" default scenario and several alternative scenarios
based on the Public Securities Association's standard default assumption
("SDA"). The default scenarios reflect the
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Company's estimate of the most likely range of potential losses on the
underlying mortgage loans, taking into consideration the credit analysis
described above.
After determination of a prepayment speed and a base case SDA assumption, the
pools' cash flow stream is modeled. The proposed purchase price is calculated as
the present value of the base case cash flow stream, discounted by the current
market rate for securities with similar product type and credit characteristics.
The Company then examines the yield of the security under various alternative
SDA and prepayment assumptions, and if necessary, adjusts the proposed purchase
price so that it will receive an acceptable yield under a variety of possible
scenarios.
Single Family Mortgage Operations
Single-Family Mortgage Loans. In 1999, the Company did not purchase any mortgage
whole loans. However, the Company continues to monitor the relative value
available in the mortgage whole loan market vis-a-vis the subordinate MBS
market. To the extent that the Company is able to purchase and securitize
mortgage whole loans at attractive prices, the Company would attempt to do so,
creating attractive yields on the resulting subordinate MBS.
In analyzing potential whole loan pools for purchase, the Company focuses on
pools of whole single-family mortgage loans that do not fit into the large
government-sponsored (FHA, FHLMC or GNMA) or private conduit programs.
Single-family mortgage loans generally are acquired in pools from a wide variety
of sources, including private sellers such as banks, thrifts, finance companies,
mortgage companies and governmental agencies. The majority (77%) of the
Company's acquisitions of single-family mortgage loan pools to date have been
fixed rate loans, with the balance made up of adjustable rate mortgage ("ARM")
loans.
The Company uses five sales representatives from HCP, located in Illinois,
Minnesota, Massachusetts and New York, to source single-family mortgage loan
products. For the foreseeable future, the Company believes that there will be an
adequate supply of mortgage loan product that can be sourced by the existing HCP
sales force.
At December 31, 1999, the Company had purchased since inception in excess of $1
billion of single-family mortgage loan pools. Also, at December 31, 1999 the
Company did not have any commitments outstanding to purchase single-family
mortgage pools.
Because mortgage loan pools can be purchased from virtually any bank, insurance
company or financial institution, the Company is not dependent upon any one
source. During 1999, the Company did not purchase any mortgage loan pools.
During 1998, the Company purchased approximately 22% of the Company's
single-family mortgage loan portfolio from one source (Residential Funding
Corporation). Management believes that the loss of any single financial
institution from which the Company purchases mortgage loans would not have any
detrimental effect on the Company. The Company does not service its
single-family mortgage loans. The servicing is outsourced to unrelated third
parties specializing in single-family loan servicing.
Single-family mortgage loan pools are usually acquired through competitive bids
or negotiated transactions. The competition for larger single-family mortgage
loan portfolios is generally more intense, while there is less competition for
smaller single-family mortgage loan portfolios. Management believes that the
Company's funding flexibility, personnel, proprietary due
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diligence software and single-family mortgage loan trading relationships provide
it with certain advantages over competitors in pricing and purchasing certain
single-family mortgage loan portfolios.
The Company purchases mortgages in bulk, after its bid has been accepted,
subject to the Company's due diligence work. Prior to making an offer to
purchase a single-family mortgage loan portfolio, HCP employees conduct an
extensive investigation and evaluation of the loans in the portfolio. This
examination typically consists of analyzing the information made available by
the portfolio seller (generally, an outline of the portfolio with the credit and
collateral files for each loan in the pool), reviewing other relevant material
that may be available, analyzing the underlying collateral (including reviewing
the Company's single-family mortgage loan database which contains, among other
things, listings of property values and loan loss experience in local markets
for similar assets), and obtaining opinions of value from third parties (and, in
some cases, conducting site inspections). The Company's senior management
determines the amount to be offered for the portfolio using a proprietary
stratification and pricing system which focuses on, among other things, rate,
term, location, credit scores and types of the loans. The proprietary
stratification and pricing system identifies pool characteristics and segments
loans by product type (i.e., fixed or adjustable rate, interest rate change
frequency, ARM index, etc.). The segments are then further divided by credit
quality using a logic program, which uses credit bureau scores and other
criteria to grade loans within numerous categories. These categories include
subdivisions such as loans eligible for sale/securitization to Fannie Mae or
Freddie Mac (the "Agencies"), and further subdivisions of loans that only meet
some Agency requirements, loans without mortgage insurance, loans with certain
LTV and delinquency characteristics, etc.
Upon completion of the product segmentation and loan grading phase, the
resulting pools are individually priced and totaled to determine an overall
portfolio value. The effective pricing would require information on gross
weighted average coupon, servicing fee, original term, weighted average
maturity, remittance data, settlement data and ARM data (i.e., index, margin,
rate and payment reset frequency, etc.).
By examining the mortgage pool loan data, a prepayment speed is selected based
primarily upon the gross coupons and seasoning of the subject pool. After
determination of a prepayment speed, the pool's cash flow stream is modeled. The
present value of the cash flow stream is determined by discounting the cash flow
by the current market rate for loans with similar product type and credit
characteristics.
The Company also reviews information on the local economy and real estate
markets (including the amount of time and procedures legally required to
foreclose on real property) where the loan collateral is located.
HCP's due diligence staff contributes to the single-family mortgage loan
acquisition process by providing expertise in the analysis of many
characteristics of the single-family mortgage loans. It has been Management's
experience that buyers generally discount the price of a single-family mortgage
loan if there is a lack of information. By accumulating additional information
on loan pools through its due diligence operations, the Company believes it is
better able to assess the value of loan pools.
In conducting due diligence operations, HCP often discovers non-conforming
elements of single-family mortgage loans, such as: (i) problems with documents,
including missing or lost
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documentation, errors on documents, nonstandard forms of documents and
inconsistent dates between documents, (ii) problems with the real estate,
including inadequate initial appraisals, deterioration in property values or
economic decline in the general geographic area, and (iii) miscellaneous
problems, including poor servicing, poor credit history of the borrower, poor
payment history by the borrower and current delinquency status. The price paid
for such loans is adjusted to compensate for these non-conforming elements.
The Company maintains a process to improve the value of its single-family
mortgage loan portfolio, including updating data, obtaining lost note affidavits
in the event that a note has been misplaced, updating property values with new
appraisals, assembling historical records, obtaining mortgage insurance if the
value of a loan is in question, grouping similar loans in packages for
securitization, and segmenting portfolios for different buyers. However,
Management believes, in most cases, any value created will be extracted by
financing or securitizing the single-family mortgage loans and then realizing
the enhanced spread on the retained pool, as opposed to recognizing a gain on
sale of the single-family mortgage loan portfolio.
Single-Family Market Trends. The Company focuses on purchasing its mortgage
loans, which are generally available in bulk, from loan originators such as
mortgage bankers, banks and thrifts that originate primarily for sale and from
mortgage portfolio holders as they restructure their holdings.
Single-Family Acquisition Strategy. The Company believes that it can continue to
acquire single-family mortgage loans that have a relatively high yield when
compared to the applicable risk of loss. In many cases, portions of a pool may
be made eligible for inclusion in Agency pools, which will raise the credit
level of the Investment Portfolio, while preserving the higher yield obtained at
the time of purchase. In addition, the Company may securitize a single-family
mortgage loan pool. In structuring a securitization, the Company generally
retains subordinated or other interests (including, for example, interest only
tranches and principal only tranches). The investment grade tranches typically
are not retained.
Single-Family Underwriting Guidelines. The Company has developed an underwriting
approval policy to maintain uniform control over the quality of the
single-family mortgage loans it purchases. This policy sets forth a three step
review process: (i) collateral valuation, (ii) credit review, and (iii) property
valuation. Prior to final purchase of a portfolio, a senior manager of the
Company reviews the results of all three underwriting evaluations. The
collateral valuation entails a check on the collateral documents (i.e., the
note, mortgage, title policy and assignment chain). The documents are examined
for conformity among the documents and adherence to secondary market standards.
The credit review involves an analysis of the credit of the borrower, including
an examination of the origination and credit documents, credit report and
payment history. For more seasoned single-family mortgage loans, the analysis
may be more directed at payment histories and credit scores. The property
valuation involves an analysis of the loan-to-value of the collateral, including
an examination of the original appraisal in the context of the current regional
property market conditions and often a drive-by valuation of the subject
property and review of recent comparable sales.
Single-Family Servicing. Pools of single-family mortgage loans are purchased
with servicing retained or released by the seller. In the case of pools
purchased with servicing retained by the seller, the Company considers the
reputation and the servicing capabilities of the servicer. In
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some instances, the Company requires a master servicer to provide the assurance
of quality required. A master servicer provides oversight of its subservicers
and stands ready, and is contractually obligated, to take over the servicing if
there is a problem with the subservicer. In the case of pools purchased with
servicing released, the Company places the servicing with a qualified servicer.
In some cases, the Company may retain the servicing and contract with a
qualified servicer to provide subservicing. In this case, the Company keeps the
risk of ownership of the servicing with respect to any change in value as a
result of prepayment of the underlying single-family mortgage loans or other
factors. If the Company contracts out to a servicer the servicing of a mortgage
loan pool, the servicer's responsibilities would include collection of the
borrower's remittances, proper application of the borrower's remittances to
principal, interest and escrow, remitting collections to the master servicer and
remitting advances to the master servicer on delinquent loans (for principal and
interest only). The master servicer would then remit funds and loan level
documentation to the Company, or if the loan is securitized - to the trustee.
The trustee would then distribute the funds to the certificate holders. Neither
the Company nor any of its affiliates are involved in any single-family
servicing operations.
Commercial Mortgage Loans and Multifamily Mortgage Loans
The Company discontinued its commercial and multifamily mortgage origination
business in the second quarter of 1999. HCP's wholly-owned subsidiary, Hanover
Capital Mortgage Corporation ("HCMC"), has retained the relevant licenses
necessary to originate these mortgages, and may at some point decide to re-enter
this market. HCMC was one of the first commercial mortgage banking operations to
originate multifamily mortgage loans for sale to conduits, which are financial
firms (generally "Wall Street" firms) that purchase loans on real estate with
the specific intention to convert the underlying mortgages to securities in the
form of bonds.
Commercial and Multifamily Mortgage Loan Servicing. The Company continues to
service a very limited number of multifamily and commercial mortgages. HCMC, as
servicer, will have the risks associated with operating a mortgage servicing
business as well as the risk of ownership of the servicing.
HCMC serviced approximately $13 million and $46 million of multifamily mortgage
loans at December 31, 1999 and December 31, 1998. The servicing of mortgage
loans involves processing and administering the mortgage loan payments for a
fee. It involves collecting mortgage payments on behalf of investors, reporting
information to investors and maintaining escrow accounts for the payment of
principal and interest to investors and property taxes and insurance premiums on
behalf of borrowers.
The primary risk of operating a servicing business is failing to service the
loans in accordance with the servicing contracts, which exposes the servicer to
liability for possible losses suffered by the owner of the loans. The
operational requirements include proper handling and accounting for all payment
and escrow amounts, proper borrower and periodic credit reviews, proper value
and property reviews and proper payment of all monies due to third parties, such
as real estate taxing authorities and insurance companies.
The primary risks of ownership of servicing rights include the loss of value
through faster than anticipated loan prepayments (even though there may be
prepayment penalties) or improper servicing as outlined above.
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Commercial Market Trends. The market for commercial and multifamily mortgage
loans has undergone dramatic changes in recent years with the advent of
securitizations. Financing of income-producing property has evolved from a
traditional two-party lending relationship, with the borrower obtaining funding
from a traditional lending institution, to a market in which lenders with
expertise in the creation of mortgage-backed securities offer borrowers an
alternative source of competitive financing. Securitization involves multiple
parties, each with specialized roles and responsibilities creating profitable
lending opportunities for those with experience in commercial mortgage finance
and the capital markets. Securitizations of commercial and multifamily mortgage
loans have grown rapidly during the 1990's.
INVESTMENT PORTFOLIO ACQUISITIONS
The Company's core business strategy is to acquire or create subordinate
mortgage backed securities collateralized primarily by single-family mortgage
loans. The Company either acquires the mortgage backed securities outright, or
it acquires mortgage loans, securitizes the mortgage loans and retain the
subordinate mortgage backed securities created thereby. The process for
identifying possible mortgage backed securities or mortgage loan pools in the
secondary market for acquisition, bidding, due diligence and closing is time
consuming. Once a bid is accepted, the process to conclude a successful purchase
generally takes 30-60 days depending upon the complexity of each purchase.
During the accumulation period (ramp up period subsequent to Hanover's initial
public offering (IPO) in September 1997 to full investment of the proceeds of
the IPO) the Company could not invest exclusively in mortgage loans and
subordinate mortgage backed securities and instead chose to invest a portion of
its leveraged capital in Agency ARM securities. At December 31, 1997 the Company
had invested $348,131,000 or 67.3% of the Company's total assets in Agency ARM
securities, and $160,970,000 or 31.1% of the Company's total assets in mortgage
loans.
In October 1998, the Company sold off all of its Agency ARM securities at a loss
of $5,989,000. The sale of these mortgage securities was part of an action plan
taken by Management to reduce leverage and increase liquidity in response to the
severe unanticipated dislocation in the financial markets at that time. These
ARM mortgage securities, never the core business of the Company, suffered from
historically high prepayments, causing accelerated premium amortization and
depressed market pricing.
HANOVER CAPITAL PARTNERS LTD.
The Company conducts due diligence and consulting operations through HCP for
commercial banks, government agencies, mortgage banks, credit unions and
insurance companies. The operations consist of the underwriting of credit,
analysis of loan documentation and collateral, and analysis of the accuracy of
the accounting for mortgage loans serviced by third party servicers. The due
diligence analyses are performed on a loan by loan basis. Audits of the accuracy
of the interest charged on adjustable rate mortgage loans are frequently a part
of the due diligence services provided to customers. Consulting services include
loan sale advisory work and brokering of mortgage loans for third parties. HCP
also performs due diligence on mortgage loans acquired by the Company.
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HCP owns a licensed mortgage banker, HCMC, and a licensed broker-dealer, Hanover
Capital Securities, Inc. ("HCS"). Although HCP maintains these companies'
licenses in good standing, neither of these companies currently conduct any
material ongoing business. As noted above, HCMC originated multifamily mortgage
loans until June 1999, when this activity was discontinued, and continues to
service a small number of multifamily loans.
In January 2000, HCP hired all of the former management of Document Management
Network, Inc. ("DMN"), and is continuing DMN's business as the Document
Management Network division of HCP. DMN provides mortgage assignment services
for many of the same customers serviced by HCP. Whenever an institution
purchases a mortgage loan in the secondary market, the purchaser is required to
submit paperwork (called an "assignment of mortgage") to the local county or
city jurisdiction in which the mortgaged property is located in order to record
the new institution's interest in the mortgaged property. DMN employees prepare
and process this paperwork for third party institutions.
FINANCING
General
The Company's purchases of mortgage related assets are initially financed
primarily with equity and short-term borrowings through reverse repurchase
agreements until long-term financing is arranged or the assets are securitized.
Generally, upon repayment of each borrowing in the form of a reverse repurchase
agreement, the mortgage asset used to collateralize the financing will
immediately be pledged to secure a new reverse repurchase agreement or some form
of long term financing. The Company had established committed and uncommitted
mortgage asset financing agreements from various financial institutions at
December 31, 1999.
Reverse Repurchase Agreements
A reverse repurchase agreement ("repo"), although structured as a sale and
repurchase obligation, is a financing transaction in which the Company pledges
its mortgage assets as collateral to secure a short-term loan. Generally, the
other party to the agreement will loan an amount equal to a percentage of the
market value of the pledged collateral, typically 80% to 97%. At the maturity of
the reverse repurchase agreement, the Company is required to repay the loan and
correspondingly receives back its collateral. Under reverse repurchase
agreements, the Company generally retains the incidents of beneficial ownership,
including the right to distributions on the collateral and the right to vote on
matters as to which certificate holders vote. If the Company defaults in a
payment obligation under such agreements, the lending party may liquidate the
collateral.
In the event of the insolvency or bankruptcy of the Company, certain reverse
repurchase agreements may qualify for special treatment under the United States
Bankruptcy Code, which permits the creditor to avoid the automatic stay
provisions of the Bankruptcy Code and to foreclose on the collateral without
delay. In the event of the insolvency or bankruptcy of a lender during the term
of a reverse repurchase agreement, the lender may be permitted, under the
Bankruptcy Code, to repudiate the contract, and the Company's claim against the
lender for damages therefrom may be treated simply as that of an unsecured
creditor. In addition, if the lender is a broker or dealer subject to the
Securities Investor Protection Act of 1970 or an insured depository institution
subject to the Federal Deposit Insurance Act, the Company's ability to
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exercise its rights to recover its mortgage assets under a reverse repurchase
agreement or to be compensated for damages resulting from the lender's
insolvency may be limited by those laws. The effect of these various statutes
is, among other things, that a bankrupt lender, or its conservator or receiver,
may be permitted to repudiate or disaffirm its reverse repurchase agreements,
and the Company's claims against the bankrupt lender may be treated as an
unsecured claim. Should this occur, the Company's claims would be subject to
significant delay and, if and when paid, could be in an amount substantially
less than the damages actually suffered by the Company.
To reduce its exposure to the credit risk of reverse repurchase agreements, the
Company enters into arrangements with several different parties. The Company
monitors its exposure to the financial condition of its reverse repurchase
agreement lenders on a regular basis, including the percentage of its mortgage
loans that are the subject of reverse repurchase agreements with a single
lender. Notwithstanding these measures, no assurance can be given that the
Company will be able to avoid such third party risks.
The reverse repurchase borrowings bear short-term fixed (one year or less)
interest rates varying from LIBOR to LIBOR plus 238 basis points depending on
the credit of the related mortgage assets. Generally, the borrowing agreements
require the Company to deposit additional collateral in the event the market
value of existing collateral declines, which, in dramatically rising
interest-rate markets, could require the Company to sell assets to reduce the
borrowings.
There exists a risk during the initial holding of the mortgage loan assets, when
the mortgage loan assets are financed with repo agreements, that adverse
developments in the mortgage market could cause the repo lenders to reduce the
mark to market on the mortgage loans collateralizing the repo agreements. A
reduction in the repo lender's market value calculations could result in margin
calls that could be in excess of the Company's liquid assets. In this situation,
the Company might be forced to sell other portfolio assets to meet the repo
lender's margin call. There also exists a risk during the initial holding period
of the mortgage loan assets that there might be no demand or very limited demand
for the creation of new mortgage securitizations. If this situation were to
exist for an extended time period, the Company might be forced to maintain repo
financing on its mortgage assets for a longer than intended period, which might
cause repo financing availability to become more scarce and might cause repo
financing terms to become more onerous for the Company.
SECURITIZATION AND SALE PROCESS
General
When the Company acquires a sufficient volume of mortgage loans with similar
characteristics, generally $50 million to $100 million or more, the Company
normally securitizes the mortgage loans through the issuance of mortgage-backed
securities. Such securitization generally will be in the form of collateralized
mortgage obligations but may also be in the form of REMICs. Alternatively, to a
lesser extent and to the extent consistent with the Company's qualification as a
REIT, the Company may resell loans in bulk whole loan sales. The length of time
from when the Company commits to purchase a mortgage loan to when it sells or
securitizes the loan will generally range from 30 days to one year or more,
depending on certain factors, including the length of the purchase commitment
period, the amount and type of the mortgage loan, and the
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securitization process. Any decision by the Company to issue CMOs or REMICs or
to sell mortgage loans in bulk will be influenced by a variety of factors.
For accounting and tax purposes, mortgage loans financed through the issuance of
CMOs are treated as assets of the Company, and the CMOs are treated as debt of
the Company. The Company earns the net interest spread between the interest
income on the mortgage loans and the interest and other expenses associated with
the CMO financing. The net interest spread will be directly affected by
prepayments of the underlying mortgage loans and, to the extent the CMOs have
variable interest, may be affected by changes in short-term interest rates.
The Company may from time to time issue REMICs. REMIC transactions are generally
accounted for as sales of the mortgage loans for tax purposes and can be
accounted for as sales or financing for accounting purposes depending upon
various criteria. REMIC securities consist of one or more classes of "regular
interests" and a single "residual interest". The regular interests are tailored
to the needs of investors and may be issued in multiple classes with varying
maturities, average lives and interest rates. These regular interests are
predominantly senior securities but, in conjunction with providing credit
enhancement, may be subordinated to the rights of other regular interests. The
residual interest represents the remainder of the cash flows from the underlying
mortgage loans over the amounts required to be distributed on the regular
interests. In some cases, the regular interests may be structured so that there
is no significant residual cash flow. In such a REMIC transaction, the Company
sells its entire interest in the mortgage loans, and all of the capital
originally invested in the mortgage loans may be reinvested. The Company may
retain regular and residual interests on a short-term or long-term basis. Gain
on sale income from the issuance of REMICs may not qualify as acceptable REIT
income for tax purposes. Accordingly, REMIC issuances are not Hanover's primary
securitization technique and will generally be undertaken through the taxable
subsidiaries.
The Company expects that its retained interests in securitizations will be
subordinated to the securities issued to third party investors with respect to
losses of principal and interest on the underlying mortgage loans. Accordingly,
any such losses on underlying mortgage loans will be applied first to reduce the
remaining amount of the Company's retained interest, until reduced to zero. Any
retained regular interest may include "principal only" or "interest only"
securities or other interest rate or prepayment sensitive securities or
investments. Any retained securities may subject the Company to credit, interest
rate and/or prepayment risks. The Company anticipates it will retain securities
only on terms which it believes are sufficiently attractive to compensate it for
assuming the associated risks.
The Company may also retain subordinated mortgage backed securities, with
ratings ranging from AA to unrated, generally fixed-rate. The fixed-rate
securities generally evidence interests in 30-year single-family mortgage loans.
Securities backed by multifamily mortgage loans and commercial loans are
generally interests in 7 or 10 year balloon loans with 25 or 30 year
amortization schedules. In general, subordinated classes bear all losses prior
to the related senior classes. Losses in excess of losses anticipated at the
time subordinated securities are purchased would adversely affect the Company's
yield on the securities and could result in the failure of the Company to recoup
its initial investment.
Except in the case of breach of the representations and warranties made by the
Company when mortgage loans are securitized, the securitization of mortgage
loans will be non-recourse to the Company. As a result, the Company is able to
maintain the economic benefit of financing the
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mortgage assets and earning a positive net interest spread, while limiting its
potential risk of credit loss to its investment in the subordinated or residual
securities (generally approximately 5% to 10% of the loan pool amount). A second
advantage to the CMO structure is that it is permanent financing and, therefore,
not subject to margin calls during periods in which the value of the pool assets
is declining due to increases in interest rates.
The Company may also pay a monoline bond insurer a monthly fee to assume a
portion of the credit risk in a pool of mortgage loans. The monoline insurer
would generally require the issuer to retain a portion of the credit risk and
over-collateralize a particular pool of mortgage loans.
Proceeds from securitizations will be available to support new loan originations
and acquisitions. In addition to providing relatively less expensive long-term
financing, Management believes that the Company's securitizations will reduce
the Company's interest rate risk on mortgage assets held for long-term
investment.
Credit Enhancement
CMOs or REMICs created by the Company are structured so that one or more of the
classes of the securities are rated investment grade by at least one nationally
recognized rating agency. The ratings for the Company's mortgage assets will be
based on the rating agency's view of the perceived credit risk of the underlying
mortgage loans, the structure of the mortgage assets and the associated level of
credit enhancement. Credit enhancement is designed to provide protection to the
holders of the securities in the event of borrower defaults and other losses,
including reductions in the principal or interest as required by law or a
bankruptcy court. The Company can utilize multiple forms of credit enhancement,
including special hazard insurance, monoline insurance, reserve funds, letters
of credit, surety bonds and subordination or any combination thereof. A decline
in the credit quality of the mortgage loans backing any mortgage securities or
of any third party providing credit enhancement, or adverse developments in
general economic trends affecting real estate values or the mortgage industry,
could result in ratings being downgraded.
In determining whether to provide credit enhancement, the Company takes into
consideration the costs associated with each method. The Company generally
provides credit enhancement through the issuance of mortgage-backed securities
in senior/subordinated structures or by over-collateralization of its mortgage
assets. The need for additional collateral or other credit enhancements will
depend upon factors such as the type of collateral provided and the interest
rates paid thereon, the geographic concentration of the mortgaged property and
other criteria established by the rating agency. The pledge of additional
collateral would reduce the capacity of the Company to raise additional funds
through short-term secured borrowings or additional CMOs and will diminish the
ability of the Company to expand its Investment Portfolio. Accordingly,
collateral would be pledged for CMOs only in the amount required to obtain the
highest rating category of a nationally-recognized rating agency. The
subordinated mortgage securities may be sold, retained by the Company or
accumulated for sale in subsequent transactions.
Other Mortgage-Backed Securities
As an additional alternative for the financing of the Investment Portfolio, the
Company may cause to be issued other mortgage-backed securities if the issuance
of such other securities is
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advantageous and consistent with the Company's qualification as a REIT. In
particular, mortgage pass-through certificates representing undivided interests
in pools of mortgage loans formed by the Company may prove to be attractive
vehicles for raising funds.
The holders of mortgage pass-through certificates receive their pro rata share
of the principal payments made on a pool of mortgage loans and interest at a
pass-through interest rate that is fixed at the time of the offering. The
Company intends to retain significant portions of the undivided interests in the
mortgage loans underlying pass-through certificates. The retained interest may
also be subordinated so that, in the event of a loss, payments to certificate
holders will be made before the Company receives its payments. Unlike the
issuance of CMOs, the issuance of mortgage pass-through certificates will not
create an obligation of the Company to security holders in the event of a
borrower default. However, as in the case of CMOs, the Company may be required
to obtain credit enhancement in order to obtain a rating for the mortgage
pass-through certificates in one of the top two rating categories established by
a nationally-recognized rating agency.
CAPITAL ALLOCATION GUIDELINES (CAG)
The Company has adopted capital allocation guidelines ("CAG") in order to strike
a balance between the under-utilization of leverage and excess dependence on
leverage, which could reduce the Company's ability to meet its obligations
during adverse market conditions. Modifications to the CAG require the approval
of a majority of the Company's Board of Directors. The CAG are intended to keep
the Company's leverage balanced by (i) matching the amount of leverage to the
riskiness (return and liquidity) of each mortgage asset, and (ii) monitoring the
credit and prepayment performance of each mortgage asset to adjust the required
capital. This analysis takes into account the Company's various hedging and
other risk containment programs discussed below. In this way, the use of balance
sheet leverage is optimized through the implementation of the CAG controls. The
lender haircut indicates the minimum amount of equity the lender requires with a
mortgage asset. There is some variation in haircut levels among lenders from
time to time. From the lender's perspective, the haircut is a "cushion" to
protect capital in case the borrower is unable to meet a margin call. The size
of the haircut depends on the liquidity and price volatility of each mortgage
asset. Agency securities are very liquid, with price volatility in line with the
fixed income markets, which means a lender requires a smaller haircut, typically
3%. On the other extreme, securities rated below "AAA" and securities not
registered with the Securities and Exchange Commission are substantially less
liquid, and have more price volatility than Agency securities, which results in
a lender requiring a larger haircut (5% to 40% depending on the rating).
Particular securities that are performing below expectations would also
typically require a larger haircut. The haircut for residential whole loan pools
will generally range between 3% and 5% depending on the documentation and
delinquency characteristics of the pool. Certain whole loan pools may have
haircuts which may be negotiated with lenders in excess of 5% due to other
attributes of the pool (delinquencies, aging, liens etc.).
Implementation of the CAG -- Mark to Market Accounting
Each quarter, for financial management purposes, the Company marks its mortgage
assets to market. This process consists of (i) valuing the Company's mortgage
assets acquired in the secondary market, and (ii) valuing the Company's
non-security investments, such as retained interests in securitizations. For the
purchased mortgage assets, the Company obtains benchmark
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market quotes from traders who make markets in securities similar in nature to
the mortgage assets. The Company then adjusts for the difference in pricing
between securities and whole loan pools. Market values for the Company's
retained interests in securitizations are calculated internally using market
assumptions for losses, prepayments and discount rates.
The face amount of the financing used for the securities and retained interests
is subtracted from the current market value of the mortgage assets. This is the
current market value of the Company's equity positions. This value is compared
to the required capital as determined by the CAG. If the actual equity of the
Company falls below the capital required by the CAG, the Company must prepare a
plan to bring the actual capital above the level required by the CAG.
Periodically, Management presents to the Board of Directors the results of the
CAG compared to actual equity. Management may propose changing the capital
required for a class of investments or for an individual investment based on its
prepayment and credit performance relative to the market and the ability of the
Company to predict or hedge the risk of the mortgage asset.
As a result of these procedures, the leverage of the balance sheet will change
with the performance of the Company's mortgage assets. Good credit or prepayment
performance may release equity for purchase of additional mortgage assets,
leading to increased earnings. Poor credit or prepayment performance may cause
additional equity to be allocated to existing investments, forcing a reduction
in mortgage assets on the balance sheet and lower future earnings. In either
case, the constant mortgage asset performance evaluation, along with the
corresponding leverage adjustments, should help to maintain the maximum
acceptable leverage (and earnings) while protecting the capital base of the
Company.
RISK MANAGEMENT
The Company believes that its portfolio income is subject to three primary
risks: credit risk, interest rate risk and prepayment risk.
Credit Risk Management
The Company reduces credit risk through (i) the review of each mortgage-backed
security or mortgage loan prior to purchase to ensure that it meets the
guidelines established by the Company, (ii) use of early intervention,
aggressive collection and loss mitigation techniques in the servicing process,
(iii) use of insurance in the securitization process, (iv) maintenance of
appropriate capital and reserve levels, and (v) obtaining representations and
warranties, to the extent possible, from originators. Although the Company does
not set specific geographic diversification requirements, the Company closely
monitors the geographic dispersion of the mortgage loans and makes decisions on
a portfolio by portfolio basis about adding to specific concentrations.
Single-family mortgage loans are generally purchased in bulk pools of $2 million
to $100 million. The credit underwriting process varies depending on the pool
characteristics, including seasoning, loan-to-value ratios and payment
histories. For a new pool of single-family mortgage loans, a full due diligence
review is undertaken, including a review of the documentation, appraisal reports
and credit underwriting. Where required, an updated property valuation is
obtained. The bulk of the work is performed by employees in the due diligence
operations of HCP.
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Interest Rate Risk Management
For accounting purposes, the Company has three basic types of mortgage loans and
three basic types of MBS. Mortgage loans are classified as (i) mortgage loans
held for sale, (ii) mortgage loans held to maturity, or (iii) collateral for
CMOs. MBS are classified as (i) available for sale, (ii) held to maturity, or
(iii) held for trading. Fixed rate mortgage loans and MBS held for sale,
available for sale or held for trading are generally hedged. A variety of
hedging instruments may be used, depending on the asset or liability to be
hedged and the relative price of the various hedging instruments. Possible
hedging instruments include forward sales of mortgage securities, and may also
include interest rate futures or options, interest rate swaps, and caps and
floor agreements. Mortgage loans held in securitized form are generally financed
in a manner designed to maintain a consistent spread in a variety of interest
rate environments and therefore do not require any hedging.
The Company may purchase interest rate caps, interest rate swaps and similar
instruments to attempt to mitigate the risk of the cost of its variable rate
liabilities increasing at a faster rate than the earnings on its mortgage assets
during a period of rising interest rates. The Company generally hedges as much
of the interest rate risk as management determines is reasonable, given the cost
of such hedging transactions and the need to maintain the Company's status as a
REIT, among other factors. The Company may also, to the extent consistent with
its qualification as a REIT and Maryland law, utilize financial futures
contracts, options and forward contracts and other instruments as a hedge
against future interest rate changes. See "Business - Hedging."
Prepayment Risk Management
Prepayment risk is monitored by senior management and through periodic review of
the impact of a variety of prepayment scenarios on the Company's revenues, net
earnings, dividends, cash flow and net balance sheet market value.
Although the Company believes it has developed a cost-effective asset/liability
management program to provide a level of protection against interest rate and
prepayment risks, no strategy can completely insulate the Company from the
effects of interest rate changes, prepayments and defaults by counterparties.
Further, certain of the Federal income tax requirements that the Company must
satisfy to qualify as a REIT limit the Company's ability to fully hedge its
interest rate and prepayment risks.
HEDGING
Investment Portfolio
The Company's primary method of addressing interest rate risk on its mortgage
loans is through its strategy of securitizing mortgage loans with collateralized
mortgage obligation ("CMO") borrowings or REMIC financing, which are designed to
provide long term financing while maintaining a consistent spread in a variety
of interest rate environments. The Company believes that its primary interest
rate risk relates to MBS and mortgage loans that are financed with reverse
repurchase agreements and are held for securitization.
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The Company uses certain hedging strategies in connection with the management of
the Investment Portfolio. To the extent consistent with the Company's REIT
status, the Company follows a hedging program intended to protect against
interest rate changes and to enable the Company to earn net interest income in
periods of generally rising, as well as declining or static, interest rates.
Specifically, the goal of the hedging program is to offset the potential adverse
effects of changes in interest rates relative to the interest rates of the
mortgage assets held in the Investment Portfolio. As part of its hedging
program, the Company also monitors prepayment risks that arise in fluctuating
interest rate environments.
The Company may use a variety of instruments in its hedging program. One example
currently used is an interest rate cap. In a typical interest rate cap
agreement, the cap purchaser makes an initial lump sum cash payment to the cap
seller in exchange for the seller's promise to make cash payments to the
purchaser on fixed dates during the contract term if prevailing interest rates
exceed the rate specified in the contract. The Company may also use, but as yet
has not used, mortgage derivative securities. Mortgage derivative securities can
be used as effective hedging instruments in certain situations as the value and
yields of some of these instruments tend to increase as interest rates rise and
to decrease as interest rates decline, while the experience for others is the
converse. The Company will limit its purchases of mortgage derivative securities
to investments that meet REIT requirements. To a lesser extent, the Company may
also enter into, but again has not entered into, interest rate swap agreements,
financial futures contracts and options on financial futures contracts, and
forward contracts. However, the Company will not invest in these instruments
unless the Company is exempt from the registration requirements of the Commodity
Exchange Act or otherwise complies with the provisions of that Act. The REIT
rules may restrict the Company's ability to purchase certain instruments and may
restrict the Company's ability to employ other strategies. In all its hedging
transactions, the Company deals only with counterparties that the Company
believes are sound credit risks.
In connection with securitizations of mortgage loans, the Company is subject to
the risk of rising mortgage interest rates between the time it commits to a
fixed price purchase and the time it sells or securitizes the mortgage loans. To
mitigate this risk, the Company currently utilizes interest rate caps and
forward sales of Agency mortgage securities and may utilize other hedging
strategies, including mandatory and optional forward selling of mortgage loans
or mortgage-backed securities, interest rate floors, and buying and selling of
futures and options on futures. The nature and quantity of these hedging
transactions is determined by the management of the Company based on various
factors, including market conditions and expected volume of mortgage loan
purchases.
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.
Costs and Limitations
The Company believes that it has implemented a cost-effective hedging policy to
provide an adequate level of protection against interest rate risks. However,
maintaining an effective hedging strategy is complex, and no hedging strategy
can completely insulate the Company from interest rate risks. Moreover, as noted
above, certain of the REIT rules limit the Company's ability to fully hedge its
interest rate risks. The Company monitors carefully, and may have to
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limit, its hedging strategies to assure that it does not violate the REIT rules,
which could result in disqualification and/or payment of penalties.
In addition, hedging involves transaction and other costs, which can increase
dramatically as the period covered by the hedge increases and also increase in
periods of rising and fluctuating interest rates. Therefore, the Company may be
prevented from effectively hedging its interest rate risks without significantly
reducing the Company's return on equity.
SERVICING RIGHTS
Whether servicing is purchased by the Company (along with purchased
single-family mortgage loans or purchased multifamily mortgage loans and
commercial mortgage loans) or created by HCMC (by the origination of multifamily
mortgage loans and commercial mortgage loans), a value is placed on the
servicing as a purchased mortgage servicing right ("PMSR") or an originated
mortgage servicing right ("OMSR"), as the case may be, and recorded as an asset
on the books of the respective entity.
The valuation of a PMSR and an OMSR includes an analysis of the characteristics
of the size, rate, escrow amounts, type, maturity, etc. of the loan, as well as
an estimate of the mortgage loan's remaining life. To the extent the
characteristics change or the estimate of remaining life changes, the value of
the PMSR or OMSR will be adjusted. For example, if mortgage loans are repaid
more quickly than originally forecasted (increased speed), the value of the OMSR
or PMSR will be reduced.
REGULATION
Although HCMC does not currently originate mortgage loans, HCMC continues to
service a small number of loans and has retained its mortgage-banking licenses
in several states. In addition, the Company's activities are subject to the
rules and regulations of HUD. Mortgage operations also may be subject to
applicable state usury and collection statutes.
HCP's wholly owned subsidiary, Hanover Capital Securities, Inc., is a registered
broker/dealer with the Securities and Exchange Commission.
COMPETITION
The Company participates on a national level in the mortgage market, which is
estimated at $4.4 trillion for single-family mortgage loans and $1.0 trillion
for multifamily mortgage loans and commercial loans. In purchasing mortgage
loans and MBS and issuing mortgage-backed securities, the Company competes with
other REITs, established mortgage conduit programs, investment banking firms,
savings and loan associations, banks, thrift and loan associations, finance
companies, mortgage bankers, insurance companies, other lenders and other
entities purchasing mortgage assets. In addition, there are several mortgage
REITs similar to the Company and others may be organized in the future.
Continued consolidation in the mortgage banking industry may reduce the number
of sellers of mortgage loans, which would reduce the Company's potential
customer base and result in the Company purchasing a larger percentage of
mortgage loans from a smaller number of sellers. These changes could negatively
impact the Company. As an issuer of mortgage securities, the Company will face
competition for investors from other investment opportunities.
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Increasingly, mortgage lending is being conducted by mortgage lenders who
specialize in the origination and servicing of mortgage loans and then sell
these loans to other mortgage investment institutions, such as the Company. The
Company believes it has a competitive advantage because of the low cost of its
operations relative to traditional mortgage investors such as banks and savings
and loans. Like traditional financial institutions, the Company seeks to
generate income for distribution to its shareholders primarily from the
difference between the interest income on its mortgage assets and the financing
costs associated with carrying the mortgage assets.
EMPLOYEES
The Company had five employees (the "Principals") at December 31, 1999. The
Company engages the services of HCP to provide management expertise, product
sourcing, due diligence support, and general and administrative services to
assist the Company in accomplishing its business objectives. At December 31,
1999, HCP employed 34 people on a full-time basis and 24 people on a part-time
basis. HCP periodically hires additional employees on a temporary basis to
perform due diligence and consulting service work on specific engagements. HCP
maintains a database of approximately 600 individuals that can be employed for
due diligence and consulting engagements. To date, the Company and its
subsidiaries believe they have been successful in their efforts to recruit
qualified employees, but there is no assurance that it will continue to be
successful in the future. None of the employees are subject to collective
bargaining agreements.
TRADEMARKS
HCP owns two registered trademarks that have been registered with the United
States Patent and Trademark Office, each of which expires in the year 2003.
FUTURE REVISIONS IN POLICIES AND STRATEGIES
The Board of Directors has established the Company's investment and operating
policies, which can be revised only with the approval of the Board of Directors,
including a majority of the unaffiliated directors. Except as otherwise
restricted, the Board of Directors may revise the policies without the consent
of stockholders if the Board of Directors determines that the change is in the
best interests of stockholders. Developments in the market which affect the
policies and strategies mentioned herein or which change the Company's
assessment of the market may cause the Board of Directors to revise the
Company's policies and financing strategies.
The Company has elected to qualify as a REIT for tax purposes (see "Federal
Income Tax Considerations"). The Company has adopted certain compliance
guidelines which include restrictions on the acquisition, holding and sale of
assets. Prior to the acquisition of any asset, the Company determines whether
the asset meets REIT requirements. Substantially all of the assets that the
Company has acquired and will acquire for investment are expected to qualify as
REIT assets. This requirement limits the Company's investment strategies.
The Company closely monitors its purchases of mortgage assets and the sources of
its income, including from its hedging strategies, to ensure at all times that
it maintains its qualifications as a REIT. The Company has developed certain
accounting systems and testing procedures to
21
<PAGE> 23
facilitate its ongoing compliance with the REIT provisions of the Code. No
changes in the Company's investment policies and operating strategies, including
credit criteria for mortgage asset investments, may be made without the approval
of the Company's Board of Directors, including a majority of the unaffiliated
directors.
The Company intends to conduct its business so as not to become regulated as an
investment company under the Investment Company Act of 1940. The Investment
Company Act exempts entities that are "primarily engaged in the business of
purchasing or otherwise acquiring mortgages and other liens on and interests in
real estate" ("Qualifying Interests"). Under current interpretation of the staff
of the Securities and Exchange Commission, in order to qualify for this
exemption, the Company must maintain at least 55% of its assets directly in
Qualifying Interests. In addition, unless certain mortgage securities represent
all the securities issued with respect to an underlying pool of mortgages, the
securities may be treated as securities separate from the underlying mortgage
pool and, thus, may not be considered Qualifying Interests for purposes of the
55% requirement. The Company closely monitors its compliance with this
requirement and intends to maintain its exempt status. As of this date, the
Company has been able to maintain its exemption through the purchase of mortgage
loan pools and certain whole pool government Agency securities that qualify for
the exemption.
A REIT is subject to a 100% tax on the net income from prohibited transactions.
The only "prohibited transaction" is the sale or disposition of property, that
is not foreclosure property, held primarily for sale to customers in the
ordinary course of a trade or business. Management believes that none of the
1998 or 1999 sales transactions would be classified as prohibited transactions.
RELATIONSHIPS WITH AFFILIATES AND PRIOR BUSINESS
HCP has rendered asset management services in connection with the short-term
trading of seasoned (more than one year since origination) single-family
mortgage loans since 1995. In managing mortgage activities, HCP typically
targeted mortgage loan pools containing single-family mortgage loans with
deficiencies that could be corrected so as to permit resales on favorable terms.
In managing sale activities, HCP generally had pursued a strategy of selling
single-family mortgage loans within eighteen months after their acquisition. The
Company, on the other hand, generally holds mortgage loans on a long-term basis,
so that returns are earned over the lives of mortgage loans rather than from
their sales.
In the past, HCP has engaged in single-family mortgage loan acquisition,
financing, hedging and sale activities pursuant to private management
arrangements with (i) Alpine Associates, a Limited Partnership ("Alpine
Associates"), (ii) a limited liability company formed by HCP, Alpine Associates
and an affiliate of Bankers Trust New York Corp. and (iii) certain affiliates of
Bankers Trust New York Corp. The objective in each of those arrangements was to
profit from purchasing and reselling mortgage loans rather than, as in the case
of the Company, from holding, financing and securitizing mortgage loans.
After the closing of the initial public offering in September 1997, the Company
acquired an Investment Portfolio, the composition of which has changed over
time. HCP has continued to conduct the due diligence and consulting operations
and, in addition, support the Company's acquisition and investment activities by
providing due diligence services to the Company. HCS facilitates the Company's
trading activities by acting as a broker/dealer.
22
<PAGE> 24
Management Agreement
Effective as of January 1, 1998, Hanover entered into a Management Agreement
(the "Management Agreement") with HCP. Under this agreement, HCP, subject to the
direction and control of Hanover's Board of Directors, provides certain services
for Hanover, including, among other things: (i) serving as Hanover's consultant
with respect to formulation of investment criteria and preparation of policy
guidelines by the Board of Directors; (ii) assisting Hanover in developing
criteria for the purchase of mortgage assets that are specifically tailored to
Hanover's investment objectives; (iii) representing Hanover in connection with
the purchase and commitment to purchase or sell mortgage assets; (iv) arranging
for the issuance of mortgage securities from a pool of mortgage loans; (v)
furnishing reports and statistical and economic research to Hanover regarding
Hanover's activities and the services performed for Hanover by HCP; (vi)
monitoring and providing to the Board of Directors on an ongoing basis price
information and other data; (vii) investing or reinvesting any money of Hanover
in accordance with its policies and procedures and the terms and conditions of
the Management Agreement; (viii) providing the executive and administrative
personnel office space and services required in rendering such services to
Hanover; and (ix) administering the day-to-day operations of Hanover. For these
services, Hanover each month pays HCP an amount equal to the sum of: (a) the
wages and salaries of the personnel employed by HCP and/or its affiliates (other
than independent contractors and other third parties rendering due diligence
services in connection with the acquisition of any mortgage assets) apportioned
to Hanover for such month; plus (b) twenty-five percent (25%) of (a). Hanover is
also required to pay HCP each month an amount equal to the sum of: (c) the
expenses of HCP for any services provided to the Company; plus (d) three percent
(3%) of (c). Effective July 1, 1999, the Management Agreement was amended to
define HCP's monthly expenses related to services provided to the Company to
include: rent; telephone; utilities; office furniture; equipment; machinery; and
other office expenses of HCP required for the Company's day-to-day operations,
including bookkeeping, clerical and back-office services provided by HCP. Any
amount that may become payable by HCP to Hanover for any services provided by
Hanover to HCP, including the services of the Principals, is offset against
amounts payable to HCP.
Subject to other contractual limitations, the Management Agreement does not
prevent HCP from acting as an investment advisor or manager for any other
person, firm or corporation. The term of the Management Agreement continues
until December 31, 2000 and is automatically renewed for successive one year
periods unless the unaffiliated directors resolve to terminate the Management
Agreement.
FEDERAL INCOME TAX CONSIDERATIONS
General
Hanover has elected to be treated as a REIT for tax purposes, pursuant to the
Internal Revenue Code of 1986, as amended (sometimes referred to as the "Code").
In brief, if certain detailed conditions imposed by the REIT provisions of the
Code are met, entities that invest primarily in real estate investments and
mortgage loans, and that otherwise would be taxed as corporations are, with
certain limited exceptions, not taxed at the corporate level on their taxable
income that is currently distributed to their shareholders. This treatment
eliminates most of the "double taxation" (at the corporate level and then again
at the shareholder level when the income is
23
<PAGE> 25
distributed) that typically results from the use of corporate investment
vehicles. In the event that Hanover does not qualify as a REIT in any year, it
would be subject to Federal income tax as a domestic corporation and the amount
of Hanover's after-tax cash available for distribution to its shareholders would
be reduced. Hanover believes it has satisfied the requirements for qualification
as a REIT since commencement of its operations in September 1997. Hanover
intends at all times to continue to comply with the requirements for
qualification as a REIT under the Code, as described below.
Requirements for Qualification as a REIT
To qualify for tax treatment as a REIT under the Code, Hanover must meet certain
tests which are described briefly below.
Ownership of Common Stock
For all taxable years after its first taxable year, Hanover's shares of capital
stock must be held by a minimum of 100 persons for at least 335 days of a 12
month year (or a proportionate part of a short tax year). In addition, at any
time during the second half of each taxable year, no more than 50% in value of
the capital stock of Hanover may be owned directly or indirectly by five or
fewer individuals. Hanover is required to maintain records regarding the actual
and constructive ownership of its shares, and other information, and to demand
statements from persons owning above a specified level of the REITs shares (if
Hanover has 200 or fewer shareholders of record, from persons holding 0.5% or
more of Hanover's outstanding shares of capital stock) regarding their ownership
of shares. Hanover must keep a list of those shareholders who fail to reply to
such a demand. Hanover is required to use (and does use) the calendar year as
its taxable year for income tax reporting purposes.
Nature of Assets
On the last day of each calendar quarter, Hanover must satisfy three tests
relating to the nature of its assets. First, at least 75% of the value of
Hanover's assets must consist of mortgage loans, certain interests in mortgage
loans, real estate, certain interests in real estate (the foregoing, "Qualified
REIT Assets"), government securities, cash and cash items. Hanover expects that
substantially all of its assets will continue to be Qualified REIT Assets.
Second, not more than 25% of Hanover's assets may consist of securities that do
not qualify under the 75% asset test. Third, of the investments in securities
not included in the 75% asset test, the value of any one issuer's securities may
not exceed 5% by value of Hanover's total assets, and Hanover may not own more
than 10% of any one issuer's outstanding voting securities.
On December 17, 1999, as part of a larger bill, the President signed into law
the REIT Modernization Act ("RMA"). Effective January 1, 2001, the RMA will
amend the tax rules relating to the composition of REIT's assets. Under current
law, a REIT is precluded from owning more than 10% of the outstanding voting
securities of any one issuer, other than a wholly owned subsidiary or another
REIT. Beginning in 2001, a REIT will remain subject to the current restriction
and be precluded from owning more than 10% of the value of all classes of
securities of any one issuer.
There is an exception to this prohibition. A REIT will be allowed to own up to
100% of the securities of a taxable REIT subsidiary ("TRS"). However, no more
than 20% of the value of a
24
<PAGE> 26
REIT's total assets may be represented by securities of one or more TRSs. The
amount of debt and rental payments from a TRS to a REIT will be limited to
ensure that a TRS is subject to an appropriate level of corporate tax. The new
10% asset test will not apply to certain arrangements (including third party
subsidiaries) in place on July 12, 1999, provided that the subsidiary does not
engage in a "substantial" new line of business, its existing business does not
increase, and a REIT does not acquire any new securities in the subsidiary.
Under the RMA, a third party subsidiary will be able to convert tax free into a
TRS.
Pursuant to its compliance guidelines, Hanover intends to monitor closely the
purchase and holding of its assets in order to comply with the above asset
tests.
Sources of Income
Hanover must meet the following two separate income-based tests each year:
1. 75% INCOME TEST. At least 75% of Hanover's gross income for the taxable year
must be derived from Qualified REIT Assets including interest on obligations
secured by mortgages on real property or interests in real property. During the
first year of operations certain temporary investment income will also qualify
under the 75% income test. The investments that Hanover has made and will
continue to make will give rise primarily to mortgage interest qualifying under
the 75% income test.
2. 95% INCOME TEST. In addition to deriving 75% of its gross income from the
sources listed above, at least an additional 20% of Hanover's gross income for
the taxable year must be derived from those sources, or from dividends, interest
or gains from the sale or disposition of stock or other securities that are not
dealer property. Hanover intends to limit substantially all of the assets that
it acquires to Qualified REIT Assets. The policy of Hanover to maintain REIT
status may limit the types of assets, including hedging contracts and other
securities, that Hanover otherwise might acquire.
Distributions
Hanover must distribute to its shareholders on a pro rata basis each year an
amount equal to at least (i) 95% of its taxable income before deduction of
dividends paid and excluding net capital gains, plus (ii) 95% of the excess of
the net income from foreclosure property over the tax imposed on such income by
the Code, less (iii) certain "excess noncash income". Hanover intends to make
distributions to its shareholders in sufficient amounts to meet this 95%
distribution requirement.
Pursuant to the REIT Modernization Act ("RMA"), effective January 1, 2001, the
distribution of taxable income requirement a REIT will be reduced from 95% to
90%.
Taxation of Hanover's Shareholders
For any taxable year in which Hanover is treated as a REIT for Federal income
tax purposes, amounts distributed by Hanover to its shareholders out of current
or accumulated earnings and profits will be includable by the shareholders as
ordinary income for Federal income tax purposes unless properly designated by
Hanover as capital gain dividends. Distributions of Hanover will not be eligible
for the dividends received deduction for corporations. Shareholders
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<PAGE> 27
may not deduct any net operating losses or capital losses of Hanover. Any loss
on the sale or exchange of shares of the common stock of Hanover held by a
shareholder for six months or less will be treated as a long-term capital loss
to the extent of any capital gain dividends received on the common stock held by
such shareholder.
If Hanover makes distributions to its shareholders in excess of its current and
accumulated earnings and profits, those distributions will be considered first a
tax-free return of capital, reducing the tax basis of a shareholder's shares
until the tax basis is zero. Such distributions in excess of the tax basis will
be taxable as gain realized from the sale of Hanover's shares. Hanover will
withhold 30% of dividend distributions to shareholders that Hanover knows to be
foreign persons unless the shareholder provides Hanover with a properly
completed IRS form claiming a reduced withholding rate under an applicable
income tax treaty.
Under the Code, if a portion of Hanover's assets were treated as a taxable
mortgage pool or if Hanover were to hold REMIC residual interests, a portion of
Hanover's dividends would be treated as unrelated business taxable income
("UBTI") for pension plans and other tax exempt entities. Hanover believes that
it has not engaged in activities that would cause any portion of Hanover's
income to be taxable as UBTI for pension plans and similar tax exempt
shareholders. Hanover believes that its shares of stock will be treated as
publicly offered securities under the plan asset rules of the Employment
Retirement Income Security Act ("ERISA") for Qualified Plans.
The provisions of the Code are highly technical and complex and are subject to
amendment and interpretation from time to time. This summary is not intended to
be a detailed discussion of all applicable provisions of the Code, the rules and
regulations promulgated thereunder, or the administrative and judicial
interpretations thereof. Hanover has not obtained a ruling from the Internal
Revenue Service with respect to tax considerations relevant to its organization
or operations.
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<PAGE> 28
ITEM 2: PROPERTIES
The Company's and its unconsolidated subsidiaries operations are conducted in
several leased office facilities throughout the United States. A summary of the
office leases is shown below:
<TABLE>
<CAPTION>
OFFICE MINIMUM
SPACE ANNUAL EXPIRATION
LOCATION (SQ. FT.) RENTAL DATE OFFICE USE
-------- --------- ------ ---- ----------
<S> <C> <C> <C> <C>
New York, New York (a) 7,863 $216,233 February 2010 Executive, Administration,
Accounting, Investment
Operations
Edison, New Jersey 5,834 78,874 June 2002 Accounting, Administration, Due
Diligence Operations, Mortgage
Loan Servicing, Investment
Operations
Chicago, Illinois 1,151 22,397 January 2004 Due Diligence Operations,
Investment Operations
Rockland, Massachusetts 300 6,000 Month to Month Investment Operations
St. Paul, Minnesota 150 4,200 August 2000 Investment Operations
------ --------
Total: 17,487 $343,400
====== ========
</TABLE>
(a) HCP entered into an amendment to the existing office lease in December
1998 to relocate from its former office space (2,328 sq. ft.) to larger
office space (7,863 sq. ft.) in the same office building. Hanover took
occupancy of the new office space in November 1999.
Management of the Company believes that these facilities are adequate for the
Company's and its unconsolidated subsidiaries foreseeable office space needs and
that lease renewals and/or alternate space at comparable rental rates is
available, if necessary.
ITEM 3: LEGAL PROCEEDINGS
The Company is not engaged in any material legal proceeding.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
27
<PAGE> 29
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
In September 1997, Hanover raised net proceeds of approximately $79 million in
its initial public offering (the "IPO"). In the IPO, Hanover sold 5,750,000
units (each unit consists of one share of common stock, par value $.01 and one
stock warrant) including 750,000 units sold pursuant to the underwriters'
over-allotment option, which was exercised in full. Each warrant entitled the
holder to purchase one share of common stock at the original issue price -
$15.00. The strike price of the warrant was subsequently reset to $14.56. The
warrants became exercisable on March 19, 1998 and expire on September 15, 2000.
As of December 31, 1999, there were 5,917,878 warrants outstanding, including
172,500 warrants issued pursuant to the underwriters' over-allotment option.
Hanover utilized substantially all of the net proceeds of the IPO to fund
leveraged purchases of mortgage assets.
On September 19, 1997, the units began trading on the American Stock Exchange
under the trading symbol HCM.U or HCM/U. Commencing March 19, 1998, the warrants
became detachable from the common stock, and commencing March 20, 1998, the
common stock and warrants began trading separately on the American Stock
Exchange under the trading symbols HCM and HCM.WS, respectively. As of March 17,
2000, Hanover had 5,826,899 shares of common stock issued and outstanding, which
was held by 73 holders of record and approximately 1,839 beneficial owners.
The following tables set forth, for the periods indicated, the high, low and
closing sales price of Hanover's securities as reported on the American Stock
Exchange in 1998 and 1999.
<TABLE>
<CAPTION>
UNIT PRICES
-----------
High Low Close
---- --- -----
<S> <C> <C> <C>
Quarter Ended March 31, 1998 21 7/8 16 1/4 19 1/16
Quarter Ended June 30, 1998 20 13/16 10 5/8 10 5/8
Quarter Ended September 30, 1998 11 3/4 7 1/4 7 1/4
Quarter Ended December 31, 1998 7 1/4 3 1/2 4 3/16
Quarter Ended March 31, 1999 5 1/4 4 1/4 4 1/2
Quarter Ended June 30, 1999 5 5/8 4 3/8 5 1/4
Quarter Ended September 30, 1999 5 1/4 4 3/8 4 3/8
Quarter Ended December 31, 1999 4 3/8 3 3 1/8
</TABLE>
28
<PAGE> 30
<TABLE>
<CAPTION>
COMMON STOCK
------------
High Low Close
---- --- -----
<S> <C> <C> <C>
Quarter Ended March 31, 1998 (a) 16 1/2 16 1/8 16 1/4
Quarter Ended June 30, 1998 17 3/8 9 1/2 9 1/2
Quarter Ended September 30, 1998 10 3/8 6 7/8 6 7/8
Quarter Ended December 31, 1998 6 7/8 3 1/2 4
Quarter Ended March 31, 1999 5 7/16 4 1/4 4 7/16
Quarter Ended June 30, 1999 6 4 1/8 5 3/8
Quarter Ended September 30, 1999 5 3/8 4 4
Quarter Ended December 31, 1999 4 3/8 3 1/4 3 5/8
</TABLE>
<TABLE>
<CAPTION>
WARRANTS
------------
High Low Close
---- --- -----
<S> <C> <C> <C>
Quarter Ended March 31, 1998 (a) 3 7/8 3 1/8 3 1/8
Quarter Ended June 30, 1998 3 1/4 1 1/8 1 1/8
Quarter Ended September 30, 1998 1 3/8 3/16 3/16
Quarter Ended December 31, 1998 3/8 5/16 1/8
Quarter Ended March 31, 1999 1/4 1/16 1/8
Quarter Ended June 30, 1999 3/16 1/16 1/8
Quarter Ended September 30, 1999 1/8 1/32 1/16
Quarter Ended December 31, 1999 3/64 1/64 1/64
</TABLE>
The following table sets forth, for the periods indicated, Hanover's dividends
declared for each quarter for the two most recent fiscal years:
<TABLE>
<CAPTION>
DIVIDENDS
DECLARED
--------
<S> <C>
Quarter Ended March 31, 1998 $0.21
Quarter Ended June 30, 1998 $0.21
Quarter Ended September 30, 1998 $0.17
Quarter Ended December 31, 1998 $0.11
Quarter Ended March 31, 1999 $0.20
Quarter Ended June 30, 1999 $0.10
Quarter Ended September 30, 1999 $0.10
Quarter Ended December 31, 1999 $0.10
</TABLE>
(a) Common stock and warrants were first listed on the American Stock
Exchange on March 20, 1998.
Hanover intends to pay quarterly dividends and other distributions to its
shareholders of all or substantially all of its taxable income in each year in
order to qualify for the tax benefits accorded to a REIT under the Code. To the
extent that Hanover records capital gain income in future years, this income
does not need to be distributed as dividends to shareholders to the extent of
unutilized capital losses recorded (more than $6,500,000 as of December 31,
1999). All distributions will be made by Hanover at the discretion of the Board
of Directors and will depend on the earnings of Hanover, financial condition of
Hanover, maintenance of REIT status and such other factors as the Board of
Directors deems relevant.
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<PAGE> 31
ITEM 6: SELECTED FINANCIAL DATA
The following selected financial data are derived from audited consolidated
financial statements of Hanover for the years ended December 31, 1999, December
31, 1998 and for the period from June 10, 1997 (inception) to December 31, 1997.
The selected financial data should be read in conjunction with the more detailed
information contained in the Consolidated Financial Statements and Notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Form 10-K (dollars in thousands, except
per share data):
<TABLE>
<CAPTION>
Period from
STATEMENT OF OPERATIONS HIGHLIGHTS Year Ended Year Ended June 10 (inception)
December 31, 1999 December 31, 1998 to December 31, 1997
----------------- ----------------- --------------------
<S> <C> <C> <C>
Net interest income $ 4,408 $ 6,623 $ 1,676
Loan loss provision (446) (356) (18)
Gain (loss) on sale and mark-to-market (5,831) (5,704) 35
Provision for loss on unconsolidated subsidiary (4,793) -- --
----------- ----------- -----------
Total revenues (loss) (6,662) 563 1,693
Expenses 4,191 4,064 940
----------- ----------- -----------
Operating income (loss) (10,853) (3,501) 753
Equity in (loss) of unconsolidated subsidiaries (1,774) (1,433) (254)
----------- ----------- -----------
Net income (loss) $ (12,627) $ (4,934) $ 499
=========== =========== ===========
Basic earnings (loss) per share $ (2.12) $ (0.77) $ 0.15
=========== =========== ===========
Diluted earnings (loss) per share $ (2.12) $ (0.77) $ 0.14
=========== =========== ===========
Dividends declared per share $ 0.50 $ 0.70 $ 0.16
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET HIGHLIGHTS December 31, December 31, December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Mortgage loans $ 270,084 $ 407,994 $ 160,970
Mortgage securities 62,686 78,478 348,131
Cash and cash equivalents 18,022 11,837 4,022
Other assets 14,694 17,861 4,420
----------- ----------- -----------
Total assets $ 365,486 $ 516,170 $ 517,543
=========== =========== ===========
Reverse repurchase agreements $ 55,722 $ 370,090 $ 435,138
CMO Borrowings 254,963 77,305 --
Other liabilities 4,443 2,995 4,307
----------- ----------- -----------
Total liabilities 315,128 450,390 439,445
----------- ----------- -----------
Stockholders' equity 50,358 65,780 78,098
----------- ----------- -----------
Total liabilities and stockholders' equity $ 365,486 $ 516,170 $ 517,543
=========== =========== ===========
Number of common shares outstanding 5,826,899 6,321,899 6,466,677
=========== =========== ===========
</TABLE>
30
<PAGE> 32
ITEM 7. 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 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") 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 and (iii) acquire subordinated mortgage securities similar in nature to
the retained interests generated from internal securitizations. The principal
business strategy of the Company's primary unconsolidated subsidiary, Hanover
Capital Partners Ltd. ("HCP"), is to generate consulting fee income by (i)
performing loan file due diligence reviews for third parties, (ii) performing
loan sale advisory services and (iii) brokering and trading portfolios of loans.
Until recently, HCP was also engaged in the business of originating multifamily
and commercial loans. This business was discontinued in the quarter ended June
30, 1999.
The Company's principal business objective is to generate net interest income on
its portfolio of mortgage loans and mortgage securities, and to generate fee
income through HCP. The Company acquires single-family mortgage loans through a
network of sales representatives targeting financial institutions throughout the
United States. 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.
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
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.
31
<PAGE> 33
RESULTS OF OPERATIONS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Quarter Ended Year
----------------------------------------------------- Ended
Mar 31 Jun 30 Sept 30 Dec 31 Dec 31
1999 1999 1999 1999 1999
------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Net interest income (expense) $ 2,051 $ 1,733 $ (884) $ 1,508 $ 4,408
Loan loss provision (119) (113) (107) (107) (446)
Gain on sale of servicing rights 342 2 196 -- 540
Gain (loss) on sale of mortgage assets 163 -- (17) -- 146
Gain (loss) on mark to market of mortgage
securities and mortgage loans, net of
associated hedge -- -- (6,534) 17 (6,517)
Provision for (loss) on disposition of
unconsolidated subsidiary -- -- (4,793) -- (4,793)
------- ------- -------- ------- --------
Total revenues (loss) 2,437 1,622 (12,139) 1,418 (6,662)
Expenses 825 860 1,304 1,202 4,191
------- ------- -------- ------- --------
Operating income (loss) 1,612 762 (13,443) 216 (10,853)
Equity in (loss) of unconsolidated subsidiaries (876) (704) (551) 357 (1,774)
------- ------- -------- ------- --------
Net income (loss) $ 736 $ 58 $(13,994) $ 573 $(12,627)
======= ======= ======== ======= ========
Basic earnings (loss) per share $ 0.12 $ 0.01 $ (2.40) $ 0.10 $ (2.12)
======= ======= ======== ======= ========
Dividends declared per share (a) $ 0.20 $ 0.10 $ 0.10 $ 0.10 $ 0.50
======= ======= ======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended Year
----------------------------------------------------- Ended
Mar 31 Jun 30 Sept 30 Dec 31 Dec 31
1998 1998 1998 1998 1998
------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Net interest income (expense) $ 2,159 $ 774 $ 1,692 $ 1,998 $ 6,623
Loan loss provision (51) (97) (130) (78) (356)
Gain on sale of servicing rights -- -- -- -- --
Gain (loss) on sale of mortgage assets -- (49) -- (5,655) (5,704)
Gain (loss) on mark to market of mortgage
securities and mortgage loans, net of
associated hedge -- -- -- -- --
------- ------- -------- ------- --------
Provision for (loss) on disposition of
unconsolidated subsidiary -- -- -- -- --
------- ------- -------- ------- --------
Total revenues (loss) 2,108 628 1,562 (3,735) 563
Expenses 854 978 928 1,304 4,064
------- ------- -------- ------- --------
Operating income (loss) 1,254 (350) 634 (5,039) (3,501)
Equity in (loss) of unconsolidated subsidiaries (6) (294) (288) (845) (1,433)
------- ------- -------- ------- --------
Net income (loss) $ 1,248 $ (644) $ 346 $(5,884) $ (4,934)
======= ======= ======== ======= ========
Basic earnings (loss) per share $ 0.19 $ (0.10) $ 0.05 $ (0.93) $ (0.77)
======= ======= ======== ======= ========
Dividends declared per share (a) $ 0.21 $ 0.21 $ 0.17 $ 0.11 $ 0.70
======= ======= ======== ======= ========
</TABLE>
32
<PAGE> 34
(a) The dividends relating to the three months ended December 31, 1999 were
declared on December 21, 1999.
The Company recorded a net loss of ($12,627,000) or ($2.12) per share based on
5,942,403 weighted shares of common stock outstanding for the year ended
December 31, 1999 compared to a net loss of ($4,934,000) or ($0.77) per share
based on 6,418,305 weighted shares of common stock outstanding for 1998. Total
revenues for the year ended December 31, 1999 were negative ($6,662,000)
compared to a positive $563,000 in 1998.
The 1999 revenues were negatively impacted by charges for (1) provision for loss
on the disposition of an unconsolidated subsidiary, Hanover Capital Partners 2,
Inc. ("HCP-2") of $4,793,000, (2) mark to market adjustments on mortgage
securities acquired from the Hanover 1998-B securitization of $3,537,000, (3)
mark to market adjustments on mortgage loans securitized in the August 1999
Hanover 1999-B securitization of $2,997,000 and (4) adjustments to the
investment portfolio's net interest income resulting primarily from cumulative
prepayment speed adjustments affecting amortization totaling $2,178,000. The
1999 revenues before these charges were $6,844,000.
By comparison, 1998 revenues of $563,000 included a loss of $5,989,000 on the
sale of adjustable rate mortgage securities in October, 1998. Revenues for 1998
before this loss were $6,552,000.
The Company's equity in losses of Hanover Capital Partners Ltd. ("HCP"), its
consulting subsidiary, declined from a loss of $1,039,000 in 1998 to a loss of
$443,000 in 1999. The Company believes that its increased focus on building fee
income revenue in HCP is beginning to bear fruit. Third party consulting and
loan brokering revenues at HCP increased from $3,500,000 in 1998 to $5,036,000
in 1999, and the Company recorded a profit of $383,000 from its equity in HCP in
the fourth quarter of 1999.
During 1999, the Company reflected equity in losses of HCP-2 of $1,300,000
compared to $394,000 in 1998. As noted above, the Company took a provision of
$4,793,000 in the quarter ended September 30, 1999 and recorded certain other
operating expenses in connection with its decision to sell HCP-2.
HCP-2 is an unconsolidated mortgage finance subsidiary that was organized in
October 1998 to execute a REMIC financing securitization for the Company. The
financing structure required certain costs of the securitization (net premiums,
hedging and deferred financing costs) to be capitalized in this subsidiary.
Substantially all of HCP-2's net equity ($4,473,000 at September 30, 1999)
consisted of these capitalized expenses. These deferred financing costs were
being amortized through net interest income (expense) over the anticipated life
of the respective mortgage loans and recorded by the Company in its economic
ownership percentage (99%) of this net loss through September 30, 1999. As a
result of the provision for the expected sale of HCP-2, the Company believes it
will not record future losses from HCP-2.
Also included in the equity in loss of unconsolidated subsidiaries is a $31,000
loss from a newly organized subsidiary - HanoverTrade.com, Inc. ("HTC"). HTC was
organized in June 1999 to develop an E-commerce business to broker mortgage loan
pools to financial institutions and other finance companies via the internet.
33
<PAGE> 35
Operating expenses for the year ended December 31, 1999 were $4,191,000,
compared to $4,064,000 in 1998. The Company did not purchase any mortgage loans
during 1999, compared to 1998 when the Company purchased in excess of
$749,000,000 of mortgage loan pools. Accordingly, the Company incurred only a
fraction of the due diligence and commission expenses in 1999 ($124,000) as
compared to 1998 ($973,000) and experienced significantly lower financing and
commitment fees ($404,000 vs $836,000). Offsetting these cost savings were
substantial increases in legal and professional expenses ($1,201,000 vs
$545,000) and personnel expenses ($1,230,000 vs $712,000). Legal and
professional expenses increased substantially in 1999 compared to 1998 as a
result of increased regulatory filings and the negotiation of credit lines to
replace lines that were wound down during the liquidity crunch at the end of
1998. The increase in personnel expenses results primarily from the reallocation
of certain personnel expenses from HCP to the Company to better reflect the
proper allocation of the affected individuals' time, and from the addition of a
new chief financial officer in 1999.
The Management Agreement by and between Hanover and HCP, whereby HCP provides
Hanover due diligence, asset management and administrative services, was amended
in September 1999 (retroactive to July 1, 1999). The amendment reallocated
certain asset management and administrative service expenses between Hanover and
HCP to more accurately reflect current top management personnel expense and
certain other occupancy related charges. As a result of this amendment, the
Company recorded additional personnel and occupancy expenses that were
previously allocated to HCP. Hanover will continue to record similar expenses in
future periods. Also included in personnel expense in the third quarter of 1999
is approximately $103,000 of additional compensation expense paid to certain
employees of Hanover, relating to the provision for the forgiveness of certain
of their loans in connection with the write-off of HCP-2.
The Company's third quarter 1999 and 1998 operating expenses did not include any
incentive bonus compensation pursuant to the Company's incentive bonus plan. 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%.
34
<PAGE> 36
The table below highlights the Company's historical trends and components of
return on average equity.
COMPONENTS OF ANNUALIZED RETURN ON AVERAGE EQUITY (1)
<TABLE>
<CAPTION>
Gain (loss) on Other Equity in
Net Interest Sale of Gains or Operating Earnings (Loss) Annualized
For the Income/ Assets/ (Losses)/ Expenses/ of Subsidiaries/ Return on
Quarter Ended Equity Equity Equity Equity Equity Equity
------------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
June 30, 1997 (2) 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
September 30, 1997 (3) 4.85% 0.00% 0.00% 3.59% 0.97% 2.23%
December 31, 1997 7.71% 0.18% 0.00% 4.26% (1.41%) 2.22%
March 31, 1998 10.78% 0.00% 0.00% 4.37% (0.03%) 6.38%
June 30, 1998 3.47% (0.25%) 0.00% 5.00% (1.50%) (3.28%)
September 30, 1998 8.23% 0.00% 0.00% 4.89% (1.52%) 1.82%
December 31, 1998 11.12% (32.76%) 0.00% 7.55% (4.89%) (34.08%)
March 31, 1999 11.36% 2.97% 0.00% 4.85% (5.15%) 4.33%
June 30, 1999 9.89% 0.01% 0.00% 5.25% (4.30%) 0.35%
September 30, 1999 (6.57%) 1.19% (75.10%) 8.65% (3.65%) (92.78%)
December 31, 1999 11.01% 0.00% 0.13% 9.46% 2.81% 4.51%
</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 for this period is based on the equity balance at
September 19, 1997 (IPO date) and the equity balance at September 30,
1997, excluding unrealized loss on investments available for sale.
35
<PAGE> 37
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>
INTEREST EARNING ASSETS AND RELATED LIABILITIES
Quarter Ended Quarter Ended Quarter Ended Quarter Ended
March 31, 1999 June 30, 1999 September 30, 1999 December 31, 1999
Average Effective Average Effective Average Effective Average Effective
Balance Rate (1) Balance Rate (1) Balance Rate (1) Balance Rate (1)
------- -------- ------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Mortgage loans $246,329 7.092% $123,945 7.010% $ 41,034 2.704% $ 251 (9.243%)
CMO collateral 124,784 6.825% 204,469 7.076% 262,666 6.781% 279,928 7.202%
FNMA MBS 57,552 6.783% 53,619 6.930% 49,968 6.724% 46,930 6.979%
Private placement notes 18,334 15.069% 17,261 14.414% 18,643 (22.958%) 16,401 17.492%
-------- ------ -------- ------ -------- ------ -------- ------
446,999 7.306% 399,294 7.353% 372,311 4.835% 343,510 7.650%
-------- ------ -------- ------ -------- ------ -------- ------
Interest bearing liabilities:
Reverse repurchase borrowings on
mortgage loans 225,835 6.432% 113,125 6.150% 37,031 6.258% -- --
CMO borrowings 98,357 6.879% 191,858 6.791% 232,132 6.894% 262,354 6.960%
Reverse repurchase borrowings on:
CMO collateral 18,194 5.956% 1,518 6.379% 15,361 7.054% 3,366 8.030%
FNMA MBS 56,420 5.069% 52,559 5.388% 47,888 5.822% 38,534 5.890%
Private placement notes 4,037 5.455% 5,836 5.826% 4,243 5.845% 4,605 6.687%
-------- ------ -------- ------ -------- ------ -------- ------
402,843 6.319% 364,896 6.373% 336,655 6.701% 308,859 6.855%
-------- ------ -------- ------ -------- ------ -------- ------
Net interest earning assets $ 44,156 $ 34,398 $ 35,656 $ 34,651
======== ======== ======== ========
Net interest spread 0.986% 0.980% (1.866%) 0.796%
====== ====== ====== ======
Yield on net interest earning
assets (2) 16.303% 17.519% (12.598%) 15.176%
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended Quarter Ended Quarter Ended Quarter Ended
March 31, 1998 June 30, 1998 September 30, 1998 December 31, 1998
Average Effective Average Effective Average Effective Average Effective
Balance Rate (1) Balance Rate (1) Balance Rate (1) Balance Rate (1)
------- -------- ------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Mortgage loans $216,275 7.410% $370,811 7.371% $566,456 7.489% $465,445 7.392%
CMO collateral -- -- 92,272 7.158% 91,980 7.071% 86,477 6.230%
FNMA MBS 334,722 6.116% 281,933 3.992% 243,299 4.528% 59,492 5.446%
Private placement notes -- -- -- -- -- -- 13,446 16.662%
-------- ------ -------- ------ -------- ------ -------- ------
550,997 6.624% 745,016 6.066% 901,735 6.648% 624,860 7.246%
-------- ------ -------- ------ -------- ------ -------- ------
Interest bearing liabilities:
Reverse repurchase borrowings on
mortgage loans 166,882 6.318% 332,424 6.452% 523,403 6.377% 447,915 6.422%
CMO borrowings -- -- 88,069 6.901% 87,524 6.916% 80,522 6.926%
Reverse repurchase borrowings on:
CMO collateral -- -- 1,076 7.031% 203 6.145% 1,760 6.616%
FNMA MBS 324,305 5.597% 272,176 5.616% 241,388 5.826% 55,548 5.754%
Private placement notes -- -- -- -- -- -- 2,784 5.729%
-------- ------ -------- ------ -------- ------ -------- ------
491,187 5.842% 693,745 6.241% 852,518 6.364% 588,529 6.535%
-------- ------ -------- ------ -------- ------ -------- ------
Net interest earning assets $ 59,810 $ 51,271 $ 49,217 $ 36,331
======== ======== ======== ========
Net interest spread 0.782% (0.175%) 0.284% 0.711%
====== ====== ====== ======
Yield on net interest earning
assets (2) 13.046% 3.700% 11.562% 18.769%
====== ====== ====== ======
</TABLE>
(1) Loan loss provisions are excluded in the above calculations.
(2) 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.
36
<PAGE> 38
NET INTEREST INCOME (EXPENSE)
Net interest income for the year ended December 31, 1999 was $4,408,000 compared
to net interest income of $6,623,000 for 1998. The following table reflects net
interest income (expense) generated for each period (dollars in thousands):
NET INTEREST INCOME (EXPENSE) IN 1999
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------------------
March 31, June 30, September 30, December 31, Total
1999 1999 1999 1999 1999
------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Mortgage loans $ 736 $ 413 $ (314) $ (6) $ 829
CMO collateral 166 335 181 396 1,078
FNMA MBS 261 221 143 251 876
Private placement notes 637 537 (1,132) 640 682
Other 251 227 238 227 943
------ ------- ------- ------- -------
Total net interest income $2,051 $ 1,733 $ (884) $ 1,508 $ 4,408
====== ======= ======= ======= =======
</TABLE>
NET INTEREST INCOME (EXPENSE) IN 1998
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------------------
March 31, June 30, September 30, December 31, Total
1998 1998 1998 1998 1998
------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Mortgage loans $1,371 $ 1,412 $ 2,076 $ 1,251 $ 6,110
CMO collateral -- 113 109 (77) 145
FNMA MBS 580 (1,050) (762) 11 (1,221)
Private placement notes -- -- -- 519 519
Other 208 299 269 294 1,070
------ ------- ------- ------- -------
Total net interest income $2,159 $ 774 $ 1,692 $ 1,998 $ 6,623
====== ======= ======= ======= =======
</TABLE>
37
<PAGE> 39
Mortgage Loans Held for Sale and Held to Maturity
Net interest income generated from investments in mortgage loans (classified as
held for sale and held to maturity) during the years ended December 31, 1999 and
1998, respectively, is detailed below (dollars in thousands):
<TABLE>
<CAPTION>
Mortgage Loans Held for Sale and Held to Maturity
Quarter Ended
-------------------------------------------------------------------
March 31, June 30, September 30, December 31,
1999 1999 1999 1999
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Average asset balance $246,329 $123,945 $ 41,034 $ 251
Average repo borrowing balance 225,835 113,125 37,031 --
-------- -------- --------- ---------
Net interest earning assets $ 20,494 $ 10,820 $ 4,003 $ 251
Average leverage ratio 91.680% 91.270% 90.245% --
Effective interest income rate 7.092% 7.010% 2.704% (9.243%)
Effective interest expense rate 6.432% 6.150% 6.258% --
-------- -------- --------- ---------
Net interest spread 0.660% 0.860% (3.554%) (9.243%)
Interest income $ 4,367 $ 2,172 $ 278 $ (6)
Interest expense 3,631 1,759 592 --
-------- -------- --------- ---------
Net interest income (loss) $ 736 $ 413 $ (314) $ (6)
======== ======== ========= =========
Yield on net interest earning assets 14.369% 15.282% (31.376%) (9.243%)
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------------------------------------
March 31, June 30, September 30, December 31,
1998 1998 1998 1998
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Average asset balance $216,275 $370,811 $ 566,455 $ 465,445
Average repo borrowing balance 166,882 332,424 523,403 447,915
-------- -------- --------- ---------
Net interest earning assets $ 49,393 $ 38,387 $ 43,052 $ 17,530
Average leverage ratio 77.161% 89.648% 92.400% 96.234%
Effective interest income rate 7.410% 7.371% 7.489% 7.392%
Effective interest expense rate 6.318% 6.452% 6.377% 6.422%
-------- -------- --------- ---------
Net interest spread 1.092% 0.919% 1.112% 0.970%
Interest income $ 4,006 $ 6,833 $ 10,606 $ 8,602
Interest expense 2,635 5,421 8,530 7,351
-------- -------- --------- ---------
Net interest income $ 1,371 $ 1,412 $ 2,076 $ 1,251
======== ======== ========= =========
Yield on net interest earning assets 11.099% 14.712% 19.285% 28.543%
</TABLE>
In 1999, the Company securitized substantially all of its remaining inventory of
mortgage loans. These loans were transferred from the held for sale category to
the CMO collateral category. Accordingly, the Company's net interest income from
mortgage loans held for sale and held to maturity declined to $829,000 in 1999
compared to $6,110,000 in 1998. The Company did not purchase any mortgage loans
in 1999. In 1998 the Company purchased in excess of $850,000,000 of mortgage
loans.
38
<PAGE> 40
Mortgage Loans - CMO Collateral
Net interest income generated from the Mortgage Loans - CMO collateral during
1999 and 1998 is detailed below (dollars in thousands):
<TABLE>
<CAPTION>
Mortgage Loans - CMO Collateral
Quarter Ended
-------------------------------------------------------------------
March 31, June 30, September 30, December 31,
1999 1999 1999 1999
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Average asset balance $124,784 $204,469 $ 262,666 $ 279,298
Average CMO borrowing balance 98,357 191,858 232,132 262,354
Average repo balance 18,194 1,518 15,361 3,366
-------- -------- --------- ---------
Net interest earning assets $ 8,233 $ 11,093 $ 15,173 $ 13,578
Average leverage ratio 93.402% 94.575% 94.223% 95.138%
Effective interest income rate 6.825% 7.076% 6.781% 7.202%
Effective interest expense rate 6.737% 6.789% 6.904% 6.974%
-------- -------- --------- ---------
Net interest spread 0.088% 0.287% (0.123%) 0.228%
Interest income $ 2,129 $ 3,617 $ 4,453 $ 5,029
Interest expense 1,963 3,282 4,272 4,633
-------- -------- --------- ---------
Net interest income $ 166 $ 335 $ 181 $ 396
======== ======== ========= =========
Yield on net interest earning assets 8.065% 12.080% 4.772% 11.659%
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------------------------------------
March 31, June 30, September 30, December 31,
1998 1998 1998 1998
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Average asset balance $ -- $ 92,272 $ 91,980 $ 86,477
Average CMO borrowing balance -- 88,069 87,524 80,522
Average repo balance -- 1,076 203 1,760
-------- -------- --------- ---------
Net interest earning assets $ -- $ 3,127 $ 4,253 $ 4,195
Average leverage ratio -- 95.445% 95.155% 93.113%
Effective interest income rate -- 7.158% 7.071% 6.230%
Effective interest expense rate -- 6.903% 6.915% 6.919%
-------- -------- --------- ---------
Net interest spread -- 0.255% 0.156% (0.689%)
Interest income $ -- $ 1,651 $ 1,625 $ 1,346
Interest expense -- 1,538 1,516 1,423
-------- -------- --------- ---------
Net interest income (expense) $ -- $ 113 $ 109 $ (77)
======== ======== ========= =========
Yield on net interest earning assets -- 14.413% 10.291% (7.346%)
</TABLE>
In 1999, the Company securitized $249,932,000 (par value) of mortgage loans in
two securitizations. The securitizations were accomplished in a grantor/owner
trust format (CMO) through a wholly-owned subsidiary, Hanover SPC-A, Inc. The
transactions were accounted for as financings for both GAAP and tax accounting
purposes. In 1998, the company securitized $102,977,000 in a REMIC CMO format.
This transaction was accounted for as a financing for GAAP and a sale for tax.
In a GAAP financing, the Company continues to record 100% of the interest
income, net of servicing and other fees, generated by the mortgage loans. The
primary source of financing for these mortgage loans was the CMO borrowing.
These financings represent the liability for
39
<PAGE> 41
certain investment grade mortgage notes issued by the Company. The interest
expense on this financing represents the coupon interest amount to be paid to
those note holders.
The Company's net equity in these transactions was leveraged through reverse
repurchase financing. At December 31, 1999 the Company had $3,366,000 of reverse
repurchase financing against its net equity in these transactions.
Interest expense includes the interest on CMO borrowings, interest on the
related reverse repurchase agreements and amortization of certain deferred
financing costs and interest rate caps.
40
<PAGE> 42
FNMA Mortgage Securities
Net interest income in 1999 and 1998 generated from investments in FNMA mortgage
securities is detailed below (dollars in thousands):
<TABLE>
<CAPTION>
FNMA Mortgage Securities
Quarter Ended
--------------------------------------------------------------------
March 31, June 30, September 30, December 31,
1999 1999 1999 1999
-------- --------- --------- --------
<S> <C> <C> <C> <C>
Average asset balance $ 57,552 $ 53,619 $ 49,968 $ 46,930
Average repo borrowing balance 56,420 52,559 47,888 38,534
-------- --------- --------- --------
Net interest earning assets $ 1,132 $ 1,060 $ 2,080 $ 8,396
Average leverage ratio 98.033% 98.023% 95.837% 82.110%
Effective interest income rate 6.783% 6.930% 6.724% 6.979%
Effective interest expense rate 5.069% 5.388% 5.822% 5.890%
-------- --------- --------- --------
Net interest spread 1.714% 1.542% 0.902% 1.089%
Interest income $ 976 $ 929 $ 840 $ 819
Interest expense 715 708 697 568
-------- --------- --------- --------
Net interest income $ 261 $ 221 $ 143 $ 251
======== ========= ========= ========
Yield on net interest earning assets 92.226% 83.396% 27.500% 11.974%
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------------------------------
March 31, June 30, September 30, December 31,
1998 1998 1998 1998
-------- --------- --------- --------
<S> <C> <C> <C> <C>
Average asset balance $334,722 $ 281,933 $ 243,299 $ 59,492
Average repo borrowing balance 324,305 272,176 241,388 55,548
-------- --------- --------- --------
Net interest earning assets $ 10,417 $ 9,757 $ 1,911 $ 3,944
Average leverage ratio 96.888% 96.539% 99.215% 93.371%
Effective interest income rate 6.116% 3.992% 4.528% 5.446%
Effective interest expense rate 5.597% 5.616% 5.826% 5.754%
-------- --------- --------- --------
Net interest spread 0.519% (1.624%) (1.298%) (0.308%)
Interest income $ 5,118 $ 2,814 $ 2,754 $ 810
Interest expense 4,538 3,864 3,516 799
-------- --------- --------- --------
Net interest income $ 580 $ (1,050) $ (762) $ 11
======== ========= ========= ========
Yield on net interest earning assets 22.271% (43.054%) (159.498%) 1.116%
</TABLE>
In August 1998, the Company exchanged $17.4 million of adjustable rate mortgage
loans for a like amount of mortgage securities in the form of five FNMA
certificates. All of these mortgage certificates were subsequently sold with
recourse in October 1998. In December 1998, the Company exchanged $55.2 million
of fixed rate mortgage loans (without recourse) for a like amount of mortgage
securities in the form of 31 FNMA certificates. In March 1998, the Company
purchased $4,122,000 of FNMA passthrough certificates from a Wall Street dealer
firm.
Interest expense includes the interest on the related reverse repurchase
agreements and amortization of deferred financing costs and interest rate caps.
41
<PAGE> 43
Private Placement MBS
Net interest income (expense) generated from private placement mortgage-backed
securities is detailed below (dollars in thousands):
<TABLE>
<CAPTION>
Private Placement MBS
Quarter Ended
---------------------------------------------------------------
March 31, June 30, September 30, December 31,
1999 1999 1999 1999
------- ------- -------- -------
<S> <C> <C> <C> <C>
Average asset balance $18,334 $17,261 $ 18,643 $16,401
Average repo borrowing balance 4,037 5,836 4,243 4,605
------- ------- -------- -------
Net interest earning assets $14,297 $11,425 $ 14,400 $11,796
Average leverage ratio 22.019% 33.810% 22.759% 28.077%
Effective interest income rate 15.069% 14.414% (22.958%) 17.492%
Effective interest expense rate 5.455% 5.826% 5.845% 6.687%
------- ------- -------- -------
Net interest spread 9.614% 8.588% (28.803%) 10.805%
Interest income (expense) $ 692 $ 622 $ (1,070) $ 717
Interest expense 55 85 62 77
------- ------- -------- -------
Net interest income (expense) $ 637 $ 537 $ (1,132) $ 640
======= ======= ======== =======
Yield on net interest earning assets 17.784% 18.801% (31.444%) 21.710%
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------------------------
March 31, June 30, September 30, December 31,
1998 1998 1998 1998
------- ------- -------- -------
<S> <C> <C> <C> <C>
Average asset balance $ -- $ -- $ -- $13,446
Average repo borrowing balance -- -- -- 2,784
------- ------- -------- -------
Net interest earning assets $ -- $ -- $ -- $10,662
Average leverage ratio -- -- -- 20.707%
Effective interest income rate -- -- -- 16.662%
Effective interest expense rate -- -- -- 5.729%
------- ------- -------- -------
Net interest spread -- -- -- 10.933%
Interest income $ -- $ -- $ -- $ 560
Interest expense -- -- -- 41
------- ------- -------- -------
Net interest income $ -- $ -- $ -- $ 519
======= ======= ======== =======
Yield on net interest earning assets -- -- -- 19.484%
</TABLE>
The Private Placement MBS category includes (1) subordinate MBS, interest only
notes, and principal only notes that the Company created in its second
securitization, 1998-B, and (2) starting in June 1999, subordinate MBS that the
company purchased in the open market.
In October 1998, the Company completed its second private placement REMIC
securitization transaction, the 1998-B securitization. Hanover contributed
certain mortgage loan collateral to its newly organized unconsolidated
subsidiary, HCP-2. This had the effect of removing the mortgage loan collateral
from Hanover's balance sheet for GAAP and tax accounting purposes.
42
<PAGE> 44
HCP-2 accounted for the transaction as a financing for GAAP and as a sale for
tax accounting purposes.
The Company's investment in 1998-B private placement MBS at December 31, 1999
includes a $13,567,000 investment in six investment grade ("AA", "A" and "BBB"),
six interest only notes, six below investment grade notes and three principal
only notes. The Company's investment in 1998-B private placement MBS at December
31, 1998 includes a $18,883,000 investment in the same securities plus three
additional investment grade subordinate MBS and three additional below
investment grade subordinate MBS.
The 1998-B 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.
In the second quarter of 1999, the Company purchased twelve below investment
grade subordinate MBS from third parties. At December 31, 1999, these securities
had an aggregate book of value of $3,640,000.
Other interest income
Interest income generated during 1999 and 1998 from non-mortgage assets is
detailed below (dollars in thousands):
<TABLE>
<CAPTION>
QUARTER ENDED Year
----------------------------------------------- Ended
Mar 31, Jun 30, Sept 30, Dec 31, Dec 31,
1999 1999 1999 1999 1999
---- ---- ---- ------ ------
<S> <C> <C> <C> <C> <C>
Cash margin $ -- $ -- $ -- $ -- $ --
Overnight investing 199 169 146 84 598
Related party notes 52 58 92 143 345
---- ---- ---- ------ ------
$251 $227 $238 $ 227 $ 943
==== ==== ==== ====== ======
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED Year
----------------------------------------------- Ended
Mar 31, Jun 30, Sept 30, Dec 31, Dec 31,
1998 1998 1998 1998 1998
---- ---- ---- ------ ------
<S> <C> <C> <C> <C> <C>
Cash margin $109 $157 $173 $ -- $ 439
Overnight investing 81 82 3 209 375
Related party notes 18 60 93 85 256
---- ---- ---- ------ ------
$208 $299 $269 $ 294 $1,070
==== ==== ==== ====== ======
</TABLE>
Interest income on cash deposited as additional cash collateral (cash margin)
pursuant to reverse repurchase financing agreements with certain lenders in 1998
earned interest at the respective borrowing rate charged by the lender. There
was no such activity in 1999.
Interest income recorded on overnight investing was generated for the most part
from investing excess cash in Federal Home Loan Bank discount notes and, to a
much lesser extent, investments in the highest rated commercial paper and
savings accounts. Interest rates on overnight investments ranged from 3.65% to
5.13%.
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<PAGE> 45
The Company had maintained a significantly higher liquidity balance in the first
three quarters of 1999 as compared to 1998. (Cash and cash equivalent balances
at December 31, 1999 and 1998 were $18,022,000 and $11,837,000, respectively.)
Accordingly, interest income generated from overnight investing was considerably
higher than in 1998. In the fourth quarter of 1999, excess cash was applied to
reduce borrowings against FNMA collateral.
Notes receivable due from HCP earn interest at the prime rate less one percent.
The balance due from HCP at December 31, 1999 and 1998 was $4,896,000 and
$713,000, 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 December 31, 1999 and 1998 was $3,050,000 and
$3,180,000, respectively.
In September 1999 Hanover advanced $3,041,000 to HCP to fund the purchase of
certain third party private placement notes by HCP. This advance is included in
the notes receivable due from HCP at December 31, 1999.
TAXABLE INCOME
Hanover's taxable income for year ended December 31, 1999 is estimated at
$2,367,000. Taxable income differs from GAAP net (loss) for the year ended
December 31, 1999 due to various recurring and one time book/tax differences.
The following table details the major book/tax differences in arriving at the
estimated taxable income for the year ended December 31, 1999 (dollars in
thousands):
<TABLE>
<S> <C>
GAAP net (loss) $(12,627)
- ---------------
Recurring adjustments:
- ----------------------
Add: Equity in loss of unconsolidated
subsidiaries 1,774
Loan loss provision, net of realized losses 405
Difference in recognition on sales of
servicing rights and mortgage loans
and mortgage securities 230
Less: Tax amortization of net premiums
on mortgages, CMO collateral and
mortgage securities and interest accrual
in excess of GAAP amortization and
interest accrual (447)
Other (99)
Adjustments related to third quarter charges:
- ---------------------------------------------
Add: Realized loss on mark to market of
mortgage securities and mortgage loans 6,517
Provision for loss on disposition of
unconsolidated subsidiary (HCP-2) 4,793
Catch up amortization of net premiums
and deferred costs on CMO collateral
and mortgage securities 1,821
--------
Estimated taxable income $ 2,367
- ------------------------ ========
</TABLE>
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<PAGE> 46
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
With the completion of the 1999-B securitization and the concomitant reduction
of mortgage loans held for sale to close to zero, the Company believes it has
substantially reduced its exposure to liquidity events. The Company expects to
meet its future short-term and long-term liquidity requirements generally from
its existing working capital, cash flow provided by operations, reverse
repurchase agreements and other possible sources of financing, including CMOs
and REMICs. The Company considers its ability to generate cash to be adequate to
meet operating requirements both short-term and long-term.
The Company's remaining exposure to market-driven liquidity events is limited to
the short-term reverse repurchase financing it has in place against its
mortgage-backed securities. If a significant decline in the market value of the
Company's mortgage-backed securities 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 two committed reverse repurchase agreement lines of credit in
place at December 31, 1999 and four uncommitted lines of credit. Management may
add additional committed and uncommitted lines of credit in the future.
Net cash provided by operating activities for the year ended December 31, 1999
was $2,676,000 compared to a net loss of ($12,627,000) for the year ended
December 31, 1999. Significant non-cash charges and expenses included $6,517,000
of non cash losses from mark-to-market of certain securities and mortgage loans;
$4,793,000 provision for loss on sale of HCP-2 subsidiary; and $4,300,000 in
amortization of premium and deferred costs. The most significant use of cash not
reflected in net income were loans to related parties of $4,294,000, consisting
primarily of loans to HCP which were used to fund purchases by HCP of
subordinate MBS.
Net cash provided by investing activities amounted to $145,515,000 during the
year ended December 31, 1999. The majority of cash proceeds from investing
activities was generated from (1) principal payments received on collateral for
CMOs of $61,613,000, mortgage loans available for sale of $44,429,000 and
mortgage securities of $12,895,000; and (2) proceeds from sale of mortgage loans
of $28,789,000, offset by the purchase of twelve below investment grade mortgage
securities for $3,668,000 in the second quarter. (In addition, HCP purchased
seventeen below investment grade mortgage securities in the third quarter. The
cash used for this purchase ($3,041,000) was provided by the Company in the form
of a note receivable from HCP, which is reflected in the increase in loans to
related parties described in the preceding paragraph.)
Cash flows from financing activities used $142,006,000 during the year ended
December 31, 1999. During the year ended December 31, 1999, the Company made net
repayments to its
45
<PAGE> 47
reverse repurchase lenders of $314,368,000 and had net borrowings on CMOs (net
of principal repayments) of $177,624,000. The Company also paid dividends of
$3,026,000 and purchased an additional 495,000 shares of its common stock for
$2,235,000 during this period.
CAPITAL RESOURCES
The Company had no significant capital expenditure during 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 Company did not experience any material Y2K issues. Nevertheless, there
still remain some future dates that could potentially cause computer systems
problems.
The following information is provided relating to the Company's preparation for
Y2K issues in the year ended December 31, 1999:
1. Y2K-Readiness- The Company reviewed the status of all of its information
technology ("IT") systems and determined that all of its computer hardware
is Y2K compliant. In addition, the Company received satisfactory
certification from virtually all of its third party vendors and/or verified
to its satisfaction that their IT systems were Y2K compliant as of December
31, 1999.
<TABLE>
<CAPTION>
Key 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 did not incur any significant costs associated with Y2K
non-compliance by the third party vendors. The Company does not own any
non-IT systems (i.e. elevator
46
<PAGE> 48
systems, building air management systems, security and fire control
systems). The Company received written and/or verbal confirmation that the
non-IT systems located in the Company's principal leased facilities are all
Y2K compliant.
2. Y2K-Costs - The Company did not incur any material costs related to its Y2K
issues and believes its total Y2K costs to date have been less than
$25,000. It does not anticipate any material costs will be incurred on as
yet unidentified Y2K issues.
3. Y2K-Risks- The Company's most reasonably likely worst case scenario related
to the Y2K issue would have occurred if any of the companies which service
its mortgage asset 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. To the Company's
knowledge, neither of these scenarios occurred.
4. Y2K-Contingency Plans- The Company developed contingency plans to handle
the most reasonably likely worst case Y2K scenario. The Y2K contingency
plans identified individuals within the Company to contact in the event of
a Y2K problem, as well as the availability of back-up systems.
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 December 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.
Investments in Certain Mortgage Assets
The Company takes certain risks in investing in subprime single-family mortgage
loans and securities collateralized by such loans. If these mortgage loans are
missing relevant documents, such as the original note, they may be difficult to
enforce. These mortgage loans may also have inadequate property valuations. In
addition, if a single-family mortgage loan has a poor payment history, it is
more likely to have future delinquencies because of poor borrower payment habits
or a continuing cash flow problem.
Defaults on Mortgage Assets
The Company makes long-term investments in mortgage assets and securities.
During the time it holds mortgage assets for investment, the Company is subject
to the risks of borrower defaults and bankruptcies and hazard losses (such as
those occurring from earthquakes or floods) that are
47
<PAGE> 49
not covered by insurance. If a default occurs on any mortgage loan held by the
Company or on any mortgage loan collateralizing below investment grade in BS
held by the Company, the Company will bear the risk of loss of principal to the
extent of any deficiency between the value of the mortgaged property, plus any
payments from an insurer or guarantor, and the amount owing on the mortgage
loan.
If the Company were to invest in commercial mortgage loans, the Company may be
subject to certain additional risks. Commercial properties tend to be unique and
more difficult to value than single-family residential properties. Commercial
mortgage loans often have shorter maturities than single-family mortgage loans
and often have a significant principal balance or "balloon" due on maturity. A
balloon payment creates a greater risk for the lender because the ability of a
borrower to make a balloon payment normally depends on its ability to refinance
the loan or sell the related property at a price sufficient to permit the
borrower to make the payment. Commercial mortgage lending is generally viewed as
exposing the lender to a relatively greater risk of loss than single-family
mortgage lending because it usually involves larger mortgage loans to single
borrowers or groups of related borrowers and the repayment of the loans is
typically dependent upon the successful operation of the related properties. As
of December 31, 1999, the Company did not have any commercial mortgage loan
investments. However, the Company may elect to make such investments.
Negative Effects of Fluctuating Interest Rates
Changes in interest rates may impact the Company's earnings in various ways.
While the Company anticipates that over the long term less than 25% of its
mortgage loans will be adjustable rate mortgages ("ARMs"), rising short term
interest rates may negatively affect the Company's earnings in the short term.
Increases in the interest rate on an ARM loan are generally limited to either 1%
or 2% per adjustment period. ARM loans owned by the Company are subject to such
limitations, while adjustments in the interest rate on the Company's borrowings
are not correspondingly limited. As a result, in periods of rising interest
rates, the Company's net interest income could temporarily decline.
The rate of prepayment on the Company's mortgage loans may increase if interest
rates decline, or if the difference between long-term and short-term interest
rates diminishes. Increased prepayments would cause the Company to amortize any
premiums paid on the acquisition of its mortgage loans faster than currently
anticipated, resulting in a reduced yield on its mortgage loans. Additionally,
to the extent proceeds of prepayments cannot be reinvested at a rate of interest
at least equal to the rate previously earned on the prepaid mortgage loans, the
Company's earnings may be adversely affected.
Insufficient Demand for Mortgage Loans and the Company's Loan Products
The availability of mortgage loans that meet the Company's criteria depends on,
among other things, the size of and level of activity in the residential,
multifamily and commercial real estate lending markets. The size and level of
activity in these markets, in turn, depends on the level of interest rates,
regional and national economic conditions, inflation and deflation in property
values and the general regulatory and tax environment as it relates to mortgage
lending. If the Company can not obtain sufficient mortgage loans or mortgage
securities that meet its criteria, its business will be adversely affected.
48
<PAGE> 50
Investment Company Act
The Company at all times intends to conduct its business so as not to become
regulated as an investment company under the Investment Company Act. If the
Company were to become regulated as an investment company, the Company's use of
leverage would be substantially reduced. The Investment Company Act exempts
entities that are "primarily engaged in the business of purchasing or otherwise
acquiring mortgages and other liens on interest in real estate" ("Qualifying
Interests"). Under current interpretation of the staff of the Securities and
Exchange Commission, in order to qualify for this exemption, the Company must
maintain at least 55% of its assets directly in Qualifying Interests. As of
December 31, 1999, Management calculates that the Company is in compliance with
this requirement.
Clinton Administration Proposal
The Clinton's administration for the fiscal year 2001 budget proposal was
announced on February 1, 2000. The proposed budget would amend the tax rules
relating to the distribution of a REIT's income. Under current law, a REIT is
required to distribute at least 85% of its ordinary income and 95% of its
capital gains during a taxable year in order to avoid a 4% excise tax on the
undistributed amount. Under the Clinton Administration proposal, a REIT would be
required to distribute 98% of both ordinary income and capital gain net income
to avoid the excise tax. If this proposal was enacted, it would be effective for
calendar years beginning after December 31, 2000.
As in previous Clinton Administration proposals, the administration proposes a
"closely held REIT" ownership test, under which no "person" (i.e., a
corporation, partnership or trust, including a pension or profit sharing trust)
could own stock of a REIT possessing 50% or more the total combined voting power
of all classes of voting stock or 50% or more of the total value of shares of
all classes of stock. This 2001 proposal contains an exception for REITs owning
more than 50% of another REIT. Further, there is a newly proposed "limited
look-through rule" for partnerships that own REITs. There is no exception for
publicly traded REITs. This proposal, if enacted, would be effective for
entities electing REIT status for taxable years beginning on or after the date
of first committee action (an entity that has elected REIT status prior to this
date will avoid these restrictions so long as it has sufficient business assets
or activities as of such date). It is presently uncertain whether these REIT
proposals, or any other proposals regarding REITs, will be enacted.
State and Local Taxes
Hanover and its shareholders may be subject to state or local taxation in
various jurisdictions, including those in which it or they transact business or
reside. The state and local tax treatment of Hanover and its shareholders may
not conform to federal income tax consequence discussed above. Consequently,
prospective shareholders should consult their own tax advisors regarding the
effect of state and local tax laws on an investment in Hanover shares.
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,
49
<PAGE> 51
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.
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 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 REIT's; 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.
50
<PAGE> 52
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
During 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 and certain mortgage securities.
The Company generally closes out the hedge position to coincide with the related
sale or securitization transactions and recognizes the results of the hedge
transaction in determining the amount of the related gain or loss for loans or
securities sold, or as a basis adjustment to loans held to maturity.
At December 31, 1999 the Company had forward commitments to sell $6 million (par
value) of Agency mortgage securities that had not yet settled. This forward sale
was entered into to hedge the expected sale of approximately $6 million of AA
and A rated subordinate mortgage-backed securities held in a trading account.
The Company generally hedges its "held for sale" 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 $86,000 during 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 should offset a
corresponding decline in the value of the hedged assets. Conversely, if interest
rates decrease, the market value of the hedged asset will generally 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 corresponding gain in value of 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.
The Company also enters into interest rate hedge mechanisms (interest rate caps)
to manage its interest rate exposure on certain reverse repurchase agreement
financing and floating rate CMOs. 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.
At December 31, 1999 the Company had the following interest rate caps in effect
(dollars in thousands):
51
<PAGE> 53
<TABLE>
<CAPTION>
NOTIONAL AMOUNT INDEX STRIKE % MATURITY DATE
--------------- ----- -------- -------------
<S> <C> <C> <C>
$ 29,741 3 Month LIBOR 5.75% March, 2001
28,823 3 Month LIBOR 5.75% April, 2001
75,000 1 Month LIBOR 7.25% August, 2002
35,000 1 Month LIBOR 7.75% August, 2004
--------
$168,564
========
</TABLE>
In addition, the Company's affiliate, HCP, had the following interest rate caps
in effect at December 31, 1999:
<TABLE>
<CAPTION>
NOTIONAL AMOUNT INDEX STRIKE % MATURITY DATE
--------------- ----- -------- -------------
<S> <C> <C> <C>
$ 11,000 3 month LIBOR 7.695% October, 2003
</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 the strike rate, subject to the limitation of the notional
amount of financing.
INTEREST RATE SENSITIVITY
Interest Rate Mismatch Risk - Reverse Repo Financing
At December 31, 1999, the Company owned a de minimus amount of mortgage loans
held for sale. If the Company resumes its strategy of purchasing mortgage loans,
it would finance 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) with reverse repurchase agreement
("repo") financing or with equity alone in certain instances. In this scenario,
the Company would be exposed to the mismatch between the cost of funds on its
repo financing and the yield on the mortgage loans. The Company's repo financing
agreements at December 31, 1999 were indexed to LIBOR plus a spread of 125 to
238 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.
The Company also has floating rate reverse repurchase financing for certain
fixed-rate mortgage backed securities. At December 31, 1999, the Company had a
total of $52,356,000 of floating rate reverse repo financing compared to
$62,686,000 of fixed rate mortgage-backed securities investments, and the
Company's affiliate, HCP, had $10,842,000 of such financing against $14,180,000
of fixed-rate securities. The Company has attempted to hedge this exposure by
using the interest rate caps described above.
Price Risk
The market value of mortgage loans and mortgage securities will fluctuate with
changes in interest rates. In the case of mortgage loans held for sale and
mortgage securities available for sale or held for trading, the Company will be
required to record changes in the market value of such assets. In the case of
mortgage loans held for sale and mortgage securities held in trading, the
Company generally attempts to hedge these changes through the short sale of
mortgage securities, described above. At December 31, 1999, the Company did not
have any significant
52
<PAGE> 54
mortgage loans held for sale. The mortgage securities held in trading were
hedged with the short sale of mortgage securities described above.
In the case of mortgage loans held for sale, 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. 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. Net
Hedging Gains on fixed mortgage pools were $86,000 through the first three
quarters of 1999.
Prepayment Risk
Interest income on the mortgage loan and mortgage securities portfolio is also
negatively affected by prepayments on mortgage loan pools or MBS purchased at a
premium and positively impacted by prepayments on mortgage loan pools or MBS
purchased at a discount. The Company assigns an anticipated prepayment speed to
each mortgage pool and MBS at the time of purchase and records the appropriate
amortization of the premium or discount over the estimated life of the mortgage
loan pool or MBS. 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 and amortization of the
premium or discount 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.
Delinquency and Default Risk
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.
Securitized Mortgage Loan Assets
With respect to the match funding of assets and liabilities, the CMO collateral
relating to the 1998-A, 1999-A and 1999-B securitizations reflect $176,751,000
of fixed rate mortgage loans and $93,082,000 of adjustable rate mortgage loans
at December 31, 1999. The primary financing for this asset category is the CMOs
($254,963,000) and to a much lesser extent repo agreements ($3,366,000). 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 CMOs for the 1998-A and 1999-A securitizations lock in long-term fixed
financing and thereby eliminates most interest rate risk. The financing for the
1999-B securitization is indexed to LIBOR. Accordingly, the Company has hedged
this interest rate risk through the purchase of interest rate caps. The Company
purchased amortizing interest rate caps with notional balances of $110 million
in August 1999 to hedge the 1999-B securitization.
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<PAGE> 55
Mortgage Securities
At December 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 ($62,686,000). The coupon interest rates
on the fixed rate mortgage securities would not be affected by changes in
interest rates. The interest only notes remit 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.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company and the related notes, together with the
Independent Auditors' Report thereon beginning on page F-1 of this Form 10-K.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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<PAGE> 56
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference to the Company's definitive proxy statement to
be filed with the Securities and Exchange Commission.
ITEM 11: EXECUTIVE COMPENSATION
Incorporated herein by reference to the Company's definitive proxy statement to
be filed with the Securities and Exchange Commission.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference to the Company's definitive proxy statement to
be filed with the Securities and Exchange Commission.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference to the Company's definitive proxy statement to
be filed with the Securities and Exchange Commission.
55
<PAGE> 57
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
See Part II, Item 8 hereof.
(2) Financial Statements and Auditors' Reports
All schedules omitted are inapplicable or the information required is
shown in the Financial Statements or notes thereto. The auditors'
reports of Deloitte & Touche LLP with respect to the Financial
Statements begin on page F-1 of this Form 10-K.
(3) Exhibits
Exhibits required to be attached by Item 601 of Regulation S-K are
listed in the Exhibit Index attached hereto, which is incorporated
herein by this reference.
(b) Reports on Form 8-K
Hanover filed no reports on Form 8-K during 1999.
(c) Exhibits
See Item 14(a) 3 above.
56
<PAGE> 58
TABLE OF CONTENTS TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
HANOVER CAPITAL MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
Independent Auditors' Report...................................................................... F-2
Consolidated Financial Statements as of December 31, 1999 and December 31, 1998
and for the Years Ended December 31, 1999 and 1998 and for the Period from June
10, 1997 (inception) through December 31, 1997:
Balance Sheets.......................................................................... F-3
Statements of Operations................................................................ F-4
Statements of Stockholders' Equity...................................................... F-5
Statements of Cash Flows................................................................ F-6
Notes to Consolidated Financial Statements.............................................. F-7
HANOVER CAPITAL PARTNERS LTD. AND SUBSIDIARIES
Independent Auditors' Report...................................................................... F-38
Consolidated Financial Statements as of December 31, 1999 and December 31, 1998
and for each of the Three Years in the Period Ended December 31, 1999:
Balance Sheets.......................................................................... F-39
Statements of Operations................................................................ F-40
Statements of Stockholders' Equity...................................................... F-41
Statements of Cash Flows................................................................ F-42
Notes to Consolidated Financial Statements.............................................. F-43
HANOVER CAPITAL PARTNERS 2, INC. AND SUBSIDIARY
Independent Auditors' Report...................................................................... F-57
Consolidated Financial Statements as of December 31, 1999 and December 31, 1998
and for the Year Ended December 31, 1999 and for the Period from October 7, 1998
(inception) through December 31, 1998:
Balance Sheets.......................................................................... F-58
Statements of Operations................................................................ F-59
Statements of Stockholders' Equity...................................................... F-60
Statements of Cash Flows................................................................ F-61
Notes to Consolidated Financial Statements.............................................. F-62
</TABLE>
<PAGE> 59
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Hanover Capital Mortgage Holdings, Inc. and Subsidiaries
New York, New York
We have audited the accompanying consolidated balance sheets of Hanover Capital
Mortgage Holdings, Inc. and Subsidiaries (the "Company") as of December 31, 1999
and 1998, and the related consolidated statements of operations, stockholders'
equity and cash flows for the years ended December 31, 1999 and 1998 and for the
period from June 10, 1997 (inception) through December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Hanover
Capital Mortgage Holdings, Inc. and Subsidiaries as of December 31, 1999 and
1998, and the consolidated results of their operations and their cash flows for
the years ended December 31, 1999 and 1998 and for the period from June 10, 1997
(inception) through December 31, 1997 in conformity with generally accepted
accounting principles in the United States of America.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
March 17, 2000
F-2
<PAGE> 60
HANOVER CAPITAL MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except as noted)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
ASSETS 1999 1998
--------- ---------
<S> <C> <C>
Mortgage loans:
Held for sale $ 251 $ 256,833
Held to maturity -- 69,495
Collateral for CMOs 269,833 81,666
Mortgage securities:
Available for sale 48,529 74,000
Held to maturity 8,238 4,478
Trading 5,919 --
Cash and cash equivalents 18,022 11,837
Accrued interest receivable 2,926 3,940
Equity investments
Operating (Hanover Capital Partners Ltd.) 1,466 1,761
Mortgage Finance (Hanover Capital Partners 2, Inc.) -- 5,728
Other (HanoverTrade.com, Inc.) (30) --
Notes receivable from related parties 8,187 3,893
Due from related parties 232 313
Other receivables 151 1,621
Prepaid expenses and other assets 1,910 605
--------- ---------
TOTAL ASSETS $ 365,634 $ 516,170
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Reverse repurchase agreements $ 55,722 $ 370,090
CMO borrowing 254,963 77,305
Accrued interest payable 2,433 1,394
Dividends payable 583 695
Due to related party 88 --
Accrued expenses and other liabilities 1,339 906
--------- ---------
TOTAL LIABILITIES 315,128 450,390
--------- ---------
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, 5,826,899 and
6,321,899 shares outstanding at December 31, 1999
and December 31, 1998, respectively 58 65
Additional paid-in-capital 75,840 78,069
Retained earnings (deficit) (25,496) (9,955)
Accumulated other comprehensive (loss) 104 (2,399)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 50,506 65,780
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 365,634 $ 516,170
========= =========
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE> 61
HANOVER CAPITAL MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED YEAR ENDED JUNE 10 (INCEPTION)
DECEMBER 31, DECEMBER 31, TO DECEMBER 31,
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
REVENUES:
Interest income $ 27,505 $ 47,799 $ 4,880
Interest expense 23,097 41,176 3,204
-------- -------- -------
Net interest income 4,408 6,623 1,676
Loan loss provision 446 356 18
-------- -------- -------
Net interest income
after loan loss provision 3,962 6,267 1,658
Gain on sale of servicing rights 540 -- --
Gain (loss) on sale of mortgage assets 146 (5,704) 35
Gain (loss) on mark to market of mortgage
assets, net of associated hedge (4,292) -- --
Impairment charge on mortgage securities (2,225)
Provision for (loss) on unconsolidated
subsidiary (4,793) -- --
-------- -------- -------
Total revenue (loss) (6,662) 563 1,693
EXPENSES:
Personnel 1,230 712 --
Management and administrative 894 733 400
Due diligence 119 687 266
Commissions 5 286 61
Legal and professional 1,201 545 138
Financing/commitment fees 404 836 32
Other 338 265 43
-------- -------- -------
Total expenses 4,191 4,064 940
-------- -------- -------
Operating income (loss) (10,853) (3,501) 753
Equity in income/(loss) of unconsolidated
subsidiaries
Hanover Capital Partners Ltd. (443) (1,039) (254)
Hanover Capital Partners 2, Inc. (1,300) (394) --
HanoverTrade.com, Inc. (31) -- --
-------- -------- -------
NET INCOME (LOSS) $(12,627) $ (4,934) $ 499
======== ======== =======
BASIC EARNINGS (LOSS) PER SHARE $ (2.12) $ (0.77) $ 0.15
======== ======== =======
DILUTED EARNINGS (LOSS) PER SHARE $ (2.12) $ (0.77) $ 0.14
======== ======== =======
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE> 62
HANOVER CAPITAL MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999 AND 1998 AND
PERIOD FROM JUNE 10 (INCEPTION) TO DECEMBER 31, 1997
(in thousands except share data)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL RETAINED OTHER
------------ PAID-IN COMPREHENSIVE EARNINGS COMPREHENSIVE
SHARES AMOUNT CAPITAL (LOSS) (DEFICIT) (LOSS) TOTAL
------ ------ ------- ------ --------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of Stock 6,466,677 $ 65 $ 79,411 $ 79,476
Comprehensive (loss):
Net income $ 499 $ 499 499
Other comprehensive (loss):
Unrealized (loss) (842) $ (842) (842)
---------
Comprehensive
(loss) $ (343)
=========
Dividends declared (1,035) (1,035)
--------- --------- --------- --------- --------- --------
BALANCE,
DECEMBER 31, 1997 6,466,677 65 79,411 (536) (842) 78,098
Adjustment of initial public
offering expenses 11 11
Exercise of
Warrants 2,122 32 32
Costs associated
with registration
of warrants (40) (40)
Repurchase of
common stock (146,900) (1,345) (1,345)
Comprehensive (loss):
Net (loss) (4,934) (4,934) (4,934)
Other comprehensive (loss):
Change in net
unrealized gain (loss)
on securities available
for sale (1,557) (1,557) (1,557)
---------
Comprehensive (loss) $ (6,491)
=========
Dividends declared (4,485) (4,485)
--------- --------- --------- --------- --------- --------
BALANCE,
DECEMBER 31, 1998 6,321,899 65 78,069 (9,955) (2,399) 65,780
Repurchase of common stock (495,000) (2,236) (2,236)
Treasury stock par value
re-class (7) 7 --
Comprehensive (loss):
Net (loss) (12,627) (12,627) (12,627)
Other comprehensive (loss):
Change in net
unrealized gain (loss)
on securities available
for sale, net of
reclassification
adjustment 2,355 2,355 2,355
Equity in other comprehensive
income of unconsolidated
subsidiary 148 148 148
---------
Comprehensive (loss) $ (10,124)
=========
Dividends declared (2,914) (2,914)
--------- --------- --------- --------- --------- --------
BALANCE,
DECEMBER 31, 1999 5,826,899 $ 58 $ 75,840 $ (25,496) $ 104 $ 50,506
========= ========= ========= ========= ========= ========
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE> 63
HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 10
YEAR ENDED YEAR ENDED (INCEPTION) TO
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (12,627) $ (4,934) $ 499
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Amortization of net premium and deferred costs 4,300 6,594 361
Loan loss provision 446 356 18
(Gain) on sale of servicing rights (540) -- --
(Gain) loss on sale of mortgage assets (146) 5,705 (35)
Loss on mark to market of mortgage assets 4,292 -- --
Impairment charge on mortgage securities 2,225
Provision for loss on sale of unconsolidated subsidiary 4,793 -- --
Equity in loss of unconsolidated subsidiaries 1,774 1,433 254
(Increase) decrease in accrued interest receivable 1,014 (343) (3,597)
(Increase) in loans to related parties (4,294) (3,411) (482)
(Increase) decrease in other receivables 1,104 (1,621) --
(Increase) in prepaid expenses and other assets (1,305) (364) (241)
Increase (decrease) in accrued interest payable 1,039 842 2,250
Increase (decrease) in due to related parties 169 (782) 540
Increase in accrued expenses and other liabilities 432 423 482
--------- --------- ---------
Net cash provided by operating activities 2,676 3,898 49
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of mortgage loans (1,449) (863,324) (349,287)
Purchase of Agency mortgage securities -- (4,333) (163,030)
Purchase of private placement mortgage securities (3,668) (21,523) --
Principal payments received on mortgage securities 12,895 150,543 --
Principal payments received on collateral for CMOs 61,613 23,165 --
Principal payments received on mortgage loans held for sale 44,429 123,098 1,995
and held to maturity
Proceeds from sale of mortgage assets 30,909 276,582 35
Proceeds from sale of mortgage servicing 786 -- --
--------- --------- ---------
Net cash provided by (used in) investing activities 145,515 (315,792) (510,287)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings from (repayment of) reverse repurchase (314,368) 243,218 435,138
agreements
Net borrowing from CMOs 238,962 100,675 --
Payments on CMOs (61,338) (23,370) --
Net proceeds of initial public offering -- 11 79,122
Exercise of stock warrants - net -- (8) --
Equity investments in subsidiaries (1) (2,700) --
Dividends received - unconsolidated subsidiary -- 8,054 --
Payment of dividends (3,026) (4,826) --
Repurchase of common stock (2,235) (1,345) --
--------- --------- ---------
Net cash provided by (used in) financing activities (142,006) 319,709 514,260
--------- --------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 6,185 7,815 4,022
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 11,837 4,022 --
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 18,022 $ 11,837 $ 4,022
========= ========= =========
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE> 64
HANOVER CAPITAL MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998 AND PERIOD FROM JUNE 10 (INCEPTION) TO
DECEMBER 31, 1997
1. ORGANIZATION AND BASIS OF PRESENTATION
GENERAL
Hanover Capital Mortgage Holdings, Inc. ("Hanover") was incorporated in Maryland
on June 10, 1997. 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") 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 and (iii) acquire subordinated mortgage securities similar in nature to
the retained interests generated from internal securitizations. The principal
business strategy of the Company's primary unconsolidated subsidiary, Hanover
Capital Partners Ltd. ("HCP"), is to generate consulting and other fee income by
(i) performing loan file due diligence reviews for third parties, (ii)
performing loan sale advisory services and (iii) brokering and trading
portfolios of loans. Until recently, HCP was also engaged in the business of
originating multifamily and commercial loans. This business was discontinued in
the quarter ended June 30, 1999 and substantially all charges associated with
its discontinuance were recognized in the quarter. The Company's principal
business objective is to generate net interest income on its portfolio of
mortgage loans and mortgage securities, and to generate fee income through HCP.
The Company acquires single-family mortgage loans through a network of sales
representatives targeting financial institutions throughout the United States.
CAPITALIZATION
In September 1997, Hanover raised net proceeds of approximately $79 million in
its initial public offering (the "IPO"). In the IPO, Hanover 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,
as adjusted on January 1, 1999, entitles the holder to purchase 1.0302 shares of
common stock at the adjusted price of $14.56 per share of common stock. 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 and mortgage backed securities ("MBS"). As
of December 31, 1999, there were 6,217,877 warrants outstanding, including
172,500 warrants issued pursuant to the underwriters over-allotment option.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The 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.
F-7
<PAGE> 65
BASIS OF PRESENTATION
The consolidated financial statements of the Company are prepared on the accrual
basis of accounting in accordance with generally accepted accounting principles
("GAAP") and in conformity with the rules and regulations of the Securities and
Exchange Commission. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included.
USE OF ESTIMATES; RISKS AND UNCERTAINTIES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosure of
contingent 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. The Company's estimates and
assumptions primarily arise from risks and uncertainties associated with
interest rate volatility, credit exposure and regulatory changes. Although
management is not currently aware of any factors that would significantly change
its estimates and assumptions in the near term, future changes in market trends
and conditions may occur which could cause actual results to differ materially.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, overnight investments deposited
with banks and government securities with maturities less than 30 days.
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. Mortgage loans that are
securitized in a collateralized mortgage obligation ("CMO") are classified as
collateral for CMOs as of the closing date of the CMO. 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 and CMO collateral are reported at
the lower of the original cost of the mortgaged loans or the market value of the
mortgage loans as of the date they were designated as CMO collateral or held to
maturity.
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.
F-8
<PAGE> 66
The Company has limited its exposure to credit losses on its portfolio of
mortgage loans by performing an in-depth due diligence on every loan purchased.
The due diligence encompasses the borrower's credit, the enforceability of the
documents, and the value of the mortgage property. In addition, many mortgage
loans are guaranteed by an agency of the federal government or private mortgage
insurance. The Company monitors the delinquencies and losses on the underlying
mortgages and makes a provision for known losses as well as unidentified
potential losses in its mortgage loan portfolio if the impairment is deemed to
be other than temporary. The provision is based on management's assessment of
numerous factors affecting its portfolio of mortgage loans including, but not
limited to, current and projected economic conditions, delinquency status,
losses to date on mortgages and remaining credit protection.
MORTGAGE SECURITIES
The Company's policy is to generally classify mortgage securities as available
for sale as they are acquired. Each available for sale mortgage security is
monitored for a period of time prior to making a determination whether the asset
will be classified as held to maturity or trading. 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 designated as trading are reported at fair value. Gains and
losses resulting from changes in fair value are recorded as income or expense
and included in earnings.
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 increases in market value; however, further
increases in market value will be reflected separately in the equity section of
the Company's balance sheet. In the quarter ended September 30, 1999, the
Company determined that six interest only notes were impaired. See Note 13,
"Certain Charges and Expenses in the Quarter Ended September 30, 1999".
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 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 mortgage 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.
The Company purchases both investment grade and below investment grade mortgage
backed securities. Below investment grade MBS have the potential to absorb
credit losses caused by delinquencies and defaults on the underlying mortgage
loans. When purchasing below investment grade MBS, the Company leverages HCP's
due diligence operations and management's substantial mortgage credit
F-9
<PAGE> 67
expertise to make a thorough evaluation of the underlying mortgage loan
collateral. The Company monitors the delinquencies and defaults on the
underlying mortgages of its mortgage securities and, if an impairment is deemed
to be other than temporary, makes a provision for known losses as well as
unidentified potential losses. The provision is based on management's assessment
of numerous factors affecting its portfolio of mortgage securities including,
but not limited to, current and projected economic conditions, delinquency
status, credit losses to date on underlying mortgages and remaining credit
protection. The provision is made by reducing the cost basis of the individual
security and the amount of such write-down is recorded as a realized loss,
thereby reducing earnings. Provisions for credit losses do not reduce taxable
income and therefore do not affect the dividends paid by the Company to
stockholders in the period the provisions are taken. Actual losses realized by
the Company reduce taxable income in the period the actual loss is realized and
may affect the dividends paid to stockholders for that tax year.
EQUITY INVESTMENTS
Hanover records its investment in Hanover Capital Partners Ltd. ("HCP"), Hanover
Capital Partners 2, Inc. ("HCP-2"), and HanoverTrade.com, Inc. ("HTC") on the
equity method. Accordingly, Hanover records 97% of the earnings or losses of HCP
and HTC, and, until September 30, 1999, 99% of the earnings or losses of HCP-2
through its ownership of all of the non-voting preferred stock of HCP, HTC and
HCP-2, respectively. After writing off its investment in HCP-2 in September,
1999, Hanover stopped recording earnings or losses of HCP-2. Hanover believes
that HCP-2 has no value.
Hanover generally has no right to control the affairs of HCP, HCP-2 or HTC
because Hanover's investment in those companies is based solely on ownership of
non-voting preferred stock. Even though Hanover has no right to control the
affairs of these companies, management believes that Hanover has the ability to
exert significant influence over these companies and therefore these investments
are accounted for on the equity method.
REVERSE REPURCHASE AGREEMENTS
Reverse repurchase agreements are accounted for as collateralized financing
transactions and recorded at their contractual amounts, plus accrued interest.
FINANCIAL INSTRUMENTS
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 mortgage loan and mortgage securities portfolio. The Company
generally closes out the hedge position to coincide with the related sale or
securitization transactions. Gains and losses on mortgage loan hedge positions
are either (i) deferred as an adjustment to the carrying value of the related
loans until the loan has been funded and securitized, after which the gains or
losses will be amortized into income over the remaining life of the loan using a
method that approximates the effective yield method, or (ii) deferred until such
time as the related loans are sold. Gains or losses on hedge positions
associated with mortgage securities held in a trading account are recognized as
income or loss in each period.
The Company also enters into interest rate caps to manage its interest rate
exposure on certain reverse repurchase agreement and CMO 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
F-10
<PAGE> 68
operations. Any payments received under the interest rate cap agreements are
recorded as a reduction of interest expense on the reverse repurchase agreement
financing.
For derivative financial instruments designated as hedge instruments, the
Company periodically evaluates the effectiveness of these hedges against the
financial instrument being hedged under various interest rate scenarios. The
Company utilized hedge deferral accounting procedures in accounting for its
hedging program so long as there is adequate correlation between the hedged
results and the change in value of the hedged financial instrument. If the hedge
instrument performance does not result in adequate correlation between the
changes in value of the hedge instrument and the related hedged financial
instrument, the Company will terminate hedge deferral accounting and mark the
carrying value of the hedge instrument to market. If a hedge instrument is sold
or matures, or the criteria that was anticipated at the time the hedge
instrument was entered into no longer exists, the hedge instrument is no longer
accounted for as a hedge. Under these circumstances, the accumulated change in
the market value of the hedge is recognized in current period income or loss to
the extent that the effects of interest rate or price changes of the hedged item
have not offset the hedged results.
In accordance with SFAS No.107, Disclosure about Derivative Financial
Instruments, and SFAS No. 119, Disclosure about Derivative Financial Instruments
and Fair Value of Financial Instruments, the Company has provided fair value
estimates and information about valuation methodologies. The estimated fair
value amounts have been determined using available market information or
appropriate valuation methodologies. However, considerable judgment is required
in interpreting market data to develop estimates of fair value, so the estimates
are not necessarily indicative of the amounts that would be realized in a
current market exchange. The effect of using different market assumptions and/or
estimation methodologies may materially impact the estimated fair value amounts.
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.
Effective January 1, 2001, the distribution requirement will be reduced from 95%
to 90%.
During 1998, Hanover distributed dividends in excess of its accumulated and
current taxable income. Consequently, the distributions in excess of accumulated
and current taxable income were treated as a return of capital to the
stockholders.
EARNINGS PER SHARE
Basic earnings or loss per share excludes dilution and is computed by dividing
income or loss available to common stockholders by the weighted average number
of common shares outstanding during the period. Diluted earnings or loss 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 and losses. Shares issued during the period and
shares reacquired during the period are weighted for the period they were
outstanding.
COMPREHENSIVE INCOME
Accounting principles generally require that recognized revenue, expenses, gains
and losses be included in net income. Although certain changes in assets and
liabilities, such as unrealized gains and losses on available for sale
securities, are reported as a separate component of the equity section of the
consolidated balance sheets, such items, along with net income, are components
of comprehensive income.
F-11
<PAGE> 69
RECLASSIFICATION
The 1998 financial statements have been reclassified to conform to the 1999
financial statement presentation.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The FASB issued SFAS 133 Accounting for Derivative Instruments and Hedging
Activities ("SFAS 133") in June 1998. SFAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. Management's preliminary evaluation of
SFAS 133 indicates the implementation of SFAS 133 will not result in any
material changes to the Company's consolidated statement of operations. SFAS
137, issued in June 1999, delayed the effective date of SFAS 133 to make it
effective for quarters in fiscal years beginning after June 15, 2000.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENT
The FASB issued SFAS No. 134 Accounting For Mortgage-Backed Securities Retained
after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise ("SFAS 134") in October 1998. SFAS 134 amends FAS 65 Accounting for
Certain Mortgage Banking Activities, and FAS 115 Accounting for Certain
Investments in Debt and Equity Securities to require that after the
securitization of mortgage loans held for sale, an entity engaged in mortgage
banking activities classify the resulting mortgage-backed securities or other
retained interests based on its ability and intent to sell or hold those
investments. SFAS 134 is effective for fiscal quarters beginning after December
15, 1998. The Company adopted SFAS 134 effective January, 1, 1999. The adoption
of SFAS 134 had no affect on the Company's consolidated financial statements.
3. MORTGAGE LOANS
At December 31, 1999 management had made the determination that $251,000 of
mortgage loans were held for sale. No mortgage loans were designated as held to
maturity and $269,833,000 of mortgage loans were held as collateralized mortgage
obligation ("CMO") collateral.
HELD FOR SALE
The following table summarizes certain characteristics of the Company's
single-family mortgage loan pools, held for sale portfolio which are carried at
the lower of cost or market (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- -----------------
Fixed Adjustable Fixed Adjustable
Rate Rate (a) Total Rate Rate (a) Total
---- -------- ----- ---- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Principal amount of mortgage loans $ 45 $ 206 $ 251 $ 93,615 $ 159,901 $ 253,516
Net premium and deferred cost -- -- -- 2,305 1,262 3,567
Loan loss allowance -- -- -- (157) (93) (250)
--------- --------- --------- --------- --------- ---------
Carrying cost of mortgage loans $ 45 $ 206 $ 251 $ 95,763 $ 161,070 $ 256,833
Mix 17.93% 82.07% 100.00% 37.290% 62.710% 100.00%
Weighted average net coupon 9.261% 8.125% 8.329% 8.545% 7.542% 7.912%
Weighted average maturity 141 194 184 187 264 235
</TABLE>
F-12
<PAGE> 70
The Company had one adjustable rate mortgage loan at December 31, 1999 with a
one year constant maturity treasury ("CMT") reference rate index with a 12 month
repricing period and a net life cap of 13.50%.
The adjustable rate mortgage loans at 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%.
(a) The adjustable rate mortgage loans include $ -0- and $31,857,000 of
hybrid mortgage loans at December 31, 1999 and December 31, 1998
respectively, which allow the coupon interest rate to change at one
specified time during the life of the loan.
(b) Weighted average maturity reflects the number of months until maturity.
HELD TO MATURITY
The Company did not have any mortgage loans held to maturity at December 31,
1999. The following table summarizes certain characteristics of the Company's
single-family mortgage loans, held to maturity which are carried at cost at
December 31, 1998 (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- -----------------
Fixed Adjustable Fixed Adjustable
Rate Rate (a) Total Rate Rate (a) Total
---- -------- ----- ---- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Principal amount of mortgage loans -- -- -- $ 67,515 $ 144 $ 67,659
Net premium and deferred cost -- -- -- 1,874 4 1,878
Loan loss allowance -- -- -- (39) (3) (42)
--------- --------- --------- --------- --------- ---------
Carrying cost of mortgage loans -- -- -- $ 69,350 $ 145 $ 69,495
========= ========= =========
Mix -- -- -- 99.79% 0.21% 100.00%
Weighted average net coupon -- -- -- 8.707% 7.625% 8.705%
Weighted average maturity -- -- -- 253 302 253
</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%.
The average effective yield, which includes the amortization of net premium,
discounts and certain deferred costs for the periods shown below on the combined
held for sale and held to maturity mortgage loan portfolio were as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Quarter ended March 31 7.092% 7.410%
Quarter ended June 30 7.010% 7.371%
Quarter ended September 30 2.704% 7.489%
Quarter ended December 31 (9.243%) 7.392%
-------- --------
6.620% 7.424%
======== ========
</TABLE>
F-13
<PAGE> 71
COLLATERAL FOR CMOS
In April 1998, the Company issued its first CMO securitization transaction,
Hanover Capital SPC, Inc. Series 1998-A ("1998-A"). $102,977,000 (par value) of
single family fixed rate residential mortgage loans were assigned as collateral
for the 1998-A securitization. In March 1999, the Company completed its second
CMO securitization transaction, Hanover Grantor Trust 1999-A ("1999-A").
$138,357,000 (par value) of single family fixed and adjustable rate residential
loans were assigned as collateral for the 1999-A securitization. In August 1999,
the Company completed its third CMO securitization transaction, Hanover Capital
Trust 1999-B ("1999-B"). $111,575,000 (par value) of single family fixed and
adjustable rate residential loans were assigned as collateral for the 1999-B
securitization. The Company has limited exposure to credit risk retained on
loans it has securitized through the issuance of CMOs.
The following table summarizes the Company's single-family fixed and adjustable
rate mortgage loan pools held as CMO collateral (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- -----------------
Fixed Adjustable Fixed Adjustable
Rate Rate (a) Total Rate Rate (a) Total
---- -------- ----- ---- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Principal amount of mortgage loans $ 174,761 $ 93,419 $ 268,180 $ 79,812 $ -- $ 79,812
Net premium (discount)
and deferred costs 2,361 (165) 2,196 1,934 -- 1,934
Loan loss allowance (371) (172) (543) (80) -- (80)
---------- --------- --------- --------- --------- ---------
Carrying cost of mortgage loans $ 176,751 $ 93,082 $ 269,833 $ 81,666 $ -- $ 81,666
========= ========= ========= ========= ========= =========
Mix 65.50% 34.50% 100.00% 100.00% -- 100.00%
Weighted average net coupon 8.310% 7.180% 7.916% 7.787% -- 7.787%
Weighted average maturity 221 249 231 231 -- 231
</TABLE>
The adjustable rate mortgage loans assigned as CMO collateral at December 31,
1999 had 18 reference rate indexes with a weighted average 4 month repricing
period and a weighted average net life cap of 13.82%.
The average effective yield, which includes the amortization of net premiums,
discounts and certain deferred costs, for the periods shown below on the CMO
collateral were as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Quarter ended March 31 6.825% N/A
Quarter ended June 30 7.076% 7.158%
Quarter ended September 30 6.781% 7.071%
Quarter ended December 31 7.201% 6.230%
-------- --------
6.991% 6.832%
======== ========
</TABLE>
4. MORTGAGE SECURITIES
At December 31, 1999, the Company had $45,479,000 of fixed rate FNMA
mortgage-backed securities, all classified as available for sale, and
$17,207,000 of fixed rate private-placement mortgage-backed securities,
classified as available for sale, held to maturity, and trading, as shown in the
table below.
F-14
<PAGE> 72
<TABLE>
<CAPTION>
FIXED RATE FNMA MORTGAGE-BACKED SECURITIES
DECEMBER 31, 1999 DECEMBER 31, 1998
------------------------------------------ ------------------------------------------
Available Held Available Held
For to For to
Sale (a) Maturity Trading Total Sale (a) Maturity Trading Total
-------- -------- ------- ----- -------- -------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Principal balance of mortgage securities $ 46,156 $ -- $ -- $ 46,156 $ 58,462 $ -- $ -- $ 58,462
Net premium and deferred costs 863 -- -- 863 1,179 -- -- 1,179
-------- ------ ------ -------- -------- -------- ------- --------
Total amortized cost of mortgage securities 47,019 -- -- 47,019 59,641 -- -- 59,641
Gross unrealized loss (1,540) -- -- (1,540) (46) -- -- (46)
-------- ------ ------ -------- -------- -------- ------- --------
Carrying cost of mortgage securities $ 45,479 $ -- $ -- $ 45,479 $ 59,595 $ -- $ -- $ 59,595
Mix 100% -- -- 100% 100% -- -- 100%
Weighted average net coupon 7.451% -- -- 7.451% 7.548% -- -- 7.548%
Weighted average maturity 246 -- -- 246 251 -- -- 251
</TABLE>
<TABLE>
<CAPTION>
FIXED RATE PRIVATE PLACEMENT MORTGAGE-BACKED SECURITIES
DECEMBER 31, 1999
-------------------------------------------------
Available Held
For to
Sale (b) Maturity (c) Trading (d) Total
-------- ------------ ----------- -----
<S> <C> <C> <C> <C>
Principal balance of mortgage securities $ -- $ 13,735 $ 7,105 $ 20,840
Net premium (discount) and deferred costs 1,554 (5,241) (1,186) (4,822)
-------- ---------- -------- ----------
Total amortized cost of mortgage securities $ 1,554 $ 8,494 $ 5,919 $ 16,018
Loan loss allowance -- (256) -- (256)
Gross unrealized gain/(loss) 1,496 -- -- 1,445
-------- ---------- -------- ----------
Carrying cost of mortgage securities $ 3,050 $ 8,238 $ 5,919 $ 17,207
Mix 17.73% 47.87% 34.40% 100.00%
Principal balance of mortgage loans $208,447 $1,271,860 $208,447 $1,480,307
Weighted average net coupon 0.768% 5.932% 6.597% 1.147%
Weighted average maturity 295 303 295 300
</TABLE>
<TABLE>
<CAPTION>
FIXED RATE PRIVATE PLACEMENT MORTGAGE-BACKED SECURITIES
DECEMBER 31, 1998
-----------------------------------------------
Available Held
For to
Sale (b) Maturity (c) Trading (d) Total
-------- ------------ ----------- -----
<S> <C> <C> <C> <C>
Principal balance of mortgage securities $ 14,279 $ 3,816 -- $ 18,095
Net premium (discount) and deferred costs 2,479 662 -- 3,141
-------- -------- -------- --------
Total amortized cost of mortgage securities $ 16,758 $ 4,478 $ -- $ 21,236
Loan loss allowance -- -- -- --
Gross unrealized gain/(loss) (2,353) -- -- (2,353)
-------- -------- -------- --------
Carrying cost of mortgage securities $ 14,405 $ 4,478 $ -- $ 18,883
Mix 76.29% 23.71% -- 100.00%
Principal balance of mortgage loans $297,682 $297,682 -- $297,682
Weighted average net coupon 0.987% 5.038% -- 1.058%
Weighted average maturity 307 307 -- 307
</TABLE>
The Company also has substantially all of the economic benefit and risks
associated with $14,180,000 of fixed rate private-placement subordinate mortgage
backed securities held by its affiliate, HCP. Although HCP's balance sheet is
not consolidated in the Company's consolidated balance sheet, the Company
receives 97% of HCP's income and has guaranteed HCP's debts associated with
these securities. See Note 7 "Equity Investments."
<TABLE>
<CAPTION>
FIXED RATE PRIVATE PLACEMENT MORTGAGE-BACKED SECURITIES
(HELD BY AFFILIATE)
-------------------
DECEMBER 31, 1999 DECEMBER 31, 1998
--------------------------------------------- --------------------------------------
Available Held Available Held
For to For to
Sale (e) Maturity Trading Total Sale Maturity Trading Total
-------- -------- ------- ----- ---- -------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Principal balance of mortgage securities $ 33,401 $ -- $ -- $ 33,401 $ -- $ -- $ -- $ --
Net (discount) and deferred costs (19,175) -- -- (19,175) -- -- -- --
---------- -------- ------- ---------- ------- ------- ------ ------
Total amortized cost of mortgage securities $ 14,226 $ -- $ -- $ 14,226 -- -- -- --
Loan loss provision (285) -- -- (285) -- -- -- --
Gross unrealized gain 239 -- -- 239 -- -- -- --
---------- -------- ------- ---------- ------- ------- ------ ------
Carrying cost of mortgage securities $ 14,180 $ -- $ -- $ 14,180 $ -- $ -- $ -- $ --
Mix 100% -- -- 100% -- -- -- --
Principal balance of mortgage loans $5,171,979 -- -- $5,171,979 -- -- -- --
Weighted average net coupon 6.520% -- -- 6.520% -- -- -- --
Weighted average maturity 345 -- -- 345 -- -- -- --
</TABLE>
F-15
<PAGE> 73
(a) Represents 31 fixed rate FNMA pass-through certificates that the Company
received in exchange for a like amount of fixed rate mortgage loans in
December 1998, and one FNMA pass-through certificate purchased from a
"Wall Street" dealer firm. 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.
(b) At December 31, 1999, represents six interest only notes purchased from an
affiliate, Hanover Capital Partners 2, Inc. ("HCP-2"), in a private
placement in October 1998 in connection with the 1998-B securitization. At
December 31, 1998, represented nine investment grade ("AA", "A" and "BBB")
subordinate mortgage-backed securities ("MBS") and six interest only notes
purchased from HCP-2 in such private placement. At September 30, 1999
management reclassified four investment grade subordinate MBS ("AA and
"A") to the trading category and two investment grade subordinate MBS
("BBB") to the held to maturity category. These MBS were transferred at
their fair market value which was lower than their cost basis by
$1,312,000. This decrease in market value was recorded as a one-time
charge in the consolidated statements of operations. See Note 17, "Certain
Charges and Expenses in the Quarter Ended September 30, 1999".
The interest rates on the investment grade subordinate MBS are fixed and
range from 6.25% to 6.75%. These bonds 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.
The interest only notes are divided into two major categories: at December
31, 1999, the first group had an effective weighted average interest rate
of 1.055% on a notional balance of $177,641,000; and the second group had
an effective weighted average interest rate of 0.25% on a notional balance
of $98,071,000. At December 31, 1998, 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 $143,366,000.
(c) At December 31, 1999, represents twelve below investment grade subordinate
MBS purchased from third parties in the second quarter of 1999; and two
investment grade ("BBB") subordinate MBS, six below investment grade
subordinate MBS and three investment grade ("AAA") principal only notes
purchased from HCP-2 in October 1998 in connection with the 1998-B
securitization. At December 31, 1998, represents six below investment
grade subordinate MBS and three and three investment grade ("AAA")
principal only notes, all purchased from HCP-2 in October 1998 in
connection with the 1998-B securitization.
The coupon interest rates on the below investment grade subordinate MBS
purchased from third parties are fixed and range from 6.25% to 6.68%.
These notes generate normal principal and interest remittances to the
Company on a monthly basis. These notes represented a $6,094,000
(principal balance) subordinated interest in $1,063,413,000 of mortgage
loans at December 31, 1999. These notes were carried at $3,640,000 at
December 31, 1999.
F-16
<PAGE> 74
The coupon interest rates on the 1998-B subordinate MBS 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 1998-B
subordinate MBS represented a $6,360,000 (principal balance) subordinated
interest in $208,447,000 of mortgage loans at December 31, 1999 and a
$3,546,000 subordinated interest in $297,682,000 of mortgage loans at
December 31, 1998. These notes were carried at $4,597,000 at December 31,
1999 and at $3,106,000 at December 31, 1998.
The 1998-B principal only notes do not pay interest. These notes generate
principal remittances, and are carried at a discount to face value. The
difference between the carrying value and the face amount is accreted into
income on the constant yield method. These notes had a principal balance
of $1,281,000 and $1,676,000 at December 31, 1999 and 1998, and were
carried at $1,052,000 and at $1,370,000 at December 31, 1999 and 1998.
(d) Represents four investment grade subordinate MBS ("AA" and "A") purchased
from HCP-2, in October 1998 in connection with the 1998-B securitization.
The coupon 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. These notes are
carried at fair value.
(e) At December 31, 1999, represents seventeen below investment grade
subordinate MBS purchased from third parties in the third quarter of 1999.
The coupon interest rates on these 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. These notes represented a $33,401,000
(principal balance) subordinated interest in $5,171,979,000 of mortgage
loans at December 31, 1999. These notes were carried at $14,180,000 at
December 31, 1999 on the balance sheet of HCP. Although HCP's balance
sheet is not consolidated in the Company's consolidated balance sheet, the
Company receives 97% of HCP's income and has guaranteed HCP's debts
associated with these securities. See Note 7 "Equity Investments."
The carrying value at December 31, 1999 of the Company's mortgage securities by
contractual maturity dates are presented below (dollars in thousands):
<TABLE>
<CAPTION>
Available for Sale Held to Maturity Trading
Carrying Value Carrying Value Carrying Value
-------------- -------------- --------------
<S> <C> <C> <C>
Due after ten years $48,529 $8,238 $5,919
</TABLE>
As mentioned above, actual maturities may differ from stated maturities because
borrowers usually have the right to prepay certain obligations, often times
without penalties. Maturities of mortgage securities depend on the repayment
characteristics and experience of the underlying mortgage loans.
The average effective yield, which includes amortization of net premiums,
(discounts) and deferred costs, for the periods shown below on the combined
available for sale, held to maturity and trading mortgage securities portfolio
(excluding securities owned by HCP) were as follows:
F-17
<PAGE> 75
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Quarter ended March 31 8.784% 6.116%
Quarter ended June 30 8.752% 3.992%
Quarter ended September 30 (1.335%) 4.528%
Quarter ended December 31 9.701% 7.520%
-------- --------
6.494% 5.170%
======== ========
</TABLE>
The proceeds, gross realized gains and losses from sales of available for sale
mortgage securities in 1999 and 1998 were as follows (dollars in thousands):
1999
<TABLE>
<CAPTION>
REALIZED
PROCEEDS GAIN (LOSS)
-------- -----------
<S> <C> <C>
Hanover Capital 1998-B Subordinate MBS (a) 2,232 146
</TABLE>
1998
<TABLE>
<CAPTION>
REALIZED
PROCEEDS GAIN (LOSS)
-------- -----------
<S> <C> <C>
Adjustable rate FNMA and FHLMC
Certificates (b) $ 189,057 $ (5,989)
Adjustable rate FNMA certificates (c) 17,172 (161)
Fixed rate FNMA certificates (d) 56,740 495
--------- ---------
$ 262,969 $ (5,655)
========= =========
</TABLE>
(a) relates to the sale in March 1999 of six subordinate MBS acquired in
connection with the 1998-B securitization in October 1998.
(b) relates to the sale in October 1998 of eight FNMA certificates and seven
FHLMC certificates purchased in December 1997
(c) relates to the sale in October 1998 of five FNMA certificates acquired from
a swap of mortgage loans in August 1998
(d) relates to the sale in October 1998 of nineteen FNMA certificates acquired
from a swap of mortgage loans in October 1998
5. CONCENTRATION OF CREDIT RISK
MORTGAGE LOANS
The Company's exposure to credit risk associated with its investment activities
is measured on an individual customer basis as well as by groups of customers
that share similar attributes. In the normal course of its business, the Company
has concentrations of credit risk in its mortgage portfolio for the loans in
certain geographic areas. At December 31, 1999 and 1998, the percent of total
principal amount of loans outstanding in any one state, exceeding 5% of the
principal amount of mortgage loans are as follows:
F-18
<PAGE> 76
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999 AT DECEMBER 31, 1998
Mortgage Loans Mortgage Loans
-------------------- ------------------------------------------------------
Collateral for Collateral for
CMOs Held for Sale Held to Maturity CMOs
---- ------------- ---------------- ----
<S> <C> <C> <C> <C>
California 13% 13% 17% 11%
Texas 9 7 13 --
Florida 15 10 8 26
Missouri -- -- 6 --
Illinois -- 5 -- --
South Carolina -- -- -- --
Ohio 6 -- -- 12
Hawaii -- -- -- 6
Maryland 5 -- -- --
Total 48% 35% 44% 55%
==== ==== ==== ====
</TABLE>
The Company did not have any material concentrations of credit risk in its held
for sale and held to maturity categories at December 31, 1999.
The Company did not purchase any mortgage loans in 1999. During 1998 the Company
purchased approximately 75.2% of its total principal amount of mortgage loans
from six financial institutions, the largest of which represented approximately
21.7% of the total principal amount of mortgage loans purchased in 1998.
Management believes that the loss of any single financial institution from which
the Company purchased mortgage loans would not have any material detrimental
effect on the Company.
MORTGAGE SECURITIES
The Company's exposure to credit risk associated with its investment activities
is measured on an individual security basis as well as by groups of securities
that share similar attributes. In certain instances, the Company has
concentrations of credit risk in its mortgage securities portfolio for the
securities of certain issuers. Management believes exposure to credit risk
associated with purchased Agency mortgage securities is minimal due to the
guarantees provided by FNMA.
CONCENTRATION OF CREDIT RISK BY ISSUER
DECEMBER 31, 1999
<TABLE>
<CAPTION>
Hanover
Capital
Hanover Capital Mortgage Holdings, Inc. Partners Ltd. Total
------------------------------------------------------- ------------- -----
Available Held Available
for to for
Issuer Sale Maturity Trading Total Sale
- ------ ---- -------- ------- ----- ----
<S> <C> <C> <C> <C> <C> <C>
FNMA $45,479 $ -- $ -- $45,479 $ -- $45,479
Hanover Capital 1998-B 3,050 4,597 5,919 13,566 -- 13,567
Issuer 1 -- -- -- -- 7,387 7,387
Issuer 2 -- -- -- -- 6,793 6,793
Issuer 3 -- 2,220 -- 2,220 -- 2,220
Issuer 4 -- 706 -- 706 -- 706
Issuer 5 -- 715 -- 715 -- 714
------- ------- ------- ------- ------- -------
Total $48,529 $ 8,238 $ 5,919 $62,686 $14,180 $76,866
======= ======= ======= ======= ======= =======
</TABLE>
F-19
<PAGE> 77
CONCENTRATION OF CREDIT RISK BY ISSUER
DECEMBER 31, 1998
<TABLE>
<CAPTION>
Hanover
Capital
Hanover Capital Mortgage Holdings, Inc. Partners Ltd. Total
------------------------------------------------------- ------------- -----
Available Held Available
for to for
Issuer Sale Maturity Trading Total Sale
- ------ ---- -------- ------- ----- ----
<S> <C> <C> <C> <C> <C> <C>
FNMA $59,595 $ -- -- $59,595 $ -- $59,595
Hanover Capital 1998-B 14,405 4,478 -- 18,883 $ -- 18,883
------- ------- ------- ------- ------- -------
Total $74,000 $ 4,478 -- $78,478 $ -- $78,478
======= ======= ======= ======= ======= =======
</TABLE>
The Company has cash and cash equivalents in a major financial institution which
is insured by the Federal Deposit Insurance Corporation (FDIC) up to $100,000.
At December 31, 1999, the Company had amounts on deposit with the financial
institution in excess of FDIC limits. At December 31, 1999, the Company had
overnight investments of $18,000,000 in Federal Home Loan Bank discount notes.
The Company limits its risk by placing its cash and cash equivalents in a high
quality financial institution, Federal Agency notes or in the highest rated
commercial paper.
6. LOAN LOSS ALLOWANCE
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 allowance for the following periods (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED PERIOD FROM JUNE 10
DECEMBER 31, DECEMBER 31, (INCEPTION) TO
1999 1998 DECEMBER 31, 1997
---- ---- -----------------
<S> <C> <C> <C>
Balance, beginning of period $ 372 $ 18 $ - 0 -
Loan loss provision 446 356 18
Transfers/sales 39 (2) --
Charge-offs (110) -- --
Recoveries 52 -- --
----- ----- -----
Balance, end of period $ 799 $ 372 $ 18
===== ===== =====
</TABLE>
7. EQUITY INVESTMENTS
Hanover owns 100% of the non-voting preferred stock of Hanover Capital Partners
Ltd. ("HCP"), which entitles Hanover to receive 97% of the earnings or losses of
HCP and its wholly owned subsidiaries. Hanover also owns 100% of the non-voting
preferred stock of Hanover Capital Partners 2, Inc. ("HCP-2"), which entitles
Hanover to receive 99% of the earnings or losses of HCP-2 and its wholly owned
subsidiary. In June 1999, the Company acquired 100% of the non-voting preferred
stock of HanoverTrade.com, Inc. ("HTC") which entitles Hanover to receive 97% of
the earnings or losses of HTC.
F-20
<PAGE> 78
Hanover currently conducts substantially all of its taxable consulting
operations (i.e. due diligence consulting, loan sale advisory, and loan
brokering and trading) through HCP. HCP-2 was organized in October 1998 to
facilitate the securitization of $318 million of fixed and adjustable rate
residential mortgage loans in connection with the issuance of the 1998-B
security. HCP-2 does not conduct any ongoing business. The Company wrote off its
remaining investment in HCP-2 in September, 1999. HTC was organized in June 1999
to develop an E-commerce business to broker mortgage loan pools to financial
institutions via the internet.
HCP and its subsidiaries operate as a specialty finance company which is
principally engaged in performing due diligence, consulting and mortgage
investment banking services. A wholly-owned subsidiary of HCP, Hanover Capital
Mortgage Corporation, is a servicer of multifamily mortgage loans and, prior to
June 1999, was an originator of multifamily and commercial loans. HCMC's
origination operations were discontinued in June 1999. Another wholly-owned
subsidiary of HCP, Hanover Capital Securities, Inc. is a registered
broker/dealer with the Securities and Exchange Commission.
HCP-2 was organized in October, 1998 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, 1998-B.
Hanover contributed $324.2 million of fixed rate mortgage loans (with a par
value of $318 million) subject to $310 million of 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 mortgage security and sold all of the REMIC mortgage
securities except the AAA notes to two newly created wholly-owned subsidiaries
of Hanover (Hanover QRS-1 98-B, Inc. and Hanover QRS-2 98-B, Inc.). Hanover
recorded its investment in HCP-2 on the equity method. The Board of Directors
has approved the sale or disposition of the Company's preferred stock investment
in HCP-2 and has recorded a one-time charge to the consolidated statement of
operations for a loss on the sale of HCP-2 of $4,428,000. See Note 17, "Certain
Charges and Expenses in the Three Months Ended September 30, 1999".
Until September 30, Hanover recorded 99% of the earnings or losses of HCP-2
through its ownership of all the non-voting preferred stock of HCP-2. After
September 30, Hanover has not recorded earning or losses of HCP-2
The table below reflects the activity recorded in Hanover's equity investments
for the following periods (dollars in thousands):
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED YEAR ENDED JUNE 10 (INCEPTION)
DECEMBER 31, DECEMBER 31, TO DECEMBER 31,
1999 1998 1997
--------------------------------------------- --------------------------------- -------------------
HCP HCP-2 HTC Total HCP HCP-2 Total HCP Total
--- ----- --- ----- --- ----- ----- --- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning balance $ 1,761 $ 5,728 $ -- $ 7,489 $ 100 $ -- $ 100 $ -- $ --
Applicable % of net (loss) (443) (1,300) (31) (1,774) (1,039) (394) (1,433) (254) (254)
Applicable % of
comprehensive gain 148 -- -- 148 -- -- -- -- --
Capital contribution -- -- 1 1 2,700 -- 2,700 -- --
Formation transaction -- -- -- -- -- 14,176 14,176 354 354
Dividends received (a) -- -- -- -- -- (8,054) (8,054) -- --
Write off of investment -- (4,428) -- (4,428) -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- ------
Ending Balance $ 1,466 $ -- $ (30) $ 1,436 $ 1,761 $ 5,728 $ 7,489 $ 100 $ 100
======== ======== ======== ======== ======== ======== ======== ======== ======
</TABLE>
(a) represents a return of capital
F-21
<PAGE> 79
8. NOTES RECEIVABLE FROM RELATED PARTIES
In connection with Hanover's original formation transactions in September 1997,
Hanover agreed to lend a maximum of $1,750,000 collectively, to four
officer/stockholders (collectively referred to as the "Principals") to enable
the Principals to pay personal income taxes on the gains they must recognize
upon contributing their HCP preferred stock to the Company for shares of
Hanover's common stock. The loans are secured solely by 116,667 shares of
Hanover's common stock owned by the Principals, collectively. The loans bear
interest at the lowest applicable Federal tax rate during the month the loans
are made. At December 31, 1999 Hanover had loaned the Principals the full
$1,750,000. These loans bear interest at 6.02% (on $482,600 of loans) and 5.70%
(on $1,267,400 of loans) at December 31, 1999.
In March 1998, Hanover agreed to lend up to an additional $1,500,000 in
unsecured loans to the Principals, in lieu of incurring the costs and expenses
Hanover was required to pay associated with the registration of 100,000 shares
of Hanover's common stock owned by the Principals. Pursuant to such agreement,
Hanover loaned the Principals an additional $1,203,880 in April 1998. These
additional loans are due and payable on March 31, 2001 and bear interest at
5.51%.
In November 1998, Hanover agreed to lend an additional $226,693 in unsecured
loans to the Principals. These loans are due and payable in November 2002 and
bear interest at 4.47% (the lowest applicable Federal tax rate in November
1999). A portion of these loans ($69,148) was repaid in February 1999, and
another portion ($61,837) was forgiven on January 28, 2000. The Company reserved
for this forgiveness on September 30, 1999. At December 31, 1999, the balance of
these loans, net of the reserved amount, was $95,708.
During 1999 Hanover advanced funds to HCP pursuant to an unsecured loan
agreement. These loans to HCP bear interest at 1.00% below the prime rate. At
December 31, 1999 the loans outstanding to HCP totaled $4,896,046.
Amounts due from related parties and due to related parties are detailed below
(dollars in thousands):
<TABLE>
<CAPTION>
INTERCOMPANY BALANCES
---------------------
DECEMBER 31, DECEMBER 31,
1999 1998
---- ----
<S> <C> <C>
Due from HTC $121 $ --
Due from HCP-2 -- 305
Due from HCP 6 --
Due to HCP 88 --
</TABLE>
F-22
<PAGE> 80
<TABLE>
<CAPTION>
NOTES RECEIVABLE
----------------
DECEMBER 31, DECEMBER 31,
1999 1998
---- ----
<S> <C> <C>
Principals (a) (b) (c) $3,049 $3,180
HCP (d) 4,869 713
</TABLE>
(a) The Principals are John A. Burchett, George J. Ostendorf, Irma N. Tavares
and Joyce S. Mizerak, 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.
(c) Pursuant to the note agreements, the Company loaned the Principals $143,000
to purchase common stock in HCP-2 in order to complete the 1998-B
securitization transaction. The Principals subsequently made payments on
the loans totaling $69,000. In September 1999, the Company reserved for an
expected forgiveness of $62,000 of these loans. This amount was
subsequently forgiven on January 28, 2000. Summarized below is the change
in Principals loans during 1999:
<TABLE>
<S> <C>
Balance at January 1, 1999 $ 3,180
Loan repayments (69)
Provision for loan forgiveness (62)
-------
Balance at December 31, 1999 $ 3,049
=======
</TABLE>
(d) In September 1999 the Company advanced $3,041,000 to HCP to fund the
purchase of certain subordinated mortgage securities pursuant to an
unsecured loan agreement.
9. REVERSE REPURCHASE AGREEMENTS
At December 31, 1999 the Company had a total of $250 million of committed and
uncommitted mortgage asset reverse repurchase agreement financing available
pursuant to master reverse repurchase agreements with two lenders. All
borrowings pursuant to the master reverse 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 125 basis points
to LIBOR plus 238 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
Association (PSA) agreements and through existing reverse repurchase agreements,
bear interest rates that vary from LIBOR to LIBOR plus 288 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.
F-23
<PAGE> 81
At December 31, 1999 the Company had no outstanding borrowings on mortgage loans
under the above mentioned reverse repurchase agreements.
At December 31, 1999, the Company had outstanding borrowings on retained CMO
securities of $3,366,000 with a weighted average borrowing rate of 8.16% and a
weighted average remaining maturity of three months. Retained CMO securities
represent the Company's net investment in the CMOs issued by the Company. The
reverse repurchase financing agreements at December 31, 1999 were collateralized
by securities with a cost basis of $7,201,152.
At December 31, 1999, the Company had outstanding reverse repurchase agreement
financing for mortgage securities (other than retained CMO securities) of
$52,356,000 with a weighted average borrowing rate of 6.05% and a remaining
maturity of less than one month. These mortgage securities are mortgage
securities that the Company has purchased or created in transactions other than
CMOs. The repurchase agreement financing at December 31, 1999 was collateralized
by securities with a cost basis of $60,465,000.
The table below details the scheduled maturities of the Company's committed and
uncommitted master reverse repurchase agreements at December 31, 1999:
<TABLE>
<CAPTION>
Committed Uncommitted Maturity Date
--------- ----------- -------------
<S> <C> <C>
$ 50 million -- March 2000
100 million $100 million March 2000
</TABLE>
Information pertaining to reverse repurchase agreement financing as of and for
the years ended December 31, 1999 and 1998 is summarized as follows (dollars in
thousands):
REVERSE REPO FINANCING
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
OTHER
MORTGAGE RETAINED CMO MORTGAGE
REVERSE REPURCHASE AGREEMENTS LOANS SECURITIES SECURITIES
- ----------------------------- ----- ---------- ----------
<S> <C> <C> <C>
Balance of borrowing at end of period -- $ 3,366 $ 52,356
Average borrowing balance during the
period $ 93,998 $ 2,244 $ 53,638
Average interest rate during the period 6.364% 7.164% 5.510%
Maximum month-end borrowing balance $283,837 $ 3,393 $ 61,559
during the period
COLLATERAL UNDERLYING THE AGREEMENTS
------------------------------------
Balance at end of period - carrying value -- $ 7,201 $ 60,465
</TABLE>
F-24
<PAGE> 82
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
OTHER
MORTGAGE RETAINED CMO MORTGAGE
REVERSE REPURCHASE AGREEMENTS LOANS SECURITIES SECURITIES
- ----------------------------- ----- ---------- ----------
<S> <C> <C> <C>
Balance of borrowing at end of period $306,239 $ 1,911 $ 61,940
Average borrowing balance during the $367,656 $ 760 $224,050
period
Average interest rate during the period 6.511% 6.853% 5.695%
Maximum month - end borrowing balance $659,319 $ 2,331 $249,450
during the period
COLLATERAL UNDERLYING THE AGREEMENTS
------------------------------------
Balance at end of period - carrying value $320,759 $ 2,542 $ 64,938
</TABLE>
Additional information pertaining to individual reverse repurchase agreement
lenders at December 31, 1999 is summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
Weighted
Reverse Average
Repurchase Accrued Total Underlying Maturity
Lender Type of Collateral Financing Interest Financing Collateral Date
- ------ ------------------ --------- -------- --------- ---------- ----
<S> <C> <C> <C> <C> <C> <C>
Lender A (committed) Retained CMO Securities $ 3,366 $ 21 $ 3,387 $ 7,201 March 31, 2000 (a)
Lender B (committed) Mortgage Securities 5,000 3 5,003 9,793 March 31, 2000 (b)
Lender C Mortgage Securities 37,481 360 37,841 37,337 January 25, 2000 (c)
Lender D Mortgage Securities 8,975 92 9,067 9,352 January 23, 2000 (c)
Lender E Mortgage Securities 463 -- 463 705 January 26, 2000 (c)
Lender F Mortgage Securities 437 -- 437 713 January 28, 2000 (c)
------- ------- ------- -------
Total $55,722 $ 476 $56,198 $65,101
======= ======= ======= =======
</TABLE>
(a) The Company expects that the lender will renew this facility for an
additional year.
(b) The maturity date of this facility was extended to April 30, 1999 and the
Company expects that the lender will renew this facility for an additional
year.
(c) These borrowings are pursuant to uncommitted lines of credit which are
typically renewed monthly.
10. CMO BORROWING
The Company issued its first CMO (also referred to as mortgage-backed bonds
borrowing) secured by fixed rate mortgage loans in April 1998, and issued
subsequent CMO borrowings secured by fixed rate and adjustable rate mortgage
loans in March 1999 and August 1999. For GAAP 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. Borrower remittances received on
the CMO collateral are used to make payments on the CMOs. 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.
F-25
<PAGE> 83
Information pertaining to the CMOs as of and for the year ended December 31,
1999 is summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
1999-B 1999-A 1998-A
SECURITIZATION SECURITIZATION SECURITIZATION TOTAL
-------------- -------------- -------------- -----
<S> <C> <C> <C> <C>
Balance of borrowing at end of period $ 94,718 $105,993 $ 54,252 $254,963
Average borrowing balance during the period $ 98,658 $108,977 $ 57,634 $265,270
Average interest rate during the period 6.250% 7.063% 6.670% 6.675%
Interest rate at end of period 6.380% 7.131% 6.947% 6.813%
Maximum month-end borrowing balance
during the period $ 99,973 $110,513 $ 59,088 $269,575
CMO collateral
- --------------
Balance at end of period - carrying balance $ 98,507 $113,662 $ 57,664 $269,833
</TABLE>
Information pertaining to the CMOs as of and for the year ended December 31,
1998 is summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
1998-A
SECURITIZATION
--------------
<S> <C>
Balance of borrowing at end of period $77,305
Average borrowing balance during the $63,764
period
Average interest rate during the period 6.914%
Interest Rate at end of period 6.940%
Maximum month - end borrowing balance $98,391
during the period
CMO collateral
- --------------
Balance at end of period - carrying value $81,666
</TABLE>
Aggregate annual repayments of mortgage backed bonds based upon contractual
amortization of the underlying mortgage loan collateral at December 31, 1999
were as follows (dollars in thousands):
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
2000 $ 14,719
2001 10,751
2002 11,332
2003 11,400
2004 11,384
Thereafter 195,377
--------
Total $254,963
========
</TABLE>
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
F-26
<PAGE> 84
common stock. The repurchases were made from time to time in open market
transactions. During the year ended December 31, 1998, the Company repurchased a
total of 146,900 shares of its common stock at an average price of $9.16 per
share for a total cost of $1,345,000. During the year ended December 31, 1999,
the Company repurchased a total of 495,000 shares at an average price of $4.51
per share for a total cost of $2,236,000. Through December 31, 1999 the Company
had repurchased a total of 641,900 shares at an average price of $5.58 per share
for a total of $3,580,000. In October, 1999, the Board of Directors of the
Company authorized a second share repurchase program pursuant to which the
Company was authorized to repurchase up to 1,000,000 shares of its outstanding
common stock from time to time in open market transactions. Through December 31,
1999, the Company had not repurchased any shares pursuant to the second program.
12. EMPLOYEE BENEFIT PLANS
401(K) PLAN
The Company participates in the HCP non-contributory retirement plan ("401(k)
Plan"). The 401(k) plan is available to all full-time company employees with at
least six months of service. The 401(k) Plan is designed to be tax deferred in
accordance with provisions of Section 401(k) of the Internal Revenue Code. The
401(k) Plan provides that each participant may contribute 15.0% of his or her
salary subject to the maximum allowable each fiscal year ($10,000 in 1999 and
$10,000 in 1998). Under the 401(k) Plan, an employee may elect to enroll on
January 1, or July 1, provided that the employee has met the six month
employment service requirement.
COMPANY STOCK OPTION PLANS
The Company has adopted two stock option plans: (1) the 1997 Executive and
Non-Employee Director 1997 Stock Option Plan (the "1997 Stock Option Plan"); and
(2) the 1999 Equity Incentive Plan (the "1999 Equity Incentive Plan", together
with the 1997 Stock Option Plan, "the Stock Option Plans"). The purpose of the
Stock Option Plans is to provide a means of performance-based compensation in
order to attract and retain qualified personnel and to afford additional
incentive to others to increase their efforts in providing significant services
to the Company.
1997 Stock Option Plan
The 1997 Stock Option Plan provides for the grant of qualified incentive stock
options ("ISOs") which meet the requirements of Section 422 of the Internal
Revenue Code, stock options not so qualified ("NQSOs"), deferred stock,
restricted stock, performance shares, stock appreciation and limited stock
awards ("Awards"), and dividend equivalent rights ("DERs"). The 1997 Stock
Option Plan authorizes the grant of options to purchase, and Awards of, an
aggregate of up to 325,333 shares of the Company's Common Stock. If an option
granted under the Stock Option Plan expires or terminates, or an Award is
forfeited, the shares subject to any unexercised portion of such option or Award
will again become available for issuance under the Stock Option Plan.
Unless previously terminated by the Board of Directors, the 1997 Stock Option
Plan will terminate ten years from the date of approval (or five years in the
case of ISOs granted to an employee who owns in excess of 10% of the combined
voting power of the Company's outstanding equity stock) and no options or Awards
may be granted under the 1997 Stock Option Plan thereafter, but existing options
or Awards remain in effect until the options are exercised or the options or the
Awards are terminated by their terms. The aggregate fair market value
(determined as of the time of grant) of the shares with respect to
F-27
<PAGE> 85
which ISOs are exercisable for the first time by an employee during any calendar
year may not exceed $100,000.
All stock options granted by the Compensation Committee pursuant to the Stock
Option Plan are contingent and may vest, subject to other vesting requirements
imposed by the Compensation Committee, in full or in part on any September 30
beginning with September 30, 1998 and ending with September 30, 2002 (each, an
"Earn-Out Measuring Date"). No vesting occurred on the first Earn-Out Measuring
Date (September 30, 1998) and the second Earn-Out Measuring Date (September 30,
1999) because the Company did not meet or exceed the vesting requirements.
Vesting occurs when the return on a unit (a unit is composed of one common stock
certificate and one warrant certificate) is at least equal to the initial public
offering price of the unit. In addition, subject to any other vesting
restrictions, one-third of any outstanding stock options will vest as of any
Earn-Out Measuring Date through which the return on a unit is at least equal to
a 20% annualized return on the initial public offering price of the unit.
The return on a unit is determined by adding (i) the appreciation in the value
of the unit since the closing of the initial public offering and (ii) the amount
of distributions made by the Company on the share of Common Stock included in
the unit since the closing of the initial public offering. The appreciation in
the value of a unit as of any Earn-Out Measuring Date is the average difference,
during the 30 day period that ends on the Earn-Out Measuring Date, between the
market price of the shares of Common Stock included in the unit and the initial
public offering price of the unit multiplied by two to take into account the
value of the warrant included in the unit. In determining whether such stock
options have vested, appropriate adjustments will be made for stock splits,
recapitalizations, stock dividends and transactions having similar effects.
1999 Stock Option Plan
The Company adopted the 1999 Equity Incentive Plan (the "1999 Stock Option
Plan"), which provides for the grant of stock options which are not intended to
be "qualified incentive stock options" pursuant to Section 422 of the Internal
Revenue Code. The 1999 Stock Option Plan authorizes the grant of options of up
to 550,710 shares of the Company's Common Stock. If an option granted under the
1999 Stock Option Plan expires or terminates, or an Award is forfeited, the
shares subject to any unexercised portion of such option or Award will again
become available for the issuance of further options or Awards under the 1999
Equity Incentive Plan. The maximum number of Common Stock that any eligible
participant may receive under the 1999 Stock Option Plan for any year may not
exceed 50,000.
Unless terminated earlier by the Board of Directors, the 1999 Stock Option Plan
will terminate ten years from its approval date. When the 1999 Stock Option Plan
ends, no options or Awards may be granted under the 1999 Stock Option Plan, but
existing options or Awards remain in effect until they are exercised or
terminated. Each option must terminate no more than ten years from the date it
is granted. Options may be granted on terms providing for exercise either in
whole or in part at any time or times during their restrictive terms, or only in
specified percentages at stated time periods or intervals during the term of the
option. One third of the option vests one year after the grant of the option,
another third of the option vests two years after the grant, and after three
years the option may be exercised in full.
F-28
<PAGE> 86
A summary of the status of the Company's 1997 and 1999 Stock Option Plans as of
December 31, 1999 and changes during the periods from September 19, 1997 to
December 31, 1997 and for the years ended December 31, 1998 and 1999 is
presented below:
<TABLE>
<CAPTION>
1997 Plan 1999 Plan
# of # of Weighted
Options for Options for Average
Stock Option Activity - 1997 Shares Shares Exercise Price Exercise Price
- ---------------------------- ------ ------ -------------- --------------
<S> <C> <C> <C> <C>
Granted - September 19, 1997 162,664 $ 15.00
Granted - September 28, 1997 160,660 15.75
Cancelled (3,000) 15.75
-------
Outstanding at Dec. 31, 1997 320,324 $ 15.37
======= ========
Stock Option Activity - 1998
- ----------------------------
Granted - January 14, 1998 2,000 $ 15.94
Granted - March 9, 1998 2,000 18.13
Cancelled (1,750) 15.75
-------
Outstanding at Dec. 31, 1998 322,574
-------
Stock Option Activity - 1999
- ----------------------------
Granted - August 29, 1999 282,750 $ 4.625
Cancelled (27,250) 15.75
Cancelled (12,500) 4.625
------- -------- -------- --------
Outstanding at Dec. 31, 1999 295,324 $ 15.35
======= ========
270,250 $ 4.625
======== ========
</TABLE>
No shares were exercisable at December 31, 1999, 1998 and 1997.
The per share weighted average fair value of stock options granted during the
period ended December 31, 1999 and 1998 was $0.49 and $0.95, respectively at the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Expected life (years) 10 9
Risk-free interest rate 6.27% 5.10%
Volatility 61.4% 60.0%
Expected dividend yield 12.3% 10.0%
</TABLE>
The Company applies APB opinion No. 25 in accounting for its 1997 and 1999 Stock
Option Plan and, accordingly, no compensation cost has been recognized for its
stock options in the financial statements for 1999, 1998 and 1997. Had the
Company determined compensation cost based on the fair value at the grant date
for its stock options under Statements of Financial Accounting Standards No.
123, Accounting For Stock-Based Compensation, the Company's net income would
have been reduced to the pro forma amounts for the period indicated below
(dollars in thousands, except per share data):
F-29
<PAGE> 87
<TABLE>
<CAPTION>
PERIOD FROM JUNE 10
YEAR ENDED YEAR ENDED (INCEPTION) TO
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net earnings (loss):
As reported ($12,627) ($4,934) $ 499
Pro forma ($12,766) ($4,938) $ 417
Earnings (loss) per share - basic:
As reported ($ 2.12) ($ 0.77) $0.15
Pro forma ($ 2.15) ($ 0.77) $0.13
Earnings (loss) per share - diluted:
As reported ($ 2.12) ($ 0.77) $0.14
Pro forma ($ 2.14) ($ 0.77) $0.11
</TABLE>
Bonus Incentive Compensation Plan
A bonus incentive compensation plan was established in 1997, whereby an annual
bonus will be accrued for eligible participants of the Company. The annual bonus
will be paid one-half in cash and (subject to ownership limits) one-half in
shares of common stock in the following year. The Company must generate annual
net income before bonus accruals that allows for a return of equity to
stockholders in excess of the average weekly ten-year U.S. Treasury rate plus
4.0% before any bonus accrual is recorded. No such accrual was recorded in 1999
and 1998.
13. 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 1999 consolidated statement of operations of the Company includes management
and administrative expenses of $809,000, due diligence expenses of $119,000 and
commission expenses of $5,000 relating to billings from HCP. The 1998
consolidated statement of operations of the Company includes management and
administrative expenses of $733,000, due diligence expenses of $687,000 and
commission expenses of $286,000 relating to billings from HCP. The 1999 and 1998
consolidated statement of operations also reflects a reduction in personnel
expenses for a portion of salaries allocated (and billed) to HCP.
During 1999 and 1998 the Company recorded $175,000 and $129,000 of interest
income generated from loans to the Principals and $168,000 and $126,000 of
interest income from loans to HCP. The term of the Management Agreement
continues until December 31, 2000 with subsequent renewal.
F-30
<PAGE> 88
14. EARNINGS PER SHARE
Calculations for earnings (loss) per share are shown below (dollars in
thousands, except per share data):
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED YEAR ENDED JUNE 10 (INCEPTION)
DECEMBER 31, DECEMBER 31, TO DECEMBER 31,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
EARNINGS (LOSS) PER SHARE BASIC:
Net income (loss) [numerator] $ (12,627) $ (4,934) $ 499
=========== =========== ===========
Average common shares
outstanding [denominator] 5,942,403 6,418,305 3,296,742
=========== =========== ===========
Per share $ (2.12) $ (0.77) $ 0.15
=========== =========== ===========
EARNINGS (LOSS) PER SHARE DILUTED:
Net income (loss) [numerator] $ (12,627) $ (4,934) $ 499
=========== =========== ===========
Average common shares
outstanding 5,942,403 6,418,305 3,296,742
=========== =========== ===========
Add: Incremental shares from
assumed conversion of
warrants 27,016 -0- 374,943
----------- ----------- -----------
Dilutive potential common shares 27,016 -0- 374,943
----------- ----------- -----------
Adjusted weighted average shares
outstanding [denominator] 5,969,419 6,418,305 3,671,685
=========== =========== ===========
Per share $ (2.12) $ (0.77) $ 0.14
=========== =========== ===========
</TABLE>
15. STOCK WARRANTS AND STOCK OPTIONS
In November 1998 Hanover entered into a short term financing agreement (that has
since terminated) with Residential Funding Corporation ("RFC"). In connection
with that financing arrangement, Hanover in April 1999 executed a Warrant
Agreement to issue to RFC warrants to purchase 299,999 shares of Hanover's
common stock. The warrants are 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.
16. GAIN ON SALE OF SERVICING RIGHTS
On March 31, 1999 Hanover entered into an agreement to sell the servicing rights
on $148 million of single-family mortgage loans. The total income from the sale
of mortgage servicing rights was $566,000. The gain on sale of mortgage
servicing rights was $540,000 and the balance of the income ($26,000) relating
to mortgage loans classified as held for sale, was deferred and was amortized
into
F-31
<PAGE> 89
interest income in 1999 over the lives of the mortgage loans using the effective
yield method until the mortgage loans were securitized in August 1999.
17. CERTAIN CHARGES AND EXPENSES IN THE THREE MONTHS ENDED SEPTEMBER 30, 1999
For the three-month period ended September 30, 1999 the Company recorded certain
charges and expenses totaling $14,061,000. These charges and expenses are
summarized as detailed below (dollars in thousands):
<TABLE>
<S> <C> <C>
Realized (loss) on mark to
market of mortgage securities $ 1,312 (a)
Impairment charge on mortgage securities 2,225 (b)
Realized (loss) on mark to
market of mortgage loans 2,997 (c)
Provision for (loss) on disposition of
unconsolidated subsidiary (HCP-2) 4,793 (d)
Additional operating expenses relating
to the provision for (loss) on sale of
unconsolidated subsidiary (HCP-2) 153 (d)
Loss from unconsolidated subsidiary
(HCP-2) 403 (d)
Catch-up premium, (discount), deferred
financing adjustments on certain
CMOs and mortgage securities 1,821 (e)
Mortgage loan net interest
income adjustment 357 (f)
-------
$14,061
=======
</TABLE>
(a) The realized (loss) on mark to market of mortgage securities resulted from
the September 30, 1999 mark to market adjustment recorded on six 1998-B
notes transferred from the available for sale category to the held to
maturity and the trading categories.
(b) The impairment charge on mortgage securities resulted from the mark down of
six 1998-B interest only notes to market value.
(c) The realized (loss) from mark to market resulted from a mark to market
adjustment of $2,997,000 at the time of transfer of mortgage loans from the
held for sale category to the collateral for CMOs category (in connection
with the 1999-B securitization transaction).
(d) The financing structure for the 1998-B securitization resulted in the
organization of HCP-2 in October 1998. HCP-2 was capitalized with a
non-cash contribution from Hanover in the form of mortgage pools net of
related reverse repurchase agreement financing in exchange for 100% of the
non-voting preferred stock of HCP-2 (99% economic interest in HCP-2) and
cash contributions from the Principals (which were loaned to the Principals
from Hanover) in exchange for all of the common stock of HCP-2 (1% economic
interest in HCP-2). The financing structure required certain costs of the
securitization (net premium, hedging and deferred financing costs) to be
capitalized in the subsidiary, HCP-2. Substantially all of Hanover's
investment in HCP-2 consists of these capitalized costs. The capitalized
costs are amortized on HCP-2's books over the anticipated life of the
F-32
<PAGE> 90
respective mortgage loans and passed through to Hanover each period as
Hanover's equity ownership (99%) in HCP-2. HCP-2 will continue to generate
losses as these capitalized costs are amortized.
In September 1999, the Company decided to sell HCP-2. A provision for a
loss on the disposition of this investment has been reflected as follows:
<TABLE>
<S> <C>
100% of the balance of the
investment in HCP-2 $4,428,000
Advances to HCP-2 365,000
----------
Total provision $4,793,000
==========
</TABLE>
The Company reserved for the expected forgiveness of $62,000 of loans that
Hanover advanced to the Principals in October 1998 that the Principals used
to invest in HCP-2. These loans were forgiven on January 28, 2000. In
addition, the Company reserved for additional compensation ($41,000) to the
Principals equal to the anticipated income tax consequences attributable to
the forgiveness of the notes. The total compensation costs related to the
provision for forgiveness of Principals' notes ($103,000) and an estimate
of costs relating to the disposition of HCP-2 (legal and other) of $50,000
are reflected as additional operating expenses in the consolidated
statement of operations for 1999.
Also reflected in the above is the $403,000 loss for the three month period
ended September 30, 1999 from an unconsolidated subsidiary (HCP-2). Because
the Company has no basis in its investment in HCP-2 at September 30, 1999
the Company does not expect to record any future losses from HCP-2.
(e) At September 30, 1999 management reviewed the actual prepayment speeds as
compared to the projected prepayment speeds on all of its investment
portfolios. The review resulted in a cumulative adjustment of premiums,
(discount), deferred costs and deferred financing amortization of
$1,821,000 on certain of the Company's investment portfolio. The following
cumulative income adjustments were recorded in the three month period ended
September 30, 1999:
<TABLE>
<S> <C>
Mortgage securities - 1998-B $1,606,000
Collateral for CMO - 1998-A 138,000
Collateral for CMO - 1999-A 58,000
Mortgage securities - swapped
FNMA certificates 19,000
----------
$1,821,000
==========
</TABLE>
(f) An adjustment to mortgage loan net interest income of $357,000 was
reflected in the three month period ended September 30, 1999 in connection
with the 1999-B securitization. This adjustment reduced the Company's
outstanding accrued interest receivable on loans included in the
securitization to the amount specified in the securitization documentation.
F-33
<PAGE> 91
18. SUPPLEMENTAL DISCLOSURES FOR STATEMENTS OF CASH FLOWS
(in thousands except share data):
<TABLE>
<CAPTION>
PERIOD FROM JUNE 10
YEAR ENDED YEAR ENDED (INCEPTION) TO
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Cash paid during the period for
Interest $22,058 $39,876 $844
======= ======= ====
</TABLE>
Supplemental Schedule of Noncash Activities
Dividends of $583,000 and $695,000 were declared in December 1999 and December
1998 but not paid until February 2000 and January 1999, respectively.
Acquisition of a 99% economic ownership in Hanover Capital Partners 2, Inc. in
October 1998 from the contribution of $324,210 (book value) of mortgage
loans net of $309,963 of reverse repurchase agreement financing less funds
to be returned to Hanover of $71.
Acquisition of a 97% economic ownership in Hanover Capital Partners Ltd. in
September 1997 from the issuance of 716,667 shares of Hanover's common
stock.
19. COMMITMENTS AND CONTINGENCIES
Hanover entered into employment agreements with the Principals in 1997. Such
agreements are for five year terms which expire in 2002, and provide for initial
aggregate annual base salaries of $975,000 (subject to cost of living
increases). A portion of the aggregate base salaries was allocated to one of
Hanover's taxable subsidiaries, HCP, based on management's actual and estimated
time involved with the subsidiary's activities.
As additional consideration to the Principals for their contribution of their
HCP preferred stock to Hanover, Hanover has agreed to (1) issue to the
Principals up to 216,667 additional shares of Hanover's common stock and (2)
forgive a maximum of $1,750,000 in loans made to the Principals if certain
financial returns to stockholders are met, at certain Earn-Out Measuring Dates
as described in Hanover's IPO Prospectus dated September 15, 1997.
Hanover has guaranteed a one year reverse repurchase financing agreement for
HCP. The amount of reverse repurchase financing outstanding at December 31, 1999
was $10,842,000.
Hanover has guaranteed the obligations of HCP with respect to an amendment to an
office lease entered into by HCP. The office lease (effective November 1999) is
for a period of 10 years and 3 months and obligates HCP for $2,162,300 of base
rental expense plus escalation, electric and other billings over the lease term.
Pursuant to a short-term (3 month) reverse repurchase financing agreement
entered into in November 1998, Hanover agreed to issue and deliver to the lender
warrants to purchase 299,999 shares of Hanover's common stock. The warrants are
exercisable at $4.00 per share. In addition, Hanover agreed to (1) retain and
compensate the lender as an underwriter on certain future mortgage loan
securitization deals, (2) have HCMC offer the lender the right to purchase any
originated commercial loans through November 2000 on the same terms and
conditions as it would offer such to a third party and (3) offer the lender the
opportunity to act as master servicer on any mortgage loan securitization
effected by the Company through November 2000 on the same terms and conditions
as it would offer such to a third party. The lender in turn will offer HCP the
opportunity to undertake due diligence services for portfolio transactions or
for securitization transactions in which the lender is not undertaking or is
otherwise
F-34
<PAGE> 92
contracting with third parties for such due diligence services on the
same terms and conditions as it would offer such to a third party through
November 2000.
In March 1999, Hanover entered into a one-year reverse repurchase financing
agreement. Pursuant to the terms of the agreement, Hanover agreed to pay at
least $500,000 in underwriting fees to the lender during the term of the
agreement. As of December 31, 1999, Hanover had not paid any such fees to the
lender. The Company expects that this commitment will be applied towards a
securitization transaction that is scheduled for April 2000.
In October 1998, the Company sold 15 adjustable rate FNMA certificates and 19
fixed rate FNMA certificates that the Company received in a swap for certain
adjustable rate and fixed rate mortgage loans. These securities were sold with
recourse. Accordingly, the Company retains credit risk with respect to the
principal amount of these mortgage securities.
At December 31, 1999 the Company had forward commitments to sell $6 million (par
value) of Agency mortgage securities that had not yet settled. This forward sale
was entered into to hedge the expected sale of approximately $6 million of AA
and A rated subordinate mortgage-backed securities held in a trading account.
20. FINANCIAL INSTRUMENTS
The estimated fair value of the Company's assets and liabilities classified as
financial instruments and off-balance sheet financial instruments at December
31, 1999 and 1998 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
--------------------------------- ------------------------------------
Carrying Notional Fair Carrying Notional Fair
Amount Amount Value Amount Amount Value
------ ------ ----- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
Assets:
Mortgage loans $270,084 $263,624 $407,994 $407,694
Mortgage securities, available for sale 48,529 48,529 74,000 74,000
Mortgage Securities, held to maturity 8,238 7,379 4,478 4,473
Mortgage Securities, trading 5,919 5,919 -- --
Interest Rate Caps 1,072 $166,266 1,139 394 $ 69,939 200
Cash and cash equivalents 18,022 18,022 11,837 11,837
Accrued interest receivable 3,015 3,015 3,940 3,940
Notes receivable 7,946 7,946 3,893 3,893
-------- -------- -------- -------- -------- --------
Total $362,825 $166,266 $355,574 $506,536 $ 69,939 $506,037
======== ======== ======== ======== ======== ========
Liabilities:
Reverse repurchase agreements $ 55,722 $ 55,722 $370,090 $370,090
CMO borrowing 254,963 250,906 77,305 77,831
Accrued interest payable 2,433 2,433 1,394 1,394
Other liabilities 2,513 2,513 1,601 1,601
-------- -------- -------- --------
Total $315,631 $311,574 $450,390 $450,916
======== ======== ======== ========
Off-Balance Sheet:
Forward commitments to sell mortgage securities $ 68 $ 6,000 $ 68 $ -- $ 51,457 $ 51,409
======== ======== ======== ======== ======== ========
</TABLE>
F-35
<PAGE> 93
The following methods and assumptions were used to estimate the fair value of
the Company's financial instruments:
Mortgage loans - The fair values of these financial instruments are based upon
actual prices received upon recent sales of loans and securities to investors
and projected prices which could be obtained through investors considering
interest rates, loan type, and credit quality.
Mortgage securities - The fair values of these financial instruments are based
upon either or all of the following: actual prices received upon recent sales of
securities to investors, projected prices which could be obtained through
investors, estimates considering interest rates, loan type, quality and
discounted cash flow analysis based on prepayment and interest rate assumptions
used in the market place for similar securities with similar credit ratings.
Cash and cash equivalents, accrued interest receivable, notes receivable,
reverse repurchase agreements, accrued interest payable, other liabilities - The
fair value of these financial instruments was determined to be their carrying
value due to their short-term nature.
CMO Borrowing - The fair values of these financial instruments are based upon
either or all of the following: actual prices received upon recent sales of
securities to investors, projected prices which could be obtained through
investor estimates considering interest rates, loan type, quality and discounted
cash flow analysis based on prepayment and interest rate assumptions used in the
market place for similar securities with similar credit ratings.
Forward commitments to sell securities - The Company has outstanding forward
commitments to sell mortgage securities into mandatory delivery contracts with
investment bankers, private investors and agency-backed securities. The fair
value of these financial instruments was determined through review of published
market information associated with similar instruments. These commitment
obligations are considered in conjunction with the Company's lower of cost or
market valuation of its loans held for sale.
Interest rate caps - The fair values of these financial instruments are
estimated based on dealer quotes and is the estimated amount the Company would
pay to execute a new agreement with similar terms.
21. SUBSEQUENT EVENTS
On February 1, 2000 a $0.10 cash dividend previously declared by the Board of
Directors was paid to stockholders of record as of December 31, 1999.
On January 28, 2000 the Company forgave $62,000 of loans to Principals.
On January 27, February 18 and February 25, 2000, the Company's affiliate, HCP,
purchased $819,000, $1,000,000 and $3,851,000 (principal balance) of subordinate
mortgage backed securities at purchase prices of $458,000, $538,000 and
$2,112,000. HCP funded these purchases with a loan of $1,297,000 from the
Company and with loans of $1,838,000 from the dealers who sold such securities.
Hanover guaranteed the dealer loans.
F-36
<PAGE> 94
22. QUARTERLY FINANCIAL DATA - UNAUDITED
Selected quarterly financial data are as follows (dollars in thousands, except
per share data):
<TABLE>
<CAPTION>
Three Months Three Months Three Months Three Months
Ended Ended Ended Ended
December 31, September 30, June 30, March 31,
1999 1999 1999 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net interest income $ 1,509 $ (884) $ 1,733 $ 2,051
========= ========= ========= =========
Net income (loss) $ 573 $ (13,994) $ 58 $ 736
========= ========= ========= =========
Basic earnings (loss) per share (2) $ 0.10 $ (2.40) $ 0.01 $ 0.12
========= ========= ========= =========
Diluted earnings (loss) per share (2) $ 0.10 $ (2.38) $ 0.01 $ 0.11
========= ========= ========= =========
Dividends declared $ 0.10 $ 0.10 $ 0.10 $ 0.10
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Three Months Three Months Three Months Three Months
Ended Ended Ended Ended
December 31, September 30, June 30, March 31,
1998 1998 1998 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net interest income $ 1,998 $ 1,692 $ 774 $ 2,159
========= ========= ========= =========
Net income (loss) $ (5,884) $ 346 $ (644) $ 1,248
========= ========= ========= =========
Basic earnings (loss) per share (2) $ (0.93) $ 0.05 $ (0.10) $ 0.19
========= ========= ========= =========
Diluted earnings (loss) per share (2) $ (0.93) $ 0.05 $ (0.10) $ 0.17
========= ========= ========= =========
Dividends declared $ 0.11 $ 0.17 $ 0.21 $ 0.21
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Three Months Three Months June 10, 1997
Ended Ended Through
December 31, September 30, June 30,
1997 1997 (1) 1997 (1)
--------- --------- ---------
<S> <C> <C> <C>
Net interest income $ 1,548 $ 128 $ 0
========= ========= =========
Net income $ 440 $ 59 $ 0
========= ========= =========
Basic earnings per share (2) $ 0.07 $ 0.07 $ 0.00
========= ========= =========
Diluted earnings per share (2) $ 0.07 $ 0.07 $ 0.00
========= ========= =========
Dividends declared $ 0.16 $ 0.00 $ 0.00
========= ========= =========
</TABLE>
(1) - the Company was organized on June 10, 1997, however operations did not
begin until the IPO date - September 19, 1997
(2) - earnings per share are computed independently for each of the quarters
presented; therefore the sum of the quarterly earnings per share do not
equal the earnings per share total for the year.
******
F-37
<PAGE> 95
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Hanover Capital Partners Ltd.
New York, New York
We have audited the accompanying consolidated balance sheets of Hanover Capital
Partners Ltd. and Subsidiaries (the "Company") as of December 31, 1999 and 1998,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of Hanover Capital
Partners Ltd. and Subsidiaries at December 31, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999 in conformity with generally
accepted accounting principles in the United States of America.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
March 17, 2000
F-38
<PAGE> 96
HANOVER CAPITAL PARTNERS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
ASSETS 1999 1998
------------ -----------
CURRENT ASSETS:
<S> <C> <C>
Cash $ 514,804 $ 635,484
Investment in marketable securities 19,055 17,992
Accounts receivable 668,993 517,245
Receivables from related parties 186,969 213,779
Accrued interest receivable 181,471 --
Accrued revenue on contracts in progress 761,923 247,100
Prepaid expenses and other current assets 170,201 192,580
------------ -----------
Total current assets 2,503,416 1,824,180
PROPERTY AND EQUIPMENT - Net 56,601 141,459
NET INVESTMENT IN MORTGAGE SECURITIES
AVAILABLE FOR SALE 14,180,184 --
DEFERRED TAX ASSET 856,143 801,351
OTHER ASSETS 175,633 128,572
INCOME TAX RECEIVABLE -- 219,563
------------ -----------
TOTAL ASSETS $ 17,771,977 $ 3,115,125
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Reverse repurchase agreement $ 10,842,000 $ --
Accrued appraisal and subcontractor costs 13,582 20,730
Accounts payable and accrued expenses 508,975 466,697
Deferred revenue -- 89,625
Notes payable to related parties 4,896,046 712,824
------------ -----------
Total current liabilities 16,260,603 1,289,876
------------ -----------
TOTAL LIABILITIES 16,260,603 1,289,876
------------ -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock: $.01 par value, 100,000
shares authorized, 97,000 shares outstanding
at December 31, 1999 and 1998 970 970
Common stock:
Class A: $.01 par value, 5,000
authorized at 3,000 shares
outstanding at December 31, 1999 and 1998 30 30
Additional paid-in capital 2,839,947 2,839,947
Retained earnings (deficit) (1,471,884) (1,015,698)
Accumulated other comprehensive income 142,311 --
------------ -----------
TOTAL STOCKHOLDERS' EQUITY: 1,511,374 1,825,249
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 17,771,977 $ 3,115,125
============ ===========
</TABLE>
See notes to consolidated financial statements.
F-39
<PAGE> 97
HANOVER CAPITAL PARTNERS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Due diligence fees $ 5,530,307 $ 5,001,047 $ 4,058,609
Mortgage sales and servicing 229,557 701,574 826,486
Loan brokering/asset management fees 789,003 654,748 3,027,319
Interest income on mortgage 384,642 -- --
backed securities, net of interest
expense of $547,636 in 1999
Other income (loss) 125,809 (12,609) 58,151
----------- ----------- -----------
Total revenues 7,059,318 6,344,760 7,970,565
----------- ----------- -----------
EXPENSES:
Personnel expense 3,954,622 4,364,725 5,373,331
Subcontractor expense 1,950,946 1,537,294 1,386,979
Occupancy expense 477,937 578,512 495,285
Travel and subsistence 390,318 555,382 302,936
General and administrative expense 378,407 532,006 419,543
Appraisal, inspection and other 155,609 223,262 618,059
professional fees
Interest expense 252,144 155,128 117,894
Depreciation and amortization 107,583 107,971 117,675
Reversal of reserve for IRS assessment -- -- (23,160)
----------- ----------- -----------
Total expenses 7,667,566 8,054,280 8,808,542
----------- ----------- -----------
(LOSS) BEFORE INCOME TAX (BENEFIT) (608,248) (1,709,520) (837,977)
INCOME TAX (BENEFIT) (152,062) (661,524) (325,959)
----------- ----------- -----------
NET (LOSS) $ (456,186) $(1,047,996) $ (512,018)
=========== =========== ===========
BASIC (LOSS) PER SHARE $ (152.07) $ (349.33) $ (525.79)
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-40
<PAGE> 98
HANOVER CAPITAL PARTNERS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
<TABLE>
<CAPTION>
Common Stock Common Stock
Preferred Stock New Class A Old Class A Additional
--------------- --------------- ---------------- Paid-In
Shares Amount Shares Amount Shares Amount Capital
------ ------ ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 166.424 $ 2 $ 57,440
Agreement and plan of recapitalization:
Exchange of old Class A Shares for new
Class A Shares and Series A Preferred
Stock 97,000 $ 970 3,000 $ 30 (166.424) (2) (998)
Comprehensive (loss):
Net (loss)
Comprehensive (loss)
Dividends (noncash)
------ ----- ----- ---- ------- ------- ----------
BALANCE, DECEMBER 31, 1997 97,000 $ 970 3,000 $ 30 -- -- 56,442
Capital Contributions 2,783,505
Comprehensive (loss):
Net (loss)
Comprehensive (loss)
------ ----- ----- ---- ------- ------- ----------
BALANCE, DECEMBER 31, 1998 97,000 $ 970 3,000 $ 30 -- -- 2,839,947
Comprehensive (loss):
Net (loss)
Other comprehensive income:
Change in net unrealized gain on
securities available for sale,
net of income tax effect
Comprehensive (loss)
------ ----- ----- ---- ------- ------- ----------
BALANCE, DECEMBER 31, 1999 97,000 $ 970 3,000 $ 30 -- -- $2,839,947
====== ===== ===== ==== ======= ======= ==========
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Retained Other
Comprehensive Earnings Comprehensive
(Loss) (Deficit) Gain Total
------ --------- ---- -----
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 $ 617,448 $ 674,890
Agreement and plan of recapitalization:
Exchange of old Class A Shares for new
Class A Shares and Series A Preferred
Stock
Comprehensive (loss):
Net (loss) $ (512,018) (512,018) (512,018)
----------
Comprehensive (loss) (512,018)
==========
Dividends (noncash) (73,132) (73,132)
---------- ---------- ----------
BALANCE, DECEMBER 31, 1997 32,298 -- 89,740
Capital Contributions 2,783,505
Comprehensive (loss):
Net (loss) (1,047,996) (1,047,996) (1,047,996)
----------
Comprehensive (loss) (1,047,996)
========== ---------- ---------- ----------
BALANCE, DECEMBER 31, 1998 (1,015,698) -- 1,825,249
Comprehensive (loss):
Net (loss) (456,186) (456,186) (456,186)
Other comprehensive income:
Change in net unrealized gain on
securities available for sale,
net of income tax effect 142,311 142,311 142,311
----------
Comprehensive (loss) $ (313,875)
========== ----------- ---------- ----------
BALANCE, DECEMBER 31, 1999 $(1,471,884) $ 142,311 $1,511,374
=========== ========== ==========
</TABLE>
F-41
<PAGE> 99
HANOVER CAPITAL PARTNERS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR YEAR YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $ (456,186) $(1,047,996) $ (512,018)
Adjustments to reconcile net (loss) to net cash
(used in) operating activities:
Amortization of net premium (204,010) -- --
Loan loss provision 289,297 -- --
Depreciation and amortization 107,583 107,971 117,675
Gain on sale of mortgage servicing rights -- (371,977) (16,916)
Reversal of reserve for IRS assessment -- -- (23,160)
IRS payroll tax settlement -- -- (99,240)
Loss on disposal of property and equipment 14,588 -- 35,696
Loss on disposal of securities -- 100,750 --
Purchase of trading securities (1,063) (598) (951)
Changes in assets - (increase) decrease:
Accounts receivable (151,748) (383,416) 3,550,036
Receivables from related parties 26,810 597,371 (315,097)
Accrued interest receivable (181,471) -- --
Accrued revenue on contracts in progress (514,823) (211,687) 514,368
Income tax receivable 219,563 73,322 (292,885)
Prepaid expenses and other current assets 22,379 (74,028) 24,474
Deferred tax asset -- (781,270) (20,081)
Other assets (47,062) 37,348 (12,254)
Changes in liabilities - increase (decrease):
Accrued appraisal and subcontractor costs (7,148) (111,248) (2,675,194)
Accounts payable and accrued expenses 42,278 132,106 (343,799)
Income taxes payable -- -- (89,477)
Deferred income taxes (152,062) -- (12,993)
Deferred revenue (89,625) (15,325) (89,384)
Minority interest -- (616) 366
------------ ----------- -----------
Net cash (used in) operating activities (1,082,700) (1,949,293) (260,834)
------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (38,598) (33,841) (43,060)
Sale of property and equipment 1,285 -- --
Proceeds from sale of mortgage servicing rights -- 418,974 34,446
Purchase of securities -- (100,000) --
Capitalization of mortgage servicing rights -- -- (43,783)
Purchase of private placement mortgage securities (14,110,858) -- --
Principal payments received on mortgage securities 84,969 -- --
------------ ----------- -----------
Net cash (used in) provided by investing activities (14,063,202) 285,133 (52,397)
------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (repayment of) note payable to bank -- (1,405,000) 360,000
Net proceeds from note payable to related party 4,183,222 712,824 --
Capital contributions -- 2,783,505 --
Net borrowings from reverse repurchase agreements 10,842,000 -- --
------------ ----------- -----------
Net cash provided by financing activities 15,025,222 2,091,329 360,000
------------ ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (120,680) 427,169 46,769
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 635,484 208,315 161,546
------------ ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 514,804 $ 635,484 $ 208,315
============ =========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES:
Loans of $7,165,000, $13,930,000, and $25,649,378 were originated by HCMC
and funded by investors in 1999, 1998 and 1997, respectively
Noncash dividends of $73,132, were distributed to the Company's
stockholders on September 19, 1997
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes $ 5,350 $ 5,671 $ 129,359
============ =========== ===========
Interest $ 323,851 $ 689,779 $ 116,993
============ =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-42
<PAGE> 100
HANOVER CAPITAL PARTNERS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. BUSINESS DESCRIPTION
Hanover Capital Partners Ltd. ("HCP") and its subsidiaries operate as a
specialty finance company which is principally engaged in performing due
diligence services, asset management services, and mortgage and investment
banking services for third parties and for its affiliate, Hanover Capital
Mortgage Holdings, Inc. A wholly-owned subsidiary of HCP, Hanover Capital
Mortgage Corporation ("HCMC"), is a servicer of multifamily mortgage loans and
until June 30, 1999 was an originator of multifamily mortgage loans. HCMC is
approved by the U.S. Department of Housing and Urban Development (HUD) as a
Title II Nonsupervised Mortgagee under the National Housing Act. Another
wholly-owned subsidiary of HCP, Hanover Capital Securities, Inc. ("HCS") is a
registered broker/dealer with the Securities and Exchange Commission.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of HCP and its
wholly-owned subsidiaries (the "Company"). The wholly-owned subsidiaries include
HCMC and HCS. All significant intercompany accounts and transactions have been
eliminated.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the required amounts of revenues and expenses during
the reporting period.
INVESTMENTS IN LIMITED LIABILITY COMPANIES
Minority ownership interests in limited liability companies are accounted for by
the equity method of accounting. HCP's investments in limited liability
companies are classified as other assets in the accompanying consolidated
balance sheets. The ownership of each limited liability company at December 31,
1999 and 1998 is detailed below:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Alpine/Hanover, LLC 1.0% 1.0%
ABH-I, LLC 1.0% 1.0%
</TABLE>
REVENUE RECOGNITION
Revenues from due diligence contracts in progress are recognized for the
services provided as they are earned and billed.
F-43
<PAGE> 101
LOAN ORIGINATION FEES AND COSTS
Loan origination fees and costs are deferred until the sale of the loan. The
Company sells all originated loans to investors at the time of origination, and
accordingly, recognizes loan origination fees at that time. Direct loan
origination costs and loan origination fees are offset and included in mortgage
sales and servicing.
LOAN SERVICING FEES
Loan servicing fees consist of fees paid by investors for the collection of
monthly mortgage payments, maintenance of required escrow accounts, remittance
to investors, and ancillary income associated with those activities. The Company
recognizes loan servicing fees as payments are collected.
DEFERRED REVENUE
Cash advances received for certain service contracts are recorded in the
accompanying consolidated balance sheets as deferred revenue and are recognized
during the period the services are provided and the related revenue is earned.
INCOME TAXES
The Company files a consolidated Federal income tax return. The Company has not
been subject to an examination of its income tax returns by the Internal Revenue
Service. The Company's tax sharing policy provides that each member of the
Federal consolidated group receive an allocation of income taxes as if each
filed a separate Federal income tax return. HCP, HCMC and HCS generally file
their state income tax returns on a separate company basis. Deferred income
taxes are provided for the effect of temporary timing differences between the
tax basis of an asset or liability and its reported amount in the consolidated
financial statements.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation.
Depreciation is computed on the straight-line method over the estimated useful
lives of the assets, generally three to seven years. Leasehold improvements are
depreciated over the terms of the respective leases or their estimated useful
lives, whichever is shorter.
INVESTMENT IN MARKETABLE SECURITIES
Investment in marketable securities which the Company has classified as trading
securities are reported in the accompanying consolidated balance sheets at
market value at December 31, 1999 and 1998.
CASH AND CASH EQUIVALENTS
For cash flow purposes, the Company considers highly liquid investments,
purchased with an original maturity of three months or less, to be cash
equivalents.
F-44
<PAGE> 102
MORTGAGE SERVICING RIGHTS
Effective January 1, 1997, the Company adopted Statement of Financial Accounting
Standards No. 125, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities ("SFAS 125"). Under SFAS 125, after the
transfer of a financial asset, the Company recognizes the financial assets it
controls and the liabilities it has incurred. Furthermore, the Company no longer
recognizes the financial assets for which control has been surrendered and
liabilities have been extinguished. The adoption of SFAS 125 did not have an
effect on the financial position or results of operations of the Company.
For purposes of assessing impairment, the lower of carrying value or fair value
of servicing rights is determined on an individual loan basis. Capitalized
servicing rights are amortized in proportion to projected net servicing revenue.
The fair value of servicing rights is determined using a discounted cash flow
method.
MORTGAGE SECURITIES
The Company's policy is to generally classify mortgage securities as available
for sale as they are acquired. Each available for sale mortgage security is
monitored for a period of time prior to making a determination whether the asset
will be classified as held to maturity or trading. 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 designated as trading are reported at fair value. Gains and
losses resulting from changes in fair value are recorded as income or expense
and included in earnings.
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 increases in market value; however, further
increases in market value will be reflected separately in the equity section of
the Company's consolidated 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 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 mortgage 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.
F-45
<PAGE> 103
The Company purchases both investment grade and below investment grade mortgage
backed securities ("MBS"). Below investment grade MBS have the potential to
absorb credit losses caused by delinquencies and defaults on the underlying
mortgage loans. When purchasing below investment grade MBS, the Company
leverages off of its due diligence operations and management's substantial
mortgage credit expertise to make a thorough evaluation of the underlying
mortgage loan collateral. The Company monitors the delinquencies and defaults on
the underlying mortgages of its mortgage securities and, if an impairment is
deemed to be other than temporary, makes a provision for known losses as well as
unidentified potential losses. The provision is based on management's assessment
of numerous factors affecting its portfolio of mortgage securities including,
but not limited to, current and projected economic conditions, delinquency
status, credit losses to date on underlying mortgages and remaining credit
protection. The provision is made by reducing the cost basis of the individual
security and the amount of such write-down is recorded as a realized loss,
thereby reducing earnings. Provisions for credit losses do not reduce taxable
income and therefore do not affect the dividends paid by the Company to
stockholders in the period the provisions are taken. Actual losses realized by
the Company reduce taxable income in the period the actual loss is realized and
would affect the dividends paid to stockholders for that tax year.
REVERSE REPURCHASE AGREEMENTS
Reverse repurchase agreements are accounted for as collateralized financing
transactions and recorded at their contractual amounts, plus accrued interest.
FINANCIAL INSTRUMENTS
The Company from time to time enters into interest rate hedge mechanisms
including short sales and interest rate caps to manage its exposure to market
pricing changes and/or changes in costs of match funded liabilities in
connection with the purchase, holding, permanent financing or sale of its
mortgage securities portfolio. The Company generally closes out the hedge
position to coincide with the related sale or permanent financing transactions.
Gains and losses on hedge positions are either (i) deferred as an adjustment to
the carrying value of the related securities until the security has been sold or
permanently financed, after which the gains or losses will be amortized into
income over the remaining life of the security or financing using a method that
approximates the effective yield method, or (ii) deferred until such time as the
related securities are sold. Gains or losses on hedge positions associated with
mortgage securities held in a trading account are recognized as income or loss
in each period.
The Company also enters into interest rate caps to manage its interest rate
exposure on certain reverse repurchase agreement and CMO 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. Any payments received under the interest rate cap agreements are
recorded as a reduction of interest expense on the reverse repurchase agreement
financing.
For derivative financial instruments designated as hedge instruments, the
Company periodically evaluates the effectiveness of these hedges against the
financial instrument being hedged under various interest rate scenarios. The
Company utilizes hedge deferral accounting procedures in accounting for its
hedging program so long as there is adequate correlation between the hedged
F-46
<PAGE> 104
results and the change in value of the hedged financial instrument. If the hedge
instrument performance does not result in adequate correlation between the
changes in value of the hedge instrument and the related hedged financial
instrument, the Company will terminate hedge deferral accounting and mark the
carrying value of the hedge instrument to market. If a hedge instrument is sold
or matures, or the criteria that was anticipated at the time the hedge
instrument was entered into no longer exists, the hedge instrument is no longer
accounted for as a hedge. Under these circumstances, the accumulated change in
the market value of the hedge is recognized in current period income or loss to
the extent that the effects of interest rate or price changes of the hedged item
have not offset the hedged results.
In accordance with SFAS No.107, Disclosure about Derivative Financial
Instruments, and SFAS No. 119, Disclosure about Derivative Financial Instruments
and Fair Value of Financial Instruments, the Company has provided fair value
estimates and information about valuation methodologies. The estimated fair
value amounts have been determined using available market information or
appropriate valuation methodologies. However, considerable judgment is required
in interpreting market data to develop estimates of fair value, so the estimates
are not necessarily indicative of the amounts that would be realized in a
current market exchange. The effect of using different market assumptions and/or
estimation methodologies may materially impact the estimated fair value amounts.
BASIC EARNINGS PER SHARE
Basic earnings per share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding during
the period. Shares issued during the period and shares reacquired during the
period are weighted for the portion of time they were outstanding.
COMPREHENSIVE INCOME
Accounting principles generally require that recognized revenue, expenses,
gains and losses be included in net income. Although certain changes in assets
and liabilities, such as unrealized gains and losses on available for sale
securities, are reported as a separate component of the equity section of the
consolidated balance sheets, such items, along with net income, are components
of comprehensive income.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The FASB issued SFAS 133 Accounting for Derivative Instruments and Hedging
Activities ("SFAS 133") in June 1998. SFAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. Management's preliminary evaluation of
SFAS 133 indicates the implementation of SFAS 133 will not result in any
material changes to the Company's consolidated statement of operations. SFAS
137, issued in June 1999, delayed the effective date of SFAS 133 to make it
effective for quarters in fiscal years beginning after June 15, 2000.
3. PAYROLL TAX SETTLEMENT
In 1994, the Internal Revenue Service ("IRS") began an examination of the
Company's payroll tax withholding practices with respect to independent
contractors who provided services to HCP's due diligence business.
Pursuant to the IRS Classification Settlement Program ("CSP"), HCP settled all
disputed payroll taxes relating to the IRS examination of HCP's payroll
withholding practices with respect to independent contractors. In October 1997,
management agreed to the terms of the CSP which required HCP to pay the United
States Government $99,240 in full discharge of any federal
F-47
<PAGE> 105
employment tax liability and to further treat the workers as employees (rather
than independent contractors) on a prospective basis effective April 1, 1998.
At December 31, 1995, HCP had recorded an accrual of $400,000 for payroll
withholding tax for independent contractors. HCP recorded a reversal of reserve
of $23,160 and $277,600 for the payroll tax matter in the accompanying
consolidated statements of operations for the years ended December 31, 1997 and
1996, respectively, to adjust the previously established reserve to the actual
and expected settlement amounts.
4. CONCENTRATION RISK
REVENUES FROM CERTAIN CUSTOMERS
For the years ended December 31, 1999, 1998 and 1997, the Company received
revenues from certain customers, which are subject to change annually, which
exceeded 10% of total revenues as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Major Customer # 1 22% 28% 24%
Major Customer # 2 13% 13% 18%
</TABLE>
MORTGAGE SECURITIES
The Company's exposure to credit risk associated with its investment activities
is measured on an individual security basis as well as by groups of securities
that share similar attributes. In certain instances, the Company has
concentrations of credit risk in its mortgage securities portfolio for the
securities of certain issuers. The following table sets forth the concentrations
of the Company's credit risk by issuer at December 31, 1999. The Company did not
own any mortgage securities at December 31, 1998.
CONCENTRATION OF CREDIT RISK BY ISSUER
DECEMBER 31, 1999
<TABLE>
<CAPTION>
Carrying
Value of
Mortgage
Issuer Securities
------ ----------
<S> <C>
Private Issuer 1 $ 7,386,525
Private Issuer 2 6,793,659
-----------
Total $14,180,184
===========
</TABLE>
5. MORTGAGE SERVICING
The Company, through its wholly-owned subsidiary, HCMC, services multifamily
mortgage loans on behalf of others. Loan servicing consists of the collection of
monthly mortgage payments on behalf of investors, reporting information to those
investors on a monthly basis and
F-48
<PAGE> 106
maintaining custodial escrow accounts for the payment of principal and interest
to investors and property taxes and insurance premiums on behalf of borrowers.
As of December 31, 1999 and 1998, HCMC was servicing 6 and 13 loans,
respectively, with unpaid principal balances of $13,388,037 and $46,329,000
including loans subserviced for others of $10,690,537 and $27,533,700
respectively. Escrow balances maintained by HCMC were $212,528 and $1,316,400 at
December 31, 1999 and 1998, respectively. The aforementioned servicing portfolio
and related escrow accounts are not included in the accompanying consolidated
balance sheets as of December 31, 1999 and 1998.
Activity in mortgage servicing rights for the years ended December 31, 1998
was as follows:
<TABLE>
<CAPTION>
1998
----
<S> <C>
Beginning balance $ 49,449
Capitalization --
Sales (46,997)
Scheduled amortization (2,452)
--------
$ --
========
</TABLE>
6. MORTGAGE OPERATIONS
In September 1998, the Company purchased a portfolio of single family mortgage
loans with a principal balance of $101,586,036. This balance was comprised of
fixed rate loans ($22,752,341) and adjustable rate loans ($78,833,695). The
mortgage loan portfolio was purchased at 101.395% of par value. The Company sold
this portfolio of loans at book value to Hanover Capital Mortgage Holdings, Inc.
During the period in which the Company owned the loan portfolio, net interest
income of $121,585 was recognized and is reported as a component of other income
(loss) in the 1998 consolidated statement of operations.
F-49
<PAGE> 107
7. RELATED PARTY TRANSACTIONS
Receivables from related parties at December 31, 1999 and 1998 consist of the
following:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Due from Hanover Capital Mortgage Holdings, Inc. (1) $150,027 $ 82,782
Due from ABII-I, LLC (includes $9,005 and $9,005 of asset
management fees at December 31, 1999 and 1998,
respectively) (2) 9,005 16,015
Due from Hanover Mortgage Capital Corporation (3) 6,727 9,342
Due from AGR Financial, LLC (4) -- 44,192
Due from Hanover Investment Fund (3) 125 2,250
Due from Hanover Capital Partners 2, Inc. (6) -- 5,150
Due from HanoverTrade.com (7) 14,274 --
-------- --------
Due from related entities 180,158 159,731
Due from officers (5) 6,811 54,048
-------- --------
Receivables from related parties $186,969 $213,779
======== ========
</TABLE>
(1) The Company entered into a Management Agreement in 1998 to provide, among
other services, due diligence, asset management and administrative services
to Hanover Capital Mortgage Holdings, Inc. ("HCHI") in connection with
acquiring single-family mortgage loan pools and managing and servicing
HCHI's investment portfolio. The term of the Management Agreement continues
until December 31, 2000 with automatic annual renewal.
(2) Amounts due from entities that the Company had a minority ownership
interest in represent receivables resulting primarily from fees generated
from asset management services and out-of-pocket expenses. The Company
ceased providing asset management services to these entities in September
1997. Asset management fees are recognized in the period earned and
amounted to $2,446,000 for the year ended December 31, 1997.
(3) Amounts due from entities that are owned by certain of the Company's
officers/owners represent receivables resulting primarily from accounting
fees and out-of-pocket expenses.
(4) Amounts due from AGR Financial, LLC represent unpaid billings for services
that the Company provides to AGR Financial, LLC pursuant to an agreement
dated August 1996. The services include but are not limited to providing
AGR Financial, LLC with software operating systems, processing
capabilities, payroll services and accounting services.
(5) Amounts due from officers at December 31, 1998 include $53,766 from the
Company's President, which was repaid in August 1999.
(6) Amounts due reflect certain costs that the Company paid for Hanover Capital
Partners 2, Inc. in connection with a security transaction completed by
Hanover Capital Partners 2, Inc. in October 1998.
(7) Amounts due reflect certain costs that the Company paid for
HanoverTrade.com. These expenses incurred relate to start-up costs of
HanoverTrade.com.
F-50
<PAGE> 108
8. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1999 and 1998 consists of the following:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Office machinery and equipment $ 229,133 $ 415,032
Furniture and fixtures 4,745 111,246
Leasehold improvements -- 68,553
--------- ---------
233,878 594,831
Less accumulated depreciation (177,277) (453,372)
--------- ---------
Property and equipment - net $ 56,601 $ 141,459
========= =========
</TABLE>
Depreciation expense for the years ended December 31, 1999, 1998 and 1997 was
$107,583, $105,519, and $110,284, respectively.
9. MORTGAGE SECURITIES
At December 31, 1999, the Company had $14,180,184 of fixed rate
private-placement mortgage-backed securities, classified as available for sale,
as shown on the table below. The Company did not have any such securities at
December 31, 1998.
<TABLE>
<CAPTION>
FIXED RATE PRIVATE PLACEMENT MORTGAGE-BACKED SECURITIES
DECEMBER 31, 1999
-------------------------------------------------------------------------------
Available Held
For to
Sale (a) Maturity Trading Total
-------- -------- ------- -----
<S> <C> <C> <C> <C>
Principal balance of mortgage securities $ 33,400,795 $ -- $ -- $ 33,400,795
Net (discount) and deferred costs (19,174,902) -- -- (19,174,902)
--------------- ------------ ------------- ---------------
Total amortized cost of mortgage securities 14,225,893 -- -- 14,225,893
Loan loss allowance (285,290) -- (285,290)
Gross unrealized gain 239,581 -- -- 239,581
--------------- ------------ ------------- ---------------
Carrying cost of mortgage securities $ 14,180,184 $ -- $ -- $ 14,180,184
Mix 100% -- -- 100%
Principal balance of mortgage loans $ 5,171,979,000 -- -- $ 5,171,979,000
Weighted average net coupon 6.520% -- -- 6.520%
Weighted average maturity 345 -- -- 345
</TABLE>
(a) At December 31, 1999, represents seventeen below investment grade
subordinate MBS purchased from third parties in the third quarter of 1999.
The coupon interest rates on these 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. These notes represented a $33,400,795
(principal balance) subordinated interest in $5,171,979,000 of mortgage
loans at December 31, 1999. These notes were carried at $14,180,184 at
December 31, 1999.
F-51
<PAGE> 109
The carrying value at December 31, 1999 of the Company's mortgage securities by
contractual maturity dates are presented below:
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY TRADING
CARRYING VALUE CARRYING VALUE CARRYING VALUE
-------------- -------------- --------------
<S> <C> <C> <C>
Due after ten years $14,180,184 -- --
</TABLE>
As mentioned above, actual maturities may differ from stated maturities because
borrowers usually have the right to prepay certain obligations, often times
without penalties. Maturities of mortgage securities depend on the repayment
characteristics and experience of the underlying mortgage loans.
The average effective yield, which includes amortization of net premiums,
(discounts) and deferred costs, for the periods shown below on the combined
available for sale, held to maturity and trading mortgage securities portfolio
were as follows:
<TABLE>
<CAPTION>
1999
------
<S> <C>
Quarter ended March 31 --
Quarter ended June 30 --
Quarter ended September 30 20.218%
Quarter ended December 31 19.696%
------
22.527%
======
</TABLE>
10. LOAN LOSS ALLOWANCE
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 securities portfolio, including the evaluation of impaired
loans. The following table summarizes the activity in the loan loss allowance
for the year ended December 31, 1999. There was no loan loss reserve prior to
January 1, 1999 as the Company did not invest in mortgage securities prior to
January 1, 1999.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1999
-----------------
<S> <C>
Balance beginning of period $ --
Loan loss provision 289,297
Transfers/sales --
Charge-offs (4,006)
---------
Balance end of period $ 285,291
=========
</TABLE>
11. REVERSE REPURCHASE AGREEMENTS
At December 31, 1999 the Company had a total of $10,842,000 of uncommitted
borrowings pursuant to a master reverse repurchase agreement with one lender.
All borrowings pursuant to the master reverse repurchase agreement are secured
by mortgage securities.
F-52
<PAGE> 110
The reverse repurchase agreements bear interest rates that vary from LIBOR plus
90 to LIBOR plus 130 basis points. The lender will typically finance an amount
equal to 60% to 80% of the market value of the mortgage securities, depending on
the nature of the collateral.
The weighted average borrowing rate under the agreement was 7.111% at December
31, 1999. The weighted average maturity was eight months. The reverse repurchase
financing agreements at December 31, 1999 were collateralized by securities with
a cost basis of $14,180,184.
Information pertaining to reverse repurchase agreement financing as of and for
the year ended December 31, 1999 is summarized as follows:
REVERSE REPO FINANCING
YEAR ENDED DECEMBER 31, 1999
----------------------------
<TABLE>
<CAPTION>
MORTGAGE
REVERSE REPURCHASE AGREEMENTS SECURITIES
----------------------------- ----------
<S> <C>
Balance of borrowing at end of period $10,842,000
Accrued interest at end of period $ 66,572
Average borrowing balance during the
period $11,022,000
Average interest rate during the period 6.874%
Maximum month-end borrowing balance
during the period $11,082,000
COLLATERAL UNDERLYING THE AGREEMENTS
------------------------------------
Balance at end of period - carrying value $14,180,184
</TABLE>
12. INCOME TAXES
The components of deferred income taxes as of December 31, 1999 and 1998 are as
follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Deferred tax assets $ 986,625 $ 813,003
Deferred tax liabilities (130,482) (11,652)
----------- -----------
Net deferred tax assets $ 856,143 $ 801,351
=========== ===========
</TABLE>
The items resulting in significant temporary differences for the years ended
December 31, 1999 and 1998 that generate deferred tax assets and liabilities
relate primarily to the recognition of revenue and accrued liabilities for
financial reporting purposes.
F-53
<PAGE> 111
The components of the income tax (benefit) for the years ended December 31,
1999, 1998 and 1997 consist of the following:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Current - Federal, state and local $ -- $ -- $(292,885)
Deferred - Federal, state and local (152,062) (661,524) (33,074)
--------- --------- ---------
Total $(152,062) $ 661,524 $(325,959)
========= ========= =========
</TABLE>
The income tax (benefit) differs from amounts computed at statutory rates, as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Federal income taxes (benefit) at statutory rate $(206,804) $(595,554) $(285,167)
State and local income taxes provision (benefit) (40,145) (76,256) (59,486)
Unconsolidated subsidiary's net income (loss) -- -- 1,177
Meals and entertainment 6,486 6,002 4,052
Officer's life insurance -- 4,273 9,613
Adjustment of deferred tax asset 88,401 -- --
Other, net -- 11 3,852
--------- --------- ---------
Total $(152,062) $(661,524) $(329,811)
========= ========= =========
</TABLE>
The Company has a Federal taxable net operating loss carryforward of
approximately $1.9 million which begins to expire in the year 2012.
13. STOCKHOLDERS' EQUITY
On September 19, 1997, the Company entered into an Agreement and Plan of
Recapitalization ("Agreement") with its four stockholders to recapitalize the
Company. The Agreement provided for the tax-free exchange of the stockholders'
166.424 Class A "old" common stock shares for 3,000 shares of "new" Class A
common stock shares, $0.01 par value (representing a 3% economic interest in the
Company) and 97,000 shares of Series A preferred stock, $0.01 par value
(representing a 97% economic interest in the Company). The preferred stock has
no dividend rate or preference over the common stock. Dividend distributions
will be made in the same amount on a per share basis of the common stock as for
the preferred stock. Dividend distributions will be made to the common
stockholders and the preferred stockholders in proportion to the number of
outstanding shares. The preferred stockholder has the right to
F-54
<PAGE> 112
receive $10,750,005 upon liquidation of the Company before common stockholders
receive any liquidating distributions.
14. NOTE PAYABLE TO BANK
HCP had a $2.0 million Line of Credit Facility Agreement ("Line") with a bank
that expired December 31, 1999 and was not renewed. There was no outstanding
balance at December 31, 1999 and 1998.
15. NOTE PAYABLE TO RELATED PARTY
At December 31, 1999 the Company had a principal balance outstanding on a note
payable to Hanover Capital Mortgage Holdings, Inc. in the amount of $4,896,046.
The note bears interest at the prime rate minus 1% and interest is calculated on
the daily principal balance outstanding. At December 31, 1999 the interest rate
in effect was 7.5%. Included in the 1999 consolidated statement of operations is
interest expense in the amount of $167,955 related to this note payable.
16. COMMITMENTS AND CONTINGENCIES
The Company has noncancelable operating lease agreements for office space.
Future minimum rental payments for such leases are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
2000 $ 321,703
2001 317,551
2002 278,114
2003 238,677
2004 218,103
Thereafter 991,068
----------
Total $2,365,216
==========
</TABLE>
Rent expense for the years ended December 31, 1999, 1998 and 1997 amounted to
$217,413, $250,684, and $310,814 respectively.
HCHI has guaranteed the obligations of the Company with respect to an amendment
to an office lease entered into by the Company. The office lease (beginning
November 4, 1999) is for a period of 10 years and 3 months and obligates the
Company for $2,162,300 of base rental expense plus escalation, electric and
other billings over the lease term.
17. FINANCIAL INSTRUMENTS
The estimated fair value of the Company's assets and liabilities classified as
financial instruments and off-balance sheet financial instruments at December
31, 1999 and 1998 are as follows:
F-55
<PAGE> 113
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------------------- -----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Assets:
Mortgage securities, available for sale $14,180,184 $14,180,184 -- --
Interest rate caps 135,609 245,000 -- --
Cash and cash equivalents 515,804 514,804 $ 635,484 $ 635,484
Marketable securities 19,055 19,055 17,992 17,992
Accrued interest receivable 181,471 181,471 -- --
----------- ----------- ----------- -----------
Total $15,032,123 $15,140,514 $ 653,476 $ 653,476
=========== =========== =========== ===========
Liabilities:
Reverse repurchase agreements $10,842,000 $10,842,000 -- --
----------- ----------- ----------- -----------
Total $10,842,000 $10,842,000 -- --
=========== =========== =========== ===========
</TABLE>
The following methods and assumptions were used to estimate the fair value of
the Company's financial instruments:
Mortgage securities - The fair values of these financial instruments are based
upon either or all of the following: actual prices received upon recent sales of
securities to investors, projected prices which could be obtained through
investors, estimates considering interest rates, loan type, quality and
discounted cash flow analysis based on prepayment and interest rate assumptions
used in the market place for similar securities with similar credit ratings.
Cash and cash equivalents, accrued interest receivable, reverse repurchase
agreements - The fair value of these financial instruments was determined to be
their carrying value due to their short-term nature.
Marketable securities - The fair values of these financial instruments are based
on quotes obtained from third parties.
Interest rate caps - The fair values of these financial instruments are
estimated based on dealer quotes and is the estimated amount the Company would
pay to execute a new agreement with similar terms.
18. SUBSEQUENT EVENTS
On January 1, 2000, the Company hired the five most senior employees of Document
Management Network, Inc. ("DMN") and purchased all of DMN's assets for a nominal
sum. These employees have become the DMN division of the Company. DMN prepares
documentation (primarily assignments of mortgage loans ) for third parties on a
contract basis.
On January 27, February 18 and February 25, 2000, the Company purchased
$819,000, $1,000,000 and $3,851,000 (principal balance) of subordinate mortgage
backed securities at purchase prices of $458,000, $538,000 and $2,112,000. The
Company funded these purchases with a loan of $1,270,000 from the Company's
affiliate, Hanover Capital Mortgage Holdings, Inc. and with loans of $1,838,000
from the dealers who sold such securities.
******
F-56
<PAGE> 114
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Hanover Capital Partners 2, Inc.
New York, New York
We have audited the accompanying consolidated balance sheets of Hanover Capital
Partners 2, Inc. and Subsidiary (the "Company") as of December 31, 1999 and 1998
and the related consolidated statements of operations, stockholders' equity and
cash flows for the year ended December 31, 1999, and for the period from October
7, 1998 (inception) through December 31, 1998. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing standards
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Hanover Capital
Partners 2, Inc. and Subsidiary as of December 31, 1999 and 1998, and the
results of their consolidated operations and their consolidated cash flows for
the year ended December 31, 1999, and for the period from October 7, 1998
(inception) through December 31, 1998 in conformity with generally accepted
accounting principles in the United States of America.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
March 17, 2000
F-57
<PAGE> 115
HANOVER CAPITAL PARTNERS 2, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in thousands, except as noted)
<TABLE>
<CAPTION>
ASSETS DECEMBER 31, DECEMBER 31,
1999 1998
--------- ---------
<S> <C> <C>
Mortgage loans:
Collateral for CMOs $ 210,578 $ 300,599
Cash and cash equivalents -- 143
Accrued interest receivable 1,267 1,868
Deferred financing costs 2,336 3,191
--------- ---------
TOTAL ASSETS $ 214,181 $ 305,801
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
CMO Borrowings $ 208,448 $ 297,682
Accrued interest payable 1,267 1,868
Due to related parties 364 310
Accrued expenses and other liabilities -- 154
--------- ---------
TOTAL LIABILITIES 210,079 300,014
--------- ---------
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 14,319
Retained (deficit) (10,217) (8,532)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 4,102 5,787
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 214,181 $ 305,801
========= =========
</TABLE>
See notes to consolidated financial statements.
F-58
<PAGE> 116
HANOVER CAPITAL PARTNERS 2, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER OF 1998
YEAR ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31,
1999 1998
----------- -----------
<S> <C> <C>
REVENUES:
Interest income $ 16,841 $ 5,611
Interest expense 18,521 5,965
----------- -----------
Net interest expense (1,680) (354)
Loan loss provision -- 38
----------- -----------
Net interest expense after loan loss
provision (1,680) (392)
----------- -----------
EXPENSES:
Operating 5 5
----------- -----------
NET (LOSS) $ (1,685) $ (397)
=========== ===========
BASIC (LOSS) PER SHARE $(16,851.72) $ (3,974.00)
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-59
<PAGE> 117
HANOVER CAPITAL PARTNERS 2, INC. AND SUBSIDIARY
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------- ------------------- PAID-IN- RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
------ ------ ------ ------ ------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of
common stock -- -- 100 -- $ 143 $ 143
Issuance of
preferred stock 9,900 -- -- -- 14,176 14,176
Net (loss) $ (397) (397)
Dividends declared (8,135) (8,135)
----- ------- --- ----- -------- -------- --------
BALANCE,
DECEMBER 31, 1998 9,900 -- 100 -- $ 14,319 $ (8,532) $ 5,787
===== ======= === ===== ======== ======== ========
Net (loss) (1,685) (1,685)
Dividends declared -- --
----- ------- --- ----- -------- -------- --------
BALANCE
DECEMBER 31, 1999 9,900 -- 100 -- $ 14,319 $(10,217) $ 4,102
===== ======= === ===== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-60
<PAGE> 118
HANOVER CAPITAL PARTNERS 2, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except share data)
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 7, 1998
YEAR ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31,
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $ (1,685) $ (397)
Adjustments to reconcile net (loss) to
net cash (used in) provided by operating activities:
Amortization of net premium and deferred costs 797 353
Loan loss provision (38) 38
Decrease in deferred financing 855 --
(Increase) decrease in accrued interest receivable 601 (1,868)
(Increase) in prepaid and other assets (1) --
Increase (decrease) in accrued interest payable (601) 1,868
Decrease (increase) in accrued expenses and other liabilities (73) 73
Increase in due to related parties 55 241
--------- ---------
Net cash (used in) provided by operating activities (90) 308
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal payments received on collateral for
mortgage backed bonds 89,235 20,082
Transfer of premium and deferred hedge 27 3,320
--------- ---------
Net cash provided by investing activities 89,262 23,402
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from CMOs -- 317,764
Payoff of reverse repurchase agreements -- (309,963)
Payments on CMOs (89,234) (20,082)
Deferred financing costs -- (3,375)
Capital contributions -- 143
Payment of dividends (81) (8,054)
--------- ---------
Net cash (used in) financing activities (89,315) (23,567)
--------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (143) 143
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 143 --
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ -- $ 143
========= =========
SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES
9,900 shares of preferred stock were issued in exchange for $324,210 (book value) of
mortgage loans, net of $309,963 of reverse repurchase financing in October 1998.
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for interest $ -- $ 3,913
========= =========
</TABLE>
See notes to consolidated financial statements
F-61
<PAGE> 119
HANOVER CAPITAL PARTNERS 2, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS DESCRIPTION
GENERAL
Hanover Capital Partners 2, Inc. (the"Company") was incorporated in Delaware on
October 7, 1998. The Company was formed to acquire single-family residential
mortgage loans from Hanover Capital Mortgage Holdings, Inc. 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 the Company, was incorporated
in Delaware on October 9, 1998 for the sole purpose of selling certain
investment grade and subordinated securities to Hanover Capital Mortgage
Holdings, Inc., through its wholly-owned subsidiaries, Hanover QRS-1 98-B, Inc.
and Hanover QRS-2 98-B, Inc.
CAPITALIZATION
At the time of incorporation, the Company was authorized to issue 9,900 shares
of preferred stock at $.01 per share and 100 shares of common stock at $.01 per
share
In October 1998, the Company received $324.2 million of fixed rate mortgage
loans (with a par value of $318 million) subject to $310.0 million of reverse
repurchase agreement financing from Hanover Capital Mortgage Holdings, Inc. in
exchange for the issuance of 9,900 shares of non-voting preferred stock
(representing a 99% economic ownership of the Company). In October 1998, the
Company also received cash proceeds of $143,189 for the issuance of 100 shares
of common stock (representing a 1% economic ownership of the Company).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Hanover Capital
Partners 2, Inc. and its wholly-owned subsidiary, Hanover SPC-2, Inc. All
significant inter-company accounts and transactions have been eliminated.
F-62
<PAGE> 120
RISKS AND UNCERTAINTIES
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 and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. The
Company's estimates and assumptions primarily arise from risks and uncertainties
associated with interest rate volatility, credit exposure and regulatory
changes. Although management is not currently aware of any factors that would
significantly change its estimates and assumptions in the near term, future
changes in market trends and conditions may occur which could cause actual
results to differ materially.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents may include cash on hand, overnight investments
deposited with banks and government securities with maturities of less than 30
days.
REVENUE RECOGNITION
Mortgage loan interest income is recognized on the accrual method based on the
net coupon after deducting service fees.
DEFERRED FINANCING COSTS
Deferred financing costs incurred ($3,375,000) in connection with the
securitization were capitalized and are being amortized as part of interest
expense over the life of the CMOs.
EARNINGS PER SHARE
Basic earnings or losses per share excludes dilution and is computed by dividing
income or loss available to common stockholders by the weighted average number
of common shares outstanding during the period. Shares issued during the period
and shares reacquired during the period are weighted for the period they were
outstanding.
3. MORTGAGE LOANS
COLLATERAL FOR CMOs
In October 1998 the Company issued its first real estate mortgage investment
conduit ("REMIC") security. $317,764,000 of par value single family fixed rate
residential mortgage loans were assigned as collateral for the Company's CMOs
(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 CMOs are reported at cost. Premiums,
discounts and all deferred costs associated with the mortgage loans held as
collateral for CMOs are amortized into interest income over the lives of the
mortgage loans using the effective yield method adjusted for the effects of
prepayments.
F-63
<PAGE> 121
The following table summarizes the Company's single-family fixed rate mortgage
loan pools classified as held to maturity (and held as collateral for CMOs),
which are carried at cost (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Fixed rate $ 208,447 $ 297,682
Net premiums, and
deferred costs 2,131 2,955
Loan loss provision -- (38)
--------- ---------
Carrying value $ 210,578 $ 300,599
========= =========
</TABLE>
The following table summarizes certain characteristics of the Company's
single-family fixed rate mortgage loans held as collateral for CMOs at December
31, 1999 and 1998 (dollars in thousands):
<TABLE>
<CAPTION>
Carrying Value Principal Amount Weighted Weighted
of Collateral of Collateral Average Average
for CMOs for CMOs Net Coupon Maturity (1)
-------- -------- ---------- ------------
<S> <C> <C> <C> <C>
1999 $210,578 $208,447 7.474% 222
======== ======== ===== ========
1998 $300,599 $297,682 7.549% 307
======== ======== ===== ========
</TABLE>
(1) weighted average maturity reflects the number of months remaining until
maturity.
The average effective yield after amortization of net premiums, discounts and
deferred costs for 1999 and 1998 on the collateral for the mortgage backed bond
portfolio was 6.930% and 7.004%.
4. CONCENTRATION OF CREDIT RISK
The Company's exposure to credit risk associated with its investment activities
is measured on an individual customer basis as well as by groups of customers
that share similar attributes. In the normal course of its business, the Company
has concentrations of credit risk in its mortgage portfolio for loans in certain
geographic areas. At December 31, 1999 and 1998, the percent of total principal
amount of loans outstanding in any one state, exceeding 5% of the principal
amount of mortgage loans are as follows:
<TABLE>
<CAPTION>
State 1999 1998
----- ---- ----
<S> <C> <C>
Illinois 25% 18%
California 10 10
Florida 12 10
Ohio 6 8
Indiana -- 7
Texas -- 6
Arizona 8 6
Kentucky 6 6
--- ---
67% 71%
=== ===
</TABLE>
F-64
<PAGE> 122
5. AFFILIATED PARTY TRANSACTIONS
In October 1998, the Company received $324.2 million of fixed rate mortgage
loans (with a par value of $318 million) subject to $310.0 million of reverse
repurchase agreement financing from Hanover Capital Mortgage Holdings, Inc. in
exchange for the issuance of 9,900 shares of non-voting preferred stock
(representing a 99% economic ownership of the Company).
At December 31, 1999 and 1998 the Company reflected amounts due to Hanover
Capital Mortgage Holdings, Inc. of $364,600 and $304,800 and Hanover Capital
Partners Ltd. of $0 and $5,200 for the payment of operating expenses and
securitization costs.
6. COLLATERALIZED MORTGAGE OBLIGATIONS
The Company, through a wholly owned subsidiary, Hanover SPC-2, Inc. has issued
non-recourse debt in the form of CMOs. Borrower remittances received on the
collateral for CMOs are used to make payments on the CMOs. The obligations under
the CMOs are payable solely from the collateral for CMOs and are otherwise
non-recourse to the Company. The maturity of the CMOs is directly affected by
the rate of principal prepayments on the related collateral. The CMOs 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 CMOs is likely to occur earlier than its stated maturity.
Information pertaining to CMOs financing for 1999 and 1998 is summarized as
follows (dollars in thousands):
<TABLE>
<CAPTION>
CMO
Borrowing
---------
1999 1998
---- ----
<S> <C> <C>
Balance at period-end $208,448 $297,682
Average balance during the period $242,003 $307,843
Average interest rate during the period 7.653% 7.512%
Interest rate at period-end 7.760% 7.543%
Maximum month-end balance during the period $282,329 $317,764
Collateral for CMOs
--------------------------------------
Balance at period-end - carrying value $210,578 $300,599
</TABLE>
Aggregate annual repayments of CMOs based upon contractual amortization of the
underlying mortgage loan collateral at December 31, 1999 were as follows
(dollars in thousands):
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C> <C>
2000 $ 15,452
2001 11,398
2002 11,696
2003 11,603
2004 11,648
Thereafter 146,651
---------
Total $ 208,448
=========
</TABLE>
F-65
<PAGE> 123
7. INCOME TAXES
The Company and its wholly owned subsidiary file a consolidated Federal income
tax return. They each file separate state income tax returns. Deferred income
taxes are provided for the effects of temporary differences between the basis of
an asset or liability and its reported amount in the financial statements. The
significant differences between the statutory income tax rate result primarily
from state income taxes and the recording of a valuation allowance for the
entire tax benefit including the deferred tax asset. The significant differences
giving rise to deferred tax assets and liabilities result primarily from the
treatment of the REMIC transaction as a sale for income tax purposes.
The Company had a net deferred tax asset of approximately $1,542,000 in 1999 and
1998 which is fully reserved by a valuation allowance. This deferred tax asset
is substantially the result of a capital loss carryforward in the amount of
$3,800,000 which expires in the year 2013 for Federal income tax purposes.
8. FINANCIAL INSTRUMENTS
In accordance with SFAS No. 107, Disclosure about Derivative Financial
Instruments, and SFAS No. 119, Disclosure about Derivative Financial Instruments
and Fair Value of Financial Instruments, the Company has provided fair value
estimates and information about valuation methodologies. The estimated fair
value amounts have been determined using available market information or
appropriate valuation methodologies. However, considerable judgment is required
in interpreting market data to develop estimates of fair value, so the estimates
are not necessarily indicative of the amounts that would be realized in a
current market exchange. The effect of using different market assumptions and/or
estimation methodologies may materially impact the estimated fair value amounts.
The estimated fair value of the Company's assets and liabilities classified as
financial instruments at December 31, 1999 and 1998 is as follows (dollars in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
------------------------- -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Assets:
Mortgage loans
Collateral for CMOs $210,578 $200,179 $300,599 $297,367
Cash and cash equivalents -- -- 143 143
Accrued interest receivable 1,267 1,267 1,868 1,868
-------- -------- -------- --------
Total $211,845 $201,446 $302,610 $299,378
======== ======== ======== ========
Liabilities:
CMO borrowing $208,448 $200,179 $297,682 $297,367
Accrued interest payable 1,267 1,267 1,868 1,868
Other liabilities 365 365 464 464
-------- -------- -------- --------
Total $210,080 $201,811 $300,014 $299,699
======== ======== ======== ========
</TABLE>
F-66
<PAGE> 124
The Company had no off-balance sheet financial instruments at December 31, 1999.
The following methods and assumptions were used to estimate the fair value of
the Company's financial instruments:
Collateral for CMOs - The fair values of these mortgage loans are based upon
actual prices received upon recent sales of loans and securities to investors
and projected prices which could be obtained through investors considering
interest rates, loan type, and credit quality. Cash and cash equivalents,
accrued interest receivable, accrued interest payable, other liabilities - The
fair value of these instruments was determined to be their carrying value due to
their short-term nature.
CMO Borrowing - The fair values of these financial instruments are based upon
either or all of the following: actual prices received upon recent sales of
securities to investors, projected prices which could be obtained through
investor estimates considering interest rates, loan type, quality and discounted
cash flow analysis based on prepayment and interest rate assumptions used in the
market place for similar securities with similar credit ratings.
*******
F-67
<PAGE> 125
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on March 30, 2000.
HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
By /s/ Thomas P. Kaplan
------------------------
Thomas P. Kaplan
Managing Director and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of Registrant and the
capacities indicated on March 30, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
<S> <C>
/s/ John A. Burchett Chairman of the Board of Directors
----------------------- and Chief Executive Officer
John A. Burchett
/s/ Irma N. Tavares Senior Managing Director and a Director
-----------------------
Irma N. Tavares
/s/ Joyce S. Mizerak Senior Managing Director, Secretary and a Director
-----------------------
Joyce S. Mizerak
/s/ George J. Ostendorf Senior Managing Director and a Director
-----------------------
George J. Ostendorf
/s/ John A. Clymer Director
-----------------------
John A. Clymer
/s/ Joseph J. Freeman Director
-----------------------
Joseph J. Freeman
/s/ James F. Stone Director
-----------------------
James F. Stone
/s/ Saiyid T. Naqvi Director
-----------------------
Saiyid T. Naqvi
/s/ John N. Rees Director
-----------------------
John N. Rees
/s/ Thomas P. Kaplan Managing Director and Chief Financial
----------------------- Officer (Principal Financial and Accounting
Thomas P. Kaplan Officer)
</TABLE>
<PAGE> 126
EXHIBIT INDEX
<TABLE>
<S> <C>
3.1* Articles of Incorporation of the Company, as amended
3.2* By-Laws of the Company
4.1* Specimen Common Stock Certificate
4.2* Warrant Agreement pursuant to which Warrants were issued
(including form of Warrant)
4.3* Representatives' Warrant Agreement pursuant to which the
Representatives' Warrants were issued
4.4* Specimen Unit Certificate
10.3* Registration Rights Agreement
10.4* Shareholders' Agreement of HCP
10.5* Agreement and Plan of Recapitalization
10.6* Bonus Incentive Compensation Plan
10.7* 1997 Executive and Non-Employee Director Stock Option Plan
10.7.1 1999 Equity Incentive Plan
10.8* Employment Agreement by and between the Company and John A.
Burchett
10.9* Employment Agreement by and between the Company and Irma N.
Tavares
10.10* Employment Agreement by and between the Company and Joyce S.
Mizerak
10.11* Employment Agreement by and between the Company and George J.
Ostendorf
10.12* Standard Form of Office Lease, dated as of May 6, 1991, by and
between Irwin Kahn and HCP, as amended by the First Amendment
of Lease, dated as of July 1, 1996
10.12.1 Second Amendment of lease, dated as of December 22, 1998, by
and between FGP 90 West Street, Inc., successor to Irwin Kahn,
and HCP.
</TABLE>
<PAGE> 127
<TABLE>
<S> <C>
10.13* Office Lease Agreement, dated as of March 1, 1994, by and
between Metroplex Associates and HCMC, as amended by the First
Modification and Extension of Lease Amendment, dated as of
February 28, 1997.
10.14 Office Lease Agreement, dated as of February 1, 1999, between
La Salle-Adams, LLC and HCP.
10.16* Office Lease and Service Agreement, dated as of August 28,
1995 by and between Federal Deposit Insurance Receiver for
Merchants Bank and HCP
10.17 Agreement of Lease, dated as of July 27, 1999 by and between
Saint Paul Executive Office Suites, Inc., d.b.a. LesWork Inc.
and HCP.
10.25* Contribution Agreement
10.26* Participation Agreement
10.27* Loan Agreement
10.29** Management Agreement, dated as of January 1, 1998, by and
between the Company and HCP
10.30 Amendment Number One to Management Agreement, dated as of
September 30, 1999
10.31 Amended and Restated Master Loan and Security Agreement by and
between Greenwich Capital Financial Products, Inc. and Hanover
Capital Mortgage Holdings, Inc., dated November 23, 1998, as
amended by Amendment Number One, Amendment Number Two and
Amendment Number Three thereto
10.32 Warehousing Credit and Security Agreement, dated as of April
30, 1999, by and between Bank United and the Company, as
amended by the First Amendment and Second Amendment thereto
21 Subsidiaries of the Company
27 Financial Data Schedule
</TABLE>
- ----------
* Incorporated herein by reference to the Company's Registration
Statement No. 333-29261, as amended, as filed with the Securities and
Exchange Commission.
** Incorporated herein by reference to the Company's Form 10-K for the
year ended December 31, 1997, as filed with the Securities and Exchange
Commission.
<PAGE> 1
EXHIBIT 10.7.1
HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
1999 EQUITY INCENTIVE PLAN
1. PURPOSE AND DURATION
1.1 Purposes. The purposes of the Hanover Capital Mortgage Holdings, Inc.
1999 Equity Incentive Plan are to attract, retain and motivate employees,
directors and consultants of the Company and its Affiliated Entities and to
enable them to participate in the growth of the Company by providing for or
increasing the proprietary interests of such persons in the Company.
1.2 Effective Date. The Plan is effective as of the date of its adoption by
the Board.
1.3 Expiration Date. The Plan shall expire one day less than ten years from
the date of the adoption of the Plan by the Board. In no event shall any Awards
be made under the Plan after such expiration date, but Awards previously granted
may extend beyond such date.
2. DEFINITIONS
As used in the Plan, the following capitalized words shall have the
meanings indicated:
"Affiliated Entity" means HCP and any other corporation, partnership,
trust, limited liability company or other entity directly or indirectly
Controlling, Controlled by or under direct or indirect common Control with the
Company or HCP.
"Award" means, individually or collectively, a grant under the Plan of
Options or Restricted Stock.
"Award Agreement" means the written agreement setting forth the terms and
provisions applicable to an Award granted under the Plan.
"Board" means the Board of Directors of the Company.
"Code" means the Internal Revenue Code of 1986, as amended.
"Committee" means the Compensation Committee of the Board, which shall
consist of two or more directors, each of whom shall be a Non-Employee Director
and an "outside director" within the meaning of Section 162(m) of the Code, or
any successor provision.
"Company" means Hanover Capital Mortgage Holdings, Inc., a Maryland
corporation, or any successor thereto.
"Control" (including the terms "controlling," "controlled by," and "under
common control with") means the direct or indirect possession of the power to
direct or cause the direction of the management and policies of any corporation,
partnership, trust, limited liability
<PAGE> 2
company or other entity, whether through the ownership of voting securities, by
contract, or otherwise.
"Director" means any individual who is a member of the Board.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" means, with respect to a Share as of any date of
determination, in the discretion of the Committee, (i) the closing price per
Share on such date, as reported in the Wall Street Journal, on the principal
exchange for the Shares, (ii) the average closing price per Share, as reported
in the Wall Street Journal, during the twenty (20) day period that ends on such
date on the principal exchange for the Shares or (iii) if Shares are not
publicly traded, the fair market value of such Share as determined by the
Committee in accordance with a valuation methodology approved by the Committee
in good faith.
"Grant Date" means the effective date of an Award as specified by the
Committee and set forth in the applicable Award Agreement.
"HCP" means Hanover Capital Partners Ltd., a New York corporation, or any
successor thereto.
"Non-Employee Director" means a "non-employee director" as that term is
defined in Rule 16b-3 promulgated under the Exchange Act, or any successor
provision.
"Option" means an option to purchase Shares awarded to a Participant under
Section 6 of the Plan.
"Ownership Limit" means the limitation set forth in Article Ninth of the
Company's Articles of Incorporation on the percentage of the outstanding Shares
that any person or group of persons may own, applying certain constructive
ownership rules set forth therein.
"Participant" means an individual who has been selected by the Committee to
receive an Award under the Plan.
"Plan" means the Hanover Capital Mortgage Holdings, Inc. 1999 Equity
Incentive Plan set forth in this document and as hereafter amended from time to
time in accordance with Section 10.
"Restricted Period" means the period of time selected by the Committee
during which Shares of Restricted Stock are subject to forfeiture and/or
restrictions on transferability.
"Restricted Stock" means Shares awarded to a Participant under Section 7 of
the Plan pursuant to an Award that entitles the Participant to acquire Shares
for a purchase price (which may be zero if permissible under applicable law),
subject to such conditions as the Committee may determine to be appropriate,
including a Company right during a specified period or periods to repurchase the
Shares at their original purchase price (or to require forfeiture of the Shares
if the
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<PAGE> 3
purchase price was zero and if permissible under applicable law) upon the
Participant's termination of employment.
"Securities Act" means the Securities Act of 1933, as amended.
"Shares" means shares of the Company's common stock, par value $.01 per
share.
3. ADMINISTRATION OF THE PLAN
The Plan shall be administered by the Committee, which shall have the
authority to adopt, alter and repeal such administrative rules, guidelines and
practices governing the operation of the Plan as it shall consider advisable
from time to time, to interpret the provisions of the Plan and any Award and to
decide all disputes arising in connection with the Plan. The Committee's
decisions and interpretations shall be final and binding. In the event that
there is no Committee as provided in the Plan, the Plan shall be administered by
the Board, in which case all references in the Plan to the Committee shall be
references to the Board.
4. ELIGIBILITY OF PARTICIPANTS
The persons eligible to receive Awards under the Plan shall be the
executive officers of the Company, the executive officers of any Affiliated
Entity, and any other employees, consultants, advisers and agents of the Company
or any Affiliated Entity who, in the opinion of the Committee, are in a position
to make a significant contribution to the success of the Company. Directors,
including directors who are not employees, of the Company or any Affiliated
Entity shall be eligible to receive Awards under the Plan.
5. STOCK AVAILABLE FOR AWARDS
5.1 Number of Shares Under Plan. Subject to Section 8.12, Awards may be
granted under the Plan in respect of up to 550,710 of the Shares. Shares issued
under the Plan may consist in whole or in part of authorized but unissued Shares
or treasury Shares.
5.2 Lapsed, Forfeited or Expired Awards. If any Award in respect of Shares
expires or is terminated before exercise or is forfeited for any reason, the
Shares subject to such Award, to the extent of such expiration, termination or
forfeiture, shall again be available for award under the Plan.
5.3 Number of Shares Subject to any Award. Subject to Section 8.12, the
number of Shares in respect of which a Participant may receive an Award under
the Plan for any year shall not exceed 50,000.
6. STOCK OPTIONS
6.1 Grant of Options. Subject to the terms and provisions of the Plan, the
Committee may award Options and determine the number of shares to be covered by
each Option, the exercise price therefor, the term of the Option, and any other
conditions and limitations applicable to the exercise
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<PAGE> 4
of the Option (including, without limitation, any vesting requirements
applicable to the Option) and the holding of any Shares acquired upon exercise
of the Option. Options granted under the Plan are not intended to be "incentive
stock options" within the meaning of Section 422(b) of the Code.
6.2 Exercise Price. Subject to the provisions of this Section 6 and Section
10, the exercise price for each Option shall be determined by the Committee in
its sole discretion.
6.3 Restrictions on Option Transferability and Exercisability. The
Committee may provide that an Option is transferable by the Participant and
exercisable by persons other than the Participant upon such terms and conditions
as it shall determine. In the absence of any such provision as to any Option,
however, the Option shall not be transferable by the Participant other than by
will or the laws of descent and distribution, and the Option shall be
exercisable, during the Participant's lifetime, only by the Participant.
7. RESTRICTED STOCK
7.1 Grant of Restricted Stock. The Committee may award Shares of Restricted
Stock and determine the purchase price, if any, therefor, the duration of the
Restricted Period, the conditions under which the Shares may be forfeited to or
repurchased by the Company and any other terms and conditions of the Awards. The
Committee may modify or waive any restrictions, terms and conditions with
respect to any Restricted Stock. Shares of Restricted Stock may be issued for
whatever consideration is determined by the Committee, subject to applicable
law.
7.2 Transferability. Shares of Restricted Stock may not be sold, assigned,
transferred, pledged or otherwise encumbered, except as permitted by the
Committee, during the Restricted Period.
7.3 Evidence of Award. Shares of Restricted Stock shall be evidenced in
such manner as the Committee may determine. Any certificates issued in respect
of Shares of Restricted Stock shall be registered in the name of the Participant
and, unless otherwise determined by the Committee, deposited by the Participant,
together with a stock power endorsed in blank, with the Company. At the
expiration of the Restricted Period, the Company shall deliver the certificates
and stock power to the Participant.
7.4 Shareholder Rights. A Participant shall have all the rights of a
shareholder with respect to Restricted Stock awarded, including voting and
dividend rights, unless otherwise provided in the Award Agreement.
8. GENERAL PROVISIONS APPLICABLE TO AWARDS
8.1 Legal and Regulatory Matters. The grant of Awards and the delivery of
Shares shall be subject to compliance with (i) applicable federal and state laws
and regulations, (ii) if outstanding Shares are listed at the time on any stock
exchange, the listing requirements of such exchange, (iii) the Ownership Limit
and (iii) the Company's counsel's approval of all other legal matters in
connection with such Award and the issuance and delivery of the Shares. If the
sale of the Shares has not been registered under the Securities Act, the Company
may require, as a condition to
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<PAGE> 5
delivery of the Shares, such representations or agreements as counsel for the
Company may consider appropriate to avoid violation of such Act and may require
that the certificates evidencing the Shares bear an appropriate legend
restricting transfer.
8.2 Written Award Agreement. The terms and provisions of an Award shall be
set forth in an Award Agreement approved by the Committee and delivered or made
available to the Participant as soon as practicable following the Grant Date.
8.3 Determination of Restrictions on the Award. The vesting,
exercisability, payment and other restrictions applicable to an Award (which may
include, without limitation, restrictions on transferability or provision for
mandatory resale to the Company) shall be determined by the Committee and set
forth in the applicable Award Agreement. Notwithstanding the foregoing, the
Committee may accelerate (i) the vesting or payment of any Award, (ii) the lapse
of restrictions on any Award (including an Award of Restricted Stock) and (iii)
the date on which any Option first becomes exercisable.
8.4 Mergers, etc. Notwithstanding any other provision of the Plan, but
subject to the provisions of any particular Award Agreement, in the event of a
consolidation or merger in which the Company is not the surviving corporation or
which results in the acquisition of substantially all the Company's outstanding
shares by a single person or entity or by a group of persons and/or entities
acting in concert, or in the event of the sale or transfer of substantially all
the Company's assets (any of such events, a "Change in Control"), the Committee,
in its sole discretion (and in addition to or in lieu of any actions permitted
to be taken by the Company under the terms of any particular Award Agreement),
may (i) accelerate the exercisability, prior to the effective date of such
Change in Control, of all outstanding Options (and terminate the restrictions
applicable to any shares of Restricted Stock), (ii) arrange, if there is a
surviving or acquiring entity, subject to the consummation of such Change in
Control, to have that entity or an affiliate of that entity grant to
Participants replacement awards, (iii) cancel all outstanding Options for (or
permit the purchaser of the Company's stock or assets to deliver in exchange for
all outstanding Options) an amount equal to the value of the Shares, as
determined by the Committee in good faith, the Optionholder would have received
had the Option been exercised (to the extent then exercisable or to a greater
extent, including in full, as the Committee may determine) less the exercise
price therefor (upon any such cancellation such Options shall immediately
terminate and be of no further force or effect), (iv) repurchase (or permit the
purchaser of the Company's stock or assets to purchase) any Shares of Restricted
Stock for an amount equal to the amount that would have been paid therefor had
such Shares not been Restricted Stock, or (v) take any combination (or none) of
the foregoing actions.
8.5 Termination of Employment. The date of a Participant's termination of
employment for any reason shall be determined in the sole discretion of the
Committee. For purposes of the Plan, the following events shall not be deemed a
termination of employment of a Participant: (i) a transfer of employment between
the Company and an Affiliated Entity or between two Affiliated Entities; or (ii)
an approved leave of absence for military service or sickness, or for any other
purpose approved by the Company, if the Participant's right to employment is
guaranteed either by a statute or by contract or under the policy pursuant to
which the leave of absence was granted or if the Committee otherwise so provides
in writing. For purposes of the Plan, employees of an Affiliated Entity shall
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<PAGE> 6
be deemed to have terminated their employment on the date on which such
Affiliated Entity ceases to be an Affiliated Entity.
8.6 Effect of Termination of Employment. The Committee shall have full
authority to determine and specify in the applicable Award Agreement the effect,
if any, that a Participant's termination of employment for any reason will have
on the vesting, exercisability, payment or lapse of restrictions applicable to
an outstanding Award.
8.7 Grant of Awards. Each Award may be made alone, in addition to or in
relation to any other Award. The terms of each Award need not be identical, and
the Committee need not treat Participants uniformly.
8.8 Settlement of Awards. No Shares shall be delivered pursuant to any
exercise of an Award until payment in full of the price therefor, if any, is
received by the Company. Such payment may be made in whole or in part in cash or
by certified or bank check or, to the extent permitted by the Committee at or
after the Grant Date, by delivery of a note or Shares, including Restricted
Stock, valued at their Fair Market Value on the date of delivery, or such other
lawful consideration as the Committee shall determine.
8.9 Withholding Requirements and Arrangements. The Participant shall pay to
the Company, or make provision satisfactory to the Committee for payment of, any
taxes required by law to be withheld in respect of Awards under the Plan no
later than the date of the event creating the tax liability. In the Committee's
discretion, such tax obligations may be paid in whole or in part in Shares,
including Shares retained from the Award creating the tax obligation, valued at
Fair Market Value on the date of delivery, provided, however, that with respect
to any Participant subject to Section 16(a) of the Exchange Act, any such
retention of Shares shall be made in compliance with any applicable requirements
of Rule 16b-3(e) or any successor rule under the Exchange Act. The Company may,
to the extent permitted by law, deduct any such tax obligations from any payment
of any kind otherwise due to the Participant.
8.10 No Effect on Employment. The Plan shall not give rise to any right on
the part of any Participant to continue in the employ of the Company or any
Affiliated Entity. The loss of existing or potential profit in Awards granted
under the Plan shall not constitute an element of damages in the event of
termination of the relationship of a Participant even if the termination is in
violation of an obligation of the Company to the Participant by contract or
otherwise.
8.11 No Rights as Shareholder. Subject to the provisions of the Plan and
the applicable Award Agreement, no Participant shall have any rights as a
shareholder with respect to any Shares to be distributed under the Plan until he
or she becomes the holder thereof.
8.12 Adjustments. Upon the happening of any of the following described
events, a Participant's rights with respect to Awards granted hereunder shall be
adjusted as hereinafter provided, unless otherwise specifically provided in the
Award Agreement.
8.12.1 Stock Splits and Recapitalizations. In the event the Company
issues any of its Shares as a stock dividend upon or with respect to Shares, or
in the event Shares shall be subdivided
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<PAGE> 7
or combined into a greater or smaller number of Shares, or if, upon a merger or
consolidation (except those described in Section 8.4), reorganization, split-up,
liquidation, combination, recapitalization or the like of the Company, Shares
shall be exchanged for other securities of the Company, securities of another
entity, cash or other property, each Participant upon exercising an Award (for
the purchase price to be paid under the Award) shall be entitled to purchase
such number of Shares, other securities of the Company, securities of such other
entity, cash or other property as the Participant would have received if the
Participant had been the holder of the Shares with respect to which the Award is
exercised at all times between the Grant Date of the Award and the date of its
exercise, and appropriate adjustments shall be made in the purchase price per
Share.
8.12.2 Restricted Stock. If any person owning Restricted Stock receives
new or additional or different shares or securities ("New Securities") in
connection with a corporate transaction described in Section 8.12.1 or a stock
dividend described in Section 8.12.1 as a result of owning such Restricted
Stock, the New Securities shall be subject to all of the conditions and
restrictions applicable to the Restricted Stock with respect to which such New
Securities were issued.
8.12.3 Fractional Shares. No fractional Shares shall be issued under
the Plan. Any fractional Shares which, but for this Section, would have been
issued shall be deemed to have been issued and immediately sold to the Company
for their Fair Market Value, and the Participant shall receive from the Company
cash in lieu of such fractional Shares.
8.12.4 Recapitalization. The Committee may adjust the number of Shares
subject to outstanding Awards and the exercise price and the terms of
outstanding Awards to take into consideration material changes in accounting
practices or principles, extraordinary dividends, acquisitions or dispositions
of stock or property, or any other event if it is determined by the Committee
that such adjustment is appropriate to avoid distortion in the operation of the
Plan.
8.12.5 Further Adjustment. Upon the happening of any of the events
described in Sections 8.12.1 or 8.12.4, the class and aggregate number of Shares
set forth in Section 5.1 hereof that are subject to Awards which previously have
been or subsequently may be granted under the Plan shall be appropriately
adjusted to reflect the events described in such Sections. The Committee shall
determine the specific adjustments to be made under this Section 8.12.5.
8.13 Other Transfer Restrictions. Notwithstanding any other provision of
the Plan, in order to qualify for the exemption provided by Rule 16b-3 under the
Exchange Act, and any successor provision, (i) any Shares or other equity
security offered under the Plan to a Participant subject to Section 16 of the
Exchange Act (a "Section 16 Participant") may not be sold for six (6) months
after acquisition; and any Shares or other equity security acquired by a Section
16 Participant upon exercise of an Option may not be sold for six (6) months
after the date of grant of the Option; and (ii) any Option or other similar
right related to an equity security issued under the Plan shall not be
transferable except in accordance with the rules under Section 16 of the
Exchange Act, subject to any other applicable transfer restrictions under the
Plan or the Award Agreement. The Committee shall have no authority to take any
action if the authority to take such action, or the taking of such action, would
disqualify a transaction under the Plan from the exemption provided by Rule
16b-3 under the Act, and any successor provision.
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8.14 Ownership Limit. Notwithstanding any other provision of the Plan, the
rights of any Participant to acquire Shares under the Plan are subject to the
Ownership Limit.
9. AMENDMENT AND TERMINATION
9.1 Amendment, Suspension, Termination of the Plan. The Committee may
modify, amend, suspend or terminate the Plan in whole or in part at any time;
provided, however, that no modification, amendment, suspension or termination of
the Plan shall be made without shareholder approval if such approval is
necessary to comply with any applicable tax, regulatory or stock exchange
requirement; provided, further, that such modification, amendment, suspension or
termination shall not, without a Participant's consent, affect adversely the
rights of such Participant with respect to any Award previously made.
9.2 Amendment, Suspension, Termination of an Award. The Committee may
modify, amend or terminate any outstanding Award, including, without limitation,
substituting therefor another Award of the same or a different type and changing
the date of exercise or realization; provided, however, that the Participant's
consent to such action shall be required unless the Committee determines that
the action, taking into account any related action, would not materially and
adversely affect the Participant.
10. NONDISCRETIONARY GRANTS OF OPTIONS TO NON-EMPLOYEE DIRECTORS
On the date upon which a Non-Employee Director is first elected a member of
the Company's Board of Directors, such Non-Employee Director will receive the
grant of an Option to purchase 2,000 Shares. In addition, a Non-Employee
Director will receive a grant of an Option to purchase an additional 2,000
Shares as of the date of each subsequent meeting of the shareholders at which
such Non-Employee Director is re-elected to the Company's Board of Directors
(less the number of Shares subject to any option then granted to such
Non-Employee Director under the Company's 1997 Executive and Non-Employee
Director Stock Option Plan). The purchase price per Share of the Shares subject
to each Option granted to a Non-Employee Director shall be the Fair Market Value
on the date the Option is granted. Options granted to Non-Employee Directors
shall be fully vested and immediately exercisable. The term of each Option
granted to a Non-Employee Director pursuant to this Section 10 shall be one day
less than ten (10) years from its Grant Date, unless sooner terminated or
extended in accordance with Section 9. If a Non-Employee Director dies while
serving as a Director, such Non-Employee Director's Options shall be exercisable
by either his or her executor or administrator or, if not so exercised, by the
legatees or the distributees of his or her estate, only during the twelve (12)
months following his or her death. If a Non-Employee Director's membership on
the Board terminates for any reason other than death, such Non-Employee
Director's Options shall be exercisable only during the three (3) months
following the date of termination. Any Option, and the number and nature of
Shares subject to any such Option, held by a Non-Employee Director will be
subject to adjustment only to the extent set forth in Section 8.12 and not
pursuant to any other provision of the Plan.
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11. LEGAL CONSTRUCTION
11.1 Captions. The captions provided herein are included solely for
convenience of reference and shall not affect the meaning of any of the
provisions of the Plan or serve as a basis for interpretation or construction of
the Plan.
11.2 Severability. In the event any provision of the Plan is held invalid
or illegal for any reason, the illegality or invalidity shall not affect the
remaining provisions of the Plan, and the Plan shall be construed and enforced
as if the illegal or invalid provision had not been included.
11.3 Governing Law. The Plan and all rights under the Plan shall be
construed in accordance with and governed by the internal laws of the State of
Maryland.
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EXHIBIT B
HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
1999 EQUITY INCENTIVE PLAN
STOCK OPTION AGREEMENT
<<Firstname>> <<Lastname>>
Hanover Capital Mortgage Holdings, Inc., a Maryland corporation (the
"Company"), hereby grants to <<Firstname>> <<Lastname>> (the "Grantee") an
option (the "Option") to purchase <<Numwords>> (<<Number>>) shares of the
Company's common stock, $.01 par value per share (the "Shares"), pursuant to the
Company's 1999 Equity Incentive Plan (the "Plan"), a copy of which is attached
hereto and is incorporated herein in its entirety by this reference. Except as
otherwise provided herein, all capitalized terms used but not defined herein
have the meanings they have in the Plan.
The Grantee hereby accepts the Option granted subject to the terms and
provisions set forth in the Plan and the following additional terms and
provisions:
1. The price at which Shares may be purchased pursuant to the Option is
$<<Price>> per Share, both the price and the number of Shares being subject to
adjustment only as provided in the Plan.
2. (a) Subject to Sections 2(b) through 2(e) below, the Option may be
exercised in accordance with the following vesting schedule:
During the first year commencing on the date of grant, the Option shall
not be exercisable to any extent. Commencing on the first day following the
first anniversary of the date of grant and until the second such anniversary,
the Option may be exercised for not more than one-third (1/3) of the Shares
subject to the Option. Commencing on the first day following the second
anniversary of the date of grant and until the third such anniversary, the
Option may be exercised for not more than two-thirds (2/3) of the Shares subject
to the Option. Commencing on the first day following the third anniversary of
the date of grant, the Option may be exercised in full.
(b) Subject to Sections 2(c) through 2(e) below, if the employment of
the Grantee by the Company or any Affiliated Entity terminates for any reason
(and the Grantee does not continue to be employed by any member of the group
consisting of the Company and its Affiliated Entities), the Option shall be
exercisable by the Grantee only during the three (3) months following such
termination and only as to the number of Shares, if any, as to which it was
exercisable immediately prior to such termination.
(c) Notwithstanding Section 2(b) but subject to Section 2(e), if the
employment of the Grantee by the Company or any Affiliated Entity terminates as
a result of the Grantee's death or
<PAGE> 11
permanent and total disability (as defined in Section 22(e)(3) of the Code), the
Option shall be exercisable (in the case of the Grantee's death, either by the
Grantee's executor or administrator or, if not so exercised, for the legatees or
distributees of the Grantee's estate) only during the one (1) year following
such termination. During such one (1) year period, the Option shall be
exercisable only as to the number of Shares, if any, as to which it was
exercisable immediately prior to such termination.
(d) Notwithstanding Section 2(b), if the employment of the Grantee by the
Company or any Affiliated Entity terminates for "good cause" (and the Grantee
does not continue to be employed by any member of the group consisting of the
Company and its Affiliated Entities), the Option shall terminate immediately.
For purposes of this Agreement, "for cause" shall mean (i) the willful or
reckless failure by the Grantee to perform his or her duties under, or the
willful or reckless violation by the Grantee of, any written employment
agreement, which failure or violation shall not have been cured within the cure
period, if any, provided in such agreement, (ii) the commission by the Grantee
of an act of fraud or theft against the Company or any Affiliated Entity or
(iii) the conviction of the Grantee of, the plea by the Grantee of nolo
contendere to, any felony.
(e) Notwithstanding any other provision of this Agreement, the Option shall
expire at the close of the day immediately preceding the tenth anniversary of
the date of grant.
WARNING: THE OPTION EXERCISE PERIOD MAY BE CUT SHORT IN THE EVENT OF A CHANGE IN
CONTROL OF THE COMPANY. SEE SECTION 8.4 OF THE PLAN.
3. The Option shall not be exercisable unless either (a) a registration
statement under the Securities Act of 1933, as amended, with respect to the
Option and the Shares to be issued on the exercise thereof shall have become,
and continues to be, effective, or (b) the Grantee (i) shall have represented,
warranted and agreed, in form and substance satisfactory to the Company, at the
time of exercising the Option, that he or she is acquiring the Shares to be
issued on the exercise thereof for his or her own account, for investment and
not with a view to or in connection with any distribution, (ii) shall have
agreed to restrictions on transfer in form and substance satisfactory to the
Company and (iii) shall have agreed to an endorsement which makes appropriate
reference to such representations, warranties, agreements and restrictions on
the certificate(s) representing the Shares.
SHARES ISSUED UPON EXERCISE OF THE OPTION WILL BE SUBJECT TO ALL
RESTRICTIONS ON TRANSFER IMPOSED BY THE COMPANY'S ARTICLES OF INCORPORATION OR
BY-LAWS AND BY APPLICABLE STATE OR FEDERAL SECURITIES LAWS.
4. The Option may be exercised, subject to such conditions as the Committee
may require in accordance with the Plan, by the delivery, by certified or
registered mail, to the Company's Treasurer at its principal place of business
in New York, New York, of a Notice of Exercise in the form attached hereto as
Exhibit A, which notice shall specify, among other things, the number of Shares
to be so purchased, and shall be accompanied by full payment for the Shares
purchased,
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together with any tax or excise due in respect of issue of such shares, in cash
or by certified or bank cashier's check.
5. Notwithstanding anything to the contrary contained herein, no Shares
shall be issued to the Grantee pursuant to the Option until the Company and the
Grantee have made appropriate arrangements for the withholding of applicable
income taxes, if any, attributable to the exercise of the Option with respect to
such Shares or, in the sole discretion of the Company, the disposition by the
Grantee of such Shares, and the Company may require the Grantee to make a cash
payment to the Company or to provide the Company with other security in respect
of such taxes.
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THE OPTION IS NOT TRANSFERABLE BY THE GRANTEE OTHERWISE THAN BY WILL OR THE
LAWS OF DESCENT AND DISTRIBUTION AND, DURING THE LIFETIME OF THE GRANTEE, MAY BE
EXERCISED ONLY BY THE GRANTEE.
WITNESS the execution hereof under seal as of the 29th day of July, 1999.
"GRANTEE"
----------------------------------
<<Firstname>> <<Lastname>>
"COMPANY"
Hanover Capital Mortgage Holdings, Inc.
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
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EXHIBIT A
HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
1999 EQUITY INCENTIVE PLAN
NOTICE OF EXERCISE
TO: Treasurer, Hanover Capital Mortgage Holdings, Inc.
FROM: <<Firstname>> <<Lastname>>
Optionholder's Name
I elect to exercise my option to purchase shares of Hanover Capital
Mortgage Holdings, Inc. common stock as follows:
Date of Option Grant: July 23, 1999
Exercise Price: $______/share
Number of Shares to Be Purchased: ___________
Total Exercise Price Enclosed: $__________
Full payment, in cash or certified or bank cashier's check, for the shares I am
electing to purchase is enclosed with this notice. I understand that issuance of
the purchased shares may be conditioned on my payment of any tax or excise due
thereon and on fulfillment of requirements specified in the Stock Option
Agreement, dated as of July 23, 1999, between Hanover Capital Mortgage Holdings,
Inc. and me.
-----------------------------------
Optionholder's Signature
-----------------------
Date
Received by:
- ---------------------------------------
Date:
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<PAGE> 1
SECOND AMENDMENT OF LEASE
THIS AGREEMENT, made as of December 22, 1998, between FGP 90
WEST STREET, INC. ("LANDLORD"), a Delaware corporation having an office at 292
Madison Avenue, 5th Floor, New York, New York, 10017, HANOVER CAPITAL PARTNERS,
LTD. ("TENANT"), a New York corporation, having an office at 90 West Street, New
York, New York 10006.
W I T N E S E T H:
WHEREAS, by Agreement of Lease dated as of May 6, 1991, Landlord's
predecessor-in-interest, Irwin Kahn, as Receiver, did demise and let unto Tenant
and Tenant did hire and take a portion of the Fifteenth (15th) Floor designated
as Room 1508 as more particularly described in the Lease (the "ORIGINAL
PREMISES") in the building (the "BUILDING") known by the street address 90 West
Street, New York, New York, which Agreement of Lease was amended by a First
Amendment of Lease (the "FIRST AMENDMENT" ) made between Landlord and Tenant and
dated as of July 1, 1996 (the Agreement of Lease, as so amended, being the
"LEASE"), which, among other things demised to Tenant certain storage space on
the Sixth (6th) Floor of the Building (such storage space, together with the
Original Premises, being the "EXISTING PREMISES"), which Lease is scheduled to
expire at noon on November 30, 2001, all terms used herein and not otherwise
defined having the meanings ascribed thereto in the Lease; and
WHEREAS, Tenant desires to modify the Lease to extend the term of the
Lease, to substitute for the Existing Premises certain space (the "SUBSTITUTE
PREMISES") on the Twenty-Second (22nd) Floor of the Building, designated as
Suite 2210, as more particularly shown on EXHIBIT A annexed hereto and made a
part hereof, and to make certain other modifications to the Lease, and Landlord
is agreeable thereto on the terms and conditions hereinafter set forth, the
Lease, as hereby modified and amended, being the "MODIFIED LEASE."
NOW, THEREFORE, in consideration of the sum of Ten Dollars ($10.00)
paid by Tenant to Landlord and for other good and valuable consideration, the
mutual receipt and legal sufficiency of which is hereby acknowledged, the
parties agree as follows:
1. Effective as of the date (the "EFFECTIVE DATE") of the substantial
completion of Landlord's Work (as defined in SUBPARAGRAPH 5.A hereof) and the
Common Area Upgrade Work (as defined in PARAGRAPH 10 hereof), the Lease is
amended, upon all of the terms, covenants and conditions therein (except as
otherwise modified hereby), such that the term of the Lease, unless sooner
terminated in accordance with its terms, is extended through and including noon
on the day (the "EXPIRATION DATE") which is 123 months after the last day of the
calendar month in which the Effective Date shall occur (or, if the Effective
Date shall be the first day of a calendar month, until the last day of the
calendar month which is 123 months after the Effective Date). Upon the
occurrence of the Effective Date, the parties will enter into an agreement
prepared by Landlord and
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reasonably acceptable to Tenant confirming the Effective Date, but the failure
of either or both of the parties to enter into such an agreement shall not
impair the effectiveness of the Effective Date as set forth in this Agreement.
2. Effective as of the date hereof, the following changes shall be
effective in the Modified Lease:
A. The security deposit presently being held under the Lease
shall be increased by $50,372.14, which amount Tenant shall pay to Landlord
simultaneously with the execution of this Agreement by Tenant, to $54,058.14.
B. Paragraph 7 (Tenant's Termination Option) of the First
Amendment is deleted in its entirety.
3. On the Effective Date, possession of the Substitute Premises shall
be delivered to Tenant, and Tenant shall surrender possession of the Existing
Premises to Landlord in such condition as if that date were the expiration date
of the Lease.
4. Notwithstanding anything to the contrary contained herein, if, on or
before the Effective Date there is a default or event of default or a condition
or event which, with notice or the passage of time or both, would constitute a
default or an event of default under the Lease, then, at Landlord's sole option,
the Lease shall expire as provided therein and this Agreement shall be of no
force or effect.
5. With respect to the condition of Substitute Premises:
A. Tenant has inspected the Substitute Premises and the Building and
agrees to take the Substitute Premises in their "as is" condition, as of the
date hereof, except that Landlord shall cause to be done the items of work
("LANDLORD'S WORK") substantially in accordance with plans and specifications
being prepared by Tenant's architect, Turner Design, which shall be subject to
Landlord's approval as provided with respect to Alterations in this lease (said
plans and specifications, upon approval by Landlord, being, collectively, the
"LANDLORD'S WORK PLANS"). Tenant shall submit said plans and specifications to
Landlord for approval not later than thirty (30) days after the date of
execution and unconditional delivery of this lease by both parties hereto. It is
expressly agreed that (i) in no event shall said plans and specifications and
materials proposed by Tenant be of a standard lower than the Building standards
as determined by Landlord, and (ii) Landlord's Work shall not include the
following items which are to be furnished and installed by Tenant at Tenant's
sole cost and expense: (a) computer cabling, cable splicing, outlets, connectors
and attachments; (b) furniture and furnishings; and (c) telephone and
communications equipment installation. Except for Landlord's Work, Landlord
shall not be required to spend any money or to do any work to prepare the
Substitute Premises for Tenant's occupancy. In all instances where Tenant is
required to supply information or authorizations with regard to Landlord's Work,
Tenant shall supply the same within three (3) business days after written
request therefor by Landlord.
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B. The cost of Landlord's Work shall be borne by Landlord to and
including Two Hundred Fifty-Nine Thousand Four Hundred Seventy-Nine and No/100
Dollars ($259,479.00) (the "CAP"), and if the cost shall exceed the Cap such
excess shall be reimbursed by Tenant to Landlord, as additional rent hereunder,
within ten (10) days after demand therefor. Alternatively, Landlord may require
Tenant to post the amount reasonably estimated by Landlord to constitute such
excess with Landlord prior to Landlord's Work, within ten (10) days after demand
therefor, and when the actual amount of such excess is determined, an
appropriate payment shall be made by Landlord or Tenant, as the case may be, to
the other within ten (10) days. The cost of Landlord's Work shall be inclusive
of all costs and expenses incurred by Landlord in connection therewith,
including, without limitation, architect's and engineer's fees in connection
with preparation of the Plans, insurance costs in connection with Landlord's
Work, and obtaining and maintaining all permits and other filings required in
connection with Landlord's Work. It is agreed that Landlord shall be entitled to
a fee of ten percent (10%) of the total cost of Landlord's Work (exclusive of
such fee) on account of Landlord's supervisory and administrative costs in
connection with Landlord's Work, and that such fee shall be a part of the total
cost of Landlord's Work. Landlord shall have no obligation to make any other
alterations or changes to the Substitute Premises.
C. The Substitute Premises shall be ready for occupancy when Landlord's
Work is substantially completed. Landlord's Work shall be deemed to be
substantially completed when all major construction is completed (or when all
major construction would have been completed but for Tenant Delays as
hereinafter defined) although minor items are not substantially completed. Such
unfinished work shall include, but not be limited to, any uncompleted
construction or improvements which do not materially interfere with Tenant's use
and occupancy of the Substitute Premises. Tenant shall promptly submit to
Landlord a "punch-list" of such minor unfinished work which punch-list items,
after approval by Landlord, will be diligently completed. Upon Landlord's
request, Tenant shall periodically inspect Landlord's Work and make any
objections thereto, if called for, without delay, so as to mitigate changes,
delays and costs.
Tenant specifically acknowledges and agrees that the cost of Landlord's
Work will increase and there will be delay in completion of Landlord's Work by
reason of the following causes ("TENANT'S DELAYS"): (i) interference by Tenant,
its employees, agents, contractors (at any level), licensees (at any level)or
invitees (all of the foregoing being, collectively, the "TENANT PARTIES") with
the performance of Landlord's Work; (ii) unreasonable delay or failure by any of
the Tenant Parties in supplying information, approving estimates or giving
authorizations; (iii) request by Tenant for any material changes or additions in
the Landlord's Work Plans originally approved, it being agreed that any change
which results in any delay to Landlord shall be deemed "material" for the
purposes of this clause; (iv) the failure or unreasonable delay of any of the
Tenant Parties to consult with Landlord to enable Landlord to prepare plans or
specifications;(v) delay or failure of any special or additional new materials
selected by Tenant; (vi) any resubmissions or revisions of the landlord's Work
Plans (without regard to any time periods granted to Tenant hereunder for making
such resubmissions or revisions); and (vii) work, materials, components and
other items specified by Tenant which are not Building standard, and/or are not
readily available to Landlord
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<PAGE> 4
or Landlord's designated contractor, or require special manufacturing,
fabrication or installation, or require additional time to obtain or install
thereby delaying the date that Landlord's Work would otherwise be substantially
completed. Landlord shall not be responsible for any Tenant Delays, and, at
Landlord's option, the substantial completion date of Landlord's Work shall be
deemed to have occurred on the date on which Landlord's Work would have been
substantially completed if not for the occurrence of any such Tenants Delays. In
addition, Tenant shall reimburse Landlord, as additional rent, for any and all
losses, costs and damages suffered by Landlord caused by any Tenant Delays.
Tenant acknowledges that it has been informed by Landlord that it is of material
significance to Landlord that the Effective Date shall occur as soon as
practicable.
D. The taking of possession of the Substitute Premises by Tenant shall
be conclusive evidence that the Substitute Premises and the Building were both
in good and satisfactory condition at the Delivery Date. Tenant acknowledges
that Landlord has made no representations regarding the condition, operation or
expenses of the Substitute Premises or the Building, except as expressly
provided in this Agreement.
E. Subject to the provisions of Article 3 of the Lease, all work
performed by Landlord shall, upon installation, become Landlord's property and
shall be surrendered at the expiration or sooner termination of the term of the
Lease, in good condition, reasonable wear and tear excepted.
F. Landlord has made and makes no representation of the date on which
it will complete Landlord's Work, and Landlord shall be under no penalty or
liability to Tenant whatsoever by reason of any delay in such performance and
the Modified Lease shall not be affected thereby; except for Tenant's
termination option as expressly provided in SUBPARAGRAPH 5.I hereof. If Landlord
is delayed in its ability to give possession of the Substitute Premises to
Tenant in the condition required under this Agreement because of the holding
over or retention of possession of any tenant or other occupant, or for any
other reason, Landlord shall not be subject to any liability for failure to give
possession on said date nor shall the validity of the Lease and this Agreement
be impaired under such circumstances, and Tenant shall continue in possession of
the Existing Premises until the Substitute Premises are available for Tenant's
occupancy. The provisions of this Paragraph are intended to constitute "an
express provision to the contrary" within the meaning of Section 233-a of the
New York Real Property Law.
G. If Landlord, in its sole discretion, shall permit Tenant to enter
into the Substitute Premises or any portion thereof prior to substantial
completion of Landlord's Work therein, for any reason, Tenant agrees that (i)
such entry shall be at Tenant's sole risk, (ii)that such entry shall not
interfere in any way with Landlord's Work to be done by Landlord, and (iii)if
Landlord notifies Tenant that such entry is interfering with or delaying
Landlord's Work or any other work being done by Landlord, Tenant shall forthwith
discontinue any further work and shall remove from the Substitute Premises and
shall cause its workmen or contractors to remove any equipment, materials or
installations which are the subject of Landlord's notice.
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<PAGE> 5
H. If Tenant shall fail to make timely payment of any sums payable to
Landlord, whether pursuant this PARAGRAPH 5 or otherwise required under the
Modified Lease, then, in addition to all other rights and remedies afforded
Landlord in the event of such non-payment, Landlord may, without notice to
Tenant, discontinue the performance of Landlord's Work (or any items thereof)
until such time as Tenant makes payment to Landlord of all such past due sums
and provides Landlord with adequate assurance of the timely payment of all
additional sums which may or shall be payable by Tenant pursuant to this
PARAGRAPH 5. Any delay resulting from the discontinuance of Landlord's Work
pursuant to this Section shall be deemed a Tenant Delay.
I. If Landlord's Work shall not be substantially complete within six
(6) months (subject to extension for force majeure and Tenant Delays) after the
commencement of construction thereof (it being acknowledged that such
construction cannot commence until all necessary permits have been obtained),
then, in such event, Tenant shall have the option, to be exercised by the giving
of written notice to Landlord within five (5) business days (with respect to
which time is of the essence) after the expiration of said six (6) months, to
declare that the provisions of this Agreement other than PARAGRAPH 11 hereof
ineffective, in which event the Lease shall continue in force and effect for the
remainder of the term thereof as if this Agreement had not been made. Such
option shall be Tenant's only right or remedy in the event of such a delay in
substantial completion of Landlord's Work.
J. If Landlord's Work shall not be substantially complete within twelve
(12) months (subject to extension for Tenant Delays but not for force majeure)
after the commencement of construction thereof (it being acknowledged that such
construction cannot commence until all necessary permits have been obtained),
then, in such event, Tenant shall have the option, to be exercised by the giving
of written notice to Landlord within five (5) business days (with respect to
which time is of the essence) after the expiration of said twelve (12) months,
to declare that the provisions of this Agreement other than PARAGRAPH 11 hereof
ineffective, in which event the Lease shall continue in force and effect for the
remainder of the term thereof as if this Agreement had not been made. Such
option shall be Tenant's only right or remedy in the event of such a delay in
substantial completion of Landlord's Work.
6. As of the Effective Date, the following changes shall be effective
in the Modified Lease:
A. The fixed annual rent (also referred to in the Lease as
"Basic Rent" and "Base Rent"), as that term is used in the Lease, and subject to
future increases, if any, as provided in the Modified Lease, shall be Two
Hundred Sixteen Thousand Two Hundred Thirty-Two and 50/100 Dollars
($216,232.50), payable in equal monthly installments of Eighteen Thousand
Nineteen and 38/100 Dollars ($18,019.38).
B. Provided Tenant is not in default under the Modified Lease,
beyond any applicable notice and cure period, then Tenant shall be entitled to
an abatement of the fixed annual rent payable under SUBPARAGRAPH 6.A for the
first three (3) months following the Effective Date.
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<PAGE> 6
If the Modified Lease shall be terminated at any time because of a default by
Tenant thereunder, then, in addition to all other amounts owed to Landlord on
account thereof, Tenant shall also be required to pay to Landlord the amount of
any abatement allowed to Tenant pursuant to this SUBPARAGRAPH 6.B.
C. Article 49 (Electricity) of the Original Lease is hereby
deleted in its entirety and the provision on EXHIBIT B annexed hereto and made a
part hereof is substituted therefor.
D. Article 50 (A) (2) of the Original Lease (as previously
modified by Subparagraph 6 (d) (i) of the First Amendment), which defines the
Base Rate for the Cost (porter wage) Increase, shall be modified so that the
"Base Rate" shall mean the Rate in effect in for the calendar year 1999, and the
term "Multiplication Factor" as defined in Article 50 (A) (3) of the Lease shall
mean 7,863.
E. Article 51 (A) (1) of the Original Lease (as previously
modified by Subparagraph 6 (d) (ii) of the First Amendment), which defines the
"Base Tax Year" for the purpose of determining real estate tax escalation shall
be modified so that the "Base Tax Year" shall mean the New York City real estate
tax year commencing July 1, 1998 and ending June 30, 1999, and the term "The
Percentage" as defined in Article 51 (a) (2) of the Original Lease shall be Two
and Three Hundred Thirteen Thousandths percent (2.313%).
F. Paragraph 8 of the First Amendment, dealing with the
Storage Space (which is being surrendered on the Effective Date along with the
remainder of the Existing Premises) shall be of no further force and effect.
G. The Substitute Premises shall be substituted for the
Existing Premises as the "demised premises" for the purposes of the Modified
Lease.
7. Tenant represents and warrants that it has dealt with no broker,
finder or like agent in connection with this Agreement other than Cushman &
Wakefield, and Tenant does hereby agree to indemnify and hold Landlord harmless
of and from any and all loss, costs, damage or expense (including, without
limitation, attorneys fees and disbursements) incurred by Landlord by reason of
any claim of, or liability to, and other broker, finder or like agent who shall
claim to have dealt with Tenant in connection with this Agreement.
8. Tenant, at its own expense, may make application for a real estate
tax abatement and/or commercial rent tax special reduction under the New York
City Commercial Revitalization Program (the "TAX ABATEMENT PROGRAM") with
respect to the Substitute Premises. Landlord shall, at no cost or expense to
Landlord, cooperate with Tenant in the preparation of such application and any
future filings which may be required to maintain such abatement throughout the
applicable benefit period. Landlord does not warrant that any such abatement or
reduction is available or will be obtained for the Substitute Premises. Landlord
shall have no liability to Tenant, and the rent set forth in the Modified Lease
will not be abated or reduced, if and to the extent that such abatement or
reduction under the Tax Abatement Program is denied, reduced, suspended, revoked
or terminated for any reason.
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(a) Tenant's percentage share of the taxes for the Building is deemed
to be The Percentage (as defined in PARAGRAPH 6 (E) hereof), determined by
dividing the net rentable square footage contained in the Substitute Premises by
the net rentable square footage contained in the Building.
(b) Tenant is informed hereby that:
(i) an application for abatement of real property taxes should
be timely made for the Substitute Premises;
(ii) the rent, including amounts payable by Tenant for real
property taxes, will accurately reflect any abatement of real property taxes;
(iii) in order to receive an abatement under Title 4 at least
$10 per square foot or $35 per square foot, or, if by the 60th day following the
rent commencement date Tenant employs 125 or fewer employees, then at least $5
per square foot or $35 per square foot must be spent on improvements to the
Substitute Premises and the common areas, the amount being dependent upon the
length of the lease and whether it is a new, renewal or expansion lease.
(iv) all abatements granted will be revoked if, during the
benefit period, real estate taxes, water or sewer charges or other lienable
charges are unpaid for more than one year, unless such delinquent amounts are
paid as provided in the relevant law.
(c) Landlord shall be relieved from all obligations under this
Paragraph (other than to pass through to Tenant the benefit of any abatement
actually received as required by law) if Tenant shall be in default under this
lease beyond any applicable notice and grace periods. Tenant shall promptly pay
to Landlord, as additional rent hereunder, the amount of any costs incurred by
Landlord in connection with the performance of Landlord's obligations pursuant
to this Paragraph, including, without limitation, the amount of any
administrative charges or fees imposed by the governmental authority
administering the Abatement, and the cost of any attorneys' fees and expenses in
connection with the Tax Abatement Program.
9. Provided that Tenant has not defaulted under the Lease, as amended,
and subject to the provisions of this PARAGRAPH 9, Tenant shall have the one
time only option (the "TERMINATION OPTION") to terminate the Lease, as amended,
and the term and estate granted thereby, only if exercised in strict compliance
with this Article. Tenant may, subject to the provisions of this Article,
exercise the Termination Option so as to end the term of the Modified Lease as
of the day (the "TERMINATION DATE") which is five (5) years and three (3) months
after the Effective Date. In order to exercise the Termination Option, Tenant
must do the following:
(1) Tenant must exercise the Termination Option by the giving of
advanced written notice thereof (the "TERMINATION NOTICE") to Landlord in the
manner provided in Article 28 of the Original
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Lease, with a copy by regular first class mail, at the address indicated above,
or at such other address as Landlord shall designate in the future by written
notice, not later than the twelve (12) months prior to the Termination Date,
time being of the essence with respect to the giving of such notice.
(2) Tenant must deliver with the written Termination Notice a certified
check made payable to the Landlord in the agreed and liquidated amount of
$230,399.04, representing reimbursement to Landlord for the unamortized costs of
Landlord's work, commissions, legal fees and other expenses and as consideration
to Landlord for the acceptance of such early termination ("TERMINATION
PAYMENT"). The Termination Payment shall not be credited to Tenant as a payment
of Fixed Annual Rent or Additional Rent.
In event that Tenant strictly complies with the provisions hereof, the
Modified Lease and the term and estate thereby granted (unless the same shall
have expired sooner pursuant to the provisions of the Lease, as amended, or of
the law) shall terminate on the corresponding Termination Date with the same
effect as if such date were the date hereinbefore specified as the expiration
date of the Lease, as amended. The failure by Tenant to timely make the
Termination Payment or to otherwise fail to comply with the provisions of this
Article shall, at Landlords' option, invalidate the termination of the Lease, as
amended, and, in such event, this Article shall be void and of no further force
and effect.
10. Landlord shall upgrade the common corridors and common area
lavatory facilities of the Twenty-Second (22nd) Floor of the Building to a
standard consistent with the upgrading which Landlord has done to the common
corridors and common area lavatory facilities on the eighth (8th) floor of the
Building, and Landlord shall also install new package air conditioning units on
the Twenty-Second (22nd) Floor consistent with the Building standards for air
conditioning (the foregoing items being the "COMMON AREA UPGRADE WORK"). Tenant
acknowledges that such work may be done while Tenant is in occupancy of space on
that floor, and Tenant agrees (i) that Landlord shall have no liability to
Tenant, whether by rent abatement or otherwise, with respect thereto, and (ii)
that Tenant shall cooperate with the reasonable requests of Landlord in pursuit
of such work so that the same can be done in a safe, timely and cost-efficient
manner.
11. Landlord and Tenant hereby each acknowledges that to its best
knowledge no defaults presently exist on behalf of the other party pursuant to
the Lease. Each of Landlord and Tenant does hereby release the other from any
and all claims which the releasing party may have against other, if any, arising
or accruing prior to the date hereof under the Lease or otherwise with respect
to the Existing Premises, other than (a) any amounts which are or may become due
with respect to fixed annual rent, escalation payments or other amounts of
additional rent under the Lease, and (b) claims by third parties for personal
injury or property damage.
12. RENEWAL OPTION.
12.1. EXTENSION TERM. Subject to the provisions of PARAGRAPH 12.5,
Tenant shall have the right to extend the term of the Modified Lease
for one (1) additional term (the "EXTENSION
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TERM") of five (5) years, commencing on the day following the
expiration of the immediately preceding term of the Modified Lease (the
"COMMENCEMENT DATE OF THE EXTENSION TERM") provided that:
(a) Tenant shall give Landlord notice (the "EXTENSION NOTICE")
of its election to extend the Term at least twelve (12) months
prior to the expiration of the then existing term of the
Modified Lease; and
(b) The Modified Lease is in full force and effect and Tenant
is not in default under the Modified Lease as of the time of
the giving of the Extension Notice or the relevant
Commencement Date of the Extension Term, and Tenant's
Termination Option pursuant to Paragraph 9 of this Agreement
Lease has either expired or been waived by Tenant.
12.2. FIXED ANNUAL RENT. The fixed annual rent payable by Tenant during
the Extension Term shall be the fair market rent for the demised
premises as determined as of the date occurring six (6) months prior to
the Commencement Date of the Extension Term (the "DETERMINATION DATE"),
such amount to be determined pursuant to the provisions of PARAGRAPH
12.3, but such fixed rent shall in no event be less than the fixed rent
in effect under the Modified Lease for the last month of the
immediately preceding term hereof (without giving effect to any
temporary abatement of fixed annual rent under the provisions of
ARTICLE 9 or any other Article of the Modified Lease). Fair market rent
shall be determined at the highest and best use of the demised premises
regardless of whether such use is the use permitted hereunder. In
determining the fair market rent, the provisions of ARTICLES 50 and 51
(and any other escalation payments that may be provided for in the
Modified Lease) shall remain in effect during any Extension Term with
the same base periods as set forth therein, and such base periods shall
be recognized in making such determination of fair market value.
12.3 DETERMINATION OF FAIR MARKET RENT.
12.3.1. Landlord and Tenant shall endeavor to agree as to the
amount of the fair market rent for the demised premises
pursuant to the provisions of PARAGRAPH 12.2, during the
thirty (30) day period following a Determination Date. If
Landlord and Tenant cannot so agree within such thirty (30)
day period, then Landlord or Tenant may initiate the appraisal
process provided for herein by giving notice to that effect to
the other, and the party so initiating the appraisal process
(the "INITIATING PARTY") shall specify in such notice the name
and address of the person designated to act as an arbitrator
on its behalf. Within thirty (30) days after the designation
of such arbitrator, the other party (the "OTHER PARTY") shall
give notice to the Initiating Party specifying the name and
address of the person designated to act as an arbitrator on
its behalf. If the Other Party fails to notify the Initiating
Party of the appointment of its arbitrator within the time
above specified, then the appointment of the second arbitrator
shall be made in the same manner as hereinafter provided for
the
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appointment of a third arbitrator in a case where the two (2)
arbitrators appointed hereunder and the parties are unable to
agree upon such appointment. The two (2) arbitrators so chosen
shall meet within ten (10) days after the second arbitrator is
appointed and if, within sixty (60) days after the second
arbitrator is appointed, the two (2) arbitrators shall not
agree, they shall together appoint a third arbitrator. In the
event of their being unable to agree upon such appointment
within eighty (80) days after the appointment of the second
arbitrator, the third arbitrator shall be selected by the
parties themselves if they can agree thereon within a further
period of fifteen (15) days. If the parties do not so agree,
then either party, on behalf of both and on notice to the
other, may request such appointment by the American
Arbitration Association (or organization successor thereto) in
New York City in accordance with its rules then prevailing.
12.3.2. Each party shall pay the fees and expenses of the
original arbitrator appointed by or for such party, and the
fees and expenses of the third arbitrator and all other
expenses (not including the attorneys fees, witness fees and
similar expenses of the parties which shall be borne
separately by each of the parties) of the arbitration shall be
borne by the parties equally.
12.3.3. The majority of the arbitrators shall determine the
fair market rent of the demised premises and render a written
certified report of their determination to both Landlord and
Tenant within sixty (60) days of the appointment of the first
two arbitrators or sixty (60) days from the appointment of the
third arbitrator if such third arbitrator is appointed
pursuant to this SUBPARAGRAPH 12.3. If no two (2) arbitrators
can agree, then the fair market rent shall be the average of
the two (2) closest determinations. The fair market rent, so
determined, shall be applied to determine the fixed rent
pursuant to SUBPARAGRAPH 12.2.
12.3.4. Each of the arbitrators selected as herein provided
shall have at least ten (10) years experience in the leasing
and renting of space for a comparable use in similar buildings
in the general area (neighborhood) of Manhattan, New York in
which the demised premises are located.
12.3.5. If Landlord notifies Tenant that the fixed rent for
the Extension Term shall be equal to the fixed rent for the
last year of the immediately preceding term (without regard to
any abatements that may have been in effect during all or any
part of such year), then the provisions of SUBPARAGRAPH 12.3.1
shall be inapplicable and have no force or effect with respect
to the Extension Term.
12.3.6. If Landlord or Tenant initiates the appraisal process
and, as of the Commencement Date of the Extension Term, the
amount of the fair market rent has not been determined, Tenant
shall pay fixed rent computed upon the fair market rent
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determined by Landlord and when the final determination has
been made, an appropriate retroactive adjustment shall be made
if necessary.
12.4 TERMS OF OCCUPANCY. Except as provided in PARAGRAPHS 12.1 and
12.2, Tenant's occupancy of the demised premises during the Extension
Term shall be on the same terms and conditions as are in effect
immediately prior to the expiration of the immediately preceding term
of the Modified Lease; provided, however, that Tenant shall have no
further right to extend the Term beyond the second Extension Term. If
Tenant exercises its right to extend the term of the Modified Lease for
the Extension Term pursuant to this Article, the phrases "the term of
this lease", or "the term hereof" as used in the Modified Lease, shall
be construed to include, when practicable, the Extension Term.
12.5 REQUIRED NOTICE. If Tenant does not timely send the Extension
Notice pursuant to the provisions of this Article, it being expressly
agreed that time shall be of the essence with respect to all notices to
be given by Tenant pursuant to this Article, then this Article shall
have no further force or effect with respect to any future Extension
Term and the Modified Lease shall expire at the end of the then current
term unless sooner terminated in accordance with its terms..
12.6. CONFIRMATORY AMENDMENT. If the Modified Lease is renewed in
accordance with the provisions of this Article, then at Landlord's
request Tenant shall execute an instrument in form for recording
setting forth the exercise of Tenant's right to extend the term of the
Modified Lease, the last day of the relevant Extension Term, and the
fixed annual rent for such Extension Term, but the failure of Tenant to
do so shall not impair the effectiveness of such extension.
13. As modified and amended by this Agreement all of the terms,
covenants and conditions of the Lease are hereby ratified and confirmed and
shall continue to be and remain in full force and effect throughout the
remainder of the term thereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered as of the day and year first above written.
LANDLORD:
FGP 90 WEST STREET, INC.
By:
---------------------------
11
<PAGE> 12
TENANT:
HANOVER CAPITAL PARTNERS, LTD.
By:
----------------------------
Name:
Title:
Federal I.D. No. 13-3508242
STATE OF NEW YORK )
) SS.:
COUNTY OF NEW YORK )
On this day of _________, 1998, before me personally came
_______________, to me known, who being by me duly sworn, did depose and say
that _he resides in
that _he is the
of HANOVER CAPITAL PARTNERS, LTD., the corporation described in and which
executed the foregoing instrument as TENANT; that _he knows the seal of said
corporation; that the seal affixed to said instrument is such corporate seal;
that it was so affixed by order of the Board of Directors of said corporation,
and that _he signed h name thereto by like order.
--------------------------------
NOTARY PUBLIC
12
<PAGE> 13
EXHIBIT A
THE SUBSTITUTE PREMISES
Note: This floor plan is annexed to and made a part of this Agreement solely to
indicate the Substitute Premises by outlining and marking. All areas,
conditions, dimensions and locations are approximate.
<PAGE> 14
EXHIBIT B
SUBSTITUTE ELECTRICITY CLAUSE
"49. ELECTRICITY:
49.1 DEFINITIONS. As used herein:
(a) "UTILITY" shall mean the public utility, if any, providing
electricity to the Building.
(b) "ALTERNATE SUPPLIER" means any energy services company, whether or
not affiliated with Landlord, that is permitted by federal, state or local law,
rule or regulation or by the Utility to supply electricity to the Building or
directly to Tenant, regardless of whether such Alternate Supplier generates its
own electricity at or near the Building or delivers such electricity over the
transmission and distribution system of the Utility currently or in the future
providing electricity and/or electric transmission and distribution services to
the Building.
49.2 METHOD OF ELECTRIC SUPPLY. At the commencement of the term,
electricity shall be supplied to the demised premises as provided in SUBSECTION
49.2.1 (submetering) . However, at any time Landlord shall have the option of
having electricity supplied to the demised premises as provided in SUBSECTION
49.2.2 (rent inclusion) or SUBSECTION 49.2.3 (direct metering) upon not less
than sixty (60) days prior notice to Tenant, which notice shall state the
scheduled effective date of the conversion (the "CONVERSION DATE"). Landlord may
exercise such option more than once during the term, including, without
limitation, returning to the provision of a Section under which electricity was
previously supplied to Tenant. The cost, if any, in connection with any such
change in the method of supplying electricity to the demised premises shall be
borne by Landlord unless such change is made as a result of a change in
applicable laws, rules or regulations pertaining to the provision of electricity
(including, without limitation, any change in rate or redistribution schedules
which would adversely impact on Landlord), in which event the cost of such
conversion with respect to the demised premises shall be paid by Tenant as
additional rent within ten (10) days after demand therefor by Landlord. .
49.2.1 SUBMETERING. Using the method of supplying electricity
described in this SUBSECTION 49.2.1, Landlord shall furnish electricity to the
demised premises on a submetered basis and Tenant covenants and agrees to
purchase the same from Landlord, Landlord's designated agent, or an Alternate
Supplier, at charges, terms and rates set, from time to time, during the term of
this lease by Landlord, which shall not be higher than either (i) those
specified in the service classification then in effect pursuant to which
Landlord then purchased electric current from the Utility, together with a
surcharge in the amount of ten (10%) percent of such charges in order to
reimburse Landlord for its administrative expenses in connection with such
submetering, or (ii) if Landlord uses an Alternate Supplier, the per kilowatt
hour rate and other charges pursuant to which
B-1
<PAGE> 15
Landlord purchases electricity from the Alternate Supplier, together with a
surcharge in the amount of ten (10%) percent of such charges in order to
reimburse Landlord for its administrative expenses in connection with such
submetering. In either event, such charges shall be increased in the same
percentage as any percentage increase in the billing to Landlord for
electricity, for the entire Building, by reason of increase in Landlord's
electric rates, charges, fuel adjustment or service classifications, or by taxes
or charges of any kind imposed thereon, or for any other such reason. Any such
percentage increase in Landlord's billing for electricity shall be computed by
the application of the average consumption (energy and demand) of electricity
for the entire Building for the twelve (12) full months immediately prior to the
rate change, other change, or any changed methods of or rules on billing for
same, on a consistent basis to the new rate and to the service classification
then in effect. If the average consumption of electricity for the entire
Building for such prior twelve (12) months cannot reasonably be applied to and
used with respect to changed methods of or rules on billing, then the percentage
increase shall be computed by the use of the average consumption (energy and
demand) for the entire Building for the first three (3) months after such
change, projected to a full twelve (12) months and that same consumption, so
projected, shall be applied to the service classification then in effect or the
rate charged by the Alternate Supplier, if any. Where more than one meter
measures the service of Tenant in the Building, the service rendered through
each meter may be computed and billed separately in accordance with the
provisions hereof. If such bills are not paid within ten (10) days, Landlord
may, without further notice, discontinue the service of electric current to the
demised premises without releasing Tenant from any liability for any damage or
loss sustained by Tenant by such discontinuance of service; provided, however,
that if Landlord shall discontinue furnishing electric service to the demised
premises pursuant to this sentence and Tenant shall pay to Landlord such
delinquent amounts, then, unless Landlord shall have terminated this lease,
Landlord shall resume providing such electrical service to the demised premises.
If at any time any submeter(s) which measure electricity to be paid by Tenant
hereunder shall not be properly functioning, or shall not yet have been
installed, then for such period Tenant shall pay for such electricity service on
a rent inclusion basis as provided in SUBSECTION 49.2.2.
49.2.2 RENT INCLUSION. For the purposes of SUBSECTION 49.2.2,
Landlord and Tenant agree that:
49.2.2.1 The term "ELECTRIC RATE" shall mean the
greater of the following, in all events including all applicable surcharges,
demand charges, energy charges, fuel adjustment charges, time of day charges,
taxes and other sums payable in respect thereof:
(i) The service classification pursuant to which
Landlord purchases electricity from the Utility; or
(ii) The service classification pursuant to which
Tenant would purchase electricity directly from the Utility; provided, however,
at no time shall the amount payable by Tenant for electricity be less than the
"Cost per Kilowatt Hour" (as defined in SUBSECTION 49.2.2.2), or
B-2
<PAGE> 16
(iii) The per kilowatt hour rate and other
charges pursuant to which Landlord purchases electricity from an Alternate
Supplier.
49.2.2.2 The term "COST PER KILOWATT HOUR" shall mean
the total cost for electricity incurred by Landlord to service the Building
during a particular time period (including all applicable surcharges, demand
charges, energy charges, fuel adjustment charges, time of day charges, taxes and
other sums payable in respect thereof) divided by the total kilowatt hours
purchased by Landlord during such period.
49.2.2.3 As long as Tenant is not in default under
any of the covenants of this lease, Landlord shall furnish Tenant, either
through the Utility or an Alternate Supplier with all such electric energy
reasonably required in connection with the permitted use and occupancy of the
demised premises. In addition to the fixed annual rent payable hereunder, Tenant
shall pay for the cost of such service at the initial rate per annum (the
"MINIMUM ELECTRIC CHARGE") equal to the amount then being asked for such purpose
by Landlord with respect to new leases at the Building, which payments shall be
made in monthly installments, with monthly installments of fixed annual rent, as
additional rent. At any time and from time to time, Landlord may cause a survey
to be made by an independent electrical engineer or consultant selected by
Landlord of the consumption of electric energy in the demised premises. The
survey will include a determination of the power requirements of Tenant's
equipment (including, but not limited to, any air conditioning equipment
provided by the Landlord) and of the lighting in the demised premises and a
determination of the periods of use of such air conditioning equipment and
lighting. The results of the survey will be projected with such adjustments as
may be appropriate to arrive at an estimate of the annual consumption of
electric energy in the demised premises. The estimated cost attributable to the
furnishing by Landlord of such quantity of electric energy to the demised
premises shall be determined by applying the Electric Rate to Tenant's estimated
usage, and then increasing the resulting amount by an additional ten percent
(10%) in order to reimburse Landlord for its administrative and equipment
expenses in providing such electric service. If such estimated cost shall be
greater than the Minimum Electric Charge, then the electric inclusion charge
hereunder shall be increased as of the date of such survey by the amount of such
additional cost. The determination of Landlord's consultant or engineer shall be
conclusive hereunder. Notwithstanding anything to the contrary herein, if the
cost to Landlord of furnishing electricity service shall increase because of an
increase in the Electric Rate, then Landlord may, upon written notice to Tenant,
increase the additional rent by an amount equal to the amount set forth above
multiplied by the percentage increase in the cost to Landlord without the need
of a survey therefor. The increased additional rent payable by virtue of such
notice shall commence as of the date of such increase in the rate payable by
Landlord to such Utility or Alternate Supplier. Under no circumstances shall the
electrical inclusion charge be less than the Minimum Electric Charge.
49.2.3 DIRECT METER. Using this method, Tenant, at its sole
cost and expense, shall obtain electricity directly from the Utility or an
Alternate Supplier designated by Landlord. The cost of such service shall be
paid by Tenant directly to such Utility or Alternate Supplier in accordance
B-3
<PAGE> 17
with its billing schedule. From and after the Conversion Date, Landlord shall no
longer be obligated to furnish Tenant with electric energy; provided, however,
that if Tenant, upon being notified of the conversion to direct meter has
promptly contacted the Utility (or Alternate Supplier, as the case may be) and
taken such other actions as may be required for direct metering, and
notwithstanding such timely action by Tenant the demised premises shall not be
able to receive electricity by direct metering on the date set forth by Landlord
for such conversion, then the Conversion Date shall be extended for such time as
is reasonably necessary for Tenant to make arrangements to obtain electric
service directly from the Utility or Alternate Supplier, as the case may be. If
Landlord exercises such right of termination, this lease shall remain unaffected
thereby and shall continue in full force and effect; and thereafter Tenant shall
obtain electric service directly from the Utility, or the Alternate Supplier
designated by Landlord, and may utilize the then existing electric feeders,
risers, and wiring servicing the demised premises to the extent available and
safely capable of being used for such purposes and only to the extent of
Tenant's then authorized connected load.
49.3 COMPLIANCE WITH LAWS AND CAPACITY. Tenant's use of electric
current shall not at any time exceed the capacity of any of the electrical
conductors and equipment in or otherwise serving the demised premises. Tenant
shall not make or perform or permit the making of, any alterations to wiring,
installations or other electrical facilities in or serving the demised premises
without the prior consent of Landlord in each instance. Should Landlord grant
any such consent, all additional risers or other equipment required therefor
shall be installed by Landlord, and the cost thereof shall be paid by Tenant
upon Landlord's demand. If Tenant installs any electrical equipment, Tenant
shall at its own expense make whatever changes are necessary to comply with the
requirements of the insurance underwriters and governmental authorities having
jurisdiction.
49.4 FAILURE OF UTILITY OR ALTERNATE SUPPLIER. Unless the same shall
arise due to the willful act of Landlord in default or any of the terms and
conditions of this lease, Landlord shall not be liable in any way to Tenant for
any failure or defect in the supply or character of electric energy furnished to
the demised premises by reason of any requirement, act or omission of the
Utility or Alternate Supplier or for any other reason whatsoever.
49.5 SOURCE OF ELECTRICITY. Landlord shall have the right to determine,
in its sole discretion, the provider of electricity to the Building, whether the
same be the Utility or an Alternate Supplier, and Landlord may, in its sole
discretion, change such determination from time to time. It is expressly agreed
that Landlord may designate itself as an Alternate Supplier.
49.6 ELECTRICAL TAXES. If any tax (other than, a federal, state or city
income tax) is imposed in connection with Landlord's or Tenant's use of an
Alternate Supplier or upon Landlord's receipt from the sale or resale of
electricity to Tenant by any federal, state or municipal authority, Tenant
covenants and agrees that, where permitted by law, Tenant's pro rata share of
such taxes shall be passed on to and included in the bill of, and paid by,
Tenant to Landlord, as additional rent or, if applicable, to the Alternate
Supplier."
B-4
<PAGE> 1
Exhibit 10.14
OFFICE LEASE
Between
LASALLE-ADAMS, L.L.C.
as Landlord
And
HANOVER CAPITAL PARTNERS LTD.
as Tenant
<PAGE> 2
<TABLE>
<CAPTION>
LEASE INDEX
<S> <C>
1. BASIC LEASE PROVISIONS........................................... 1
2. DEMISE AND TERM.................................................. 2
3. RENT............................................................. 2
4. USE.............................................................. 5
5. CONDITION OF PREMISES............................................ 5
6. BUILDING SERVICES................................................ 5
7. RULES AND REGULATIONS............................................ 7
8. CERTAIN RIGHTS RESERVED TO LANDLORD.............................. 7
9. MAINTENANCE AND REPAIRS.......................................... 7
10. ALTERATIONS...................................................... 8
11. INSURANCE........................................................ 9
12. WAIVER AND INDEMNITY............................................. 9
13. FIRE AND CASUALTY................................................ 10
14. CONDEMNATION..................................................... 11
15. ASSIGNMENT AND SUBLETTING........................................ 11
16. SURRENDER........................................................ 12
17. DEFAULTS AND REMEDIES............................................ 13
18. HOLDING OVER..................................................... 14
19. SECURITY DEPOSIT................................................. 14
20. SUBSTITUTION OF OTHER PREMISES................................... 15
21. DEMOLITION OR RENOVATION......................................... 15
22. ESTOPPEL CERTIFICATES............................................ 15
23. SUBORDINATION.................................................... 16
24. QUIET ENJOYMENT.................................................. 16
25. BROKER........................................................... 16
26. NOTICES.......................................................... 17
27. MISCELLANEOUS.................................................... 17
</TABLE>
i
<PAGE> 3
OFFICE LEASE
THIS LEASE (this "Lease") is made as of this ______ day of January, 1999 between
LASALLE-ADAMS, L.L.C., an Illinois limited liability company ("Landlord") having
an address at 208 South LaSalle Street, Suite 1602, Chicago, Illinois 60604 and
HANOVER CAPITAL PARTNERS LTD., a New York corporation ("Tenant"), for space in
the building known as 208 South LaSalle Street, Chicago, Illinois 60604 (such
building, together with the land upon which it is situated, being herein
referred to as the "Building"). The following Basic Lease Provisions (the "Lease
Provisions") set forth certain basic terms of this Lease:
1. BASIC LEASE PROVISIONS.
1.1 SUITE NUMBER: 1338, as shown on EXHIBIT A attached hereto.
1.2 RENTABLE SQUARE FEET: 1,151
1.3 BASE RENT:
<TABLE>
<CAPTION>
PERIOD RENT PER RENTABLE ANNUAL RENT MONTHLY RENT
SQUARE FOOT
<S> <C> <C> <C>
2/1/1999 to 1/31/2000 $19.00 $21,869.00 $1,822.42
2/1/2000 to 1/31/2001 19.50 22,444.50 1,870.38
2/1/2001 to 1/31/2002 20.00 23,020.00 1,918.33
2/1/2002 to 1/31/2003 20.50 23,595.50 1,966.29
2/1/2003 to 1/31/2004 21.00 24,171.00 2,014.25
</TABLE>
1.4 TENANT'S PROPORTIONATE SHARE OF OPERATING EXPENSES & TAXES: 0.14538%
1.5 BASE EXPENSES OR BASE EXPENSE YEAR: 1999
1.6 BASE TAXES OR BASE TAX YEAR: 1999
1.7 SECURITY DEPOSIT: $3,644.83
1.8 BROKER FOR LANDLORD: Prime Group Realty Services, Inc.
BROKER FOR TENANT: MAP Real Estate
<PAGE> 4
1.9 TERM OF LEASE: 5 Years
1.10 COMMENCEMENT DATE: February 1, 1999
1.11 NOTICES TO LANDLORD: LaSalle-Adams, L.L.C.
208 South LaSalle Street, Suite 1602
Chicago, IL 60604
Attn: General Manager
NOTICES TO TENANT: Hanover Capital Partners Ltd.
100 Metroplex Drive
Suite 301
Edison, NJ 08817
Attn: In-House Counsel
With a copy to: Hanover Capital Partners Ltd.
208 South LaSalle Street, Suite 1338
Chicago, IL 60604
Attn: George J. Ostendorf, Managing Director
1.1 GUARANTOR: None
1.2 OTHER: None
2. DEMISE AND TERM. Landlord leases to Tenant and Tenant leases from Landlord
the premises (the "Premises") described in Section 1.1 of the Lease Provisions
and shown on the plan attached hereto as Exhibit "A", subject to the covenants
and conditions set forth in this Lease, for a term (the "Term") described in
Section 1.9 of the Lease Provisions commencing on the date (the "Commencement
Date") described in Section 1.10 of the Lease Provisions and expiring on the
date (the "Expiration Date") as determined by adding the Term to the
Commencement Date, unless terminated earlier as otherwise provided in this
Lease. Within five (5) business days after its receipt of Landlord's request
(the "Date Confirmation Letter"), Tenant shall confirm in writing to Landlord
the actual Commencement Date and the Expiration Date by its execution and return
of the Date Confirmation Letter.
3. RENT.
3.1 DEFINITIONS. For purposes of this Lease, the following terms shall have
the following meanings:
3.1.1 "BASE EXPENSES" or "BASE EXPENSE YEAR" shall mean the amount or the
year set forth in Section 1.5 of the Lease Provisions.
3.1.2 "BASE TAXES" or "BASE TAX YEAR" shall mean the amount or the year set
forth in Section 1.6 of the Lease Provisions.
<PAGE> 5
3.1.3 "EXPENSES" shall mean all expenses, costs and disbursements (other
than Taxes) paid or incurred by Landlord in connection with the ownership,
management, maintenance, operation, replacement and repair of the Building.
If the cost incurred in making an improvement or replacing any equipment is
not fully deductible as an expense in the year incurred in accordance with
generally accepted accounting principles, the cost shall be amortized over
the useful life of the improvement or equipment, as reasonably determined
by Landlord. Expenses shall not include: (a) costs of tenant alterations;
(b) interest and principal payments on mortgages; (c) advertising expenses
and leasing commissions; (d) any cost or expenditure for which Landlord is
reimbursed, whether by insurance proceeds or otherwise, except through
Expense Escalation (as hereinafter defined); and (e) legal expenses of
negotiating leases or pursuing collections. Expenses shall be determined on
a cash or accrual basis, as Landlord may elect. If less than 95% of the
rentable square feet in the Building is rented or occupied at any time
during any calendar year, operating expenses for such calendar year shall
be an amount equal to the Expenses which would normally be expected to be
incurred had 95% of the Building's rentable square feet been occupied and
had Landlord been supplying services to 95% of the Building's rentable
square feet throughout such calendar year.
3.1.4 "RENT" shall mean Base Rent, Rent Escalation, Expense Escalation, Tax
Escalation (as such terms are hereinafter defined) and any other sums or
charges due by Tenant hereunder.
3.1.5 "TAXES" shall mean all taxes, assessments and fees levied upon the
Building, the property of Landlord located therein or the rents collected
therefrom, by any governmental entity based upon the ownership, leasing,
renting or operation of the Building, including, without limitation, all
costs and expenses of protesting any such items. Taxes shall not include
any net income, capital stock, succession, transfer, franchise, gift,
estate or inheritance taxes; provided, however, if at any time during the
Term, a tax or excise on income is levied or assessed by any governmental
entity, in lieu of or as a substitute for, in whole or in part, real estate
taxes or other ad valorem taxes, such tax shall constitute and be included
in Taxes. For the purposes of determining Taxes for any given year, the
amount to be included for such year (a) from special assessments payable in
installments shall be the amount of the installments (and any interest) due
and payable during such year, or, at Landlord's option, special assessments
levied, assessed or otherwise imposed for such year without regard to when
such special assessments are payable, and (b) from all other Taxes shall be
the amount due and payable in such year, or at Landlord's option, Taxes
levied, assessed or otherwise imposed for such year without regard to when
such Taxes are payable.
3.1.6 "TENANT'S PROPORTIONATE SHARE" shall mean the percentage set forth in
Section 1.4 of the Lease Provisions.
3
<PAGE> 6
3.2 COMPONENTS OF RENT. Tenant agrees to pay the following amounts to
Landlord at the office of the Building or at such other place as Landlord
designates:
3.2.1 Base rent ("Base Rent") to be paid in monthly installments in the
amounts as set forth in Section 1.3 of the Lease Provisions, in advance, on
or before the first day of each month of the Term, except that Tenant shall
pay the first month's Base Rent plus any partial month rent (if any) upon
execution of this Lease.
3.2.2 Tax Escalation and Expense Escalation ("Tax Escalation and Expense
Escalation") in an amount equal to Tenant's Proportionate Share of (a) the
increase in expenses for any calendar year over the Base Expenses and (b)
the increase in Taxes for any calendar year over the Base Taxes. (If
Sections 1.5 and 1.6 of the Lease Provisions set forth a Base Expense Year
and a Base Tax Year rather than Base Expenses and Base Taxes, the Base
Expenses and the Base Taxes shall equal the amount of Expenses and Taxes,
respectively, for the Base Expense Year and the Base Tax Year.) Prior to
each calendar year, Landlord shall estimate the amount of the Tax
Escalation and Expense Escalation due for such year, and Tenant shall pay
Landlord one-twelfth of such estimate on the first day of each month during
such year. Such estimate may be revised by Landlord whenever it obtains
information relevant to making such estimate more accurate. At the end of
each calendar year, Landlord shall deliver to Tenant a report setting forth
the actual Expenses and Taxes for such calendar year and a statement of the
amount of the Tax Escalation and Expense Escalation that Tenant has paid
and is payable for such year. Within thirty (30) days after receipt of such
report, Tenant shall pay to Landlord the amount of the Tax Escalation and
Expense Escalation due for such calendar year minus any payments of the Tax
Escalation and Expense Escalation made by Tenant for such year. If Tenant's
estimated payments of the Tax Escalation and Expense Escalation exceed the
amount due Landlord for such calendar year, Landlord shall apply such
excess as a credit against Tenant's other obligations under this Lease or
promptly refund such excess to Tenant if the Term has already expired,
provided Tenant is not then in default hereunder, in either case without
interest to Tenant.
3.3 PAYMENT OF RENT. The following provisions shall govern the payment of
Rent.
3.3.1 All Rent shall be paid to Landlord without offset or deduction, and
the covenant to pay Rent shall be independent of every other covenant in
this Lease. Payment shall be delivered to the Landlord at the address set
forth above or at such other address as Landlord may designate from time to
time.
3.3.2 Any sum due from Tenant to Landlord which is not paid when due shall
bear interest from the date due until the date paid at the annual rate of
fifteen percent (15%) per annum, but in no event higher than the maximum
rate permitted by law (the "Default Rate"); and, in addition, Tenant shall
pay Landlord
4
<PAGE> 7
a late charge for any Rent payment which is paid more than five (5) days
after its due date equal to five percent (5%) of such payment.
3.3.3 In the event of the termination of this Lease prior to the
determination of any Tax Escalation and Expense Escalation, Landlord's
obligation to refund any such sums (provided Tenant is not in default
hereunder) and Tenant's agreement to pay any such sums shall survive the
termination of this Lease.
3.3.4 No adjustment to the Rent by virtue of the operation of the rent
adjustment provisions in this Lease shall result in the payment by Tenant
in any year of less than the Base Rent shown on the Lease Provisions.
3.3.5 Each amount owed to Landlord under this Lease for which the date of
payment is not expressly fixed shall be due on the same date as the Rent
listed on the statement showing such amount is due.
3.3.6 If Landlord fails to give Tenant an estimate of Tax Escalation and
Expense Escalation prior to the beginning of any calendar year, Tenant
shall continue to pay Tax Escalation and Expense Escalation at the rate for
the previous calendar year until Landlord delivers such estimate.
4. USE. Tenant shall occupy and use the Premises only for general office
purposes and for no other purposes. Tenant shall comply with all federal, state
and municipal laws, ordinances and regulations and all covenants, conditions and
restrictions of record applicable to Tenant's use or occupancy of the Premises.
Without limiting the foregoing, Tenant shall not cause, nor permit, any
hazardous or toxic substances, medical waste or drugs to be brought upon,
produced, stored, used, discharged or disposed of in, on or about the Premises
without the prior written consent of Landlord (which Landlord may withhold in
its sole discretion) and then only in compliance with all applicable
environmental laws.
5. CONDITION OF PREMISES. Tenant's taking possession of the Premises shall be
conclusive evidence that the Premises were in good order and satisfactory
condition when Tenant took possession. No agreement of Landlord to alter,
remodel, decorate, clean or improve the Premises or the Building (or to provide
Tenant with any credit or allowance for the same), and no representation
regarding the condition of the Premises or the Building, have been made by or on
behalf of Landlord or relied upon by Tenant; provided, however, that, prior to
the Commencement Date, Landlord shall paint the Premises throughout using
building standard grade materials with one (1) color as reasonably selected by
Tenant.
6. BUILDING SERVICES.
6.1 BASIC SERVICES. Landlord shall furnish the following services: (i)
heating and air conditioning to provide a temperature condition required, in
Landlord's judgment, for comfortable occupancy of the Premises under normal
business operations, daily from 8:00 A.M. to 6:00 P.M. and Saturdays from 8:00
A.M. to 1:00
5
<PAGE> 8
P.M., the remainder of weekends and holidays excepted; (ii) water for drinking,
and, subject to Landlord's approval, cold water at Tenant's expense for any
private restrooms and office kitchen requested by Tenant; (iii) men's and
women's restrooms at locations designated by Landlord and in common with other
tenants of the Building; (iv) daily janitor service in the Premises and common
areas of the Building, weekends and holidays excepted, including periodic
outside window washing of the perimeter windows in the Premises; and (v)
passenger elevator service in common with Landlord and other tenants of the
Building, 24 hours a day, 7 days a week; and freight elevator service daily,
weekends and holidays excepted, upon request of Tenant and subject to scheduling
and charges by Landlord.
6.2 ELECTRICITY. Electricity shall be distributed to the Premises either by
the electric utility company serving the Building or, at Landlord's option, by
Landlord; and Landlord shall permit Landlord's wire and conduits, to the extent
available, suitable and safely capable, to be used for such distribution. If and
so long as Landlord is distributing electricity to the Premises, Tenant shall
obtain all of its electricity from Landlord and shall pay all of Landlord's
charges, which charges shall be based, at Landlord's option, either on meter
readings or on a survey of Tenant's electrical usage made by Landlord or on
Tenant's pro rata share of all space, including the Premises, which is commonly
metered with the Premises. If the electric utility company is distributing
electricity to the Premises, Tenant at its cost shall make all necessary
arrangements with the electric utility company for metering and paying for
electric current furnished to the Premises. All electricity used during the
performance of janitor service, or the making of any alterations or repairs in
the Premises, or the operation of any special air conditioning or other systems
serving the Premises, shall be paid for by Tenant.
6.3 TELEPHONES. Tenant shall arrange for telephone service directly with
one or more of the public telephone companies servicing the Building and shall
be solely responsible for paying for such telephone service. If Landlord
acquires ownership of the telephone cables in the Building at any time, Landlord
shall permit Tenant to connect to such cables on such terms and conditions as
Landlord may prescribe. In no event does Landlord make any representation or
warranty with respect to telephone service in the Building, and Landlord shall
have no liability with respect thereto.
6.4 ADDITIONAL SERVICES. Landlord shall not be obligated to furnish any
services other than those stated above. If Landlord elects to furnish services
requested by Tenant in addition to those stated above (including services at
times other than those stated above), Tenant shall pay Landlord's then
prevailing charges for such services. If Tenant shall fail to make any such
payment, then without notice to Tenant and in addition to all other remedies
available to Landlord, Landlord may discontinue any additional services. No
discontinuance of any such service shall result in any liability of Landlord to
Tenant or be considered as an eviction or a disturbance of Tenant's use of the
Premises. In addition, if Tenant's concentration of personnel or equipment
adversely affects the temperature or humidity in the Premises or the Building,
Landlord may install supplementary air conditioning units in the Premises, and
Tenant shall pay for the cost of installation and maintenance thereof.
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6.5 FAILURE OR DELAY IN FURNISHING SERVICES. Tenant agrees that Landlord
shall not be liable for damages for failure or delay in furnishing any service
stated above if such failure or delay is caused, in whole or in part, by any one
or more of the events stated in Section 27.8, nor shall any such failure or
delay be considered to be an eviction or disturbance of Tenant's use of the
Premises, or relieve Tenant from its obligation to pay any Rent when due, or
from any other obligations of Tenant under this Lease.
7. RULES AND REGULATIONS. Tenant shall observe and comply, and shall cause its
subtenants, assignees, invitees, employees, contractors and agents to observe
and comply, with the rules and regulations listed on Exhibit "B" attached hereto
and with such reasonable modifications and additions thereto as Landlord may
make from time to time. Landlord shall not be liable for failure of any person
to obey such rules and regulations. Landlord shall not be obligated to enforce
such rules and regulations against any person, and the failure of Landlord to
enforce any such rules and regulations shall not constitute a waiver thereof or
relieve Tenant from compliance therewith.
8. CERTAIN RIGHTS RESERVED TO LANDLORD. Landlord reserves the following rights,
each of which Landlord may exercise without notice to Tenant and without
liability to Tenant, and the exercise of any such rights shall not be deemed to
constitute an eviction or disturbance of Tenant's use or possession of the
Premises and shall not give rise to any claim for set-off or abatement of rent
or any other claim: (a) to change the name or street address of the Building or
the suite number of the Premises; (b) to install and maintain any and all signs
on the exterior or interior of the Building; (c) to make repairs, decorations,
alterations, additions, or improvements, whether structural or otherwise, in and
about the Building, and for such purposes to enter upon the Premises,
temporarily close doors, corridors and other areas in the Building and interrupt
or temporarily suspend services or use of common areas, and Tenant agrees to pay
Landlord for overtime and similar expenses incurred if such work is done other
than during ordinary business hours at Tenant's request; (d) to retain at all
times, and to use in appropriate instances, keys to all doors within and into
the Premises; (e) to grant to any person or to reserve unto itself the exclusive
right to conduct any business or render any service in the Building; (f) to show
or inspect the Premises at reasonable times and, if vacated or abandoned, to
prepare the Premises for reoccupancy; (g) to install, use and maintain in and
through the Premises, pipes, conduits, wires and ducts serving the Building,
provided that such installation, use and maintenance does not unreasonably
interfere with Tenant's use of the Premises; and (h) to take any other action
which Landlord deems reasonable in connection with the operation, maintenance or
preservation of the Building.
9. MAINTENANCE AND REPAIRS. Tenant, at its expense, shall maintain and keep the
Premises in good order and repair at all times during the Term. In addition,
Tenant shall reimburse Landlord for the cost of any repairs to the Building
necessitated by the acts or omissions of Tenant, its subtenants, assignees,
invitees, employees, contractors and agents, to the extent Landlord is not
reimbursed for such costs under its insurance policies. Subject to the preceding
sentence, Landlord shall perform any
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maintenance or make any repairs to the Building as Landlord shall desire or deem
necessary for the safety, operation or preservation of the Building, or as
Landlord may be required or requested to do by any governmental authority or by
the order or decree of any court or by any other proper authority.
10. ALTERATIONS.
10.1 LIMITATIONS. Tenant shall not make any replacement, alteration,
improvement or addition to or removal from the Premises (collectively an
"Alteration") without the prior written consent of Landlord. In the event Tenant
proposes to make any Alteration, Tenant shall, prior to commencing such
Alteration, submit to Landlord for prior written approval: (i) detailed plans
and specifications; (ii) sworn statements, including the names, addresses and
copies of contracts for all contractors; (iii) all necessary permits evidencing
compliance with all applicable governmental rules, regulations and requirements;
(iv) certificates of insurance in form and amounts required by Landlord, naming
Landlord and any other parties designated by Landlord as additional insureds;
and (v) all other documents and information as Landlord may reasonably request
in connection with such Alteration. Tenant agrees to pay Landlord's standard
charges for review of all such items and supervision of the Alteration. Neither
approval of the plans and specifications nor supervision of the Alteration by
Landlord shall constitute a representation or warranty by Landlord as to the
accuracy, adequacy, sufficiency or propriety of such plans and specifications or
the quality of workmanship or the compliance of such Alteration with applicable
law. Tenant shall pay the entire cost of the Alteration and, if requested by
Landlord, shall deposit with Landlord prior to the commencement of the
Alteration, security for the payment and completion of the Alteration in form
and amount required by Landlord. Each Alteration shall be performed in a good
and workmanlike manner, in accordance with the plans and specifications approved
by Landlord, and shall meet or exceed the standards for construction and quality
of materials established by Landlord for the Building. In addition, each
Alteration shall be performed in compliance with all applicable governmental and
insurance company laws, regulations and requirements. Each Alteration shall be
performed by union contractors if required by Landlord and in harmony with
Landlord's employees, contractors and other tenants. Each Alteration made by
Landlord or Tenant in or upon the Premises (excepting only Tenant's furniture,
equipment and trade fixtures) shall become Landlord's property and shall remain
upon the Premises at the expiration or termination of this Lease without
compensation to Tenant; provided, however, that Landlord shall have the right to
require Tenant to remove such Alteration at Tenant's sole cost and expense in
accordance with the provisions of Section 16.
10.2 LIEN WAIVERS. Upon completion of any Alteration, Tenant promptly shall
furnish Landlord with sworn owner's and contractors statements and full and
final waivers of lien covering all labor and materials included in such
Alteration. Tenant shall not permit any mechanic's lien to be filed against the
Building, or any part thereof or any interest therein, arising out of any
Alteration performed, or alleged to have been performed, by, on behalf of, or at
the direction of Tenant. If any such lien is filed, Tenant, within ten (10) days
thereafter, shall have such lien released of record or deliver to Landlord a
bond in form, amount, and issued by a surety satisfactory to
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Landlord, indemnifying Landlord against all costs and liabilities resulting from
such lien and the foreclosure or attempted foreclosure thereof. If Tenant fails
to have such lien so released or to deliver such bond to Landlord, Landlord,
without investigating the validity of such lien, may pay or discharge the same;
and Tenant shall reimburse Landlord upon demand for the amount so paid by
Landlord, including Landlord's expenses and attorneys' fees.
11. INSURANCE. Tenant, at its expense, shall maintain at all times during the
Term the following insurance policies: (a) fire insurance, including extended
coverage, vandalism, malicious mischief and water damage coverage and demolition
and debris removal, insuring the full replacement cost of all improvements,
alterations or additions to the Premises made at Tenant's expense, and all other
property owned or used by Tenant and located in the Premises; (b) commercial
general liability insurance, contractual liability insurance and property damage
insurance with respect to the Building and the Premises, with limits to be set
by Landlord from time to time but in any event not less than $2,000,000 combined
single limit for personal injury, sickness or death or for damage to or
destruction of property for any one occurrence; and (c) insurance against such
other risks and in such other amounts as Landlord may from time to time require.
The form of all such policies and deductibles thereunder shall be subject to
Landlord's prior approval. All such policies shall be issued by insurers
acceptable to Landlord and licensed to do business in the State of Illinois and
shall contain a waiver of any rights of subrogation thereunder. In addition, the
policies shall name Landlord and any other parties designated by Landlord as
additional insureds, shall require at least thirty (30) days' prior written
notice to Landlord of termination or modification and shall be primary and not
contributory. Tenant, at least ten (10) days prior to the Commencement Date, and
within ten (10) days prior to the expiration of each such policy, shall deliver
to Landlord certificates evidencing the foregoing insurance or renewal thereof,
as the case may be.
12. WAIVER AND INDEMNITY.
12.1 WAIVER. Tenant releases Landlord, its property manager and their
respective agents and employees from, and waives all claims for, damage or
injury to person or property and loss of business sustained by Tenant and
resulting from the Building or the Premises or any part thereof or any equipment
therein becoming in disrepair, or resulting from any accident in or about the
Building. This paragraph shall apply particularly, but not exclusively, to
flooding, damage caused by Building equipment and apparatus, water, snow, frost,
steam, excessive heat or cold, broken glass, sewage, gas, odors, excessive noise
or vibration or the bursting or leaking of pipes, plumbing fixtures or sprinkler
devices. Without limiting the generality of the foregoing, Tenant waives all
claims and rights of recovery against Landlord, its property manager and their
respective agents and employees for any loss or damage to any property of
Tenant, which loss or damage is insured against, or required to be insured
against, by Tenant pursuant to Section 11 above, whether or not such loss or
damage is due to the fault or negligence of Landlord, its property manager or
their respective agents or employees, and regardless of the amount of insurance
proceeds collected or collectible under any insurance policies in effect.
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12.2 INDEMNITY. Tenant agrees to indemnify, defend and hold harmless
Landlord, its property manager and their respective agents and employees, from
and against any and all claims, demands, actions, liabilities, damages, costs
and expenses (including attorneys' fees and expenses), for injuries to any
persons and damage to or theft or misappropriation or loss of property occurring
in or about the Building and arising from the use and occupancy of the Premises
or from any activity, work, or thing done, permitted or suffered by Tenant in or
about the Premises (including, without limitation, any alteration by Tenant) or
from any breach or default on the part of Tenant in the performance of any
covenant or agreement on the part of Tenant to be performed under this Lease or
due to any other act or omission of Tenant, its subtenants, assignees, invitees,
employees, contractors and agents. Without limiting the foregoing, Tenant shall
indemnify, defend and hold Landlord harmless from any claims, liabilities,
damages, costs and expenses (including attorney's fees and expenses) arising out
of the use or storage of hazardous or toxic materials in the Building by Tenant,
its subtenants, assignees, invitees, employees, contractors and agents. If any
such proceeding is filed against Landlord or any such indemnified party, Tenant
agrees to defend Landlord or such party in such proceeding at Tenant's sole cost
by legal counsel reasonably satisfactory to Landlord, if requested by Landlord.
13. FIRE AND CASUALTY. If all or a substantial part of the Premises or the
Building is rendered untenantable by reason of fire or other casualty, Landlord
may, at its option, either restore the Premises and the Building, or terminate
this Lease effective as of the date of such fire or other casualty. Landlord
agrees to give Tenant written notice within ninety (90) days after the
occurrence of any such fire or other casualty designating whether Landlord
elects to so restore or terminate this Lease. If Landlord elects to terminate
this Lease, Rent shall be paid through and apportioned as of the date of such
fire or other casualty. If Landlord elects to restore, Landlord's obligation to
restore the Premises shall be limited to restoring those improvements in the
Premises existing as of the date of such fire or other casualty which were made
at Landlord's expense and shall exclude any furniture, equipment, fixtures,
additions, alterations or improvements in or to the Premises which were made at
Tenant's expense. If Landlord elects to restore, Rent shall abate for that part
of the Premises which is untenantable on a per diem basis from the date of such
fire or other casualty until Landlord has substantially completed its repair and
restoration work, provided that Tenant does not occupy such part of the Premises
during said period.
Notwithstanding the foregoing, there shall be no abatement of Rent or Tax
Escalation or Expense Escalation by reason of any portion of the Building being
unusable or inaccessible for a period equal to five (5) consecutive business
days or less. If the cause of the damage or destruction is an earthquake or a
flood, Tenant shall be entitled to an abatement of rent only when and if
Landlord receives reimbursement for such rent from insurance proceeds, if any.
If such damage or destruction occurs as a result of the negligence or the
intentional acts of Tenant or Tenant's employees, agents, contractors or
invitees, and the proceeds of insurance which are actually received by Landlord
are not sufficient to pay for the repair of all of the damage, Tenant
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shall pay to Landlord upon demand, the difference between the cost of repairing
the damage and the insurance proceeds received by Landlord.
14. CONDEMNATION. If the Premises or the Building is rendered untenantable by
reason of a condemnation (or by a deed given in lieu thereof), then either party
may terminate this Lease by giving written notice of termination to the other
party within thirty (30) days after such condemnation, in which event this Lease
shall terminate effective as of the date of such condemnation. If this Lease so
terminates, Rent shall be paid through and apportioned as of the date of such
condemnation. If such condemnation does not render the Premises or the Building
untenantable, this Lease shall continue in effect and Landlord shall promptly
restore the portion not condemned to the extent reasonably possible to the
condition existing prior to the condemnation. In such event, however, Landlord
shall not be required to expend an amount in excess of the proceeds received by
Landlord from the condemning authority. Landlord reserves all rights to
compensation for any condemnation. Tenant hereby assigns to Landlord any right
Tenant may have to such compensation, and Tenant shall make no claim against
Landlord or the condemning authority for compensation for termination of
Tenant's leasehold interest under this Lease or interference with Tenant's
business.
15. ASSIGNMENT AND SUBLETTING.
15.1 LANDLORD'S CONSENT. Tenant shall not, without the prior written
consent of Landlord: (i) assign, convey, pledge, mortgage or otherwise transfer
this Lease or any interest hereunder, or sublease the Premises, or any part
thereof, whether voluntarily or by operation of law; or (ii) permit the use of
the Premises by any person other than Tenant and its employees. Any such
transfer, sublease or use described in the preceding sentence (a "Transfer")
occurring without the prior written consent of Landlord shall be void and of no
effect. Landlord's consent to any Transfer shall not constitute a waiver of
Landlord's right to withhold its consent to any future Transfer. Landlord's
consent to any Transfer or acceptance of rent from any party other than Tenant
shall not release Tenant from any covenant or obligation under this Lease.
Landlord may require as a condition to its consent to any assignment of this
Lease that the assignee execute an instrument in which such assignee assumes the
obligations of Tenant hereunder. For the purposes of this paragraph, the
transfer (whether direct or indirect) of all or a majority of the capital stock
in a corporate Tenant (other than the shares of the capital stock of a corporate
Tenant whose stock is publicly traded) or the merger, consolidation or
reorganization of such Tenant and the transfer of all or any general partnership
interest in any partnership Tenant shall be considered a Transfer.
Notwithstanding anything contained in Paragraph 15 of this Lease to the
contrary, provided that Tenant remains liable under the Lease, Tenant shall have
the right to assign the Premises without the consent of Landlord to Hanover
Capital Mortgage Corp., Hanover Capital Mortgage Holdings, or Hanover Capital
Securities (collectively, "Hanover Entity") as a result of a merger or
consolidation between Tenant and any such Hanover Entity. In such event, Tenant
shall notify Landlord of such transfer fifteen (15) days prior to the date
thereof.
15.2 STANDARDS FOR CONSENT. If Tenant desires the consent of Landlord to a
Transfer, Tenant shall submit to Landlord, at least sixty (60) days prior to the
proposed
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effective date of the Transfer, a written notice which includes such information
as Landlord may require about the proposed Transfer and the transferee. If
Landlord does not terminate this Lease, in whole or in part, pursuant to Section
15.3, Landlord shall not unreasonably withhold its consent to any assignment or
sublease. Landlord shall not be deemed to have unreasonably withheld its consent
if, in the judgment of Landlord: (i) the transferee is of a character or engaged
in a business which is not in keeping with the standards or criteria used by
Landlord in leasing the Building; (ii) the financial condition of the transferee
is such that it may not be able to perform, or may be less able than Tenant to
perform, its obligations in connection with this Lease; (iii) the purpose for
which the transferee intends to use the Premises or portion thereof is in
violation of the terms of this Lease or the lease of any other tenant in the
Building; (iv) the transferee is a governmental entity or is an existing tenant
of the Building; or (v) any other basis which Landlord reasonably deems
appropriate. If Landlord wrongfully withholds its consent to any Transfer,
Tenant's sole and exclusive remedy therefor, shall be to seek specific
performance of Landlord's obligation to consent to such Transfer.
15.3 RECAPTURE. Landlord shall have the right to terminate this Lease as to
that portion of the Premises which is the subject of a Transfer or proposed
Transfer. Landlord may exercise such right to terminate by giving notice to
Tenant at any time within thirty (30) days after the date on which Tenant has
furnished (or failed to furnish) to Landlord all of the items required under
Section 15.2. If Landlord exercises such right to terminate, Landlord shall be
entitled to recover possession of, and Tenant shall surrender such portion of,
the Premises (with appropriate demising partitions erected at the expense of
Tenant) on the later of (i) the effective date of the proposed Transfer, or (ii)
sixty (60) days after the date of Landlord's notice of termination. In the event
Landlord exercises such right to terminate, Landlord shall have the right to
enter into a lease with the proposed transferee without incurring any liability
to Tenant on account thereof. If Landlord consents to any Transfer, Tenant shall
pay to Landlord all rent and other consideration received by Tenant in excess of
the Rent paid by Tenant hereunder for the portion of the Premises so
transferred. Such rent shall be paid as and when received by Tenant. In
addition, Tenant shall pay to Landlord any attorney's fees and expenses incurred
by Landlord in connection with any proposed Transfer, whether or not Landlord
consents to such Transfer.
16. SURRENDER. Upon termination of the Term or Tenant's right to possession of
the Premises, Tenant shall return the Premises to Landlord in good order and
condition, ordinary wear and damage by fire or other casualty excepted. If
Landlord requires Tenant to remove any Alterations pursuant to Section 10.1,
then such removal shall be done in a good and workmanlike manner; and upon such
removal Tenant shall restore the Premises to its condition prior to the
installation of such Alterations. If Tenant does not remove such Alterations
after request to do so by Landlord, Landlord may remove the same and restore the
Premises; and Tenant shall pay to Landlord upon demand the cost of such removal
and restoration. Tenant shall also remove its furniture, equipment, trade
fixtures and all other items of personal property from the Premises prior to the
termination of the Term or Tenant's right to possession of the Premises. If
Tenant does not remove such items, Tenant shall be conclusively presumed to have
conveyed the
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same to Landlord without further payment or credit by Landlord to Tenant; or at
Landlord's sole option such items shall be deemed abandoned, in which event
Landlord may cause such items to be removed and disposed of at Tenant's expense,
without notice to Tenant and without obligation to compensate Tenant.
17. DEFAULTS AND REMEDIES.
17.1 DEFAULT. The occurrence of any of the following shall constitute a
default ("Default") by Tenant under this Lease: (i) Tenant fails to pay any Rent
when due and such failure is not cured within five (5) days after notice from
Landlord, (ii) Tenant fails to perform any other provision of this Lease and
such failure is not cured within thirty (30) days after notice from Landlord (or
immediately if the failure involves a hazardous condition), (iii) Tenant's
leasehold interest is levied upon or attached under process of law, (iv) Tenant
abandons or vacates the Premises, (v) any voluntary or involuntary proceedings
are filed by or against Tenant or any guarantor of this Lease under any
bankruptcy, insolvency or similar laws and, in the case of any involuntary
proceedings, are not dismissed within thirty (30) days after filing, or (vi)
Tenant or any guarantors of this Lease die or dissolve.
17.2 RIGHT OF RE-ENTRY. Upon the occurrence of a Default, Landlord may
elect to terminate this Lease, or, without terminating this Lease, terminate
Tenant's right to possession of the Premises. Upon any such termination, Tenant
shall immediately surrender and vacate the Premises and deliver possession
thereof to Landlord. Tenant grants to Landlord the right to enter and repossess
the Premises and to expel Tenant and any others who may be occupying the
Premises and to remove any and all property therefrom, without being deemed in
any manner guilty of trespass and without relinquishing Landlord's rights to
Rent or any other right given to Landlord hereunder or by operation of law.
17.3 RELETTING. If Landlord terminates Tenant's right to possession of the
Premises without terminating this Lease, Landlord may relet the Premises or any
part thereof. In such case, Landlord shall use reasonable efforts to relet the
Premises on such terms as Landlord shall reasonably deem appropriate; provided,
however, Landlord may first lease Landlord's other available space and shall not
be required to accept any tenant offered by Tenant or to observe any
instructions given by Tenant about such reletting. Tenant shall reimburse
Landlord for the costs and expenses of reletting the Premises including, but not
limited to, all brokerage, advertising, legal, alteration and other fees and
expenses incurred to secure a new tenant for the Premises. In addition, if the
consideration collected by Landlord upon any such reletting, after payment of
the expenses of reletting the Premises which have not been reimbursed by Tenant,
is insufficient to pay monthly the full amount of the Rent, Tenant shall pay to
Landlord the amount of each monthly deficiency as it becomes due. If such
consideration is greater than the amount necessary to pay the full amount of the
Rent, the full amount of such excess shall be retained by Landlord and in no
event shall any portion thereof be payable to Tenant.
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17.4 TERMINATION OF LEASE. If Landlord terminates this Lease, Landlord may
recover from Tenant and Tenant shall pay to Landlord, on demand, as and for
liquidated and final damages, an accelerated lump sum amount equal to the amount
by which Landlord's estimate of the aggregate amount of Rent owing from the date
of such termination through the Expiration Date plus Landlord's estimate of the
aggregate expenses of reletting the Premises, exceeds Landlord's estimate of the
fair rental value of the Premises for the same period (after deducting from such
fair rental value the time needed to relet the Premises and the amount of
concessions which would normally be given to a new tenant), both discounted to
present value at the rate of five percent (5%) per annum.
17.5 OTHER. Landlord may but shall not be obligated to perform any
obligation of Tenant under this Lease; and, if Landlord so elects, all costs and
expenses paid by Landlord in performing such obligation, together with interest
at the Default Rate, shall be reimbursed to Landlord by Tenant on demand. Any
and all remedies set forth in this Lease: (i) shall be in addition to any and
all other remedies Landlord may have at law or in equity, (ii) shall be
cumulative, and (iii) may be pursued successively or concurrently as Landlord
may elect. The exercise of any remedy by Landlord shall not be deemed an
election of remedies or preclude Landlord from exercising any other remedies in
the future.
17.6 BANKRUPTCY. If Tenant becomes bankrupt, the bankruptcy trustee shall
not have the right to assume or assign this Lease unless the trustee complies
with all requirements of the United States Bankruptcy Code; and Landlord
expressly reserves all of its rights, claims, and remedies thereunder.
18. HOLDING OVER. If Tenant retains possession of the Premises after the
expiration or termination of the Term or Tenant's right to possession of the
Premises, Tenant shall pay Rent during such holding over at double the rate in
effect immediately preceding such holding over computed on a monthly basis for
each month or partial month that Tenant remains in possession. Tenant shall also
pay, indemnify and defend Landlord from and against all claims and damages
(including attorneys' fees and expenses), consequential as well as direct,
sustained by reason of Tenant's holding over. In addition, at any time while
Tenant remains in possession, Landlord may elect instead, by written notice to
Tenant and not otherwise, to have such retention of possession constitute a
renewal of this Lease for one year for the fair market rental value of the
Premises as reasonably determined by Landlord but in no event less than the Rent
payable immediately prior to such holding over. The provisions of this Section
do not waive Landlord's right of re-entry or right to regain possession by
actions at law or in equity or any other rights hereunder, and any receipt of
payment by Landlord shall not be deemed a consent by Landlord to Tenant's
remaining in possession or be construed as creating or renewing any lease or
right of tenancy between Landlord and Tenant.
19. SECURITY DEPOSIT. Upon execution of this Lease, Tenant shall deposit with
Landlord, as security for the performance of Tenant's obligations under this
Lease, the security deposit set forth in Section 1.7 of the Lease Provisions
(the "Security Deposit").
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Upon the occurrence of a Default, Landlord may use all or any part of the
Security Deposit for the payment of any Rent or for the payment of any amount
which Landlord may pay or become obligated to pay by reason of such Default, or
to compensate Landlord for any loss or damage which Landlord may suffer by
reason of such Default. If any portion of the Security Deposit is used, Tenant,
within five (5) days after written demand therefor shall deposit cash with
Landlord in an amount sufficient to restore the Security Deposit to its original
amount. Landlord shall not be required to keep the Security Deposit separate
from its general funds, and Tenant shall not be entitled to interest on the
Security Deposit. In no event shall the Security Deposit be considered an
advanced payment of Rent, and in no event shall Tenant be entitled to use the
Security Deposit for the payment of Rent. If no Default by Tenant exists
hereunder, the Security Deposit or any balance thereof shall be returned to
Tenant within thirty (30) days after the expiration of the Term and vacation of
the Premises by Tenant. Landlord shall have the right to transfer the Security
Deposit to any purchaser of the Building. Upon such transfer, Tenant shall look
solely to such purchaser for return of the Security Deposit; and Landlord shall
be relieved of any liability with respect to the Security Deposit.
20. SUBSTITUTION OF OTHER PREMISES. Landlord shall have the right at any time to
move Tenant to any other leasable space in the Building provided that said space
shall be approximately the same size as the Premises and that Landlord shall pay
the cost of moving Tenant's furniture and equipment to the new space. The new
space shall include tenant improvements that are substantially equivalent to the
tenant improvements contained in the Premises, and the cost of any required
tenant improvements shall be paid by Landlord. If Landlord elects to relocate
Tenant, Landlord shall give Tenant written notice of its election. Landlord
shall deliver substitute space to Tenant not more than one hundred eighty (180)
days after Tenant approves plans for the construction of required tenant
improvements, if any, at the new space. Tenant shall not unreasonably withhold
or delay its approval of any plans for the construction of tenant improvements.
Landlord shall give Tenant thirty (30) days advance notice of the estimated
move-in date. After Tenant moves into the new space, this Lease shall remain in
full force and effect and be deemed applicable to such new space, except as to
Base Rent, Tenant's Share of Tax Escalation and Operating Expense Escalation,
all of which shall be adjusted based on the relationship between the number of
rentable square feet in the original Premises and the number of rentable square
feet in the substituted space. Upon Tenant's relocation, Landlord and Tenant
shall amend this Lease to provide for the relocation of the Premises.
21. DEMOLITION OR RENOVATION. Landlord shall have the right to terminate this
Lease without compensation to Tenant upon ninety (90) days prior notice to
Tenant if Landlord intends to renovate or demolish the Building or a substantial
part thereof.
22. ESTOPPEL CERTIFICATES. Tenant agrees that, from time to time upon written
request by Landlord, Tenant shall execute and deliver to Landlord a written
certificate certifying: (i) that this Lease is unmodified and in full force and
effect (or if there have been modifications, a description of such modifications
and that this Lease as modified is in full force and effect); (ii) the dates to
which Rent has been paid; (iii) that Tenant is
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in possession of the Premises, if that is the case; (iv) that Landlord is not in
default under this Lease, or, if Tenant believes Landlord is in default, the
nature thereof in detail; (v) that Tenant has no off-sets or defenses to the
performance of its obligations under this Lease (or if Tenant believes there are
any off-sets or defenses, a full and complete explanation thereof); and (vi)
such additional matters as may be requested by Landlord, it being agreed that
such certificate may be relied upon by any prospective purchaser, mortgagee or
other person having or acquiring an interest in the Building. If Tenant fails to
execute and deliver any such certificate within ten (10) days after request,
Tenant shall be deemed to have irrevocably appointed Landlord as Tenant's
attorney-in-fact to execute and deliver such certificate in Tenant's name.
23. SUBORDINATION. This Lease is and shall be expressly subject and subordinate
at all times to (a) any present or future ground, underlying or operating lease
of the Building, and all amendments, renewals and modifications to any such
lease, and (b) the lien of any present or future mortgage or deed of trust
encumbering fee title to the Building and/or the leasehold estate under any such
lease. If any such mortgage or deed of trust be foreclosed, or if any such lease
be terminated, upon request of the mortgagee, beneficiary or lessor, as the case
may be, Tenant will attorn to the purchaser at the foreclosure sale or to the
lessor under such lease, as the case may be. The foregoing provisions are
declared to be self-operative and no further instruments shall be required to
effect such subordination and/or attornment; provided, however, that Tenant
agrees upon request by any such mortgagee, beneficiary, lessor or purchaser at
foreclosure, as the case may be, to execute such subordination and/or attornment
instruments as may be required by such person to confirm such subordination
and/or attornment on the form customarily used by such party. Notwithstanding
the foregoing to the contrary, any such mortgagee, beneficiary or lessor may
elect to give the rights and interests of Tenant under this Lease (excluding
rights in and to insurance proceeds and condemnation awards) priority over the
lien of its mortgage or deed of trust or the estate of its lease, as the case
may be. In the event of such election and upon the mortgagee, beneficiary or
lessor notifying Tenant of such election, the rights and interests of Tenant
shall be deemed superior to and to have priority over the lien of said mortgage
or deed of trust or the estate of such lease, as the case may be, whether this
Lease is dated prior to or subsequent to the date of such mortgage, deed of
trust or lease. In such event, Tenant shall execute and deliver whatever
instruments may be required by such mortgagee, beneficiary or lessor to confirm
such superiority on the form customarily used by such party. If Tenant fails to
execute any instrument required to be executed by Tenant under this Section 23
within ten (10) days after request, Tenant irrevocably appoints Landlord as its
attorney-in-fact, in Tenant's name, to execute such instrument.
24. QUIET ENJOYMENT. As long as no Default exists, Tenant shall peacefully and
quietly have and enjoy the Premises for the Term, free from interference by
Landlord, subject, however, to the provisions of this Lease. The loss or
reduction of Tenant's light, air or view will not be deemed a disturbance of
Tenant's occupancy of the Premises nor will it affect Tenant's obligations under
this Lease or create any liability of Landlord to Tenant.
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25. BROKER. Tenant represents to Landlord that Tenant has dealt only with the
broker(s), if any, set forth in Section 1.8 of the Lease Provisions (the
"Broker") in connection with this Lease and that, insofar as Tenant knows, no
other broker negotiated this Lease or is entitled to any commission in
connection herewith. Tenant agrees to indemnify, defend and hold Landlord, its
property manager and their respective employees harmless from and against all
claims, demands, actions, liabilities, damages, costs and expenses (including,
attorneys' fees and expenses) arising from either (i) a claim for a fee or
commission made by any broker, other than the Broker, claiming to have acted by
or on behalf of Tenant in connection with this Lease, or (ii) a claim of, or
right to, lien under the Statutes of Illinois relating to real estate broker
liens with respect to any such broker retained by, or claiming to have been
retained by, Tenant. Landlord agrees to pay the Broker a commission in
accordance with a separate agreement between Landlord and a Broker if, and only
if, a written agreement with that Broker has been signed by Landlord.
26. NOTICES. All notices and demands to be given by one party to the other party
under this Lease shall be given in writing, mailed or delivered to Landlord or
Tenant, as the case may be, at the address set forth above or at such other
address as either party may hereafter designate. Notices shall be delivered by
hand or by United States certified or registered mail, postage prepaid, return
receipt requested, or by a nationally recognized overnight air courier service.
Notices shall be considered to have been given upon the earlier to occur of
actual receipt (or refusal of receipt) or two (2) business days after posting in
the United States mail.
27. MISCELLANEOUS.
27.1 SUCCESSORS AND ASSIGNS. Subject to Section 15, each provision of this
Lease shall extend to, bind and inure to the benefit of Landlord and Tenant and
their respective legal representatives, successors and assigns; and all
references herein to Landlord and Tenant shall be deemed to include all such
parties.
27.2 ENTIRE AGREEMENT. This Lease, and the riders and exhibits, if any,
attached hereto which are hereby made a part of this Lease, represent the
complete agreement between Landlord and Tenant, superseding any letters of
intent and other prior writings and conversations between them or their agents,
and Landlord has made no representations or warranties except as expressly set
forth in this Lease. No modification or amendment of or waiver under this Lease
shall be binding upon Landlord or Tenant unless in writing signed by Landlord
and Tenant. The invalidity or unenforceability of any provision of this Lease
shall not affect or impair any other provisions.
27.3 TIME OF ESSENCE. Time is of the essence of this Lease and each and all
of its provisions.
27.4 EXECUTION AND DELIVERY. Submission of this instrument for examination
or signature by Tenant does not constitute a reservation of space or an option
for lease, and it is not effective until execution and delivery by both Landlord
and Tenant.
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Execution and delivery of this Lease by Tenant to Landlord shall constitute an
irrevocable offer by Tenant to lease the Premises on the terms and conditions
set forth herein, which offer may not be revoked for fifteen (15) days after
such delivery. This Lease may be executed and delivered in counterparts, each of
which so executed and delivered shall be deemed to be an original and all of
which shall constitute one and the same instrument.
27.5 GOVERNING LAW. This Lease shall be governed by and construed in
accordance with the internal laws of the State of Illinois, without regard to
its conflicts of laws principles.
27.6 ATTORNEYS' FEES. Tenant shall pay to Landlord all costs and expenses,
including attorneys fees and expenses, incurred by Landlord in enforcing this
Lease or incurred by Landlord as a result of any litigation to which Landlord
becomes a party as a result of this Lease.
27.7 DELAY IN POSSESSION. In no event shall Landlord be liable to Tenant if
Landlord is unable to deliver possession of the Premises to Tenant on the
Commencement Date for causes outside Landlord's reasonable control. If Landlord
is unable to deliver possession of the Premises to Tenant by the Commencement
Date, the Commencement Date shall be deferred until Landlord can deliver
possession to Tenant, and the Expiration Date shall be deferred for an equal
number of days.
27.8 FORCE MAJEURE. Landlord shall not be in default hereunder and Tenant
shall not be excused from performing any of its obligations hereunder if
Landlord is prevented from performing any of its obligations hereunder due to
any accident, breakage, strike, shortage of materials, acts of God or other
causes beyond Landlord's reasonable control.
27.9 INTERPRETATION. The headings and titles in this Lease are for
convenience only and shall have no effect upon the construction or
interpretation of this Lease. As used in this Lease the words tenant and
landlord include the plural as well as the singular. Words used in the neuter
gender include the masculine and feminine gender. This Lease shall not be
construed more strictly against one party than the other merely by virtue of the
fact that it was prepared by counsel for one of the parties, it being
acknowledged and agreed that both parties have had meaningful opportunities to
review, comment upon and negotiate each and every provision hereof.
27.10 NO WAIVER. No receipt of money by Landlord from Tenant after
termination of this Lease or after the service of any notice or after the
commencing of any suit or after final judgment for possession of the Premises
shall renew, reinstate, continue or extend the Term or affect any such notice or
suit. No waiver of any default of Tenant shall be implied from any omission by
Landlord to take any action on account of such default if such default persists
or is repeated, and no express waiver shall affect any default other than the
default specified in the express waiver and then only for the time and to the
extent therein stated.
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27.11 NO RECORDING. Tenant shall not record this Lease or a memorandum of
this Lease in any official records.
27.12 LIMITATION OF LIABILITY. Any liability of Landlord under this Lease
shall be limited solely to its interest in the Building, and in no event shall
any personal liability be asserted against Landlord in connection with this
Lease nor shall any recourse be had to any other property or assets of Landlord.
27.13 AUTHORITY. If Tenant is a corporation, trust, or general or limited
partnership, Tenant, and each individual executing this Lease on behalf of such
entity represents and warrants that such individual is duly authorized to
execute and deliver this Lease on behalf of said entity, that said entity is
duly authorized to enter into this Lease, and that this Lease is enforceable
against said entity in accordance with its terms. If Tenant is a corporation,
trust or partnership, Tenant shall deliver to Landlord upon demand evidence of
such authority satisfactory to Landlord.
27.14 CONFLICT. Except as otherwise provided herein to the contrary, any
conflict between the printed provisions, exhibits, addenda or riders of this
Lease and the typewritten or handwritten provisions, if any, shall be controlled
by the typewritten or handwritten provisions.
27.15 MULTIPLE PARTIES. If more than one person or entity is named as
Tenant herein, the obligations of Tenant shall be the joint and several
responsibility of all persons or entities named herein as Tenant. Service of a
notice in accordance with Section 26 on one Tenant shall be deemed service of
notice on all Tenants.
27.16 RELATIONSHIP OF PARTIES. Nothing contained in this Lease shall be
deemed or construed by the parties hereto or by any third party to create the
relationship of principal and agent, partnership, joint venturer or any
association between Landlord and Tenant.
27.17 RIGHT TO LEASE. Landlord reserves the absolute right to effect such
other tenancies in the Building as Landlord in its sole discretion shall
determine, and Tenant is not relying on any representation that any specific
tenant or number of tenants will occupy the Building.
27.18 SECURITY INTEREST. In consideration of the covenants and agreements
contained herein, and as a material consideration to Landlord for entering into
this Lease, Tenant hereby unconditionally grants to Landlord a continuing
security interest in and to all personal property of Tenant located in, or left
at, the Building and the security deposit and any advance rent payment or other
deposit, now in or hereafter delivered to or coming into the possession, custody
or control of Landlord, by or for the account of Tenant, together with any
increase in profits or proceeds from such property. The security interest
granted to Landlord hereunder secures payment and performance of all obligations
of Tenant under this Lease now or hereafter arising or existing, whether direct
or indirect, absolute or contingent, or due or to become due. In the event of a
default under this Lease which is not cured within the applicable grace period,
if
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any, Landlord is and shall be entitled to all the rights, powers and remedies
granted a secured party under the Illinois Uniform Commercial Code and otherwise
available at law or in equity, including, but not limited to, the right to
retain as damages the personal property, security deposit and other funds held
by landlord, without additional notice or demand regarding this security
interest. Tenant agrees that it will execute such other documents or instruments
as may be reasonably necessary to carry out and effectuate the purpose and terms
of this Section or as otherwise reasonably requested by Landlord, including
without limitation, execution of a UCC-1 financing statement. Tenant's failure
to execute such documents within ten (10) days after request shall constitute a
default under this Lease and Landlord shall have the right to execute such
documents and instruments as Tenant's attorney in-fact.
27.19 WAIVER OF TRIAL BY JURY. In any proceeding to enforce the terms of
this Lease or obtain any remedy provided for herein or otherwise permitted by
law in connection with the subject matter hereof, Landlord and Tenant waive
trial by jury to the fullest extent permitted by law.
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IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of
the day and year first above written.
TENANT: LANDLORD:
HANOVER CAPITAL PARTNERS LTD. LASALLE-ADAMS, L.L.C.
By: By:
Name: Joyce S. Mizerak Name:
Title: Managing Director Title:
By:
Name:
Title:
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EXHIBIT "A"
FLOOR PLANS
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EXHIBIT "B"
RULES AND REGULATIONS
1. Tenant shall not make any room-to-room canvass to solicit business from other
tenants in the Building and shall not exhibit, sell or offer to sell, use, rent
or exchange any item or services in or from the Premises unless ordinarily
included within Tenant's use of the Premises as specified in the Lease.
2. Tenant shall not make any use of the Premises which may be dangerous to
person or property or which shall increase the cost of insurance or require
additional insurance coverage.
3. Tenant shall not paint, display, inscribe or affix any sign, picture,
advertisement, notice, lettering or direction or install any lights on any part
of the outside or inside of the Building, other than the Premises, and then not
on any part of the inside of the Premises which can be seen from outside the
Premises, except as approved by Landlord in writing.
4. Tenant shall not use the name of the Building in advertising or other
publicity, except as the address of its business, and shall not use pictures of
the Building in advertising or publicity.
5. Tenant shall not obstruct or place objects on or in sidewalks, entrances,
passages, courts, corridors, vestibules, halls, elevators and stairways in and
about the Building. Tenant shall not place objects against glass partitions or
doors or windows or adjacent to any open common space which would be unsightly
from the Building corridors or from the exterior of the Building.
6. Bicycles shall not be permitted in the Building other than in locations
designated by Landlord.
7. Tenant shall not allow any animals, other than seeing-eye dogs, in the
Premises or the Building.
8. Tenant shall not disturb other tenants or make excessive noises, cause
disturbances, create excessive vibrations, odors or noxious fumes or use or
operate any electrical or electronic devices or other devices that emit
excessive sound waves or are dangerous to other tenants of the Building or that
would interfere with the operation of any device or equipment or radio or
television broadcasting or reception from or within the Building or elsewhere,
and shall not place or install any projections, antennae, aerials or similar
devices outside of the Building or the Premises.
9. Tenant shall not waste electricity or water and shall cooperate fully with
Landlord to assure the most effective operation of the Building's heating and
air conditioning, and shall refrain from attempting to adjust any controls
except for the thermostats within the Premises. Tenant shall keep all doors to
the Premises closed.
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10. Unless Tenant installs new doors to the Premises, Landlord shall furnish two
(2) sets of keys for all doors to the Premises at the commencement of the Term.
Tenant shall furnish Landlord with duplicate keys for any new or additional
locks on doors installed by Tenant. When the Lease is terminated, Tenant shall
deliver all keys to Landlord and will provide to Landlord the means of opening
any safes, cabinets or vaults left in the Premises.
11. Except as otherwise provided in the Lease, Tenant shall not install any
signal, communication, alarm or other utility or service system or equipment
without the prior written consent of Landlord.
12. Tenant shall not use any draperies or other window coverings instead of or
in addition to the Building standard window coverings designated and approved by
Landlord for exclusive use throughout the Building.
13. Landlord may require that all persons who enter or leave the Building
identify themselves to watchmen, by registration or otherwise. Landlord,
however, shall have no responsibility or liability for any theft, robbery or
other crime in the Building. Tenant shall assume full responsibility for
protecting the Premises, including keeping all doors to the Premises locked
after the close of business.
14. Tenant shall not overload floors; and Tenant shall obtain Landlord's prior
written approval as to size, maximum weight, routing and location of business
machines, safes, and heavy objects. Tenant shall not install or operate
machinery or any mechanical devices of a nature not directly related to Tenant's
ordinary use of the Premises.
15. In no event shall Tenant bring into the Building inflammables such as
gasoline, kerosene, naphtha and benzene, or explosives or firearms or any other
articles of an intrinsically dangerous nature.
16. Furniture, equipment and other large articles may be brought into the
Building only at the time and in the manner designated by Landlord. Tenant shall
furnish Landlord with a list of furniture, equipment and other large articles
which are to be removed from the Building, and Landlord may require permits
before allowing anything to be moved in or out of the Building. Movements of
Tenant's property into or out of the Building and within the Building are
entirely at the risk and responsibility of Tenant.
17. No person or contractor, unless approved in advance by Landlord, shall be
employed to do janitorial work, interior window washing, cleaning, decorating or
similar services in the Premises.
18.Tenant shall not use the Premises for lodging, cooking (except for microwave
reheating and coffee makers) or manufacturing or selling any alcoholic beverages
or for any illegal purposes.
19. Tenant shall comply with all safety, fire protection and evacuation
procedures and regulations established by Landlord or any governmental agency.
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20. Tenant shall cooperate and participate in all reasonable security programs
affecting the Building.
21. Tenant shall not loiter, eat, drink, sit or lie in the lobby or other public
areas in the Building. Tenant shall not go onto the roof of the Building or any
other non-public areas of the Building (except the Premises), and Landlord
reserves all rights to control the public and non-public areas of the Building.
In no event shall Tenant have access to any electrical, telephone, plumbing or
other mechanical closets without Landlord's prior written consent.
22. Tenant shall not use the freight or passenger elevators, loading docks or
receiving areas of the Building except in accordance with regulations for their
use established by Landlord.
23. Tenant shall not dispose of any foreign substances in the toilets, urinals,
sinks or other washroom facilities, nor shall Tenant permit such items to be
used other than for their intended purposes; and Tenant shall be liable for all
damage as a result of a violation of this rule.
24. In no event shall Tenant allow its employees to use the public areas of the
Building as smoking areas.
25. Tenant will install building-standard signage at the entry door. Landlord
must give final approval.
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AGREEMENT OF LEASE
SAINT PAUL EXECUTIVE SUITES INC.
6 WEST FIFTH STREET, ST. PAUL, MINNESOTA
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THIS AGREEMENT OF LEASE ("Lease") is made and entered into as of July
27, 1999 by and between SAINT PAUL EXECUTIVE SUITES, INC. d.b.a. LES WORK
EXECUTIVE SUITES, INC. ("Landlord") and Hanover Capital partners, LTD.,
("Tenant").
NOW, THEREFORE, THE PARTIES AGREE AS FOLLOWS:
1. THE LEASED PREMISES.
Landlord leases to Tenant, and Tenant rents of and from Landlord, part
of 6 West Fifth Street, as described and shown on Exhibit A, attached hereto and
made a part hereof. Said portion of 6 West Fifth Street is referred to herein as
the "Leased Premises".
2. TERM.
The term of this lease shall be for a period of approximately 1 year
commencing September 1, 1999, or the date of Tenant occupancy, whichever occurs
earlier, and terminating August 31, 2000, unless terminated earlier as provided
herein.
The Tenant agrees to give the Landlord thirty (30) days written notice
before the expiration of the lease of the Tenants' intention to vacate at the
end of this lease, otherwise the Landlord will have the option of continuing
this lease on a Month-to-Month basis, from such expiration, and any subsequent
expirations.
3. MONTHLY RENT.
Commencing September 1, 1999, Tenant shall pay to Landlord, payable at
the address designated in this Lease for service of notice upon Landlord, or at
such other place as Landlord may designate in writing to Tenant, exclusive of
any other charge to be paid by Tenant, the following, payable in equal
consecutive monthly installments, in advance, on or before the 10th day of each
month through and including August, the sum of: $695.00 ($525.00 Rent + $130.00
Answering + $40.00 Fax/Modem) per month
4. SECURITY/DAMAGE DEPOSIT.
Landlord acknowledges receipt of security deposit in the amount of $595
currently on file. Deposit will be refunded upon TENANT(S) vacating the
premises, less any past due balances and/or the cost of repairs due to damage
above and beyond reasonable wear and tear. This deposit may not be used as last
month's rent.
5. USE OF LEASED PREMISES.
Tenant, and its approved sublessee, shall use the Leased Premises for
general office purposes only.
6. USE OF COMMON AREAS.
Tenant shall have the non-exclusive use, in common with others entitled
to use the same, of the common areas of 6 West Fifth Street. "Common areas"
shall include, without limitation, access facilities, walkways, stairways,
elevators, hallways and public restrooms.
7. RULES AND REGULATIONS.
A. Tenant's exclusive use of the Leased Premises and
non-exclusive use of the common areas shall be subject to the terms and
conditions of this Lease and all reasonable rules and regulations
prescribed by Landlord from time to time with respect to the operation
of Six West Fifth Street, and its common areas.
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B. No smoking by any persons of any tobacco or similar
products, including but not limited to cigarettes, cigars, pipes or any
use of `chewing tobacco,' is allowed within any of Landlords areas.
Including but not limited to Tenant's suites, common areas, kitchen,
restrooms, stairwells or elevators.
8. UTILITIES AND SERVICES.
Provided Tenant is not in default under any of the terms or conditions
of this Lease, Landlord shall furnish such heat and air conditioning,
electricity, water, sewage and elevator service in and about the Leased Premises
as shall be necessary for the comfortable use and occupancy of the Leased
Premises, at all times.
9. ALTERATIONS AND IMPROVEMENTS BY TENANT.
Tenant shall not make any material changes, additions, or improvements
to the Leased Premises without the prior written consent of Landlord.
10. MECHANICS LIEN.
Tenant shall pay timely for labor and material furnished to Tenant or
claimed to have been furnished to Tenant in connection with work of any
character performed or claimed to have been performed on the Leased Premises, at
the direction or with the consent of Tenant. Tenant shall not permit any
mechanics or similar liens to remain upon the Leased Premises incident to the
foregoing. However, Tenant may contest the validity of such lien or claims,
provided, Tenant shall give to Landlord, if required by Landlord, reasonable
security to insure payment and to prevent any sale, foreclosure or forfeiture of
the Leased Premises by reason of such non-payment. Upon a final determination of
the validity of any such lien or claim, Tenant shall immediately pay any
judgment or decree rendered against Tenant or Landlord, including but not
limited to, all proper costs and charges, and shall cause such lien to be
released of record without costs to Landlord.
11. LANDLORD'S ACCESS.
Landlord, its agent, employees and/or contractors, shall have the right
to enter the Leased Premises at all reasonable times for the purpose of
inspection, cleaning, repairing or improving the Leased Premises or other
premises in the Building, including, not limited to, the right, but not the
obligation, to install, maintain, use, repair, and replace the pipes, ducts,
conduits, and wires leading through the Leased Premises, provided, that such
entry shall be accomplished in a manner that will cause as little interference
with and inconvenience to the Tenant's use as is reasonable under the
circumstances. Any interference with or inconvenience to the Tenant arising out
of the exercise by Landlord of the rights set forth in this paragraph shall not
constitute a breach by Landlord of any of its agreements in this Lease, and
shall not result in any diminution of rent or liability on the part of Landlord
by reason of inconvenience, annoyance or injury to Tenant's business. Landlord,
or its agents, shall have the right to exhibit the Leased Premises to
prospective tenants or to prospective purchasers at any time upon reasonable
notice to Tenant.
12. DAMAGE BY FIRE OR OTHER CASUALTY.
If the Leased Premises are damaged or destroyed by fire or other
casualty, and such damage or destruction is certified within a reasonable period
of time thereafter, in writing, by a licensed contractor to be repairable within
thirty (30) days after the date of such occurrence, this Lease shall remain in
full force and effect, and Landlord, subject to the provisions hereinafter set
forth, shall proceed with due diligence to repair such damage or destruction, at
its expense, and in that event, there shall be a proportionate abatement of rent
and all other charges for so much of the Leased Premises as may be untenantable
until repair or restoration.
If the Leased Premises are damaged or destroyed as above stated and
cannot be repaired within thirty (30) days, either Tenant or Landlord may
terminate this Lease.
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13. TENANT INSURANCE.
Tenant shall provide its own fire, extended coverage, and theft
insurance covering all Tenant's personal property. Tenant agrees that it will
not look to Landlord for reimbursement of any damage Tenant sustains during its
occupancy from whatever cause, and Tenant shall indemnify, defend, and hold
harmless therefore.
14. ASSIGNMENT OR SUBLEASE.
Tenant may not, voluntarily or by operation of law, assign or transfer
this Lease, or sublease the whole or any part of the Leased Premises, without
the prior written consent of Landlord, which consent will not be unreasonably
withheld.
15. NOVATION IN THE EVENT OF A SALE BY LANDLORD.
In the event of the sale of the Leased Premises, Landlord shall be and
hereby is relieved of all of the covenants and obligations created hereby and
such sale shall result automatically in the purchasers assuming and agreeing to
carry out all the covenants and obligations of Landlord herein; provided,
however, that Landlord shall not be released from any claim resulting from a
default of Landlord occurring prior to the date of such sale.
16. ESTOPPEL CERTIFICATE.
Within ten (10) days after request therefore by Landlord, or in the
event that upon any sale, transfer, or financing, an Estoppel Certificate shall
be requested from Tenant, Tenant agrees hereby to deliver in recordable form an
Estoppel Certificate to the Landlord, any proposed purchaser, transferee or
lender, certifying to such correct facts relating to this Lease as may be
requested reasonably by Landlord.
17. REMEDIES OF LANDLORD.
In the event that during the term of this Lease any of the following
occur:
1. Tenant shall have failed to pay any installment of
rent or any other charge provided herein, or any
portion thereof, when the same shall be due and
payable, and the same shall remain unpaid for a
period of ten (10) days after the same is due; or
2. Tenant shall have failed to comply with any other
provision of this lease or the laws or ordinances of
the City of Saint Paul, the State of Minnesota, or
the United States of America, and shall not have
cured any curable failure within thirty (30) days
after Landlord, by written notice, has informed
Tenant of such noncompliance; provided, however, in
the case of a default within a period of thirty (30)
days, Tenant shall have such additional time to cure
such default as may be reasonably necessary, provided
Tenant proceeds promptly and with due diligence to
cure such default after receipt of said notice;
the Landlord upon written notice to Tenant may elect either (i) to cancel and
terminate this lease, and this lease shall not be treated as an asset of
Tenant's estate, or (ii) to terminate Tenant's right to possession only without
canceling and terminating Tenant's continued liability under this Lease.
Notwithstanding the fact that initially Landlord elects under (ii) to terminate
Tenant's right to possession only, Landlord shall have the continuing right to
cancel and terminate this lease by serving ten (10) days written notice on
Tenant of such further election, and shall have the right to pursue any remedy
at law or in equity that may be available to Landlord.
18. DEFAULT BY LANDLORD.
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3
<PAGE> 4
Landlord shall not be deemed to be in default under this Lease until
Tenant has given Landlord written notice specifying the nature of the default
which Landlord is obligated to cure, and Landlord does not cure such default
within ten (10) days after receipt of such notice; provided, however, in the
case of default which cannot be cured, with due diligence, within a period of
ten (10) days, Landlord shall have such additional time to cure default as may
be reasonably necessary, provided Landlord proceeds promptly and with due
diligence to cure such default after receipt of said notice.
19. SIGNS; WINDOW COVERINGS.
Tenant shall not place or cause to be placed any sign or lettering on
the exterior of the Building, in the halls or other common areas, or on the
Leased Premises without the prior written consent of Landlord. Tenant shall have
the right to place a sign or lettering on the entrance to the Leased Premises,
and on any sign directory provided by Landlord, provided the location, style,
text, size and color are first approved in writing by Landlord. Any sign or
lettering not so approved may be removed by Landlord at Tenant's expense.
20. CONDITION OF LEASED PREMISES AND LANDLORD'S PROPERTY AT TERMINATION.
At termination of this Lease, Tenant shall vacate and deliver the
Leased Premises, all partitions, improvements, alterations and other property of
Landlord to Landlord in as good order and condition as the same were in on the
commencement date, reasonable wear and tear excepted.
21. NOTICES.
All notices and communications of similar legal import from either
Landlord or Tenant to the other shall be in writing and shall be considered to
have been duly given or served if sent by first class mail, postage prepaid, or
hand delivered to the party or parties at its address set forth below, or to
such other address as such party may hereafter designate by written notice to
the other party or parties
If to Landlord, to:
Les Work, Inc.
6 West Fifth Street
Suite 700
Saint Paul, MN 55102
If to Tenant, to:
Ralph Laughlin Herb Lethert
Chief Financial Officer Vice President
Hanover Capital Partners. LTD. and Hanover Capital Partners, LTD.
100 Metroplex 6 Wets Fifth Street
Suite 301 Suite 700
Edison, NJ 08817 St. Paul, MN 55102
22. GOVERNING LAW.
This Lease shall be subject to and governed by the laws of the State of
Minnesota, and all questions concerning the meaning and intention of the terms
of this Lease and concerning the validity hereof and questions relating to
performance hereunder shall be adjudicated and resolved in accordance with the
laws of that state, notwithstanding the fact that one or more of the parties now
is or may hereafter become a resident of a different state.
-----/-----
4
<PAGE> 5
23. SHORT FORM LEASE.
Neither party shall record this Lease without the written consent of
the other party; however, upon the request of either Landlord or Tenant, the
other party shall join in the execution of a memorandum or so-called "short
form" of this Lease for the purpose of recordation. Said memorandum or short
form of this Lease shall describe the parties, the Leased Premises, the term of
this Lease, any special provisions, and shall incorporate this Lease by
reference. Any fees required to be paid in order to record such memorandum or
short from of this Lease shall be paid by the party desiring to record such
memorandum or short form of this lease.
24. SERVICES.
A. Landlord shall contract with a person or entity to provide to Tenant
on a fee for services basis secretarial and word processing services, postage
machine use based on actual Tenant usage, fax sending and receiving, delivery
and pick-up, long distance telephone based on actual usage, telephone answering
and photocopying, and the current rates for said services are set forth in
Exhibit B attached hereto.
B. Tenant shall not solicit or employ, directly or indirectly, as an
employee, independent contractors, or otherwise, any person who has been
employed by Landlord during the Tenant's occupancy of the Premises, or for a
period of one (1) year after the termination of this Lease. In the event of a
violation of this provision, due to the inability to accurately ascertain the
amount of damages Landlord will suffer, Tenant shall pay to Landlord a sum equal
to Ten Thousand and no/100 ($10,000.00) Dollars as liquidated damages, in
addition to any other injunctive or other civil relief that may be available in
the courts of the State of Minnesota.
C. Landlord shall also provide a telephone answering service for Tenant
and a receptionist during normal weekday business hours as prescribed by
Landlord. Landlord owns the telephones and telephone system used at 6 West Fifth
Street. Landlord shall maintain the telephones and telephone system during the
term of this Lease and shall provide services as listed on Exhibit C at an
additional charge as set forth in Exhibit C.
D. Landlord shall provide photocopying equipment for use in common by
other tenants, a mailbox, cleaning and janitorial service, a lobby office
directory, nameplates for the exterior door of the Leased Premises and blinds
for office windows.
E. Tenant shall not install, or have installed within Landlord's space,
any telephone lines, phones, fax lines, or modem lines for the purposes of
faxing, modeming, telephone usage, `800' numbers or any other purpose, without
the prior written consent of Landlord. Landlord has the option to install or
provide such services, for the Tenant, using Landlord's telephone vendor, at an
additional charge as set forth by Landlord. All long distance made from or
through Landlord's telephone system shall be made through Landlord's long
distance vendor.
F. Tenant shall not install, or have installed within Landlord's space,
any photocopiers or postage machines without prior written authorization from
Landlord.
The parties hereto have duly executed this Lease Agreement effective as
of the date and year first above written.
LANDLORD
Saint Paul Executive Office Suites Inc.
BY:
-----------------------------------
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5
<PAGE> 6
Mark J. Stenglein
ITS: President
TENANT:
BY:
-----------------------------------
-----/-----
6
<PAGE> 1
Ex. 10.30
Amendment Number One to the Management Agreement
Between
Hanover Capital Mortgage Holdings, Inc.
And
Hanover Capital Partners, Ltd.
This Amendment is made this 30th day of September, 1999, between Hanover
Capital Mortgage Holdings, Inc., having an address at 90 West Street, Suite
2210, New York, New York, 10006 (the "Company"), and Hanover Capital Partners
Ltd., having an address at 100 Metroplex Drive, Suite 301, Edison, New Jersey,
07932 (the "Manager"), to the Management Agreement, dated as of January 1, 1998
between the Company and the Manager (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 July 1, 1999, Section 7.1 of the Agreement is hereby is
hereby deleted in its entirety and replaced with the following:
"7.1 EXPENSES OF THE MANAGER. The Company shall pay the Manager for each
month an amount equal to one-hundred (100%) percent of the following
expenses apportioned to providing services under this Agreement to the
Company (as reasonably determined by the Manager) related to: rent,
telephone, utilities, office furniture, equipment, machinery, and other
office expenses of the Manager and/or its Affiliates required for the
Company's day-to-day operations, including bookkeeping, clerical and
back-office services provided by the Manager or its Affiliates."
2. 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.
3. 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.
4. Except as amended above, the Agreement shall continue in full force and
effect in accordance with its terms.
[Signature Page follows]
<PAGE> 2
IN WITNESS WHEREOF, the Company and the Manager 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.
(Company)
By:
Name: Joyce S. Mizerak
Title: Sr. Managing Director
HANOVER CAPITAL PARTNERS LTD.
(Manager)
By:
Name: Joyce S. Mizerak
Title: Sr. Managing Director
<PAGE> 1
Exhibit 10.31
- -------------------------------------------------------------------------------
AMENDED AND RESTATED MASTER LOAN AND SECURITY AGREEMENT
-----------------------
Dated as of November 23,1998
------------------------
HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
as Borrower
HANOVER CAPITAL PARTNERS, LTD.
as Borrower
and
- -------------------------------------------------------------------------------
GREENWICH CAPITAL FINANCIAL PRODUCTS, INC.
as Lender
<PAGE> 2
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
RECITALS...................................................................................................... -1-
SECTION 1 Definitions and Accounting Matters................................................. -1-
1.01 Certain Defined Terms.............................................................. -1-
1.02 Accounting Terms and Determinations................................................ -22-
SECTION 2 Advances, Note and Prepayments..................................................... -23-
2.01 Advances........................................................................... -23-
2.02 Notes.............................................................................. -23-
2.03 Procedure for Borrowing............................................................ -24-
2.04 Repayment of Advances; Interest.................................................... -25-
2.05 Limitation on Types of Advances; Illegality........................................ -26-
2.06 Determination of Borrowing Base; Mandatory Prepayments or Pledge................... -27-
2.07 Optional Prepayments............................................................... -27-
2.08 Requirements of Law................................................................ -27-
2.09 Purpose of Advances................................................................ -29-
2.10 Extension of Termination Date...................................................... -29-
2.11 Extension of Maximum Pledge Period................................................. -29-
SECTION 3 Payments; Computations; Etc.; Commitment Fee....................................... -29-
3.01 Payments........................................................................... -29-
3.02 Computations....................................................................... -29-
3.03 Commitment Fee..................................................................... -29-
3.04 Selection of Interest Period....................................................... -30-
SECTION 4 Collateral Security................................................................ -30-
4.01 Collateral; Security Interest...................................................... -30-
4.02 Further Documentation.............................................................. -33-
4.03 Changes in Locations, Name, etc.................................................... -34-
4.04 Lender's Appointment as Attorney-in-Fact........................................... -34-
4.05 Performance by Lender of Borrower's Obligations.................................... -35-
4.06 Proceeds........................................................................... -35-
4.07 Remedies........................................................................... -36-
4.08 Limitation on Duties Regarding Presentation of Collateral.......................... -37-
4.09 Powers Coupled with an Interest.................................................... -37-
4.10 Release of Security Interest....................................................... -37-
4.11 Establishment of the Collection Account............................................ -38-
SECTION 5 Conditions Precedent............................................................... -38-
5.01 Initial Advance.................................................................... -38-
5.02 Initial and Subsequent Advances.................................................... -40-
SECTION 6 Representations and Warranties..................................................... -44-
6.01 Financial Condition................................................................ -44-
6.02 No Change.......................................................................... -45-
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
<S> <C>
6.03 Corporate Existence; Compliance with Law........................................... -45-
6.04 Corporate Power; Authorization; Enforceable Obligations............................ -45-
6.05 No Legal Bar....................................................................... -45-
6.06 No Material Litigation............................................................. -46-
6.07 No Default......................................................................... -46-
6.08 Collateral; Collateral Security.................................................... -46-
6.09 Chief Executive Office............................................................. -46-
6.10 Location of Books and Records...................................................... -47-
6.11 No Burdensome Restrictions......................................................... -47-
6.12 Taxes.............................................................................. -47-
6.13 Margin Regulations................................................................. -47-
6.14 Investment Company Act; Other Regulations.......................................... -47-
6.15 Subsidiaries....................................................................... -47-
6.16 Acquisition of Mortgage Loans...................................................... -47-
6.17 No Adverse Selection............................................................... -47-
6.18 Borrowers Solvent; Fraudulent Conveyance........................................... -47-
6.19 ERISA.............................................................................. -48-
6.20 True and Complete Disclosure....................................................... -48-
6.21 True Sales......................................................................... -48-
6.22 Participation Certificates......................................................... -48-
6.23 Year 2000 Compliance............................................................... -49-
SECTION 7 Covenants of the Borrower.......................................................... -49-
7.01 Financial Statements............................................................... -49-
7.02 Existence, Etc..................................................................... -50-
7.03 Maintenance of Property; Insurance................................................. -50-
7.04 Notices............................................................................ -50-
7.05 Other Information.................................................................. -51-
7.06 Further Identification of Collateral............................................... -51-
7.07 Eligible Asset Determined to be Defective.......................................... -51-
7.08 Monthly Reporting.................................................................. -51-
7.09 Financial Condition Covenants...................................................... -52-
7.10 Borrowing Base Deficiency.......................................................... -52-
7.11 Prohibition of Fundamental Changes................................................. -52-
7.12 Limitation on Liens on Collateral.................................................. -52-
7.13 Limitation on Transactions with Affiliates......................................... -52-
7.14 Underwriting Guidelines............................................................ -53-
7.15 Limitations on Modifications, Waivers and Extensions of
Eligible Assets.................................................................... -53-
7.16 Servicing.......................................................................... -53-
7.17 Limitation on Distributions........................................................ -53-
7.18 Use of Proceeds.................................................................... -53-
7.19 Restricted Payments................................................................ -53-
7.20 Reports............................................................................ -53-
</TABLE>
ii
<PAGE> 4
<TABLE>
<CAPTION>
<S> <C>
7.21 Inspection......................................................................... -53-
7.22 Further Proceeds................................................................... -53-
7.23 Further Documentation.............................................................. -54-
7.24 Taxes.............................................................................. -54-
7.25 Lost Note Affidavits; Lost Instrument Affidavits................................... -54-
7.26 Underlying Eligible Bonds.......................................................... -54-
7.27 Year 2000 Compliance............................................................... -55-
SECTION 8 Events of Default.................................................................. -55-
SECTION 9 Remedies Upon Default.............................................................. -58-
SECTION 10 No Duty of Lender.................................................................. -59-
SECTION 11 Miscellaneous...................................................................... -59-
11.01 Waiver............................................................................. -59-
11.02 Notices............................................................................ -59-
11.03 Indemnification and Expenses....................................................... -59-
11.04 Amendments......................................................................... -60-
11.05 Successors and Assigns............................................................. -60-
11.06 Survival........................................................................... -60-
11.07 Captions........................................................................... -61-
11.08 Counterparts....................................................................... -61-
11.09 GOVERNING LAW; ETC................................................................. -61-
11.10 SUBMISSION TO JURISDICTION; WAIVERS................................................ -61-
11.11 WAIVER OF JURY TRIAL............................................................... -62-
11.12 Acknowledgments.................................................................... -62-
11.13 Hypothecation and Pledge of Collateral............................................. -62-
11.14 Assignments; Participations........................................................ -62-
11.15 Servicing.......................................................................... -63-
11.16 Periodic Due Diligence Review...................................................... -64-
11.17 Set-Off............................................................................ -65-
</TABLE>
iii
<PAGE> 5
<TABLE>
<CAPTION>
SCHEDULES
- ---------
<S> <C>
SCHEDULE 1 Representations and Warranties re: Eligible Assets
SCHEDULE 2 Filing Jurisdictions and Offices
SCHEDULE 3 Subsidiaries
SCHEDULE 4 Litigation
</TABLE>
<TABLE>
<CAPTION>
EXHIBITS
- --------
<S> <C>
EXHIBIT A Form of Promissory Note
EXHIBIT B Form of Mortgage Custodial Agreement
EXHIBIT C Form of Opinion of Counsel to Borrower
EXHIBIT D Form of Notice of Borrowing and Pledge
EXHIBIT E Underwriting Guidelines
EXHIBIT F Form of Blocked Account Agreement
EXHIBIT G Form of Mortgage Loan Tape
EXHIBIT H Form of Borrowing Base Certificate
EXHIBIT I Form of Remittance Report
EXHIBIT J Form of Instruction Letter
EXHIBIT K-1 Form of Lost Instrument Affidavit
EXHIBIT K-2 Form of Lost Note Affidavit
EXHIBIT L Form of Notice of Extension of Interest Period
</TABLE>
iv
<PAGE> 6
AMENDED AND RESTATED MASTER LOAN AND SECURITY AGREEMENT
AMENDED AND RESTATED MASTER LOAN AND SECURITY AGREEMENT, dated as of
November 23, 1998, among HANOVER CAPITAL MORTGAGE HOLDINGS, INC. ("Hanover
Capital Holdings"), a Maryland corporation and Hanover Capital Partners, Ltd.
("Hanover Capital Partners"), a New York corporation, (each, a "Borrower" and
collectively, the "Borrowers"), and GREENWICH CAPITAL FINANCIAL PRODUCTS, INC.,
a Delaware corporation (the "Lender").
RECITALS
Hanover Capital Holdings entered into that certain Master Loan and Security
Agreement, dated as of March 30, 1998 and amended and restated as of May 14,
1998 (the "Existing Agreement"), with the Lender to obtain financing from time
to time to provide interim funding for (i) certain Eligible Bonds (as defined
herein), (ii) certain Pledged Stock (as defined herein), (iii) certain
Participation Certificates (as defined herein), and (iii) the acquisition of
certain Mortgage Loans (as defined herein), which Mortgage Loans are to be sold
or contributed by Hanover Capital Holdings to one or more trusts or other
entities sponsored by Hanover Capital Holdings or an Affiliate (as defined
herein) thereof, or to third-parties, and which Eligible Bonds, Participation
Certificates, Pledged Stock, and Mortgage Loans secure Advances (as defined
herein) made by the Lender thereunder.
The Borrowers and the Lender desire to amend and restate the Existing
Agreement to provide terms and conditions under which the Lender is prepared to
provide funding to Hanover Capital Partners in addition to Hanover Capital
Holdings from and after the date hereof.
Accordingly, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:
SECTION 1 Definitions and Accounting Matters.
1.1 Certain Defined Terms. As used herein, the following terms shall have
the following meanings (all terms defined in this Section 1.01 or in other
provisions of this Loan Agreement in the singular to have the same meanings when
used in the plural and vice versa):
"Accepted Servicing Practices" shall have the meaning assigned thereto in
Section 11.15(a) hereof.
"Advance" shall mean any Committed Advance or Uncommitted Advance, as
applicable, and collectively "Advances" shall mean the sum of all Committed
Advances and Uncommitted Advances.
<PAGE> 7
"Affiliate" means, with respect to any Person, any other Person which,
directly or indirectly, controls, is controlled by, or is under common control
with, such Person. For purposes of this definition, "control" (together with the
correlative meanings of "controlled by" and "under common control with") means
possession, directly or indirectly, of the power (a) to vote 10% or more of the
securities (on a fully diluted basis) having ordinary voting power for the
directors or managing general partners (or their equivalent) of such Person, or
(b) to direct or cause the direction of the management or policies of such
Person, whether through the ownership of voting securities, by contract, or
otherwise.
"Applicable Collateral Percentage" shall mean, with respect to all Eligible
Mortgage Loans (other than Delinquent Mortgage Loans), 97%; with respect to all
Eligible Bonds, 60%; with respect to the Pledged Stock, 60%; with respect to
Thirty-Day Delinquent Mortgage Loans, 90%; with respect to Sixty-Day Delinquent
Mortgage Loans, 85%; and with respect to Participation Certificates, 97%
multiplied by the Ownership Percentage.
"Applicable Margin" shall mean, with respect to Advances that are Tranche A
Advances, Tranche B Advances, and Tranche C Advances, respectively, the
applicable rate per annum set forth below:
<TABLE>
<CAPTION>
<S> <C>
Tranche A Advances..................... 0.70%
Tranche B Advances..................... 1.00%
Tranche C Advances..................... 1.25%
</TABLE>
"Applicable Notice Documents" shall have the meaning provided in Section
2.03(a) hereof.
"Appraised Value" shall mean the value set forth in an appraisal made in
connection with the origination or acquisition of the related Mortgage Loan as
the value of the Mortgaged Property.
"Asset Documents" shall mean (i) with respect to each Eligible Mortgage
Loan, the documents comprising the related Mortgage File, (ii) with respect to
each Eligible Bond, the documents comprising the related Bond File, (iii) the
Pledged Stock and (iv) with respect to Participation Certificates, the documents
comprising the original Participation Certificate File.
"Asset File" shall mean the Bond File, the Mortgage File, or the
Participation Certificate File, as applicable.
"Bankruptcy Code" shall mean the United States Bankruptcy Code of 1978, as
amended from time to time.
"Blocked Account Agreement" shall mean an agreement between Hanover Capital
Holdings, the Collection Bank, and the Lender, substantially in the form of
Exhibit F hereto, as the
-2-
<PAGE> 8
same may be amended, supplemented or otherwise modified from time to time, in
which Hanover Capital Holdings and Collection Bank acknowledge the Lender's lien
on the Collection Account (which lien is hereby consented to by Hanover Capital
Partners), and the Borrowers hereby grant to the Lender the right to assume at
any time exclusive dominion and control over the distribution of all monies in
the account, which control may be exercised by Hanover Capital Holdings prior to
such assumption of control by the Lender.
"Bond/PC Custodial Agreement" shall mean that certain agreement between the
Lender and the Bond/PC Custodian setting forth (i) the procedures for delivery
and maintenance of the Eligible Bonds, Underlying Eligible Bonds, Pledged Stock,
Bond Files, Participation Certificates, and Participation Certificate Files, and
(ii) governing the establishment and maintenance of the Lender's "securities
account" (as defined in Section 8-501(a) of the UCC) and identifying the Bond/PC
Custodian as "securities intermediary" (as defined in Section 8-102(a)(14) of
the UCC and 31 C.F.R. Section 357.2).
"Bond/PC Custodian" shall mean either (i) the Lender, (ii) Chase Manhattan
Bank or (iii) any other Person designated by the Lender, as custodian of the
Pledged Stock, Eligible Bonds, Underlying Eligible Bonds, Bond Files,
Participation Certificates, and Participation Certificate Files.
"Bond File" shall have the meaning provided in Section 5.02(g)(vii) hereof.
"Bond Summary" shall mean a written summary for each Eligible Bond and
Underlying Eligible Bond to be delivered by the Borrower to the Lender pursuant
to Section 2.03(a) hereof, which shall include the following information and
documentation: (i) the name of the issuer, (ii) the original principal amount,
(iii) the current principal amount, (iv) the applicable interest rate, (v) for
each bond which is publicly offered, the cusip, (vi) the name and class of the
bond, (vii) such other information as shall be mutually agreed upon by the
Borrower and the Lender, and (viii) with respect to each certificated bond, a
copy of the related certificate attached thereto.
"Borrower" shall have the meaning provided in the heading hereof.
"Borrowing Base" shall mean the aggregate Collateral Value of all Eligible
Assets that have been, and remain, pledged to the Lender hereunder.
"Borrowing Base Deficiency" shall have the meaning provided in Section 2.06
hereof.
"Business Day" shall mean any day other than (i) a Saturday or Sunday or
(ii) a day on which the New York Stock Exchange, the Federal Reserve Bank of New
York or the Mortgage Custodian is authorized or obligated by law or executive
order to be closed.
-3-
<PAGE> 9
"Capital Stock" shall mean any and all shares, interests, participations or
other equivalents (however designated) of capital stock of a corporation, any
and all similar ownership interests in a Person (other than a corporation) and
any and all warrants or options to purchase any of the foregoing.
"Cash Equivalents" shall mean (a) securities with maturities of 90 days or
less from the date of acquisition issued or fully guaranteed or insured by the
United States Government or any agency thereof, (b) certificates of deposit and
eurodollar time deposits with maturities of 90 days or less from the date of
acquisition and overnight bank deposits of any commercial bank having capital
and surplus in excess of $500,000,000, (c) repurchase obligations of any
commercial bank satisfying the requirements of clause (b) of this definition,
having a term of not more than seven days with respect to securities issued or
fully guaranteed or insured by the United States Government, (d) commercial
paper of a domestic issuer rated at least A-1 or the equivalent thereof by
Standard and Poor's Ratings Group ("S&P") or P-1 or the equivalent thereof by
Moody's Investors Service, Inc. ("Moody's") and in either case maturing within
90 days after the day of acquisition, (e) securities with maturities of 90 days
or less from the date of acquisition issued or fully guaranteed by any state,
commonwealth or territory of the United States, by any political subdivision or
taxing authority of any such state, commonwealth or territory or by any foreign
government, the securities of which state, commonwealth, territory, political
subdivision, taxing authority or foreign government (as the case may be) are
rated at least A by S&P or A by Moody's, (f) securities with maturities of 90
days or less from the date of acquisition backed by standby letters of credit
issued by any commercial bank satisfying the requirements of clause (b) of this
definition or (g) shares of money market mutual or similar funds which invest
exclusively in assets satisfying the requirements of clauses (a) through (f) of
this definition.
"Certificate Registrar" shall mean the Person who carries on its books and
records the identity of the holder of a Participation Certificate.
"Change of Control" shall mean either (i) any one of the following three
individuals leaves the employ of Hanover Capital Holdings: John Burchett, Irma
Tavares, or Joyce Mizerak, or (ii) there occurs a change of "control" of either
Borrower as such term is defined in the Securities Exchange Act of 1934, as
amended.
"Code" shall mean the Internal Revenue Code of 1986, as amended from time
to time.
"Collateral" shall have the meaning provided in Section 4.01(b) hereof.
"Collateral Value" shall mean, (a) with respect to each Eligible Mortgage
Loan or Eligible Bond, the Applicable Collateral Percentage of the lesser of (i)
the Market Value of such Eligible Mortgage Loan or Eligible Bond and (ii) the
Purchase Price Percentage of such Eligible Mortgage Loan or Eligible Bond
multiplied by the outstanding principal balance of such Eligible Mortgage Loan
or Eligible Bond; and (b) with respect to each Participation Certificate, the
-4-
<PAGE> 10
Applicable Collateral Percentage of the lesser of (i) the Market Value of the
Underlying Mortgage Loans subject to such Participation Certificate, and (ii)
the Purchase Price Percentage of such Participation Certificate multiplied by
the outstanding principal balance of the Underlying Mortgage Loans subject to
such Participation Certificate, and (c) with respect to the Pledged Stock, the
Applicable Collateral Percentage of the Market Value of the Underlying Eligible
Bond(s) owned by the related Eligible Entity; provided that the following
additional limitations on Collateral Value shall apply:
(1) subject to (vi)(A) below, the aggregate Collateral Value of all
Thirty-Day Delinquent Mortgage Loans may not at any one time exceed the
lesser of (x) $10,000,000 or (y) 5% of the aggregate outstanding principal
balance of all Advances;
(2) subject to (vi)(A) below, the aggregate Collateral Value of all
Sixty-Day Delinquent Mortgage Loans may not at any one time exceed the
lesser of (x) $6,000,000 or (y) 3% of the aggregate outstanding principal
balance of all Advances;
(3) the aggregate Collateral Value for all Document Deficient Assets
shall not at any time exceed the lesser of (x) $20,000,000 or (y) 10% of
the aggregate outstanding principal balance of all Advances; provided,
however, that in no event shall Type I Document Deficient Assets and Type
III Document Deficient Assets (taking into account Underlying Mortgage
Loans subject to Participation Certificates), taken in the aggregate, at
any time exceed the lesser of (1) $2,000,000 or (2) 1% of the aggregate
outstanding principal balance of all Advances; and
(4) the Collateral Value shall be zero for each Eligible Asset, for
each Underlying Mortgage Loan securing such Eligible Asset, or for each
Underlying Eligible Bond owned by an Eligible Entity with respect to which
the Pledged Stock has been pledged to the Lender hereunder, as applicable:
(1) which is an Eligible Mortgage Loan or an Underlying Mortgage
Loan, other than Thirty-Day Delinquent Mortgage Loans subject to
subsection (i) above, which is thirty (30) days or more delinquent in
respect of any Scheduled Payment as of the date of determination;
(2) which is an Eligible Mortgage Loan or an Underlying Mortgage
Loan which is thirty (30) days or more delinquent in respect of the
first Scheduled Payment;
(3) which is an Eligible Mortgage Loan or an Underlying Mortgage
Loan, other than Sixty-Day Delinquent Mortgage Loans subject to
subsection (ii) above, which is sixty (60) days or more delinquent in
respect of any Scheduled Payment;
-5-
<PAGE> 11
(4) in respect of which the Maximum Pledge Period has passed;
(5) which is an Eligible Mortgage Loan and which has been
released from the possession of the Mortgage Custodian under Section
5(a) of the Mortgage Custodial Agreement to any Person other than the
Lender or its bailee for a period in excess of ten (10) days (or if
such tenth day is not a Business Day, the next succeeding Business
Day);
(6) which is an Eligible Mortgage Loan and which has been
released from the possession of the Mortgage Custodian under Section
5(b) of the Mortgage Custodial Agreement under any Transmittal Letter
in excess of the time period stated in such Transmittal Letter for
release;
(7) which is an Eligible Mortgage Loan or Underlying Mortgage
Loan and in respect of which (1) the related Mortgaged Property is the
subject of a foreclosure proceeding;
(8) which is an Eligible Mortgage Loan or Underlying Mortgage
Loan and as to which (i) the related Mortgage Note or the related
Mortgage is not genuine or is not the legal, valid, binding and
enforceable obligation of the maker thereof, subject to no right of
rescission, set-off, counterclaim or defense, or (ii) such Mortgage,
is not a valid, subsisting, enforceable and perfected first lien on
the Mortgaged Property;
(9) which the Lender determines, in its reasonable discretion, is
not eligible for sale in the secondary market or for securitization
without unreasonable credit enhancement;
(10) which has a Material Exception with respect thereto;
(11) which is an Eligible Mortgage Loan or Underlying Mortgage
Loan and in respect of which the related Mortgagor is the subject of a
bankruptcy proceeding;
(12) which is an Eligible Mortgage Loan or Underlying Mortgage
Loan which is ninety (90) days or more delinquent in respect of any
Scheduled Payment;
(13) which is a Type II Document Deficient Asset for which the
Mortgage Custodian or the Bond/PC Custodian, as applicable, has failed
to receive, pursuant to Section 2(I)(e) of the Mortgage Custodial
Agreement, (a) with respect to intervening assignments, either (i) the
related intervening
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<PAGE> 12
assignment within 120 days from the date such Mortgage Loan was
pledged to the Lender or (ii) proof that the last intervening
assignment was recorded, which such proof shall be in the form of (A)
the original title policy or a copy of the same certified by the
Borrower as a true, correct, and complete copy thereof or (B) a
certified copy of the last intervening assignment with evidence of
recording indicated thereon; or, (b) with respect to the title policy,
either (i) the original title policy or a copy of the same certified
by the Borrower as a true, correct and complete copy thereof within
120 days from the date such Mortgage Loan was pledged to the Lender,
or (ii) any other evidence of such title policy acceptable to the
Lender in its sole discretion, including, without limitation, any
preliminary title report, binder, or commitment to provide such title
policy;
(14) which is an Eligible Bond and in respect to which there is a
breach of any of the representations or warranties in Schedule 1
hereto; and
(15) which is a Type III Document Deficient Asset for which the
Bond/PC Custodian has failed to receive, an original Participation
Certificate within 21 days from the date such Participation
Certificate was pledged to the Lender.
"Collection Account" shall mean the segregated account established at
the direction of the Borrowers, and maintained in the name of the
Lender and subject to a security interest in favor of the Lender into
which all Collections received by the Master Servicer, a Subservicer,
or a Trustee shall be remitted by such Master Servicer, Subservicer or
Trustee. Hanover Capital Holdings shall have the right to direct that
withdrawals from such account be made until such time as Lender, in
its sole discretion, provides notice to the Collection Bank
terminating such right of Hanover Capital Holdings.
"Collection Bank" shall mean Fleet Bank.
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<PAGE> 13
"Collections" shall mean, collectively, (i) with respect to Mortgage
Loans which are Assets, all collections and proceeds on or in respect
of the Mortgage Loans which are Assets, excluding collections required
to be paid to the Subservicer or a mortgagor on the Mortgage Loans
which are Assets, (ii) with respect to Eligible Bonds which are
Assets, Underlying Eligible Bonds which are Assets and Participation
Certificates which are Assets, all cash dividends or distributions or
any monies distributed on account of such Eligible Bonds which are
Assets, Underlying Eligible Bonds which are Assets or Participation
Certificates which are Assets, as applicable.
"Commitment Fee" shall have the meaning assigned thereto in Section
3.03 hereof.
"Committed Advance" shall have the meaning assigned thereto in Section
2.01(a) hereof.
"Commonly Controlled Entity" shall mean an entity, whether or not
incorporated, which is under common control with the Borrower within
the meaning of Section 4001 of ERISA or is part of a group which
includes the Borrower and which is treated as a single employer under
Section 414 of the Code.
-8-
<PAGE> 14
"Contractual Obligation" shall mean as to any Person, any provision of
any agreement, instrument or other undertaking to which such Person is
a party or by which it or any of its property is bound or any
provision of any security issued by such Person.
"Default" shall mean an Event of Default or an event that with notice
or lapse of time or both would become an Event of Default.
"Delinquent Mortgage Loan" shall mean either a Thirty-Day Delinquent
Mortgage Loan or a Sixty-Day Delinquent Mortgage Loan; provided that
in no event shall a Mortgage Loan or Underlying Mortgage Loan that is
ninety (90) days or more delinquent have a Collateral Value in excess
of zero.
"Document Deficient Assets" shall be the collective reference to Type
I Document Deficient Assets, Type II Document Deficient Mortgage Loans
and Type III Document Deficient Mortgage Loans.
"Dollars" and "$" shall mean lawful money of the United States of
America.
"Due Diligence Package" shall mean with respect to each Mortgage Loan
or Underlying Mortgage Loan to be pledged to the Lender hereunder (a) all
materials in the possession or under the control of the Borrower, which
materials shall include, without limitation, (i) the Borrower's analysis of
the seller and the Subservicer, (ii) the results of the Borrower's
underwriting and due diligence review of all documents related to such
Mortgage Loan or Underlying Mortgage Loan, and (b) any certificates,
remittance reports, Servicing Agreements, and purchase agreements governing
such Mortgage Loans or Underlying Mortgage Loan.
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<PAGE> 15
"Due Diligence Review" shall mean the performance by the Lender of any
or all of the reviews permitted under Section 11.16 hereof with
respect to any or all of the Eligible Assets of the Borrower or
related parties, as desired by the Lender from time to time.
"Effective Date" shall mean the date upon which the conditions
precedent set forth in Section 5.01 shall have been satisfied.
"Eligible Assets" shall mean Eligible Mortgage Loans, Eligible Bonds,
Pledged Stock, and Participation Certificates (or the Underlying
Mortgage Loans related thereto) as to which the representations and
warranties set forth on Schedule 1 hereof are true and correct.
"Eligible Bond" shall mean either an Investment Grade Bond or a
Non-Investment Grade Bond for which (i) the Borrower or one of its
Affiliates was the issuer or was the depositor into a trust which was
the issuer, (ii) the Borrower is the current owner and (iii) Greenwich
Capital Markets, Inc. was the underwriter or placement agent.
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<PAGE> 16
"Eligible Entity" shall mean a corporation which is wholly and
directly owned by the Borrower and which (i) is a Special Purpose
Entity and (ii) owns one or more Underlying Eligible Bonds.
"Eligible Mortgage Loan" shall mean either a Prime Mortgage Loan or a
Scratch and Dent Mortgage Loan which was acquired by the Borrower and
which conforms to the Borrower's Underwriting Guidelines.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended from time to time.
"ERISA Affiliate" shall mean any corporation or trade or business that
is a member of any group of organizations (i) described in Section
414(b) or (c) of the Code of which the Borrower is a member and (ii)
solely for purposes of potential liability under Section 302(c)(11) of
ERISA and Section 412(c)(11) of the Code and the lien created under
Section 302(f) of ERISA and Section 412(n) of the Code, described in
Section 414(m) or (o) of the Code of which the Borrower is a member.
"Event of Default" shall have the meaning provided in Section 8
hereof.
"Exception" shall have the meaning assigned thereto in the Mortgage
Custodial Agreement.
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<PAGE> 17
"Exception Report" shall mean the exception report prepared by the
Mortgage Custodian pursuant to the Mortgage Custodial Agreement.
"Federal Funds Rate" shall mean, for any day, the weighted average of
the rates on overnight federal funds transactions with members of the
Federal Reserve System arranged by federal funds brokers, as published
on the next succeeding Business Day by the Federal Reserve Bank of New
York, or, if such rate is not so published for any day which is a
Business Day, the average of the quotations for the day of such
transactions received by the Lender from three federal funds brokers
of recognized standing selected by it.
"FHLMC" shall mean the Federal Home Loan Mortgage Corporation or any
successor thereto.
"FNMA" shall mean the Federal National Mortgage Association or any
successor thereto.
"Funding Date" shall mean the date on which an Advance is made
hereunder.
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<PAGE> 18
"GAAP" shall mean generally accepted accounting principles as in
effect from time to time in the United States of America.
"Governing Agreements" shall mean the agreement or agreements which
govern the issuance and the payment of the Eligible Bonds, Underlying
Eligible Bonds or Participation Certificates, as applicable.
"Governmental Authority" shall mean any nation or government, any
state or other political subdivision thereof, any entity exercising
executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government and any court or arbitrator
having jurisdiction over the Borrower, any of its Subsidiaries or any
of their properties.
"Guarantee Obligation" as to any Person (the "guaranteeing person"),
shall mean any obligation of (a) the guaranteeing person or (b)
another Person (including, without limitation, any bank under any
letter of credit) with respect to which the guaranteeing person has
issued a reimbursement, counterindemnity or similar obligation, in
either case guaranteeing or in effect guaranteeing any Indebtedness,
leases, dividends or other obligations (the "primary obligations") of
any other third Person (the "primary obligor") in any manner, whether
directly or indirectly, including, without limitation, any obligation
of such guaranteeing person, whether or not contingent, (i) to
purchase any such primary obligation or any property constituting
direct or
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<PAGE> 19
indirect security therefor, (ii) to advance or supply funds (1) for
the purchase or payment of any such primary obligation or (2) to
maintain working capital or equity capital of the primary obligor or
otherwise to maintain the net worth or solvency of the primary
obligor, (iii) to purchase property, securities or services primarily
for the purpose of assuring the owner of any such primary obligation
of the ability of the primary obligor to make payment of such primary
obligation or (iv) otherwise to assure or hold harmless the owner of
any such primary obligation against loss in respect thereof; provided,
however, that the term Guarantee Obligation shall not include
endorsements of instruments for deposit or collection in the ordinary
course of business. The terms "Guarantee" and "Guaranteed" used as a
verb shall have a correlative meaning. The amount of any Guarantee
Obligation of any guaranteeing person shall be deemed to be the lower
of (a) an amount equal to the stated or determinable amount of the
primary obligation in respect of which such Guarantee Obligation is
made and (b) the maximum amount for which such guaranteeing person may
be liable pursuant to the terms of the instrument embodying such
Guarantee Obligation, unless such primary obligation and the maximum
amount for which such guaranteeing person may be liable are not stated
or determinable, in which case the amount of such Guarantee Obligation
shall be such guaranteeing person's maximum reasonably anticipated
liability in respect thereof as determined by the Borrower in good
faith.
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<PAGE> 20
"Hedging Agreement" shall mean, with respect to any or all of the
Eligible Assets, any interest rate swap, cap or collar agreement or
similar arrangements providing for protection against fluctuations in
interest rates or other market risks commonly hedged or the exchange
of nominal interest obligations, either generally or under specific
contingencies, entered into by a Borrower and reasonably acceptable to
the Lender.
"HUD" shall mean the Department of Housing and Urban Development, or
any federal agency or official thereof which may from time to time
succeed to the functions thereof.
"Indebtedness" shall mean, of any Person at any date, without
duplication, (a) all indebtedness of such Person for borrowed money
(whether by loan or the issuance and sale of debt securities) or for
the deferred purchase price of property or services (other than
current trade liabilities incurred in the ordinary course of business
and payable in accordance with customary practices), (b) any other
indebtedness of such Person which is evidenced by a note, bond,
debenture or similar instrument, (c) all obligations of such Person
under financing leases, (d) all obligations of such Person in respect
of letters of credit, acceptances or similar instruments issued or
created for the account of such Person and (e) all liabilities secured
by any Lien on any property owned by such Person even though such
Person has not assumed or otherwise become liable for the payment
thereof.
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<PAGE> 21
"Indemnified Party" shall have the meaning provided in Section 11.03
hereof.
"Instruction Letter" shall mean a letter agreement from the related
Borrower to each Trustee, Certificate Registrar and/or Subservicer, as
applicable, substantially in the form of Exhibit J attached hereto, in
which such Persons acknowledge the Lender's security interest in the
Eligible Assets, and agrees to remit Collections either directly into
the Collection Account or in any other way the Lender may so direct
from time to time, which Instruction Letter may be delivered by Lender
to such Trustee, Certificate Registrar and/or Subservicer in its sole
discretion.
"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
following one month, two months, three months, or six months
thereafter (the "Reset Date"), as the Borrower may select as provided
in Section 3.04 hereof, and (ii) thereafter, each period commencing on
the Payment Date and ending on the applicable Reset Date.
Notwithstanding the foregoing, no Interest Period may end after the
Termination Date.
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<PAGE> 22
"Investment Company Act" shall mean the Investment Company Act of
1940, as amended.
"Investment Grade" shall mean a credit rating of BBB- or better, as
determined by Standard & Poor's Ratings Group ("S&P"), or a credit
rating of Baa2 or better, as determined by Moody's Investors Service,
Inc. ("Moody's).
"Investment Grade Bond" shall mean a certificated or uncertificated
subordinate bond with an Investment Grade credit rating as of any date
of determination; provided, that, in the event such bond is downgraded
to below an Investment Grade credit rating, such bond will be treated
as a Non-Investment Grade Bond hereunder and shall be included in
calculating whether the Non-Investment Grade Bond Sublimit has been
exceeded.
"Lender" shall have the meaning provided in the heading hereof.
"LIBOR" shall mean for any Advance, with respect to each day during
each Interest Period pertaining to such Advance, the rate per annum
equal to the rate appearing on Bloomberg on the first day of such
Interest Period, for the one-month, three-month, or six-month term, as
applicable, corresponding to such Interest Period, or if such rate
shall not be so quoted then the applicable rate appearing at page 3750
of the Telerate Screen on the first day of such Interest
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<PAGE> 23
Period, or if neither such rate shall be so quoted, the rate per annum
at which the Lender is offered Dollar deposits at or about 11:00 a.m.,
New York City time, on such date by prime banks in the interbank
eurodollar market where the eurodollar and foreign currency exchange
operations in respect of its Advances are then being conducted for
delivery on the first day of such Interest Period for the number of
days comprised therein, and in an amount comparable to the amount of
the Advances to be outstanding on such day.
"Lien" shall mean any mortgage, lien, pledge, charge, security
interest or similar encumbrance.
"Loan Agreement" shall mean this Amended and Restated Master Loan and
Security Agreement, as the same may be amended, supplemented or
otherwise modified from time to time.
"Loan Documents" shall mean, collectively, this Loan Agreement, the
Note, the Mortgage Custodial Agreement, the Bond/PC Custodial
Agreement, the Blocked Account Agreement, and the Instruction Letters.
"Loan-to-Value Ratio" or "LTV" shall mean with respect to any Mortgage
Loan, the ratio of (a) the Par Amount of the Mortgage Loan as of the
date of origination (unless otherwise indicated) to (b) the Appraised
Value of the
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<PAGE> 24
Mortgaged Property or if the Mortgage Loan was made in connection with
the purchase of the related Mortgaged Property, the lesser of the
Appraised Value and the sales price of such property.
"Lost Instrument Affidavit" shall mean an affidavit, substantially in
the form of Exhibit K-1 or otherwise acceptable to the Lender in its
sole discretion, executed by the Borrower or other Person acceptable
to the Lender in its sole discretion, which Lost Instrument Affidavit
shall (i) attach a copy of the original Participation Certificate
certified by the Borrower as a true, complete, and correct copy
thereof, (ii) indemnify the Lender, and (iii) remain effective for all
successors and assigns of the Borrower and the Lender.
"Lost Note Affidavit" shall mean an affidavit, substantially in the
form of Exhibit K-2 or otherwise acceptable to the Lender in its sole
discretion, executed by the related Borrower or other Person
acceptable to the Lender in its sole discretion, which states that the
Mortgage Custodian is not in possession of the original Mortgage Note,
which Lost Note Affidavit shall (i) attach a copy of the original
Mortgage Note certified by the related Borrower as a true, complete,
and correct copy thereof, (ii) indemnify the Lender, and (iii) remain
effective for all successors and assigns of the related Borrower and
the Lender.
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<PAGE> 25
"Market Value" shall mean, with respect to (i) any Eligible Asset
other than Pledged Stock, the price at which such Eligible Asset could
be sold to a third-party, as determined by the Lender in its sole
discretion (exercised in good faith), taking into account customary
factors, including, but not limited to: (a) the historical experience
for collateral with similar characteristics to the Eligible Asset,
such as prepayment speeds, expected default rates and loss severity;
(b) market factors; (c) the creditworthiness of the issuer thereof, if
applicable, and (d) appropriate discount rates and with respect to
(ii) Pledged Stock, the aggregate price at which all Underlying
Eligible Bonds owned by the related Eligible Entity could be sold to a
third-party, as determined by the Lender in its sole discretion
(exercised in good faith), taking into account customary factors,
including, but not limited to: (a) the historical experience for
collateral with similar characteristics to the Underlying Eligible
Bonds, such as prepayment speeds, expected default rates and loss
severity; (b) market factors; (c) the creditworthiness of the issuer
thereof, if applicable, and (d) appropriate discount rates; provided
that the Market Value shall be zero (y) with respect to any Underlying
Eligible Bond for which there is a breach of any of the
representations or warranties in Schedule 1 hereto or (z) with respect
to the aggregate Market Value of Eligible Bonds or Underlying Eligible
Bonds in excess of the Non-Investment Grade Bond Sublimit; and
provided, further, that in all events such Market Value for any
Eligible Asset may be determined
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<PAGE> 26
to be zero in the Lender's sole discretion. The Lender's determination
of Market Value shall be final and binding on the parties.
"Master Servicer" shall mean Hanover Capital Mortgage Holdings, Inc.
"Material Adverse Effect" shall mean a material adverse effect on (a)
the business, assets, property, business, condition (financial or
otherwise) or prospects of a Borrower, (b) the ability of a Borrower
to perform its obligations under any of the Loan Documents to which it
is a party, (c) the validity or enforceability of any of the Loan
Documents, (d) the rights and remedies of the Lender under any of the
Loan Documents, (e) the timely payment of the principal of or interest
on the Advances or other amounts payable in connection therewith or
(f) the Collateral.
"Material Exception" shall mean, (a) (i) with respect to any Mortgage
Loan, any Exception listed on the Exception Report consisting of the
absence from the Mortgage File, or deficiency in respect of, any of
the Mortgage Loan Documents set forth in Section 2(I)(a), 2(I)(c),
2(I)(d), 2(I)(e), or 2(I)(g) (other than with respect to Document
Deficient Assets), or (ii) for which the information set forth in
Section I of Annex 1 to the Mortgage Custodial Agreement is
incomplete, (b) with respect to any Eligible Bond or Underlying
Eligible Bond, any deviation from the document requirements set forth
in
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<PAGE> 27
Section 5.02(g) hereof, and (c) with respect to any Participation
Certificate, any deviation from the document requirements set forth in
Section 5.02(f) or the absence from the Participation Certificate File
of any document or information required therein.
"Maximum Committed Amount" shall mean $100,000,000.
"Maximum Credit" shall mean the sum of the Maximum Committed Amount
and the Maximum Uncommitted Amount, which on the date hereof shall
equal $200,000,000.
"Maximum Uncommitted Amount"shall mean $100,000,000, or such greater
amount agreed to in writing by Lender from time to time.
"Maximum Pledge Period" shall mean the first 180 days that an Eligible
Asset has been pledged to the Lender hereunder or with respect to an
Underlying Eligible Bond, the first 180 days that both (a) such
Underlying Eligible Bond has been owned by an Eligible Entity and (b)
the related Pledged Stock of such Eligible Entity has been pledged to
the Lender hereunder, or such other period as determined in accordance
with Section 2.11 hereof.
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<PAGE> 28
"Mortgage" shall mean the mortgage, deed of trust or other instrument
securing a Mortgage Note, which creates a first lien on the fee simple
in real property securing the Mortgage Note.
"Mortgage Custodial Agreement" shall mean the Mortgage Custodial
Agreement, dated as of the date hereof, among the Borrowers, the
Mortgage Custodian and the Lender, substantially in the form of
Exhibit B hereto, as the same shall be modified and supplemented and
in effect from time to time.
"Mortgage Custodian" shall mean First Chicago National Processing
Corporation, as custodian pursuant to the Mortgage Custodial Agreement
for all Mortgage Loans pledged hereunder, and its successors and
permitted assigns thereunder.
"Mortgage File" shall have the meaning assigned thereto in the
Mortgage Custodial Agreement.
"Mortgage Interest Rate" means the annual rate of interest borne on a
Mortgage Note, which shall be adjusted from time to time with respect
to adjustable rate Mortgage Loans.
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<PAGE> 29
"Mortgage Loan" shall mean a Prime Mortgage Loan or Scratch and Dent
Mortgage Loan which the Mortgage Custodian has been instructed to hold
for the Lender pursuant to the Mortgage Custodial Agreement, and which
mortgage loan includes, without limitation (i) a Mortgage Note and
related Mortgage and (ii) all right, title and interest of the
Borrower in and to the Mortgaged Property covered by such Mortgage.
"Mortgage Loan Schedule" shall mean a schedule of Eligible Mortgage
Loans containing the following information with respect to each
Eligible Mortgage Loan to be delivered by the Borrower to the Lender
pursuant to Section 2.03(a) or 7.08 hereof, as applicable: (i) the
applicable Borrower's Mortgage Loan number; (ii) the Mortgagor's name
and the street address; (iii) the current principal balance as of the
date specified therein (which date shall be no earlier than forty-five
(45) days prior to the date such Mortgage Loan Schedule is required to
be delivered to the Lender or such other date mutually agreed upon by
the Borrower and Lender), (iv) the original principal balance as of
the date of origination; (v) the LTV as of the date of origination of
the related Mortgage Loan; (vi) the LTV of the related Mortgage Loan
as of the date of acquisition by the applicable Borrower; (vii) the
paid through date; (viii) the mortgage interest rate; (ix) the final
maturity date under the Mortgage Note; (x) the Scheduled Payment; (xi)
the name of the Subservicer; (xii) delinquency status (reported as
current, 30-59, 60-89, 90+, etc.), (xiii) the current FICO score for
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<PAGE> 30
such Mortgage Loan, (xiv) the Purchase Price Percentage, (xv) whether
such Mortgage Loan is subject to graduated payments, (xvi) whether it
is a fixed or adjustable rate Mortgage Loan, (xvii) with respect to
adjustable rate Mortgage Loans, the interest rate adjustment date,
(xviii) with respect to adjustable rate Mortgage Loans, the interest
rate margin, (xix) a code indicating whether the Mortgage Loan is a
Prime Mortgage Loan or a Scratch and Dent Mortgage Loan, and (xx) such
other information as shall be mutually agreed upon by the Borrower and
Lender.
"Mortgage Loan Tape" shall mean the computer-readable magnetic tape
required to be delivered by the Borrower to the Lender pursuant to
Section 2.03(a) hereof (the format of which shall be substantially in
the form of Exhibit G attached hereto) which contains the information,
with respect to each Mortgage Loan, required to be contained in the
Mortgage Loan Schedule.
"Mortgage Note" shall mean the original executed promissory note or
other evidence of the indebtedness of a mortgagor/borrower with
respect to a Mortgage Loan.
"Mortgaged Property" shall mean the real property (including all
improvements, buildings, fixtures, building equipment and personal
property thereon and all additions, alterations and replacements made
at any time
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<PAGE> 31
with respect to the foregoing) and all other collateral securing
repayment of the debt evidenced by a Mortgage Note.
"Mortgagor" shall mean the obligor on a Mortgage Note.
"Multiemployer Plan" shall mean a Plan which is a multiemployer plan
as defined in Section 4001(a)(3) of ERISA.
"Net Worth" shall mean, with respect to any Person, the excess of
total assets of such Person, over total liabilities of such Person,
determined in accordance with GAAP.
"Non-Investment Grade Bond" shall mean a certificated or
uncertificated subordinate bond which is either unrated or has a
credit rating below Investment Grade as of the date of the pledge of
such bond to the Lender hereunder or at any date thereafter.
"Non-Investment Grade Bond Sublimit" shall mean $15,000,000.
"Note" shall mean the promissory note provided for by Section 2.02(a)
hereof for Advances and any promissory note delivered in substitution
or exchange
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<PAGE> 32
therefor, in each case as the same shall be modified and supplemented
and in effect from time to time.
"Notice of Borrowing and Pledge" shall have the meaning provided in
Section 2.03(a) hereof.
"Ownership Percentage" shall mean the undivided ownership interest of
the holder of each Participation Certificate in each Underlying
Mortgage Loan subject to such Participation Certificate as evidenced
by the related Participation Certificate.
"Par Amount" shall mean, in respect of a Mortgage Loan at any time,
the outstanding principal balance of such Mortgage Loan at such time.
"Participants" shall have the meaning set forth in Section 11.14(b)
hereof.
"Participation Certificate" shall mean a certificate, delivered to the
Lender or its designee on each Funding Date in a form suitable for
registration in the name of the Lender, representing a Borrower's
Ownership Percentage in certain Eligible Mortgage Loans, which
Eligible Mortgage Loans are held by the Participation Custodian for
the benefit of the holder of such Participation Certificate.
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<PAGE> 33
"Participation Certificate File" shall mean, with respect to each
Participation Certificate pledged to the Lender hereunder: (i) the
original certificate or a Lost Instrument Affidavit in lieu thereof,
subject to the sublimit in clauses (iv) and (v)(O) of the definition
of Collateral Value and Section 7.25 hereof, (ii) the related
Governing Agreements, (iii) the related Instruction Letter, (iv) an
assignment executed by the registered holder in such Participation
Certificate in blank for the benefit of an assignee and acceptable to
the Lender in form and substance and sufficient to transfer the
Participation Certificates pursuant to the Governing Agreements, (v)
the name of the Certificate Registrar (if any) with contact
information and (vi) any other documents which the Lender may request
"Participation Certificate Schedule" shall mean a schedule of
information related to each Participation Certificate and the related
Underlying Mortgage Loan required to be delivered by the Borrower to
the Lender pursuant to Section 2.03(a) hereof, which schedule shall
contain the following information: (a) with respect to each
Participation Certificate, (i) the name of the issuer, and (ii) the
Ownership Percentage and, (b) with respect to each Underlying Mortgage
Loan, (i) the applicable Borrower's Mortgage Loan number; (ii) the
Underlying Mortgagor's name and the street address; (iii) the current
principal balance as of the date specified therein; (iv) the original
balance as of the date specified therein; (v) the LTV as of the date
of the origination of the related
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<PAGE> 34
Underlying Mortgage Loan; (vi) the paid-through date; (vii) the
mortgage interest rate; (viii) the final maturity date under the
Underlying Mortgage Note; (ix) the Scheduled Payment; (x) the name of
the servicer; (xi) the delinquency status (reported as current, 30-59,
60-89, 90+, etc.); (xii) the Purchase Price Percentage; (xiii) whether
it is a fixed or adjustable rate Underlying Mortgage Loan;; (xiv) with
respect to any adjustable rate Underlying Mortgage Loans, the interest
rate adjustment date; (xv) with respect to any adjustable rate
Underlying Mortgage Loan, the interest rate margin; and (xvi) such
other information as shall be mutually agreed upon by the Borrower and
Lender.
"Participation Certificate Tape" shall mean the computer-readable
magnetic tape required to be delivered by the Borrower to the Lender
pursuant to Section 2.03(a) hereof (the format of which shall be
substantially in the form of the Mortgage Loan Tape with the addition
of a field to set forth the related Borrower's Ownership Percentage)
which contains the information, with respect to each Participation
Certificate, required to be contained in the Participation Certificate
Schedule.
"Participation Custodian" shall mean the custodian holding the
Underlying Mortgage Loan and all documents related thereto for the
holders of the related Participation Certificate.
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"Participation Servicer" shall mean the servicer of an Underlying
Mortgage Loan subject to a Participation Certificate.
"Payment Date" shall mean the eighth day of each calendar month, or if
such day is not a Business Day, the next succeeding Business Day.
"Payoff" shall mean, with respect to any Mortgage Loan, repayment by
the applicable Mortgagor of all outstanding principal thereunder
together with all interest accrued thereon to the date of such
repayment and any penalty or premium thereon.
"Payoff Proceeds" shall mean, with respect to any Mortgage Loan, all
funds received from the applicable Mortgagor in connection with a
Payoff.
"PBGC" shall mean the Pension Benefit Guaranty Corporation or any
entity succeeding to any or all of its functions under ERISA.
"Permitted Exceptions" shall mean the exceptions to lien priority
including but not limited to: (i) the lien of current real property
taxes and assessments not yet due and payable; (ii) covenants,
conditions and restrictions, rights of way, easements and other
matters of the public record as of the date of recording acceptable to
mortgage lending institutions generally and specifically referred
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to in the lender's title insurance policy delivered to the originator
of the Mortgage Loan and (A) referred to or to otherwise considered in
the appraisal (if any) made for the originator of the Mortgage Loan or
(B) which do not adversely affect the appraised value of the Mortgaged
Property set forth in such appraisal; and (iii) other matters to which
like properties are commonly subject which do not materially interfere
with the benefits of the security intended to be provided by the
Mortgage or the use, enjoyment, value or marketability of the related
Mortgaged Property.
"Person" shall mean any individual, corporation, company, voluntary
association, partnership, joint venture, limited liability company,
trust, unincorporated association, government (or any agency,
instrumentality or political subdivision thereof) or any other entity
of whatever nature.
"Plan" shall mean at a particular time, any employee benefit plan
which is covered by ERISA and in respect of which a Borrower or a
Commonly Controlled Entity is (or, if such plan were terminated at
such time, would under Section 4069 of ERISA be deemed to be) an
"employer" as defined in Section 3(5) of ERISA.
"Pledged Stock" shall mean all of the shares of Capital Stock of an
Eligible Entity, together with all stock certificates, options or
rights of any nature
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whatsoever which may be issued or granted by such Eligible Entity to
the related Borrower while this Loan Agreement is in effect.
"Pledged Stock Summary" shall mean a summary of information related to
the Pledged Stock required to be delivered by the related Borrower to
the Lender pursuant to Section 2.03(a) hereof, which schedule shall
contain the following information with respect to each Pledged Stock
certificate, (i) the name of the Eligible Entity and state of
formation/authorization, (ii) the class of stock, (iii) the
certificate number and (iv) the number of shares.
"Post-Default Rate" shall mean, in respect of any principal of any
Advance or any other amount under this Loan Agreement, the Note or any
other Loan Document that is not paid when due to the Lender (whether
at stated maturity, by acceleration, by optional or mandatory
prepayment or otherwise), a rate per annum during the period from and
including the due date to but excluding the date on which such amount
is paid in full equal to 2% per annum plus (a) the interest rate
otherwise applicable to such Advance or other amount, or (b) if no
interest rate is otherwise applicable, then LIBOR.
"Prime Mortgage Loan" shall mean an "A" Credit Mortgage Loan (as
defined in the Underwriting Guidelines) secured by a first mortgage
lien on a one to
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four family residential property as to which the representations and
warranties set forth on Schedule 1 hereof are true and correct.
"Property" shall mean any right or interest in or to property of any
kind whatsoever, whether real, personal or mixed and whether tangible
or intangible.
"Purchase Price Percentage" shall mean, with respect to any Eligible
Asset or Eligible Bond, as applicable, the dollar price paid by the
related Borrower for such Eligible Asset divided by the outstanding
principal balance of such Eligible Asset or Eligible Bond, as
applicable, as of the cut-off date of acquisition.
"Regulations G, T, U and X" shall mean Regulations G, T, U and X of
the Board of Governors of the Federal Reserve System (or any
successor), as the same may be modified and supplemented and in effect
from time to time.
"Relevant System" shall mean (i) The Depository Trust Company in New
York, New York, or (ii) such other clearing organization or book-entry
system as is designated in writing by Lender.
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"Reportable Event" shall mean any of the events set forth in Section
4043(b) of ERISA, other than those events as to which the thirty day
notice period is waived under subsections .13, .14, .16, .18, .19 or
.20 of PBGC Reg. Section 2615.
"Requirement of Law" shall mean as to any Person, the certificate of
incorporation and by-laws or other organizational or governing
documents of such Person, and any law, treaty, rule or regulation or
determination of an arbitrator or a court or other Governmental
Authority, in each case applicable to or binding upon such Person or
any of its property or to which such Person or any of its property is
subject.
"Responsible Officer" shall mean, as to any Person, the chief
executive officer or, with respect to financial matters, the chief
financial officer of such Person; provided, that in the event any such
officer is unavailable at any time he or she is required to take any
action hereunder, Responsible Officer shall mean any officer
authorized to act on such officer's behalf as demonstrated to the
Lender to its reasonable satisfaction.
"Restricted Payments" shall mean with respect to any Person,
collectively, all dividends or other distributions of any nature
(cash, securities, assets or otherwise), and all payments, by virtue
of redemption or otherwise, on any class of equity securities
(including, without limitation, warrants, options or
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rights therefor) issued by such Person, whether such securities are
now or may hereafter be authorized or outstanding and any distribution
in respect of any of the foregoing, whether directly or indirectly.
"Scheduled Payment" shall mean, for any Eligible Asset, the scheduled
payment of principal and/or interest due thereunder.
"Scratch and Dent Mortgage Loan" shall mean a Mortgage Loan secured by
a first mortgage lien on a one to four family residential property
intended by the originator to conform with FNMA, FHLMC or other
conduit standards but which was subsequently discovered did not meet
the originally intended market parameters due to errors in relevant
documentation or credit deterioration of the obligor and as to which
the representations and warranties set forth on Schedule 1 hereof are
true and correct.
"Secured Obligations" shall mean the unpaid principal amount of, and
interest on the Advances, and all other obligations and liabilities of
the Borrowers to the Lender, whether direct or indirect, absolute or
contingent, due or to become due, or now existing or hereafter
incurred, which may arise under, out of or in connection with this
Loan Agreement, the Note, any other Loan Document and any other
document made, delivered or given in connection herewith or therewith,
whether on account of principal, interest, reimbursement obligations,
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fees, indemnities, costs, expenses (including, without limitation, all
fees and disbursements of counsel to the Lender that are required to
be paid by the Borrowers pursuant to the terms hereof or thereof) or
otherwise. For purposes hereof, "interest" shall include, without
limitation, interest accruing after the maturity of the Advances and
interest accruing after the filing of any petition in bankruptcy, or
the commencement of any insolvency, reorganization or like proceeding,
relating to the Borrower, whether or not a claim for post-filing or
post-petition interest is allowed in such proceeding.
"Servicing Agreement" shall have the meaning provided in Section
11.15(c) hereof.
"Servicing Records" shall have the meaning provided in Section
11.15(b) hereof.
"Side Letter" shall mean that certain letter agreement, dated as of
the date hereof, between the Lender and Hanover Capital Holdings.
"Single Employer Plan" shall mean any Plan which is covered by Title
IV of ERISA, but which is not a Multiemployer Plan.
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"Sixty-Day Delinquent Mortgage Loan" shall mean a Mortgage Loan or
Underlying Mortgage Loan as to which a Scheduled Payment is more than
59 days, but less than or equal to 89 days delinquent.
"Special Purpose Entity" shall mean a bankruptcy remote special
purpose entity (i) with respect to which a nationally recognized law
firm has delivered a substantive non-consolidation opinion, acceptable
to Lender in its reasonable discretion, to a rating agency in
connection with the issuance of the Underlying Eligible Bonds and (ii)
which has restrictions and limitations in its organizational documents
that are consistent with its bankruptcy remote special purpose entity
status and are reasonably acceptable to Lender.
"Subsidiary" shall mean, with respect to any Person, any other Person
of which at least a majority of the securities or other ownership
interests having by the terms thereof ordinary voting power to elect a
majority of the board of directors or other persons performing similar
functions of such corporation, partnership or other entity
(irrespective of whether or not at the time securities or other
ownership interests of any other class or classes of such corporation,
partnership or other entity shall have or might have voting power by
reason of the happening of any contingency) is at the time directly or
indirectly owned or controlled by such Person or one or more
Subsidiaries of such Person or by such Person and one or more
Subsidiaries of such Person.
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"Subservicer" shall have the meaning provided in Section 11.15(c)
hereof.
"Take-Out Commitments" shall be the collective reference to valid,
binding and enforceable commitments in form and substance acceptable
to the Lender to purchase one or more Eligible Assets, in each case as
amended, supplemented or otherwise modified in accordance with the
terms thereof and in effect from time to time.
"Tangible Net Worth" shall mean, with respect to any Person, as of any
date of determination, the consolidated Net Worth of such Person and
its Subsidiaries, less the consolidated net book value of all assets
of such Person and its Subsidiaries (to the extent reflected as an
asset in the balance sheet of such Person or any Subsidiary at such
date) which will be treated as intangibles under GAAP, including,
without limitation, such items as deferred financing expenses, net
leasehold improvements, good will, trademarks, trade names, service
marks, copyrights, patents, licenses and unamortized debt discount and
expense.
"Termination Date" shall mean March 28, 1999 or such earlier date on
which this Loan Agreement shall terminate in accordance with the
provisions hereof
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or by operation of law, as same may be extended in accordance with
Section 2.10 hereof.
"Thirty-Day Delinquent Mortgage Loan" shall mean a Mortgage Loan or
Underlying Mortgage Loan as to which a Scheduled Payment is more than
29 days, but less than or equal to 59 days delinquent.
"Tranche A Advances" shall mean Advances so long as, and to the extent
that, they are secured by Prime Mortgage Loans, Scratch and Dent Mortgage Loans,
or Participation Certificates.
"Tranche B Advances" shall mean Advances so long as, and to the extent
that, they are secured by (i) Eligible Bonds that are Investment-Grade Bonds; or
(ii) Pledged Stock to the extent the related Eligible Entity owns Underlying
Eligible Bonds that are Investment Grade Bonds.
"Tranche C Advances" shall mean Advances so long as, and to the extent
that, they are secured by (i) Eligible Bonds that are Non-Investment Grade Bonds
or (ii) Pledged Stock to the extent the related Eligible Entity owns Underlying
Eligible Bonds that are Non-Investment Grade Bonds.
"Transfer Documents" shall mean all documents required to re-register
the Eligible Bonds, Pledged Stock or Underlying Eligible Bonds in the
name of the Lender or the Bond/PC Custodian, or otherwise to effect a
delivery thereof in accordance with Section 5.02(g)(i) through (iii)
hereof, including without limitation, with respect to certificated
securities, the original certificate.
"Transmittal Letter" shall have the meaning assigned to such term in
the Mortgage Custodial Agreement.
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"Trustee" shall mean, with respect to Eligible Bonds, Underlying
Eligible Bonds and Participation Certificates, if applicable, the
person under the applicable Governing Agreement responsible for
administering such Eligible Bonds, Underlying Eligible Bonds or
Participation Certificates.
"Trust Receipt" shall have the meaning assigned to such term in the
Mortgage Custodial Agreement.
"Type I Document Deficient Asset" shall mean an Eligible Mortgage Loan
for which the Mortgage Custodian has received a Lost Note Affidavit in
lieu of the original Mortgage Note.
"Type II Document Deficient Asset" shall mean an Eligible Mortgage
Loan for which the Mortgage Custodian has failed to receive (i) any
intervening assignment, or (ii) the original title policy or a copy of
the same certified by the Borrower as a true, correct and complete
copy thereof.
"Type III Document Deficient Asset" shall mean a Participation
Certificate for which the Bond/PC Custodian has failed to receive an
original Participation Certificate but has received a Lost Instrument
Affidavit in lieu thereof.
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"Uncommitted Advance" shall have the meaning assigned thereto in
Section 2.01(b) hereof.
"Underlying Eligible Bond" shall mean either an Investment Grade Bond
or a Non-Investment Grade Bond for which (i) the Borrower or one of
its Affiliates was the issuer, (ii) an Eligible Entity is the current
owner and (iii) Greenwich Capital Markets, Inc. was the underwriter or
placement agent.
"Underlying Mortgage Loan" shall mean a Mortgage Loan for which the
Participation Certificate evidences the Lender's ownership interest
therein.
"Underlying Mortgagor" shall mean the obligor on an Underlying
Mortgage Note.
"Underlying Mortgage Note" shall mean the original executed promissory
note or other evidence of the indebtedness of a mortgagor/borrower
with respect to a Underlying Mortgage Loan.
"Underwriting Guidelines" shall mean Hanover Capital Mortgage
Holdings, Inc.'s Credit & Risk Management Policies and Procedures
Manual, attached as Exhibit E hereto, as amended from time to time in
accordance with Section 7.14.
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"Uniform Commercial Code" shall mean the Uniform Commercial Code as in
effect on the date hereof in the State of New York; provided that if
by reason of mandatory provisions of law, the perfection or the effect
of perfection or non-perfection of the security interest in any
Collateral is governed by the Uniform Commercial Code as in effect in
a jurisdiction other than New York, "Uniform Commercial Code" shall
mean the Uniform Commercial Code as in effect in such other
jurisdiction for purposes of the provisions hereof relating to such
perfection or effect of perfection or non-perfection.
1.2 Accounting Terms and Determinations. Except as otherwise expressly
provided herein, all accounting terms used herein shall be
interpreted, and all financial statements and certificates and reports
as to financial matters required to be delivered to the Lender
hereunder shall be prepared, in accordance with GAAP.
SECTION 2 Advances, Note and Prepayments.
2.1 Advances.
(1) Subject to fulfillment of the terms and conditions set forth in
this Loan Agreement, the Lender agrees to make loans (individually, a
"Committed
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Advance"; collectively, the "Committed Advances" to the Borrowers,
from time to time on any Business Day, from and including the
Effective Date to but excluding the Termination Date, in an aggregate
principal amount at any one time outstanding up to but not exceeding
the Maximum Committed Amount; provided, however, that the Lender shall
not be obligated to make any Committed Advance if the aggregate
outstanding principal amount of Advances plus the requested Advance
would exceed the Borrowing Base.
(2) In addition to the foregoing, the Lender may from time to time in
its sole discretion, on the terms and conditions set forth in this
Agreement, make loans (individually, an "Uncommitted Advance" to the
Borrowers, from time to time on any given Business Day from and
including the Effective Date to but excluding the Termination Date, in
an aggregate principal amount at any one time outstanding up to but
not exceeding the Maximum Uncommitted Amount; provided, however, that
the Lender shall not be obligated to make any Uncommitted Advance if
the aggregate outstanding principal amount of Advances plus the
requested Advance would exceed the Borrowing Base. Unless otherwise
agreed by the parties, in determining whether Advances outstanding
secured by Eligible Assets are Committed Advances or Uncommitted
Advances, such Advances shall first be deemed Committed Advances up to
the Maximum Committed Amount, and then the remainder shall be deemed
Uncommitted Advances.
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(3) Subject to the terms and conditions of this Loan Agreement, during
the term of the Loan Agreement, the Borrowers may borrow, repay and
reborrow hereunder.
(4) In no event shall an Advance be made when any Default or Event of
Default has occurred and is continuing.
2.2 Notes.
(1) The Advances made by the Lender shall be evidenced by a
single promissory note of the Borrowers substantially in the form
of Exhibit A hereto (the "Note"), dated the date hereof, payable
to the Lender in a principal amount equal to the amount of the
Maximum Credit and otherwise duly completed. The Lender shall
have the right to have its Note subdivided, by exchange for
promissory notes of lesser denominations or otherwise.
(2) The date, amount and interest rate of each Advance made
by the Lender to either Borrower, and each payment made on
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account of the principal and interest thereof, shall be recorded
by the Lender on its books and, prior to any transfer of the
Note, endorsed by the Lender on the schedule attached to the Note
or any continuation thereof; provided that the failure of the
Lender to make any such recordation or endorsement shall not
affect the obligations of the Borrowers to make a payment when
due of any amount owing hereunder or under the Note in respect of
the Advances.
2.3 Procedure for Borrowing.
(1) Either Borrower may request a borrowing hereunder, on
any Business Day during the period from and including the
Effective Date to and including the Termination Date, by
delivering to (i) the Lender, with a copy to the Mortgage
Custodian, a Mortgage Loan Tape and Mortgage Loan Schedule or
(ii) to the Bond/PC Custodian, a Participation Certificate Tape
and Participation Certificate Schedule, or a Pledged Stock
Summary and/or Bond Summary, as applicable, (the "Applicable
Notice Documents"), and an irrevocable written notice of
borrowing and pledge substantially in the form of Exhibit D-1,
Exhibit D-2, Exhibit D-3 or Exhibit D-4 attached hereto, as
applicable, (each a "Notice of Borrowing and Pledge"),
appropriately completed, which such Notice of Borrowing and
Pledge and the related Applicable Notice Documents must be
received by the Lender prior to 10:00 a.m., New York City time,
at least three (3) Business Days prior to the
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requested Funding Date; provided that the Lender shall be under
no obligation to make an Advance more than once daily. Such
Notice of Borrowing and Pledge shall (i) include the Applicable
Notice Documents in respect of the Eligible Assets that the
Borrower proposes to pledge to the Lender and be included in the
Borrowing Base in connection with such Advance, (ii) contain the
amount of the requested Advance, which shall in all events be at
least equal to $3,000,000 or such lesser amount as mutually
agreed upon by the Lender and the related Borrower, to be made on
such Funding Date (setting forth the amount of the Advance
allocable to each Eligible Asset or Underlying Eligible Bond, as
applicable, set forth on the attached Mortgage Loan Schedule,
Participation Certificate Schedule or the Bond Summary, as
applicable), (iii) specify the requested Funding Date, which
shall be not earlier than the third Business Day following the
date of such Notice of Borrowing and Pledge, (iv) contain (by
attachment) such other information reasonably requested by the
Lender from time to time and (v) the applicable agreement
evidencing the Purchase Price Percentage as reflected in the
Mortgage Loan Schedule, Participation Certificate Schedule or
Bond Summary, as applicable.
(2) (i) With respect to Mortgage Loans, the related Borrower
shall deliver (or cause to be delivered) and release to the
Mortgage Custodian, no later than 10:00 a.m. New York City time,
three (3) Business Days prior to the requested Funding Date, a
complete Mortgage File pertaining
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to each Mortgage Loan to be pledged to the Lender and included in
the Borrowing Base on such requested Funding Date, in accordance
with the terms and conditions of the Mortgage Custodial
Agreement, (ii) with respect to Participation Certificates, such
Borrower shall deliver (or cause to be delivered) and release to
the Lender, no later than 10:00 a.m. New York City time, three
(3) Business Days prior to the requested Funding Date, a complete
Participation Certificate File (with a copy of the Participation
Certificate in lieu of the original) pertaining to each
Participation Certificate to be pledged to the Lender and
included in the Borrowing Base on such requested Funding Date,
(iii) with respect to Eligible Bonds, such Borrower shall deliver
(or cause to be delivered) and release to the Lender, no later
than 10:00 a.m. three days prior to the requested Funding Date,
copies of all documents composing the Bond File pertaining to
each Eligible Bond to be pledged to the Lender and included in
the Borrowing Base on such requested Funding Date and (iv) with
respect to the Pledged Stock to be pledged to the Lender and
included in the Borrowing Base on such requested Funding Date,
such Borrower shall deliver (or cause to be delivered) and
release to the Lender, no later than 10:00 a.m. three days prior
to the requested Funding Date, (A) copies of all documents
composing the Bond File pertaining to each Underlying Eligible
Bond and (B) the documents to be delivered pursuant to Section
5.02(h).
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(3) In addition to the foregoing, the related Borrower shall
deliver (or cause to be delivered) and release to the Lender no
later than 10:00 a.m. New York City time, three (3) Business Days
prior to the requested Funding Date, a Due Diligence Package for
each Mortgage Loan and Underlying Mortgage Loan to be pledged to
the Lender and included in the Borrowing Base on such requested
Funding Date.
(4) (i) With respect to Eligible Mortgage Loans, pursuant to
the Mortgage Custodial Agreement, the Mortgage Custodian shall
deliver to the Lender and the related Borrower, no later than
11:00 a.m., New York City time, on a Funding Date, a Trust
Receipt in respect of all Eligible Mortgage Loans pledged to the
Lender on such Funding Date and an Exception Report in respect of
all Eligible Mortgage Loans so pledged to the Lender, (ii) with
respect to Eligible Bonds and Participation Certificates, the
Borrower shall deliver to the Bond/PC Custodian, with copies to
the Lender, the original Eligible Bonds and related Bond Files
and the original Participation Certificates and Participation
Certificate Files, (iii) with respect to Pledged Stock, the
Borrower shall deliver to the Bond/PC Custodian, with copies to
the Lender, the original Underlying Eligible Bonds and related
Bond Files and the original Pledged Stock. The Bond/PC Custodian
shall inform the Lender of its receipt of the documents
referenced in clause (iii) of this subsection (d) in a form and
manner acceptable to the Lender in its sole discretion. Subject
to
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Section 5 hereof, such Advance will then be made available to the
related Borrower by the Lender transferring, via wire transfer
(pursuant to wire transfer instructions provided by the related
Borrower on or prior to such Funding Date) the aggregate amount
of such Advance in immediately available funds; provided,
however, to the extent that any such requested borrowing shall
constitute an Uncommitted Advance, the Lender may, at its sole
option, elect not to make an Uncommitted Advance.
2.4 Repayment of Advances; Interest.
(1) The Borrowers hereby promise to repay in full on the
Termination Date the then aggregate outstanding principal amount
of the Advances.
(2) The Borrower hereby promise to pay to the Lender
interest on the unpaid principal amount of each Advance for the
period from and including the Funding Date of such Advance to but
excluding the date such Advance shall be paid in full, at a rate
per annum equal to LIBOR plus the Applicable Margin.
Notwithstanding the foregoing, the Borrowers hereby promise to
pay to the Lender interest at the applicable Post-Default Rate on
any principal of any Advance and on any other amount payable by
the Borrowers hereunder or under the Note that shall not be paid
in full when due
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(whether at stated maturity, by acceleration or by mandatory
prepayment or otherwise) for the period from and including the
due date thereof to but excluding the date the same is paid in
full. Accrued interest on each Advance shall be payable at the
end of each Interest Period unless the related Borrower has been
otherwise notified by the Lender. In the event the Lender
requests payment of accrued interest on a day other than on the
Payment Date immediately following the applicable Reset Date, the
Borrowers shall pay such accrued interest no later than one (1)
Business Day following receipt of such notice by the Lender;
provided, however, that each Borrower shall not be obligated to
pay accrued interest more frequently than once a month.
Notwithstanding the foregoing, interest accruing at the
Post-Default Rate shall be payable to the Lender on demand.
Promptly after the determination of any interest rate provided
for herein or any change therein, the Lender shall give notice
thereof to each Borrower.
(3) The Borrowers and the Lender acknowledge that the
Proceeds of Collateral may be held in the Collection Account
pursuant to the Blocked Account Agreement. The Lender agrees that
if no Default shall have occurred and be continuing, including
without limitation, any Default under Section 2.04 hereof, on
each Payment Date, the Collection Bank shall be permitted to
remit such amounts then held in such Collection Account at the
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direction of the Hanover Capital Holdings until notified to the
contrary by the Lender.
2.5 Limitation on Types of Advances; Illegality. Anything
herein to the contrary notwithstanding, if, on or prior to the
determination of any LIBOR:
(1) the Lender determines, which determination shall be
conclusive, that quotations of interest rates for the relevant
deposits referred to in the definition of "LIBOR" in Section 1.01
hereof are not being provided in the relevant amounts or for the
relevant maturities for purposes of determining rates of interest
for Advances as provided herein; or
(2) the Lender determines, which determination shall be
conclusive, that the relevant rate of interest referred to in the
definition of "LIBOR" in Section 1.01 hereof upon the basis of
which the rate of interest for Advances is to be determined is
not likely adequately to cover the cost to the Lender of making
or maintaining Advances; or
(3) it becomes unlawful for the Lender to honor its
obligation to make or maintain Advances hereunder using a LIBOR;
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then the Lender shall give the Borrowers prompt notice thereof
and, so long as such condition remains in effect, the Lender
shall be under no obligation to make additional Advances, and the
Borrowers shall, at their option, either prepay all such Advances
as may be outstanding or pay interest on such Advances at a rate
per annum equal to the Federal Funds Rate plus the Applicable
Margin.
2.6 Determination of Borrowing Base; Mandatory Prepayments
or Pledge.
(1) If at any time the aggregate outstanding principal
amount of all Advances exceeds the Borrowing Base of Eligible
Assets pledged to secure the Advances (a "Borrowing Base
Deficiency"), as determined by the Lender and notified to the
Borrowers on any Business Day, the Borrowers shall no later than
one (1) Business Day after receipt of such notice, at the option
of the Borrowers, either prepay the Advances in part or in whole
or pledge additional Eligible Assets to the Lender (which shall
be in all respects acceptable to the Lender), such that after
giving effect to such prepayment or pledge the aggregate
outstanding principal amount of the Advances does not exceed the
Borrowing Base.
(2) On the fifth day of each month (or if such day is not a
Business Day, the next succeeding Business Day), the Lender (or
the
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Borrowers if the Borrowers and the Lender shall mutually agree)
shall calculate and deliver a Borrowing Base Certificate in the
form attached hereto as Exhibit H, such certificate to be based
on the principal balance of the Eligible Assets as of the last
calendar day of the prior month or such other calendar day as
applicable for the related Subservicer or Trustee and acceptable
to the Lender. In the event that such Borrowing Base Certificate
indicates that a Borrowing Base Deficiency exists, the Borrowers
shall on the immediately following Payment Date either prepay the
Advances in part or in whole or pledge additional Eligible Assets
to the Lender (which shall be in all respects acceptable to the
Lender), such that after giving effect to such prepayment or
pledge the aggregate outstanding principal amount of the Advances
does not exceed the Borrowing Base.
2.7 Optional Prepayments. The Advances are prepayable
without premium or penalty, in whole or in part at any time. 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 a Borrower
intends to prepay an Advance in whole or in part from any source,
the Borrower 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
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accrued interest to such date on the amount prepaid. Partial
prepayments shall be in an aggregate principal amount of at least
$100,000.
2.8 Requirements of Law.
(1) If any Requirement of Law (other than with respect to
any amendment made to the Lender's certificate of incorporation
and by-laws or other organizational or governing documents) or
any change in the interpretation or application thereof or
compliance by the Lender with any request or directive (whether
or not having the force of law) from any central bank or other
Governmental Authority made subsequent to the date hereof:
(1) shall subject the Lender to any tax of any kind
whatsoever with respect to this Loan Agreement, the Note or
any Advance made by it (excluding net income taxes) or
change the basis of taxation of payments to the Lender in
respect thereof;
(2) shall impose, modify or hold applicable any
reserve, special deposit, compulsory Advance or similar
requirement against assets held by, deposits or other
liabilities in or for the account of, Advances or other
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extensions of credit by, or any other acquisition of funds
by, any office of the Lender which is not otherwise included
in the determination of the LIBOR hereunder;
(3) shall impose on the Lender any other condition;
and the result of any of the foregoing is to increase the cost to
the Lender, by an amount which the Lender deems to be material,
of making, continuing or maintaining any Advance or to reduce any
amount receivable hereunder in respect thereof, then, in any such
case, the Borrowers shall (i) promptly pay the Lender such
additional amount or amounts as will compensate the Lender for
such increased cost or reduced amount receivable; provided that,
notwithstanding the foregoing, within 30 days following receipt
of notice from the Lender that any amount or amounts are due
pursuant to this Section 2.08, the Borrowers shall have the
option to pay in full all Secured Obligations (including, without
limitation, any additional payments required pursuant to this
Section 2.08) and terminate this Loan Agreement.
(2) If the Lender shall have determined that the adoption of or
any change in any Requirement of Law (other than with respect to any
amendment made to the Lender's certificate of incorporation and
by-laws or other organizational or governing documents) regarding
capital
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adequacy or in the interpretation or application thereof or compliance
by the Lender or any corporation controlling the Lender with any
request or directive regarding capital adequacy (whether or not having
the force of law) from any Governmental Authority made subsequent to
the date hereof shall have the effect of reducing the rate of return
on the Lender's or such corporation's capital as a consequence of its
obligations hereunder to a level below that which the Lender or such
corporation (taking into consideration the Lender's or such
corporation's policies with respect to capital adequacy) by an amount
deemed by the Lender to be material, then from time to time, the
Borrower shall promptly pay to the Lender such additional amount or
amounts as will compensate the Lender for such reduction.
(3) If the Lender becomes entitled to claim any additional
amounts pursuant to this subsection, it shall promptly notify the
Borrower of the event by reason of which it has become so entitled. A
certificate as to any additional amounts payable pursuant to this
subsection submitted by the Lender to the Borrowers shall be
conclusive in the absence of manifest error.
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2.9 Purpose of Advances. Each Advance shall be used to finance
the acquisition of Eligible Assets identified to the Lender in writing
on each Mortgage Loan Schedule, Participation Certificate Schedule, or
Pledged Stock Summary and/or Bond Summary, as applicable, as such
Mortgage Loan Schedule, Participation Certificate Schedule, or Pledged
Stock Summary and/or Bond Summary, may be amended from time to time.
2.10 Extension of Termination Date. At the request of the
Borrowers, which request must be made at least thirty (30) days prior
to the then current Termination Date, the Lender may in its sole
discretion extend the Termination Date for a period of 364 days by
giving written notice of such extension to the Borrowers no later than
twenty (20) days, but in no event earlier than thirty (30) days, prior
to the then current Termination Date.
2.11 Extension of Maximum Pledge Period. At the request of the
Borrowers, which request must be made at least thirty (30) days prior
to the expiration of the Maximum Pledge Period, the Lender may in its
sole discretion extend such Maximum Pledge Period for any longer time
period as determined by the Lender in its sole discretion.
SECTION 3 Payments; Computations; Etc.; Commitment Fee.
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3.1 Payments.
(1) Except to the extent otherwise provided herein, all payments
of principal, interest and other amounts to be made by the Borrowers
under this Loan Agreement and the Note, shall be made in Dollars, in
immediately available funds, without deduction, set-off or
counterclaim, to the Lender at the following account maintained by the
Lender: Chase Manhattan Bank, N.A., Account # 140095961, ABA #
021000021, for the A/C of Greenwich Capital Financial Products, Inc.
(Hanover), Attn: Brett Kibbe, not later than 3:00 p.m., New York City
time, on the date on which such payment shall become due (and each
such payment made after such time on such due date shall be deemed to
have been made on the next succeeding Business Day). Each Borrower
acknowledges that it has no rights of withdrawal from the foregoing
account.
(2) Except to the extent otherwise expressly provided herein, if
the due date of any payment under this Loan Agreement or the Note
would otherwise fall on a day that is not a Business Day, such date
shall be extended to the next succeeding Business Day, and interest
shall be payable for any principal so extended for the period of such
extension.
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3.2 Computations. Interest on the Advances shall be computed on
the basis of a 360-day year for the actual days elapsed (including the
first day but excluding the last day) occurring in the period for
which payable.
3.3 Commitment Fee. The Borrowers agree to pay to the Lender, on
the Payment Dates in April, July, October and January and on the
Termination Date (each a "Commitment Fee Payment Date"), a commitment
fee equal to (a) 12.5 basis points (0.125%) multiplied by (b)(i) the
number of days from and including the date of the Loan Agreement or
the previous Commitment Fee Payment Date up to but not including the
related Commitment Fee Payment Date or the Termination Date, as
applicable, divided by (ii) 360 multiplied by (c) the Maximum
Committed Amount (the "Commitment Fee"), such payment to be made in
Dollars, in immediately available funds, without deduction, set-off or
counterclaim, to the Lender commencing on April 8, 1998. The Lender
may, in its sole discretion, net such Commitment Fee from the proceeds
of any Advance made to a Borrower.
3.4 Selection of Interest Period. The Borrowers' selection of the
duration of Interest Period shall be irrevocable and shall be
effective only if noted on the applicable Notice of Borrowing and
Pledge. Prior to the termination of the Interest Period selected
pursuant to this Section 3.04,
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the Borrowers may elect an Interest Period by delivering written
notice, substantially in the form of Annex L attached hereto, to the
Lender indicating the desired Interest Period, which such notice must
be received no later than two (2) Business Day(s) prior to the date on
which the then current Interest Period is scheduled to end. In the
event no such written notice is received by the Lender, the applicable
Interest Rate shall be one month.
SECTION 4 Collateral Security.
4.1 Collateral; Security Interest.
(1) With respect to Eligible Mortgage Loans, the Mortgage
Custodian shall, pursuant to the Mortgage Custodial Agreement: (i)
hold the related Mortgage Loan Documents as exclusive bailee and agent
for the Lender and (ii) deliver Trust Receipts to the Lender each to
the effect that it has reviewed the related Mortgage Loan Documents in
the manner and to the extent required by the Mortgage Custodial
Agreement and identifying any Exceptions in such Mortgage Loan
Documents as so reviewed in the Exception Reports. With respect to
Eligible Bonds or Pledged Stock, the Bond/PC Custodian shall, pursuant
to the Bond/PC Custodial Agreement, hold such Eligible Bonds or
Pledged Stock and the related Bond Files, either directly or through
the facilities of a Relevant System, as "securities intermediary" (as
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defined in Section 8-102(a)(14) of the UCC and 31 C.F.R. Section
357.2) and credit them to the "securities account" of the Lender. With
respect to Participation Certificates, the Bond/PC Custodian shall,
pursuant to the Bond/PC Custodial Agreement, hold such Participation
Certificates and the related Participation Certificate Files as
exclusive bailee and agent for the Lender and (ii) shall review such
Participation Certificate File in the manner and to the extent
required by the Bond/PC Custodial Agreement.
(2) Each of the following items of property is hereinafter
referred to as the "Collateral":
(1) all Mortgage Loans, Eligible Bonds, Pledged Stock, and
Participation Certificates (or the Underlying Mortgage Loans
related thereto) identified on a Notice of Borrowing and
Pledge delivered by the related Borrower to the Lender and
the Bond/PC Custodian or the Mortgage Custodian, as
applicable, from time to time (the "Assets");
(2) all Asset Documents, including without limitation all
promissory notes, and all Servicing Records, Servicing
Agreements, servicing rights, all Transfer
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Documents, all Governing Agreements and all original
certificates evidencing Assets, together with all files,
documents, instruments, surveys, certificates,
correspondence, appraisals, computer storage media,
accounting records and other books and records relating
thereto;
(3) all mortgage guaranties and insurance relating to Assets
(issued by governmental agencies or otherwise) and any
mortgage insurance certificate or other document evidencing
such mortgage guaranties or insurance relating to Assets and
all claims and payments thereunder;
(4) all other insurance policies and insurance proceeds
relating to any Assets;
(5) all purchase or Take-Out Commitments relating to or
constituting any or all of the foregoing;
(6) all of the related Borrower's rights in the Pledged
Stock of each Eligible Entity the Pledged Stock of which is
an Asset, and all of the related Borrower's
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rights as a shareholder in such Eligible Entity the Pledged
Stock of which is an Asset;
(7) all warrants, options and other rights to acquire stock
in each Eligible Entity and all of the related Borrower's
rights, if any, to participate in the management of such
Eligible Entity the Pledged Stock of which is an Asset;
(8) all rights, privileges, authority and powers of the
related Borrower as owner or holder of its equity interest
in each Eligible Entity the Pledged Stock of which is an
Asset, including, but not limited to, all general intangible
and contract rights related thereto;
(9) all documents and certificates representing or
evidencing the related Borrower's equity interest in each
Eligible Entity the Pledged Stock of which is an Asset;
(10) all of the related Borrower's right as shareholder of
each Eligible Entity the Pledged Stock of which is an Asset
to receive dividends and redemptions on account of
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the Pledged Stock or to receive distributions of each such
Eligible Entity's respective assets, upon complete or
partial liquidation or otherwise; (1)
(11) all distributions, cash, Property, and instruments from
time to time received, receivable or otherwise distributed
in respect of, or in exchange for the related Borrower's
interest in each Eligible Entity related to any Pledged
Stock which is an Asset and delivered or transferred to the
Lender or the related Borrower or in the case of securities
deposited in any securities account controlled by the Lender
or the related Borrower and not controlled by any other
party;
(12) any other rights, title, interest, privilege, authority
and power of the Borrower in or relating to each Eligible
Entity related to any Pledged Stock which is an Asset, all
whether now existing or hereafter arising, and whether
arising at law or in equity and any and all proceeds of and
distribution in any of the foregoing and all books and
records of the related Borrower pertaining to the foregoing;
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(13) all Hedging Agreements relating to such Assets;
(14) the Collection Account and the balance from time to
time standing to the credit of the Collection Account and
all rights with respect thereto;
(15) all purchase agreements relating to such Assets;
(16) all collateral, however defined, under any other
agreement between the Borrowers or any of their Affiliates
on the one hand and the Lender or any of its Affiliates on
the other hand;
(17) all "accounts", "chattel paper", "general intangibles"
and "securities accounts" as defined in the Uniform
Commercial Code constituting any and all of the foregoing;
and
(18) any and all replacements, substitutions, distributions
on or proceeds of any and all of the foregoing.
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(3) Each Borrower hereby pledges to the Lender, and grants a
security interest in favor of the Lender in, all of the Borrower's
right, title and interest in, to and under the Collateral, whether now
owned or hereafter acquired, now existing or hereafter created and
wherever located, to secure the Secured Obligations. Each Borrower
agrees to mark its computer records and tapes to evidence the interests
granted to the Lender hereunder.
(4) Re-Registration; Rights of Lender. The Lender shall have
the right to register or cause to be registered in the name of the
Lender or the Bond/PC Custodian or other designee, all Eligible Bonds,
Pledged Stock, Underlying Eligible Bonds or Participation Certificates
pledged to the Lender hereunder and the Lender or its other designee
shall have all rights of conversions, exchange, subscription and any
other rights, privileges and options pertaining to such Eligible Bonds,
Pledged Stock, Underlying Eligible Bonds or Participation Certificates
as if it were the owner thereof, and in connection therewith, the right
to deposit and deliver any and all of the Eligible Bonds, Pledged
Stock, Underlying Eligible Bonds or Participation Certificates with any
committee, depositary transfer, agent, register or other designated
agency upon such terms and conditions as the Lender may determine.
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(5) Cash Dividends. The Lender, as "entitlement holder" (as
defined in Section 8-102(a) of the UCC) with respect to the Eligible
Bonds, Underlying Eligible Bonds and Pledged Stock, shall be entitled
to receive all cash dividends and distributions paid in respect
thereof. Any such dividends or distributions received by either
Borrower shall be promptly remitted to the Collection Account.
(6) Stock Powers; Voting Rights. Concurrently with the
delivery to the Lender of each certificate representing one or more
shares of the Pledged Stock, the related Borrower shall deliver an
undated stock power covering such certificate, duly executed in blank
with, if the Lender so requests, signature guaranteed. With respect to
the Pledged Stock, the related Borrower shall be permitted to exercise
all voting and corporate rights with respect to the Pledged Stock
unless an Event of Default shall have occurred and be continuing;
provided, however, that no vote shall be cast or corporate right
exercised or other action taken which would impair the Collateral or
which would be inconsistent with or result in any violation of any
provision of the Note, this Loan Agreement or the other Loan Documents.
Without the prior written consent of the Lender, the related Borrower
will not (i) vote to enable, or take any other action to permit, (A)
the Eligible Entity to issue any stock or other equity
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securities of any nature or to issue any other securities convertible
into or granting the right to purchase or exchange for any stock or
other equity securities of any of the Eligible Entity, (B) the Eligible
Entity to sell, assign, transfer, exchange or otherwise dispose of, or
grant any option with respect to any Property owned by the Eligible
Entity or (C) the Eligible Entity to dividend or otherwise make any
distribution to its shareholders or (ii) sell, assign, transfer,
exchange or otherwise dispose of, or grant any option with respect to,
the Collateral, or (iii) create, incur or permit to exist any Lien or
option in favor of, or any claim of any Person with respect to, any of
the Collateral, or any interest therein, except for the Lien provided
for by this Pledge Agreement, or (iv) enter into any agreement or
undertaking restricting the right or ability of such Borrower or the
Lender to sell, assign or transfer any of the Collateral.
4.2 Further Documentation. At any time and from time to time,
upon the written request of the Lender, and at the sole expense of the
related Borrower, such Borrower will promptly and duly execute and
deliver, or will promptly cause to be executed and delivered, such
further instruments and documents and take such further action as the
Lender may reasonably request for the purpose of obtaining or
preserving the full benefits of this Loan Agreement and of the rights
and powers herein granted, including, without limitation, the filing of
any financing or continuation statements under the Uniform Commercial
Code in effect in any jurisdiction with respect to the Liens created
hereby. Each Borrower also hereby authorizes the Lender to file any
such financing or continuation statement without the signature of such
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Borrower to the extent permitted by applicable law. A carbon,
photographic or other reproduction of this Loan Agreement shall be
sufficient as a financing statement for filing in any jurisdiction.
4.3 Changes in Locations, Name, etc. Neither Borrower shall
(i) change the location of its chief executive office/chief place of
business from that specified in Section 6 hereof or (ii) change its
name, identity or corporate structure (or the equivalent) or change the
location where it maintains its records with respect to the Collateral
unless it shall have given the Lender at least 30 days prior written
notice thereof and shall have delivered to the Lender all Uniform
Commercial Code financing statements and amendments thereto as the
Lender shall request and taken all other actions deemed necessary by
the Lender to continue its perfected status in the Collateral with the
same or better priority.
4.4 Lender's Appointment as Attorney-in-Fact.
(1) Each Borrower hereby irrevocably constitutes and appoints
the Lender and any officer or agent thereof, with full power of
substitution, as its true and lawful attorney-in-fact with full
irrevocable power and authority in the place and stead of such Borrower
and in the name of such Borrower or in its own name, from time to time
in the Lender's discretion, for
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the purpose of carrying out the terms of this Loan Agreement, to take
any and all appropriate action and to execute any and all documents and
instruments which may be necessary or desirable to accomplish the
purposes of this Loan Agreement, and, without limiting the generality
of the foregoing, each Borrower hereby gives the Lender the power and
right, on behalf of the Borrower, without assent by, but with notice
to, the Borrower, if an Event of Default shall have occurred and be
continuing, to do the following:
(1) in the name of the Borrower or its own name, or otherwise,
to take possession of and endorse and collect any checks,
drafts, notes, acceptances or other instruments for the
payment of moneys due under any mortgage insurance or with
respect to any other Collateral and to file any claim or to
take any other action or proceeding in any court of law or
equity or otherwise deemed appropriate by the Lender for the
purpose of collecting any and all such monies due under any
such mortgage insurance or with respect to any other
Collateral whenever payable;
(2) to pay or discharge taxes and Liens levied or placed on or
threatened against the Collateral; and
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(3) (A) to direct any party liable for any payment under any
Collateral to make payment of any and all moneys due or to
become due thereunder directly to the Lender or as the Lender
shall direct; (B) to ask or demand for, collect, receive
payment of and receipt for, any and all moneys, claims and
other amounts due or to become due at any time in respect of
or arising out of any Collateral; (C) to sign and endorse any
invoices, assignments, verifications, notices and other
documents in connection with any of the Collateral; (D) to
commence and prosecute any suits, actions or proceedings at
law or in equity in any court of competent jurisdiction to
collect the Collateral or any thereof and to enforce any other
right in respect of any Collateral; (E) to defend any suit,
action or proceeding brought against the Borrower with respect
to any Collateral; (F) to settle, compromise or adjust any
suit, action or proceeding described in clause (E) above and,
in connection therewith, to give such discharges or releases
as the Lender may deem appropriate; and (G) generally, to
sell, transfer, pledge and make any agreement with respect to
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or otherwise deal with any of the Collateral as fully and
completely as though the Lender were the absolute owner
thereof for all purposes, and to do, at the Lender's option
and the Borrower's expense, at any time, and from time to
time, all acts and things which the Lender deems necessary to
protect, preserve or realize upon the Collateral and the
Lender's Liens thereon and to effect the intent of this Loan
Agreement, all as fully and effectively as the Borrower might
do.
Each Borrower hereby ratifies all that said attorneys shall lawfully do or
cause to be done by virtue hereof. This power of attorney is a power
coupled with an interest and shall be irrevocable.
(2) Each Borrower also authorizes the Lender, at any time and
from time to time, to execute, in connection with any sale provided for
in Section 4.07 hereof, any endorsements, assignments or other
instruments of conveyance or transfer with respect to the Collateral.
(3) The powers conferred on the Lender are solely to protect
the Lender's interests in the Collateral and shall not impose any duty
upon the Lender to exercise any such powers. The Lender shall be
accountable
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only for amounts that it actually receives as a result of the exercise
of such powers, and neither the Lender nor any of its officers,
directors, or employees shall be responsible to the Borrowers for any
act or failure to act hereunder, except for its own gross negligence or
willful misconduct.
4.5 Performance by Lender of Borrower's Obligations. If a
Borrower fails to perform or comply with any of agreements contained in
the Loan Documents and the Lender itself performs or complies, or
otherwise causes performance or compliance, with such agreement, the
expenses of the Lender incurred in connection with such performance or
compliance, together with interest thereon at a rate per annum equal to
the Post-Default Rate, shall be payable by such Borrower to the Lender
on demand and shall constitute Secured Obligations.
4.6 Proceeds. If an Event of Default shall occur and be
continuing, (a) all proceeds of Collateral received by a Borrower
consisting of cash, checks and other near-cash items shall be held by
the Borrower in trust for the Lender, segregated from other funds of
the Borrower, and shall forthwith upon receipt by the Borrower be
turned over to the Lender in the exact form received by the Borrower
(duly endorsed by the Borrower to the Lender, if required) and (b) any
and all such proceeds received by the Lender (whether from the Borrower
or otherwise) may, in the sole discretion of the
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Lender, be held by the Lender as collateral security for, and/or then
or at any time thereafter may be applied by the Lender against, the
Secured Obligations (whether matured or unmatured), such application to
be in such order as the Lender shall elect. Any balance of such
proceeds remaining after the Secured Obligations shall have been paid
in full and this Loan Agreement shall have been terminated shall be
paid over to the related Borrower or to whomsoever may be lawfully
entitled to receive the same. For purposes hereof, proceeds shall
include, but not be limited to, all principal and interest payments,
all prepayments and payoffs, insurance claims, condemnation awards,
sale proceeds, real estate owned rents and any other income and all
other amounts received with respect to the Collateral.
4.7 Remedies. If an Event of Default shall occur and be
continuing, the Lender may exercise, in addition to all other rights
and remedies granted to it in this Loan Agreement and in any other
instrument or agreement securing, evidencing or relating to the Secured
Obligations, all rights and remedies of a secured party under the
Uniform Commercial Code. Without limiting the generality of the
foregoing, the Lender without demand of performance or other demand,
presentment, protest, advertisement or notice of any kind (except any
notice required by law referred to below) to or upon the Borrowers or
any other Person (each and all of which demands, presentments,
protests, advertisements and notices are hereby waived), may in such
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circumstances forthwith collect, receive, appropriate and realize upon
the Collateral, or any part thereof, and/or may forthwith sell (on a
servicing released basis with respect to Collateral serviced by either
Borrower or an Affiliate of either Borrower, at the Lender's option),
lease, assign, give option or options to purchase, or otherwise dispose
of and deliver the Collateral or any part thereof (or contract to do
any of the foregoing), in one or more parcels or as an entirety at
public or private sale or sales, at any exchange, broker's board or
office of the Lender or elsewhere upon such terms and conditions as it
may deem advisable and at such prices as it may deem best, for cash or
on credit or for future delivery without assumption of any credit risk.
The Lender shall have the right upon any such public sale or sales,
and, to the extent permitted by law, upon any such private sale or
sales, to purchase the whole or any part of the Collateral so sold,
free of any right or equity of redemption in either Borrower, which
right or equity is hereby waived or released. Each Borrower further
agrees, at the Lender's request, to assemble the Collateral and make it
available to the Lender at places which the Lender shall reasonably
select, whether at the Borrower's premises or elsewhere. The Lender
shall apply the net proceeds of any such collection, recovery, receipt,
appropriation, realization or sale, after deducting all reasonable
costs and expenses of every kind incurred therein or incidental to the
care or safekeeping of any of the Collateral or in any way relating to
the Collateral or the rights of the Lender hereunder, including without
limitation reasonable attorneys' fees and disbursements, to the payment
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in whole or in part of the Secured Obligations, in such order as the
Lender may elect, and only after such application and after the payment
by the Lender of any other amount required or permitted by any
provision of law, including without limitation Section 9-504(1)(c) of
the Uniform Commercial Code, need the Lender account for the surplus,
if any, to the related Borrower. To the extent permitted by applicable
law, each Borrower waives all claims, damages and demands it may
acquire against the Lender arising out of the exercise by the Lender of
any of its rights hereunder, other than those claims, damages and
demands arising from the gross negligence or willful misconduct of the
Lender. If any notice of a proposed sale or other disposition of
Collateral shall be required by law, such notice shall be deemed
reasonable and proper if given at least 10 days before such sale or
other disposition. The Borrowers shall remain liable for any deficiency
(plus accrued interest thereon as contemplated pursuant to Section
2.04(b) hereof) if the proceeds of any sale or other disposition of the
Collateral are insufficient to pay the Secured Obligations and the fees
and disbursements of any attorneys employed by the Lender to collect
such deficiency. Because the Borrowers recognize that it may not be
possible to purchase or sell all of the Collateral on a particular
Business Day, or in a transaction with the same purchaser, or in the
same manner because the market for such Collateral may not be liquid,
the Borrowers agree that liquidation of the Collateral does not require
a public purchase or sale and that a good faith private purchase or
sale shall be deemed to have been made in a commercially
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reasonable manner. Accordingly, the Lender may elect, in its sole
discretion, the time and manner of liquidating any Collateral and
nothing contained herein shall (A) obligate the Lender to liquidate any
Collateral on the occurrence of an Event of Default or to liquidate all
Collateral in the same manner or on the same Business Day or (B)
constitute a waiver of any of the Lender's rights or remedies. With
respect to any Pledged Stock, prior to the Lender taking title to any
Pledged Stock or as a condition to the sale of any Pledged Stock as
permitted hereunder, the Lender shall obtain (i) an opinion of counsel
acceptable to the rating agencies which rated the Underlying Eligible
Bonds held by the related Eligible Entity (or, if such Underlying
Eligible Bonds are unrated, acceptable to the rating agencies which
rated any rated Underlying Eligible Bonds issued in conjunction with
such unrated Underlying Eligible Bonds) that such Eligible Entity will
not be consolidated into any bankruptcy of the purchaser of such
Pledged Stock (including the Lender if the Lender shall acquire the
Pledged Stock hereunder) and (ii) a written covenant from such
purchaser (including the Lender if the Lender shall acquire the Pledged
Stock hereunder) that it agrees not to (x) file or consent to the
filing of any bankruptcy, insolvency or reorganization case or
proceeding with respect to the related Special Purpose Entity;
institute any proceedings under any applicable insolvency law or under
any laws relating to the relief from debts or the protection of debtors
generally with respect to the related Special Purpose Entity; (y) seek
or consent to the appointment of a receiver, liquidator,
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assignee, trustee, sequestrator, custodian or any similar official for
the related Special Purchase Entity or a substantial portion of the
related Special Purpose Entity's Properties; or (z) make any assignment
for the benefit of the related Special Purpose Entity's creditors.
4.8 Limitation on Duties Regarding Presentation of Collateral.
The Lender's duty with respect to the custody, safekeeping and physical
preservation of the Collateral in its possession, under Section 9-207
of the Uniform Commercial Code or otherwise, shall be to deal with it
in the same manner as the Lender deals with similar property for its
own account. Neither the Lender nor any of its directors, officers or
employees shall be liable for failure to demand, collect or realize
upon all or any part of the Collateral or for any delay in doing so or
shall be under any obligation to sell or otherwise dispose of any
Collateral upon the request of the Borrowers or otherwise.
4.9 Powers Coupled with an Interest. All authorizations and
agencies herein contained with respect to the Collateral are
irrevocable and powers coupled with an interest.
4.10 Release of Security Interest. Upon termination of this
Loan Agreement and repayment to the Lender of all Secured Obligations
and the performance of all obligations under the Loan Documents,
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the Lender shall release its security interest in any remaining
Collateral; provided that, if any payment, or any part thereof, of any
of the Secured Obligations is rescinded or must otherwise be restored
or returned by the Lender upon the insolvency, bankruptcy, dissolution,
liquidation or reorganization of a Borrower, or upon or as a result of
the appointment of a receiver, intervenor or conservator of, or a
trustee or similar officer for, a Borrower or any substantial part of
its Property, or otherwise, this Loan Agreement, all rights hereunder
and the Liens created hereby shall continue to be effective, or be
reinstated, as though such payments had not been made.
4.11 Establishment of the Collection Account.
(1) The Borrowers shall establish and maintain the Collection
Account at Fleet Bank Providence, Rhode Island, which shall be entitled
"Greenwich Capital Financial Products, Inc." The Borrowers shall not
change the name of the account without the prior written consent of the
Lender. Such Collection Account shall be subject to a Blocked Account
Agreement.
(2) The Borrower shall cause each Subservicer and Trustee to
deposit all Collections in the Collection Account in accordance with
the applicable Servicing Agreement or Governing Agreement.
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SECTION 5 Conditions Precedent.
5.1 Initial Advance. The agreement of the Lender to make the
initial Advance requested to be made by it hereunder is subject to the
satisfaction, immediately prior to or concurrently with the making of
such Advance, of the following conditions precedent:
(1) Loan Agreement. The Lender shall have received this Loan
Agreement, executed and delivered by a duly authorized officer of each
Borrower.
(2) Note. The Lender shall have received the Note, conforming
to the requirements hereof and executed by a duly authorized officer of
each Borrower.
(3) Mortgage Custodial Agreement. The Lender shall have
received the Mortgage Custodial Agreement, conforming to the
requirements hereof and executed by a duly authorized officer of each
Borrower and the Mortgage Custodian.
(4) Blocked Account Agreement. The Lender shall have received
a Blocked Account Agreement substantially in the form of
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Exhibit F hereof executed by duly authorized officers of each Borrower
and the Collection Bank.
(5) Establishment of Collection Account. The Borrowers shall
have established the Collection Account as defined herein.
(6) Filings, Registrations, Recordings. Any documents
(including, without limitation, financing statements) required to be
filed, registered or recorded in order to create, in favor of the
Lender, a perfected, first-priority security interest in the
Collateral, subject to no Liens other than those created hereunder,
shall have been properly prepared and executed for filing (including
the applicable county(ies) if the Lender determines such filings are
necessary in its sole discretion), registration or recording in each
office in each jurisdiction in which such filings, registrations and
recordations are required to perfect such first-priority security
interest.
(7) Corporate Proceedings. The Lender shall have received a
certificate of the Secretary or Assistant Secretary of each Borrower,
dated as of the date hereof, and certifying (A) that attached thereto
is a true, complete and correct copy of (i) the articles of
incorporation of such Borrower, (ii) the by-laws of such Borrower, and
(iii) resolutions duly adopted by the Board of Directors of such
Borrower authorizing the execution, delivery and
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performance of this Loan Agreement, the Notes and the other Loan
Documents to which it is a party, and the borrowings contemplated
hereunder, and that such resolutions have not been amended, modified,
revoked or rescinded, and (B) as to the incumbency and specimen
signature of each officer executing any Loan Documents on behalf of
such Borrower and authorized to execute any Notice of Borrowing, and
such certificate and the resolutions attached thereto shall be in form
and substance satisfactory to the Lender.
(8) Good Standing Certificates. The Lender shall have received
copies of certificates evidencing the good standing of each Borrower,
dated as of a recent date, from the Secretary of State (or other
appropriate authority) of the State of Maryland or the State of New
York, as the case may be, and of each other jurisdiction where the
ownership, lease or operation of property, or the conduct of business,
requires such Borrower to qualify as a foreign corporation, except
where the failure to qualify would not have a Material Adverse Effect.
(9) Legal Opinions. The Lender shall have received the
executed legal opinions of Piper & Marbury and Sidley & Austin, special
counsel to Hanover Capital Holdings, addressing the matters set forth
in items 1 through 6 in the form attached hereto as Exhibit C, dated
the initial Funding Date and otherwise in form and substance acceptable
to the Lender and
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covering such other matters incident to the transactions contemplated
by this Loan Agreement as the Lender shall reasonably request.
(10) Fees and Expenses. The Lender shall have received all
fees and expenses required to be paid by the Borrower on or prior to
the initial Funding Date pursuant to Section 11.03(b) or the Lender may
net such payments out of any Advance hereunder.
(11) Financial Statements. The Lender shall have received the
financial statements referenced in Section 6.01(a).
(12) Underwriting Guidelines. The Lender and the Borrowers
shall have agreed upon the Borrowers' current Underwriting Guidelines
for Mortgage Loans and the Lender shall have received a certified copy
thereof.
(13) Consents, Licenses, Approvals, etc. The Lender shall have
received copies certified by the Borrowers of all consents, licenses
and approvals, if any, required in connection with the execution,
delivery and performance by the Borrowers of, and the validity and
enforceability of, the Loan Documents, which consents, licenses and
approvals shall be in full force and effect.
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(14) Insurance. The Lender shall have received evidence in
form and substance satisfactory to the Lender showing compliance by the
Borrowers as of such initial Funding Date with Section 7.03 hereof.
(15) Side Letter. The Lender shall have received the Side
Letter, duly executed and delivered by Hanover Capital Holdings.
(16) Guaranty. The Lender shall have received a Guaranty, duly
executed and delivered by Hanover Capital Mortgage Holdings, Inc.; and
(17) Other Documents. The Lender shall have received such
other documents as the Lender or its counsel may reasonably request.
5.2 Initial and Subsequent Advances. The making of each
Advance to a Borrower (including the initial Advance) on any Business
Day is subject to the satisfaction of the following further conditions
precedent, both immediately prior to the making of such Advance and
also after giving effect thereto and to the intended use thereof:
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(1) No Default. No Default or Event of Default shall have
occurred and be continuing.
(2) Representations and Warranties. Each representation and
warranty made by a Borrower in Section 6 hereof and elsewhere in each
of the Loan Documents, shall be true and correct on and as of the date
of the making of such Advance (in the case of the representations and
warranties in Schedule 1, solely with respect to Eligible Assets,
included in the Borrowing Base on such date) with the same force and
effect as if made on and as of such date (or, if any such
representation or warranty is expressly stated to have been made as of
a specific date, as of such specific date). Each Borrower shall also be
in compliance with all governmental licenses and authorizations and
qualified to do business and in good standing in all required
jurisdictions where the failure to be so qualified should reasonably be
expected to have a Material Adverse Effect.
(3) Borrowing Base. The aggregate outstanding principal amount
of the Advances shall not exceed the Borrowing Base.
(4) Notice of Borrowing and Pledge. The Lender shall have
received a Notice of Borrowing and Pledge and the related
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Applicable Notice Documents (with any certificates attached thereto),
in accordance with Section 2.03(a) hereof, appropriately completed.
(5) Trust Receipt; Exception Report. The Lender shall have
received (i) from the Mortgage Custodian, with respect to Eligible
Mortgage Loans, a Trust Receipt in respect of all Mortgage Loans to be
pledged hereunder on such Business Day and a corresponding Exception
Report, with Exceptions (as defined in the Mortgage Custodial
Agreement) in respect of such Mortgage Loans and (ii) from the Bond/PC
Custodian, with respect to Participation Certificates, Eligible Bonds
and Underlying Eligible Bonds, the appropriate documentation as
required pursuant to Section 5.02(f) or (g), as applicable; provided,
that in all cases the documentation required pursuant to clauses (i)
and (ii) above shall be acceptable to the Lender in its sole
discretion.
(6) Delivery of Participation Certificates. With respect to
each Participation Certificate being pledged to the Lender: (i) such
Participation Certificate shall have been delivered to the Lender or
its designee, shall be in suitable form for registration in the name of
the Lender, shall conform to the requirements hereof and shall
otherwise be in form and substance satisfactory to the Lender, (ii) the
related Borrower shall have executed and delivered an Instruction
Letter as defined herein and (iii) the
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Participation Custodian shall have acknowledged the Lender's interest
in the Underlying Mortgage Loans.
(7) Delivery of Eligible Bonds or Underlying Eligible Bonds.
(1) With respect to Eligible Bonds or Underlying Eligible
Bonds that shall be delivered or held in definitive,
certificated form, the related Borrower shall deliver to the
Bond/PC Custodian the original of the relevant certificate in
form suitable for transfer, with accompanying, duly executed
instruments of transfer or appropriate instruments of
assignment executed in blank or in the name of the Lender or,
the Bond/PC Custodian, transfer tax stamps, and any other
documents or instruments necessary in the reasonable opinion
of the Lender to effect and perfect a legally valid delivery
of such security or other item of investment property to the
Lender, the Bond/PC Custodian. Unless otherwise instructed by
Lender, any delivery of a security or other item of investment
property in definitive, certificated form shall be made to The
Chase Manhattan Bank, 4 New
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York Plaza, New York, New York 10004, Attention: Outsourcing
Department, Jennifer John.
(2) With respect to Eligible Bonds or Underlying Eligible
Bonds that shall be delivered or held in uncertificated form
and the ownership of which is registered on books maintained
by the issuer thereof or its transfer agent, the related
Borrower shall cause the registration of such security or
other item of investment property in the name of Lender, the
Bond/PC Custodian and at the request of the Lender, shall take
such other and further steps, and shall execute and deliver
such documents or instruments necessary in the opinion of the
Lender, to effect and perfect a legally valid delivery of the
relevant interest granted therein to Lender hereunder.
(3) With respect to Eligible Bonds or Underlying Eligible
Bonds that shall be delivered through a Relevant System in
book-entry form and credited to or otherwise held in an
account, the related Borrower shall cause the giving of
written instructions to the relevant financial institution or
other entity, and shall provide a copy thereof
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to the Lender, sufficient if complied with to effect and
perfect a legally valid delivery of the relevant interest
granted therein to Lender hereunder. In connection with any
account to which the Eligible Bonds or Underlying Eligible
Bonds are credited or otherwise held, the related Borrower
shall execute and deliver such other and further documents or
instruments necessary, in the reasonable opinion of the
Lender, to effect and perfect a legally valid delivery of the
relevant interest granted therein to Lender hereunder. Any
account to which the Eligible Bonds or Underlying Eligible
Bonds are credited or otherwise shall be designated "Greenwich
Capital Financial Products, Inc. Account" or such variation
thereon as the Lender may direct.
(4) Any delivery of an Eligible Bond in accordance with
clauses (i) through (iii) above, or any other method
acceptable to the Lender, shall be sufficient to cause the
Lender to have a perfected, first priority security interest
in, and to be the "entitlement holder" (as defined in Section
8-102(a)(7) of the Uniform Commercial Code of
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the State of the New York (the "UCC")) with respect to the
Eligible Bonds.
(5) No Eligible Bonds or Underlying Eligible Bonds, whether
certificated or uncertificated, shall remain in the possession
of, or (a) with respect to Eligible Bonds, at the Lender's
discretion, in the name of, the related Borrower or any of its
agents, or in any account in the name of the related Borrower
or any of its agents, or (b) with respect to Underlying
Eligible Bonds at the Lender's discretion following an Event
of Default, in the name of, the related Borrower or any of its
agents, or in any account in the name of the related Borrower
or any of its agents.
(6) In addition to the foregoing, and as a condition to the
Lender's performance on each Funding Date, the related
Borrower shall (a) deliver to the Lender no later than 10:00
a.m. three (3) days prior to the requested Funding Date,
copies of the documents listed below, and (b) deliver the
originals (unless copies are specified) of such documents no
later than 11:00 a.m. on such Funding
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Date. The documents to be delivered as a condition to the
Lender's performance include without limitation (collectively,
the "Bond File"): (A) a copy of the executed Governing
Agreements governing the Eligible Bonds and/or Underlying
Eligible Bonds and/or any supplements thereto, and the
offering documents related to the Eligible Bonds and/or
Underlying Eligible Bonds, each certified by the Borrower or
the Bond/PC Custodian as a true, correct and complete copy of
the original, and all ancillary documents required to be
delivered to the certificateholders under the Governing
Agreements, (B) an officer's certificate as may be requested
by Lender, (C) opinions of counsel in form and substance
satisfactory to the Lender, (D) the Eligible Bonds and/or
Underlying Eligible Bonds in accordance with this Section
5.02(g), (E) an Instruction Letter executed by the related
Borrower, (F) for all Eligible Bonds and/or Underlying
Eligible Bonds in uncertificated form, evidence that such
Eligible Bonds and/or Underlying Eligible Bonds have been
registered in the name of the Bond/PC Custodian or the Lender
on the books of the issuer itself or its transfer agent, (G)
all Transfer Documents, (H) copies of
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distribution statements delivered to the Bond/PC Custodian for
two months prior to the month in which the related Funding
Date occurs, if any, certified by the applicable Trustee as
true and correct, (I) any other documents or instruments
necessary in the reasonable opinion of the Lender to effect
and perfect a legally valid transfer of the relevant interest
granted therein to the Lender under the Loan Documents, (J)
any other documents required under this Section 5.02(g).
Nothing set forth herein shall be deemed a waiver of any of
either Borrower's obligations hereunder.
(7) With respect to any Underlying Eligible Bonds delivered
hereunder, the Lender shall take possession of such Underlying
Eligible Bonds solely to prevent misappropriation of the
Underlying Eligible Bonds and the consequent diminution in
value of the Pledged Stock, and the Lender affirmatively
disclaims any security interest in the Underlying Eligible
Bonds.
(8) Delivery of Pledged Stock. With respect to the Pledged
Stock that shall be delivered or held in definitive, certificated form,
the
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related Borrower shall deliver to the Bond/PC Custodian the original of
the relevant certificate in form suitable for transfer, with
accompanying, duly executed instruments of transfer or appropriate
instruments of assignment executed in blank or in the name of the
Lender or the Bond/PC Custodian, transfer tax stamps, and any other
documents or instruments necessary in the reasonable opinion of the
Lender to effect and perfect a legally valid delivery of such security
or other item of investment property to the Lender or the Bond/PC
Custodian. Unless otherwise instructed by Lender, any delivery of a
security or other item of investment property in definitive,
certificated form shall be made to The Chase Manhattan Bank, 4 New York
Plaza, New York, New York 10004, Attention: Outsourcing Department,
Jennifer John.
(9) Additional Matters. All corporate and other proceedings,
and all documents, instruments and other legal matters in connection
with the transactions contemplated by this Loan Agreement and the other
Loan Documents shall be reasonably satisfactory in form and substance
to the Lender, and the Lender shall have received such other documents
and legal opinions in respect of any aspect or consequence of the
transactions contemplated hereby or thereby as it shall reasonably
request.
(10) No Material Adverse Effect. There shall not have occurred
one or more events that, in the reasonable judgment of the
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Lender, constitutes or should reasonably be expected to constitute a
Material Adverse Effect.
(11) Due Diligence Package. The Lender shall have received a
Due Diligence Package with respect to each Mortgage Loan or Underlying
Mortgage Loan at least three (3) Business Days prior to the related
Funding Date.
(12) Due Diligence Review. Subject to the Lender's right to
perform one or more Due Diligence Reviews pursuant to Section 11.16
hereof, the Lender shall have completed its due diligence review of the
Asset Documents and Bond File, and the Due Diligence Package for each
Advance and such other documents, records, agreements, instruments,
mortgaged properties or information relating to such Advances as the
Lender in its sole discretion deems appropriate to review and such
review shall be satisfactory to the Lender in its sole discretion.
(13) Servicing Agreement(s); Instruction Letters. With respect
to Eligible Assets pledged to the Lender and Underlying Eligible Bonds,
the Lender shall have received, no later than 10:00 a.m. three (3) days
prior to the requested Funding Date, an Instruction Letter executed by
the related Borrower, with the related Servicing Agreement or Governing
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Agreement attached thereto, which such Servicing Agreement or Governing
Agreement shall be in form and substance acceptable to Lender. With
respect to the Master Servicer or a Subservicer of a Borrower which is
an Affiliate of a Borrower and which is servicing Mortgage Loans or
Participation Certificates, such Subservicer or Master Servicer
consents to terminate the related Servicing Agreement upon notification
by the Lender of an occurrence of an Event of Default.
SECTION 6 Representations and Warranties. As of the Effective
Date and each Funding Date, each Borrower represents and warrants to
the Lender that:
6.1 Financial Condition.
(1) The unaudited consolidated balance sheet of Hanover
Capital Holdings and its consolidated Subsidiaries as of December 31,
1997, 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 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.
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(2) Such financial statement, including the related schedules
and notes thereto, has been prepared in accordance with GAAP applied
consistently throughout the periods involved (except as approved by
such accountants or Responsible Officer, as the case may be, and as
disclosed therein).
(3) Neither of the Borrowers nor any of their consolidated
Subsidiaries had, at the date of the financial statement referred to
above, any material Guarantee Obligation, contingent liability or
liability for taxes, or any long-term lease or unusual forward or
long-term commitment, including, without limitation, any interest rate
or foreign currency swap or exchange transaction, or other financial
derivative, which is not reflected in the foregoing statements or in
the notes thereto.
6.2 No Change. Since September 31, 1997, 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.
6.3 Corporate Existence; Compliance with Law. Each Borrower
(a) is (i) in the case of Hanover Capital Holdings, a corporation duly
organized, validly existing and in good standing under the laws of the
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State of Maryland and (ii) in the case of Hanover Capital Partners, a
corporation duly organized, validly existing and in good standing under
the laws of the State of New York, (b) has the corporate power and
authority, and has all governmental licenses, authorizations, consents
and approvals necessary, to own and operate its property, to lease the
property it operates as lessee and to carry on its business as now
being or as proposed to be conducted, (c) is duly qualified to do
business and is in good standing under the laws of each jurisdiction in
which the nature of the business conducted by it makes such
qualification necessary and where failure so to qualify should be
reasonably expected (either individually or in the aggregate) to have a
Material Adverse Effect, and (d) is in compliance in all material
respects with all Requirements of Law.
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6.4 Corporate Power; Authorization; Enforceable Obligations.
(1) Each Borrower has the corporate power and authority, and
the legal right, to make, deliver and perform this Loan Agreement, the
Note, and each other Loan Document, and to borrow and to grant Liens
hereunder, and has taken all necessary corporate action to authorize
the borrowings and the granting of Liens on the terms and conditions of
this Loan Agreement, the Note, and each other Loan Document to which it
is a party, and the execution, delivery and performance of this Loan
Agreement, the Note, and each other Loan Document.
(2) No consent or authorization of, approval by, notice to,
filing with or other act by or in respect of, any Governmental
Authority or any other Person is required or necessary in connection
with the borrowings hereunder or with the execution, delivery,
performance, validity or enforceability of this Loan Agreement or the
Note or any other Loan Document, except (i) for filings and recordings
in respect of the Liens created pursuant to this Loan Agreement, and
(ii) as previously obtained and currently in full force and effect.
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(3) Each Loan Document has been duly and validly executed and
delivered by the Borrowers and constitutes, a legal, valid and binding
obligation of each Borrower, enforceable against such Borrower in
accordance with their terms, except as enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting the enforcement of creditors' rights generally
and by general equitable principles (whether enforcement is sought by
proceedings in equity or at law).
6.5 No Legal Bar. The execution, delivery and performance of
this Loan Agreement and the Note, the borrowings hereunder and the use
of the proceeds thereof will not violate any Requirement of Law or
Contractual Obligation of either Borrower or of any of their
Subsidiaries and will not result in, or require, the creation or
imposition of any Lien (other than the Liens created hereunder) on any
of its or their respective properties or revenues pursuant to any such
Requirement of Law or Contractual Obligation.
6.6 No Material Litigation. There are no actions, suits,
arbitrations, investigations or proceedings of or before any arbitrator
or Governmental Authority pending or, to the knowledge of either
Borrower, threatened against such Borrower or any of its Subsidiaries
or against any of its or their respective properties or revenues, other
than those actions, suits,
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arbitrations, investigations or proceedings described on Schedule 4
hereto, none of which should reasonably be expected to have a Material
Adverse Effect.
6.7 No Default. Neither Borrower nor any of their Subsidiaries
is in default under or with respect to any of its Contractual
Obligations in any respect which should reasonably be expected to have
a Material Adverse Effect. No Default or Event of Default has occurred
and is continuing.
6.8 Collateral; Collateral Security.
(1) No Borrower has assigned, pledged, or otherwise conveyed
or encumbered any of the Collateral to any Person other than the
Lender, and immediately prior to the pledge of such Collateral, the
applicable Borrower was the sole owner of the Collateral and had good
and marketable title thereto, free and clear of all Liens, in each case
except for Liens that have been released or are to be released
simultaneously with the Liens granted in favor of the Lender hereunder.
No Eligible Asset was acquired by the applicable Borrower from an
Affiliate of such Borrower.
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(2) The provisions of this Loan Agreement are effective to
create in favor of the Lender a valid security interest in all right,
title and interest of the related Borrower in, to and under the
Collateral.
(3) Upon (i) receipt by the Mortgage Custodian of each
Mortgage Note, (ii) the delivery to the Bond/PC Custodian of (a) the
Eligible Bonds in accordance with Section 5.02 hereof together with the
Transfer Documents and (b) the Pledged Stock, (iii) receipt by the
Bond/PC Custodian of the Participation Certificates and (iv) the filing
(to the extent such interest can be perfected by filing under the
Uniform Commercial Code) of financing statements on Form UCC-1 naming
the Lender as "Secured Party" and the Borrower as a "Debtor", and
describing the Collateral, in the jurisdictions and recording offices
listed on Schedule 2 attached hereto, in both instances, the security
interests granted hereunder in the Collateral will constitute fully
perfected first-priority security interests under the Uniform
Commercial Code in all right, title and interest of the related
Borrower in, to and under such Collateral, and without limitation on
the foregoing, the Lender, as entitlement holder, shall have a
"security entitlement" to the Eligible Bonds.
6.9 Chief Executive Office. Each Borrower's chief executive
office on the Effective Date is located at 90 West Street, Suite 1508,
New York, New York 10006.
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6.10 Location of Books and Records. The location where each
Borrower keeps its books and records, including all computer tapes and
records relating to the Collateral is its chief operating office,
which, on the effective date, is located at 100 Metroplex Drive, Suite
301, Edison, New Jersey 08817.
6.11 No Burdensome Restrictions. No Requirement of Law or
Contractual Obligation of either Borrower or any of its Subsidiaries
has a Material Adverse Effect.
6.12 Taxes. Each Borrower and its Subsidiaries have filed all
Federal and state income tax returns and all other material tax returns
that are required to be filed by them and have paid all taxes due
pursuant to such returns or pursuant to any assessment received by any
of them, except for any such taxes or assessments, if any, that are
being appropriately contested in good faith by appropriate proceedings
diligently conducted and with respect to which adequate reserves in
conformity with GAAP have been provided. No tax Lien has been filed,
and, to the knowledge of the Borrowers, no claim is being asserted,
with respect to any such tax or assessment.
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6.13 Margin Regulations. No part of the proceeds of any
Advances will be used for "purchasing" or "carrying" any "margin stock"
within the respective meanings of each of the quoted terms under, or
for any other purpose which violates or would be inconsistent with the
provisions of, Regulation G, T, U or X.
6.14 Investment Company Act; Other Regulations. Neither
Borrower is an "investment company", or a company "controlled" by an
"investment company", within the meaning of the Investment Company Act
of 1940, as amended. Neither Borrower is subject to regulation under
any Federal or state statute or regulation which limits its ability to
incur Indebtedness.
6.15 Subsidiaries. All of the Subsidiaries of the Borrowers at
the date hereof are listed on Schedule 3 to this Loan Agreement.
6.16 Acquisition of Mortgage Loans. The Mortgage Loans were
acquired by the related Borrower, and the origination and collection
practices used by the originator of the Mortgage Loans have been, in
all respects legal, proper, prudent and customary in the residential
mortgage loan servicing business, and in accordance with the
Underwriting Guidelines. All such Mortgage Loans are in conformity with
the Underwriting Guidelines.
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6.17 No Adverse Selection. The Borrowers have used no
selection procedures that identified the Eligible Assets as being less
desirable or valuable than other comparable Eligible Assets owned by
the Borrowers.
6.18 Borrowers Solvent; Fraudulent Conveyance. As of the date
hereof and immediately after giving effect to each Advance, the fair
value of the assets of each Borrower is greater than the fair value of
the liabilities (including, without limitation, contingent liabilities
if and to the extent required to be recorded as a liability on the
financial statements of such Borrower in accordance with GAAP) of such
Borrower and each Borrower is and will be solvent, is and will be able
to pay its debts as they mature and does not and will not have an
unreasonably small capital to engage in the business in which it is
engaged and proposes to engage. Neither Borrower intends to incur, nor
believes that it has incurred, debts beyond its ability to pay such
debts as they mature. Neither Borrower is contemplating the
commencement of insolvency, bankruptcy, liquidation or consolidation
proceedings or the appointment of a receiver, liquidator, conservator,
trustee or similar official in respect of such Borrower or any of its
assets. Neither Borrower is transferring any Eligible Assets with any
intent to hinder, delay or defraud any of its creditors.
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6.19 ERISA. Each Plan to which either Borrower or its
Subsidiaries make direct contributions, and, to the knowledge of the
Borrowers, each other Plan and each Multiemployer Plan, is in
compliance in all material respects with, and has been administered in
all material respects in compliance with, the applicable provisions of
ERISA, the Code and any other Federal or state law.
6.20 True and Complete Disclosure. The information, reports,
financial statements, exhibits and schedules furnished in writing by or
on behalf of the Borrowers to the Lender in connection with the
negotiation, preparation or delivery of this Loan Agreement and the
other Loan Documents or included herein or therein or delivered
pursuant hereto or thereto, do not contain any untrue statement of
material fact or omit to state any material fact necessary to make the
statements herein or therein not misleading. All written information
furnished after the date hereof by or on behalf of the Borrowers to the
Lender in connection with this Loan Agreement and the other Loan
Documents and the transactions contemplated hereby and thereby will be
true, correct and accurate in every material respect, or (in the case
of projections) based on reasonable estimates, on the date as of which
such information is stated or certified. There is no fact known to a
Responsible Officer of the Borrowers that, after due inquiry, should
reasonably be expected
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to have a Material Adverse Effect that has not been disclosed herein,
in the other Loan Documents or in a report, financial statement,
exhibit, schedule, disclosure letter or other writing furnished to the
Lender for use in connection with the transactions contemplated hereby
or thereby.
6.21 True Sales. Any Eligible Asset acquired by an Affiliate
of either Borrower has been conveyed to the related Borrower pursuant
to a legal sale, and if so requested by the Lender, is covered by an
opinion of counsel to that effect in form and substance acceptable to
the Lender.
6.22 Participation Certificates. The Borrowers represent and
warrant to the Lender with respect to each Participation Certificate
that the representations and warranties set forth on Schedule 1, Part
III hereof are true and correct and that (a) such Participation
Certificate is owned by the related Borrower free from all Liens, (b)
such Participation Certificate shall have been delivered to the Lender
or its designee in a form suitable for registration in the name of the
Lender, (c) such Participation Certificate represents an Ownership
Percentage in the Underlying Mortgage Loans referenced therein, (d) the
Eligible Assets referenced in such Participation Certificate are being
held by a Participation Custodian for the benefit of the holder of such
Participation Certificate, and (e) the Participation
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Custodian is not an Affiliate of either Borrower under the Governing
Agreement for the related Participation Certificate.
6.23 Year 2000 Compliance. The Borrower has made a full and
complete assessment of all issues which may be related to the
occurrence of the year 2000, including all issues related to its
computer program and software and the computer program and software of
the Subservicer (the "Year 2000 Issues"), and both the Borrower and the
Subservicer have realistic and achievable programs for remediating the
Year 2000 Issues on a timely basis (the "Year 2000 Program"). Based on
such assessment and on the Year 2000 Program, the Borrower does not
reasonably anticipate that Year 2000 Issues will have a material
adverse affect on the Borrower's or the Subservicer's operations or
financial condition.
SECTION 7 Covenants of the Borrower. Each of the Borrowers
covenants and agrees with the Lender that, so long as any Advance is
outstanding and until the later to occur of the payment in full of all
Secured Obligations and the termination of this Loan Agreement:
7.1 Financial Statements. Hanover Capital Holdings shall
deliver to the Lender:
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(1) if available, as soon as available and in any event within
forty-five (45) days after the end of each of the first three quarterly
fiscal periods of each fiscal year of Hanover Capital Holdings, the
consolidated and consolidating balance sheets of Hanover Capital
Holdings and its consolidated Subsidiaries as at the end of such period
and the related unaudited consolidated and consolidating statements of
income and of cash flows for Hanover Capital Holdings and its
consolidated Subsidiaries for such period and the portion of the fiscal
year through the end of such period, setting forth in each case in
comparative form the figures for the previous year, accompanied by a
certificate of a Responsible Officer of Hanover Capital Holdings, which
certificate shall state that said consolidated financial statements
fairly present the consolidated and consolidating financial condition
and results of operations of Hanover Capital Holdings and its
Subsidiaries in accordance with GAAP, consistently applied, as at the
end of, and for, such period (subject to normal year-end audit
adjustments);
(2) as soon as available and in any event within ninety (90)
days after the end of each fiscal year of Hanover Capital Holdings, the
audited consolidated and consolidating balance sheets of Hanover
Capital Holdings and its consolidated Subsidiaries as at the end of
such fiscal year and the related consolidated and consolidating
statements of income and retained earnings and of cash flows for
Hanover Capital Holdings and its consolidated
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Subsidiaries for such year, setting forth in each case in comparative
form the figures for the previous year, accompanied by an opinion
thereon of independent certified public accountants of recognized
national standing, which opinion shall not be qualified as to scope of
audit or going concern and shall state that said consolidated and
consolidating financial statements fairly present the consolidated and
consolidating financial condition and results of operations of Hanover
Capital Holdings and its consolidated Subsidiaries as at the end of,
and for, such fiscal year in accordance with GAAP; and
(3) from time to time such other information regarding the
financial condition, operations, or business of the Borrowers and their
Subsidiaries as the Lender may reasonably request.
7.2 Existence, Etc. Each Borrower and its Subsidiaries will:
(1) preserve and maintain its legal existence;
(2) preserve and maintain all of its material rights,
privileges, licenses and franchises;
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(3) comply with the requirements of all applicable
Requirements of Law (including, without limitation, the Truth in
Lending Act, the Real Estate Settlement Procedures Act and all
environmental laws) if failure to comply with such requirements should
reasonably be expected (either individually or in the aggregate) to
have a Material Adverse Effect; and
(4) keep adequate records and books of account, in which
complete entries will be made in accordance with GAAP consistently
applied.
7.3 Maintenance of Property; Insurance. Each Borrower shall
keep all property useful and necessary in its business in good working
order and condition. Each Borrower shall maintain errors and omissions
insurance and/or mortgage impairment insurance and blanket bond
coverage in such amounts as are in effect on the Effective Date (as
disclosed to Lender in writing) and shall not reduce such coverage
without the written consent of the Lender, and shall also maintain such
other insurance with financially sound and reputable insurance
companies, and with respect to property and risks of a character
usually maintained by entities engaged in the same or similar business
similarly situated, against loss, damage and liability of the kinds and
in the amounts customarily maintained by such entities.
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7.4 Notices.
(1) Each Borrower shall give notice to the Lender promptly:
(1) upon such Borrower becoming aware of, and in any event
within one (1) Business Day after, the occurrence of any
Default or Event of Default or any Event of Default or Default
under any other material agreement of such Borrower;
(2) upon, and in any event within three (3) Business Days
after, service of process on such Borrower or any of its
Subsidiaries, or any agent thereof for service of process, in
respect of any legal or arbitrable proceedings affecting such
Borrower, or any of its Subsidiaries (a) that questions or
challenges the validity or enforceability of any of the Loan
Documents or (b) in which the amount in controversy exceeds
$300,000;
(3) upon such Borrower becoming aware of any default related
to any Collateral, any Material Adverse
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Effect and any event or change in circumstances which should
reasonably be expected to have a Material Adverse Effect;
(4) upon such Borrower becoming aware that the Mortgaged
Property in respect of any Mortgage Loan has been damaged by
waste, fire, earthquake or earth movement, windstorm, flood,
tornado or other casualty, or otherwise damaged so as to
materially and adversely affect the Collateral Value of such
Mortgage Loan;
(5) upon entry of a judgment or decree in an amount in excess
of $200,000.
Each notice pursuant to this Section 7.04(a) (other than 7.04(a)(v)) shall
be accompanied by a statement of a Responsible Officer of the related
Borrower setting forth details of the occurrence referred to therein
and stating what action the related Borrower has taken or proposes to
take with respect thereto.
7.5 Other Information. Each Borrower shall furnish to the
Lender, as soon as available, copies of any and all proxy statements,
financial statements and reports which such Borrower sends to its
stockholders,
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and copies of all regular, periodic and special reports, and all
registration statements filed with the Securities and Exchange
Commission, any Governmental Authority which supervises the issuance of
securities by such Borrower.
7.6 Further Identification of Collateral. Each Borrower will
furnish to the Lender from time to time statements and schedules
further identifying and describing the Collateral and such other
reports in connection with the Collateral as the Lender or any Lender
may reasonably request, all in reasonable detail.
7.7 Eligible Asset Determined to be Defective. Upon discovery
by the Borrower or the Lender of any breach of any representation or
warranty listed on Schedule 1 hereto applicable to any Eligible Asset,
the party discovering such breach shall promptly give notice of such
discovery to the other.
7.8 Monthly Reporting. The Borrowers shall deliver or cause to
be delivered to the Lender, no later than five (5) days after the last
day of each calendar month, the following documents, as applicable: (a)
with respect to Eligible Mortgage Loans, a monthly servicing report and
a Mortgage Loan Schedule and a Mortgage Loan Tape in a
computer-readable
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format reasonably acceptable to the Lender which shall list and set
forth such information as the Lender may reasonably request, including,
without limitation, (i) the outstanding principal balance and
delinquency status of each such Mortgage Loan as of the last day of the
prior calendar month (reported as current, 30-59, 60-89, 90+, etc., in
each case as of a date specified therein), (ii) any Mortgagor that is
in bankruptcy, and (iii) a servicer exception report as defined in the
Underwriting Guidelines, (b) with respect to Eligible Bonds and
Underlying Eligible Bonds, a Bond Summary which shall list and set
forth such information as the Lender may reasonably request, and (c)
with respect to Participation Certificates, a Participation Certificate
Schedule and Participation Certificate Tape in a computer-readable
format reasonably acceptable to the Lender which shall list and set
forth such information as the Lender may reasonably request, and (d)
with respect to all Eligible Assets, (i) a Remittance Report in the
form attached hereto as Exhibit I together with a statement of
reconciliation with respect to the Collection Account, (ii) if the
Borrowers and the Lender shall mutually agree (in accordance with
Section 2.06 (b) hereof), a Borrowing Base Certificate in the form
attached hereto as Exhibit H, and (iii) any other information as the
Lender shall reasonably request. Each monthly servicing report
described above shall separately identify each pool of Eligible Assets
pledged to the Lender to secure the related Advance.
7.9 Financial Condition Covenants.
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(1) Maintenance of Tangible Net Worth. Hanover Capital
Holdings shall at all times maintain Tangible Net Worth of not less
than $65,000,000.
(2) 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.
(3) 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.
7.10 Borrowing Base Deficiency. If at any time there exists a
Borrowing Base Deficiency the Borrowers shall cure same in accordance
with Section 2.06 hereof.
7.11 Prohibition of Fundamental Changes. Neither Borrower nor
any of its Subsidiaries shall enter into any transaction of merger or
consolidation or amalgamation, or liquidate, wind up or dissolve itself
(or
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suffer any liquidation, winding up or dissolution) or sell all or
substantially all of its assets, without the prior written consent of
the Lender.
7.12 Limitation on Liens on Collateral. Each Borrower will
defend the Collateral against, and will take such other action as is
necessary to remove, any Lien, security interest or claim on or to the
Collateral, other than the security interests created under this Loan
Agreement, and each Borrower will defend the right, title and interest
of the Lender in and to any of the Collateral against the claims and
demands of all persons whomsoever.
7.13 Limitation on Transactions with Affiliates. Neither
Borrower nor any of its Subsidiaries shall enter into any transaction,
including, without limitation, any purchase, sale, lease or exchange of
property or the rendering of any service, with any Affiliate unless
such transaction is (a) not otherwise prohibited under this Loan
Agreement, (b) in the ordinary course of such Borrower's business and
(c) upon fair and reasonable terms no less favorable to such Borrower,
as the case may be, than it would obtain in a comparable arm's length
transaction with a Person which is not an Affiliate.
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7.14 Underwriting Guidelines. Without prior written consent of
the Lender, the Borrowers shall not amend or otherwise modify the
Underwriting Guidelines.
7.15 Limitations on Modifications, Waivers and Extensions of
Eligible Assets. The Borrowers will not, nor will they permit or allow
others to, amend, modify, terminate or waive any provision of any
Eligible Asset to which either Borrower is a party in any manner which
should reasonably be expected to materially and adversely affect the
value of such Eligible Asset as Collateral.
7.16 Servicing. The Borrowers shall not permit any Person
other than the Master Servicer to service Eligible Assets without the
prior written consent of the Lender.
7.17 Limitation on Distributions. After the occurrence and
during the continuation of any Event of Default, the Borrowers shall
not make any payment on account of, or set apart assets for, a sinking
or other analogous fund for the purchase, redemption, defeasance,
retirement or other acquisition of any equity or partnership interest
of either Borrower, whether now or hereafter outstanding, or make any
other distribution in respect
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thereof, either directly or indirectly, whether in cash or property or
in obligations of either Borrower.
7.18 Use of Proceeds. The Borrowers will use the proceeds of
the Advances solely to acquire, fund, manage and service the Eligible
Assets.
7.19 Restricted Payments. The Borrowers shall not make any
Restricted Payments.
7.20 Reports. With respect to Eligible Bonds, Underlying
Eligible Bonds or Participation Certificates, the Borrowers shall
promptly deliver to the Lender (i) any report received by or required
to be delivered (a) by any Person pursuant to the Governing Agreements
at the same time as required thereunder, or (b) to any holder of any
securities issued pursuant to the Governing Agreements; (ii) any notice
of transfer of servicing; and (iii) any other such document or
information as the Lender may reasonably request from time to time.
7.21 Inspection. The Borrowers shall permit the Lender, during
normal business hours and upon reasonable prior notice but in any event
within two (2) Business Days, to inspect their books and records
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relating to the Collateral and other matters relating to the
transactions contemplated hereby; provided, however, that in the event
a Default shall have occurred the Lender shall not be required to give
any prior notice.
7.22 Further Proceeds. If either Borrower shall become
entitled to receive or shall receive any rights, whether in addition
to, in substitution of, as a conversion of, or in exchange for the
Eligible Bonds or Pledged Stock, or otherwise in respect thereof, such
Borrower shall accept the same as the Lender's agent, hold the same in
trust for the Lender and deliver the same forthwith to the Lender in
the exact form received, duly endorsed by such Borrower to the Lender,
if required, together with an undated bond power covering such
certificate duly executed in blank and with, if the Lender so requests,
signature guaranteed, to be held by the Lender hereunder as additional
collateral security for the Secured Obligations. If any sums of money
or property so paid or distributed in respect of the Eligible Bonds or
Pledged Stock shall be received by a Borrower, such Borrower shall,
until such money or property is paid or delivered to the Lender as
required hereunder, hold such money or property in trust for the
Lender, segregated from other Advances of such Borrower, as additional
collateral security for the Secured Obligations.
7.23 Further Documentation. At any time and from time to time,
upon the written request of the Lender, and at the sole expense of
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the Borrowers, the Borrowers will promptly and duly execute and deliver
such further instruments and documents and take such further actions as
the Lender may reasonably request for the purposes of obtaining or
preserving the full benefits of this Loan Agreement and of the rights
and powers herein granted. If any amount payable under or in connection
with any of the Collateral shall be or become evidenced by any
instrument (including any certificated security or promissory note) or
chattel paper (in each case as defined in the UCC), such instrument or
chattel paper shall be immediately delivered to the Mortgage Custodian
or the Bond/PC Custodian, as applicable, on behalf of Lender, duly
endorsed in a manner satisfactory to Lender, to be held as Collateral
pursuant to this Loan Agreement. Prior to such delivery, the Borrowers
shall hold all such instruments or chattel paper in trust of the
Lender, and shall not commingle any of the foregoing with any assets of
the Borrowers.
7.24 Taxes. Each Borrower shall pay, and hold the Lender
harmless from, any and all liabilities with respect to, or resulting
from and delay in paying, any and all stamp, excise, sales or other
similar taxes which may be payable or determined to be payable with
except to any of the Collateral or in connection with any of the
transactions contemplated by this Loan Agreement.
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7.25 Lost Note Affidavits; Lost Instrument Affidavits . Each
Lost Note Affidavit or Lost Instrument Affidavit, as applicable,
delivered to the Lender hereunder shall (i) attach a copy of the
original Mortgage Note or, if available, a copy of the original
Participation Certificate, as applicable, certified by applicable
Borrower as a true, correct, and complete copy thereof, (ii) indemnify
the Lender, and (iii) remain effective for all the Borrowers' and
Lenders' successors and assigns.
7.26 Underlying Eligible Bonds . Each Borrower covenants and
agrees that: (i) it will not sell, transfer or otherwise dispose, or
permit any Eligible Entity to sell, assign or transfer or otherwise
dispose of any Underlying Eligible Bonds, without the written consent
of the Lender and (ii) it will not create or suffer to exist, or permit
any Eligible Entity to create or suffer to exist, any Lien upon the
Underlying Eligible Bonds, or pledge, option or otherwise encumber, or
permit any Eligible Entity to pledge, option or otherwise encumber the
Underlying Eligible Bonds, whether now owned or hereafter acquired.
7.27 Year 2000 Compliance. The Borrower shall take and shall
cause each of its Affiliates and any Subservicer to take all such
actions as are reasonably necessary to successfully implement the Year
2000 Program and to assure that the Year 2000 Issues will not have a
material
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adverse effect on the Borrower's or any Subservicer's operations or
financial condition. At the request of the Lender, the Borrower will
provide a description of the Year 2000 Program, together with any
updates or progress reports with respect thereto. The Borrower shall
provide the Lender with immediate notice in writing in the event that
the Borrower has reason to believe that the occurrence of the year 2000
will adversely affect the Borrower's or any Subservicer's business or
any Advances executed in connection herewith.
SECTION 8 Events of Default. Each of the following events
shall constitute an event of default (an "Event of Default") hereunder:
(1) Borrower Default in the Payment of any Advance. 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
(2) Borrower Default in the Payment of Other Amount. Either
Borrower shall default in the payment of any other amount payable by it
hereunder or under any other Loan Document, and such default shall have
continued unremedied for three (3) Business Days; or
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(3) Failure of Representation or Warranty. Any representation,
warranty or certification made or deemed made by either Borrower herein
(other than those in Schedule 1 hereto) or by either Borrower in any
other Loan Document or any certificate furnished to the Lender pursuant
to the provisions thereof, shall prove to have been false or misleading
in any material respect as of the time made or furnished; or
(4) Default of Covenant. Either Borrower shall:
(1) fail to comply with the requirements of Section 7 hereof
(other than Sections 7.01 (to the extent applicable to such
Borrower), 7.02(b), 7.02(d), 7.03, or 7.08),
(2) fail to comply with the requirements of Sections 7.01(to
the extent applicable to such Borrower), 7.02(b), 7.02(d),
7.03, or 7.08 and such default shall continue unremedied for a
period of five (5) Business Days, or
(3) fail to observe or perform any other covenant, condition
or agreement contained in this Loan Agreement or any other
Loan Document and such failure to observe
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or perform shall continue unremedied for a period of seven (7)
Business Days; or
(5) Cross Default. Either Borrower or any of its Subsidiaries
shall:
(1) default in any payment of principal of or interest on any
Indebtedness (other than the Advances) or in the payment of
any Guarantee Obligation, beyond the period of grace (not to
exceed 30 days), if any, provided in the instrument or
agreement under which such Indebtedness or Guarantee
Obligation was created, if the aggregate amount of the
Indebtedness and/or Guarantee Obligations in respect of which
such default or defaults shall have occurred is $250,000 or
more; or
(2) default in the observance or performance of any other
agreement or condition relating to any Indebtedness (other
than the Advances) or Guarantee Obligation or contained in any
instrument or agreement evidencing, securing or relating
thereto, in each case beyond the period of grace (not to
exceed 30 days), if any, provided
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in the instrument or agreement under which such Indebtedness
or Guarantee Obligation was created; or
(3) permit any other event to occur or condition exist; or
(4) default with respect to any other agreement between such
Borrower, on the one hand, and Lender or any of its Affiliates
on the other hand, which has not been waived by the Lender,
the effect of which default or other event or condition is to cause, or give the
holder or holders of such Indebtedness or the beneficiary or beneficiaries of
such Guarantee Obligation (or a trustee or agent on behalf of such holder or
holders or beneficiary or beneficiaries) the immediate right to cause, with the
giving of notice if required, such Indebtedness to become due prior to its
stated maturity or such Guarantee Obligation to become payable; or
(6) Unsatisfied Judgment. One or more judgments or decrees shall be
entered against either Borrower or against either Borrower in the aggregate or
any of its Subsidiaries involving in the aggregate a liability (not paid or
fully covered by insurance) of $1,000,000 or more, and all such judgments or
decrees shall not have been vacated, discharged, stayed or bonded pending appeal
within 60 days from the entry thereof; or
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(7) Inability to Pay Debts. Either Borrower shall admit in writing its
inability to pay its debts as such debts become due; or
(8) Voluntary Bankruptcy Event. Either Borrower or any of its
Subsidiaries shall (i) apply for or consent to the appointment of, or the taking
of possession by, a receiver, custodian, trustee, examiner or liquidator of
itself or of all or a substantial part of its property, (ii) make a general
assignment for the benefit of its creditors, (iii) commence a voluntary case
under the Bankruptcy Code, (iv) file a petition seeking to take advantage of any
other law relating to bankruptcy, insolvency, reorganization, liquidation,
dissolution, arrangement or winding-up, or composition or readjustment of debts,
(v) fail to controvert in a timely and appropriate manner, or acquiesce in
writing to, any petition filed against it in an involuntary case under the
Bankruptcy Code or (vi) take any corporate or other action for the purpose of
effecting any of the foregoing; or
(9) Involuntary Bankruptcy Event. A proceeding or case shall be
commenced, without the application or consent of the related Borrower or any of
its Subsidiaries, in any court of competent jurisdiction, seeking (i) its
reorganization, liquidation, dissolution, arrangement or winding-up, or the
composition or readjustment of its debts, (ii) the appointment of a receiver,
custodian, trustee, examiner, liquidator or the like of the related Borrower or
any such Subsidiary or of all or any substantial part of its property, or (iii)
similar relief in respect of the related Borrower or any such Subsidiary under
any law relating to bankruptcy, insolvency,
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reorganization, winding-up, or composition or adjustment of debts, and such
proceeding or case shall continue undismissed, or an order, judgment or decree
approving or ordering any of the foregoing shall be entered and continue
unstayed and in effect, for a period of 60 or more days; or an order for relief
against the related Borrower or any such Subsidiary shall be entered in an
involuntary case under the Bankruptcy Code; or
(10) Termination of Loan Documents. The Mortgage Custodial Agreement,
the Bond/PC Custodial Agreement, or any other Loan Document, shall for whatever
reason be terminated or cease to be in full force and effect, or the
enforceability thereof shall be contested by any party thereto; or
(11) ERISA Default. (i) any Person shall engage in any "prohibited
transaction" (as defined in Section 406 of ERISA or Section 4975 of the Code)
involving any Plan, (ii) any "accumulated funding deficiency" (as defined in
Section 302 of ERISA), whether or not waived, shall exist with respect to any
Plan or any Lien in favor of the PBGC or a Plan shall arise on the assets of a
Borrower or any Commonly Controlled Entity, (iii) a Reportable Event shall occur
with respect to, or proceedings shall commence to have a trustee appointed, or a
trustee shall be appointed, to administer or to terminate, any Single Employer
Plan, which Reportable Event or commencement of proceedings or appointment of a
trustee is, in the reasonable opinion of the Lender, likely to result in the
termination of such Plan for purposes of Title IV of ERISA, (iv) any Single
Employer Plan shall terminate for purposes of Title IV of ERISA, (v) either
Borrower or any Commonly Controlled Entity shall, or in the reasonable opinion
of the Lenders is likely
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to, incur any liability in connection with a withdrawal from, or the insolvency
or reorganization of, a Multiemployer Plan or (vi) any other event or condition
shall occur or exist with respect to a Plan; and in each case in clauses (i)
through (vi) above, such event or condition, together with all other such events
or conditions, if any, could reasonably be expected to have a Material Adverse
Effect; or
(12) Material Adverse Effect. Any other event shall occur which, in the
sole good faith discretion of the Lender, may have a Material Adverse Effect; or
(13) Change of Control. Any Change of Control of either Borrower shall
have occurred; or
(14) Pre-Existing Condition. The discovery by the Lender during its
continuing due diligence of the Borrowers of a condition or event and which the
Lender, in its sole reasonable discretion, determines materially and adversely
affects: (i) the condition (financial or otherwise) of either Borrower, its
Subsidiaries or Affiliates; or (ii) the ability of the Borrower or the Lender to
fulfill their respective obligations under this Agreement; or
(15) Other Liens. Either Borrower shall grant, or suffer to exist, any
Lien on any Collateral except the Liens contemplated hereby; or the Liens
contemplated hereby shall cease to be first priority perfected Liens on the
Collateral in favor of the Lender or shall be Liens in favor of any Person other
than the Lender; or
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(16) Failure to Answer. The Lender shall reasonably request, specifying
the reasons for such request, information, and/or written responses to such
requests, regarding the financial well-being of either Borrower and such
information and/or responses shall not have been provided within three Business
Days of such request.
SECTION 9 Remedies Upon Default.
(1) Upon the occurrence of one or more Events of Default other than
those referred to in Sections 8(h) or (i), and in addition to the remedies
provided in Section 4.07 hereof and otherwise provided in this Loan Agreement,
the Lender may immediately declare the principal amount of the Advances then
outstanding under the Note to be immediately due and payable, together with all
interest thereon and fees and expenses accruing under this Loan Agreement. Upon
the occurrence of an Event of Default referred to in Sections 8(h) or (i), and
in addition to the remedies provided in Section 4.07 hereof and otherwise
provided in this Loan Agreement, such amounts shall immediately and
automatically become due and payable without any further action by any Person.
Upon such declaration or such automatic acceleration, the balance then
outstanding on the Note shall become immediately due and payable, without
presentment, demand, protest or other formalities of any kind, all of which are
hereby expressly waived by the Borrowers and the Lender may thereupon exercise
any remedies available to it at law and pursuant to the Loan Agreement.
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(2) Upon the occurrence of one or more Events of Default, and in
addition to the remedies provided in Section 4.07 hereof and otherwise provided
in this Loan Agreement, the Lender shall have the right to obtain physical
possession of the Servicing Records and all other files of the Borrowers
relating to the Collateral and all documents relating to the Collateral which
are then or may thereafter come in to the possession of the Borrowers or any
third party acting for a Borrower and the Borrowers shall deliver to the Lender
such assignments as the Lender shall request. The Borrowers shall be responsible
for paying any fees of any Subservicer resulting from the termination of a
Subservicer which is an Affiliate of a Borrower due to an Event of Default. The
Lender shall be entitled to specific performance of all agreements of the
Borrowers contained in this Loan Agreement.
SECTION 10 No Duty of Lender. The powers conferred on the Lender
hereunder are solely to protect the Lender's interests in the Collateral and
shall not impose any duty upon it to exercise any such powers. The Lender shall
be accountable only for amounts that it actually receives as a result of the
exercise of such powers, and neither it nor any of its officers, directors,
employees or agents shall be responsible to the Borrowers for any act or failure
to act hereunder, except for its or their own gross negligence or willful
misconduct.
SECTION 11 Miscellaneous.
11.1 Waiver. No failure on the part of the Lender to exercise and no
delay in exercising, and no course of dealing with respect to, any right, power
or privilege under any Loan
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Document shall operate as a waiver thereof, nor shall any single or partial
exercise of any right, power or privilege under any Loan Document preclude any
other or further exercise thereof or the exercise of any other right, power or
privilege. The remedies provided herein are cumulative and not exclusive of any
remedies provided by law.
11.2 Notices. Except as otherwise expressly permitted by this Loan
Agreement, all notices, requests and other communications provided for herein
and under the Mortgage Custodial Agreement (including without limitation any
modifications of, or waivers, requests or consents under, this Loan Agreement)
shall be given or made in writing (including without limitation by telex or
telecopy) delivered to the intended recipient at the "Address for Notices"
specified below its name on the signature pages hereof or thereof); or, as to
any party, at such other address as shall be designated by such party in a
written notice to each other party. Except as otherwise provided in this Loan
Agreement and except for notices given under Section 2 (which shall be effective
only on receipt), all such communications shall be deemed to have been duly
given when transmitted by telex or telecopy or personally delivered or, in the
case of a mailed notice, upon receipt, in each case given or addressed as
aforesaid.
11.3 Indemnification and Expenses.
(1) The Borrowers agrees to hold the Lender and each of its officers,
directors, agents and employees (each, an "Indemnified Party") harmless from and
indemnify each Indemnified Party against all liabilities, losses, damages,
judgments, costs and expenses of any kind which
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may be imposed on, incurred by or asserted against such Indemnified Party in any
suit, action, claim or proceeding relating to or arising out of this Loan
Agreement, the Note, any other Loan Document or any transaction contemplated
hereby or thereby, or any amendment, supplement or modification of, or any
waiver or consent under or in respect of, this Loan Agreement, the Note, any
other Loan Document or any transaction contemplated hereby or thereby, except,
in each case, to the extent arising from such Indemnified Party's gross
negligence or willful misconduct. In any suit, proceeding or action brought by
the Lender in connection with any Eligible Asset for any sum owing thereunder,
or to enforce any provisions of any such Eligible Asset, the Borrowers will
save, indemnify and hold the Lender harmless from and against all expense, loss
or damage suffered by reason of any defense, set-off, counterclaim, recoupment
or reduction or liability whatsoever of the account debtor or obligor
thereunder, arising out of a breach by a Borrower of any obligation thereunder
or arising out of any other agreement, indebtedness or liability at any time
owing to or in favor of such account debtor or obligor or its successors from a
Borrower. The Borrowers also agree to reimburse the Lender as and when billed by
the Lender for all the Lender's costs and expenses incurred in connection with
the enforcement or the preservation of the Lender's rights under this Loan
Agreement, the Note, any other Loan Document or any transaction contemplated
hereby or thereby, including without limitation the fees and disbursements of
its counsel (including all fees and disbursements incurred in any action or
proceeding between a Borrower and an Indemnified Party or between an Indemnified
Party and any third party relating hereto). The Borrowers hereby acknowledges
that, notwithstanding the fact that the Note is secured by the Collateral, the
obligations of the Borrowers under the Note are recourse obligations of the
Borrowers.
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(2) The Borrowers agree to pay as and when billed by the Lender all of
the out-of-pocket costs and expenses incurred by the Lender in connection with
the development, preparation and execution of, and any amendment, supplement or
modification to, this Loan Agreement, the Note, any other Loan Document or any
other documents prepared in connection herewith or therewith, and the
consummation and administration of the transactions contemplated hereby and
thereby, including without limitation (i) all the reasonable fees, disbursements
and expenses of counsel to the Lender not to exceed $30,000 (provided that such
cap shall not include amendments to the initial Master Loan and Security
Agreement dated as of March 30, 1998 between the Lender and Hanover Capital
Holdings or any amended and restated version of such agreement) which amounts
shall be paid promptly by the Borrowers or may be netted out of any Advances
made by Lender, and (ii) all the due diligence, inspection, testing and review
costs and expenses incurred by the Lender with respect to Collateral under this
Loan Agreement as set forth in Section 11.16 hereof.
11.4 Amendments. Except as otherwise expressly provided in this Loan
Agreement, any provision of this Loan Agreement may be modified or supplemented
only by an instrument in writing signed by the Borrowers and the Lender and any
provision of this Loan Agreement may be waived by the Lender.
11.5 Successors and Assigns. This Loan Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective successors
and permitted assigns.
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11.6 Survival. The obligations of the Borrowers under Section 11.03
hereof shall survive the repayment of the Advances and the termination of this
Loan Agreement. In addition, each representation and warranty made or deemed to
be made by a request for a borrowing herein or pursuant hereto shall survive the
making of such representation and warranty, and the Lender shall not be deemed
to have waived, by reason of making any Advance, any Default that may arise
because any such representation or warranty shall have proved to be false or
misleading, notwithstanding that the Lender may have had notice or knowledge or
reason to believe that such representation or warranty was false or misleading
at the time such Advance was made.
11.7 Captions. The table of contents and captions and section headings
appearing herein are included solely for convenience of reference and are not
intended to affect the interpretation of any provision of this Loan Agreement.
11.8 Counterparts. This Loan Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument, and any of the parties hereto may execute this Loan Agreement by
signing any such counterpart.
11.9 GOVERNING LAW; ETC. THIS LOAN AGREEMENT SHALL BE GOVERNED BY THE
LAW OF THE STATE OF NEW YORK WITHOUT REFERENCE TO CHOICE OF LAW DOCTRINE (BUT
WITH REFERENCE TO SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW, WHICH
BY ITS TERMS APPLIES TO THIS
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LOAN AGREEMENT), AND SHALL CONSTITUTE A SECURITY AGREEMENT WITHIN THE MEANING OF
THE UNIFORM COMMERCIAL CODE.
11.10 SUBMISSION TO JURISDICTION; WAIVERS. EACH BORROWER HEREBY
IRREVOCABLY AND UNCONDITIONALLY:
(1) SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR
PROCEEDING RELATING TO THIS LOAN AGREEMENT, THE NOTE AND THE OTHER LOAN
DOCUMENTS, OR FOR RECOGNITION AND ENFORCEMENT OF ANY JUDGMENT IN
RESPECT THEREOF, TO THE NON-EXCLUSIVE GENERAL JURISDICTION OF THE
COURTS OF THE STATE OF NEW YORK, THE FEDERAL COURTS OF THE UNITED
STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK, AND APPELLATE
COURTS FROM ANY THEREOF;
(2) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE BROUGHT
IN SUCH COURTS AND, TO THE EXTENT PERMITTED BY LAW, WAIVES ANY
OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH
ACTION OR PROCEEDING IN ANY SUCH COURT OR THAT SUCH ACTION OR
PROCEEDING WAS BROUGHT IN AN INCONVENIENT COURT AND AGREES NOT TO PLEAD
OR CLAIM THE SAME;
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(3) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR
PROCEEDING MAY BE EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR
CERTIFIED MAIL (OR ANY SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE
PREPAID, TO ITS ADDRESS SET FORTH UNDER ITS SIGNATURE BELOW OR AT SUCH
OTHER ADDRESS OF WHICH THE LENDER SHALL HAVE BEEN NOTIFIED; AND
(4) AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT TO
EFFECT SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL
LIMIT THE RIGHT TO SUE IN ANY OTHER JURISDICTION.
11.11 WAIVER OF JURY TRIAL. EACH OF THE BORROWERS AND THE LENDER HEREBY
IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND
ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO
THIS LOAN AGREEMENT, ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED
HEREBY OR THEREBY.
11.12 Acknowledgments. Each Borrower hereby acknowledges that:
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(1) it has been advised by counsel in the negotiation, execution and
delivery of this Loan Agreement, the Note and the other Loan Documents;
(2) the Lender has no fiduciary relationship to the Borrower, and the
relationship between the Borrower and the Lender is solely that of debtor and
creditor; and
(3) no joint venture exists between the Lender and the Borrower.
11.13 Hypothecation and Pledge of Collateral. The Lender shall have
free and unrestricted use of all Collateral and nothing in this Loan Agreement
or in Section 9-207(2)(e) of the UCC shall preclude the Lender from engaging in
repurchase transactions with the Collateral or otherwise pledging, repledging,
transferring, hypothecating, or rehypothecating the Collateral, provided that,
the Lender shall return the Collateral in accordance with this Agreement if the
Borrowers comply with the terms of this Agreement. Nothing contained in this
Loan Agreement shall obligate the Lender to segregate, or cause the Mortgage
Custodian or the Bond/PC Custodian to segregate, any Collateral delivered to the
Lender, the Bond/PC Custodian, or the Mortgage Custodian by the Borrowers.
11.14 Assignments; Participations.
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(1) The Borrowers may assign any of its rights or obligations hereunder
or under the Note with the prior written consent of the Lender. The Lender may
assign or transfer to any bank or other financial institution that makes or
invests in loans or any Affiliate of the Lender all or any of its rights or
obligations under this Loan Agreement and the other Loan Documents.
(2) The Lender may, in accordance with applicable law, at any time sell
to one or more lenders or other entities ("Participants") participating
interests in any Advance, the Note, its commitment to make Advances, or any
other interest of the Lender hereunder and under the other Loan Documents. In
the event of any such sale by the Lender of participating interests to a
Participant, the Lender's obligations under this Loan Agreement to the Borrowers
shall remain unchanged, the Lender shall remain solely responsible for the
performance thereof, the Lender shall remain the holder of the Note for all
purposes under this Loan Agreement and the other Loan Documents, and the
Borrowers and the Lender shall continue to deal solely and directly with the
Lender in connection with the Lender's rights and obligations under this Loan
Agreement and the other Loan Documents. The Borrowers agree that if amounts
outstanding under this Loan Agreement and the Note are due or unpaid, or shall
have been declared or shall have become due and payable upon the occurrence of
an Event of Default, each Participant shall be deemed to have the right of
set-off in respect of its participating interest in amounts owing under this
Loan Agreement and the Note to the same extent as if the amount of its
participating interest were owing directly to it as a Lender under this Loan
Agreement or the Note; provided, that such Participant shall only be entitled to
such right of set-off if it shall have agreed in the agreement pursuant to which
it shall have acquired its participating interest to share with the
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Lender the proceeds thereof. The Lender also agrees that each Participant shall
be entitled to the benefits of Sections 2.08 and 11.03 with respect to its
participation in the Advances outstanding from time to time; provided, that the
Lender and all Participants shall be entitled to receive no greater amount in
the aggregate pursuant to such Sections than the Lender would have been entitled
to receive had no such transfer occurred.
(3) The Lender may furnish any information concerning the Borrowers or
any of their Subsidiaries in the possession of such Lender from time to time to
assignees and participants (including prospective assignees and participants).
(4) Each Borrower agrees to cooperate with the Lender in connection
with any such assignment and/or participation, to execute and deliver such
replacement notes, and to enter into such restatements of, and amendments,
supplements and other modifications to, this Loan Agreement and the other Loan
Documents in order to give effect to such assignment and/or participation.
11.15 Servicing. With respect to Eligible Assets which are Mortgage
Loans:
(1) Each Borrower covenants to maintain or cause the servicing of the
Mortgage Loans to be maintained in conformity with accepted customary and
prudent servicing practices in the industry for the same type of mortgage loans
as the Mortgage Loans and in a manner at least equal in quality to the servicing
the Borrowers or the Borrowers' designee provides for Mortgage
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Loans which they own ("Accepted Servicing Practices"). In the event that the
preceding language is interpreted as constituting one or more servicing
contracts, each such servicing contract shall terminate automatically upon the
earlier of (i) an Event of Default, or (ii) the Termination Date.
(2) If the Mortgage Loans are serviced by either Borrower, such
Borrower agrees that the Lender is the collateral assignee of all servicing
records, including but not limited to any and all servicing agreements, files,
documents, records, data bases, computer tapes, copies of computer tapes, proof
of insurance coverage, insurance policies, appraisals, other closing
documentation, payment history records, and any other records relating to or
evidencing the servicing of Mortgage Loans (the "Servicing Records"), and (ii)
such Borrower grants the Lender a security interest in all of such Borrower's
rights relating to the Mortgage Loans and all Servicing Records to secure the
obligation of such Borrower or its designee to service in conformity with this
Section and any other obligation of such Borrower to the Lender. The Borrowers
covenant to safeguard such Servicing Records and to deliver them promptly to the
Lender or its designee (including the Mortgage Custodian) at the Lender's
request.
(3) If the Mortgage Loans or Underlying Mortgage Loans are serviced by
a third party servicer, (such third party servicer, the "Subservicer"), the
Borrowers shall provide a copy of the servicing agreement to the Lender at least
three (3) Business Days prior to the applicable Funding Date, which shall be in
form and substance acceptable to the Lender (the "Servicing Agreement").
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(4) Each Borrower shall provide to the Lender a letter from such
Borrower or any Subservicer which is an Affiliate of such Borrower (which may be
part of the Instruction Letter), as the case may be, to the effect that upon the
occurrence of an Event of Default, the Lender may terminate any Servicing
Agreement and transfer servicing to its designee, at no cost or expense to the
Lender, it being agreed that the Borrowers will pay any and all fees required to
terminate the Servicing Agreement and to effectuate the transfer of servicing to
the designee of the Lender.
(5) After the Funding Date, until the pledge of any Mortgage Loan is
relinquished by the Mortgage Custodian, the Borrowers will have no right to
modify or alter the terms of such Mortgage Loan except with the prior written
consent of the Lender, and the Borrowers will have no obligation or right to
repossess such Mortgage Loan or substitute another Mortgage Loan, except as
provided in the Mortgage Custodial Agreement; provided, that the Borrowers may
enter into forbearance agreements or plans with Mortgagors consistent with its
collection activities as servicer of the Mortgage Loans and in conformity with
Accepted Servicing Practices.
(6) The Borrowers shall permit the Lender to inspect the servicing
facilities of the Borrowers, their Affiliates, or any Subservicer which is its
Affiliate of a Borrower as the case may be, for the purpose of satisfying the
Lender that the Borrowers, an Affiliate, or such Subservicer, as the case may
be, has the ability to service the Mortgage Loans as provided in this
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Loan Agreement. With respect to any Subservicer which is not an Affiliate, the
Borrowers shall use their best efforts to enable the Lender to inspect the
servicing facilities of such Subservicer.
11.16 Periodic Due Diligence Review. Each Borrower acknowledges that
the Lender has the right to perform continuing due diligence reviews with
respect to the Eligible Assets, for purposes of verifying compliance with the
representations, warranties and specifications made hereunder, or otherwise, and
each Borrower agrees that upon reasonable (but no less than one (1) Business
Day's) prior notice to such Borrower (which prior notice shall not be required
after the occurrence and during the continuation of a Default), the Lender or
its authorized representatives will be permitted during normal business hours to
examine, inspect, and make copies and extracts of, the Asset Files and any and
all documents, records, agreements, instruments or information relating to such
Eligible Assets in the possession or under the control of such Borrower, the
Master Servicer, any Subservicer, and/or the Mortgage Custodian. Each Borrower
also shall make available to the Lender a knowledgeable financial or accounting
officer for the purpose of answering questions respecting the Asset Files and
the Eligible Assets. Without limiting the generality of the foregoing, each
Borrower acknowledges that the Lender may make Advances to the Borrower based
solely upon the information provided by such Borrower to the Lender and the
representations, warranties and covenants contained herein, and that the Lender,
at its option, has the right at any time to conduct a partial or complete due
diligence review on some or all of the Eligible Assets securing such Advance,
including without limitation ordering new credit reports and, with respect to
Eligible Assets which are Mortgage Loans, new appraisals on the related
Mortgaged Properties and otherwise re-generating the information used to
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originate such Mortgage Loan. The Lender may underwrite such Eligible Assets
itself or engage a mutually agreed upon third party underwriter to perform such
underwriting. Each Borrower agrees to cooperate with the Lender and any third
party underwriter in connection with such underwriting, including, but not
limited to, providing the Lender and any third party underwriter with access to
any and all documents, records, agreements, instruments or information relating
to such Eligible Assets in the possession, or under the control, of such
Borrower, the Master Servicer, any Subservicer. In addition, the Lender has the
right to perform continuing Due Diligence Reviews of the Borrowers, the Master
Servicer, any Subservicer, and their Affiliates, directors, officers, employees
and significant shareholders. The Borrowers and Lender further agree that all
out-of-pocket costs and expenses incurred by the Lender in connection with the
Lender's activities pursuant to this Section 11.16 shall be paid for by the
Borrowers.
11.17 Set-Off. In addition to any rights and remedies of the Lender
provided by this Loan Agreement and by law, the Lender shall have the right,
without prior notice to the Borrowers, any such notice being expressly waived by
the Borrowers to the extent permitted by applicable law, upon any amount
becoming due and payable by the Borrowers hereunder (whether at the stated
maturity, by acceleration or otherwise) to set-off and appropriate and apply
against such amount any and all property and deposits (general or special, time
or demand, provisional or final), in any currency, and any other credits,
indebtedness or claims, in any currency, in each case whether direct or
indirect, absolute or contingent, matured or unmatured, at any time held or
owing by the Lender or any Affiliate thereof to or for the credit or the account
of either Borrower. The Lender agrees promptly to notify the related Borrower
after any such
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set-off and application made by the Lender; provided that the failure to give
such notice shall not affect the validity of such set-off and application.
11.18 Joint and Several Liability. The Borrowers hereby acknowledge and
agree that they will be jointly and severally liable to the Lender for all
representations, warranties, covenants, obligations and liabilities of the
Borrowers hereunder.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the parties hereto have caused this Loan Agreement
to be duly executed and delivered as of the day and year first above written.
BORROWER
HANOVER CAPITAL MORTGAGE
HOLDINGS, INC.
By:
----------------------------------
Title:
Address for Notices:
-------------------------------------
-------------------------------------
-------------------------------------
Attention:
---------------------------
Telecopier No.:
----------------------
Telephone No.:
-----------------------
BORROWER
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HANOVER CAPITAL PARTNERS, LTD.
By:
----------------------------------
Title:
Address for Notices:
-------------------------------------
-------------------------------------
-------------------------------------
Attention:
---------------------------
Telecopier No.:
----------------------
Telephone No.:
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LENDER
GREENWICH CAPITAL FINANCIAL
PRODUCTS, INC.
By:
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Title: Vice President
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Address for Notices:
600 Steamboat Road
Greenwich, Connecticut 06830
Attention: Dawn Papaccio
Telecopier No.: (203) 629-4640
Telephone No.: (203) 625-2928
With a copy to:
Attention: General Counsel
Telecopier No.: (203) 629-5718
Telephone No.: (203) 625-2700
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Exhibit 10.31
SCHEDULE 1
REPRESENTATIONS AND WARRANTIES RE: ELIGIBLE ASSETS
Part I. Eligible Mortgage Loans and Underlying Mortgage Loans
As to each Mortgage Loan included in the Borrowing Base on a
Funding Date (and the related Mortgaged Property) and the
Underlying Mortgage Loan represented by each Participation
Certificate included in the Borrowing Base on a Funding Date,
the Borrowers shall be deemed to make the following
representations and warranties to the Lender on and as of such
Funding Date and at all times thereafter while such Mortgage
Loan or Underlying Mortgage Loan is included in the Borrowing
Base (with respect to any representations and warranties made
to the best of the Borrower's knowledge, in the event that it
is discovered that the circumstances with respect to the
related Mortgage Loan are not accurately reflected in such
representation and warranty notwithstanding the knowledge or
lack of knowledge of the Borrowers, then, notwithstanding that
such representation and warranty is made to the best of the
Borrowers' knowledge, such Mortgage Loan shall be assigned a
Collateral Value in accordance with the definition thereof in
the Loan Agreement). For purposes of this Part I of Schedule 1
only, all references to Mortgage Loan, Mortgage Note,
Mortgagor, Mortgaged Property, or other similar terms shall be
deemed to include the Underlying Mortgage Loan, Underlying
Mortgage
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Note, Underlying Mortgagor, the property securing the
Underlying Mortgage Loan, or other related terms.
(a) Mortgage Loans as Described. The information set
forth in the Mortgage Loan Schedule accompanying the related
Notice of Borrowing and Pledge is true and correct;
(b) Payments Current. On the applicable Funding Date, and all
other times:
(i) such Mortgage Loan is not thirty (30) days or more
past due in respect of the first Scheduled Payment;
(ii) other than Delinquent Mortgage Loans subject to
subsections (i) and (ii) of the definition of Collateral Value
herein, such Mortgage Loan is not thirty (30) days or more
past due in respect of any Scheduled Payment;
(iii) no Delinquent Mortgage Loan is ninety (90) days or
more past due in respect of any Scheduled Payment.
(c) No Outstanding Charges. There are no defaults in complying
with the terms of the Mortgage, and all taxes, governmental
assessments, insurance premiums, water, sewer and municipal
charges, leasehold payments or ground rents which previously
became due and owing have been paid, or an escrow of funds has
been established in an amount sufficient to pay for every such
item
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which remains unpaid and which has been assessed but is not
yet due and payable. The Borrower has not advanced funds, or
induced, solicited or knowingly received any advance of funds
by a party other than the Mortgagor, directly or indirectly,
for the payment of any amount required under the Mortgage
Loan, except for interest accruing from the date of the
Mortgage Note or date of disbursement of the Mortgage Loan
proceeds, whichever is more recent, to the day which precedes
by one month the Due Date of the first installment of
principal and interest;
(d) Original Terms Unmodified. The terms of the Mortgage Note
and Mortgage have not been impaired, waived, altered or
modified in any respect, except by a written instrument which
has been recorded, if necessary to protect the interests of the
Lender and which has been delivered to the Mortgage Custodian.
The substance of any such waiver, alteration or modification
has been approved by the title insurer, to the extent required
by the policy. No Mortgagor has been released, in whole or in
part, except in connection with an assumption agreement
approved by the title insurer, to the extent required by the
policy, and which assumption agreement is part of the Asset
File delivered to the Mortgage Custodian and the terms of which
are reflected in the Mortgage Loan Schedule;
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(e) No Defenses. The Mortgage Loan is not subject to any right
of rescission, set-off, counterclaim or defense, including
without limitation the defense of usury, nor will the operation
of any of the terms of the Mortgage Note or the Mortgage, or
the exercise of any right thereunder, render either the
Mortgage Note or the Mortgage unenforceable, in whole or in
part, and no such right of rescission, set-off, counterclaim or
defense has been asserted with respect thereto; and no
Mortgagor was a debtor in any state or federal bankruptcy or
insolvency proceeding at the time the Mortgage Loan was
originated;
(f) Hazard Insurance. Pursuant to the terms of the Mortgage,
all buildings or other improvements upon the Mortgaged Property
are insured by an insurer who meets Fannie Mae and/or Freddie
Mac guidelines against loss by fire, hazards of extended
coverage and such other hazards as are customary in the area
where the Mortgaged Property is located pursuant to insurance
policies conforming to the requirements of the Underwriting
Guidelines. If upon origination of the Mortgage Loan, the
Mortgaged Property was in an area identified in the Federal
Register by the Federal Emergency Management Agency as having
special flood hazards (and such flood insurance was required by
federal regulation and such flood insurance has been made
available) a flood insurance policy meeting the requirements of
the current guidelines of the Federal Insurance Administration
is in effect. All individual insurance policies
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contain a standard mortgagee clause naming the loan originator
or the Borrower and its respective successors and assigns as
mortgagee, and all premiums thereon have been paid. The
Mortgage obligates the Mortgagor thereunder to maintain the
hazard insurance policy at the Mortgagor's cost and expense,
and on the Mortgagor's failure to do so, authorizes the holder
of the Mortgage to obtain and maintain such insurance at such
Mortgagor's cost and expense, and to seek reimbursement
therefor from the Mortgagor. Where required by state law or
regulation, the Mortgagor has been given an opportunity to
choose the carrier of the required hazard insurance, provided
the policy is not a "master" or "blanket" hazard insurance
policy covering a condominium, or any hazard insurance policy
covering the common facilities of a planned unit development.
The hazard insurance policy is the valid and binding
obligation of the insurer, is in full force and effect, and
will be in full force and effect and inure to the benefit of
the Lender upon the consummation of the transactions
contemplated by this Loan Agreement. The Borrower has not
engaged in, and has no knowledge of the Mortgagor's having
engaged in, any act or omission which would impair the
coverage of any such policy, the benefits of the endorsement
provided for herein, or the validity and binding effect of
either including, without limitation, no unlawful fee,
commission, kickback or other unlawful compensation or value
of any kind has been or will be received, retained or realized
by an attorney, firm or other person or entity
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and no such unlawful items have been received, retained or
realized by the related Borrower;
(g) Compliance with Applicable Laws. Any and all requirements
of any federal, state or local law including, without
limitation, usury, truth-in-lending, real estate settlement
procedures, consumer credit protection, equal credit
opportunity or disclosure laws applicable to the Mortgage Loan
have been complied with in all material respects, the
consummation by the related Borrower of the transactions
contemplated hereby will not involve the violation of any such
laws or regulations, and the Borrowers shall maintain in its
possession, available for the Lender's inspection, to the
extent required by law, and shall deliver to the Lender upon
demand, evidence of compliance with all such requirements;
(h) No Satisfaction of Mortgage. The Mortgage has not been
satisfied, canceled, subordinated or rescinded, in whole or in
part, and the Mortgaged Property has not been released from the
lien of the Mortgage, in whole or in part, nor has any
instrument been executed that would effect any such release,
cancellation, subordination or rescission. The Borrowers have
not waived the performance by the Mortgagor of any action, if
the Mortgagor's failure to perform such action would cause the
Mortgage Loan to be in default, nor have
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the Borrowers waived any default resulting from any acting or
inaction by the Mortgagor;
(i) Location and Type of Mortgaged Property. The Mortgaged
Property is located in the state identified in the Mortgage
Loan Schedule and consists of a parcel of real property with a
detached single family residence erected thereon, or a two- to
four-family dwelling, or an individual condominium unit in a
low-rise condominium project, or an individual unit in a
planned unit development or a de minimis planned unit
development, provided, however, that no residence or dwelling
is a mobile home or a manufactured dwelling. No portion of the
Mortgaged Property is used for commercial purposes;
(j) Valid First Lien. The Mortgage is a valid, subsisting,
enforceable, and perfected first lien on the Mortgaged
Property, including all buildings on the Mortgaged Property and
all installations and mechanical, electrical, plumbing, heating
and air conditioning systems located in or annexed to such
buildings, and all additions, alterations and replacements made
at any time with respect to the foregoing. The lien of the
Mortgage is subject only to: (i) the lien of current real
property taxes and assessments not yet due and payable; (ii)
covenants, conditions and restrictions, rights of way,
easements and other matters of the public record as of the date
of recording acceptable to mortgage lending institutions
generally and specifically referred to in the lender's title
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insurance policy delivered to the originator of the Mortgage
Loan and (A) referred to or to otherwise considered in the
appraisal (if any) made for the originator of the Mortgage Loan
or (B) which do not adversely affect the appraised value of the
Mortgaged Property set forth in such appraisal; and (iii) other
matters to which like properties are commonly subject which do
not materially interfere with the benefits of the security
intended to be provided by the Mortgage or the use, enjoyment,
value or marketability of the related Mortgaged Property. Any
security agreement, chattel mortgage or equivalent document
related to and delivered in connection with the Mortgage Loan
establishes and creates a valid, subsisting and enforceable
first lien and first priority security interest on the property
described therein and the related Borrower has full right to
sell and assign the same to the Lender. The Mortgaged Property
was not, as of the date of origination of the Mortgage Loan,
subject to a mortgage, deed of trust, deed to secure debt or
other security instrument creating a lien subordinate to the
lien of the Mortgage;
(k) Validity of Mortgage Documents. The Mortgage Note, the
Mortgage and any other agreement executed and delivered by a
Mortgagor in connection with a Mortgage Loan are genuine, and
each is the legal, valid and binding obligation of the maker
thereof enforceable in accordance with its terms. All parties
to the Mortgage Note, the Mortgage and any other related
agreement had legal capacity to enter into the Mortgage Loan
and to execute and deliver
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the Mortgage Note, the Mortgage and any such agreement, and
the Mortgage Note, the Mortgage, and any other such related
agreement have been duly and properly executed by such
parties. The Borrower has reviewed all of the documents
constituting the Asset File and have made such inquiries as
they deem necessary to make and confirm the accuracy of the
representations set forth herein;
(l) Full Disbursement of Proceeds. The proceeds of the
Mortgage Loan have been fully disbursed and there is no
requirement for future advances thereunder (except in the case
of a Mortgage Loan a portion of the proceeds of which has been
disbursed to an escrow account in connection with improvements
to be made to the related Mortgaged Property where (i) the
Mortgage Loan bears interest on the entire principal amount
thereof as if it had been fully disbursed, (ii) any proceeds of
such Mortgage Loan have not been held in such an escrow account
for more than sixty (60) days, and (iii) the deposit of funds
into such an escrow account has been effected in accordance
with the Underwriting Guidelines) and any and all requirements
as to completion of any on-site or off-site improvement and as
to disbursements of any escrow funds therefor have been
complied with. All costs, fees and expenses incurred in making
or closing the Mortgage Loan and the recording of the Mortgage
were paid, and the Mortgagor is not entitled to any refund of
any amounts paid or due under the Mortgage Note or Mortgage;
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(m) Ownership. The related Borrower is the sole owner of
record and holder of the Mortgage Loan; the Mortgage Loan is
not assigned or pledged (other than as contemplated under the
Loan Agreement), and the related Borrower has good indefeasible
and marketable title thereto, and has full right to transfer
and pledge the Mortgage Loan therein to the Lender free and
clear of any encumbrance, equity, participation interest, lien,
pledge, charge, claim or security interest, and has full right
and authority subject to no interest or participation of, or
agreement with, any other party, to pledge and assign each
Mortgage Loan pursuant to this Loan Agreement;
(n) Doing Business. All parties which have had any interest in
the Mortgage Loan, whether as mortgagee, assignee, pledgee or
otherwise, are (or, during the period in which they held and
disposed of such interest, were) (i) in compliance with any and
all applicable licensing requirements of the laws of the state
wherein the Mortgaged Property is located, and (ii) (A)
organized under the laws of such state, or (B) qualified to do
business in such state, or (C) a federal savings and loan
association, savings bank or a national bank having its
principal office in such state, or (D) not doing business in
such state;
(o) LTV. As of the date of origination of the Mortgage Loan,
the LTV is as identified in the applicable Mortgage Loan
Schedule, and the Borrowers have no actual knowledge that such
LTV has increased to higher than the level
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permitted under the Underwriting Guidelines. All provisions of
such primary mortgage insurance policy have been and are being
complied with, such policy is in full force and effect, and
all premiums due thereunder have been paid. Any Mortgage
subject to any such primary mortgage insurance policy
obligates the Mortgagor thereunder to maintain such insurance
and to pay all premiums and charges in connection therewith;
(p) Title Insurance. The Mortgage Loan is covered by a limited
liability lender's title insurance policy or such other form of
policy of insurance acceptable to Fannie Mae or Freddie Mac for
loans similar to the Mortgage Loans issued by a title insurer
qualified to do business in the jurisdiction where the
Mortgaged Property is located, insuring the related Borrower,
its successors and assigns, as to the priority of its lien of
the Mortgage in the original principal amount of the Mortgage
Loan, and subject only to the exceptions contained in clauses
(1), (2), and (3) of paragraph (j) above. Where required by
state law or regulation, the Mortgagor has been given the
opportunity to choose the carrier of the required mortgage
title insurance. Immediately prior to the sale of the Mortgage
Loan to the Lender under the terms of this Loan Agreement, the
related Borrower, its successors and assigns were the sole
insureds of such lender's title insurance policy. Such lender's
title insurance policy is in full force and effect and will be
in force and effect upon the consummation of the transactions
contemplated by this Loan Agreement. No
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claims have been made under such lender's title insurance
policy, and no prior holder of the Mortgage, including the
related Borrower, has done, by act or omission, anything which
should reasonably be expected to impair the coverage of such
lender's title insurance policy. In connection with the
issuance of such lender's title insurance policy, no unlawful
fee, commission, kickback or other unlawful compensation or
value of any kind has been or will be received, retained or
realized by any attorney, firm or other persons or entity, and
no such unlawful items have been received, retained or
realized by the Company;
(q) No Defaults; Right to Cure; No Failure to Cure. Other than
Delinquent Mortgage Loans, there is no default, breach,
violation or event of acceleration existing under the Mortgage
or the Mortgage Note and no event which, with the passage of
time or with notice and the expiration of any grace or cure
period, would constitute a default, breach, violation or event
of acceleration (other than those payment delinquencies
permitted by paragraph (a) of this Schedule 1), and neither the
related Borrower nor its predecessors have waived any default,
breach, violation or event of acceleration;
(r) No Mechanics' Liens There are no mechanics' or similar
liens or claims which have been filed for work, labor or
material (and no rights are outstanding that under the law
could give rise to such liens) affecting the
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related Mortgaged Property which are or may be liens prior to,
or equal or coordinate with, the lien of the related Mortgage;
(s) Location of Improvements; No Encroachments. All
improvements which were considered in determining the Appraised
Value of the Mortgaged Property lay wholly within the
boundaries and building restriction lines of the Mortgaged
Property and no improvements on adjoining properties encroach
upon the Mortgaged Property. No improvement located on or being
part of the Mortgaged Property is in violation of any
applicable zoning law or regulation;
(t) Origination: Payment Terms. The Mortgage Loan was
originated by or in conjunction with a mortgagee approved by
the Secretary of Housing and Urban Development pursuant to
Section 203 and 211 of the National Housing Act or a savings
and loan association, a savings bank, a commercial bank credit
union, insurance company or similar banking institution which
is supervised and examined by a federal or state authority.
Principal payments on the Mortgage Loan commenced no more than
sixty (60) days after funds were disbursed in connection with
the Mortgage Loan. The documents, instruments and agreements
submitted for loan underwriting were not falsified and contain
no untrue statement of material fact or omit to state a
material fact required to be stated therein. The Mortgage Note
has the terms identified in the applicable Mortgage Loan
Schedule;
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(u) Customary Provisions. The Mortgage Note has a stated
maturity. The Mortgage contains customary and enforceable
provisions such as to render the rights and remedies of the
holder thereof adequate for the realization against the
Mortgaged Property of the benefits of the security provided
thereby, including, (i) in the case of a Mortgage designated as
a deed of trust, by trustee's sale, and (ii) otherwise by
judicial foreclosure. Upon default by a Mortgagor on a Mortgage
Loan and foreclosure on, or trustee's sale of, the Mortgaged
Property pursuant to the proper procedures, the holder of the
Mortgage Loan will be able to deliver good and marketable title
to the Mortgaged Property. There is no homestead or other
exemption available to a Mortgagor which would interfere with
the right to sell the Mortgaged Property at a trustee's sale or
the right to foreclose the Mortgage;
(v) Conformance with Underwriting Guidelines and Agency
Standards. The Mortgage Loan was underwritten in accordance
with, and the Mortgage Loan and Mortgaged Property conform to,
the Borrowers' applicable Underwriting Guidelines. The Mortgage
Note and Mortgage are on forms acceptable to FHLMC or FNMA;
(w) Occupancy of the Mortgaged Property. The Mortgaged
Property is lawfully occupied under applicable law. All
inspections, licenses and certificates required to be made or
issued with respect to all occupied portions
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of the Mortgaged Property and, with respect to the use and
occupancy of the same, including but not limited to
certificates of occupancy and fire underwriting certificates,
have been made or obtained from the appropriate authorities.
The Mortgaged Property is owner occupied except as set forth
on the Mortgage Loan Tape;
(x) No Additional Collateral. The Mortgage Note is not and has
not been secured by any collateral except the lien of the
corresponding Mortgage and the security interest of any
applicable security agreement or chattel mortgage referred to
in (j) above;
(y) Deeds of Trust. In the event the Mortgage constitutes a
deed of trust, a trustee, duly qualified under applicable law
to serve as such, has been properly designated and currently so
serves and is named in the Mortgage, and no fees or expenses
are or will become payable by the Lender to the trustee under
the deed of trust, except in connection with a trustee's sale
after default by the Mortgagor;
(z) Take-Out Commitments. To the extent that a Mortgage Loan
is covered by a Take-Out Commitment, such Take-Out Commitment
is a valid, binding and subsisting obligation enforceable in
accordance with its terms.
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(aa) Acceptable Investment. No specific circumstances or
conditions exist with respect to the Mortgage, the Mortgaged
Property, the Mortgagor or the Mortgagor's credit standing that
should reasonably be expected to (i) cause private
institutional investors which invest in Mortgage Loans similar
to the Mortgage Loan to regard the Mortgage Loan as an
unacceptable investment, (ii) cause the Mortgage Loan to be
more likely to become past due in comparison to similar
Mortgage Loans, or (iii) adversely affect the value or
marketability of the Mortgage Loan in comparison to similar
Mortgage Loans;
(bb) Delivery of Mortgage Documents. The Mortgage Note, the
Mortgage, the Assignment of Mortgage and any other documents
required to be delivered for the Mortgage Loan by the Borrower
under the Mortgage Custodial Agreement have been delivered to
the Mortgage Custodian at or prior to the time specified for
delivery in the Mortgage Custodial Agreement.
(cc) Assignment of Mortgage. The Assignment of Mortgage
is in recordable form and is acceptable for recording under
the laws of the jurisdiction in which the Mortgaged Property
is located;
(dd) Due on Sale. The Mortgage contains an enforceable
provision for the acceleration of the payment of the unpaid
principal balance of the Mortgage
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Loan in the event that the Mortgaged Property is sold or
transferred without the prior written consent of the mortgagee
thereunder;
(ee) No Buydown Provisions: No Graduated Payments or
Contingent Interests. Except as noted in the Mortgage Loan Tape
and Mortgage Loan Schedule or the Participation Certificate
Schedule and Participation Certificate Tape, the Mortgage Loan
does not contain provisions pursuant to which Scheduled
Payments are paid or partially paid with funds deposited in any
separate account established by a Borrower, the Mortgagor or
anyone on behalf of the Mortgagor, or paid by any source other
than the Mortgagor nor does it contain any other similar
provisions currently in effect which may constitute a "buydown"
provision. Except as noted in the Mortgage Loan Tape and
Mortgage Loan Schedule or the Participation Certificate
Schedule and Participation Certificate Tape, the Mortgage Loan
is not a graduated payment Mortgage Loan and the Mortgage Loan
does not have a shared appreciation or other contingent
interest feature;
(ff) Consolidation of Future Advances. Any future advances
made after origination of the Mortgage Loan have been
consolidated with the outstanding principal amount secured by
the Mortgage, and the secured principal amount, as
consolidated, bears a single interest rate and single repayment
term. The lien of the Mortgage securing the consolidated
principal amount is expressly
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insured as having a first lien priority by a title insurance
policy, an endorsement to the policy insuring the mortgagee's
consolidated interest or by other title evidence satisfying
paragraph (p) above. The consolidated principal amount does
not exceed the original principal amount of the Mortgage Loan;
(gg) Mortgaged Property Undamaged: Condemnation. The Mortgaged
Property is undamaged by waste, fire, earthquake or earth
movement, windstorm, flood, tornado or other casualty so as to
adversely affect the value of the Mortgaged Property as
security for the Mortgage Loan or the use for which the
premises were intended and each Mortgaged Property is in good
repair. There have not been any condemnation proceedings with
respect to the Mortgaged Property and the Borrower has no
knowledge of any such proceedings in the future;
(hh) Collection Practices; Escrow Deposits. The origination
and collection practices used with respect to the Mortgage Loan
have been in all respects in compliance with Accepted Servicing
Practices, applicable laws and regulations, and have been in
all respects legal, proper, and consistent with industry
standards for mortgage loans of the same type as the Mortgage
Loan. With respect to escrow deposits and Escrow Payments, if
any, all such payments are in the possession of, or under
control of, a Borrower and there exist no deficiencies in
connection therewith for which customary arrangements for
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repayment thereof have not been made. All Escrow Payments, if
any, have been collected in full compliance with state and
federal law. An escrow of funds is not prohibited by applicable
law and any escrow that has been established is in an amount
sufficient to pay for every item that remains unpaid and has
been assessed but is not yet due and payable. No escrow
deposits or Escrow Payments or other charges or payments due
the Borrower has been capitalized under the Mortgage or the
Mortgage Note. Any interest required to be paid pursuant to
state and local law has been properly paid and credited;
(ii) Appraisal. The file held by the Master Servicer or the
Subservicer contains an appraisal of the related Mortgaged
Property signed prior to the approval of the Mortgage Loan
application by a qualified appraiser, duly appointed by the
related Borrower, who had no interest, direct or indirect in
the Mortgaged Property or in any loan made on the security
thereof, and whose compensation is not affected by the approval
or disapproval of the Mortgage Loan, and the appraisal and
appraiser both satisfy the requirements of Title XI of the
Federal Institutions Reform, Recovery and Enforcement Act of
1989, as amended, and the regulations promulgated thereunder,
as such statute and regulations were in effect on the date the
Mortgage Loan was originated;
(jj) Soldiers' and Sailors' Relief Act. The Mortgagor has
not notified the Borrower, and the Borrower has no knowledge
of any relief requested or
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allowed to the Mortgagor under the Soldiers' and Sailors'
Civil Relief Act of 1940;
(kk) Environmental Matters. To the Borrowers' actual
knowledge, the Mortgaged Property is free from any and all
toxic or hazardous substances and there exists no violation
of any local, state or federal environmental law, rule or
regulation;
(ll) Construction or Rehabilitation of Mortgaged
Property. No Mortgage Loan was made in connection with the
construction or rehabilitation of a Mortgaged Property or
facilitating the trade-in or exchange of a Mortgaged
Property;
(mm) Ground Leases. With respect to each ground lease to which
the Mortgaged Property is subject (a "Ground Lease"): (i) the
Mortgagor is the owner of a valid and subsisting interest as
tenant under the Ground Lease; (ii) the Ground Lease is in full
force and effect, unmodified and not supplemented by any
writing or otherwise; (iii) all rent, additional rent and other
charges reserved therein have been paid to the extent they are
payable to the date hereof; (iv) the Mortgagor enjoys the quiet
and peaceful possession of the estate demised thereby, subject
to any sublease; (v) the Mortgagor is not in default under any
of the terms thereof and there are no circumstances which,
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with the passage of time or the giving of notice or both,
would constitute an event of default thereunder; (vii) the
lessor under the Ground Lease is not in default under any of
the terms or provisions thereof on the part of the lessor to
be observed or performed; (vii) the lessor under the Ground
Lease has satisfied all of its repair or construction
obligations, if any, to date pursuant to the terms of the
Ground Lease; and (ix) the execution, delivery and performance
of the Mortgage do not require the consent (other than those
consents which have been obtained and are in full force and
effect) under, and will not contravene any provision of or
cause a default under, the Ground Lease.
(nn) No Defense to Insurance Coverage. No action has been
taken or failed to be taken, no event has occurred and no state
of facts exists or has existed (whether or not known to the
Borrowers on or prior to such date) which has resulted or will
result in an exclusion from, denial of, or defense to coverage
under any applicable pool policy, special hazard insurance
policy, or bankruptcy bond (including, without limitation, any
exclusions, denials or defenses which would limit or reduce the
availability of the timely payment of the full amount of the
loss otherwise due thereunder to the insured), whether arising
out of actions, representations, errors, omissions, negligence,
or fraud of the Borrower, the related Mortgagor or any party
involved in the application for such insurance or coverage,
including the appraisal, plans and specifications and other
exhibits or documents submitted therewith to the insurer or
under any
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such insurance policy, or for any other mason under such
coverage, but not including the failure of the insurer to pay
by reason of the insurer's breach of the insurance policy or
the insurer's financial inability to pay. In connection with
the placement of any insurance or coverage, no commission, fee
or other compensation has been or will be received by any
Borrower or by any officer, director, or employee of such
Borrower or any designee of such Borrower or any corporation
in which such Borrower or any officer, director or employee
had a financial interest at the time of placement of such
insurance;
(oo) Value of Mortgage Property. The Borrowers have no
knowledge of any circumstances existing that should reasonably
be expected to adversely affect the value or the marketability
of the Mortgaged Property or the Mortgage Loan or to cause the
Mortgage Loan to prepay during any period materially faster or
slower than the Mortgage Loans acquired by the Borrowers
generally; and
(pp) Section 32 Mortgages; Overages. The related Borrower has
provided the related Mortgagor with all disclosure materials
required by Section 226.32 of the Federal Reserve Board
Regulation Z with respect to any Mortgage Loans subject to such
Section of the Federal Reserve Board Regulation Z. The related
Borrower has not made or caused to be made any payment in the
nature of an
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"overage" or "yield spread premium" to a mortgage broker or
like Person which has not been fully disclosed to the
Mortgagor.
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Part II. Eligible Bonds; Underlying Eligible Bonds
(I) As to each Eligible Bond included in the Borrowing Base on
a Funding Date or each Underlying Eligible Bond, the Borrowers
shall be deemed to make the following representations and
warranties to the Lender on and as of such Funding Date and at
all times thereafter while such Eligible Bond or the Pledged
Stock of the Eligible Entity which owns such Underlying
Eligible Bonds is included in the Borrowing Base:
(a) Compliance with Applicable Laws. All of
the Eligible Bonds or Underlying Eligible Bonds have been
validly issued, and are fully paid and non-assessable, and the
Eligible Bonds or Underlying Eligible Bonds have been offered,
issued and sold in compliance with all applicable laws;
(b) No Encumbrances. There are (i) no
outstanding rights, options, warrants or agreements for a
purchase, sale or issuance, in connection with the Eligible
Bonds or Underlying Eligible Bonds, (ii) no agreements on the
part of the Borrower to issue, sell or distribute the Eligible
Bonds or Underlying Eligible Bonds, and (iii) no obligations on
the part of the Borrowers (contingent or otherwise) to
purchase, redeem or otherwise acquire
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any securities or any interest therein or to pay any dividend
or make any distribution in respect of the Eligible Bonds or
Underlying Eligible Bonds;
(c) Ownership. A Borrower is, or will be upon
issuance of the Eligible Bonds or Underlying Eligible Bonds,
the record and beneficial owner of, and has, or will have upon
issuance, good title to, the Eligible Bonds or Underlying
Eligible Bonds, free of any and all liens or options in favor
of, or claims of, any other Person, except the security
interest created by this Loan Agreement;
(d) Unencumbered Assets. The Eligible
Bonds or Underlying Eligible Bonds shall be unencumbered;
(e) Proper Form. The Eligible Bonds or
Underlying Eligible Bonds are certificated securities in
registered form, or are in uncertificated form and (i) held
through the facilities of a Relevant System, or (ii) registered
on the books of the issuer thereof;
(f) Chief Executive Office. The chief
executive office of each Borrower is, and for the four months
immediately preceding the date of this Loan Agreement has been,
located at the address set forth for it on the signature page
hereof; and
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(g) Take-Out Commitments. To the extent that
an Eligible Bond or Underlying Eligible Bond is covered by a
Take-Out Commitment, such Take-Out Commitment is a valid,
binding and subsisting obligation enforceable in accordance
with its terms.
(II) As to each Eligible Bond included in the Borrowing Base
on a Funding Date, the Borrowers shall be deemed to make the
following representations and warranties to the Lender on and
as of such Funding Date and at all times thereafter while such
Eligible Bond is included in the Borrowing Base:
(a) First Priority Security Interest; Security Entitlement.
The Eligible Bonds, when pledged as Collateral hereunder, shall
be unencumbered, and this Loan Agreement, together with
delivery to the Lender or the Bond/PC Custodian of the Eligible
Bonds and the filing of a financing statement naming the
related Borrower as "debtor" and the Lender as "secured party"
and describing such Collateral as the "collateral", will create
a valid first priority perfected security interest in such
Collateral in favor of the Lender in accordance with its terms
against all credits of such Borrower and any Persons purporting
to purchase such Collateral from such Borrower, and without
limitation the Lender shall have a "security entitlement"
thereto. The related Borrower has obtained from any and all
concerned creditors, any waivers,
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amendments, releases or acknowledgments necessary to create
and perfect in favor of the Lender the first priority security
interests provided herein.
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Part III. Participation Certificates
As to each Participation Certificate and the related Governing
Agreement, the following eligibility criteria shall be met as of the applicable
Funding Date and as of each date Collateral Value is determined:
(a) Validity of Governing Agreement. The Governing
Agreement and any other agreement executed and
delivered in connection with Participation
Certificate are genuine, and each is the legal,
valid and binding obligation of the maker
thereof enforceable in accordance with its
terms. The related Borrower and the Trustee
had legal capacity to enter into the Governing
Agreement and the Trustee had the legal
capacity to execute and deliver the Governing
Agreement and any such agreement, and the
Governing Agreement and any such other related
agreement to which the related Borrower or the
Trustee are parties have been duly and
properly executed by the related Borrower and
the Trustee, as applicable. The Governing
Agreement to which the Trustee is a party
constitutes a legal, valid, binding and
enforceable obligation of the Trustee. The
Governing Agreement is in full force and
effect, and the enforceability of the Governing
Agreement has not been contested by the Trustee.
(b) Original Terms Unmodified. The terms of the
Governing Agreement and the related Participation
Certificate have not been impaired, altered or
modified in any respect.
(c) No Waiver. The related Borrower has not waived the performance
by the Trustee of any action, if the Trustee's failure to
perform such action would cause the Governing Agreement to be
in default, nor has the related Borrower waived any default
resulting from any action or inaction by the Trustee.
(d) No Defaults. There is no default, breach, violation or
event of acceleration existing under the Governing
Agreement and no event has occurred which, with the passage
of time or giving of notice or both and the expiration of
any grace or cure period, would constitute a default,
breach, violation or event of acceleration thereunder, and
neither the related Borrower nor its predecessors in
interest have waived any such default, breach, violation or
event of acceleration.
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(e) Delivery of Governing Agreement. The Governing Agreements for
the related Participation Certificate has been or shall be
delivered three (3) days prior to each Funding Date.
(f) Participation Certificate Assignable. Each
Participation Certificate is assignable to the
Lender. The Governing Agreement permits the
related Borrower to sell, assign, pledge, transfer
or rehypothecate the Eligible Mortgage Loan
related to such Participation Certificate.
(g) Take-Out Commitments. To the extent that a
Participation Certificate is covered by a Take-Out
Commitment, such Take-Out Commitment is a valid,
binding and subsisting obligation enforceable in
accordance with its terms.
(h) Underlying Mortgage Loans. With respect to each
Underlying Mortgage Loan, the representations and
warranties set forth in Part I of this Schedule 1
are true and correct.
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<PAGE> 182
Part IV. Pledged Stock
As to the Pledged Stock, the Borrowers shall be deemed to make
the following representations and warranties to the Lender on
and as of such Funding Date and at all times thereafter while
the Pledged Stock is included in the Borrowing Base:
(a) The shares of Pledged Stock listed on the Pledged Stock
Summary constitute all the issued and outstanding shares of all
classes of the Capital Stock of the Eligible Entity and are
represented by the certificates listed thereon.
(b) All the shares of the Pledged Stock have been duly and
validly issued and are fully paid and nonassessable.
(c) The related Borrower is the record and beneficial owner
of, and has title to, the Pledged Stock, free of any and all
Liens or options in favor of, or claims of, any other Person,
except the Lien created by this Loan Agreement.
(d) Upon delivery to the Lender of the stock certificates
evidencing the Pledged Stock (and assuming the continuing
possession by the Lender of such stock certificate in
accordance with the requirements of applicable law), the Lien
granted pursuant to this Loan Agreement will constitute a
valid, perfected
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<PAGE> 183
first priority Lien on the Pledged Stock in favor of the
Lender enforceable as such against all creditors of the
related Borrower and any Persons purporting to purchase any
Pledged Stock from the related Borrower.
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<PAGE> 184
Part V. Defined Terms
In addition to terms defined elsewhere in the Loan Agreement,
the following terms shall have the following meanings when used
in this Schedule 1:
"Appraised Value" shall mean the value set forth in an
appraisal made in connection with the origination of the
related Mortgage Loan as the value of the Mortgaged Property.
"Assignment of Mortgage" shall mean an assignment of the
Mortgage, notice of transfer or equivalent instrument in
recordable form, sufficient under the laws of the jurisdiction
wherein the related Mortgaged Property is located to reflect
the transfer of the Mortgage.
"Due Date" means the day of the month on which the Scheduled
Payment is due on a Mortgage Loan, exclusive of any days of
grace.
"Escrow Payments" shall mean with respect to any Mortgage
Loan, the amounts constituting ground rents, taxes,
assessments, water rates, sewer rents, municipal charges, fire
and hazard insurance premiums, condominium charges, and any
other payments required to be escrowed by the Mortgagor with
the mortgagee pursuant to the Mortgage or any other related
document.
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<PAGE> 185
"Loan-to-Value Ratio" or "LTV" shall mean with respect to any
Mortgage Loan, the ratio of (a) the Par Amount of the Mortgage
Loan as of the date of origination (unless otherwise indicated)
to (b) the Appraised Value of the Mortgaged Property or if the
Mortgage Loan was made in connection with the purchase of the
related Mortgaged Property, the lesser of the Appraised Value
and the sales price of such property.
"Stated Principal Balance" shall mean as to each Mortgage
Loan, the principal balance of the Mortgage Loan at the date of
determination.
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<PAGE> 186
SCHEDULE 2
FILING JURISDICTIONS AND OFFICES
Secretary of State of the State of New York
Secretary of County of New York County
Secretary of State of the State of New Jersey
Secretary of State of the State of Maryland
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<PAGE> 187
SCHEDULE 3
SUBSIDIARIES
[TO BE PROVIDED BY COUNSEL TO BORROWERS]
<PAGE> 188
SCHEDULE 4
LITIGATION
[TO BE PROVIDED BY COUNSEL TO BORROWERS]
<PAGE> 189
EXHIBIT A
[FORM OF PROMISSORY NOTE]
$[__________] Dated November __, 1998
New York, New York
FOR VALUE RECEIVED, HANOVER CAPITAL MORTGAGE HOLDINGS,
INC., a Maryland corporation and HANOVER CAPITAL PARTNERS,
LTD., a New York corporation (the "Borrowers"), hereby promise
to pay to the order of GREENWICH CAPITAL FINANCIAL PRODUCTS,
INC. a Delaware corporation (the "Lender"), at the principal
office of the Lender at 600 Steamboat Road, Greenwich,
Connecticut 06830, in lawful money of the United States, and in
immediately available funds, the principal sum of [________
DOLLARS] ($[_________]) (or such lesser amount as shall equal
the aggregate unpaid principal amount of the Advances made by
the Lender to the Borrowers under the Loan Agreement as defined
below), on the dates and in the principal amounts provided in
the Loan Agreement, and to pay interest on the unpaid principal
amount of each such Advance, at such office, in like money and
funds, for the period commencing on the date of such Advance
until such Advance shall be paid in full, at the rates per
annum and on the dates provided in the Loan Agreement.
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<PAGE> 190
The date, amount and interest rate of each Advance made
by the Lender to the Borrowers, and each payment made on
account of the principal and interest thereof, shall be
recorded by the Lender on its books and, prior to any transfer
of this Note, endorsed by the Lender on the schedule attached
hereto or any continuation thereof; provided, that the failure
of the Lender to make any such recordation or endorsement shall
not affect the obligations of the Borrowers to make a payment
when due of any amount owing under the Loan Agreement or
hereunder in respect of the Advances made by the Lender.
This Note is the Note referred to in the Amended and
Restated Master Loan and Security Agreement dated as of
November 23, 1998 (as amended, supplemented or otherwise
modified and in effect from time to time, the "Loan Agreement")
between the Borrowers and the Lender, and evidences Advances
made by the Lender thereunder. Terms used but not defined in
this Note have the respective meanings assigned to them in the
Loan Agreement.
The Borrowers agree to pay all the Lender's costs of
collection and enforcement (including attorneys' fees and
disbursements of Lender's counsel) in respect of this Note when
incurred, including, without limitation, attorneys' fees
through appellate proceedings.
Notwithstanding the pledge of the Collateral, the
Borrowers hereby acknowledge, admit and agree that the
Borrowers' obligations under this Note
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<PAGE> 191
are recourse obligations of the Borrowers to which the
Borrowers pledge their full faith and credit.
The Borrowers, and any indorsers hereof, (a) severally
waive diligence, presentment, protest and demand and also
notice of protest, demand, dishonor and nonpayments of this
Note, (b) expressly agree that this Note, or any payment
hereunder, may be extended from time to time, and consent to
the acceptance of further Collateral, the release of any
Collateral for this Note, the release of any party primarily or
secondarily liable hereon, and (c) expressly agree that it will
not be necessary for the Lender, in order to enforce payment of
this Note, to first institute or exhaust the Lender's remedies
against the Borrowers or any other party liable hereon or
against any Collateral for this Note. No extension of time for
the payment of this Note, or any installment hereof, made by
agreement by the Lender with any person now or hereafter liable
for the payment of this Note, shall affect the liability under
this Note of the Borrowers, even if the Borrowers are not a
party to such agreement; provided, however, that the Lender and
the Borrowers, by written agreement between them, may affect
the liability of the Borrowers.
Any reference herein to the Lender shall be deemed to
include and apply to every subsequent holder of this Note.
Reference is made to the Loan Agreement for provisions
concerning optional and mandatory prepayments, Collateral,
acceleration and other material terms affecting this Note.
-3-
<PAGE> 192
The Borrowers hereby acknowledge and agree that they will each
be jointly and severally liable to the Lender for all
representations, warranties, covenants and liabilities of the
Borrowers hereunder.
Any enforcement action relating to this Note may be brought by
motion for summary judgment in lieu of a complaint pursuant to
Section 3213 of the New York Civil Practice Law and Rules.
THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED UNDER THE LAWS OF
THE STATE OF NEW YORK (WITHOUT REFERENCE TO CHOICE OF LAW
DOCTRINE BUT WITH REFERENCE TO SECTION 5-1401 OF THE NEW YORK
GENERAL OBLIGATIONS LAW, WHICH BY ITS TERMS APPLIES TO THIS
NOTE) WHOSE LAWS THE BORROWERS EXPRESSLY ELECT TO APPLY TO THIS
NOTE. THE BORROWERS AGREE THAT ANY ACTION OR PROCEEDING BROUGHT
TO ENFORCE OR ARISING OUT OF THIS NOTE MAY BE COMMENCED IN THE
SUPREME COURT OF THE STATE OF NEW YORK, BOROUGH OF MANHATTAN,
OR IN THE DISTRICT COURT OF THE UNITED STATES FOR THE SOUTHERN
DISTRICT OF NEW YORK. THE BORROWERS HEREBY SUBMIT TO NEW YORK
JURISDICTION WITH RESPECT TO ANY ACTION BROUGHT WITH RESPECT TO
THIS NOTE AND WAIVES ANY RIGHT WITH RESPECT TO THE DOCTRINE OF
FORUM NON CONVENIENS WITH RESPECT TO SUCH TRANSACTIONS.
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<PAGE> 193
HANOVER CAPITAL MORTGAGE HOLDINGS,
INC.
By:
Name:
Title:
HANOVER CAPITAL PARTNERS, LTD.
By:
Name:
Title:
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<PAGE> 194
SCHEDULE OF ADVANCES
This Note evidences Advances made under the within-described
Loan Agreement to the Borrowers, on the dates, in the principal
amounts and bearing interest at the rates set forth below, and
subject to the payments and prepayments of principal set forth
below:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
PRINCIPAL INTEREST AMOUNT PAID UNPAID NOTATION
DATE MADE AMOUNT OF RATE OR PREPAID PRINCIPAL MADE BY
ADVANCE AMOUNT
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
</TABLE>
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<PAGE> 195
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
-7-
<PAGE> 196
EXHIBIT B
[FORM OF MORTGAGE CUSTODIAL AGREEMENT]
[STORED AS A SEPARATE DOCUMENT]
-8-
<PAGE> 197
EXHIBIT C
[FORM OF OPINION OF COUNSEL TO BORROWER]
-1-
<PAGE> 198
EXHIBIT D-1
FORM OF NOTICE OF BORROWING AND PLEDGE-ELIGIBLE MORTGAGE LOANS
[insert date]
Greenwich Capital Financial Products, Inc.
600 Steamboat Road
Greenwich, Connecticut 06830
Attention: David Katze
Notice of Borrowing and Pledge No.: _____________________
Name of Subservicer: _____________________
Interest Period: _____________________
Ladies/Gentlemen:
Reference is made to the Amended and Restated Master Loan
and Security Agreement, dated as of November 23, 1998 (the
"Loan Agreement"; capitalized terms used but not otherwise
defined herein shall have the meaning given them in the Loan
Agreement), between Hanover Capital Mortgage Holdings, Inc.
and Hanover Capital Partners, Ltd. (the "Borrowers") and
Greenwich Capital Financial Products, Inc. (the "Lender").
In accordance with Section 2.03(a) of the Loan Agreement, the
undersigned Borrower hereby requests that you, the Lender, make
Advances to us in an aggregate principal amount of
$_________________ [insert requested Advance amount] (such
amount representing [insert number of Mortgage Loans] loans on
____________________ [insert requested Funding Date, which must
be at least three (3) Business Days following the date of the
request], in connection with which we shall pledge to you as
Collateral the Mortgage Loans set forth on the Mortgage Loan
Schedule attached hereto.
The Borrower hereby certifies, as of such Funding Date, that:
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<PAGE> 199
(a) no Default or Event of Default has occurred and is
continuing on the date hereof nor will occur after giving
effect to such Advance as a result of such Advance;
(b) each of the representations and warranties made by
the Borrower in or pursuant to the Loan Documents is true and
correct in all material respects on and as of such date (in
the case of the representations and warranties in respect of
Eligible Mortgage Loans, solely with respect to Eligible
Mortgage Loans being included the Borrowing Base on the
Funding Date) as if made on and as of the date hereof (or, if
any such representation or warranty is expressly stated to
have been made as of a specific date, as of such specific
date); and
(c) the Borrower is in compliance with all governmental
licenses and authorizations and is qualified to do business
and is in good standing in all required jurisdictions.
Very truly yours,
[BORROWER]
By:
Name:
Title:
-3-
<PAGE> 200
Schedule I
to Notice of Borrowing and Pledge
ELIGIBLE MORTGAGE LOANS PROPOSED TO BE PLEDGED
TO LENDER ON FUNDING DATE
[ATTACH MORTGAGE LOAN SCHEDULE]
-4-
<PAGE> 201
EXHIBIT D-2
FORM OF NOTICE OF BORROWING AND PLEDGE - PLEDGED STOCK
[INSERT DATE]
Greenwich Capital Financial Products, Inc.
600 Steamboat Road
Greenwich, Connecticut 06830
Attention: David Katze
Notice of Borrowing and Pledge No.: _____________________
Name of Trustee :_____________________
Interest Period :_____________________
Ladies/Gentlemen:
Reference is made to the Amended and Restated Master Loan and Security
Agreement, dated as of November 23, 1998 (the "Loan Agreement"; capitalized
terms used but not otherwise defined herein shall have the meaning given them
in the Loan Agreement), between Hanover Capital Mortgage Holdings, Inc. and
Hanover Capital Partners, Ltd. (the "Borrowers") and Greenwich Capital
Financial Products, Inc. (the "Lender").
In accordance with Section 2.03(a) of the Loan Agreement, the undersigned
Borrower hereby requests that you, the Lender, make Advances to us in an
aggregate principal amount of $_________________ [insert requested Advance
amount] (such amount representing [insert number of Underlying Eligible Bonds]
bonds on ____________________ [insert requested Funding Date,
-1-
<PAGE> 202
which must be at least three (3) Business Days following the date of the
request], in connection with which we shall pledge to you as Collateral the
Pledged Stock set forth on Schedule I attached hereto.
The Borrower hereby certifies, as of such Funding Date, that:
(a) no Default or Event of Default has occurred and is
continuing on the date hereof nor will occur after giving
effect to such Advance as a result of such Advance;
(b) each of the representations and warranties made by
the Borrower in or pursuant to the Loan Documents is true and
correct in all material respects on and as of such date (in
the case of the representations and warranties in respect of
the Pledged Securities, solely with respect to the Pledged
Securities being included the Borrowing Base on the Funding
Date) as if made on and as of the date hereof (or, if any such
representation or warranty is expressly stated to have been
made as of a specific date, as of such specific date); and
(c) the Borrower is in compliance with all governmental
licenses and authorizations and is qualified to do business
and is in good standing in all required jurisdictions.
Very truly yours,
[BORROWER]
By:
Name:
Title:
-2-
<PAGE> 203
Schedule I
to Notice of Borrowing and Pledge
[PLEDGED STOCK PROPOSED TO BE PLEDGED
TO LENDER ON FUNDING DATE]
[ATTACH PLEDGED STOCK SUMMARY AND
BOND SUMMARY WITH RESPECT TO THE UNDERLYING ELIGIBLE BONDS]
-3-
<PAGE> 204
EXHIBIT D-3
FORM OF NOTICE OF BORROWING AND PLEDGE - PARTICIPATION CERTIFICATES
[INSERT DATE]
Greenwich Capital Financial Products, Inc.
600 Steamboat Road
Greenwich, Connecticut 06830
Attention: David Katze
Notice of Borrowing and Pledge No.: _____________________
Name of Trustee :_____________________
Interest Period :_____________________
Ownership Percentage :_____________________
Ladies/Gentlemen:
Reference is made to the Amended and Restated Master Loan and Security
Agreement, dated as of November 23, 1998 (the "Loan Agreement"; capitalized
terms used but not otherwise defined herein shall have the meaning given them
in the Loan Agreement), between Hanover Capital Mortgage Holdings, Inc. and
Hanover Capital Partners, Ltd. (the "Borrowers") and Greenwich Capital
Financial Products, Inc. (the "Lender").
In accordance with Section 2.03(a) of the Loan Agreement, the undersigned
Borrower hereby requests that you, the Lender, make Advances to us in an
aggregate principal amount of $_________________ [insert requested Advance
amount] (such amount representing [insert number
-1-
<PAGE> 205
of Participation Certificates] on ____________________ [insert requested Funding
Date, which must be at least three (3) Business Days following the date of the
request], in connection with which we shall pledge to you as Collateral the
Participation Certificates set forth in the Participation Certificate Summary
attached hereto.
The Borrower hereby certifies, as of such Funding Date, that:
(a) no Default or Event of Default has occurred and is
continuing on the date hereof nor will occur after giving
effect to such Advance as a result of such Advance;
(b) each of the representations and warranties made by
the Borrower in or pursuant to the Loan Documents is true and
correct in all material respects on and as of such date (in
the case of the representations and warranties in respect of
Participation Certificates, solely with respect to
Participation Certificates being included the Borrowing Base
on the Funding Date) as if made on and as of the date hereof
(or, if any such representation or warranty is expressly
stated to have been made as of a specific date, as of such
specific date); and
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<PAGE> 206
(c) the Borrower is in compliance with all governmental
licenses and authorizations and is qualified to do business
and is in good standing in all required jurisdictions.
Very truly yours,
[BORROWER]
By:
Name:
Title:
-3-
<PAGE> 207
Schedule I
to Notice of Borrowing and Pledge
[ELIGIBLE PARTICIPATION CERTIFICATES PROPOSED TO BE PLEDGED
TO LENDER ON FUNDING DATE]
[ATTACH PARTICIPATION CERTIFICATE TAPE]
-1-
<PAGE> 208
EXHIBIT D-4
FORM OF NOTICE OF BORROWING AND PLEDGE - ELIGIBLE BONDS
[INSERT DATE]
Greenwich Capital Financial Products, Inc.
600 Steamboat Road
Greenwich, Connecticut 06830
Attention: David Katze
Notice of Borrowing and Pledge No. : _____________________
Name of Trustee :_____________________
Interest Period :_____________________
Ladies/Gentlemen:
Reference is made to the Master Loan and Security Agreement, dated as of
November 23, 1998 (the "Loan Agreement"; capitalized terms used but not
otherwise defined herein shall have the meaning given them in the Loan
Agreement), between Hanover Capital Mortgage Holdings, Inc. and Hanover
Capital Partners, Ltd. (the "Borrowers") and Greenwich Capital Financial
Products, Inc. (the "Lender").
In accordance with Section 2.03(a) of the Loan Agreement, the undersigned
Borrower hereby requests that you, the Lender, make Advances to us in an
aggregate principal amount of $_________________ [insert requested Advance
amount] (such amount representing [insert number of Eligible Bonds] bonds on
____________________ [insert requested Funding Date, which must
-1-
<PAGE> 209
be at least three (3) Business Days following the date of the request], in
connection with which we shall pledge to you as Collateral the Eligible Bonds
set forth in the Bond Summary attached hereto.
The Borrower hereby certifies, as of such Funding Date, that:
(a) no Default or Event of Default has occurred and is
continuing on the date hereof nor will occur after giving
effect to such Advance as a result of such Advance;
(b) each of the representations and warranties made by
the Borrower in or pursuant to the Loan Documents is true and
correct in all material respects on and as of such date (in
the case of the representations and warranties in respect of
Eligible Bonds, solely with respect to Eligible Bonds being
included the Borrowing Base on the Funding Date) as if made on
and as of the date hereof (or, if any such representation or
warranty is expressly stated to have been made as of a
specific date, as of such specific date); and
(c) the Borrower is in compliance with all governmental
licenses and authorizations and is qualified to do business
and is in good standing in all required jurisdictions.
Very truly yours,
[BORROWER]
By:
Name:
Title:
-2-
<PAGE> 210
Schedule I
to Notice of Borrowing and Pledge
[ELIGIBLE BONDS PROPOSED TO BE PLEDGED
TO LENDER ON FUNDING DATE]
[ATTACH BOND SUMMARY WITH RESPECT TO THE ELIGIBLE BONDS]
-3-
<PAGE> 211
EXHIBIT E
UNDERWRITING GUIDELINES
[TO BE PROVIDED BY BORROWERS]
-4-
<PAGE> 212
EXHIBIT F
FORM OF BLOCKED ACCOUNT AGREEMENT
_______________, 199_
Fleet Bank
Attn:
Re: Account Established by Greenwich Capital Financial
Products, Inc. ("Lender"), pursuant to that certain
Amended and Restated Master Loan and Security
Agreement (as amended, supplemented or otherwise
modified from time to time, the "Loan Agreement"),
dated as of November 23, 1998, by and among the
Lender, Fleet Bank (the "Collection Bank"), Hanover
Capital Mortgage Holdings, Inc. and Hanover Capital
Partners Inc. ("Borrower")
Ladies and Gentlemen:
We refer to the collection account established by the
Borrowers pursuant to the Loan Agreement, at the Collection
Bank, Providence, Rhode Island, Account No. [ACCOUNT #], ABA#
[ABA #], [sub]account identified with
-1-
<PAGE> 213
respect to Eligible Assets pledged to the Lender (the
"Collection Account"), which the Borrowers maintain in
accordance with the Loan Agreement.
From time to time,
certain third-party servicers (each a "Subservicer") and trustees (each a
"Trustee") will deposit funds received in accordance with a related servicing
agreement or governing agreement into the Collection Account. Greenwich Capital
Financial Products, Inc. (the "Lender") has established a secured loan
arrangement with the Borrowers. By its execution of this letter, the Collection
Bank and the undersigned Borrower acknowledges that the Borrowers have granted a
security interest in all of the Borrowers' right, title and interest in and to
the Collection Account and any funds from time to time on deposit therein with
respect to such Eligible Assets, that such funds are received by the Collection
Bank in trust for the benefit of Lender and, except as provided below, are for
application against the Borrower's liabilities to Lender.
By the Collection
Bank's and the undersigned Borrower's execution of this letter, each party
agrees: (a) that all funds from time to time hereafter in the Collection Account
are the property of the Borrower held in trust for the benefit of, and subject
to a security interest in favor of, the Lender; (b) that neither the Collection
Bank nor the Borrowers will exercise any right of set-off, banker's lien or any
similar right in connection with such funds provided, that in the event any
check is returned to the Collection Bank or the Borrowers because of
insufficient funds (or is otherwise unpaid) such party shall be entitled to set
off the amount of any such returned check; (c) that following such time as the
Lender shall provide notice to the Collection Bank in writing, in its sole
discretion, revoking Borrowers' ability to make withdrawals from the Collection
Account, the Borrower will not withdraw, nor shall the Collection Bank permit
the Borrowers or any other person or entity to withdraw or transfer funds from
the Collection Account; and (d) that if the Lender shall notify the Collection
Bank that an event of default has occurred and is continuing under the Lender's
secured lending arrangement with the Borrower, the Collection Bank shall cause
or permit withdrawals from the Collection Account in any other manner as the
Lender may instruct.
All bank statements
in respect to the Blocked Account shall be sent to the Borrower with copies
to:
Greenwich
Capital
Financial
Products,
Inc.
600
Steamboat
Road
-2-
<PAGE> 214
Greenwich,
Connecticut
06830
Attention:
David
Katze
-3-
<PAGE> 215
Kindly acknowledge your agreement with the terms of this
agreement by signing the enclosed copy of this letter and
returning it to the undersigned.
Very truly yours,
GREENWICH CAPITAL FINANCIAL
PRODUCTS, INC.
By:
Name:
Title:
Agreed and acknowledged:
HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
-4-
<PAGE> 216
By:
Name:
Title:
Agreed and acknowledged:
HANOVER CAPITAL PARTNERS, LTD.
By:
Name:
Agreed and acknowledged:
FLEET BANK
By:
Name:
Title:
-5-
<PAGE> 217
EXHIBIT G
FORM OF MORTGAGE LOAN TAPE
[TO BE PROVIDED BY LENDER]
-6-
<PAGE> 218
EXHIBIT H
FORM OF BORROWING BASE CERTIFICATE
[TO BE PROVIDED BY LENDER ]
-7-
<PAGE> 219
EXHIBIT I
FORM OF REMITTANCE REPORT
______, 19__
Greenwich Capital Financial Products, Inc.
600 Steamboat Road
Greenwich, Connecticut 06830
Attention: David Katze
Ladies and Gentlemen:
The undersigned, [HANOVER CAPITAL MORTGAGE HOLDINGS, INC.], refers to the
Amended and Restated Master Loan and Security Agreement, dated as of November
23, 1998 (as amended, supplemented or otherwise modified from time to time, the
"Loan Agreement") between Hanover Capital Mortgage Holdings, Inc., Hanover
Capital Partners, Ltd. and Greenwich Capital Financial Products, Inc.
Capitalized terms used herein but not defined herein shall have the meaning
assigned to such terms in the Loan Agreement.
The undersigned hereby delivers this Remittance Report to you pursuant
to Section 7.08 of the Loan Agreement and hereby certifies to you as follows as
of _______, 1998.(1)
I. Summary of Collection Account Cash Flow
(a) Total Collections remitted for the calendar month:
$_______.
(b) Borrowing Base Deficiency due to you on Remittance
Date: $_______.
(c) Interest due and payable to you on the Remittance Date
(for the period from and including the previous
Remittance Date to and including the day preceding the
current Remittance Date): $_______.
(d) Commitment Fee due and owing (payable on Payment Dates
occurring in [April, July, October, January], and on
the Termination Date.)
(e) Total cash due to you on the Remittance Date: $_______.
(f) Cash flow in connection with any other act which during
the month:
- --------
(1) Date should be the last day of the immediately preceding calendar month.
-1-
<PAGE> 220
(i) Principal received: $_______.
(ii) Accrued interest received: $________.
(iii) Amounts swept from the Lender's Collection
Account to the securitization or whole loan
buyer: $________.
(g) Balance to the undersigned $________.
LIBOR reset for the following month as of ________, 1998 ______%.
II. Breakout of Daily Remittances to the Collection Account
Collection Dates Wire Date Cash Amount Total Amount
Totals [attach Bank Statement]
[HANOVER CAPITAL MORTGAGE HOLDINGS, INC.,]
By:
Name:
Title:
-2-
<PAGE> 221
EXHIBIT J
FORM OF INSTRUCTION LETTER
__________ __, 1998
____________________, as [Trustee] [Subservicer]
___________________
___________________
Attention:_______________
Re: Loan and Security Agreement, dated as of November 23, 1998, by
and between Greenwich Capital Financial Products, Inc.,
("Lender"), and Hanover Capital Mortgage Holdings, Inc., and
Hanover Capital Partners, Ltd. ("Borrowers")
Ladies and Gentlemen:
Pursuant to the Amended and Restated Master Loan and Security
Agreement, dated as of November 23, 1998 (the "Loan and Security Agreement"),
between the Lender and the Borrowers, you are hereby notified that: (i) the
undersigned Borrower has pledged to the Lender the assets described on Schedule
1 hereto (the "Eligible Assets"), (ii) each of the Eligible Assets is subject to
a security interest in favor of the Lender, (iii) the Eligible Assets include
all of the capital stock of a special purpose entity which owns the bonds listed
on Schedule 2 hereto (the "Underlying Eligible Bonds"), (iv) the [Trustee]
[Servicer] [Certificate Registrar] shall promptly send to the Lender a copy of
the [Governing Agreement] [Servicing Agreement] related to the Eligible Assets
or Underlying Eligible Bonds, (v) unless otherwise notified by the Lender in
writing, any payments or distributions made with respect to such Eligible Assets
or Underlying Eligible Bonds should be remitted immediately by the [Trustee]
[Servicer] [Certificate Registrar] directly to the Collection Account
established at Fleet Bank (the "Collection Bank"), in accordance with the
following wire instructions and (vi) if notified by the Lender in writing, the
[Servicer] [Trustee] [Certificate Registrar] shall send such payments or
distributions in accordance with the Lender's written instructions:
Account No.: [____________________]
ABA No.: [____________________]
[____________________]
Reference: [____________________]
The Subservicer also acknowledges its consent to terminate such
Servicing Agreement upon notification by the Lender of an occurrence of an Event
of Default.
Please acknowledge receipt of this instruction letter by signing in the
signature block below and forwarding an executed copy to the Lender promptly
upon receipt. Any notices to the Lender should be delivered to the following
address: 600 Steamboat Road, Greenwich, Connecticut 06830, Attention: Joe
Bartolotta, Telephone: (203) 625-6675, Facsimile: (203) 625-4751.
-3-
<PAGE> 222
Very truly yours,
[BORROWER]
By:
Name:
Title:
ACKNOWLEDGED:
___________________________________, as [Trustee] [Servicer] [Certificate
Registrar]
By:___________________________________
Name:
Title:
Telephone:
Facsimile:
-4-
<PAGE> 223
EXHIBIT K-1
FORM OF LOST INSTRUMENT AFFIDAVIT
I, as ___________________________ (title) (hereinafter called
"Deponent") of _______________________ (the "Bond/PC Custodian"), am authorized
to make this Lost Instrument Affidavit (this "Affidavit") on behalf of the
Bond/PC Custodian. In connection with the administration of the Participation
Certificates held by the Bond/PC Custodian on behalf of Greenwich Capital
Financial Products, Inc. (the "Lender"), Deponent being duly sworn, deposes and
says that:
1. Bond/PC Custodian's address is:
[BOND/PC CUSTODIAN'S Address]
2. Bond/PC Custodian previously delivered to the Lender a
Participation Certificate Schedule with respect to that certain Participation
Certificate made by ___ in an original principal balance of $___, which did not
indicate such Participation Certificate is missing;
3. Such Participation Certificate was assigned or sold to the
Lender by ___________ pursuant to the terms and provisions of an Amended and
Restated Master Loan and Security Agreement dated and effective as of November
23, 1998;
5. Aforesaid Participation Certificate (hereinafter called the
"Original") has been lost;
6. Deponent has made or has caused to be made diligent search
for the Original and has been unable to find or recover same;
7. The Bond/PC Custodian was the Bond/PC Custodian of the
Original at the time of loss; and
8. Deponent agrees that, if said Original should ever come
into Bond/PC Custodian's possession, custody or power, Bond/PC Custodian will
immediately and without consideration surrender the Original to the Lender.
9. Attached hereto is a true and correct copy of the
Participation Certificate.
10. Deponent hereby agrees that the Bond/PC Custodian (a)
shall indemnify and hold harmless the Lender, its successors, and assigns,
against any loss, liability or damage, including reasonable attorney's fees,
resulting from the unavailability of any Originals, including but not limited to
any loss, liability or damage arising from (i) any false statement contained in
this Affidavit, (ii) any claim of any party that it has already purchased a
participation certificate evidenced by the Originals or any interest in such
participation certificate, (iii) the issuance of new instrument in lieu thereof
and (iv) any claim whether or not based upon or arising from honoring or
refusing to honor the Original when presented by anyone (items (i) through (iv)
above are hereinafter referred to as the "Losses").
11. This Affidavit is intended to be relied on by the Lender,
its successors, and assigns and Greenwich Capital Financial Products, Inc.
represents and warrants that it has the authority to perform its obligations
under this Affidavit.
EXECUTED THIS ____ day of _______, 199_, on
behalf of the Bond/PC Custodian by:
-5-
<PAGE> 224
Signature
Typed Name
On this _________ day of _______________________, 199_, before
me appeared ____________________________________________, to me personally know,
who being duly sworn did say that she/he is the ______________________________
of ______________________, and that said Lost Instrument Affidavit was signed
and sealed on behalf of such corporation and said _____________________________
acknowledged this instrument to be the free act and deed of said corporation.
Notary Public in and for the
State of .
My Commission expires: .
-6-
<PAGE> 225
EXHIBIT K-2
FORM OF LOST NOTE AFFIDAVIT
I, as ___________________________ (title) (hereinafter called
"Deponent") of _______________________ (the "Mortgage Custodian"), am authorized
to make this Lost Note Affidavit (this "Affidavit") on behalf of the Mortgage
Custodian. In connection with the administration of the Mortgage Loans held by
the Mortgage Custodian on behalf of Greenwich Capital Financial Products, Inc.
(the "Lender"), Deponent being duly sworn, deposes and says that:
1. Mortgage Custodian's address is:
[MORTGAGE CUSTODIAN'S Address]
2. Mortgage Custodian previously delivered to the Lender a
Mortgage Loan Schedule and an Exception Report with respect to that certain
Mortgage Note made by ___ in an original principal balance of $___, secured by a
Mortgage on a property located at ____, which did not indicate such Mortgage
Note is missing;
3. Such Mortgage Note was assigned or sold to the Lender by
___________ pursuant to the terms and provisions of an Amended and Restated
Master Loan and Security Agreement dated and effective as of November 23, 1998;
4. Such Mortgage Note is not outstanding pursuant to a Request
for Release of Documents;
5. Aforesaid Mortgage Note (hereinafter called the "Original")
has been lost;
6. Deponent has made or has caused to be made diligent search
for the Original and has been unable to find or recover same;
7. The Mortgage Custodian was the Mortgage Custodian of the
Original at the time of loss; and
8. Deponent agrees that, if said Original should ever come
into Mortgage Custodian's possession, custody or power, Mortgage Custodian will
immediately and without consideration surrender the Original to the Lender.
9. Attached hereto is a true and correct copy of (i) the
Mortgage Note, endorsed in blank by the Mortgagee, as provided by [Hanover
Capital Mortgage Holdings, Inc.] [Hanover Capital Partners, Ltd.] or its
designee and (ii) the Mortgage which secures the Mortgage Note, which Mortgage
is recorded at ___________________.
10. Deponent hereby agrees that the Mortgage Custodian (a)
shall indemnify and hold harmless the Lender, its successors, and assigns,
against any loss, liability or damage, including reasonable attorney's fees,
resulting from the unavailability of any Originals, including but not limited to
any loss, liability or damage arising from (i) any false statement contained in
this Affidavit, (ii) any claim of any party
-7-
<PAGE> 226
that it has already purchased a mortgage loan evidenced by the Originals or any
interest in such mortgage loan, (iii) any claim of any borrower with respect to
the existence of terms of a Mortgage Loan evidenced by the Originals, (iv) the
issuance of new instrument in lieu thereof and (v) any claim whether or not
based upon or arising from honoring or refusing to honor the Original when
presented by anyone (items (i) through (iv) above are hereinafter referred to as
the "Losses").
11. This Affidavit is intended to be relied on by the Lender,
its successors, and assigns and Greenwich Capital Financial Products, Inc.
represents and warrants that it has the authority to perform its obligations
under this Affidavit.
EXECUTED THIS ____ day of _______, 199_, on
behalf of the Mortgage Custodian by:
Signature
Typed Name
On this _________ day of _______________________, 199_, before
me appeared ____________________________________________, to me personally know,
who being duly sworn did say that she/he is the ______________________________
of ______________________, and that said Lost Note Affidavit was signed and
sealed on behalf of such corporation and said _____________________________
acknowledged this instrument to be the free act and deed of said corporation.
Notary Public in and for the
State of .
My Commission expires: .
-8-
<PAGE> 227
EXHIBIT L
FORM OF NOTICE OF EXTENSION OF INTEREST PERIOD
[insert date]
Greenwich Capital Financial Products, Inc.
600 Steamboat Road
Greenwich, Connecticut 06830
Attention: David Katze
Notice of Borrowing and Pledge No. : _____________________
Current Interest Period : [One Month][Two Month]
[Three Month][Six Month]
Termination Date of Current
Interest Period : _____________________
Ladies/Gentlemen:
Reference is made to the Amended and Restated Master Loan and Security
Agreement, dated as of November 23, 1998 (the "Loan Agreement"; capitalized
terms used but not otherwise defined herein shall have the meaning given them in
the Loan Agreement), between Hanover Capital Mortgage Holdings, Inc. and Hanover
Capital Partners, Ltd. (the "Borrowers") and Greenwich Capital Financial
Products, Inc. (the "Lender").
In accordance with Section 3.04 of the Loan Agreement, the undersigned Borrower
hereby requests that the Lender extend the current Interest Period of [One
Month] [Two Month][Three Month][Six Month] beginning immediately following the
termination of the existing Interest Period which is scheduled to terminate on
[INSERT LAST DAY OF EXISTING INTEREST PERIOD].
-9-
<PAGE> 228
Very truly yours,
[BORROWER]
By:
Name:
Title:
-10-
<PAGE> 229
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".
(c) The definition of Collateral Value is hereby amended as
follows:
<PAGE> 230
(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 bidders have
adequate opportunity to perform customary loan and
servicing due diligence."
2
<PAGE> 231
(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."
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
<PAGE> 232
"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 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.
4
<PAGE> 233
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:
(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
5
<PAGE> 234
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> 235
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> 236
AMENDMENT NUMBER TWO
to the
Amended and Restated Master Loan and Security Agreement
dated as of November 23, 1998, as amended by
Amendment Number One, dated March 28, 1999,
by and among
HANOVER CAPITAL MORTGAGE HOLDINGS, INC.,
HANOVER CAPITAL PARTNERS, LTD.
and
GREENWICH CAPITAL FINANCIAL PRODUCTS, INC.
This AMENDMENT is made this 12th day of August, 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, as amended by Amendment
Number One, dated March 28, 1999, 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 August 12, 1999, Section 1 of the Agreement is
hereby amended as follows:
(a) The definition of Applicable Collateral Percentage is
hereby amended by inserting in the tenth line thereof immediately after
"Non-Investment Grade Bonds, 60%," and immediately before "with respect
to Thirty Day Delinquent Mortgage Loans", the following: "with respect
to Equity Certificates, 50%,".
(b) The definition of Applicable Margin is hereby amended by
inserting immediately after "Tranche C Advances," and immediately
before "respectively, the applicable rate per annum", the following :
"and Tranche D Advances" and by inserting the following to the end
thereof "Tranche D Advances......................2.50%".
(c) The definition of Bond File is hereby deleted in its
entirety and replaced with the following:
"Bond File" shall have the meaning provided in Section
5.02(g)(vi) hereof."
(d) The definition of Eligible Bond is hereby amended by
adding the following additional sentence to the end thereof:
"For purposes of this Agreement, an Eligible Bond shall also
include any Equity Certificate which is acceptable to the
Lender in its sole discretion."
<PAGE> 237
(e) The following definition shall be added immediately after
the definition of Eligible Mortgage Loan and immediately prior to the
definition of ERISA:
"Equity Certificate shall mean any subordinate interest in a
transaction involving the issuance of indebtedness, which
subordinate interest represents an equity interest in the
related issuer of such indebtedness and which is acceptable to
the Lender in its sole discretion."
(f) The definition of Maximum Pledge Period is hereby amended
by adding the following additional sentence to the end thereof:
"With respect to an Equity Certificate, the earlier of (i)
March 27, 2000, or (ii) the date of acceleration, if any, of
the Borrowers' obligations hereunder."
(g) The following definition shall be added immediately after
the definition of Tranche C Advances and immediately prior to the
definition of Transfer Documents:
"Tranche D Advances shall mean Advances, so long as, and to
the extent that, they are secured by Equity Certificates."
2. Effective as of August 12, 1999, Section 2.01 of the Agreement is
hereby amended by adding the following Section to the end thereof:
"(e) Notwithstanding any provision of this Agreement to the
contrary, the Borrower acknowledges that the Lender shall have
no obligation to make an Advance secured by an Equity
Certificate and that any such Advance shall be made at the
sole discretion of the Lender; provided, however, the Lender
shall make an Advance pursuant to the terms of this Agreement
with respect to the Equity Certificates issued pursuant to
Hanover Capital Trust, Series 1999-B."
3. Effective as of August 12, 1999, Section 4.02(e) of the Agreement is
hereby amended by adding the following to the end thereof:
"The Borrower shall direct that all payments and distributions
with respect to the Equity Certificates shall be paid directly
to the Lender."
4. 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.
5. 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.
6. Except as amended above, the Agreement shall continue in full force
and effect in accordance with its terms.
2
<PAGE> 238
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> 239
AMENDMENT NUMBER THREE
to the
Amended and Restated Master Loan and Security Agreement
dated as of November 23, 1998, as amended by
Amendment Number One, dated March 28, 1999 and
Amendment Number Two, dated August 12, 1999,
by and among
HANOVER CAPITAL MORTGAGE HOLDINGS, INC.,
HANOVER CAPITAL PARTNERS, LTD.
and
GREENWICH CAPITAL FINANCIAL PRODUCTS, INC.
This AMENDMENT is made this __ day of October, 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, as amended by Amendment
Number One, dated March 28, 1999 and Amendment Number Two, dated August 12,
1999, 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. Section 7.09(a) of the Agreement is hereby amended by substituting
"$45,000,000" for "$60,000,000"at the end thereof.
2. 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.
3. 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.
4. Except as amended above, the Agreement shall continue in full force
and effect in accordance with its terms.
<PAGE> 240
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 10.32
================================================================================
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 30, 1999
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C> <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> <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> <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
</TABLE>
<TABLE>
<S> <C>
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
Page v
<PAGE> 7
Page vi
<PAGE> 8
Page vii
<PAGE> 9
WAREHOUSING CREDIT AND SECURITY AGREEMENT
THIS WAREHOUSING CREDIT AND SECURITY AGREEMENT (this "Agreement"), is
dated as of April 30, 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:
1. 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> 10
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.
Page 2
<PAGE> 11
"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.
Page 3
<PAGE> 12
"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
Page 4
<PAGE> 13
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.
Page 5
<PAGE> 14
"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.
Page 6
<PAGE> 15
"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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<PAGE> 16
"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 30, 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.
2. 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.
(b) 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.
(c) 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.
2.5 Principal Payments.
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(a) The outstanding unpaid principal amount of all Advances shall be
payable in full upon April 30, 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.
2.6 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.
2.7 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.
2.8 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.
2.9 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.
2.10 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.
3. COLLATERAL.
3.1 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"):
(a) 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");
(b) 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");
(c) 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;
(d) 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;
(e) 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;
(f) 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;
(g) 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;
(h) All Hedging Contracts and Interest Rate Hedging Contracts
with respect to the Pledged Mortgages and Pledged Securities; and
(i) 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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3.2 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:
(a) 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.
(b) 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.
3.3 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.
3.4 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.
3.5 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.
3.6 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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3.7 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.
4. CONDITIONS PRECEDENT.
4.1 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:
(a) 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.
4.2 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:
(a) 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.
(b) 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.
(c) 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.
(d) 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.
(e) 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.
(f) 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.
(g) 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.
5. 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:
5.1 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.
5.2 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.
5.3 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.
5.4 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.
5.5 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.
5.6 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.
5.7 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.
5.8 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.
5.9 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.
5.10 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.
5.11 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:
(a) FNMA approved seller/servicer of Mortgage Loans, eligible to
originate, purchase, hold, sell, and service Mortgage Loans to be sold to
FNMA.
(b) FHLMC approved seller/servicer of Mortgage Loans, eligible to
originate, purchase, hold, sell, and service Mortgage Loans to be sold to
FHLMC.
(c) GNMA approved seller/servicer of Mortgage Loans, eligible to
originate, purchase, hold, sell, and service Mortgage Loans to be sold to
GNMA.
(d) HUD approved lender, eligible to originate, purchase, hold, sell
and service FHA-insured Mortgage Loans.
(e) VA lender in good standing under the VA loan guarantee program
eligible to originate, purchase, hold, sell, and service VA-guaranteed
Mortgage Loans.
5.12 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:
(a) 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.
(b) 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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(c) 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.
(d) 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.
(e) 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.
(f) 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.
(g) 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.
(h) 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.
(i) 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.
(j) 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.
5.13 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.
5.14 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.
5.15 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.
5.16 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.
5.17 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.
5.18 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.
5.19 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.
5.20 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.
5.21 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.
5.22 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.
5.23 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.
5.24 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.
6. 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:
6.1 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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6.2 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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6.3 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.
6.4 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.
6.5 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.
6.6 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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6.7 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.
6.8 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.
6.9 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.
6.10 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.
6.11 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.
6.12 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.
7. 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:
7.1 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.
7.2 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.
7.3 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.
7.4 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.
7.5 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.
7.6 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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7.7 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.
7.8 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.
7.9 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.
7.10 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.
7.11 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.
7.12 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.
7.13 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.
7.14 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.
7.15 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.
7.16 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.
7.17 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.
7.18 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.
7.19 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.
8. DEFAULTS; REMEDIES.
8.1 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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8.2 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.
8.3 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.
8.4 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.
8.5 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.
9. 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: ________________
10. 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.
11. 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).
12. MISCELLANEOUS.
12.1 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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12.2 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.
12.3 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.
12.4 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.
12.5 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.
12.6 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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<PAGE> 60
12.7 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.
12.8 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.
12.9 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
Page 52
<PAGE> 61
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.
12.10 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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<PAGE> 62
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.
12.11 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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12.12 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.
12.13 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.
12.14 Multiple Counterparts. This Agreement may be executed in any number
of counterparts, all of which, taken together, shall constitute one and the same
instrument.
12.15 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.
12.16 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.
12.17 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
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<PAGE> 64
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> 65
EXHIBITS:
<TABLE>
<S> <C> <C>
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
</TABLE>
Page 57
<PAGE> 66
EXHIBIT "A-1"
REQUEST FOR ADVANCE SINGLE-FAMILY MORTGAGE LOANS
Mortgage Company: Loan Number:
--------------------- --------------------------
Mortgagor: Prepared By:
--------------------- --------------------------
Warehouse Date:
--------------------- -----------------------
Social Security No.: Requested Warehouse
------------------ Amount:
Address: -------------------------
------------------------------ Closing Agent/Seller:
-----------------
------------------------------ Phone:
--------------------------
Fax:
----------------------------
Loan Type (check all that apply):
VA FHA LTV:
-------------- ---------- ----------------------------------
Conventional Jumbo
---- --------
Subprime Sublimit:
--------
Note Amount: Eligible Conforming
-------------------------- -----
Note Date:
---------------------------- Eligible Non-Conforming
-----
Interest Rate: 30 - 59 Delinquent
------------------------ -----
60 - 89 Delinquent
-----
Investor:
-----------------------------
Investor Takeout Price:
---------------
Investor Expiration Date:
-------------
METHOD OF ADVANCE
( ) Wire Transfer (see attached instructions) Amount of Wire/Check:$
-----------
( ) Check No. Date of Wire/Check:
------------------------------- --------------
REQUIRED DOCUMENTATION
(in addition to this Advance Request)
EXHIBIT "A-1" Page 58
<PAGE> 67
Attached please find the following documents in connection with the above
request:
- - Original Mortgage Note, endorsed in blank.
- - Certified copy of Mortgage.
- - Recordable Assignment of Mortgage (in blank).
- - Certified copies of all interim Assignments (if applicable).
- - Copy of Purchase Commitment if any.
Executed as of the day of , 199 .
------------ -------------------- --
,
-----------------------------------------
a corporation
--------------------
By:
---------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
EXHIBIT "A-1" Page 59
<PAGE> 68
EXHIBIT "A-2"
REQUEST FOR ADVANCE (INVESTMENT GRADE SECURITIES)
[Letterhead of Company]
Bank United
3200 Southwest Freeway, Suite 2702
Houston, Texas 77027
Gentlemen:
____________________ (the "Company"), (other Borrower), and Bank United
(the "Lender") executed a Warehousing Credit and Security Agreement dated April
_____, 1999 (such agreement as amended, supplemented, or restated is called the
"Loan Agreement"). Any term defined in the Loan Agreement and used in this
Request shall have the meaning given to it in the Loan Agreement.
The Company hereby requests an Advance in the amount of $__________
against the Investment Grade Securities described on SCHEDULE 1.1 attached
hereto in accordance with Section 2.2(b) of the Loan Agreement. The Company
hereby represents and warrants that it has granted, transferred, and conveyed to
the Lender a security interest in the Investment Grade Securities described on
SCHEDULE 1.1 attached hereto, free and clear of all other Liens. The amount of
this Request is not more than the amount permitted by the Loan Agreement to be
borrowed against Investment Grade Securities. The computation of the amount
permitted to be borrowed under the Loan Agreement is accurately reflected on
ANNEX "A" attached hereto.
The Company hereby certifies that all of the items that the Company is
required to furnish to the Lender under the Loan Agreement in connection with
this Request accompany it, all of those items are accurate and what they purport
to be and all of the Investment Grade Securities described in SCHEDULE 1.1
conform in all respects to the requirements of the Loan Agreement. The Company
hereby certifies that all of the representations and warranties in this Request,
the Loan Agreement and all other Loan Documents are currently true and correct
and are hereby republished. The Company further represents and warrants each of
the Borrowers is in full compliance with each and every term, condition,
covenant, and agreement under the Loan Agreement and all other Loan Documents.
The Company hereby acknowledges that the Lender shall rely on the truth of each
statement in this Request in making the requested Advance.
By:_______________________________
Name:_____________________________
Title:____________________________
EXHIBIT "A-2" Page 60
<PAGE> 69
ANNEX "A" TO EXHIBIT "A-2"
A. Description of the Investment Grade Securities:
(1) Cusip#
------------
(2) Description of security, i.e., series, tranche, coupon, etc.:
(3) Rating:
Moody's S&P
------------ ----------------
(4) Book Value:
$ (as of date of request)
------------------
(5) Market Value:
$ (as of date of request)
------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
INVESTMENT LESSER OF BOOK ADVANCE RATE ADVANCE AMOUNT
SECURITY OR MARKET VALUE FOR RATING
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
Total Amount of Advance: $
----------------------------------
ANNEX "A" TO EXHIBIT "A-2" Page 61
<PAGE> 70
EXHIBIT "B"
LIST OF EXISTING INDEBTEDNESS OF COMPANY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
LENDER TYPE OF COMMITMENT COLLATERAL AVG. BALANCE
FINANCING AMOUNT OUTSTANDING AS
OF __________, 19__
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
EXHIBIT "B" Page 62
<PAGE> 71
EXHIBIT "C"
PROCEDURES AND DOCUMENTATION FOR WAREHOUSING
SINGLE-FAMILY MORTGAGE LOANS
The following procedures and documentation requirements must be observed
in all respects by each Borrower. All documents must be satisfactory to Lender
in its sole discretion. Terms used below, which are not otherwise defined, shall
have the meanings given them in the Warehousing Credit and Security Agreement,
as amended, modified or renewed from time to time. The HUD, FNMA and FHLMC form
numbers referred to herein are for convenience only and the Company shall use
the equivalent forms required at the time of delivery of the Mortgage Loans or
Mortgage-backed Securities.
I. Prior to making an Advance that is not a Wet Settlement Advance, the
Lender must receive the following:
(1) Copy of settlement or funding check issued to, or signed wire
transfer request directing funds to seller of Mortgage Loan.
(2) If not an Electronic Request, Original Request for Advance against
Single-Family Mortgage Loans (EXHIBIT "A").
(3) Original signed Mortgage Note, endorsed by the applicable Borrower
in blank with corresponding interim endorsements, if applicable.
(4) Copy of the Mortgage certified true by the escrow/title company or
closing agent.
(5) Certified true copies of all interim assignments (recorded or sent
for recordation) of the Mortgage.
(6) An Assignment of the Mortgage to the Lender in recordable form but
unrecorded.
(7) Copy of specific Purchase Commitment, if any.
II. The Lender exclusively shall deliver Pledged Mortgages or Pledged
Securities and all related loan documents and/or pool documents to
Investor or Approved Custodian unless otherwise agreed in writing.
A. The following procedures are to be followed for deliveries of Pledged
Mortgages to Investors:
No later than 2:00 p.m. Houston, Texas time one (1) Business Day prior to
the expiration date of the Purchase Commitment, the Lender must receive
the following:
EXHIBIT "C" Page 63
<PAGE> 72
(1) Signed or electronic shipping instructions for the delivery of the
Pledged Mortgages including the following:
(a) Name and address of the office of the Investor to which the
loan documents are to be shipped and the preferred method of
delivery;
(b) Instructions for endorsement of the Mortgage Note;
(c) Names of Mortgagor and Mortgage Note Amounts of Pledged
Mortgages to be shipped; and
(d) Number and expiration date of the Purchase Commitment.
(2) All loan documents related to the Pledged Mortgages required for
delivery to the Investor.
(3) For deliveries of Pledged Mortgages to FNMA for cash purchase, the
following additional documents are required:
(a) Original Loan Schedule (FNMA Form 1068 or 1069) showing the
Lender's designated FNMA payee code as recipient of the loan
purchase proceeds.
(4) For deliveries of Pledged Mortgages to FHLMC for cash purchase, the
following additional documents are required:
(a) Original completed Warehouse Lender Release of Security
Interest (FHLMC Form 996) to be executed by the Lender.
(b) Original Wire Transfer Authorization for a Cash Warehouse
Delivery (FHLMC Form 987), designating the Lender as the
Warehouse Lender and showing the cash collateral account
designated by the Lender as the receiving account for loan
purchase proceeds.
B. The following procedures are to be followed for deliveries of Pledged
Mortgages to Approved Custodians:
No later than one (1) Business Day prior to required delivery date to the
Approved Custodian, the Lender must receive the following:
(1) Signed or electronic shipping instructions for the delivery of the
Pledged Mortgages to the Approved Custodian including the following:
(a) Name and address of the office of the Approved Custodian to
which the loan documents are to be shipped and the preferred
method of delivery;
EXHIBIT "C" Page 64
<PAGE> 73
(b) Instructions for endorsement of the Mortgage Note; and
(c) Names of Mortgagor and Mortgage Note Amounts of Pledged
Mortgages to be shipped.
(d) Commitment number and expiration date of the Purchase
Commitment for the Pledged Securities.
(2) All loan documents related to the Pledged Mortgages required for the
issuance of the Mortgage-backed Securities.
(3) For FNMA Mortgage-backed Securities issuance, the following
additional documents are required:
(a) Original Schedule of Mortgages (FNMA Form 2005 or 2025).
(b) Original executed Security Release Certification (FNMA Form
2004) to be executed by the Lender.
(c) Original Delivery Schedule (FNMA Form 2014), instructing FNMA
to issue the Mortgage-backed Securities in the name of the
Company with the Lender as pledgee and to deliver the
Mortgage-backed Securities to the Lender's custody account at
Banker's Trust (Account No. 92798) and bearing the following
instructions: These instructions may not be changed without
the prior written consent of Bank United.
(4) For FHLMC Mortgage-backed Securities issuance, the following
additional documents are required:
(a) Original Settlement Information and Delivery Authorization
(FHLMC Form 939), designating the Lender as the Warehouse
Lender and instructing FHLMC to deliver the Mortgage-backed
Securities to the Lender's custody account at Banker's Trust,
Account No. 92798.
(5) For GNMA Mortgage-backed Securities issuance, the following
additional documents are required:
(a) Signed original Schedule of Mortgages (HUD Form 11706).
(b) Signed original Schedule of Subscribers (HUD Form 11705)
instructing GNMA to issue the Mortgage-backed Securities in
the name of the Company and designating Bankers Trust as Agent
for the Lender as the subscriber, using the following
language: BANKERS TRUST AS AGENT FOR BANK UNITED and deliver
the Mortgage-backed Securities to the Lender's custody Account
No. 92798 at Bankers Trust. The following
EXHIBIT "C" Page 65
<PAGE> 74
instructions must also be included on the form: "These
instructions may not be changed without the prior written
consent of Bank United."
(c) Completed original Release of Security Interest (HUD Form
11711A) to be executed by the Lender.
Upon instruction by the Company, the Lender will complete the endorsement
of the Mortgage Note and make arrangements for the delivery of the
complete loan package with the appropriate Bailee Letter to the Investor
or Approved Custodian. Upon receipt of Mortgage-backed Securities, the
Lender will cause such Mortgage-backed Securities to be delivered to the
Investor which issued the Purchase Commitment. Mortgage-backed Securities
will be released to the Investor only upon payment of the purchase
proceeds to the Lender. Cash proceeds of sales of Pledged Mortgages and
Pledged Securities shall be applied to related Advances outstanding under
the Commitment. Provided no Default exists, the Lender shall return any
excess proceeds of the sale of Mortgage Loans or Mortgage-backed
Securities to the Company, unless otherwise instructed in writing.
EXHIBIT "C" Page 66
<PAGE> 75
EXHIBIT "D"
FORM OF SHIPPING REQUEST AND AUTHORIZATION
[Company Letterhead]
Date:_______________________________
BANK UNITED
[Address]
Attention:__________________________ Re: Commitment No._______________
This letter is to serve as authorization for you to endorse and ship Loan
Documents for the following loans:
LOAN NUMBER BORROWER NAME NOTE AMOUNT
to the following address:
NAME:
ADDRESS:
ATTENTION:
Please endorse the notes as follows:
Please ship the Loan Documents either by _________________________ or by such
other courier service we have specifically approved in writing. You are not
responsible for any delays in shipment or any other actions or inactions of the
courier. However, because the commitment expires on _________________________,
19___, we ask that you deliver the Loan Documents to the courier no later than
_________________________, 19___.
Please have the courier bill us by using our account no. _______________. If you
should have any questions, or should feel the need for additional documentation,
please do not hesitate to call _________________________.
__________________________________________,
a ____________________ corporation
By:_______________________________________
Name:_____________________________________
Title:____________________________________
EXHIBIT "D" Page 67
<PAGE> 76
EXHIBIT "E"
TRUST RECEIPT
Trust Receipt No._________________ _________________________, 19___
The undersigned,____________________________________________, a
____________________corporation (the "Company"), acknowledges receipt from Bank
United, a federal savings bank ("Lender"), pursuant to that certain Warehousing
Credit and Security Agreement (Single-Family Mortgage Loans) dated effective as
of April _____, 1999, by and among the Company, (the other Borrower) , and
Lender (the "Agreement"), of the following described property (the "Trust
Property"), possession of which is herewith entrusted to the Company for the
purposes set forth below:
Mortgage Loan No. Note Amount:
Obligor:
Purpose: [Specify nature of clerical or other documentation problem to be
corrected.]
The Company hereby acknowledges that a security interest in the Trust
Property and in the proceeds of the Trust Property has been granted to the
Lender pursuant to the Agreement.
In consideration of the delivery of the Trust Property by the Lender to
the Company, the Company hereby agrees to hold the Trust Property in trust for
the Lender as provided under and in accordance with all provisions of the
Agreement and to return the Trust Property to the Lender no later than the close
of business on the tenth day following the date hereof or, if such day is not a
Business Day, on the following Business Day. The Company further agrees that the
aggregate Collateral Value of Single-family Mortgage Loans with respect to which
notes or other documentation has been released under trust receipts, does not
exceed $500,000.00.
,
-------------------------------------------
a
--------------------
By:
---------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
Delivery to Company Acknowledged
BANK UNITED
By:
---------------------------
Name:
-------------------------
Title:
------------------------
EXHIBIT "E" Page 68
<PAGE> 77
The undersigned, acknowledges that the above-mentioned Trust Property has
been returned to the Lender on __________________, 19___.
BANK UNITED
By:
----------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
EXHIBIT "E" Page 69
<PAGE> 78
EXHIBIT "F"
OFFICER'S CERTIFICATE
COMPANY: HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
LENDER: BANK UNITED
DATE:
-----------------------------------------
REPORTING PERIOD: ended , 199
-------------------- ------------------ ---
This certificate is delivered to Lender under the Warehousing Credit and
Security Agreement dated effective as of April _____, 1999, among Borrowers, and
Lender (the "Agreement"), all the defined terms of which have the same meanings
when used herein.
The undersigned officer hereby certifies that: (a) I am, and at all times
mentioned herein have been, the duly elected, qualified, and acting officer of
the Company designated below; (b) to the best of my knowledge, the Financial
Statements of the Company for the period shown above (the "Reporting Period")
and which accompany this certificate were prepared in accordance with GAAP and
present fairly the financial condition of the Company as of the end of the
Reporting Period and the results of their operations for the Reporting Period;
(c) a review of the Agreement and of the activities of the Company during the
Reporting Period has been made under my supervision with a view to determining
the Company's compliance with the covenants, requirements, terms, and conditions
of the Agreement, and such review has not disclosed the existence during or at
the end of the Reporting Period (and I have no knowledge of the existence as of
the date hereof) of any Event of Default or Default, except as disclosed on
ANNEX "A" hereto (which specifies the nature and period of existence of each
Event of Default or Default, if any, and what action the Company has taken, is
taking, and propose to take with respect to each); (d) the calculations
described on the attached ANNEX "A" evidence that the Company is in compliance
with the requirements of Sections 7.4, 7.5, 7.6, 7.7, and 7.8 of the Agreement
at the end of the Reporting Period (or if the Company is not in compliance,
showing the extent of non-compliance and specifying the period of non-compliance
and what actions the Company proposes to take with respect thereto; (e) the
Company was, as of the end of the Reporting Period, in compliance and good
standing with applicable FNMA, GNMA, FHLMC, and HUD net worth requirements.
HANOVER CAPITAL MORTGAGE HOLDINGS, INC.,
a Maryland corporation
By
----------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
EXHIBIT "F" Page 70
<PAGE> 79
ANNEX "A" TO EXHIBIT "F"
BORROWERS: HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
REPORTING PERIOD:
--------------------------------------------
All financial calculations set forth herein are as of the Reporting Period.
<TABLE>
<S> <C> <C>
I. GAAP NET WORTH
The GAAP Net Worth of the Company, on a consolidated basis is:
Shareholder's equity (including capital stock, additional paid-in
capital, and retained earnings, but excluding treasury stock, if any): $_______________
MINIMUM GAAP NET WORTH IS $60,000,000.00
Covenant Satisfied: Covenant Not Satisfied:
-------------- -------------
II. TANGIBLE NET WORTH
The Tangible Net Worth of the Company, on a
consolidated basis, is: $_______________
GAAP Net Worth: $_______________
Minus: Intangible Assets, including Capitalized Servicing Rights: $_______________
Minus: Advances or loans to shareholders, officers or Affiliates $_______________
Minus: Investments in Affiliates: $_______________
Minus: Assets pledged to secure liabilities not included in Debt: $_______________
Minus: Any other HUD nonacceptable assets: $_______________
TANGIBLE NET WORTH: $_______________
</TABLE>
ANNEX "A" TO EXHIBIT "F" Page 71
<PAGE> 80
<TABLE>
<S> <C> <C>
III. ADJUSTED TANGIBLE NET WORTH
The Adjusted Tangible Net Worth of the Company,
on a consolidated basis, is: $_______________
Tangible Net Worth (from above): $_______________
Plus: 1% of UPB of Mortgage Loans (Servicing) $_______________
Minus: Non-Investment Grade Securities $_______________
Minus: deferred financing fees $_______________
Minus: intangible assets of any unconsolidated Subsidiary $_______________
ADJUSTED TANGIBLE NET WORTH: $_______________
MINIMUM ADJUSTED TANGIBLE NET WORTH IS $30,000,000.00.
Covenant Satisfied:____________ Covenant Not Satisfied:______________
IV. DEBT OF THE COMPANY
Total Recourse Liabilities: $_______________
DEBT: $_______________
V. DEBT TO ADJUSTED TANGIBLE NET WORTH
The ratio of Debt to Adjusted Tangible Net Worth is: _______ to 1.
MAXIMUM DEBT TO ADJUSTED TANGIBLE NET WORTH RATIO IS 7:1.
Covenant Satisfied:____________ Covenant Not Satisfied:______________
VI. MINIMUM CURRENT RATIO
Current Assets (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 and Mortgages held to
maturity): $_______________
Current Liabilities (liabilities due upon demand or within
one year from the date of calculation less non-recourse
Debt): $_______________
</TABLE>
ANNEX "A" TO EXHIBIT "F" Page 72
<PAGE> 81
<TABLE>
<S> <C> <C>
The ratio of Current Assets to Current Liabilities is: _______ to 1.
MINIMUM CURRENT RATIO IS 1.01:1.00.
Covenant Satisfied:____________ Covenant Not Satisfied:______________
VII. MAXIMUM NON-INVESTMENT GRADE SECURITIES/ADJUSTED TANGIBLE NET WORTH
RATIO
Non-Investment Grade Securities $_______________
Adjusted Tangible Net Worth (from II above) $_______________
The Ratio of Non-Investment Grade Securities to
Adjusted Tangible Net Worth is _______ to 1.
MAXIMUM NON-INVESTMENT/ADJUSTED TANGIBLE
NET WORTH RATIO IS: 0.50:1.00
Covenant Satisfied:____________ Covenant Not Satisfied:______________
VIII. DEFAULTS OR EVENTS OF DEFAULT (DISCLOSE NATURE AND PERIOD OF EXISTENCE AND
ACTION BEING TAKEN IN CONNECTION THEREWITH; IF NONE, STATE NONE)
</TABLE>
ANNEX "A" TO EXHIBIT "F" Page 73
<PAGE> 82
EXHIBIT "G"
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
BORROWER NAME OF ADDRESS OF STATE OF WHERE QUALIFIED BORROWER'S
SUBSIDIARY PRINCIPAL OFFICE INCORPORATION FOREIGN CORP. PERCENTAGE OWNERSHIP
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
</TABLE>
EXHIBIT "G" Page 74
<PAGE> 83
EXHIBIT "H"
DISCLOSURE OF PENDING LITIGATION
(Include the caption of the case, including styling, cause number, and
court in which it is pending, date filed, status of the proceedings, and
description of claims, counterclaims and damages asserted.)
EXHIBIT "H" Page 75
<PAGE> 84
EXHIBIT "I"
TRADE NAMES OF COMPANY
<TABLE>
<CAPTION>
BORROWER TRADE NAME JURISDICTION USED
-------- ---------- -----------------
<S> <C> <C>
</TABLE>
EXHIBIT "I" Page 76
<PAGE> 85
EXHIBIT "J-1"
CERTIFICATE OF CORPORATE RESOLUTIONS
AND INCUMBENCY OF OFFICERS
(BORROWING AUTHORITY)
{To Be Added}
EXHIBIT "I" Page 77
<PAGE> 86
EXHIBIT "J-2"
CERTIFICATE OF CORPORATE RESOLUTIONS
AND INCUMBENCY OF OFFICERS
(BORROWING AUTHORITY)
{To Be Added}
EXHIBIT "I" Page 78
<PAGE> 87
EXHIBIT "K"
BAILEE LETTER
(Investor Name and Address)
Re: Purchase of Mortgage Loans from
-----------------------------------
Ladies and Gentlemen:
Attached please find those Mortgage Loans listed separately on the
attached schedule, which Mortgage Loans are owned by____________________________
____________________, a ____________________ corporation (the "Company") and
are being delivered to you for purchase.
The Mortgage Loans comprise a portion of the Collateral under (and as the
term "Collateral" and capitalized terms not otherwise defined hereunder are
defined in) that certain Warehousing Credit and Security Agreement
(Single-family Mortgage Loans) ("Warehouse Agreement") dated effective as of
April _____, 1999, by and between the Company and BANK UNITED, a federal savings
bank ("Lender"). Each of the Mortgage Loans is subject to a security interest in
favor of Lender, which security interest shall be automatically released upon
our receipt of the full amount due to the Lender under the Warehouse Agreement
in connection with such Mortgage Loans (as set forth on the schedule attached
hereto) by wire transfer to the following account:
Bank United
Houston, Texas
ABA #313071904
Credit:
------------------------
Account:
-----------------------
Until payment therefor is received, the aforesaid security interest
therein will remain in full force and effect, and you shall hold possession of
such Collateral and the documentation evidencing same as custodian, agent and
bailee for and on behalf of Lender. In the event any Mortgage Loan is
unacceptable for purchase, return the reject item directly to the undersigned at
the address set forth below. In no event shall any Mortgage Loan be returned or
sales proceeds remitted in full no later than thirty (30) days from the date
hereof. If you are unable to comply with the above instructions, please so
advise the undersigned immediately.
EXHIBIT "K" Page 79
<PAGE> 88
NOTE: BY ACCEPTING THE MORTGAGE LOANS DELIVERED TO YOU WITH THIS LETTER,
YOU CONSENT TO BE THE CUSTODIAN, AGENT AND BAILEE FOR LENDER ON THE TERMS
DESCRIBED IN THIS LETTER. THE UNDERSIGNED REQUESTS THAT YOU ACKNOWLEDGE RECEIPT
OF THE ENCLOSED MORTGAGE LOANS AND THIS LETTER BY SIGNING AND RETURNING THE
ENCLOSED COPY OF THIS LETTER TO THE UNDERSIGNED AT THE FOLLOWING ADDRESS: 3200
Southwest Freeway, Suite 2702, Houston, Texas 77027.
HOWEVER, YOUR FAILURE TO DO SO DOES NOT NULLIFY SUCH CONSENT.
Sincerely,
BANK UNITED
By:
--------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
IRREVOCABLY ACKNOWLEDGED
AND AGREED TO:
[INVESTOR]
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
EXHIBIT "K" Page 80
<PAGE> 89
EXHIBIT "L"
LIST OF INVESTORS
{To Be Added}
EXHIBIT "L" Page 81
<PAGE> 90
EXHIBIT "M"
OPINION LETTER
{To Be Added}
EXHIBIT "M" Page 82
<PAGE> 91
EXHIBIT "N"
PROMISSORY NOTE
{To Be Added}
EXHIBIT "N" Page 83
<PAGE> 92
EXHIBIT "O"
PLEDGE OF INVESTMENT GRADE SECURITIES
I. PROCEDURES AND DOCUMENTATION FOR ADVANCES AGAINST INVESTMENT GRADE
SECURITIES
Prior to making an Advance against Investment Grade Securities, the Lender
shall receive the following documents (each of which must be in form and
substance satisfactory to Lender) in the manner set forth below:
A. A Request for Advance, in substantially the form of EXHIBIT "A-2",
executed by the pledging Borrower.
B. A Commercial Security Agreement, in substantially the form of ANNEX B
hereto, executed by the pledging Borrower.
C. A SCHEDULE 1.1, in form and substance approved by Lender, describing in
reasonable detail the Investment Grade Securities to be pledged.
D. A Financing Statement, in form and substance approved by Lender (with a
schedule attached thereto being identical to the SCHEDULE 1.1 delivered
under Item C. above), executed by the pledging Borrower as debtor and
Lender as secured party, in appropriate original counterparts for filing
with the appropriate filing officers under the Code centrally in the State
of New York and anywhere else directed by Lender.
E. For an Investment Grade Security that is not in book-entry form:
(1) The original Investment Grade Security.
(2) A bond power endorsed - or another appropriate instrument of
assignment executed - by the pledging Borrower in blank.
F. For an Investment Grade Security that is a FNMA, FHLMC, or GNMA
Mortgage-backed Security in book-entry form, confirmation of either:
(1) The appropriate entry (i) in records of a Federal Reserve Bank of
the nominal ownership by Lender of any FNMA Mortgage-backed Security
that constitutes a "FNMA BookEntry Security", as defined in the
Book-Entry Procedures for FNMA Securities, 24 C.F.R. Sections
81.41-81.49 (the "FNMA Book-Entry Procedures"), or a FHLMC
Mortgage-backed Security that constitutes a "FHLMC BookEntry
Security", as defined in the Federal Home Loan Mortgage Corporation
Book-Entry Regulations, 1 C.F.R. Sections 462.1-462.8 (the "FHLMC
Book-Entry Regulations"), and
EXHIBIT "O" Page 84
<PAGE> 93
(ii) by Lender in its records of the pledging Borrower's ownership
of that book-entry Mortgage-backed Security subject to Lender's
Lien; or
(2) The (i) appropriate entry by Chemical Bank - in its capacity as
custodian for Participants Trust Company ("PTC"), GNMA's central
depository - in its records of the nominal ownership by Lender of
any GNMA guaranteed Mortgage-backed Security, (ii) the appropriate
entry by Lender in its records of the pledging Borrower's ownership
of that book-entry Mortgage-backed Security subject to a Lender's
Lien, and (iii) receipt by Lender of a confirmation of transaction
in the form of a written advice specifying the amount and
description of that book-entry Mortgage-backed Security subject to
that Lien.
G. Any and all other files, documents, instruments, certificates,
correspondence, or other records as may be reasonably requested by Lender
and deemed necessary, appropriate, or desirable.
EXHIBIT "O" Page 85
<PAGE> 94
FIRST AMENDMENT TO
WAREHOUSING CREDIT AND SECURITY AGREEMENT
This First Amendment to Warehousing Credit and Security Agreement (this
"Amendment"), is entered into as of the 12th day of May, 1999, by and between
HANOVER CAPITAL MORTGAGE HOLDINGS, INC., a Maryland corporation ( "Company"),
HANOVER CAPITAL PARTNERS LTD., a New York corporation ("HCP")(the Company and
HCP herein collectively called "Original Borrowers"), and HANOVER QRS-1 98-B,
INC., a Delaware corporation ("QRS-1"), HANOVER QRS-2 98-B, INC., a Delaware
corporation ("QRS-2"), HANOVER SPC-A, INC., a Delaware corporation ("SPC"), and
HANOVER CAPITAL REPO CORP., a Delaware corporation ("Repo") (QRS-1, QRS-2, SPC,
and Repo herein collectively referred to as the "New Borrowers", and Original
Borrowers and New Borrowers herein collectively referred to as the "Borrowers"
); and BANK UNITED, a federal savings bank ("Lender"). Capitalized terms used
but not defined herein have the meanings assigned to them in that certain
Warehousing Credit and Security Agreement (Single-Family Mortgage Loans) (the
"Credit Agreement") dated effective as of April 30, 1999, by and between
Original Borrowers and Lender, as the same has been or may be amended or
supplemented from time to time.
Section 1. Recitals. The Borrowers and Lender desire to amend the Credit
Agreement, subject to the terms and conditions of this Amendment. Therefore, The
Company and Lender hereby agree as follows, intending to be legally bound:
Section 2. Amendments. The Credit Agreement is hereby amended and
supplemented as follows:
(a) Section 1.1 of the Credit Agreement is hereby amended by the amendment
or addition of the following definitions:
"Borrowers " shall mean the Company, HCP, QRS-1, QRS-2, SPC, and
Repo.
" New Borrowers " shall mean the QRS-1, QRS-2, SPC, and Repo.
"Original Borrowers " shall mean the Company and HCP.
"QRS-1" shall mean Hanover QRS-1 98-2, Inc., a Delaware corporation.
"QRS-2" shall mean Hanover QRS-2 98-2, Inc., a Delaware corporation.
"Repo" shall mean Hanover Capital Repo Corp., a Delaware
corporation.
"SPC" shall mean Hanover SPC-A, Inc., a Delaware corporation.
(b) The New Borrowers, as additional borrowers under the terms of
the Credit Agreement, specifically agree to be bound by and to abide by
all of the terms and conditions
<PAGE> 95
contained in the Credit Agreement and in all of the other Loan Documents,
as herein amended, as if each of the New Borrowers had executed and
delivered the same to Lender and Lender had accepted the same, such
covenants, representations, terms and conditions of the Credit Agreement
and the Loan Documents being incorporated herein by reference. Without in
any way limiting the foregoing, each New Borrower restates and ratifies
and Representations and Warranties set forth in Article V of the Credit
Agreement; the Affirmative Covenants set forth in Article VI of the Credit
Agreement; and the Negative Covenants set forth in Article VII of the
Credit Agreement; provided, however, that Section 5.19 is amended to read
as follows:
"5.19A. 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 financial books and records relating to its
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 100
Metroplex Drive, Suite 301, Edison, New Jersey 08817, and the chief
executive office of HCP and the office where it keeps its financial
books and records relating to its property and all contracts
relating thereto and all accounts arising therefrom is located at
the address set forth for HCP in Section 9 hereof; and the principal
place of business of each of the New Borrowers is 90 West Street,
Suite 1508, New York, New York, 10006, and the chief executive
office of each of the New Borrowers and the office where each New
Borrower keeps its financial books and records relating to its
property and all contracts relating thereto and all accounts arising
therefrom is located at the address set forth for the New Borrowers
in Section 9 hereof."
To the extent that any of the Exhibits to the Credit Agreement need
to be supplemented because of the addition of the New Borrowers, such
exhibits are attached hereto.
(c) Article 9 of the Credit Agreement is amended by the addition of
the following addresses for the New Borrowers:
HANOVER QRS-1 98-B, INC.
90 West Street, Suite 1508
New York, New York 10006
Attn: Joyce S. Mizerak
Tel: 212-732-5086
Fax: 212-732-4728
2
<PAGE> 96
HANOVER QRS-2 98-B, INC.
90 West Street, Suite 1508
New York, New York 10006
Attn: Joyce S. Mizerak
Tel: 212-732-5086
Fax: 212-732-4728
HANOVER SPC-A, INC.
90 West Street, Suite 1508
New York, New York 10006
Attn: Joyce S. Mizerak
Tel: 212-732-5086
Fax: 212-732-4728
HANOVER CAPITAL REPO CORP.
90 West Street, Suite 1508
New York, New York 10006
Attn: Joyce S. Mizerak
Tel: 212-732-5086
Fax: 212-732-4728
(d) The promissory note ("Credit Note") dated as of May 12, 1999, in
the original principal amount of $50,000,000, executed by the Borrowers
and payable to the order of Lender, is given to Lender in replacement of
the promissory note dated April 30, 1999, in the original principal amount
of $50,000,000, executed by the Original Borrowers and payable to the
order of Lender (the "Original Note"), and not in novation or discharge
thereof. The definition of the term "Note" in the Credit Agreement is
hereby amended to mean the Credit Note and all renewals, extensions,
modifications, increases, rearrangements, and replacements thereof.
(e) Notwithstanding any provision herein or in the Credit Agreement
or the Credit Note to the contrary, the liability of the Borrowers under
the Credit Agreement shall be joint and several.
Section 3. Representations. The Borrowers represent and warrant that all
of the representations and warranties contained in the Credit Agreement and all
instruments and documents executed pursuant thereto or contemplated thereby are
true and correct in all material respects on and as of this date.
Section 4. Continued Force and Effect. Except as specifically amended
herein, all of the terms and conditions of the Credit Agreement and all other
Loan Documents are and remain in full force and effect in accordance with their
respective terms. All of the terms used herein have the
3
<PAGE> 97
same meanings as set out in the Credit Agreement, unless amended hereby or
unless the context clearly requires otherwise. References in the Credit
Agreement to the "Agreement," the "Loan Agreement," "hereof," "herein" and words
of similar import shall be deemed to be references to the Credit Agreement as
amended hereby. Any reference in the other Loan Documents to the "Agreement,"
the "Line of Credit Agreement," "Warehouse Agreement," or the "Loan Agreement"
shall be deemed to be references to the Credit Agreement as amended through the
date hereof. Any references in the Credit Agreement or any of the Loan Documents
to the Note, or the Credit Note shall be deemed to be references to the Credit
Note.
Section 5. Representations and Release of Claims. Except as otherwise
specified herein, the terms and provisions hereof shall in no manner impair,
limit, restrict or otherwise affect the obligations of the Borrowers or any
third party to Lender, as evidenced by the Loan Documents. The Borrowers hereby
acknowledge, agree, and represent that (i) the Borrowers are indebted to Lender
pursuant to the terms of the Credit Note; (ii) the liens, security interests and
assignments created and evidenced by the Loan Documents are, respectively,
first, prior, valid and subsisting liens, security interests and assignments
against the Collateral and secure all indebtedness and obligations of the
Borrowers to Lender under the Credit Note, the Credit Agreement, all other Loan
Documents, as modified herein; (iii) there are no claims or offsets against, or
defenses or counterclaims to, the terms or provisions of the Loan Documents, and
the other obligations created or evidenced by the Loan Documents; (iv) the
Borrowers have no claims, offsets, defenses or counterclaims arising from any of
the Lender's acts or omissions with respect to the Loan Documents, or the
Lender's performance under the Loan Documents; (v) the representations and
warranties contained in the Loan Documents are true and correct representations
and warranties of the Borrowers, as of the date hereof; (vi) the Borrowers
promise to pay to the order of Lender the indebtedness evidenced by the Credit
Note according to the terms thereof; and (vii) the Borrowers are not in default
and no event has occurred which, with the passage of time, giving of notice, or
both, would constitute a default by the any of the Borrowers of such Borrower's
obligations under the terms and provisions of the Loan Documents. In
consideration of the modification of certain provisions of the Loan Documents,
all as herein provided, and the other benefits received by the Borrowers
hereunder, the Borrowers hereby RELEASE, RELINQUISH and forever DISCHARGE
Lender, its predecessors, successors, assigns, shareholders, principals,
parents, subsidiaries, agents, officers, directors, employees, attorneys and
representatives (collectively, the "Lender Released Parties"), of and from any
and all claims, demands, actions and causes of action of any and every kind or
character, whether known or unknown, present or future, which the Borrowers
have, or may have against Lender Released Parties, arising out of or with
respect to any and all transactions relating to the Credit Agreement, the
Original Note, the Credit Note, and the other Loan Documents occurring prior to
the date hereof, including any other loss, expense and/or detriment, of any kind
or character, growing out of or in any way connected with or in any way
resulting from the acts, actions or omissions of the Lender Released Parties,
and including any loss, cost or damage in connection with any breach of
fiduciary duty, breach of any duty of fair dealing, breach of competence, breach
of funding commitment, undue influence, duress, economic coercion, conflict of
interest, negligence, bad faith, malpractice, violations of the Racketeer
Influence and Corrupt Organizations Act, intentional or negligent infliction of
emotional or mental distress, tortious interference with corporate governments
or
4
<PAGE> 98
prospective business advantage, tortious interference with contractual
relations, breach of contract, deceptive trade practices, libel, slander,
conspiracy, the charging, contracting for, taking, reserving, collecting or
receiving of interest in excess of the highest lawful rate applicable to the
Loan Documents (i.e., usury), any violations of federal or state law, any
violations of federal or state banking rules, laws or regulations, including,
but not limited to, any violations of Regulation B, Equal Credit Opportunity,
bank tying act claims, any violation of the Texas Free Enterprise Antitrust Act
or any violation of federal antitrust acts.
Section 6. Severability. In the event any one or more provisions contained
in the Credit Agreement, this Amendment, or any of the Loan Documents should be
held to be invalid, illegal or unenforceable in any respect, the validity,
enforceability and legality of the remaining provisions contained herein and
therein shall not be affected in any way or impaired thereby and shall be
enforceable in accordance with their respective terms.
Section 7. Expenses. The Borrowers agree to pay all out-of-pocket costs
and expenses (including reasonable fees and expenses of legal counsel) of Lender
in connection with the preparation, operation, administration and enforcement of
this Amendment.
Section 8. Acknowledgment. Except as amended hereby, the Borrowers ratify
and confirm that the Loan Documents are and remain in full force and effect in
accordance with their respective terms and that all Collateral is unimpaired by
this Amendment and secures the payment and performance of all indebtedness and
obligations of the Borrowers under the Credit Note, the Credit Agreement, and
all other Loan Documents, as modified hereby. Each of the undersigned officers
of the New Borrowers executing this Amendment represents and warrants that he
has full power and authority to execute and deliver this Amendment on behalf of
each of the New Borrowers, as appropriate. Each of the undersigned officers of
the Original Borrowers represent and warrant that his execution and delivery of
this Amendment has been duly authorized, and that the resolutions and affidavits
previously delivered to Lender, in connection with the execution and delivery of
the Credit Agreement, are and remain in full force and effect and have not been
altered, amended or repealed in anywise. In connection with the execution of
this Amendment, AND AS A SPECIFIC CONDITION THERETO, the New Borrowers have
delivered to Lender the following documents:
(a) Certified copies of each of the New Borrower's articles of
incorporation including all amendments thereto, all certified by the
Secretary of State of Delaware as being in full force and effect on the
date hereof and all other documents the Lender may request relating to the
existence, qualification, and good standing of any of the New Borrowers.
(b) Secretary's Certificates (in the form of Exhibit "J" to the
Credit Agreement) for each New Borrower, executed by an officer of such
New Borrower and certifying that such New Borrower is authorized to
execute, deliver, and perform this Amendment and the Credit Agreement, the
Credit Note, and the other Loan Documents and each Advance Request and all
other instruments or documents to be delivered pursuant hereto (the Lender
5
<PAGE> 99
being entitled to rely thereon until a new certificate has been furnished
to the Lender) including a certification of incumbency of officers.
(c) A favorable written opinion of counsel to Borrowers, dated as of
the date of this Amendment, to be in substantially the form of Exhibit "M"
to the Credit Agreement, and addressed to the Lender.
(d) On or before the date that each of the New Borrowers pledges
collateral to Lender, a tax, lien and judgment search of the appropriate
public records for such New 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 otherwise permitted under the Loan Documents.
(e) At such time as each New Borrower delivers Collateral to Lender,
executed financing statements in recordable form covering the Collateral
and ready for filing in all additional jurisdictions required by the
Lender.
Section 9. No Waiver. The Borrowers agree that no Event of Default and no
Default has been waived or remedied by the execution of this Amendment by
Lender, and any such Default or Event of Default heretofore arising and
currently continuing shall continue after the execution and delivery hereof.
Section 10. Governing Law. This Amendment shall be governed by and
construed in accordance with the laws of the State of Texas and, to the extent
applicable, by federal law.
Section 11. Counterparts. This Amendment may be executed in any number of
counterparts and all of such counterparts taken together shall be deemed to
constitute one and the same instrument.
SECTION 12. NO ORAL AGREEMENTS. THIS WRITTEN AMENDMENT, THE CREDIT
AGREEMENT, THE CREDIT NOTE, AND THE OTHER LOAN DOCUMENTS, ALL AS MODIFIED
HEREBY, REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR ORAL AGREEMENTS OF THE
PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
EXECUTED and effective as of the dates first written above.
ORIGINAL BORROWERS: HANOVER SPC-A, INC., a Delaware
corporation
HANOVER CAPITAL MORTGAGE
HOLDINGS, INC., By:
------------------------------
6
<PAGE> 100
a Maryland corporation Name: Joyce S. Mizerak
Title: Vice President
By:
---------------------------------
Name: Joyce S. Mizerak
Title: Managing Director HANOVER CAPITAL REPO CORP., a
Delaware corporation
HANOVER CAPITAL PARTNERS LTD., By:
a New York corporation -------------------------------
Name: Joyce S. Mizerak
Title: Vice President
By:
---------------------------------
Name: Joyce S. Mizerak
Title: Managing Director
LENDER:
NEW BORROWERS:
BANK UNITED,
HANOVER QRS-1 98-B, INC., a Delaware a federal savings bank
corporation
By: By:
--------------------------------- -------------------------------
Name: Joyce S. Mizerak Name:
-----------------------------
Title: Vice President Title:
----------------------------
HANOVER QRS-2 98-B, INC., a Delaware
corporation
By:
---------------------------------
Name: Joyce S. Mizerak
Title: Vice President
<PAGE> 101
SECOND AMENDMENT TO
WAREHOUSING CREDIT AND SECURITY AGREEMENT
This Second Amendment to Warehousing Credit and Security Agreement (this
"Amendment"), is entered into as of the 1st day of October, 1999, by and between
HANOVER CAPITAL MORTGAGE HOLDINGS, INC., a Maryland corporation ( "Company");
HANOVER CAPITAL PARTNERS, LTD., a New York corporation ("HCP"); HANOVER QRS-1
98-B, INC., a Delaware corporation ("QRS-1"); HANOVER QRS-2 98-B, INC., a
Delaware corporation ("QRS-2"); HANOVER SPC-A, INC., a Delaware corporation
("SPC"); and HANOVER CAPITAL REPO CORP., a Delaware corporation ("Repo")(the
Company, HCP, QRS-1, QRS-2, SPC, and Repo herein collectively referred to as the
"Borrowers"); and BANK UNITED, a federal savings bank ("Lender"). Capitalized
terms used but not defined herein have the meanings assigned to them in that
certain Warehousing Credit and Security Agreement (Single-Family Mortgage Loans)
(the "Credit Agreement") dated effective as of April 30, 1999, by and between
Original Borrowers and Lender, as the same has been or may be amended or
supplemented from time to time.
Section 1. Recitals. The Borrowers and Lender desire to amend the Credit
Agreement, subject to the terms and conditions of this Amendment. Therefore, The
Company and Lender hereby agree as follows, intending to be legally bound:
Section 2. Amendments. The Credit Agreement is hereby amended and
supplemented as follows:
(a) Section 1.1 of the Credit Agreement is hereby amended by the amendment
or addition of the following definitions:
"Adjusted Tangible Net Worth" shall mean, 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, plus fifty percent (50%) of the lesser of book
value or market value (as determined by Lender of a third party
acceptable to Lender, in Lender's sole discretion) of any
Non-Investment Grade Securities as of such date, less deferred
financing fees and all other intangible assets of any unconsolidated
Subsidiary.
"Termination Date" shall mean shall mean March 28, 2000, or such
earlier date upon which Lender's obligation to fund shall be
terminated pursuant to the terms of this Agreement.
(b) Section 2.5(a) of the Credit Agreement is deleted in its entirety, and
the following is substituted therefor:
"(a) The outstanding unpaid principal amount of all advances
shall be payable in full upon March 28, 2000."
<PAGE> 102
(c) Section 7.5 of the Credit Agreement is deleted in its entirety, and
the following is substituted therefor:
"7.5. Minimum Adjustable Tangible Net Worth. Permit Adjusted
Tangible Net Worth of the Company (and their Subsidiaries, on a
consolidated basis) to be less than TWENTY-FIVE MILLION AND NO/100
DOLLARS ($25,000,000.00), computed as of the end of each calendar
month."
(d) Section 7.6 of the Credit Agreement is deleted in its entirety, and
the following is substituted therefor:
"7.6. Minimum GAAP Net Worth. Permit the GAAP Net Worth of the
Company (and their Subsidiaries, on a consolidated basis) to be less
than FORTY-FIVE MILLION AND NO/100 DOLLARS ($45,000,000.00),
computed as of the end of each calendar month."
(e) Section 7.8 of the Credit Agreement is deleted in its entirety, and
the following is substituted therefor:
"7.8. 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. For purposes of calculating this
ratio only, the calculation of Adjusted Tangible Net Worth of the
Company shall include one hundred percent (100%) of the lesser of
book value or market value (as determined by Lender of a third party
acceptable to Lender, in Lender's sole discretion) of such
Non-Investment Grade Securities as of the date of calculation."
(f) The Credit Agreement is amended by the addition of the following
Section 7.20:
"7.20. Failure to Maintain Committed Lines of Credit. Fail to
maintain committed lines of credit in a minimum amount that is equal
to the market value of all Mortgage Loans warehoused with any
lender, whether or not such Mortgage Loans are financed under such
committed lines of credit."
Section 3. Consent to Purchase of Non-Investment Grade Securities.
Notwithstanding the provisions of Section 7.9 to the contrary, Bank United
hereby consents to the Company?s purchase of $14,000,000 in Non-Investment Grade
Securities from HCP. Such consent shall not operate as a waiver of Lender's
right to insist upon strict compliance by Borrower with the terms of the Credit
Agreement.
2
<PAGE> 103
Section 4. Representations. The Borrowers represent and warrant that all
of the representations and warranties contained in the Credit Agreement and all
instruments and documents executed pursuant thereto or contemplated thereby are
true and correct in all material respects on and as of this date.
Section 5. Continued Force and Effect. Except as specifically amended
herein, all of the terms and conditions of the Credit Agreement and all other
Loan Documents are and remain in full force and effect in accordance with their
respective terms. All of the terms used herein have the same meanings as set out
in the Credit Agreement, unless amended hereby or unless the context clearly
requires otherwise. References in the Credit Agreement to the "Agreement," the
"Loan Agreement," "hereof," "herein" and words of similar import shall be deemed
to be references to the Credit Agreement as amended hereby. Any reference in the
other Loan Documents to the "Agreement," the "Line of Credit Agreement,"
"Warehouse Agreement," or the "Loan Agreement" shall be deemed to be references
to the Credit Agreement as amended through the date hereof. Any references in
the Credit Agreement or any of the Loan Documents to the Note, or the Credit
Note shall be deemed to be references to that certain promissory note dated as
of May 12, 1999, in the original principal amount of $50,000,000, executed by
the Borrowers and payable to the order of Lender, which was given to Lender in
replacement of the promissory note dated April 30, 1999, in the original
principal amount of $50,000,000, executed by the Original Borrowers and payable
to Lender.
Section 6. Representations and Release of Claims. Except as otherwise
specified herein, the terms and provisions hereof shall in no manner impair,
limit, restrict or otherwise affect the obligations of the Borrowers or any
third party to Lender, as evidenced by the Loan Documents. The Borrowers hereby
acknowledge, agree, and represent that (i) the Borrowers are indebted to Lender
pursuant to the terms of the Credit Note; (ii) the liens, security interests and
assignments created and evidenced by the Loan Documents are, respectively,
first, prior, valid and subsisting liens, security interests and assignments
against the Collateral and secure all indebtedness and obligations of the
Borrowers to Lender under the Credit Note, the Credit Agreement, all other Loan
Documents, as modified herein; (iii) there are no claims or offsets against, or
defenses or counterclaims to, the terms or provisions of the Loan Documents, and
the other obligations created or evidenced by the Loan Documents; (iv) the
Borrowers have no claims, offsets, defenses or counterclaims arising from any of
the Lender's acts or omissions with respect to the Loan Documents, or the
Lender's performance under the Loan Documents; (v) the representations and
warranties contained in the Loan Documents are true and correct representations
and warranties of the Borrowers, as of the date hereof; (vi) the Borrowers
promise to pay to the order of Lender the indebtedness evidenced by the Credit
Note according to the terms thereof; and (vii) the Borrowers are not in default
and no event has occurred which, with the passage of time, giving of notice, or
both, would constitute a default by the any of the Borrowers of such Borrower's
obligations under the terms and provisions of the Loan Documents. In
consideration of the modification of certain provisions of the Loan Documents,
all as herein provided, and the other benefits received by the Borrowers
hereunder, the Borrowers hereby RELEASE, RELINQUISH and forever DISCHARGE
Lender, its predecessors, successors, assigns, shareholders, principals,
parents, subsidiaries, agents, officers, directors, employees,
3
<PAGE> 104
attorneys and representatives (collectively, the "Lender Released Parties"), of
and from any and all claims, demands, actions and causes of action of any and
every kind or character, whether known or unknown, present or future, which the
Borrowers have, or may have against Lender Released Parties, arising out of or
with respect to any and all transactions relating to the Credit Agreement, the
Original Note, the Credit Note, and the other Loan Documents occurring prior to
the date hereof, including any other loss, expense and/or detriment, of any kind
or character, growing out of or in any way connected with or in any way
resulting from the acts, actions or omissions of the Lender Released Parties,
and including any loss, cost or damage in connection with any breach of
fiduciary duty, breach of any duty of fair dealing, breach of competence, breach
of funding commitment, undue influence, duress, economic coercion, conflict of
interest, negligence, bad faith, malpractice, violations of the Racketeer
Influence and Corrupt Organizations Act, intentional or negligent infliction of
emotional or mental distress, tortious interference with corporate governments
or prospective business advantage, tortious interference with contractual
relations, breach of contract, deceptive trade practices, libel, slander,
conspiracy, the charging, contracting for, taking, reserving, collecting or
receiving of interest in excess of the highest lawful rate applicable to the
Loan Documents (i.e., usury), any violations of federal or state law, any
violations of federal or state banking rules, laws or regulations, including,
but not limited to, any violations of Regulation B, Equal Credit Opportunity,
bank tying act claims, any violation of the Texas Free Enterprise Antitrust Act
or any violation of federal antitrust acts.
Section 7. Severability. In the event any one or more provisions contained
in the Credit Agreement, this Amendment, or any of the Loan Documents should be
held to be invalid, illegal or unenforceable in any respect, the validity,
enforceability and legality of the remaining provisions contained herein and
therein shall not be affected in any way or impaired thereby and shall be
enforceable in accordance with their respective terms.
Section 8. Expenses. The Borrowers agree to pay all out-of-pocket costs
and expenses (including reasonable fees and expenses of legal counsel) of Lender
in connection with the preparation, operation, administration and enforcement of
this Amendment.
Section 9. Acknowledgment. Except as amended hereby, the Borrowers ratify
and confirm that the Loan Documents are and remain in full force and effect in
accordance with their respective terms and that all Collateral is unimpaired by
this Amendment and secures the payment and performance of all indebtedness and
obligations of the Borrowers under the Credit Note, the Credit Agreement, and
all other Loan Documents, as modified hereby. Each of the undersigned officers
of the Borrowers represent and warrant that his or her execution and delivery of
this Amendment has been duly authorized, and that the resolutions and affidavits
previously delivered to Lender, in connection with the execution and delivery of
the Credit Agreement and the First Amendment thereto, are and remain in full
force and effect and have not been altered, amended or repealed in anywise.
Section 10. No Waiver. The Borrowers agree that no Event of Default and no
Default has been waived or remedied by the execution of this Amendment by
Lender, and any such Default or
4
<PAGE> 105
Event of Default heretofore arising and currently continuing shall continue
after the execution and delivery hereof. Notwithstanding the foregoing, as of
September 30, 1999, Borrower had violated the Minimum GAAP Net Worth Covenant.
Lender's agreement to forbear from exercising its rights and remedies under the
Loan Documents in connection with Borrower's noncompliance with the Minimum GAAP
Net Worth Covenant and its agreement to enter into this Amendment (including,
without limitation, the amendment of the Minimum Adjustable Net Worth Covenant
and the Minimum GAAP Net Worth Covenant) shall not constitute (i) a waiver of
any existing Events of Defaults under the Loan Documents; (ii) a waiver of any
right, remedy, or recourse of Lender exercisable upon any existing Events of
Default or any subsequent Events of Default; or (iii) a waiver of any of any of
Lender's rights, remedies or recourses under the Loan Documents or as provided
by the laws of the State of Texas. Furthermore, Lender shall have the right, at
any time and from time to time, to insist upon strict performance by Borrower of
all terms and conditions set forth in the Loan Documents.
Section 11. Governing Law. This Amendment shall be governed by and
construed in accordance with the laws of the State of Texas and, to the extent
applicable, by federal law.
Section 12. Counterparts. This Amendment may be executed in any number of
counterparts and all of such counterparts taken together shall be deemed to
constitute one and the same instrument.
SECTION 13. NO ORAL AGREEMENTS. THIS WRITTEN AMENDMENT, THE CREDIT
AGREEMENT, THE CREDIT NOTE, AND THE OTHER LOAN DOCUMENTS, ALL AS MODIFIED
HEREBY, REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR ORAL AGREEMENTS OF THE
PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
[SIGNATURES ON FOLLOWING PAGE]
5
<PAGE> 106
EXECUTED and effective as of the dates first written above.
BORROWERS: HANOVER SPC-A, INC., a Delaware
corporation
HANOVER CAPITAL MORTGAGE
HOLDINGS, INC., By:
a Maryland corporation --------------------------------
Name:
------------------------------
Title:
-----------------------------
By:
------------------------------
Name:
----------------------------
Title: HANOVER CAPITAL SPC, INC., a
--------------------------- Delaware corporation
HANOVER CAPITAL PARTNERS, LTD., By:
a New York corporation --------------------------------
Name:
------------------------------
Title:
By: -----------------------------
------------------------------
Name: HANOVER REPO CORP., a Delaware
---------------------------- corporation
Title:
---------------------------
NEW BORROWERS: By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
HANOVER QRS-1 98-B, INC., a Delaware
corporation
By: LENDER:
------------------------------
Name:
----------------------------
Title: BANK UNITED,
--------------------------- a federal savings bank
HANOVER QRS-2 98-B, INC., a Delaware
corporation By:
--------------------------------
Name:
------------------------------
By: Title:
------------------------------- -----------------------------
Name:
-----------------------------
Title:
----------------------------
6
<PAGE> 1
Exhibit 21
Consolidated Subsidiaries of Hanover Capital Mortgage Holdings, Inc.
<TABLE>
<CAPTION>
Subsidiary Jurisdiction d/b/a
- ---------- ------------ -----
<S> <C> <C>
Hanover Capital SCP, Inc. Delaware None
Hanover Captial Repo Corp. Delaware None
Hanover QRS-1 98-B, Inc. Delaware None
Hanover QRS-2 98-B, Inc. Delaware None
Hanover SPC-A, Inc. Delaware None
</TABLE>
Unconsolidated Subsidiaries of Hanover Capital Mortgage Holdings, Inc.
<TABLE>
<CAPTION>
Subsidiary Jurisdiction d/b/a
- ---------- ------------ ------------------------
<S> <C> <C>
Hanover Capital Partners Ltd. New York None
Hanover Capital Mortgage Corporation Missouri California d/b/a
Missouri Hanover Capital
Mortgage Corporation
Hanover Capital Securities, Inc. New York None
Hanover Capital Partners 2, Inc. Delaware None
Hanover SPC-2, Inc. Delaware None
HanoverTrade.com, Inc. Delaware None
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE HANOVER
CAPITAL MORTGAGE HOLDINGS, INC'S ANNUAL REPORT ON FORM 10-K FOR THE PERIOD FROM
JANUARY 1, 1999 TO DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 18,022
<SECURITIES> 62,686
<RECEIVABLES> 3,077
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 365,486<F1>
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 365,486
<CURRENT-LIABILITIES> 315,128<F1>
<BONDS> 0
0
0
<COMMON> 58
<OTHER-SE> 50,300<F2>
<TOTAL-LIABILITY-AND-EQUITY> 365,486
<SALES> 0
<TOTAL-REVENUES> 27,505
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,191
<LOSS-PROVISION> 5,239
<INTEREST-EXPENSE> 23,097
<INCOME-PRETAX> (12,627)
<INCOME-TAX> 0
<INCOME-CONTINUING> (12,627)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,627)
<EPS-BASIC> (2.12)
<EPS-DILUTED> (2.12)
<FN>
<F1>As a Real Estate Investment Trust our balance sheet is not classified.
<F2>Includes Retained Earnings and Paid In Capital.
</FN>
</TABLE>
