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The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2005 are not necessarily indicative of the results that may be expected for the calendar year ending December 31, 2005. For further information refer to the consolidated financial statements and footnotes thereto incorporated by reference in the Company’s annual report on Form 10-K for the year ended December 31, 2004.

In December 2004 the Financial Accounting Standards Board (FASB) revised Statement of Financial Accounting Standards No. 123 “Accounting for Stock-based Compensation” (“SFAS 123”) that supersedes APB 25 and requires the use of a fair value-based methodology (similar to the original SFAS 123 methodology) to measure and record expenses and liabilities associated with stock-based compensation. The revised standard is required to be adopted by Hanover beginning January 1, 2006 and is applicable to any new awards and to all existing awards for which the requisite service to earn the award has not yet been rendered. The effect of adopting the revised standard is not expected to be material to Hanover’s earnings or financial condition.

In June 2005, Hanover obtained a committed borrowing facility from Lender A, pursuant to a Master Repurchase Agreement, for up to $100 million. The facility is primarily available for financing mortgage loans and, subject to certain conditions, allows funding at 97% of the fair market value of mortgage loans outstanding principal balance. The facility earns interest, payable monthly, at a fixed percentage over LIBOR on outstanding amounts plus a fee on the unused facility amount.

connection with the acquisition of certain mortgage loans and real estate properties by HDMF. The line of credit is secured by substantially all of the assets of HDMF. The interest rate on the borrowings varies, based upon the type of underlying mortgage assets, from one-month LIBOR plus 2.25% to one-month LIBOR plus 3.00%. The Company is required to pay a non-utilization fee equal to 0.25% on the unused line of credit amount, if less than half of the line of credit is utilized. As of June 30, 2005, the weighted-average interest rate was 6.2%. This line of credit has a stated maturity date of November 21, 2005.

Hanover uses certain derivative instruments to manage the risk of (i) changes in market conditions that could affect the value of certain portfolio securities or (ii) adverse changes in floating interest rates of its debt instruments. Hanover’s derivatives are classified as freestanding with income realized from settlements and changes in valuation of contracts included in income. Derivative instruments are included as a component of other assets and carried at fair value based on estimates using market prices.

During March of 2005, Hanover Statutory Trust I (the “Trust”) sold, in a private placement, trust preferred securities for an aggregate amount of $20 million. Hanover owns all of the common stock of the Trust. The Trust used the proceeds to purchase Hanover junior subordinated notes due March 2035, which represent all of the Trust’s assets. The terms of the junior subordinated notes are substantially the same as the terms of the trust preferred securities. The trust preferred securities have a fixed interest rate of 8.51% per annum during the first five years, after which the interest rate will float and reset quarterly at the three-month Libor rate plus 4.25% per annum.

Under the provisions of the FASB issued revision to FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46(R)”), Hanover determined that the holders of the trust preferred securities were the primary beneficiaries of the Trust. As a result, Hanover cannot consolidate the Trust and has reflected the obligation to the Trust under the caption “liability to subsidiary trust issuing preferred securities” and accounts for the investment in the common stock of the Trust on the equity method of accounting.

The ability of the Trust to pay dividends depends on the receipt of interest payments on the debentures. Hanover has the right, pursuant to certain qualifications and covenants, to defer payments of interest on the notes for up to four consecutive quarters. If payment of interest on the notes is deferred, the Trust will defer the quarterly distributions on the trust preferred securities for a corresponding period. Additional interest accrues on deferred payments at the annual rate payable on the notes, compounded quarterly.

In accordance with SFAS 123, the Company accounts for employee stock options and share awards under the intrinsic-value method prescribed by APB 25 and related interpretations, and provides the disclosure-only approach allowed under the provisions of SFAS 123. If the Company had determined compensation expense for its stock-based compensation plan based on the fair value at the grant dates, consistent with the provisions of SFAS 123, the Company’s net income would have been reduced by approximately $1,000 and $4,000 for the six months ended June 30, 2005 and 2004, respectively.

On May 2, 2005, the Company issued a total of 20,000 shares of common stock to certain of its employees. The shares were issued pursuant to the Company’s 1997 Executive and Non-Employee Director Stock Option Plan. The shares vest ratably over a five-year period. The Company has accounted for this share issuance under APB 25 and has recorded deferred compensation using the closing market price of the stock on the date of grant. The deferred compensation is being amortized to compensation expense ratably over the five-year vesting period.

On May 20, 2005, the Company issued options for the purchase of 2,000 shares of the Company’s common stock to one of the Company’s independent directors in connection with the director’s re-election to the Board of Directors. The options were issued pursuant to the Company’s 1997 Executive and Non-Employee Director Stock Option Plan. The options were issued with an exercise price equal to the closing market price on the date of grant and expire ten years from the date of grant. In accordance with

As of December 31, 2004, Hanover had approximately $583,000 of loans outstanding, in the aggregate, to four of its executive officers (the “Principals”) pursuant to a 1997 contribution agreement, as amended. The notes were to mature in September 2007. The loans to the Principals, recorded as a deduction from stockholders’ equity of as of December 31, 2004, were secured solely by an aggregate of 38,889 shares of Hanover’s common stock, owned by the Principals, and were otherwise non-recourse to the Principals.

As of June 30, 2005, the conditions of the 1997 contribution agreement, as amended, were fulfilled. As a result, the remaining obligations of the Company pursuant to the agreement with the Principals of $583,000 of outstanding loans to the Principals were forgiven and recognized as compensation expense for the three months and six months ended June 30, 2005. In addition, a total of 72,222 shares of the Company’s stock were earned and subsequently issued to them. The shares were valued at the closing price of June 30, 2005, and the amount of approximately $761,000 has been recognized as compensation expense for the three months and six months ended June 30, 2005. As of June 30, 2005, there are no remaining obligations under the 1997 contribution agreement.

On June 15, 2005, through a series of transactions and a payment of $45,000, the Company’s interest in HDMF-I LLC and subsidiaries (HMDF) increased. As of June 30, 2005, the Company owns approximately 80% of HDMF. Management of the Company believes HDMF is a compatible business operation. The consolidated financial statements include the results of HDMF from the date of acquisition. The results of operations of HDMF are included with Hanover for segment reporting.

On June 24, 2005, the Company, through HT, acquired the remaining 75% ownership of Pedestal Capital Markets, Inc. (Pedestal) for $13,000. The acquisition provides the Company with an Alternative Trading System (a software application) that will be integrated into the Company’s portfolio and trading operations. The consolidated financial statements include the results of Pedestal from the date of acquisition. The results of operations of Pedestal are included with HT for segment reporting.

The following table sets forth the pro forma results of operations of the Company for the six months ended June 30, 2005 and 2004. The pro forma financial information assumes the HDMF and Pedestal acquisitions had occurred at the beginning of each of the interim periods presented. The pro forma information contains the combined operating results of HDMF and Pedestal since the acquisitions and the results prior to the acquisition date adjusted to include the pro forma impact of the elimination of the management and administrative fees charged by the Company to HDMF. The pro forma amounts are not representative of results that would have occurred had the acquisitions occurred at the beginning of each of the periods presented or that may occur in the future.

Hanover’s three principal business segments are each conducted through its three primary operating companies, Hanover, HCP and HT. Segment information is prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States. HCP and HT rely on Hanover for financing portions of their operations. Intercompany transactions are recorded on an arms-length basis. All significant intercompany accounts and transactions are eliminated in consolidation. However, interest on any intercompany notes from HCP and HT to Hanover is determined on an incremental cost basis that may be less than HCP and HT would pay to independent third parties.

The principal business of Hanover is earning interest and income on leveraged investments in subordinated mortgage-backed securities and, to a lesser extent, mortgage loans. The principal business of HCP is to generate income from services provided to the mortgage industry in the form of consulting, loan sale advisory services, loan file due diligence reviews, staffing solutions, and mortgage assignment and collateral rectification services. The principal business of HT is generating income from loan sale advisory services, traditional loan brokerage services, technology solutions, and valuation services. HT also brokers loan pools, mortgage-servicing rights, and other mortgage related assets through an Internet-based exchange. Hanover’s businesses are all conducted within the United States.

On August 3, 2005, the Company entered into two new lease agreements for a new corporate headquarters facility in Edison, NJ. The new leases coincide with the expiration of its existing headquarters lease and will modify the existing lease of HCP and provide for new office space for HCP. These new lease agreements will allow the Company to relocate both offices into one centralized location with a total space of approximately 26,000 square feet. Both lease agreements have a term of five years, each with one five-year renewal option. Total rent and other charges due under the lease agreements during the initial lease term are approximately $2.5 million. Payments under the new leases approximate the payments on the Company’s current lease arrangements. The Company is planning to occupy the new office space in September or October of 2005.

Certain statements in this report, including, without limitation, matters discussed under this Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” should be read in conjunction with the financial statements, related notes, and other detailed information included elsewhere in this Quarterly Report on Form 10-Q. We are including this cautionary statement to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Statements that are not historical fact are forward-looking statements. Certain of these forward-looking statements can be identified by the use of words such as “believes,” “anticipates,” “expects,” “intends,” “plans,” “projects,” “estimates,” “assumes,” “may,” “should,” “will,” or other similar expressions. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors, which could cause actual results, performance or achievements to differ materially from future results, performance or achievements. These forward-looking statements are based on our current beliefs, intentions and expectations. These statements are not guarantees or indicative of future performance. Important assumptions and other important factors that could cause actual results to differ materially from those forward-looking statements include, but are not limited to, those factors, risks and uncertainties described in Items 1, 7 and 7A of our Annual Report on Form 10-K for the year ended December 31, 2004 and in our other securities filings with the Securities and Exchange Commission. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and involve inherent risks and uncertainties. The forward-looking statements contained in this report are made only as of the date hereof. We undertake no obligation to update or revise information contained herein to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

We are a specialty finance company qualified as a real estate investment trust, which we refer to as a “REIT”. Accordingly, we generally distribute substantially all of our earnings to stockholders without paying Federal or state income tax at the corporate level on the distributed earnings. We seek to generate consistent income from our investments and business activities and provide steady dividends to our shareholders by investing primarily in the domestic residential mortgage market. We have three principal business segments that service the domestic residential mortgage market:

earnings per share, as compared to $3.2 million, or $0.38 diluted earnings per share, in the same period in 2004. Our (loss) and net income for the three and six months ended June 30, 2005, as compared to the same period in 2004, were largely the result of a decrease in net interest income and a reduction in the gain on sale of mortgage assets. The carrying balance of this portfolio decreased to $199.7 million as of June 30, 2005 from $205.7 million as of December 31, 2004 primarily because of payments on underlying mortgages.

Our Subordinate MBS portfolio is comprised of non-investment grade securities that represent retained interests that are subordinate to other classes of the same series of mortgage-backed securities in the right to receive payments from the underlying mortgage loans. These securities are backed by prime quality domestic residential mortgage loans issued and serviced by large mortgage originators. Our Subordinate MBS portfolio is comprised of both adjustable- and fixed-rate securities. These securities are financed under agreements where we have sold securities with a commitment to repurchase these securities at a later date, commonly referred to as “Repurchase Agreements”. Our Repurchase Agreements are both committed and uncommitted and re-price monthly based on the one-month London Interbank Offered Rate Index, or “LIBOR” index. LIBOR is an average of the interest rates that major international banks charge each other to borrow U.S. dollars in the London money market.

The investment objective for our Subordinate MBS portfolio is to generate interest income and, when appropriate, gain on sale through credit risk management combined with leverage, which incurs some interest rate risk. Credit risk management is accomplished by pre-purchase and ongoing collateral analysis coupled with a pro-active disposition strategy. As of June 30, 2005, our Subordinate MBS portfolio has financing of $38.9 million and net equity of $21.3 million for a debt to equity ratio of 1.83 to 1.00.

Hanover Grantor Trust 1999-A (“99-A Mortgage Loans”), (b) mortgage loans that collateralize a debt securitization, Hanover Grantor Trust 1999-B (“99-B Mortgage Loans”), and (c) distressed mortgage loans acquired by HDMF-I LLC, an entity consolidated as of June 30, 2005, that invests in distressed mortgages and real estate property (“HDMF Loans”). The 99-A Mortgage Loans are financed under a one-year committed financing facility. The 99-B Mortgage Loans are financed via a securitization where we sold senior bonds and retained certain subordinate bonds. The HDMF Loans are financed via a committed financing facility expiring in November 2005. We are actively seeking a replacement for this facility. The Mortgage Loan portfolio is classified as an asset in our Consolidated Balance Sheets and generates interest income. The financing related to the 99-A Mortgage Loans, the senior bonds we sold in the 1999-B securization and the financing related to the HDMF Loans are all classified as liabilities in our Consolidated Balance Sheets and generate interest expense. The difference between this interest income and expense is the net interest income we earn on our Mortgage Loan portfolio.

We maintain an Agency MBS portfolio to satisfy Investment Company Act of 1940 requirements. Our Agency MBS portfolio is comprised of whole pool fixed-rate Fannie Mae and Freddie Mac guaranteed mortgage-backed securities that we economically hedge via forward sales of like-coupon Agency MBS. We finance most of our Agency MBS portfolio with Repurchase Agreements, which re-price monthly based on the one-month LIBOR index. To the extent that we increase our Mortgage Loan portfolio, we would anticipate our Agency MBS portfolio to decline as the Mortgage Loan portfolio fulfills the Investment Company Act of 1940 requirements currently met by the Agency MBS portfolio.

Generally, we invest in subordinate MBS that are the first to absorb credit losses. Our income will be affected both by the change in fair value of our securities and by credit losses. Changes in both the fair value and the credit losses are caused by increased delinquency and foreclosure rates in the residential mortgage market and reductions in housing values. In general, delinquency and foreclosure rates are correlated with local area employment rates and loss severities are associated with regional housing price trends.

The future direction of unemployment, home prices and interest rates is uncertain and is expected to have a material affect on the performance of our investment portfolio. Historically, each of these macroeconomic factors has been cyclical. Unemployment has been relatively low, which has led to relatively low delinquencies and defaults on mortgage loans. A decline of economic growth or a return to recession could result in increased delinquencies and defaults. In addition, home prices have increased over the past five years at a rate above the historical long-term trend. Declining home prices could lead to increased loss severity on defaulted mortgage loans. In addition, short-term interest rates have been increasing since the middle of 2004 and this has increased our cost of funds and reduced the net interest income on our portfolio.

Our exposure to adverse macroeconomic trends is mitigated by our active credit risk management and our strategy of targeting (a) high credit score borrowers, who are less likely to default in an economic downturn, and (b) loans with low loan-to-value ratios, which are less likely to suffer losses due to declining home prices. We manage our interest rate risk via the purchase of a mixture of fixed and adjustable-rate mortgage-backed securities and interest-rate caps.

Through our COS operations we provide services to commercial banks, mortgage banks, government agencies, credit unions and insurance companies. Our services include: conduit support services including loan due diligence (credit and compliance) on a full range of mortgage products; quality control reviews of newly originated mortgage loans; operational reviews of loan origination and servicing operations; mortgage assignment services; loan collateral reviews; loan document rectification; and temporary staffing services.

Our COS revenue is driven by our ability to generate opportunities from new clients and by continuing to provide existing clients with needed services. Our business objective is to work closely with a specifically targeted group of clients so that we may tailor our services to meet their specific outsourcing and consulting needs. To that end, we have created an on-site fulfillment center in order to provide our clients with regularly scheduled pre-and post-closing loan services. Those clients that have utilized our fulfillment center have provided us with longer-term revenue streams. The market for COS services is affected by industry trends such as the volume of loan originations and the pace of consolidation in the mortgage industry.

We earn licensing and related professional fees by licensing our proprietary software applications to the financial industry. We market web-based technology solutions to meet specific needs of the mortgage industry in the secure transmission, analysis, valuation, tracking and stratification of loan portfolios. The software technology is licensed to government agencies and financial institutions that originate and/or trade financial assets. We also use the applications to provide servicing rights valuations to clients who do not license our software.

Hanover operates as a REIT and is required to pay dividends equal to at least 90% of its REIT taxable income. The current policy of our Board of Directors is to annually pay four quarterly dividends based on management’s estimate of Hanover’s GAAP income and REIT taxable income in order to pay the greater of GAAP income or 90% of REIT taxable income. Hanover’s REIT taxable income is primarily generated by its leveraged investment portfolio of Subordinate MBS and CMOs. Hanover’s per share dividend rate is determined in the first quarter of each taxable year and, in general, would be the amount expected to be paid for each of the four quarters of the taxable year. To the extent that our GAAP income exceeds this rate, a special dividend would be considered after the close of the taxable year. In all cases, the required 90% of REIT taxable income would be paid under our current policy.

Management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the use of estimates and judgments that can affect the reported amounts of assets, liabilities (including contingencies), revenues and expenses as well as related disclosures. These estimates are based on available internal and market information and appropriate valuation methodologies believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the expected useful lives and carrying values of assets and liabilities which can materially affect the determination of net income and book value per common share. Actual results may differ from these estimates.

Hanover’s assets are not generally traded on a national securities exchange or national automated quotation system and as a result prices may not be readily ascertainable. To overcome this void, Hanover uses complex cash flow modeling in determining estimated fair value. Considerable judgment is required when interpreting market data to develop estimated fair values, particularly in circumstances of deteriorating credit quality and market liquidity. Several of the assumptions used by management are confirmed by independent third parties on at least a quarterly basis. In determining fair value, future cash flows are based on estimates of prepayments, the impact of interest rate movements on yields, delinquency of the underlying loans and estimated probable losses based on historical experience and estimates of expected future performance. Assumptions are reviewed in light of market expectations and may be adjusted based on management’s experience. To the extent that management’s assumptions do not reflect market expectations, the value of the portfolio may be adversely impacted.

Revenue Recognition — Revenue from services performed under due diligence contracts in progress and long-term technology consulting contracts is recognized on an as-earned basis. To calculate the percentage of a contract earned, management must make estimates. As the majority of these revenues relate to services performed, such estimates may include the amount of time spent by individuals in relation to the aggregate amount of time required to complete the contract, the evaluation of both quantitative and qualitative criteria as agreed to and maintained in the contract and possibly regulations set forth in the contract if such contract is with an agency of the Federal government.

We recorded a net loss for the three months ended June 30, 2005 of $0.2 million, or $(0.02) per share, based on 8,410,429 diluted weighted-average common shares outstanding, compared to net income of $0.6 million, or $0.07 per share, based on 8,298,727 diluted weighted-average common shares outstanding, for the same period in 2004. We recorded net income for the six months ended June 30, 2005 of $1.2 million, or $0.14 per share, based on 8,418,666 diluted weighted-average common shares outstanding, compared to net income of $3.2 million, or $0.38 per share, based on 8,293,134 diluted weighted-average common shares outstanding, for the same period in 2004. Net income for the three and six months ended June 30, 2005 decreased $0.8 million and $2.0 million, respectively, from the same periods in 2004 primarily due to a decrease in net interest income and a decrease in gain on sale of mortgage assets.

The investment portfolio’s net interest income decreased to $1.8 million for the three months ended June 30, 2005 from $2.3 million for the three months ended June 30, 2004. This decrease is primarily attributable to a $0.3 million decrease in Net Interest Income-other related to the interest expense on trust preferred securities issued in March 2005. Other factors contributing to the decline in net interest income include a $0.2 million decrease in the net interest income of the Mortgage Loan portfolio, primarily due to lower asset balances as the result of scheduled and unscheduled principal payments. In addition, the Subordinate MBS portfolio’s net interest income decreased $0.1 million as a result of increased financing costs and lower asset yields. These decreases in net interest income are partially offset by an increase in the net interest income in the Agency MBS portfolio of $0.1 million for the three months ended June 30, 2005 compared to the same period in 2004. This increase is primarily the result of an increase in the size of the portfolio.

The investment portfolio’s net interest income decreased to $4.1 million for the six months ended June 30, 2005 from $4.6 million for the six months ended June 30, 2004. This decrease is primarily attributable to a $0.4 million decrease in Net Interest Income-other related to the interest expense on trust preferred securities issued in March 2005 and a $0.3 million decline in net interest income of the Mortgage Loan portfolio. The decline in the net interest income of the Mortgage Loan portfolio is primarily due to lower asset balances as the result of scheduled and unscheduled principal payments. The Subordinate MBS portfolio’s net interest income decreased $0.3 million as a result of increased financing costs and lower asset yields. These decreases in net interest income are partially offset by an increase in the net interest income in the Agency MBS portfolio of $0.5 million for the six months ended June 30, 2005 compared to the same period in 2004. This increase is primarily the result of an increase in the size of the portfolio.

Our Mortgage Loan portfolio net interest income declined to $0.1 million for the three months ended June 30, 2005 from $0.2 million for the same period in 2004. This decline in net interest income is primarily due to declining principal balances of our Mortgage Loan portfolio as a result of scheduled and unscheduled principal payments, which reduced the underlying mortgage loan balances. An additional contributing factor, to a lesser extent, is the rise in the interest expense related to one-month LIBOR indexed securities sold in our 1999-B securitization.

Our Mortgage Loan portfolio net interest income declined to $0.2 million for the six months ended June 30, 2005 from $0.5 million for the same period in 2004. This decline in net interest income is primarily due to declining principal balances of our Mortgage Loan portfolio as a result of scheduled and unscheduled principal payments, which reduced the underlying mortgage loan balances. An additional contributing factor, to a lesser extent, is the rise in the interest expense related to one-month LIBOR indexed securities sold in our 1999-B securitization.

The Agency MBS portfolio’s net interest income increased to $0.6 million for the three months ended June 30, 2005 from $0.4 million for the same period in 2004. The increase is primarily due to the increase in the size of the Agency MBS portfolio. The Agency MBS portfolio’s net interest income increased to $1.3 million for the six months ended June 30, 2005 from $0.8 million for the same period in 2004. The increase is primarily due to the increase in the size of the Agency MBS portfolio. We attempt to fully economically hedge our Agency MBS portfolio to potentially offset any gains or losses in our portfolio with losses or gains from our forward sales of like-kind Agency MBS.

For the six months ended June 30, 2005, revenues generated by technology services were $1.5 million as compared to $0.6 million for the same period in 2004. The increase in technology services for the six months ended June 30, 2005 is attributed mainly to an increase in license fees from deployment of our technology to a large mortgage banker in June 2005 and recurring monthly revenue for technology deployed at the end of 2004.

For the three and six months ended June 30, 2005, revenues generated from loan brokering and advisory services were $0.3 million and $0.8 million, respectively, as compared to $0.9 million and $1.4 million, respectively, for the same periods in 2004. The decrease in loan brokering and advisory services for the three and six months ended June 30, 2005 is attributed mainly to loan sale marketing efforts that did not result in closed transactions.

Hanover’s primary risk in its investment portfolio is credit risk on the loans that underlie the Subordinate MBS portfolio. These loans are all prime residential loans. As of June 30, 2005, the total portfolio of loans underlying the Subordinate MBS portfolio consisted of 32,312 loans with a total principal balance of $15.9 billion. Total losses for the quarter ended June 30, 2005 on our portfolio were negligible. As of June 30, 2005, loans 90 or more days past due were negligible.

We expect to meet our future short-term and longer-term liquidity requirements generally from our existing working capital, cash flow provided by operations, repurchase agreements and other possible sources of longer-term financing. We consider our ability to generate cash to be adequate to meet operating requirements both in the short-term and the longer-term. However, we have exposure to market-driven liquidity events due to our use of short-term financing. If a significant decline in the market value of our investment portfolio should occur, our available liquidity from existing sources and ability to access additional sources of credit could be reduced. As a result of such a reduction in liquidity, we may be forced to sell certain investments. If required, these sales could be made at prices lower than the carrying value of such assets, which could result in losses. As of June 30, 2005, we had $120 million of committed repurchase lines of credit from two lenders of which $19.2 million was utilized. In addition, as of June 30, 2005, we had $127.5 million of uncommitted lines of credit. We may seek to establish additional committed and uncommitted lines of credit in the future. We cannot assure that we will be successful in obtaining such additional financing on favorable terms, if at all.

We have significant cash flow variability due to our investment activities in various balance sheet categories. Our primary non-discretionary cash uses are our operating costs, pay-down of CMO debt and dividend payments. Our repayment of CMO debt amounted to $22.1 million for the six months ended June 30, 2005 as compared to $9.9 million for the same period in 2004. The repayment of the CMO debt was primarily funded by the sale of the CMO collateral to Hanover. Our principal payments received on our CMO collateral were $4.7 million for the six months ended June 30, 2005 as compared to $10.2 million for the same period in 2004. Our dividend payments are generally covered by our net income.

Our cash and cash equivalents as of June 30, 2005 increased by $18.6 million from the balances as of December 31, 2004 primarily as a result of the closing on March 15, 2005 of a private placement of $20 million of trust preferred securities through Hanover Statutory Trust I, which we refer to as the “Trust”, a statutory trust formed by us for that purpose. In connection with the private placement, the Trust used the proceeds from the offering and other cash to purchase $20,619,000 of our junior subordinated notes due 2035.

We have no current commitments for any material capital expenditures. We primarily invest our available capital in our investment portfolio. We have invested a limited amount of our capital in the development of our software products, but have no future commitments to invest further in this area. As a REIT, we are required to pay dividends equal to 90% of our taxable income and therefore must depend on raising new sources of capital for growth.

We believe the principal risk to our investment strategy is the credit performance of the domestic residential mortgage market. We employ a combination of pre-purchase due diligence, ongoing surveillance, internal and third party risk analysis models and a pro-active disposition strategy to manage credit risk. Additionally, we continually assess exogenous economic factors including housing prices and unemployment trends, on both national and regional levels. For the three and six months ended June 30, 2005, we experienced nominal credit losses of approximately $8,600 on our investments. However, there can be no guarantee that our favorable historical experience is predictive of future credit trends or actual results.

Increased credit risk manifests itself through a combination of increasing mortgage loan delinquencies and decreasing housing prices. Over the past several years, the domestic residential housing market has experienced rapid and sustained housing price gains. Should housing prices decline, we believe our investments would be subject to increased risk of credit losses. Also, over the past several years mortgage loan delinquencies have been at historically low levels and a rise in delinquency rates would increase our risk of credit losses.

Additionally, mortgage lenders increasingly have been originating and securitizing new loan types such as interest-only, negative amortization and payment option loans. The lack of historical data on these loan types increases the uncertainty with respect to investments in these mortgages. The increased percentage of adjustable-rate, as opposed to fixed-rate, mortgage loans may have increased the credit risk profile of the residential mortgage market.

We have leveraged credit risk in our Mortgage Loan portfolio because we finance our assets with a combination of a one-year committed repurchase facility and CMO debt. As with our Subordinate MBS portfolio, pre-purchase due diligence and ongoing surveillance is performed. To the extent the individual mortgage loans are in a CMO, we are not able to selectively sell these mortgage loans. A loan loss allowance has been established for our Mortgage Loan portfolio and is reviewed on a monthly basis.

We have leveraged credit risk in our Subordinate MBS portfolio through investments in the non-investment grade classes of securities, which are collateralized by high-quality, jumbo residential mortgage loans. These classes are the first to be impacted by losses on the underlying mortgage loans as their par values are written down by losses before higher-rated classes. Effectively, we are the guarantor of the higher-rated bonds, to the extent of the carrying value on the Subordinate MBS portfolio. On occasion, we will purchase subordinate bonds without owning the corresponding lower-rated class(es).

We manage credit risk through detailed investment analysis both before purchasing subordinate securities and on an ongoing basis. Before subordinate securities are purchased we analyze the collateral using both internally developed and third party analytics, review deal structures and issuance documentation, review the servicer for acceptability and verify that the bonds are modeled on a widely used valuation system. Updated loan level collateral files are received on a monthly basis and are analyzed for favorable and unfavorable credit performance and trends. Bonds that do not meet our credit criteria may be sold via an arms-length competitive bidding process.

In the 1999-B CMO, the Mortgage Loans were match funded on a maturity basis with one-month LIBOR indexed floating rate CMO debt where we retained only the subordinate certificates. The Mortgage Loans for 1999-B are a mixture of both fixed-rate and adjustable-rate loans with the subordinate certificates receiving the difference between the net coupon on the loans and the CMO debt coupon rate, known as spread. To protect the spread we own a cap on one-month LIBOR with a strike rate of 5% and maturity date of October 2006. The notional amount of the cap is $23.5 million until October 2005 and $20 million until October 2006.

Our Subordinate MBS portfolio is funded with Repurchase Agreements that re-price monthly at a rate equal to one-month LIBOR plus an interest rate margin. Therefore, to the extent that a subordinate security is not also re-pricing on a monthly basis to one-month LIBOR there is the potential for variability in our net interest income. To manage this re-pricing risk, as of June 30, 2005, approximately 30% of our Subordinate MBS portfolio was invested in bonds with coupons that reset monthly at a rate equal to one-month LIBOR plus an interest rate margin.

The market values of our investments are determined by a combination of interest rates, credit spreads and asset specific performance attributes, such as delinquencies. In general, increases in interest rates, widening credit spreads and deteriorating credit spreads will cause the value of the assets to decline. Changes in the market value of assets have two specific negative effects: increased financing margin requirements and, depending on an asset’s classification, a charge to income or to accumulated other comprehensive income. Another direct negative effect of changes in market value is that lenders may require additional margin under the terms of our Repurchase Agreements. This risk is managed by our liquidity reserve policy that is based upon an analysis of interest rate and credit spread volatility. We maintain liquidity under our liquidity policy to enable us to meet increased margin requirements if the value of our assets decline.

Mortgage Loans that are designated as held for sale on our Consolidated Balance Sheets 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 CMO collateral are reported at amortized cost, net of allowance for loan losses. Therefore, only changes in market value that are deemed permanent impairments would be charged to income. Determination of market value is established by third party market prices.

Securities in our Subordinate MBS portfolio are classified as available for sale and, therefore, changes in the market value are charged to accumulated other comprehensive income on our Consolidated Balance Sheets unless deemed other than temporary in which case the changes would be charged to income. Determination of market value is established by taking the lower of third party market prices and internally generated mark to market prices.

Prepayments have a direct effect on the amortization of purchase discounts/premiums and the market value of assets. In general, in a mortgage portfolio, as interest rates increase prepayments will decline and as interest rates decrease prepayments will increase. The change in prepayment speed has a direct impact on the value of the mortgage asset. In general, assets owned at a discount will increase in value as prepayment speeds increase and the investor will be repaid sooner. Assets will decline in value as prepayment speeds decrease and the investor will have to wait longer for repayment. Assets owned at a premium will, in general, act in the opposite direction gaining value as prepayment speeds decrease and losing value as prepayment speeds increase.

In general, our Subordinate MBS portfolio benefits from prepayment speeds that are greater than anticipated. Because prepayment principal is generally allocated to bonds senior to the Subordinate MBS, our Subordinate MBS grow as a percentage of the collateral pool, known as credit deleverage, thereby increasing their market value. Also, for adjustable rate securities the timing of the release of prepayment principal is affected by the rate of prepayments and slower prepayment may significantly affect market value.

(a) As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic SEC filings.

On August 3, 2005, HT entered into an Office Lease Agreement (the “HT Lease”) with Metroplex Associates, pursuant to which HT will lease approximately 10,000 square feet of office space located at 200 Metroplex Drive, Edison, New Jersey. The HT Lease has a five year term commencing October 1, 2005 with a base annual rent for the first and second years of $177,744 and a base annual rent of $182,810 for the remaining three years. As additional rent, HT will also pay its share of certain electricity, taxes and operating expenses, which amounts are subject to increases over the 2005 base year expenses. The HT Lease may be extended at HT’s option for up to an additional five years at then-prevailing market

On August 3, 2005, HCP entered into the Sixth Modification of Lease Agreement with Metroplex Associates, which amended and modified the HCP Lease, pursuant to which HCP will lease approximately 16,000 square feet of office space located at 200 Metroplex Drive, Edison, New Jersey. This space is adjacent to the office space leased by HT under the HT Lease. As modified, the HCP Lease has a five year term commencing October 1, 2005 and will terminate HCP’s current lease arrangement with Metroplex Associates for office space at 100 Metroplex Drive, Edison, New Jersey, which was due to expire in October 2008. The HCP Lease has a base annual rent for the first and second years of $278,430 and a base annual rent of $286,363 for the remaining three years. As additional rent, HCP will also pay its share of certain electricity, taxes and operating expenses, which amounts are subject to increases over the 2005 base year expenses. The HCP Lease may be extended at HCP’s option for up to an additional five years at then-prevailing market rates. The office space will serve as HCP’s new corporate headquarters.

48 EX-10.13.5 2 b55558hcexv10w13w5.txt EX-10.13.5 SIXTH MODIFICATION OF LEASE AGREEMENT SIXTH MODIFICATION OF LEASE AGREEMENT This Sixth Modification of Lease Agreement ("Agreement"), made this 3rd day of August, 2005, by and between METROPLEX ASSOCIATES, a New Jersey partnership, having an address c/o of Atlantic Realty Development Corporation., 90 Woodbridge Center Drive, Woodbridge, New Jersey 07095 (the "Landlord"), and HANOVER CAPITAL PARTNERS, LTD. (formerly, Hanover Capital Mortgage Corporation), a New York corporation, having an address at Metroplex Corporate Center I, 100 Metroplex Drive, Edison, New Jersey 08817 (the "Tenant"). W I T N E S S E T H: WHEREAS, by lease dated March 9, 1994 (the "Original Lease"), Landlord leased to Tenant and Tenant hired from Landlord certain premises (the "Original Space") having a gross rentable area of approximately 5,834 square feet constituting a portion of the third floor of the building (the "Building") known as Metroplex Corporate Center I, 100 Metroplex Drive, Edison, New Jersey 08817; and WHEREAS, by document entitled "First Modification and Extension of Lease Agreement", dated February 28, 1997 (the "First Modification"), the term of the Lease was extended until 6:00 p.m. on June 30, 2002; and WHEREAS, by document entitled "Second Modification and Extension of Lease Agreement", dated April 22, 2002 (the "Second Modification"), the term of the Lease was extended until 6:00 p.m. on April 30, 2005; and WHEREAS, by document entitled "Third Modification of Lease Agreement", dated May 8, 2002 (the "Third Modification"), Landlord leased to Tenant certain additional space having a gross rentable area of approximately 777 square feet located on the third floor of the Building (the "Second Space"); and WHEREAS, by document entitled "Fourth Modification of Lease Agreement", dated November, 2002 (the "Fourth Modification"), Tenant surrendered to Landlord the Second Space and Landlord leased to Tenant certain additional space having a gross rentable area of approximately 3,890 square feet located on the second floor of the Building (the "Third Space"); and WHEREAS, by a letter agreement (the "Letter Agreement"), dated July 31, 2003 (the "Letter Agreement"), Landlord leased to Tenant certain additional space having a gross rentable area of approximately 777 square feet located on the third floor of the Building (the "Fourth Space"); and WHEREAS, by document entitled "Fifth Modification of Lease Agreement", dated October 9, 2003 (the "Fifth Modification"), Tenant surrendered to Landlord the Original Space, the Third Space and the Fourth Space and Landlord leased to Tenant certain additional space having a gross rentable area of approximately 12, 267 square feet located on the first floor of the Building (the "Fifth Space"); and WHEREAS, the Fifth Space is herein collectively referred to as the "Premises"; and WHEREAS, the Original Lease, the First Modification, the Second Modification, the Third Modification, the Fourth Modification, the Letter Agreement and the Fifth Modification are herein collectively referred to as the "Lease"; and WHEREAS, Landlord and Tenant desire to further modify the Lease as hereinafter provided; NOW, THEREFORE, for and in consideration of the above premises, the mutual covenants hereinafter contained, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant hereby agree as follows: -1- 1. Premises. Upon the Replacement Space Commencement Date (as said term is hereinafter defined), the definition and description of the Premises in the Lease shall be modified and amended (i) to delete the Fifth Space (collectively, the "Surrendered Space"), and (ii) to include certain additional premises having a gross rentable area of approximately 15,865 square feet (the "Replacement Space") constituting a portion of the first floor of the building located at 200 Metroplex Drive, Edison, New Jersey (the "200 Building"), which Replacement Space is more particularly described on Exhibit A annexed hereto. As a result of the foregoing, the definition and description of the Premises in the Lease, shall, as of the Replacement Space Commencement Date, refer to the Replacement Space described herein. From and after the Replacement Space Commencement Date, all references to the Building in the Lease shall refer to the 200 Building. 2. Term. (a) The term for the Replacement Space shall commence on the later of: (1) October 1, 2005, or (ii) the date Landlord delivers possession of the Replacement Space to Tenant with the Replacement Space Work (as said term is hereinafter defined), exclusive of so-called "punchlist" items, substantially completed (the "Replacement Space Commencement Date"). The Replacement Space Work shall be deemed substantially completed at such time as the only items of Replacement Space Work to be completed are those which will not substantially interfere with Tenant's use and occupancy of the Replacement Space. Notwithstanding the foregoing, should Landlord be delayed in delivering possession of the Replacement Space to Tenant, or in substantially completing the Replacement Space Work, by reason of Tenant's delay, lack of cooperation, request for changes in the Replacement Space Work, or the performance of work by anyone employed or engaged by Tenant, or by reason of any other act or omission of Tenant, the Replacement Space Commencement Date shall be the date which is the earlier of (i) the date when Landlord delivers possession of the Replacement Space to Tenant with the Replacement Space Work, exclusive of so-called "punchlist" items, substantially completed as hereinabove provided, or (ii) the date when Landlord would have delivered possession of the Replacement Space to Tenant with the Replacement Space Work, exclusive of so-called "punchlist" items, substantially completed but for the occurrence of any Tenant delay referred to above. The term for the Replacement Space shall expire (the "Replacement Space Termination Date") at 6:00 p.m. five Lease Years (as such term is hereinafter defined) from the Replacement Space Commencement Date. The first Lease Year shall be the period commencing on the Replacement Space Commencement Date and ending twelve (12) calendar months thereafter, provided, however, that if the Replacement Space Commencement Date is not the first day of a calendar month, the first Lease Year shall commence on the Replacement Space Commencement Date and end twelve (12) calendar months from the last day of the month in which the Commencement Date occurs. Each succeeding twelve (12) calendar month period thereafter shall be a Lease Year. (b) On the Replacement Space Commencement Date, the Lease shall be terminated with respect to the Surrendered Space. All Fixed Rent, additional rent and other charges required to be paid by Tenant with respect to the Surrendered Space shall be paid and all of Tenant's other obligations under the Lease with respect to the Surrendered Space shall be performed, up to and including the Replacement Space Commencement Date. Tenant shall, on or before the Replacement Space Commencement Date, surrender the Surrendered Space to Landlord in the condition in which the Premises are required to be surrendered by Tenant in accordance with the provisions of the Lease. Failure of Tenant to comply with its obligations pursuant to this Section 2(b) shall constitute a default by Tenant under the Lease. In addition, in the event Tenant fails to surrender the Surrendered Space to Landlord as aforesaid on or before the Replacement Space Commencement Date, in addition to any damages to which Landlord may be entitled or other remedies Landlord may have by law, Tenant shall pay to Landlord a rental for the period it remains in possession of the Surrendered Space after the Replacement Space Commencement Date, at the rate of (i) twice the Fixed Rent then being paid by Tenant allocable to the Surrendered Space, plus (ii) all items of additional rent and other charges then being paid by Tenant allocable to the Surrendered Space. Nothing herein contained shall be deemed to give Tenant any right to remain in possession of the Surrendered Space after the Replacement Space Commencement Date. Landlord shall not be required to deliver possession of the Replacement Space to Tenant unless and until Tenant has complied with its obligations pursuant to this Section 2(b); however, in no event will the Replacement Space Commencement Date be delayed as a result thereof. -2- (c) Any option set forth in the Lease to renew or extend the term of the Lease is hereby declared null and void and of no further force or effect. Tenant shall have, and is hereby granted, one (1) additional option to further renew and extend the term of the Lease from the date upon which it would otherwise expire, for one (1) additional extension term which shall be for a period of five (5) years (the "Additional Extension Term"). The Additional Extension Term shall follow consecutively upon the Replacement Space Termination Date as hereinabove provided and such Additional Extension Term shall, upon commencement thereof, be deemed included in references to "the term of this Lease" and "the full term of this Lease". Tenant's option with respect to the Additional Extension Term shall be exercised by Tenant giving written notice to Landlord of Tenant's exercise of same not later than nine (9) months prior to the Replacement Space Termination Date. Time is of the essence with respect to such notice, and failure of Tenant to give such notice on or before such date shall constitute a binding and conclusive waiver of Tenant's option with respect to the Additional Extension Term. The option to renew and extend the term of the Lease as hereinabove provided shall not be deemed validly exercised unless Tenant shall not be in default at the time of either the exercise of such renewal option or the commencement of the Additional Extension Term. If Tenant elects to exercise said renewal option, the full term of the Lease shall be automatically extended for the Additional Extension Term without the need for the execution of an extension or renewal lease. The Additional Extension Term shall be on all of the same terms and conditions as are in effect hereunder immediately preceding the commencement date of the Additional Extension Term, except that the Fixed Rent during the Additional Extension Term shall be as provided in Section 3(c) hereinbelow. All provisions for the payment of additional rent shall continue to apply without limitation. Tenant shall have no further right or option to renew the term of the Lease after the expiration of the Additional Extension Term. 3. Fixed Rent. (a) Commencing on the Replacement Space Commencement Date and continuing through the Replacement Space Termination Date, Tenant shall pay to Landlord Fixed Rent for the Replacement Space in an amount equal to: (i) for Lease Months (defined as 1/12th of a Lease Year) 1-24, the product of the gross rentable area of the Replacement Space multiplied by $17.55 per square foot (i.e. 15,865 square feet x $17.55 = $278,430.75 per annum/$23,202.56 per month) and (ii) for Lease Months 25-60, the product of the gross rentable area of the Replacement Space multiplied by $18.05 per square foot (i.e. 15,865 square feet x $18.05 = $286,363.25 per annum/$23,863.60 per month). One full monthly installment of Fixed Rent shall be due and payable upon execution of this Agreement by Tenant. (b) Fixed Rent shall be payable in equal monthly installments, as aforesaid, in advance on the first day of each and every calendar month of the term of the Lease in lawful money of the United States of America in the office of Landlord or at such other place as may hereafter be designated by Landlord. Fixed Rent shall be paid to Landlord without notice or demand and without deduction, setoff or other charge therefrom or against the same. (c) If Tenant validly exercises its option to extend the term of the Lease for the Additional Extension Term, as provided in Section 2(c) hereinabove, the Fixed Rent payable by Tenant to Landlord for the Additional Extension Term shall be the "Fair Market Rental Value" of the Premises for such Additional Extension term determined as follows: Within ten (10) days after receipt by Landlord of Tenant's notice exercising its option to renew and extend the term of the Lease for the Additional Extension Term, Landlord shall notify Tenant of Landlord's determination of the Fair Market Rental Value of the Premises for the Additional Extension Term. Said Fair Market Rental Value may be different for each lease year during the Additional Extension Term. Within ten (10) days after receipt of Landlord's notice, time being of the essence with respect thereto, Tenant shall advise Landlord that (a) it accepts Landlord's determination of the Fair Market Rental Value of the Premises, or (b) it rejects Landlord's determination of the Fair Market Rental Value of the Premises. If Tenant fails to advise Landlord within said ten (10) day period, Tenant shall be deemed to have accepted the Fair Market Rental Value determined by Landlord. If Tenant rejects Landlord's determination of the Fair Market Rental Value of the Premises, Tenant shall, at its cost and expense, engage the services of an independent real estate appraiser, having an MAI designation, with knowledge and experience of rental values of -3- similar properties in the area to perform an appraisal to determine the Fair Market Rental Value of the Premises for the Additional Extension Term. Such appraiser shall render his or her appraisal report to Landlord and Tenant not later than thirty (30) days after the date of Tenant's notice to Landlord rejecting Landlord's determination of the Fair Market Rental Value of the Premises. If such appraiser shall fail to render such report within such thirty (30) day period (time being of the essence), Tenant's rejection of Landlord's determination of the Fair Market Rental Value of the Premises shall conclusively be deemed to have been waived and the rental for the Additional Extension Term shall be as originally determined by Landlord. If the appraiser shall render his or her report within such thirty (30) day period and the Fair Market Rental Value so determined shall not be acceptable to Landlord, Landlord shall have the right, at its cost and expense, to engage the services of an appraiser, having similar qualifications as those set forth above, to determine the Fair Market Rental Value of the Premises for the Additional Extension Term. In the event that Landlord's appraiser shall determine a Fair Market Rental Value which shall not differ by more than ten (10%) percent from the Fair Market Rental Value determined by Tenant's appraiser, the Fair Market Rental Value of the Premises shall be deemed to be the average of the Fair Market Rental Value determinations made by Landlord's appraiser and Tenant's appraiser. If Landlord's appraiser shall determine a Fair Market Rental Value which shall differ more than ten (10%) percent from the Fair Market Rental Value determined by Tenant's appraiser, then the two appraisers shall select a third appraiser, having similar qualifications as those set forth above, and Landlord and Tenant shall engage the services of such third appraiser to perform an appraisal to determine the Fair Market Rental Value of the Premises, with Landlord and Tenant each to pay one-half of the cost of such third appraiser. The appraiser for Landlord and the appraiser for Tenant shall select such third appraiser within ten (10) days after Landlord notifies Tenant that such third appraiser is required. Such third appraiser shall be instructed to render an appraisal report to Landlord and Tenant not later than thirty days (30) after the date of his or her engagement. The Fair Market Rental Value of the Premises for the Additional Extension Term shall be the Fair Market Rental Value determination of the appraiser selected by Landlord or Tenant whose determination is closer to the determination of the third appraiser. The Fair Market Rental Value of the Premises, as agreed upon by the parties or as determined as hereinabove provided, shall be final and binding upon both Landlord and Tenant. Notwithstanding anything to the contrary contained herein, in no event shall the Fixed Rent for any lease year during the Additional Extension Term be less than the Fixed Rent for the immediately preceding lease year. (d) All provisions for the payment of additional rent set forth in the Lease, including, without limitation, all provisions pertaining to the payment of Tenant's Proportionate Share of Operating Costs and taxes (as said terms are defined in Article 18 of the Lease) shall continue to apply with modification except as set forth herein. 4. Proportionate Share. The Lease is amended to provide that effective as of the Replacement Space Commencement Date, provided that Tenant has vacated the Surrendered Space in accordance with the terms hereof, Tenant's Proportionate Share, as defined in Article 3 of the Original Lease, shall be 12.61% for the Replacement Space. 5. Insurance. The Lease is supplemented to provide that Tenant shall, at its cost and expense, procure all policies of insurance for the purpose of insuring the Replacement Space in accordance with the terms set forth in Article 4 of the Original Lease. Policies of such insurance, or certificates thereof, together with reasonable evidence of premium payment therefor, shall be delivered to Landlord upon execution of this Agreement. 6. Additional Rent. (a) Commencing on the Replacement Space Commencement Date, the Base Year, as defined in Article 18 of the Lease, shall be changed to the calendar year 2005. (b) Commencing on the Replacement Space Commencement Date, Article 18, Section 1 of the Lease shall be deleted and the following shall be substituted therefor: "Section 1. It is expressly agreed that commencing as of January 1, 2006, Tenant shall pay, in addition to the Fixed Rent, and as additional rent hereunder, in each calendar year -4- within the term hereof, its Proportionate Share of all "Operating Costs" and "taxes" (as said terms are hereinafter defined) of the Building and the Lot which shall exceed those applicable to the "Base Year". For the purposes of this Lease, the term "Base Year" shall mean the calendar year 2005." (c) Commencing on the Replacement Space Commencement Date, Article 18, Section 4 of the Lease shall be deleted and the following shall be substituted therefor: "Section 4. Commencing on January 1, 2006 and continuing for and during each calendar year of the term of this Lease Agreement, Tenant agrees to pay to Landlord, at Landlord's option and at the same time as each monthly payment of Fixed Rent and in addition thereto, an amount equal to one twelfth (1/12th ) of Tenant's Proportionate Share of the increase in the Operating Costs and taxes applicable to the current calendar year based upon the amount by which the prior calendar year is in excess of the Base Year. Said sum shall be held by Landlord and shall be employed in connection with the payment of such Operating Costs and taxes as the same become due and payable. Tenant further agrees to make such further payments in such amounts and at such times as Landlord may reasonably require to account for any deficiency in the reserve funds held by Landlord so as to enable Landlord to satisfy the increase in the Operating Costs and taxes for the particular calendar year in full, which sums Tenant shall furnish Landlord as additional rent hereunder. Notwithstanding the foregoing provisions, if at any time Landlord incurs such costs at a higher rate Landlord shall have the right to bill Tenant for its Proportionate Share of said excess and to continue to collect same in advance on a monthly basis as above provided. Within six (6) months after the end of each calendar year during the term hereof, Landlord shall deliver to Tenant a reasonably detailed statement (the "End of Year Statement") setting forth the actual Operating Costs and taxes for such calendar year. Landlord shall keep all its books and records upon which the End of Year Statement is based, and make all calculations in connection therewith, in accordance with generally accepted accounting principles consistently applied. If Tenant has paid less than the actual amount due, Tenant shall pay the difference to Landlord within thirty (30) days after Tenant's receipt of the End of Year Statement. Any amount paid by Tenant which exceeds the amount due shall be credited against the next succeeding estimated payments due hereunder, unless the term hereof has then expired, in which event the excess amount shall be refunded to Tenant at the time of delivery of the End of Year Statement. If the Expiration Date is prior to the last day of a calendar year, Tenant's obligations pursuant to this Section 4 shall be apportioned so that Tenant shall only pay such portion of Operating Costs and taxes attributable to such calendar year occurring during the term of this Lease. " (d) The Lease is hereby supplemented to provide that notwithstanding anything to the contrary contained in the Lease, in the event that any tenant of the Building is separately billed for any item of Operating Costs, the amount billed to such tenant shall not be included in the term Operating Costs and the gross rentable floor area of such tenant's leased premises shall be excluded for the purposes of determining Tenant's Proportionate Share with respect thereto. (e) Commencing on the Replacement Space Commencement Date, Article 18 of the Lease shall be amended by adding the following as Section 5: Section 5. Without limiting any of Tenant's obligations pursuant to this Article 18, Tenant shall have the right, at its cost and expense, to audit the Operating Costs for the immediately preceding calendar year only, in order to verify the accuracy of any expense which was charged to Tenant as additional rent hereunder provided that: (a) Tenant shall notify Landlord of its election to audit the Operating Costs and taxes within thirty (30) days following Tenant's receipt of the End of Year Statement; (b) such audit shall be conducted only during the hours of 10 A.M. to 4 P.M. on Monday through Friday on the 10th through the 25th day of the month; (c) such audit shall be conducted at the office where Landlord maintains Operating Costs expense records and only after Tenant gives Landlord at least thirty (30) days' prior written notice; -5- (d) Tenant shall deliver to Landlord a copy of the results of such audit within ninety (90) days following Tenant's receipt of the End of Year Statement; (e) no such audit shall be conducted if any other tenant has conducted an audit for the time period Tenant intends to audit and Landlord furnishes to Tenant a copy of the result of such audit; (f) such audit shall only be conducted by a certified public accountant not compensated on a contingent fee basis; (g) no audit shall be conducted at any time that Tenant is in default of any of the terms of this Lease; (h) no subtenant shall have any right to conduct an audit; (i) no assignee shall conduct an audit for any period during which such assignee was not in possession of the Premises; and (j) Tenant shall keep the results of such audit strictly confidential and shall not disclose the same to any other tenant of the Building. In the event that Tenant's audit alleges that an error was made by Landlord, Landlord shall have ninety (90) days following receipt of the results of such audit to obtain an audit from an accountant of Landlord's choice, at Landlord's cost and expense, or Landlord shall be deemed to have accepted the results of Tenant's audit. In the event that Landlord's and Tenant's accountants shall be unable to reconcile the results, both accountants shall mutually agree upon a third accountant whose determination shall be conclusive. The cost of any such third accountant shall be shared equally between Landlord and Tenant. If it is determined that Tenant has paid less than the actual amount due, Tenant shall pay the difference to Landlord within thirty (30) days after the date of such determination. If it is determined that Tenant has paid any amount in excess of the amount due, such excess amount shall be refunded to Tenant within thirty (30) days after the date of such determination. 7. Electric Charges. The Lease is supplemented to provide that from and after the Replacement Space Commencement Date, Tenant shall pay, as additional rent, all charges for electricity, light, heat or other utility used by Tenant at the Replacement Space. If electric energy consumed in the Replacement Space is not separately metered, either by the utility company or by Landlord, and billed to Tenant, Tenant shall pay Landlord for such electric energy the sum of $19,831.25 per annum (i.e., $1.25 per square foot of gross rentable area of the Replacement Space) in equal monthly installments of $1,652.60 each on the first day of each month during the term of the Lease commencing on the Replacement Space Commencement Date. Such sum of $19,831.25 shall be subject to increase in accordance with increases in electric charges payable by Landlord. In addition, either Landlord or Tenant may, at any time, at its sole cost and expense, engage an electrical consultant, approved by Landlord, to make a survey of the electric energy demand in the Replacement Space and to determine the average monthly electric consumption in the Replacement Space. The findings of said consultant as to the average monthly electric consumption of Tenant shall be deemed conclusive and binding upon the parties. From and after said consultant has submitted its report, Tenant shall pay to Landlord, as additional rent, on the first day of each month during the balance of the term of the Lease (or until another such survey is performed or a separate electric meter is installed for the Replacement Space), in advance, the amount set forth in the survey as the monthly electric consumption. 8. Brokerage Commission. Tenant warrants and represents that it has not dealt or negotiated with any real estate broker or salesman in connection with this Agreement other than Newmark Real Estate of New Jersey, L.L.C. (the "Broker") or representatives thereof. Tenant shall and hereby does indemnify and hold Landlord harmless from and against any real estate commissions, fees, charges or the like, or claims therefor, including any and all costs incurred in -6- connection therewith, arising out of the within transaction payable to any party other than the Broker except to the extent any such claim or commission is based solely upon Landlord's acts. Landlord shall pay any commission due to the Broker pursuant to a separate agreement, less any prepaid commission for the unexpired term of the Surrendered Space. 9. Condition of Premises/Replacement Space Work. (a) Landlord shall, at its sole cost and expense, promptly following execution of this Agreement, prepare the Replacement Space for Tenant's occupancy in accordance with Plan SP1-3 created by dbi (the "dbi Plan") attached hereto as Exhibit B (the "Replacement Space Work"). Landlord shall pay all costs and expenses of dbi for space planning and shall obtain, at Landlord's cost, any building permits necessary for the Replacement Space Work. Tenant shall have the right to submit a written "punch list" to Landlord, setting forth any defective item of construction, and Landlord shall promptly cause such items to be corrected. The Replacement Space Work shall not include the installation of Tenant's furniture, including Tenant's systems furniture, fixtures, equipment and telephone and data cabling, all of which shall be installed by Tenant at Tenant's sole cost and expense. Except for the Replacement Space Work, it is expressly understood and agreed to by and between the parties hereto that the Replacement Space is being leased by Landlord to Tenant, and shall be delivered to Tenant in its present condition "as is", and Landlord shall not be obligated to perform any additional work of any type or nature whatsoever in connection with this Agreement. (b) Tenant shall have no obligation to remove or restore the Replacement Space Work except that Tenant, at its sole cost and expense, shall, upon the expiration or sooner termination of this Lease, remove all voice, data and computer wires and cabling from the Premises and the Building and shall repair any damage caused by such removal. 10. Security Deposit. Pursuant to Article 39 of the Lease, Tenant has deposited with Landlord the sum of $6,500 as and for a security deposit. Upon Tenant's execution of this Agreement, Tenant shall pay to Landlord the sum of $16,702.56 as additional security. Upon such payment, Tenant's total security deposit shall be in the amount of $23,202.56 which shall be held by Landlord in accordance with Article 39 of the Lease. 11. Article 16 of the Lease is hereby amended by adding the following thereto as Section 10: Section 10. Notwithstanding anything to the contrary contained herein, (i) a default by Tenant beyond any applicable cure period of any of the terms and conditions set forth in this Lease, shall also constitute a default under that certain lease between Landlord and HanoverTrade, Inc. for other premises within the Building; and (ii) a default by HanoverTrade, Inc. beyond any applicable cure period of any of the terms and conditions set forth in its lease with Landlord for other premises within the Building, shall also constitute a default under this Lease. 12. No Default. Tenant represents, warrants and covenants that Landlord is not currently in default under any of its obligations under the Lease and Tenant is not in default under any of its obligations under the Lease and no event has occurred which, with the passage of time or the giving of notice, or both, would constitute a default by either Landlord or Tenant under the Lease. 13. Defined Terms. The terms used in this Agreement and not defined herein shall have the respective meanings indicated in the Lease, unless the context requires otherwise. 14. No Other Changes. The intent of this Agreement is only to modify and amend those provisions of the Lease as herein specified. Except as herein specifically modified, changed and amended, all of the terms and conditions of the Lease shall remain in full force and effect. -7- IN WITNESS WHEREOF, the parties hereto have duly executed this Fifth Modification of Lease Agreement as of the day and year first above written. WITNESS: METROPLEX ASSOCIATES (Landlord) _______________________ By:/s/ David Halpern --------------------------------- David Halpern, Partner ATTEST: HANOVER CAPITAL PARTNERS, LTD. (Tenant) /s/ Pavl B. Pedrotti By: /s/ Joyce Mizerak - ----------------------- --------------------------------- Joyce Mizerak, President -8- EXHIBIT A REPLACEMENT SPACE -9- EXHIBIT B THE DBI PLAN -10- EX-10.17 3 b55558hcexv10w17.txt EX-10.17 OFFICE LEASE AGREEMENT DATED AUGUST 3, 2005 EXHIBIT 10.17 O F F I C E L E A S E A G R E E M E N T BY AND BETWEEN: METROPLEX ASSOCIATES, a New Jersey partnership, as "Landlord" -and- HanoverTrade, INC. a Maryland corporation, as "Tenant" PREMISES: Metroplex Corporate Center II 200 Metroplex Drive Township of Edison Middlesex County, New Jersey 08817 DATED: August 3, 2005 PREPARED BY: RICHARD C. STEWART, ESQ. TABLE OF CONTENTS

2 ARTICLE 28 UNAVOIDABLE DELAYS ARTICLE 29 SUBORDINATION ARTICLE 30 SIGNS ARTICLE 31 NOTICES OF DEFAULT ARTICLE 32 USE ARTICLE 33 LANDLORD'S RIGHT TO MODIFY ARTICLE 34 LATE CHARGES ARTICLE 35 LANDLORD'S RULES AND REGULATIONS ARTICLE 36 CONDITION OF PREMISES ARTICLE 37 ENVIRONMENTAL LAWS ARTICLE 38 INITIAL LEASEHOLD IMPROVEMENTS ARTICLE 39 SECURITY DEPOSIT ARTICLE 40 INTENTIONALLY DELETED ARTICLE 41 HOLDING OVER ARTICLE 42 AUTHORITY OF LEASE SIGNATORIES ARTICLE 43 RIGHT OF FIRST NOTIFICATION ARTICLE 44 MISCELLANEOUS EXHIBIT A DIAGRAM OF PREMISES EXHIBIT B BUILDING RULES AND REGULATIONS EXHIBIT C HVAC PERFORMANCE STANDARDS EXHIBIT D CLEANING MAINTENANCE SERVICES EXHIBIT E HOLIDAY SCHEDULE EXHIBIT F THE dbi PLAN

3 LEASE SUMMARY Any reference in this Lease to the following subjects shall incorporate the data below stated. LANDLORD: METROPLEX ASSOCIATES, a New Jersey partnership LANDLORD'S ADDRESS: c/o Atlantic Realty Development Corporation 90 Woodbridge Center Drive Woodbridge, New Jersey 07095 TENANT: HanoverTrade, Inc., a Maryland corporation TENANT'S ADDRESS: 379 Thornall Street Edison, New Jersey 08837 PREMISES: A portion of the 1st floor of the Building known as Metroplex Corporate Center II GROSS RENTABLE AREA OF PREMISES: 10,128 square feet, subject to final measurement LEASE TERM: Five (5) "lease years" (as defined in Article 1) OPTION TO RENEW: One (1) five (5) year option to renew ANNUAL BASE RENT: See Article 2 - Fixed Rent TENANT'S PROPORTIONATE SHARE: 8.05%, subject to adjustment as set forth in Article 3 PERMITTED USE: General offices BUILDING ADDRESS: 200 Metroplex Drive Edison, New Jersey 08817 4 OFFICE LEASE AGREEMENT THIS AGREEMENT, made this 3 day of August, 2005 by and between: METROPLEX ASSOCIATES, a New Jersey partnership, with offices at c/o Atlantic Realty Development Corporation, 90 Woodbridge Center Drive, Woodbridge, New Jersey 07095 (hereinafter referred to as "Landlord"), and HanoverTrade, INC., a Maryland corporation, with offices at 379 Thornall Street, Edison, New Jersey 08837 (hereinafter referred to as "Tenant"). W I T N E S S E T H: THAT Landlord, for and in consideration of the rentals, covenants and agreements hereinafter reserved, mentioned and contained on the part of Tenant, its successors and assigns to be paid, kept and performed, has demised and leased, and by these presents does demise and lease, unto Tenant, and Tenant does hereby take and hire from Landlord upon and subject to the conditions hereinafter set forth, the certain premises (the "Premises") constituting a portion of the 1st floor of the building (the "Building") known as Metroplex Corporate Center II, 200 Metroplex Drive, Edison, New Jersey 08817. The Building contains 125,812 square feet of gross rentable area and is located on certain land (the "Lot") designated as Lot 21 in Block 4A on the Tax Map of Edison, New Jersey. The Premises have a gross rentable area of approximately 10,128 square feet of floor area. In addition, Tenant and its agents, employees and invitees shall have the right, in common with Landlord and other tenants of the Building, and their respective agents, employees and invitees, to use the common areas and facilities located at the Building and Lot as provided in Article 5 of this Lease. A diagram of the Premises is annexed hereto as Exhibit A. The parties acknowledge that there are multiple methods of computing rentable area and hereby agree for the purposes of this Lease that the square footage of the Premises and the Building shall be as set forth hereinabove. Notwithstanding anything to the contrary contained in this Lease, the recital herein of the square footage of the Premises is for descriptive purposes only and Tenant shall have no right to terminate this Lease or receive any adjustment or rebate of any Fixed Rent or additional rent (as said terms are hereinafter defined in Article 2) payable hereunder if said recital is incorrect. Tenant agrees to pay the full Fixed Rent and additional rent set forth herein in consideration for the use and occupancy of the Premises, regardless of the actual number of square feet contained therein. TO HAVE AND TO HOLD the Premises unto Tenant, its successors and assigns, for a term of five (5) lease years commencing on the Commencement Date and expiring on the Expiration Date as provided in Article 1 hereof. IT IS FURTHER understood and agreed by and between the parties hereto as follows: 5 A R T I C L E 1. TERM Section 1. The term hereof shall commence on the date (the "Commencement Date"), which is the later of: (i) October 1, 2005, or (ii) the date Landlord delivers possession of the Premises and a temporary or permanent Certificate of Occupancy therefor (the "Certificate of Occupancy") to Tenant with the "Work" (as hereinafter defined in Article 38), exclusive of so-called "punch list" items, substantially completed. As used herein, the term "substantially completed" shall mean that time when the only items of Work to be completed are those which do not substantially interfere with Tenant's use and occupancy of the Premises. Should Landlord be delayed in delivering possession of the Premises or the Certificate of Occupancy to Tenant, or in substantially completing the Work, by reason of (i) Tenant's failure to complete any work which it may be performing, (ii) Tenant's failure to prepare and submit plans required hereunder in a timely manner, (iii) changes in the Work requested by Tenant, (iv) the unavailability of materials or improvements selected by Tenant, or (v) any other act or omission of Tenant, the term of this Lease shall nonetheless commence on the date which is the earlier of (i) the date when Landlord substantially completes the Work and delivers possession of the Premises and the Certificate of Occupancy to Tenant as herein provided, or (ii) the date when Landlord would have substantially completed the Work and delivered possession of the Premises and the Certificate of Occupancy to Tenant but for the occurrence of any event of Tenant delay referred to above. The said term shall expire at 6:00 p.m. on the date (the "Expiration Date") which shall be five (5) lease years after the Commencement Date. Section 2. Tenant shall have, and is hereby granted, one (1) option to renew and extend the term of the Lease from the date upon which it would otherwise expire, for one (1) renewal term which shall be for a period of five (5) years (the "Renewal Term"). The Renewal Term shall follow consecutively upon the expiration of the initial term as hereinabove provided and such Renewal Term shall, upon commencement thereof, be deemed included in references to "the term of the Lease" and "the full term of the Lease". Tenant's said option with respect to the Renewal Term shall be exercised by Tenant giving written notice to Landlord of Tenant's exercise of same not later than nine (9) months prior to the expiration date of the initial term. Time is of the essence with respect to such notice, and failure of Tenant to give such notice within the aforesaid time period shall constitute a binding and conclusive waiver of Tenant's option with respect to such Renewal Term. The option to renew and extend the term of the Lease as hereinabove provided shall not be deemed validly exercised unless Tenant shall not be in default at the time of either the exercise of such renewal option or the commencement of the Renewal Term. If Tenant elects to exercise said renewal option, the full term of the Lease shall be automatically extended for the Renewal Term without the need for the execution of an extension or renewal lease. The Renewal Term shall be on all of the same terms and conditions as are in effect hereunder immediately preceding the commencement date of the Renewal Term, except that the Fixed Rent during the Renewal Term shall be as provided in Section 2 of Article 2 hereinbelow. All provisions for the payment of additional rent shall continue to apply without limitation. Tenant shall have no further right or option to renew the term of the Lease after the expiration of the Renewal Term. Section 3. The first "lease year" shall be the period commencing on the Commencement Date and ending twelve (12) calendar months thereafter, provided, however, that if the Commencement Date is not the first day of the month, the first lease year shall commence on the Commencement Date and end twelve (12) calendar months from the last day of the month in which the Commencement Date occurs. Each succeeding twelve (12) calendar month period thereafter shall be a lease year. Section 4. Within ten (10) days after either party's request therefor, the other party shall execute and deliver to such party a written confirmation of the Commencement Date and the Expiration Date of this Lease. 6 A R T I C L E 2. FIXED RENT Section 1. Tenant covenants to pay to Landlord for and during the first and second lease years of the term hereof a minimum annual basic rental (hereinafter referred to as the "Fixed Rent") in the aggregate amount of Three Hundred Fifty-Five Thousand Four Hundred Ninety-Two and 80/100 ($355,492.80) Dollars, at the rate of One Hundred Seventy-Seven Thousand Seven Hundred Forty-Six and 40/100 ($177,746.40) Dollars per annum, Fourteen Thousand Eight Hundred Twelve and 20/100 ($14,812.20) Dollars per month. Tenant covenants to pay to Landlord for and during the third, fourth and fifth lease years of the term hereof Fixed Rent in the aggregate amount of Five Hundred Forty-Eight Thousand Four Hundred Thirty-One and 20/100 ($548,431.20) Dollars, at the rate of One Hundred Eighty-Two Thousand Eight Hundred Ten and 40/100 ($182,810.40) Dollars per annum, Fifteen Thousand Two Hundred Thirty-Four and 20/100 ($15,234.20) Dollars per month. Section 2. If Tenant exercises its option to renew the term of this Lease for the Renewal Term, Tenant covenants to pay to Landlord for and during each lease year of the Renewal Term Fixed Rent in an amount equal to the "Fair Market Rental Value" of the Premises for and during the Renewal Term determined as provided in Section 3 of this Article 2. Section 3. Within ten (10) days after receipt by Landlord of Tenant's notice exercising Tenant's option to renew the term of the Lease for the Renewal Term, Landlord shall notify Tenant of Landlord's determination of the Fair Market Rental Value of the Premises for the Renewal Term. Said Fair Market Rental Value may be different for each lease year during said Renewal Term. Within ten (10) days after receipt of Landlord's notice, time being of the essence with respect thereto, Tenant shall advise Landlord that (a) it accepts Landlord's determination of the Fair Market Rental Value of the Premises, or (b) it rejects Landlord's determination of the Fair Market Rental Value of the Premises. If Tenant fails to advise Landlord within said ten (10) day period, Tenant shall be deemed to have accepted the Fair Market Rental Value determined by Landlord. If Tenant rejects Landlord's determination of the Fair Market Rental Value of the Premises, Tenant shall, at its cost and expense, engage the services of an independent real estate appraiser, having an MAI designation, with knowledge and experience of rental values of similar properties in the area to perform an appraisal to determine the Fair Market Rental Value of the Premises for the Renewal Term. Such appraiser shall render his or her appraisal report to Landlord and Tenant not later than thirty (30) days after the date of Tenant's notice to Landlord rejecting Landlord's determination of the Fair Market Rental Value of the Premises. If such appraiser shall fail to render such report within such thirty (30) day period (time being of the essence), Tenant's rejection of Landlord's determination of the Fair Market Rental Value of the Premises shall conclusively be deemed to have been waived and the rental for the Renewal Term shall be as originally determined by Landlord. If the appraiser shall render his or her report within such thirty (30) day period and the Fair Market Rental Value so determined shall not be acceptable to Landlord, Landlord shall have the right, at its cost and expense, to engage the services of an appraiser, having similar qualifications as those set forth above, to determine the Fair Market Rental Value of the Premises for the Renewal Term. In the event that Landlord's appraiser shall determine a Fair Market Rental Value which shall not differ by more than ten (10%) percent from the Fair Market Rental Value determined by Tenant's appraiser, the Fair Market Rental Value of the Premises shall be deemed to be the average of the Fair Market Rental Value determinations made by Landlord's appraiser and Tenant's appraiser. If Landlord's appraiser shall determine a Fair Market Rental Value which shall differ more than ten (10%) percent from the Fair Market Rental Value determined by Tenant's appraiser, then the two appraisers shall select a third appraiser, having similar qualifications as those set forth above, and Landlord and Tenant shall engage the services of such third appraiser to perform an appraisal to determine the Fair Market Rental Value of the Premises, with Landlord and Tenant each to pay one-half of the cost of such third appraiser. The appraiser for Landlord and the appraiser for Tenant shall select such third appraiser within ten (10) days after Landlord notifies Tenant that such third appraiser is required. Such third appraiser shall be instructed to render an appraisal report to Landlord and Tenant not later than thirty days (30) after the date of his or her engagement. The Fair Market Rental Value of the Premises for the Renewal Term shall be the Fair Market Rental Value determination of the appraiser selected by Landlord or Tenant whose determination is closer to the determination of the third appraiser. The Fair Market Rental Value 7 of the Premises, as agreed upon by the parties or as determined as hereinabove provided, shall be final and binding upon both Landlord and Tenant. Notwithstanding anything to the contrary herein, in no event, shall the Fixed Rent for any lease year during the Renewal Term be less than the Fixed Rent for the immediately preceding lease year. Section 4. Fixed Rent shall be payable in equal monthly installments, as aforesaid, in advance on the first day of each and every calendar month of the term hereof in lawful money of the United States of America at the office of Landlord or at such other place as may hereafter be designated by Landlord. Fixed Rent for a partial month shall be prorated. If the Commencement Date shall be other than the first day of a calendar month, Tenant shall pay, on the Commencement Date, the proportionate amount of Fixed Rent for the balance of such month. One full monthly installment of Fixed Rent shall be due and payable upon execution of this Lease by Tenant. Fixed Rent shall be paid to Landlord without notice or demand and without deduction, set-off or other charge therefrom or against the same. Section 5. All sums other than Fixed Rent payable by Tenant under this Lease shall be deemed to be additional rent regardless of to whom such sums may be payable. Landlord shall have the same rights and remedies against Tenant with respect to the nonpayment of additional rent as it has with respect to the nonpayment of Fixed Rent. The term "rent" in this Lease means Fixed Rent and additional rent. A R T I C L E 3. PROPORTIONATE SHARE Wherever this Lease shall require Tenant to pay "its Proportionate Share" of any item of expenditure or of any sum, Tenant's Proportionate Share shall be deemed to be 8.05% of the total amount of such item or sum applicable to the Building or the Lot, which Proportionate Share reflects the agreed upon ratio of the gross rentable area of the Premises to the total gross rentable area of the Building as set forth herein. Tenant's Proportionate Share shall be adjusted (i) from time to time if Landlord shall make additions to or subtractions from the square footage of the floor area of the Building or the Premises, and (ii) if Landlord shall construct additional buildings on the Lot or (iii) as set forth in Article 33 hereof. A R T I C L E 4. INSURANCE Section 1. Tenant at its own cost and expense, throughout the term of this Lease, for its own benefit and for the benefit of Landlord as an additional named insured thereunder, shall maintain (or reimburse Landlord for maintaining, if such be the case) general public liability insurance against claims for personal injury, death, or property damage occurring upon, in or about the Premises, the Building, or in or about the adjoining streets, sidewalks, parking areas and passageways, such insurance to afford protection to the limit of not less than One Million ($1,000,000.00) Dollars in respect to injury or death to a single person, and to the limit of not less than One Million ($1,000,000.00) Dollars in respect to any one accident, and to the limit of not less than One Million ($1,000,000.00) Dollars in respect to property damage. Such policies shall name Landlord as an additional insured and shall be primary and non-contributing with any other insurance carried by Landlord. Section 2. In addition to the insurance required to be carried by Tenant pursuant to Section 1 of this Article 4, Tenant shall provide Landlord, at its own cost and expense, and keep in force during the term of this Lease, (i) fire and casualty insurance with broad form extended coverage, including, but not limited to, coverage for vandalism and malicious mischief in the amount of the full replacement cost, from time to time, of Tenant's trade fixtures, equipment, inventory and other contents of the Premises, and (ii) Worker's Compensation insurance in accordance with the requirements of the State of New Jersey. 8 Section 3. In the event that Tenant fails to provide any insurance policy or coverage as required or provided for in this Article 4 and Landlord elects to obtain same, Tenant shall immediately upon demand reimburse Landlord for the cost thereof and shall thereafter pay to Landlord in equal monthly installments in advance together with regularly accruing installments of Fixed Rent, one-twelfth (1/12) of the estimated annual cost of the premium(s) for such insurance coverage required to be paid by Tenant, which sums shall be payable by Tenant to Landlord as additional rent. The monthly sums required to be paid by Tenant to Landlord thereafter as provided in this Section 3, shall be employed by Landlord as a fund to replace such insurance policies as same expire. Section 4. All policies of insurance obtained by Tenant with respect to the Premises and its use and occupancy thereof and all policies of insurance required by this Lease shall be written by reputable companies authorized to do business in New Jersey and shall be acceptable to Landlord and to Landlord's mortgagee. Such policies shall, if same are procured by Tenant, be delivered to Landlord and endorsed "premium paid" by the company or agency issuing the same or shall be accompanied by other evidence satisfactory to Landlord that the premiums thereon have been paid not less than thirty (30) days prior to the expiration of any then current policy. All policies obtained by Tenant shall provide that none of same shall be cancelable unless Landlord shall have received at least thirty (30) days prior written notice of such cancellation. It is the intention of the parties that Landlord shall at all times during the term of this Lease be in possession of paid up policies of insurance which are in full force and effect. Section 5. Neither Landlord, its servants, agents or employees, nor any mortgagee of the Premises shall be liable or responsible for, and Tenant hereby releases Landlord, its servants, agents or employees and any such mortgagee of the Premises from, all liability and responsibility to Tenant and any person claiming by, through or under Tenant, by way of subrogation or otherwise, for any injury, loss or damage to any person or property in or around the Premises or to Tenant's business irrespective of the cause of such injury, loss or damage, and Tenant shall require its insurers to include in all of Tenant's insurance policies which could give rise to a right of subrogation against Landlord, its servants, agents or employees, or any mortgagee of the Premises a clause or endorsement whereby the insurer waives any rights of subrogation against Landlord, its servants, agents or employees and any such mortgagee of the Premises or permits the insured, prior to any loss, to agree with a third party to waive any claim it may have against said third party without invalidating the coverage under the insurance policy. If such waiver of subrogation shall not be, or shall cease to be, obtainable without additional charge or at all, the Tenant shall so notify Landlord promptly after learning thereof. In such case, if the Landlord shall so elect and shall pay the insurer's additional charge therefor, such waiver of subrogation shall be included in the policy. Section 6. Landlord shall throughout the term of this Lease maintain fire insurance policies with full extended coverage provisions with respect to the Building, which insurance coverage shall be in such amounts as shall be required by Landlord's first mortgagee. A R T I C L E 5. COMMON AREAS AND PARKING Section 1. Tenant shall have the nonexclusive right to use, in common with Landlord and other tenants of the Building (subject to reasonable rules from time to time made by Landlord), the common lobbies, entrances, exits, restrooms, elevators of the Building and the parking areas, walkways, sidewalks and driveways constructed on the Lot (the "Common Areas"). Attached hereto as Exhibit B are the current Rules and Regulations applicable to the Premises and the Building. Section 2. Landlord reserves the following rights in and to the Common Areas, the Building and the Premises: (a) the right to install, use, maintain, remove, repair, and replace pipes, ducts, conduits, wires and appurtenant meters and equipment (hereinafter collectively "Pipes") serving any part of the Building to be located above ceiling surfaces, below floor surfaces, within walls, or in central core areas. Landlord reserves the right to relocate any Pipes whether located within or outside of the Premises; (b) the right to alter or relocate any of the 9 Common Areas and to make such changes in, alterations of or deletions from the Common Areas as Landlord may determine to do, provided, that no such alteration, relocation or change shall unreasonably interfere with Tenant's use of the Premises; and (c) the right to use and grant easements on, over or under the Lot and to dedicate for public use portions thereof without Tenant's consent, provided that no such grant or dedication shall unreasonably interfere with Tenant's use of the Premises. Section 3. Tenant shall also have the non-exclusive right to use in common with Landlord and other tenants of the Building and their employees and invitees, on a first come first serve basis, the parking area provided by Landlord for the parking of passenger automobiles other than parking spaces designated as "Handicapped Parking", "Loading Area" or as may be otherwise reserved or allocated (the "Excluded Parking Areas"). Without limiting the foregoing, a total of four (4) non-designated parking spaces for every 1,000 square feet of gross rentable area contained within the Premises (the "Parking Ratio") shall be allocated for Tenant's use in the parking area. Landlord may issue parking permits, install a gate system, and impose any other system as Landlord deems necessary for the use of the parking area. Tenant agrees that it and its employees and invitees shall not park their automobiles in any Excluded Parking Areas, and shall comply with such rules and regulations for use of the parking area as Landlord may from time to time prescribe. Tenant further agrees that use of the parking area by Tenant, its employees, customers or invitees shall not exceed the Parking Ratio. Landlord shall not be responsible for any damage or theft of any vehicle in the parking area, and shall not be required to keep parking spaces clear of unauthorized vehicles or to otherwise supervise the use of the parking area. Landlord reserves the right to change any existing or future parking area, roads or driveways, or increase or decrease the size thereof and make any repairs or alterations it deems necessary to the parking area, roads and driveways and to temporarily revoke or modify the parking rights granted to Tenant hereunder. A R T I C L E 6. REPAIRS Section 1. Tenant shall take good care of the Premises and fixtures and appurtenances therein, and at its own cost and expense make all non-structural repairs thereto as and when needed to preserve them in good working order and condition, reasonable wear and tear and damage from the elements and casualty excepted. Notwithstanding the foregoing, all damage or injury to the Premises or to any other part of the Building or the Lot, or to its fixtures or appurtenances, whether requiring structural or non-structural repairs, caused by the negligence or improper conduct of Tenant, or its employees, invitees, licensees or agents, shall be repaired promptly by Tenant at its sole cost and expense or, at Landlord's election, may be repaired by Landlord in which event Tenant shall, promptly upon demand, reimburse Landlord for any costs and expenses incurred. Section 2. All alterations, changes, additions or improvements to the Premises installed by Tenant (or by Landlord at Tenant's request) shall be preserved in good working order and repair (and replaced as required) by Tenant at its sole cost and expense. Section 3. All repairs and replacements and all other property attached to the Premises or the Building by or on behalf of Tenant shall, immediately upon the expiration or earlier termination of the term hereof, be and become the property of Landlord without payment therefor by Landlord and shall be surrendered to Landlord upon the expiration or earlier termination of the term hereof. Upon the expiration or earlier termination of the term hereof, Tenant shall surrender the Premises to Landlord in good order, condition and repair, subject to reasonable wear and tear resulting from the Permitted Use. 10 A R T I C L E 7. COMPLIANCE WITH LAW Section 1. Tenant covenants throughout the term of this Lease at Tenant's sole cost and expense, promptly to comply with all laws and ordinances and the orders, rules, regulations and requirements of all federal, state and municipal governments and appropriate departments, commissions, boards and offices thereof and the orders, rules and regulations of any Board of Fire Underwriters or similar body or agency where the Premises are situated, or any body, now or hereafter constituted, exercising similar functions, foreseen or unforeseen, ordinary or extraordinary, relating to Tenant's use and occupancy of the Premises. Section 2. Tenant will observe and comply with the requirements of the carriers of any policy of insurance respecting the Premises and/or the Building and the requirements of all policies of public liability, fire, casualty and all other policies of insurance at any time in force with respect to the Premises and/or the Building and the equipment and contents thereof. Tenant shall not do, or permit anything to be done in the Premises, or bring or keep anything therein, which shall, in any way, increase the cost of fire insurance covering the Premises and/or the Building. Section 3. In the event that Tenant shall fail or neglect to comply with the aforesaid laws, ordinances, rules, orders, regulations and requirements, or any of them, or in case Tenant shall fail or neglect to make any necessary repairs as and to the extent required of Tenant pursuant to this Lease, then Landlord or its agents may, without any obligation so to do, enter the Premises and make said repairs and comply with any and all of the said laws, ordinances, rules, orders, regulations and requirements at the cost and expense of Tenant, and in case of Tenant's failure to pay therefor, the said cost and expense shall be added to the next month's rent, together with interest at 15% per annum, (or the maximum amount permitted by law, whichever shall be less) and shall be due and payable as such. A R T I C L E 8. ALTERATIONS AND IMPROVEMENTS Section 1. Tenant shall make no structural alterations, changes or improvements, in, to or about the Premises, without the prior written consent of Landlord which shall not be unreasonably withheld. Tenant may, at Tenant's expense, without Landlord's consent but otherwise subject to the provisions of this Article, make alterations, changes or improvements to the Premises which are non-structural and which do not affect utility service or plumbing or electrical lines. In making any alterations, changes or improvements, Tenant shall, subject to Section 2 of this Article, use contractors or mechanics first approved in writing by Landlord. If Landlord shall consent to any structural alteration, change or improvement, working drawings for all work shall be submitted to Landlord for approval before any such work is performed. Promptly after completion of any alteration, change or improvement (structural or non-structural), Tenant shall provide to Landlord "as built" plans showing all work performed. Without limiting the foregoing, all alterations, changes and improvements when completed shall be of such a character so that same shall not: (i) adversely affect the value of the Premises; or (ii) reduce the size of the Premises or the cubic content thereof; or (iii) change the character of the Premises. No alteration, change, or improvement shall be undertaken until Tenant shall have procured and paid for, so far as the same may be required from time to time, all permits and authorizations of the various governmental agencies having jurisdiction thereover, and Landlord agrees to join in the application for such permits or authorizations whenever such action is necessary. Section 2. Landlord hereby reserves the right, itself, to make or to cause to be made all alterations, changes or improvements required by Tenant, on behalf of Tenant, and, with respect to all such alterations, changes or improvements other than those which are part of the Work, Tenant shall pay Landlord the actual cost thereof together with ten (10%) percent for overhead and ten (10%) percent for profit. If Tenant is permitted to perform the work on its own behalf Landlord shall be entitled to receive ten (10%) percent of the cost thereof for general 11 supervision. All alterations, changes or improvements (other than Tenant's trade fixtures) installed in the Premises shall be and become the property of Landlord without payment therefor by Landlord, and shall be surrendered to Landlord upon the expiration or sooner termination of the term of this Lease. Landlord shall have the right, however, by notice to Tenant prior to the expiration of the term hereof, to require Tenant to remove any or all of such alterations, changes and improvements (except those which are part of the Work), in which event the same shall be removed from the Premises by Tenant, at its expense, prior to the expiration or sooner termination of the Lease, and Tenant shall restore the Premises to the condition it was in prior to the installation of the said alteration, change or improvement. Provided that Tenant shall not be in default of any of its obligations hereunder, and that all prior defaults shall have been fully cured at the termination of the term hereof, Tenant shall have the right to remove its trade fixtures and personal property from the Premises; provided, however, that Tenant shall, at its own cost and expense, repair any damage caused by such removal and shall restore the Premises to the condition that it was in prior to the installation of Tenant's said trade fixtures and personal property. Section 3. Except as above specifically contemplated, Tenant shall not in any manner make or suffer to be made any alterations, changes, additions or improvements to or of the Premises or the Building. A R T I C L E 9. CONSTRUCTION LIENS Tenant shall not suffer or permit any liens, construction liens, claims, notices of unpaid balance and right to file lien, or the like to be filed against the Premises or the Building or any part thereof by reason of work, labor, services, equipment or materials supplied or claimed to have been supplied to or on behalf of Tenant or anyone holding the Premises or the Building or any part thereof through Tenant. If any such liens, construction liens, claims, notices of unpaid balance and right to file lien, or the like shall at any time be filed against the Premises or the Building, Tenant shall cause the same to be discharged of record within ten (10) days after being given written notice of the filing of the same, or, Tenant may, in lieu of discharging same within said ten (10) days, post an insurance company surety bond providing for and securing due payment thereof and saving Landlord harmless and indemnifying it with respect thereto. Tenant shall not have any right whatsoever to subject the interests of Landlord in the Premises or the Building or in the fee simple title thereto to any construction liens or other liens whatsoever and nothing contained in this Lease shall be deemed to operate as an express or implied consent to Tenant to subject the interests of Landlord to any such lien or liens. All work performed by or on behalf of Tenant shall be performed solely upon Tenant's credit. A R T I C L E 10. WASTE Tenant covenants not to permit the Premises to fall into disrepair or to do or suffer any waste or damage, disfigurement or injury to the Premises, the Building or the Lot, or the fixtures and equipment thereof, or permit or suffer any stationary overloading of the floors thereof. A R T I C L E 11. INSPECTION BY LANDLORD Section 1. Tenant agrees to permit Landlord and the authorized representatives of Landlord to enter the Premises at all reasonable times for the purpose of inspecting the same, for the purpose of performing cleaning services and making electrical surveys, and if Landlord so elects, but without any obligation so to do, for the purpose of making any necessary repairs to the Premises or the Building and performing any work therein that may be necessary to comply with 12 any laws, ordinances, rules, regulations or requirements of any public authority or of the Board of Fire Underwriters or any similar body, or which Landlord may deem necessary to prevent waste or deterioration in connection with the Premises or the Building or for the purpose of performing any work required to be performed in connection with any provision of this Lease. Nothing herein shall imply any duty upon the part of Landlord to do any work which, under any provision of this Lease, Tenant may be required to perform, and the performance thereof by Landlord shall not constitute a waiver by Landlord of Tenant's default in failing to perform the same. Landlord may, during the progress of any work in the Premises or the Building, keep and store upon the Premises all necessary materials, tools and equipment. Landlord shall not in any event be liable for inconvenience, annoyance, disturbance, loss of business or other damage to Tenant by reason of making repairs or the performance of any work in the Premises or the Building, or on account of bringing materials, supplies and equipment into or through the Premises during the course thereof, and the obligations of Tenant under this Lease shall not thereby be affected in any manner whatsoever. Section 2. Landlord is hereby given the right at any time during usual business hours to enter the Premises and to exhibit the same for the purposes of sale, lease or mortgage and during the final six (6) months of the term Landlord shall be entitled to display on the Premises in such manner as not unreasonably to interfere with Tenant's business the usual "For Sale" or "To Let" signs and Tenant agrees that such signs may remain, unmolested, upon the Premises. A R T I C L E 12. ASSIGNMENT AND SUBLETTING Section 1. Provided that this Lease shall be in good standing and that Tenant shall not be in default of any of its obligations hereunder, Tenant may, without Landlord's consent, assign this Lease to (a) any corporation or entity resulting from a merger or consolidation of the Tenant entity, provided that the total assets and net worth of such assignee, after such consolidation or merger, shall be at least equal to that of Tenant immediately prior to such consolidation or merger; or (b) to Tenant's parent company, or to any wholly owned subsidiary of Tenant or Tenant's parent company; and provided further that such successor shall execute an instrument in writing reasonably satisfactory to Landlord's counsel fully assuming all of the obligations and liabilities imposed upon Tenant hereunder and shall deliver the same to Landlord. No such assignment shall operate to relieve Tenant from any liability hereunder. Section 2. Except as set forth in Section 1 above, Tenant shall not, either voluntarily or involuntarily, directly or indirectly, by operation of law or otherwise, assign, transfer, mortgage or otherwise encumber this Lease, or sublet the whole or any part of the Premises, or permit the Premises or any part thereof to be used or occupied by others, without the prior written consent of Landlord, which consent shall not be unreasonably withheld or delayed. The giving of such consent by Landlord shall apply only to the specific transaction thereby authorized, and shall not be construed to relieve Tenant from obtaining Landlord's consent to any other or subsequent such assignment, transfer, mortgage or other encumbrance, subletting, use or occupancy, or as modifying or limiting Landlord's rights under this Article 12. Section 3. Notwithstanding the occurrence of any transaction contemplated by Section 1 or 2 of this Article, Tenant shall, nevertheless, remain primarily liable to perform all covenants and conditions of this Lease. In addition, Tenant shall not be released or discharged from such liability by reason of any modification, amendment or supplement of this Lease agreed to by Landlord and any assignee or subtenant or by reason of Landlord's failure to enforce any of its rights or remedies hereunder against any such assignee or subtenant. At least ten (10) days prior to the effective date thereof, Tenant shall furnish Landlord with a conformed copy of any such assignment or sublease, together with an agreement in writing executed by any such assignee or subtenant to assume the obligations imposed by this Lease upon the Tenant and to perform the same in accordance with the terms hereof, and pursuant to which any subtenant agrees that if this Lease shall be terminated by reason of Tenant's default hereunder or otherwise, at Landlord's option, to be exercised by notice to the subtenant, such sublease shall continue in full force and effect and the subtenant will attorn to Landlord. If this Lease be assigned, or if the 13 Premises or any part thereof be sublet, used or occupied by anybody other than Tenant, Landlord may collect Fixed Rent and additional rent from the assignee, subtenant or occupant, and apply the net amount collected to the Fixed Rent and/or additional rent reserved hereunder, but no such collection shall be deemed a waiver of this covenant, or the acceptance of the assignee, subtenant or occupant as tenant, or a release of Tenant from the further performance by Tenant of the terms, covenants and conditions of this Lease on the part of the Tenant to be performed. Any violation of any provision of this Lease, whether by act or omission, by any assignee, subtenant or occupant, shall be deemed a violation of such provision by Tenant, it being the intention and meaning of the parties hereto that Tenant shall assume and be liable to Landlord for any and all acts and omissions of any and all assignees, subtenants and/or other occupants. Section 4. Notwithstanding, and without limiting, any other provisions of this Article, in the event that Tenant shall request Landlord's consent to an assignment of this Lease or a subletting of all or any portion of the Premises, Landlord shall have the option, in lieu of granting or refusing any such consent, to cancel and terminate this Lease, such option to cancel and terminate to be exercised not later than sixty (60) days after Landlord receives from Tenant a notice containing Tenant's request for Landlord's consent to an assignment or subletting. Any such notice containing a request for consent shall contain the following information: (1) the name and business address of the proposed assignee or subtenant; (2) the consideration to be paid by the proposed assignee or sublessee to Tenant for such assignment or subletting; (3) all other business terms and conditions of the proposed assignment or subletting transaction; and (4) such further and additional information as Landlord may request. If Landlord shall exercise its said option to cancel and terminate this Lease, Fixed Rent, additional rent and all other amounts payable by Tenant to Landlord shall be adjusted as of the date any such assignee or sublessee enters into a direct lease with Landlord, accepts possession of the Premises and thereafter commences the payment of rent. Section 5. Without limiting the foregoing, in the event that this Lease shall be assigned or all or any portion of the Premises shall be sublet, then and in that event, one hundred (100%) percent of the net proceeds, avails and profits of any such assignment and/or sublease shall be paid by Tenant and shall constitute the sole and exclusive property of Landlord. In calculating the net proceeds, avails and profits of any sublease of less than the entire Premises hereof, the rentals payable pursuant hereto and the rentals payable pursuant to any such sublease shall be equitably allocated to the portion of the Premises so being sublet and the net proceeds, avails and profits shall be determined accordingly. In connection with any assignment of this Lease, the said net proceeds, avails and profits shall include any amounts paid to Tenant as the purchase price or other consideration for the transfer of any of Tenant's trade fixtures, equipment or inventory in excess of the then reasonable fair market value thereof. Nothing herein shall be construed as relieving Tenant, in the event of an assignment of this Lease or a subletting of all or a portion of the Premises, of the primary liability to Landlord for the full and faithful performance of the covenants and agreements contained in this Lease. Section 6. In the event Tenant requests Landlord to approve any assignment of this Lease, or subletting (or other form of occupancy by a third party) of the Premises, Tenant shall pay Landlord a reasonable fee to cover Landlord's costs for the preparation and/or review of said assignment or sublease, or documents ancillary thereto, credit checks, business checks and other like items. Section 7. Notwithstanding anything to the contrary contained herein, under no circumstances shall Tenant assign this Lease or sublet all or any portion of the Premises to any then existing tenant of the Building, without Landlord's prior written consent, which consent Landlord may withhold in its sole discretion. A R T I C L E 13. HOLD HARMLESS AND INDEMNIFICATION Section 1. This Lease is made upon the express condition that Tenant agrees to and shall keep, save and hold Landlord free and harmless from and indemnify it against all liability, penalties, losses, damages, costs, expenses, causes of action, claims and/or judgments 14 arising by reason of any injury in or about the Premises to any person or persons, including without limitation, Tenant, its servants, agents and employees, and damage in or about the Premises to any property of any kind whatsoever, and to whomsoever belonging, including without limitation, damage to property of Tenant, its servants, agents and employees, and other parties, which such injury to persons or damage to property occurs as a result of or from any cause or causes whatsoever, including, without limitation, damage from water and/or steam leakage into or upon the Premises (or from the Premises), or its appurtenances, or damage or injury occurring on or about the common areas, sidewalks or parking areas adjacent thereto, during the term of this Lease or any occupancy hereunder. Tenant hereby covenants and agrees to indemnify, protect and save Landlord harmless from all liability, judgments, claims, loss, costs and obligations on account of or arising out of any such injuries and damages however occurring, except to the extent occasioned by Landlord's wilful misconduct or gross negligence, provided always, however, that if and to the extent that Tenant receives any proceeds from applicable policies of insurance with respect to same, then the amount of such proceeds shall be credited against any amounts payable by Landlord to Tenant hereunder. Section 2. Tenant, as a material part of the consideration to be rendered to Landlord, hereby waives all claims against Landlord for damages to goods, equipment, improvements, wares and merchandise in, upon or about the Premises and for injuries to Tenant, its servants, agents, employees or third persons in or about the Premises from any cause arising at any time, except to the extent occasioned by Landlord's wilful misconduct or gross negligence, provided always, however, that if and to the extent that Tenant receives any proceeds from applicable policies of insurance with respect to same, then the amount of such proceeds shall be credited against any amounts payable by Landlord to Tenant hereunder. Section 3. Except as otherwise specifically set forth in this Lease, each party shall bear the cost of its own counsel incurred in connection with this Lease and Tenant's use and occupancy of the Premises. A R T I C L E 14. CASUALTY Section 1. In case of any damage to the Building on the Lot by fire or other casualty occurring during the term of this Lease or previous thereto, which renders the Premises wholly untenantable so that the same cannot be repaired within one hundred twenty (120) days from the happening of such damage, then the term hereby created shall, at the option of Landlord, terminate from the date of such damage. In the event Landlord elects to terminate the Lease for any reason which is due to the inability to restore the same within the one hundred twenty (120) day period, Landlord shall so notify Tenant within thirty (30) days of the happening of the fire or casualty, and in such event Tenant shall immediately surrender the Premises and shall pay rent only to the time of such damage and Landlord may re-enter and repossess the Premises free and clear of any rights of Tenant under this Lease. In the event Landlord can restore the Premises within one hundred twenty (120) days, it shall so notify Tenant within thirty (30) days after the happening of the fire or casualty and the Lease shall remain in full force and effect during the period of Landlord's restoration, except that rent shall abate while the repairs and restoration are being made, but the rent shall recommence upon restoration of the Premises and delivery of the same by Landlord to Tenant. Landlord agrees that it will undertake reconstruction and restoration of the damaged Premises with due diligence and reasonable speed and dispatch. Section 2. If the Building shall be damaged, but the damage is repairable in Landlord's estimation, within one hundred twenty (120) days, Landlord agrees to repair the same with reasonable promptness. In such event, the rent accrued and accruing shall not abate, except for that portion of the Premises that has been rendered untenantable and as to that portion the rent shall abate based on equitable adjustments as reasonably determined by Landlord. If any damage to the Building is not repairable in Landlord's estimation within one hundred twenty (120) days, or if the cost to repair same shall exceed 15% of the replacement of the Building, Landlord may at its option terminate this Lease upon serving written notice of such election upon Tenant. Notwithstanding anything in this Lease to the contrary, Landlord shall have the option 15 of terminating this Lease, and shall not be required to repair any damage caused by any fire or other casualty, if said fire or other casualty occurs during the last year of the term hereof. Section 3. In connection with Landlord's restoration as hereinafter referred to, in determining what constitutes reasonable promptness consideration shall be given to delays caused by acts of God, strikes, and other causes of Force Majeure beyond the Landlord's control. Section 4. Tenant shall immediately notify Landlord in case of fire or other damage to the Premises. Section 5. Notwithstanding anything contained in this Article 14, if repairs are not completed within one hundred fifty (150) days of the date of damage, subject to delays due to Force Majeure, Tenant shall have the right prior to the completion of such work or Tenant's taking possession of the Premises to terminate this Lease, in which event Landlord and Tenant shall thereupon be released of liability one to the other (with the exception, however, of any unpaid Fixed Rent and/or additional rent accrued through the date of termination, which shall remain the responsibility of Tenant), and the within Lease shall be deemed null and void. Section 6. Anything contained in the within Lease Agreement to the contrary notwithstanding, it is understood and agreed by and between the parties hereto that in no event shall Landlord be obligated to expend any funds in connection with any repair or restoration work in excess of the proceeds of insurance policy payments which are made available to Landlord by insurance carriers and by any mortgagee of the Premises and the Building. Landlord's obligations in connection with such repair and/or restoration work shall and are hereby strictly limited to the replacement of the basic Building area as demised by Landlord to Tenant as of the Commencement Date of the term hereof (including the Work) and in no event shall Landlord be obligated to replace, repair or restore any improvements to the Premises or alterations thereof installed therein by or on behalf of Tenant nor shall Landlord be obligated in any event whatsoever to replace, repair or restore Tenant's leasehold improvements, personal property, furniture, fixtures, equipment or the like. A R T I C L E 15. CONDEMNATION/EMINENT DOMAIN Section 1. This Lease and the term hereof shall terminate: (1) if the entire Premises shall be taken by condemnation or eminent domain; or (2) at the option of Tenant (exercisable by notice given to Landlord within thirty (30) days after the date after formal institution of the taking proceedings by the filing of a Complaint or Declaration of Taking) if a material part of the Premises shall be taken in any condemnation or eminent domain proceeding(s). A taking of a "material part of the Premises", as such quoted words are used herein, shall mean the condemnation or taking by eminent domain of so much of the Premises, in excess of 15% of the area thereof, as shall materially and adversely prevent Tenant from operating its business in the Premises for the purposes for which the Premises were leased to Tenant or for the purposes for which the Premises were being used at the date of such taking; or (3) at the option of Landlord (exercisable by notice given to Tenant within three (3) months after the date of taking), if more than 15% of the Lot or if more than 15% of the Building shall be taken by condemnation or eminent domain. Section 2. Any termination of this Lease Agreement pursuant to the provisions of this Article shall be effective upon the date of transfer of possession in connection with the taking proceedings, and, upon such termination, Tenant shall be liable only for the payment of Fixed Rent, additional rent, impositions and other charges herein, pro-rated to the date of such termination, and Landlord shall refund any payment in excess thereof to Tenant. Tenant may, if permitted by law, make any independent application by separate proceedings apart from the proceeding in which Landlord shall be prosecuting its claim, to any condemning authority, for any award which might be independently payable to it in connection with Tenant's moving expenses, business dislocation damages or for the taking of Tenant's leasehold improvements, provided that no such application or any award rendered pursuant thereto shall operate to diminish any award which would otherwise be payable to Landlord. Tenant waives its right to 16 and agrees that it shall not (i) make any claim in or with respect to any condemnation or eminent domain proceedings whatsoever or otherwise except as hereinabove specifically provided, or (ii) make any claim against Landlord in any other action for the value of the unexpired portion of this Lease or the term hereof. Except as above specifically provided, the total amount of all condemnation awards shall be the sole and exclusive property of the Landlord, and Tenant shall not participate therein or in the negotiation thereof or have any rights whatsoever with respect to the awards or the proceeds of any such proceedings. Section 3. In the event that any part of the Premises is taken in any condemnation or eminent domain proceedings and this Lease is not terminated pursuant to Section 1 hereof, then this Lease shall remain in full force and effect as to such remaining portion, except that from and after the effective date of any such taking, Tenant shall be entitled to an equitable reduction in the Fixed Rent required to be paid hereunder in accordance with the value of the leasehold before and after any such condemnation, due regard being given to any reduction in square foot area of the Premises caused by such taking, the location of the areas which were taken in such proceedings, and the uses to which the Premises might reasonably be put subsequent to the date of such taking. If Landlord and Tenant do not agree on the amount of such reduced rent, the same shall be determined by arbitration as herein provided. Subject to the approval and consent of any then mortgagee of the Premises and the Building and to the terms and conditions of any mortgage upon the Premises and the Building and subject to the availability of the proceeds of any award for reconstruction and restoration and the agreement of any mortgagee to make such proceeds available, Landlord shall promptly reconstruct and restore the portion of the Premises remaining after such taking to a complete architectural unit. Except as set forth herein, any rebuilding or restoration by Landlord shall be strictly limited to the basic building structure as initially demised hereunder. In no event shall Landlord be obligated to expend any sums for such rebuilding or restoration in excess of the amount of money actually paid to and received by Landlord, net of all expenses, from any condemning authority and/or from any mortgagee of the Premises and the Building to whom any such award may have been paid by such condemning authority. The payment of any award by any condemning authority to Landlord's mortgagee and the application of such payment on account of Landlord's mortgage shall not be deemed to constitute receipt or constructive receipt of payment by Landlord. All condemnation proceeds shall be subject to the requirements of any mortgagee of the Premises and the Building that same be applied in reduction of such mortgage balance (in which event Landlord shall not be obligated to restore the Premises) and the remaining portion of any award, if any, not so applied shall at all times be available to Landlord for construction and restoration purposes and shall be the sole and exclusive property of Landlord. The balance of any such proceeds shall, after completion of restoration and reconstruction, be retained by Landlord. Monies paid "into Court" shall not be deemed to constitute payment of such award to Landlord until Landlord agrees to accept the same and until such monies are physically delivered to Landlord by the condemning authority and by Landlord's mortgagee, if any. A R T I C L E 16. BANKRUPTCY/INSOLVENCY AND DEFAULT OF TENANT Section 1. If during the term of this Lease, (a) Tenant shall make an assignment for the benefit of creditors, or (b) a voluntary petition be filed by Tenant under any law having for its purpose the adjudication of Tenant a bankrupt, or the extension of time of payment, composition, adjustment, modification, settlement or satisfaction of the liabilities of Tenant or the reorganization or liquidation of Tenant, or (c) a receiver be appointed for the property of Tenant by reason of the insolvency or alleged insolvency of Tenant, or if (d) any department of the state or federal government or any officer thereof or duly authorized Trustee or Receiver shall take possession of the business or property of Tenant by reason of the insolvency or alleged insolvency of Tenant, or if (e) an involuntary petition be filed against Tenant under any law having for its purpose the adjudication of Tenant a bankrupt, or for the liquidation of Tenant; and except with respect to items (a) and (b), supra, of this Section 1, which shall be non-curable events of default, if Tenant shall not within sixty (60) days thereafter, remove, have dismissed and/or cure any of the foregoing, then Landlord may give Tenant notice of a default under this Lease and if, within thirty (30) days after such notice, Tenant shall still have not removed and/or cured any of the foregoing; or if (f) any Debtor-in-Possession ("so-called"), Receiver or Trustee 17 pursuant to any bankruptcy or insolvency law whether Federal or State shall attempt to assign this Lease to any party or attempt to sublet all or any part of the Premises, then the occurrence of any such event shall be deemed a breach of this Lease and this Lease shall, ipso facto, upon the happening of any of said events and at the election of Landlord, be terminated and the same shall expire as if the day of the happening of such event were the date herein specifically fixed for the expiration of the term, and Tenant (or such Debtor-in-Possession, Receiver or Trustee as the case may be) will then quit and surrender the Premises to Landlord, but Tenant shall remain liable as hereinafter provided. If any of the aforesaid events occur prior to the Commencement Date hereof, this Lease shall be ipso facto terminated. Landlord reserves the right to file a claim against any assignee, receiver or trustee of or for the Premises for damages and for loss of rent, for the full term of the Lease or otherwise, which Landlord may suffer, as a result of the foregoing. Section 2. If, during the term of this Lease, Tenant shall default in performance of any of the covenants of this Lease (other than the covenants for the payment of Fixed Rent and additional rent), or if any executions or attachments shall be issued against Tenant or any of Tenant's property whereupon the Premises shall be taken or occupied by someone other than Tenant, then in any such event Landlord may give to Tenant notice of any default or of the happening of any contingency in this Article referred to, and if at the expiration of thirty (30) days after such notice the default or the contingency upon which said notice was based shall continue to exist, or, in the event said default or contingency cannot be cured within thirty days, if, at the expiration of thirty days after such notice, Tenant has not commenced to cure said default or contingency and shall not thereafter be diligently prosecuting said cure to completion. Landlord, at its option, may terminate this Lease, and upon such termination Tenant will quit and surrender the Premises to Landlord, but Tenant shall nonetheless remain liable under the terms and conditions hereof as herein provided. Section 3. If Tenant shall default in the payment of the Fixed Rent and/or additional Rent, or any part of the same, and if such default shall continue for ten (10) days without the need of any notice thereof from Landlord, Landlord may immediately thereafter terminate this Lease and accelerate the payment of all Fixed Rent, additional rent and other monetary charges reserved hereunder so that all of same shall be immediately due and payable, but Tenant shall nonetheless remain liable under the terms and conditions hereof as herein provided. Section 4. Upon any termination of this Lease, Landlord or Landlord's agents and/or servants may immediately or at any time thereafter re-enter the Premises and remove all persons and all or any property therefrom either by summary dispossess proceedings or by any suitable action or proceedings at law and may repossess said Premises together with all additions, alterations and improvements thereto, without such re-entry and repossession working a forfeiture or waiver of the rents to be paid and the covenants to be performed by Tenant during the full term hereof. In the event of termination of this Lease by reason of the occurrence of any of the events described in this Article, or in the event of the termination of this Lease by summary dispossess proceedings or under provisions of law now or at any time hereafter in force by reason of or based upon or arising out of a default under or breach of this Lease on the part of Tenant, or upon Landlord's recovering possession of the Premises in any circumstances whatsoever, whether with or without legal proceedings, by reason of or based upon or arising out of a default under or breach of this Lease on the part of Tenant, Landlord may, at its option, at any time and from time to time re-let the Premises, or any part or parts thereof, for the account of Tenant or otherwise, and receive and collect the rents therefor, applying the same first to the payment of such expenses as Landlord may have incurred in recovering possession of the Premises, including the legal expenses and reasonable attorneys' fees, and expenses of putting the same into good order or condition and preparing or altering the same for re-rental and all other expenses, commissions and charges paid, assumed or incurred by Landlord in re-letting the Premises or in connection with a termination of this Lease by reason of Tenant's default and then to the payment of monthly Fixed Rent and additional rent hereunder. Any such re-letting herein provided for may be, at Landlord's option, for the remainder of the term of this Lease or for a longer or shorter period and/or for a higher or lower rent and/or with the granting of concessions. In any such case and whether or not the Premises, or any part thereof be re-let, Tenant shall pay to Landlord the Fixed Rent, additional rent and all other charges required to be paid by Tenant pursuant to this Lease up to the time of such termination of this Lease, or of such recovery of 18 possession of the Premises by Landlord, as the case may be, together with such expenses as Landlord may incur for attorneys' fees, brokerage fees and the cost of putting the Premises in good order or for preparing same for re-rental, and thereafter Tenant covenants and agrees, if required by Landlord, to pay to Landlord until the expiration date of the term of this Lease, as herein provided, as and for liquidated damages the equivalent of the amount of all the Fixed Rent reserved herein, additional rent and all other charges required to be paid by Tenant, less the net avails of re-letting, if any, and the same shall be due and payable by Tenant to Landlord on the several rent days herein specified, that is to say, upon each of such rent days, Tenant shall pay to Landlord the amount of the deficiency then existing (any deficiency in Fixed Rent and additional rent to be computed separately for each month). In computing such liquidated damages there shall be added to the said deficiency such expenses as Landlord may incur in connection with re-letting, such as legal expenses, attorneys' fees, brokerage, advertising, and for keeping the Premises in good order or for preparing the same for re-letting. Nothing herein contained shall imply or impose upon Landlord any duty to relet the Premises in order to mitigate damages. Landlord shall not have any such duty to mitigate damages. Landlord shall be entitled to retain any overage received as a result of its re-letting of the Premises and Tenant shall have no rights therein or thereto. Section 5. No expiration or termination of the Lease term pursuant to Sections 1, 2, 3 or 6 of this Article 16 or by operation of law, or otherwise (except as expressly provided herein), and no repossession of the Premises or any part thereof pursuant to Section 4 of this Article 16, or otherwise, shall relieve Tenant of its liabilities and obligations hereunder, all of which shall survive such expiration, termination or repossession. Section 6. Without limiting Landlord's rights and remedies under the preceding Sections of this Article, if Tenant shall fail to make any payment, or perform any act on its part to be made or performed, as in this Lease provided, Landlord may (but shall not be obligated to do so), without waiving or releasing Tenant from any obligation of Tenant contained in this Lease, make any such payment or perform any such act on the part of Tenant to be made and performed, as in this Lease provided, in such manner and to such extent as Landlord may deem desirable, and in exercising any such rights Landlord may pay necessary and incidental and reasonable costs and expenses, employ counsel and incur and pay reasonable attorneys' fees. All sums so paid by Landlord and all necessary and incidental costs and expenses incurred by Landlord in connection with the performance of any such act by Landlord, together with interest computed thereon at the rate which shall be two (2%) percent per annum in excess of the prevailing interest rate charged by Chase Manhattan Bank, N.A. to its most credit worthy customers ("Prime"), which interest rate is to be adjusted as Prime fluctuates from time to time (or the maximum legal rate of interest then prevailing, whichever shall be less), from the date of the making of such expenditure by Landlord shall be deemed additional rent hereunder and, unless otherwise expressly provided, shall be payable to Landlord upon demand or at the option of Landlord, may be added to Fixed Rent or additional rent then due or thereafter becoming due under this Lease, and Tenant covenants to pay any such sum or sums, with interest as aforesaid, within five (5) days after demand, and Landlord shall have, in addition to any other right or remedy, the same rights and remedies in the event of nonpayment thereof by Tenant as in the case of default by Tenant in the payment of Fixed Rent. Section 7. If this Lease shall terminate by reason of the occurrence of any default of Tenant or any contingency mentioned in this Article, Landlord shall at its option and election be entitled, notwithstanding any other provision of this Lease, or any present or future law, to recover from Tenant or Tenant's estate (in lieu of all claims against Tenant relating to unpaid Fixed Rent or additional rent), as damages for loss of the bargain and not as a penalty, a lump sum which at the time of such termination of this Lease equals the then present worth of the Fixed Rent and all other charges payable by Tenant hereunder that were unpaid or would have accrued for the balance of the term, less the fair and reasonable rental value of the Premises for the balance of such term, such lump sum being discounted to the date of termination at the rate of six (6%) percent per annum, unless any statute or rule of law governing the proceeding in which such damages are to be proved shall limit the amount of such claim capable of being so proved, in which case Landlord shall be entitled to prove as and for liquidated damages by reason of such breach and termination of this Lease, the maximum amount which may be allowed by or under any such statute or rule of law. If the Premises or any part thereof shall be re-let by the Landlord for a period including the unexpired term of this Lease or any part thereof, 19 before the presentation of proof of such liquidated damages to any court, commission, or tribunal, the amount of rent reserved on such re-letting shall be deemed to be the fair and reasonable rental value for the part or the whole of the Premises so re-let during the term of the re-letting. Nothing herein contained shall limit or prejudice Landlord's right to prove and obtain as liquidated damages arising out of such breach or termination the maximum amount to be allowed by or under any such statute or rule of law which may govern the proceedings in which such damages are to be proved whether or not such amount be greater, equal to, or less than the amount of the excess of the Fixed Rent over the rental value referred to above. Section 8. No receipt of payment by Landlord from Tenant, after the termination of this Lease, as herein provided, shall reinstate, continue or extend the term or operate as a waiver of the right of Landlord to recover possession of the Premises, it being agreed that, upon termination, any and all payments collected shall be on account of Tenant's obligations hereunder. Section 9. Tenant hereby expressly waives the service of notice of intention to re-enter as provided for in any statute, or the necessity to institute legal proceedings to that end, and also waives any and all right or redemption in case Tenant shall be dispossessed from the Premises or this Lease shall be terminated. The terms "enter", "re-enter", "entry", or "re-entry", as used in this Lease are not restricted to their technical legal meaning. Section 10. Notwithstanding anything to the contrary contained herein, (i) a default by Tenant beyond any applicable cure period of any of the terms and conditions set forth in this Lease, shall also constitute a default under that certain lease between Landlord and Hanover Capital Partners, Ltd. for other premises within the Building; and (ii) a default by Hanover Capital Partners, Ltd. beyond any applicable cure period of any of the terms and conditions set forth in its lease with Landlord for other premises within the Building, shall also constitute a default under this Lease. ARTICLE 17. SERVICES FURNISHED BY LANDLORD Section 1. As long as Tenant is not in default under any provision of this Lease, Landlord shall furnish the following services to Tenant during Normal Business Hours (as hereinafter defined): (a) Passenger elevator service; (b) Heat, ventilation and air conditioning, which heating and air conditioning systems shall be provided by systems designed to produce in accordance with the performance standards set forth on Exhibit C annexed hereto and made a part hereof, (Tenant agrees to keep peripheral windows closed and at all times to cooperate with Landlord and observe all regulations which Landlord may prescribe for the proper functioning and protection of the heating, ventilation and air conditioning system). For and during that portion of each lease year between October 15 and May 15, Landlord shall provide heat to the Premises as climatic conditions shall require, and for and during the portion of each lease year between May 16 and October 14, Landlord shall provide air conditioning to the Premises as climatic conditions shall require. Notwithstanding anything contained in this Lease to the contrary, Landlord shall not be obligated to provide air conditioning or any climate control system(s) of any type to any area(s) within the Premises used as and for "computer room(s)" or the like; (c) Water for ordinary drinking and lavatory purposes, but if Tenant uses water for any other purposes or in unusual quantities, Landlord may install a water meter at Tenant's expense and Tenant shall pay for water consumed, as shown by said meter as additional rent as bills therefor are rendered; (d) Cleaning services with respect to the office area of the Premises which cleaning services shall be as described and set forth on Exhibit D annexed hereto and made a part hereof, on days of Normal Business Hours. Tenant shall pay to Landlord the cost of removal of 20 any of Tenant's excess rubbish. Landlord shall not be required to clean or exterminate any areas of the Premises which are used for the preparation or dispensing of food or beverages or for storage, shipping or similar purposes. Section 2. For the purposes of this Lease, "Normal Business Hours" shall mean the period between 8 A.M. and 6 P.M. on Monday through Friday, and between 8 A.M. and 1 P.M. on Saturday, of each week, excluding legal holidays and Building holidays and other days which may be designated holidays in labor contracts with trades providing services to the Premises or as may be designated as legal holidays in the State of New Jersey. Current Building holidays are set forth on Exhibit E. Notwithstanding the foregoing, Tenant shall have access to the Premises twenty four (24) hours a day, three hundred sixty five (365) days a year. However, in the event that Tenant occupies the Premises at any time other than during Normal Business Hours, Tenant shall pay to Landlord as additional rent, within ten (10) days after demand for same, the sum of Sixty-Five and 00/100 ($65.00) Dollars per hour for each hour during which Tenant shall so occupy the Premises, which sum shall be deemed to be the cost of providing services to the Premises for such periods. The aforesaid hourly charge of $65.00 per hour shall be subject to an appropriate increase by Landlord in the amount thereof, in the event that, and to the extent that there shall be an increase from time to time in the cost of providing services to the Premises for such periods. Except as herein otherwise provided, Landlord shall in no event be required to supply central heating or air conditioning other than during Normal Business Hours. Section 3. Landlord shall not be liable for full or partial stoppage or interruption of the above services or utilities caused by any factors beyond Landlord's reasonable control and Landlord shall not be liable for consequential damages in any event. No such stoppage shall operate to constitute a constructive eviction of Tenant. ARTICLE 18. ADDITIONAL RENT Section 1 . It is expressly agreed that commencing on January 1, 2006 (the "Pass-through Rent Commencement Date"), Tenant shall pay, in addition to the Fixed Rent, and as additional rent hereunder, in each calendar year which occurs wholly or partially during the term hereof, its Proportionate Share, of all "Operating Costs" and "taxes" (as said terms are hereinafter defined) of the Building and the Lot which shall exceed those applicable to the "Base Year". For the purposes of this Lease, the term "Base Year" shall mean the calendar year 2005. Section 2. For the purposes of this Article 18, "Operating Costs" shall mean the following expenses paid or incurred by Landlord in connection with the Building and the Lot: A. Wages, salaries, fees and other compensation and payments and payroll taxes and contributions to any social security, unemployment insurance, welfare, pension or similar fund and payments for other fringe benefits required by law or by union agreement (or, if the employees of any of them are non-union, then payments for benefits comparable to those generally required by union agreement in first class office buildings in the Middlesex County area which are unionized) made to or on behalf of all employees of Landlord performing services rendered in connection with the operation and maintenance of the Building and the Lot, including, without limitation, elevator operators, elevator starters, window cleaners, porters, janitors, maids, miscellaneous handymen, watchmen, persons engaged in patrolling and protecting the Building and the Lot, carpenters, engineers, firemen, mechanics, electricians, plumbers, persons engaged in the operation and maintenance of the Building and Property, Building superintendent and assistants, Building manager, and clerical and administrative personnel. B. The uniforms of all employees, and the cleaning, pressing and repair thereof. C. Cleaning costs for the Building and Lot, including the windows and sidewalks, all snow and rubbish removal (including separate contracts therefor) and the costs of all labor, supplies, equipment and materials incidental thereto. 21 D. Premiums and other charges incurred by Landlord with respect to all insurance relating to the Building and the Lot and the operation and maintenance thereof, including, without limitation: fire and extended coverage insurance, including windstorm, flood, hail, explosion, riot, rioting attending a strike, civil commotion, aircraft, vehicle and smoke insurance; public liability; elevator; workmen's compensation; boiler and machinery; rent; use and occupancy; health, accident and group life insurance of all employees; and casualty rent insurance. E. The cost of electricity, heat, water and sewer and any and all other utility services used in connection with the operation and maintenance of the Building and the Lot (excluding electricity and other utility services, if any, which are paid directly by tenants). For the purpose of this Section, "cost of electricity" shall include the cost of electricity for common areas attributable to Building operation [i.e. mechanical equipment operation, common area electricity usage, exterior lighting and, in general, all other electric utility usage mutually enjoyed by all tenants (based upon the electricity rate to be adjusted for summer and winter as applicable, and inclusive of demand charge, energy charge and energy adjustment charge in effect as of the Commencement Date)] reduced by amounts due from tenants for special electrical usage in conjunction with elapsed time recorded usage for overtime operation of the Building mechanical systems actually paid to Landlord pursuant to Article 17 hereof, as said Article pertains to electrical usage only. F. Costs incurred for operation, service, maintenance, inspection, repair and alteration of the Building, the Lot, and the heating, air-conditioning, ventilating, plumbing, electrical and elevator systems of the Building (including any separate contract therefor) and the costs of labor, materials, supplies and equipment used in connection with all of the aforesaid items. G. Sales and excise taxes and the like upon any of the expenses enumerated herein. H. Management fees of the managing agent for the Building, if any. If there shall be no managing agent, or if the managing agent shall be a company affiliated with Landlord, the management fees that would customarily be charged for the management of the Building by an independent, first-class agent in the Middlesex County area. I. The cost of replacements for tools and equipment used in the operation and maintenance of the Building and the Lot. J. The cost of repainting or otherwise redecorating any part of the Building other than premises demised to tenants in the Building. K. Decoration for the lobby and other public portions of the Building. L. The cost of telephone service, postage, office supplies, maintenance and repair of office equipment and similar costs related to operation of the Building Superintendent's office. M. The cost of licenses, permits and similar fees and charges related to operation, repair and maintenance of the Building. N. Auditing fees necessarily incurred in connection with the maintenance and operation of the Building, and accounting fees incurred in connection with the preparation and certification of a real estate tax escalation and the Operating Cost escalation statements pursuant to this Article 18. O. All costs incurred by Landlord to retrofit any portion or all of the Building to comply with a change in existing legislation, whether Federal, State or Municipal; repairs, replacements and improvements which are appropriate for the continued operation of the Building as a first-class building. P. All expenses associated with the installation of any energy or cost saving devices. 22 Q. The pro rata share of all costs and expenses relating to the Real Property (as hereinafter defined) and its maintenance, operation and repair of any common facilities including, but not limited to, snow removal, landscaping and similar services. R. Any and all other expenditures of Landlord in connection with the operation, repair or maintenance of the Lot or the Building which are properly expensed in accordance with sound accounting principles. If Landlord shall purchase any item of capital equipment or make any capital expenditure as described in subsections O and P above, or otherwise, then the costs for the same shall be amortized on a straight-line basis over a useful life period (but not more than ten (10) years), and Tenant shall reimburse Landlord for the portion of such costs allocable to the applicable amortization period which falls within the term hereof. At Landlord's option, such reimbursement shall be paid by Tenant either (i) in a lump sum without interest within thirty (30) days of its receipt of Landlord's invoice therefor, or (ii) in monthly installments, as additional rent, at the same time and in the same manner as Fixed Rent, which installments shall be paid together with interest on the outstanding amount at a rate equal to ten (10%) percent per annum. If Landlord shall lease such item of capital equipment, then the rentals or other operating costs paid pursuant to such leasing shall be included in Operating Cost for each year in which they are incurred. In the event the Building is less than 95% occupied during the Base Year, Operating Costs for the Base Year shall be appropriately adjusted so that Operating Costs shall reflect such Operating Costs as would have been incurred if the Building were 95% occupied during said year. In addition to the foregoing, Operating Costs for the Base Year shall also be adjusted to exclude any extraordinary expense of a one-time nature incurred during the Base Year. Notwithstanding anything to the contrary contained herein, in the event that any tenant of the Building is separately billed for any item of Operating Costs, the amount billed to such tenant shall not be included in the term Operating Costs and the gross rentable floor area of such tenants leased premises shall be excluded for the purposes of determining Tenant's Proportionate Share with respect thereto. Section 3. (a) Commencing on the Pass-through Rent Commencement Date, Tenant shall also pay, as additional rent, its Proportionate Share of real estate taxes, assessments, sewer rents, rates and charges, state and local taxes, transit taxes or any other governmental charge, general, special, ordinary or extraordinary (hereinafter collectively called "taxes") (but not including income or franchise taxes or any other taxes imposed upon or measured by the Landlord's income or profits, except if in substitution for real estate taxes as hereinafter provided) which may now or hereafter be levied or assessed against the Lot and upon the Building (collectively called the "Real Property") attributable to any tax year which is in excess of the amount of taxes on the Real Property attributable to the Base Year. The taxes for the Base Year shall be the product of the tax rate in effect as of the Base Year times the assessment for the calendar year in which the Building shall be fully assessed as a completed building. The Landlord shall take the benefit of the provisions of any statute or ordinance permitting any assessment to be paid over a period of time, and Tenant shall be obligated to pay its Proportionate Share, of the installments of any such assessment applicable to the term of this Lease or any renewal hereof. Any amount due to the Landlord under the provisions hereof shall be paid within ten (10) days after the Landlord shall have submitted a statement to Tenant showing in detail the computation of the amount due to Landlord. The amount of taxes for the Base Year, against which Tenant's liability for additional rent in subsequent years is determined, shall be the amount thereof finally determined to be legally payable by legal proceedings or otherwise. In the event the amount of taxes for the Base Year has not been finally determined by legal proceedings or otherwise at the time of payment of taxes for any subsequent year, the actual amount of taxes paid by Landlord for the Base Year shall be used in the statement provided by Landlord as the basis for Tenant's liability hereunder with respect to such subsequent year. Upon final determination of the amount of taxes for the Base Year by legal proceedings or otherwise, Landlord shall deliver to Tenant a statement setting forth the amount of taxes for the Base Year as finally determined and showing in reasonable detail the computation of any adjustment due to Landlord by reason thereof. Any payment due to Landlord by reason of such adjustment shall be paid as hereinbefore provided. (b) If Landlord shall receive any tax refund or rebate in respect of any tax year following the Base Year, Landlord may deduct from such tax refund any reasonable expense incurred in obtaining such tax refund, and out of the remaining balance of such tax refund, 23 Landlord shall credit against Tenant's obligations under this Section, Tenant's Proportionate Share thereof provided that Tenant shall have paid the Landlord all taxes due under this Lease for the tax year to which such refund or rebate is allocable and for the tax year in which such refund or rebate shall have been received. (c) If the tax year for real estate taxes shall be changed, then an appropriate adjustment shall be made in the computation of the additional tax due to Landlord or any amount due to Tenant. The computation shall be made in accordance with sound accounting principles. (d) If the last year of the term of this Lease ends on any day other than the last day of a tax year, any payment due to Landlord or to Tenant by reason of any increase or decrease in taxes shall be pro-rated and Tenant shall pay any amount due to Landlord within ten (10) days after being billed therefor, and Landlord shall pay any amount due to Tenant. This covenant shall survive the expiration or termination of this Lease. (e) If at any time during the term of this Lease the method or scope of taxation prevailing at the commencement of the Lease term shall be altered, modified or enlarged so as to cause the method of taxation to be changed, in whole or in part, so that in substitution for, or as a supplement to, the real estate taxes now assessed there is, a capital levy or other imposition based on the value of the Building or Lot or the rents received therefrom, or some other form of assessment, tax or imposition based in whole or in part on some other valuation of the Real Property or any portion thereof, as if the Real Property were the only property owned by the Landlord, then and in such event, such substituted or supplemental tax, assessment or imposition shall be deemed included in "taxes" for purposes of this Article 18. Section 4. Commencing on the Pass-through Rent Commencement Date and continuing for and during each calendar year of the term of this Lease Agreement, Tenant agrees to pay to Landlord, at Landlord's option and at the same time as each monthly payment of Fixed Rent and in addition thereto, an amount equal to one-twelfth (1/12) of Tenant's Proportionate Share of the increase in the Operating Costs and taxes applicable to the current calendar year based upon Landlords reasonable estimate of the amount by which such calendar year shall be in excess of the Base Year. Said sum shall be held by Landlord and shall be employed in connection with the payment of such Operating Costs and taxes as same become due and payable. Tenant further agrees to make such further payments in such amounts and at such times as Landlord may reasonably require to account for any deficiency in the reserve funds held by Landlord so as to enable Landlord to satisfy the increase in the Operating Costs and taxes for the particular calendar year in full, which sums Tenant shall furnish Landlord as additional rent hereunder. Notwithstanding the foregoing provisions, if at any time Landlord incurs such costs at a higher rate Landlord shall have the right to bill Tenant for its Proportionate Share of said excess and to continue to collect same in advance on a monthly basis as above provided. Within five (5) months after the end of each calendar year during the term hereof, Landlord shall deliver to Tenant a statement (the "End of Year Statement") setting forth the actual Operating Costs and taxes for such calendar year. If Tenant has paid less than the actual amount due, Tenant shall pay the difference to Landlord within thirty (30) days after Tenant's receipt of the End of Year Statement. Any amount paid by Tenant which exceeds the amount due shall be credited against the next succeeding estimated payments due hereunder, unless the term hereof has then expired, in which event the excess amount shall be refunded to Tenant at the time of delivery of the End of Year Statement. If the Pass-through Rent Commencement Date is other than the first day of a calendar year, or the Expiration Date is prior to the last day of a calendar year, Tenant's obligations pursuant to this Section 4 shall be apportioned so that Tenant shall only pay such portion of Operating Costs and taxes attributable to the period of such calendar year occurring after the Pass-through Rent Commencement Date or prior to the Expiration Date, as the case may be. Section 5. Without limiting any of Tenant's obligations pursuant to this Article 18, Tenant shall have the right, at its cost and expense, to audit the Operating Costs for the immediately preceding calendar year only, in order to verify the accuracy of any expense which was charged to Tenant as additional rent hereunder provided that: (a) Tenant shall notify Landlord of its election to audit the Operating Costs and taxes within thirty (30) days following Tenant's receipt of the End of Year Statement; 24 (b) such audit shall be conducted only during the hours of 10 A.M. to 4 P.M. on Monday through Friday on the 10th through the 25th day of the month; (c) such audit shall be conducted at the office where Landlord maintains Operating Costs expense records and only after Tenant gives Landlord at least thirty (30) days' prior written notice; (d) Tenant shall deliver to Landlord a copy of the results of such audit within ninety (90) days following Tenant's receipt of the End of Year Statement; (e) no such audit shall be conducted if any other tenant has conducted an audit for the time period Tenant intends to audit and Landlord furnishes to Tenant a copy of the result of such audit; (f) such audit shall only be conducted by a certified public accountant not compensated on a contingent fee basis; (g) no audit shall be conducted at any time that Tenant is in default of any of the terms of this Lease; (h) no subtenant shall have any right to conduct an audit; (i) no assignee shall conduct an audit for any period during which such assignee was not in possession of the Premises; and (j) Tenant shall keep the results of such audit strictly confidential and shall not disclose the same to any other tenant of the Building. In the event that Tenant's audit alleges that an error was made by Landlord, Landlord shall have ninety (90) days following receipt of the results of such audit to obtain an audit from an accountant of Landlord's choice, at Landlord's cost and expense, or Landlord shall be deemed to have accepted the results of Tenant's audit. In the event that Landlord's and Tenant's accountants shall be unable to reconcile the results, both accountants shall mutually agree upon a third accountant whose determination shall be conclusive. The cost of any such third accountant shall be shared equally between Landlord and Tenant. If it is determined that Tenant has paid less than the actual amount due, Tenant shall pay the difference to Landlord within thirty (30) days after the date of such determination. If it is determined that Tenant has paid any amount in excess of the amount due, such excess amount shall be refunded to Tenant within thirty (30)days after the date of such determination. ARTICLE 19. ELECTRIC CHARGES Section 1. Tenant shall pay Landlord for its use of electric energy in the Premises whether for the electric lighting fixtures provided to Tenant by Landlord, Tenant's electric equipment, such as electric typewriters, calculators and other small office machines, or otherwise. Tenant's total electrical demand shall not exceed two (2) volt-amperes connected load per square foot (nor shall any single electric office machine or any fixture requiring electric energy in excess of 1800 volt-amperes including but not limited to large copying machines and computers, be installed or operated in the Premises) without Landlord's prior written consent, which consent Landlord covenants shall not be unreasonably withheld; provided always, however, that the electrical system installed in the Premises shall have sufficient capacity to accommodate same and further provided that any additional costs attributable to such high energy use, including any additional air conditioners required by such use, shall be paid for by Tenant). The Tenant shall not install, maintain or operate in the Premises electric lighting fixtures or electric equipment whose total per square foot electrical demand exceeds the aforementioned limitation of two (2) volt-amperes connected load per square foot without making a written request for Landlord's prior consent thereto. If a separate meter is provided for 25 the Premises (which Landlord shall have the right to so provide), Tenant shall apply for electric service directly from the utility company servicing the Building and arrange for the direct billing of utility consumption to Tenant. If Landlord shall install a submeter to measure electric energy consumption in the Premises (which Landlord shall have the right to install), Tenant shall pay for electric energy based on such submeter within ten (10) days after monthly (or other) billing by Landlord. If gas service is required, Tenant shall make all arrangements with the utility company for direct service and shall install all lines and meters required therefor. Landlord shall have the right to approve the proposed installation of such service. Section 2. In the event that during the term of the Lease there shall be an increase in the rate schedule of the public utility for the supply of electric energy to the Building not directly billed to Tenant by the utility company, Tenant shall pay the resulting increase for electric energy consumed in the Premises. Section 3. In the event that any tax is imposed upon Landlord with respect to electric energy furnished to the Building by any federal, state, county or municipal authority, Tenant shall pay to Landlord, on demand, Tenant's Proportionate Share of such taxes so assessed against the Building. Section 4. Except as otherwise specifically provided in this Lease, the Landlord shall have no responsibility for failure to supply the electric energy when prevented from doing so by strikes, repairs, alterations or improvements, or by reason of the failure of the public utility to furnish the electric energy, or for any cause beyond the Landlord's reasonable control, or by order or regulation of any federal, state, county or municipal authority. Except as otherwise specifically provided in this Lease, the Landlord's obligation to furnish electricity shall not be breached nor shall there be any abatement in rent or any liability on the part of Landlord to Tenant for failure to furnish electricity for the reasons herein set forth. In no event shall Landlord be obligated to increase the existing electrical capacity of any portion of the Building's system, nor to provide any additional wiring or capacity to meet the Tenant's additional requirements. Section 5. Landlord shall not be liable in any way to Tenant for any loss, damage or expense which the Tenant may sustain or incur if either the quantity or character of electric service furnished to the Premises is changed or is no longer available or suitable for Tenant's requirements. Section 6. The failure of Landlord to furnish any service hereunder shall not be construed as a constructive eviction of Tenant and shall not excuse Tenant from failing to perform any of its obligations hereunder and shall not give Tenant any claim against Landlord for damages for failure to furnish such service. Section 7. The Tenant covenants and agrees that at all times, its use of electric energy shall never exceed the capacity of the existing feeders to the Building or the risers of wiring installation. Any riser or risers to supply the Tenant's electrical requirements upon written request of the Tenant shall be installed by the Landlord at the sole cost and expense of the Tenant, if, in the Landlord's sole judgment, the same are necessary and will not cause or create a dangerous or hazardous condition or entail excess or unreasonable alterations, repairs or expense or interfere with or disrupt other tenants or occupants. In addition to the installation of such riser or risers, the Landlord will also at the sole cost and expense of Tenant, install all other equipment proper and necessary in connection therewith subject to the aforesaid terms and conditions. Section 8. Tenant shall be responsible, at its cost and expense, for replacing all light bulbs, fluorescent lamps, non-building standard lamps and bulbs and all ballasts employed by Tenant in the Premises after the Commencement Date. Section 9. If electric energy consumed in the Premises is not separately metered, either by the utility company or by Landlord as aforesaid, and billed to Tenant, Tenant shall pay Landlord for such electric energy the sum of $12,660.00 per annum (i.e., $1.25 per square foot of gross rentable area of the Premises) in equal monthly installments of $1,055.00 each on the first day of each month during the term of this Lease commencing on the Commencement Date. 26 Such sum of $12,660.00 shall be subject to increase in accordance with increases in electric charges payable by Landlord. In addition, either Landlord or Tenant may, at any time, at its sole cost and expense, engage a electrical consultant, approved by Landlord, to make a survey of the electric energy demand properly qualified in the Premises and to determine the average monthly electric consumption in the Premises. The findings of the said consultant as to the average monthly electric consumption of the Tenant shall be deemed conclusive and binding upon the parties. From and after said consultant has submitted its report, Tenant shall pay to Landlord, as additional rent, on the first day of each month during the balance of the term hereof (or until another such survey is performed or a separate electric meter is installed for the Premises), in advance, the amount set forth in the survey as the monthly electric consumption. The Landlord is hereby granted the right from time to time, to inspect the electric lighting fixtures and electric equipment in the Premises. ARTICLE 20. NOTICES All notices, demands and requests which may be or are required to be given by either party to the other shall be in writing and shall be served by personal service or by certified mail, return receipt requested or by overnight courier which obtains delivery receipts (e.g. Federal Express). All notices, demands and requests by Landlord to Tenant shall be sent to Tenant at the Premises or at such other place as Tenant may from time to time designate in a written notice to Landlord. Notices shall be deemed given and effective on the earlier of the date of delivery and the date of attempted delivery. A notice from the attorney for Landlord or Tenant shall be effective as if given by the party represented by such attorney. All notices, demands, and requests by Tenant to the Landlord shall be sent to Landlord at 90 Woodbridge Center Drive, Woodbridge, New Jersey, with a copy to Lasser Hochman, L.L.C., 75 Eisenhower Parkway, Roseland, New Jersey 07068, attention: Richard C. Stewart, Esq., or at such other place or to such other parties as Landlord may from time to time designate in a written notice to Tenant. ARTICLE 21. LESSER AMOUNT OF RENT No payment by Tenant or receipt by Landlord of a lesser amount than the monthly Fixed Rent and additional rent herein stipulated shall be deemed to be other than on account of the earliest Fixed Rent or additional rent, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as rent be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such rent or pursue any other remedy in this Lease or at law provided. ARTICLE 22. QUIET ENJOYMENT Section 1. Landlord covenants and agrees that it has and will have at the commencement of the term of this Lease full right and power to execute and perform this Lease and to grant the estate demised herein. Tenant's rights hereunder are and shall be subject to presently existing and future easements for storm and sanitary sewers, drainage ditches, public utilities, mortgages, liens of real estate taxes and all other matters of record. Tenant has accepted its leasehold estate subject to the present and future liens of the foregoing items. Section 2. Landlord covenants and warrants that subject to the provisions of Section 1, supra, and to the items therein contemplated and referred to, Tenant, upon paying the Fixed Rent, additional rent and all charges herein provided for and observing and keeping the covenants, agreements and conditions of this Lease on its part to be kept, shall lawfully and quietly hold, occupy and enjoy the Premises during the term of this Lease, without hindrance or 27 molestation of Landlord or of any person or persons claiming under Landlord, and Landlord covenants and agrees that it will defend Tenant in such peaceful and quiet use and possession of the Premises against the claims of all such persons. ARTICLE 23. ARBITRATION In any case where this Lease provides for the settlement of a dispute by arbitration, the same shall be settled in Newark, New Jersey by arbitration under the auspices of the American Arbitration Association. The rules of the American Arbitration Association from time to time in effect shall apply (to the extent appropriate). Any award shall be enforceable by proper proceedings in any court having jurisdiction. The arbitrators, regardless how appointed, may determine how the expenses of the arbitration, including reasonable attorneys' fees, and disbursements of the successful party, shall be borne as between Landlord and Tenant. ARTICLE 24. LIMITATION OF LANDLORD'S LIABILITY Section 1. The term "Landlord" as used in this Lease, so far as covenants and/or obligations on the part of Landlord are concerned, shall be limited to mean and include only the owner or owners at the time in question of the fee of the Premises and in the event of any transfer or transfers of the title to such fee Landlord herein named (and in the case of any subsequent transfers or conveyances, the then grantor) shall be automatically freed and relieved from and after the date of such conveyance or transfer of all liability for the performance of any covenants or obligations on the part of Landlord contained in this Lease thereafter to be performed, provided that any funds in the hands of such Landlord or the then grantor at the time of such transfer, in which Tenant has an interest, shall be turned over to the grantee and any amount then due and payable to Tenant by Landlord or the then grantor under any provisions of this Lease, shall be paid to Tenant, it being intended hereby that the covenants and obligations contained in this Lease on the part of Landlord shall be binding on Landlord, its successors and assigns, only during and in respect of their respective successive periods of ownership. Section 2. Anything contained in this Lease to the contrary notwithstanding, Tenant agrees that it shall look solely to the estate and property of Landlord in the Premises and the Building for the collection of any judgment (or other judicial process) requiring the payment of money by Landlord or requiring the performance by Landlord of any covenant or obligation of this Lease in the event of any default or breach by Landlord with respect to any of the terms, covenants or conditions of this Lease to be observed and/or performed by Landlord (subject always, however, to the prior rights of any mortgagee of the Premises and the Building), and no other assets of Landlord whatsoever shall be subject to levy, execution or other procedures for the satisfaction of Tenant's remedies. Section 3. Without in any manner limiting the generality of the foregoing, it is specifically understood and agreed by and between the parties hereto that no officer, director, stockholder or agent of any corporate entity landlord shall have personal or individual liability pursuant hereto nor shall any partner of a partnership landlord have any personal or individual liability pursuant hereto nor shall the individual proprietor of any individual proprietorship landlord have any personal or individual liability pursuant hereto. 28 ARTICLE 25. ESTOPPEL NOTICES Tenant agrees at any time and from time to time upon not less than ten (10) days' prior written request by Landlord to execute, acknowledge and deliver to Landlord a statement in writing certifying that this Lease is unmodified and in full force and effect (or if there have been modifications that the same is in full force and effect as modified and stating the modifications), the Commencement Date of the term hereof and the dates to which the Fixed Rent, additional rent and other charges have been paid in advance, if any, it being intended that any such statement delivered pursuant to this Article may be relied upon by any third party, including but not limited to any prospective purchaser of Landlord's interests herein, the fee, or by any mortgagee or assignee of any mortgage upon Landlord's interest in the Premises and/or the Building. ARTICLE 26. REMEDIES The specified remedies to which Landlord and Tenant may resort under the terms of this Lease are cumulative and are not intended to be exclusive of any other remedies or means of redress to which Landlord or Tenant may be lawfully entitled in case of any breach or threatened breach by Landlord or Tenant of any provisions of this Lease. The failure of Landlord or Tenant to insist in any one or more cases upon the strict performance of any of the covenants of the Lease or to exercise any option herein contained shall not be construed as a waiver or a relinquishment for the future of such covenant or option. A receipt by Landlord of rent with knowledge of the breach of any covenant hereof shall not be deemed a waiver of such breach, and no waiver of such breach, and no waiver by Landlord or Tenant of any provision of this Lease shall be deemed to have been made unless expressed in writing and signed by Landlord or Tenant (as the case may be). In addition to the other remedies in this Lease provided, Landlord or Tenant shall be entitled to the restraint by injunction of the violation or attempted or threatened violation, of any of the covenants, or provisions of this Lease. ARTICLE 27. BROKERAGE COMMISSION Tenant warrants and represents that it has not dealt or negotiated with any real estate broker or salesman in connection with this Lease except Newmark Real Estate of New Jersey, L.L.C. ("Broker") or representatives thereof. Tenant shall and hereby does indemnify and hold Landlord harmless from and against any real estate commissions, fees, charges or the like, or claims therefor, including any and all costs incurred in connection therewith, arising out of the within transaction claimed by or payable to any party other than Broker except to the extent any such claim or commission is based solely upon Landlord's acts. Landlord shall pay any commission due Broker pursuant to a separate agreement between Landlord and Broker. ARTICLE 28. UNAVOIDABLE DELAYS In the event that either Landlord or Tenant shall be delayed or prevented from performing any of its obligations pursuant to the provisions of this Lease due to governmental action, or lack thereof, or due to shortages of or unavailability of materials and/or supplies, labor disputes, strikes, slow downs, job actions, picketing, secondary boycotts, fire or other casualty, delays in transportation, acts of God, failure to comply or inability to comply with any orders or request of any governmental agencies or authorities, acts of declared or undeclared war, public disorder, riot or civil commotion, or due to any other cause beyond the reasonable control of Landlord or Tenant, as the case may be (collectively "Force Majeure"), such party shall in any or 29 all such events be excused from its obligation to perform and comply with such provisions of this Lease for a period of time commensurate with any delay so caused, without any liability to the other therefor whatsoever, and all time periods provided for herein for performance of any such obligations shall be extended for a period of time commensurate with any such delay. Notwithstanding the foregoing, the provisions of this Article shall not apply to, and shall permit any delay in (i) the payment of any installment of Fixed Rent or additional rent and (ii) the exercise by Tenant of any option contained in this Lease. ARTICLE 29. SUBORDINATION Section 1. Tenant covenants that its rights under this Lease are now and will be subordinate to the operation and effect of any mortgage(s) or ground lease(s) now existing or hereafter placed upon the Premises, the Building and/or the Lot or any part or portion thereof without any further written document from Tenant; provided, however, Tenant agrees to execute any instrument required by Landlord to effectuate the provisions hereof and hereby constitutes Landlord as Tenant's Attorney-in-Fact to execute any such instrument in the name of Tenant. In the event that any mortgagee of the Premises and/or the Building shall succeed to the interests of the Landlord under the within Lease, it is understood and agreed that said mortgagee shall not in any event be or become liable for any act or omission of any prior landlord (including the Landlord); or be subject to any offsets or defenses which Tenant might have against any prior landlord (including the Landlord); or be bound by any rent or additional rent which Tenant might have paid for more than the current month to any prior landlord (including the Landlord); or be bound by any amendment or modification of the within Lease made without its consent; or be bound to return any security deposit under the within Lease unless the same shall actually come into possession of said mortgagee. Section 2. Tenant agrees to comply with such reasonable conditions and requirements for modifications hereof made by any existing, future or prospective bona fide institutional mortgagee of the Premises and/or the Building, which conditions and requirements shall not materially and adversely affect the basic business terms hereof, and Tenant further agrees to execute such further documents and modifications of the terms hereof as may be reasonably requested by such institutional mortgage lender. Section 3. Tenant shall, upon the request of Landlord or Landlord's mortgagee, at any time during the term hereof, furnish to Landlord or to any such mortgagee, the most recent financial statements of Tenant duly certified by a certified public accountant. Section 4. Tenant further agrees that neither the cancellation nor the termination of any ground or underlying lease, nor the foreclosure of any mortgage affecting the fee title of the Premises, the Building and/or the Lot, nor any foreclosure of a leasehold mortgage, nor any proceedings brought by the holder of any such mortgage to recover possession of the Premises or the Building shall, by operation of law or otherwise, result in the cancellation or termination of this Lease or the obligations of Tenant hereunder, and Tenant covenants and agrees to attorn to any successor to Landlord's interest in this Lease and/or in the Premises and/or the Building or to the holder of any such mortgage or ground or underlying lease or to the purchaser of the Premises and/or the Building (or Landlord's interests therein) at any foreclosure sale, provided that in any such case this Lease and Tenant's interest shall not be disturbed and shall be recognized by any successor to Landlord's interests hereunder or by any such mortgagee or purchaser for the period(s) in which this Lease remains in good standing. Section 5. If any act or omission of Landlord would give Tenant the right, immediately or after lapse of a period of time, to cancel or terminate this Lease, or to claim a partial or total eviction, Tenant shall not exercise such right (a) until it has given written notice of such act or omission to Landlord and each mortgagee of the Premises whose name and address shall previously have been furnished to Tenant, and (b) until a reasonable period for remedying such act or omission shall have elapsed following the giving of such notice and following the time when such mortgagee of the Premises shall have become entitled under such mortgage to remedy the same (which reasonable period shall in no event be less than the period to which 30 Landlord would be entitled under this Lease or otherwise, after similar notice, to effect such remedy), provided such mortgagee of the Premises shall with due diligence give Tenant notice of intention to, and commence and continue to, remedy such act or omission. ARTICLE 30. SIGNS Tenant shall only be permitted to install signage at the Premises in accordance with standards established by Landlord for the Building, at such designated locations as Landlord shall direct and in accordance with all governmental laws, orders, rules and regulations. Tenant shall not have the right to put any identifying signs on the exterior of the Building or roof of the Building. Subject to the foregoing Tenant shall, at Tenant's cost and expense, be identified on any building directory sign maintained by Landlord for all the tenants of the Building, and may identify itself, at its cost and expense, by name only, on the entrance door of the Premises leading to the interior Common Areas. Said name shall be of such shape, size and design as shall be approved by Landlord. Without limiting the foregoing, Tenant shall be solely responsible, at its cost and expense, for obtaining any and all governmental permits and approvals required for the installation of any and all signs installed by Tenant. Tenant shall, at its cost and expense, remove all signs at the expiration or earlier termination of the Lease and Tenant shall, at its cost and expense, repair all damage caused by such removal. ARTICLE 31. NOTICES OF DEFAULT Tenant agrees that any default notice served upon Landlord shall also be served upon any mortgagee (or underlying Ground Lessor) of the Premises and the Building, the name(s) of which Landlord shall have furnished to Tenant theretofore. Tenant further agrees that Landlord's mortgagee(s) (or such Ground Lessor(s)) shall have and be deemed to have the same period of time to cure any of Landlord's defaults pursuant to the provisions of this Lease as Landlord shall be granted pursuant to the provisions of this Lease. ARTICLE 32. USE Section 1. The Premises may be used only for general office purposes and for no other purpose whatsoever. Without expanding any use to which the Premises may be put as hereinbefore set forth, it is specifically understood and agreed that no part of the Premises shall, at any time, be used for the sale or preparation of food or beverages. No part of the Premises shall be used or employed for any purpose which shall emit or produce loud noises, vibrations, noxious fumes or odors or for any purpose which shall constitute a nuisance, or which shall be, or shall cause Landlord, the Premises or the Building to be violative of any governmental rule, law or regulation. Section 2. Tenant represents and warrants that its Standard Industrial Classification Number ("S.I.C." Number) under the Standard Industrial Classification Manual published by the Executive Office of the President, Office of Management and Budget is 6798. ARTICLE 33. LANDLORD'S RIGHT TO MODIFY Anything contained in the within Lease to the contrary notwithstanding, it is specifically understood and agreed by and between the parties hereto that Landlord retains the 31 sole and uncontrolled right and discretion to vary, modify or alter the size of the Lot and/or the Building, to add thereto or to subtract therefrom, or, having constructed the Building, to make any modifications thereto, additions thereto, deletions therefrom or expansion thereof as Landlord may in its sole discretion elect to do; provided always, however, that no such variation, modification, or alteration shall operate so as to affect the Premises in such a way as would vary, modify or alter the size thereof or as would materially and adversely affect Tenant's use and enjoyment thereof or of the Common Areas associated therewith. Landlord retains and shall retain in its sole discretion the right to enlarge or diminish the Common Areas. No diminution of the size of any portion of the Lot shall operate to reduce parking below legal minimum requirements unless reasonably acceptable substitute parking in sufficient amounts is then made available. ARTICLE 34. LATE CHARGES In the event that any installment of Fixed Rent, additional rent, impositions or the like shall be delinquent and overdue for a period in excess of ten (10) days, a "late charge" of five cents ($.05) for each dollar ($1.00) so delinquent and overdue may be charged to Tenant by Landlord for the purpose of defraying Landlord's expenses incident to handling such delinquent payment. This charge shall be in addition to, and not in lieu of, any other remedy which Landlord may have and is in addition to any reasonable fees and charges of any attorney which Landlord may employ to enforce Landlord's remedies in connection with any default hereunder, whether such remedy(ies) shall be authorized herein, or by law. Such "late charges", if not previously paid, shall, at the option of Landlord, be paid at the same time as the next succeeding monthly installment of Fixed Rent to be made under the Lease. ARTICLE 35. LANDLORD'S RULES AND REGULATIONS The rules and regulations regarding the Building and the Lot affixed to this Lease, as Exhibit B, as well as any other and further reasonable rules and regulations which shall be made by Landlord, shall be observed by Tenant and by Tenant's employees, agents and invitees. Landlord reserves the right to rescind any presently existing rules applicable to the Building and the Lot and to make such other and further reasonable rules and regulations as, in its judgment, may from time to time be desirable for the safety, care and cleanliness of the Building and the Lot and for the preservation of good order therein, which rules, when so made and reasonable notice thereof given to Tenant, shall have the same force and effect as if originally made a part of this Lease. Such other and further rules shall not, however, be inconsistent with the proper and rightful enjoyment by Tenant of the Premises. ARTICLE 36. CONDITION OF PREMISES It is expressly understood and agreed by and between the parties hereto that except as specifically provided for herein to the contrary, the Premises are being leased by Landlord to Tenant, and shall be delivered to Tenant, in their present condition "as is" and Landlord shall not be obligated to perform any additional work of any type or nature whatsoever in connection with said Premises in order to prepare same for Tenant's use or occupancy. 32 ARTICLE 37. ENVIRONMENTAL LAWS Section 1. (a) As used in this Article 37, the term "Occupant" shall mean any person or entity other than Tenant using and/or occupying all or any portion of the Premises. (b) Notwithstanding any other provision of this Lease to the contrary, Tenant agrees that it shall, at its sole cost and expense, fulfill, observe and comply with, and shall take all necessary steps to cause any and all Occupants to fulfill, observe and comply with, all of the terms and provisions of the Industrial Site Recovery Act, N.J.S.A 13:1K-6 et seq., ("ISRA") the Spill Compensation and Control Act, N.J.S.A. 58:10-23.11 et seq., (the "Spill Act"), and all other federal, state and local environmental laws now in effect or hereinafter enacted, as any of the same may be amended from time to time, and all rules, regulations, ordinances, opinions, orders and directives issued or promulgated pursuant thereto or in connection therewith. (c) Without limiting the foregoing, upon Landlord's request therefor, and in all events no later than sixty (60) days prior to "closing operations" or "transferring ownership or operations" (as said terms are defined in ISRA) by Tenant and/or any one or more of the Occupants, Tenant, at its sole cost and expense, shall provide Landlord with a certified true copy of: (i) An opinion letter from the New Jersey Department of Environmental Protection ("NJDEP") (or such other agency or body as shall then have jurisdiction over ISRA matters) in a form satisfactory to Landlord's counsel, stating that ISRA does not then apply to: Tenant; the use and occupancy of the Premises and the closing of operations or transferring of ownership or operations of all or any portion of the Premises; or (ii) A "No further action letter" (as said term is defined in ISRA) duly and finally approved by NJDEP or such other agency or body as shall then have jurisdiction over ISRA matters; or (iii) A "Remedial action workplan" (as said term is defined in ISRA) duly and finally approved by NJDEP or such other agency or body as shall then have jurisdiction over ISRA matters. Nothing in this Section 1(c) of Article 37 shall be construed as limiting Tenant's obligation to otherwise comply with ISRA. (d) In the event Tenant complies with Section 1(c) of Article 37, by obtaining an approved final Remedial action workplan, Tenant further agrees that it shall, at its sole cost and expense: (i) Post or cause to be posted any financial guarantee or other bond required to secure implementation and completion of said Remedial action workplan, and (ii) Promptly implement and prosecute to completion or cause to be so implemented and prosecuted said Remedial action workplan, in accordance with the schedules contained in said Remedial action workplan or as may be otherwise ordered or directed by NJDEP or such other agency or body as shall then have jurisdiction over said Remedial action workplan. Tenant expressly understands and acknowledges that Tenant's compliance with the provisions of this Section 1(d) of Article 37 may require Tenant to expend funds or do acts after the expiration or termination of one or more subleases or contracts between Tenant and one or more Occupants. Tenant agrees that it shall expend such funds and do such acts and shall not be excused therefrom even though the term of said subleases shall have previously expired or been terminated. (e) Within ten (10) days after written request by Landlord, Tenant, shall deliver to Landlord a duly executed and acknowledged affidavit of Tenant and of the chief executive officers of such Occupants as Landlord may, from time to time, require, certifying: 33 (i) The proper four digit Standard Industrial Classification number relating to Tenant and/or said Occupant's then current use of the demised premises (said Standard Industrial Classification number to be obtained by reference to the then current Standard Industrial Classification Manual prepared and published by the Executive Office of the President, Office of Management and Budget or the successor to such publication); and (ii) (A) That Tenant's and/or said Occupant's then current use of the Premises does not involve the generation, manufacture, refining, transportation, treatment, storage, handling, or disposal of hazardous substances or hazardous wastes (as hazardous substances and hazardous wastes are defined in ISRA) on site, above ground or below ground (all of the foregoing being hereinafter collectively referred to as the Presence of Hazardous Substances), or, (B) that Tenant's and/or said Occupant's then present use does involve the Presence of Hazardous Substances, in which event, said affidavit shall describe in detail that portion of Tenant's and/or said Occupant's operations which involves the Presence of Hazardous Substances. Said description shall, inter alia, identify each Hazardous Substance and describe the manner in which it is generated, handled, manufactured, refined, transported, treated, stored, and/or disposed of. Tenant and/or said Occupant shall supply Landlord with such additional information relating to said Presence of Hazardous Substances as Landlord may request. (f) Without limiting the foregoing, Tenant agrees, (i) at its sole cost and expense, to promptly discharge and remove any lien or other encumbrance against the Premises arising from or in connection with Tenant's failure or inability, for any reason whatsoever, to observe or comply with ISRA and/or the provisions of this Article 37; and (ii) to indemnify and hold Landlord harmless from and against any and all liability, penalties, losses, expenses, damages, costs, claims, causes of action, judgments and/or the like, of whatever nature, including, but not limited to, reasonable attorneys' fees, to the extent said lien, encumbrance, liability, penalty, loss, expense, damage, cost, claim, cause of action, judgment and/or the like arise from or in connection with Tenant's failure or inability, for any reason whatsoever, to observe or comply with ISRA and/or the provisions of this Article 37. (g) Tenant further represents, covenants and agrees that the Premises shall not, without the prior written consent of Landlord having been obtained, at any time during the term of this Lease, contain any underground or above-ground tanks for the storage of fuel oil, gasoline and/or other petroleum products or by-products. (h) Tenant agrees that each of the foregoing provisions of this Article 37 shall survive the expiration or earlier termination of the term of this Lease. ARTICLE 38. INITIAL LEASEHOLD IMPROVEMENTS Section 1. Landlord shall, at its sole cost and expense, promptly following execution of this Lease, prepare the Premises for Tenant's occupancy in accordance with Plan SP1-3 created by dbi (the "dbi Plan") attached hereto as Exhibit F (the "Work"). Landlord shall pay all costs and expenses of dbi for space planning and shall obtain, at Landlord's cost, any building permits necessary for the Work. The Work shall not include the installation of Tenant's furniture, including Tenant's systems furniture, fixtures, equipment and telephone and data cabling, all of which shall be installed by Tenant at Tenant's sole cost and expense. Except for the Work, it is expressly understood and agreed to by and between the parties hereto that the Premises are being leased by Landlord to Tenant, and shall be delivered to Tenant in its present condition "as is", and Landlord shall not be obligated to perform any additional work of any type or nature whatsoever in connection with this Lease. Section 2. Tenant agrees that it shall not interfere with Landlord's completion of the Work and that any labor, which may be employed in connection with the installation of Tenant's trade fixtures, furniture or other items not in the Work shall be compatible with labor 34 forces employed by Landlord. To the extent Tenant causes a delay in the completion of the Work whether by reason of a change in the Work, non-compatibility of labor or otherwise, the Commencement Date of this Lease shall be accelerated by the period of such delay. Section 3. Within thirty (30) days after the substantial completion of the Work, Tenant shall prepare and deliver to Landlord a "punch list" of all items which are not fully completed, or which are defective, and Landlord agrees to complete or correct same as quickly thereafter as is reasonably practical under the circumstances. Except as set forth on said punch list, Tenant shall be deemed to have accepted the Work. Section 4. Tenant shall have no obligation to remove or restore the Work except that Tenant, at its sole cost and expense, shall, upon the expiration or sooner termination of this Lease, remove all voice, data and computer wires and cabling from the Premises and the Building and shall repair any damage caused by such removal. The provisions of this Article 38 shall survive any termination of this Lease. Section 5. In the event the Commencement Date has not occurred by October 1, 2005 due to the fact that the Work is not complete for reasons other than delays caused by Tenant or by Force Majeure, then commencing on October 1, 2005 and continuing until the Commencement Date, Landlord shall pay Tenant $612.90 per day to reimburse Tenant for its holdover rent at its existing location. Such amount shall be paid by Landlord to Tenant within thirty (30) days of the Commencement Date. Except for such payment, Landlord shall have no further liability to Tenant in the event the Commencement Date does not occur by October 1, 2005. ARTICLE 39. SECURITY DEPOSIT Section 1. Upon execution of this Lease, the Tenant shall deposit with Landlord the sum of $14,812.20 as security for the full and faithful performance of all obligations under this Lease upon the part of Tenant to be performed. Upon the expiration of the term of this Lease, and providing Tenant is not in default hereunder and has performed all of the conditions of this Lease, Landlord shall return the said sum to Tenant. Tenant covenants and agrees that it will not assign, pledge, hypothecate, mortgage or otherwise encumber the aforementioned security during the term of this Lease. It is expressly understood and agreed that the right to co-mingle the security funds with its general funds and said security funds with its general funds and said security shall not be required to be segregated. Section 2. In the event of the failure of Tenant to keep and perform any of the terms, covenants and conditions of this Lease to be kept and performed by Tenant, then at the option of Landlord said Landlord may, after terminating this Lease, appropriate and apply said entire deposit, or so much thereof as may be necessary to compensate the Landlord for all loss or damage sustained or suffered by Landlord due to such breach on the part of Tenant. Should the entire deposit, or any portion thereof, be appropriated and applied by Landlord for the payment of overdue rent or other sums due and payable to Landlord by Tenant hereunder, or should there be any increase in the Fixed Rent then Tenant shall, upon the written demand of Landlord, forthwith remit to Landlord a amount equal to the portion appropriated or applied by Landlord as above provided, and/or the amount of any increase in the Fixed Rent, as the case may be, and Tenant's failure to do so within five (5) days after receipt of such demand shall constitute a breach of this Lease. Section 3. Landlord may deliver the funds deposited hereunder by Tenant to the purchaser of Landlord's reversionary interest in the Premises, in the event that such reversionary interest be sold and thereupon Landlord shall be discharged from any further liability with respect to such deposit. 35 ARTICLE 40. INTENTIONALLY DELETED ARTICLE 41. HOLDING OVER In the event, Tenant remains in possession of the Premises after the expiration of the term of this Lease (the "Holdover Period"), in addition to any damages to which Landlord may be entitled or other remedies Landlord may have by law, Tenant shall pay to Landlord a monthly rental for the Holdover Period, at the rate of (a) 200% of the Fixed Rent payable during the last lease year of the term of this Lease, plus (b) all items of additional rent and other charges with respect to the Premises payable by Tenant during the last lease year of the term of this Lease. Nothing herein contained shall be deemed to give Tenant any right to remain in possession of the Premises after the expiration of the term of this Lease. ARTICLE 42. AUTHORITY OF LEASE SIGNATORIES Each person signing this Lease on behalf of Tenant represents that he has full authority to do so and that this Lease binds the Tenant. ARTICLE 43. RIGHT OF FIRST NOTIFICATION In the event that at any time during the term hereof, any space contiguous to the Premises on the first (1st) floor of the Building shall become available for lease (the "Available Space"), then provided that Tenant is in possession of the Premises and not in default under this Lease, and provided further that Tenant's financial condition and creditworthiness are reasonably satisfactory to Landlord, Landlord shall notify Tenant of the availability of the Available Space and the terms upon which Landlord proposes the same to be leased. Subject to prior rights granted to any other tenants or other parties to lease the Available Space, Tenant shall have a period of ten (10) days from the date of delivery of such notice within which to notify Landlord of its election to lease the Available Space on the same terms and conditions as set forth in Landlord's notice to Tenant. In the event Tenant does not so notify Landlord of its election to lease the Available Space within the aforesaid ten (10) day period, time being of the essence, Landlord shall be free to lease the Available Space to any party as Landlord may elect upon such terms as Landlord and any proposed tenant of the Available Space may agree upon. In the event Tenant elects to lease the Available Space as aforesaid, the Available Space shall thereafter be deemed part of the Premises, and Tenant shall thereafter pay Fixed Rent and additional rent for such space and otherwise comply with the other provisions of this Lease which shall thereafter be applicable to the Available Space. In the event Tenant elects to lease the Available Space as aforesaid, a lease amendment shall be prepared and such lease amendment shall be executed by Tenant within ten (10) business days of receipt thereof or Tenant=s right to lease the Available Space shall, at Landlord=s option, be rendered null and void. If Tenant does not exercise its right to lease the Available Space in accordance with this provision, Landlord shall not be required to offer the Available Space to Tenant again. The aforesaid right of first notification is personal to the Tenant named herein and shall not apply to any assignee or subtenant of Tenant. 36 ARTICLE 44. MISCELLANEOUS (a) The covenants and agreements herein contained shall bind and inure to the benefit of Landlord and Tenant, their heirs, executors, administrators, successors and assigns. (b) If any provision of this Lease or the application thereof to any person or circumstance shall be invalid or unenforceable, the remainder of this Lease shall not be affected thereby. (c) Whenever herein the singular number is used, the same shall include the plural, and the masculine gender shall include the feminine and neuter genders. (d) The enumeration anywhere in this Lease of any right or remedy of either party shall not be construed as an exclusion or substitution of any other rights or remedies conferred under this Lease or applicable by law. (e) This Lease shall not be modified or canceled except by a writing subscribed to by the parties. (f) The submission of this Lease for examination does not constitute a reservation of or option for the premises and this Lease becomes effective as a lease only upon execution and delivery thereof by Landlord and Tenant. (g) This Lease shall not be recorded. Any recordation by Tenant shall constitute a material default entitling Landlord to terminate this Lease. (h) This Lease shall be governed by and in accordance with the laws of the State of New Jersey. (i) Landlord shall have, with respect to any payment of additional rent or other charge to be paid by Tenant pursuant to this Lease, the same rights and remedies under this Lease and at law and in equity as are available to Landlord for non-payment of Fixed Rent. IN WITNESS WHEREOF these presents have been signed sealed and delivered the day and year first above written. WITNESS: METROPLEX ASSOCIATES (Landlord) _________________________________ By: /s/ David Halpern -------------------------------- DAVID HALPERN, Partner ATTEST: HanoverTrade, INC. (Tenant) /s/ Pavl B. Pedrotti By: /s/ John A. Burchett - --------------------------------- -------------------------------- John A. Burchett Chief Executive Officer 37 EXHIBIT A DIAGRAM OF PREMISES EXHIBIT B BUILDING RULES AND REGULATIONS 1. Tenant shall not obstruct or permit its agents, clerks or servants to obstruct, in any way, the sidewalks, entry passages, corridors, halls, stairways or elevators of the Building, or use the same in any other way than as a means of passage to and from the offices of Tenant; bring in, store, test or use any materials in the Building which could cause a fire or an explosion or produce any fumes or vapor; make or permit any improper noises in the Building; smoke in the elevators; throw substances of any kind out of the windows or doors, or down the passages of the Building, or in the halls or passageways; sit on or place anything upon the window sills; or clean the windows. 2. Waterclosets and urinals shall not be used for any purpose other than those for which they are constructed; and no sweepings, rubbish, ashes, newspaper, paper towels or any other substances of any kind shall be thrown into them. Waste and excessive or unusual use of electricity or water is prohibited. 3. The windows, doors, partitions and lights that reflect or admit light into the halls or other places of the Building shall not be obstructed. NO SIGNS, ADVERTISEMENTS OR NOTICES SHALL BE INSCRIBED, PAINTED, AFFIXED OR DISPLAYED IN, ON, UPON OR BEHIND ANY WINDOWS, except as may be required by law or agreed upon by the parties; and no sign, advertisement or notice shall be inscribed painted or affixed on any doors, partitions or other part of the inside of the Building, without the prior written consent of Landlord. If such consent be given by Landlord, any such sign, advertisement, or notice shall be inscribed, painted or affixed by Landlord, but the cost of the same shall be charged to and be paid by Tenant, and Tenant agrees to pay the same promptly, on demand. Landlord agrees that Tenant shall be suitably identified. 4. No contract of any kind with any supplier or towels, water, toilet articles, waxing, rug shampooing, venetian blind washing, furniture, polishing, lamp servicing, cleaning of electrical fixtures, removal of waste paper, rubbish or garbage, or other like service shall be entered by Tenant, nor shall any vending machine of any kind be installed in the Building, without the prior written consent of Landlord. 5. When electric wiring of any kind is introduced, it must be connected as directed by Landlord, and no stringing or cutting of wires will be allowed, except with the prior written consent of Landlord, and shall be done only by contractors approved by Landlord. The number and location of telephones, telegraph instruments, electric appliances, call boxes, etc., shall be approved by Landlord. No tenant shall lay linoleum or other similar floor covering so that the same shall be in direct contact with the floor of the Premises; and if linoleum or other similar floor covering is desired to be used, an inter-lining of builder's deadening felt shall be first affixed to the floor by a paste or other removable material, the use of cement or other similar adhesive material being expressly prohibited. 6. Landlord shall have the right to prescribe the weight, size and position of all safes and other bulky or heavy equipment and all freight brought into the Building by Tenant; and also the times of moving the same in and out of the Building; and all such moving must be done under the supervision of Landlord. Landlord will not be responsible for loss of or damage to any such equipment or freight from any cause; but all damage done to the Building by moving or maintaining any such equipment or freight shall be repaired at the expense of Tenant. All safes shall stand on a base of such size as shall be designated by Landlord. Landlord reserves the right to inspect all freight to be brought into the Building and to exclude from the Building all freight which violates the Lease. 7. No machinery of any kind or articles of unusual weight or size will be allowed in the Building without the prior written consent of Landlord. Business machines and mechanical equipment shall be placed and maintained by Tenant, at Tenant's expense, in settings sufficient in Landlord's judgment to absorb and prevent vibration, noise and annoyance. 8. No additional lock or locks shall be placed by Tenant on any door in the Building, without prior written consent of Landlord. Two keys will be furnished Tenant by Landlord; two additional keys will be supplied to Tenant by Landlord, upon request, without charge; any additional keys requested by Tenant shall be paid for by Tenant. Tenant, its agents and employees, shall not change any locks. All keys to doors and washrooms shall be returned to Landlord at the termination of the tenancy, and in the event of loss of any keys furnished, Tenant shall pay Landlord the cost thereof. 9. Tenant shall not employ any person or persons other than landlord's janitors for the purpose of cleaning the premises, without prior written consent of Landlord. Landlord shall not be responsible to Tenant for any loss due to theft or vandalism from the Demised Premises however occasioned. 10. No animals of any kind shall be brought into or kept in or about the Premises. 11. The requirements of Tenant will be attended to only upon the application at the office of the Building. Employees of Landlord shall not perform any work for Tenant or do anything outside of their regular duties, unless under special instructions from the office of the Landlord. Landlord agrees to keep Tenant advised at all times of how to contact the Building Manager. 12. The Premises shall not be used for lodging or sleeping purposes, and cooking therein is prohibited. Vending machines for coffee and rolls are permitted, only upon written consent of Landlord, which consent shall not be unreasonably withheld. 13. Tenant shall not conduct, or permit any other person to conduct any auction on the premises. Tenant shall not store goods, wares or merchandise upon the Premises, except for the storage of usual supplies and inventory to be used by Tenant in the conduct of its business; permit the Premises to be used for gambling, make any unusual noises in the Building; permit to be played any musical instrument in the premises; permit to be played any radio, television, recorded or wire music in such a loud manner so as to disturb or annoy other tenants; or permit any unusual odors to be produced upon the Premises. 14. No awnings or other projections shall be attached to the outside walls of the Building. No curtains, blinds, shades or screens shall be attached or hung in, or used in connection with any window or door of the Premises, without the prior written consent of Landlord. Such curtains, blinds and shades must be of a quality, type, design, and color and attached in a manner approved by Landlord. 15. Canvassing, soliciting and peddling in the Building are prohibited, and Tenant shall cooperate to prevent the same. 16. There shall not be used in the Premises or in the Building, either by Tenant or by others, in the delivery or receipt of merchandise, any hand trucks except those equipped with rubber tires and side guards, and no hand trucks will be allowed in passenger elevators. 17. Each Tenant, before closing and leaving the Premises, shall ensure that all windows are closed and all entrance doors locked. 18. Landlord shall have the right to prohibit any advertising by Tenant which in Landlord's opinion tends to impair the reputation of the Building or its desirability as a building for offices, and upon written notice from Landlord, Tenant shall refrain from or discontinue such advertising. 19. Landlord hereby reserves to itself any and all rights not granted to Tenant hereunder, including, but not limited to, the following rights which are reserved to Landlord for its purposes in operating the Building. (a) the exclusive right to the use of the name of the Building for all purposes, except that Tenant may use the name as its business address and for no other purpose; (b) the right to change the name or address of the Building without incurring any liability to Tenant for so doing; (c) the right to install and maintain a sign or signs on the exterior of the Building; (d) the exclusive right to use or dispose of the use of the roof of the Building; (e) the right to limit the space on the directory of the Building to be allotted to Tenant; (f) the right to grant to anyone the right to conduct any particular business or undertaking in the Building. 20. Tenant shall provide Landlord with a list of all employees and a description of all motor vehicles, including make, model, color and license plate number, used thereby or by Tenant within 10 days of the Commencement Date and periodically thereafter as and when there is a change in employees or in employee or Tenant vehicles. EXHIBIT C HVAC PERFORMANCE STANDARDS Summer - 95E drybulb; 75E wetbulb. Indoor - 75E drybulb; 50E wetbulb. Winter - 0E Outdoor - 70E Indoor. EXHIBIT D CLEANING MAINTENANCE SERVICE NIGHTLY: (Between the hours of 5:30 p.m. and 8:00 a.m., Monday through Friday, legal holidays excepted) 1. Clean Common Area Lavatories as follows: (a) All lavatory floors to be swept and washed with disinfectant nightly. (b) Wash and polish all mirrors, powder shelves, bright work and enamel surfaces. (c) Wash and disinfect all basins, bowls and urinals. (d) Hand dust all partitions, tile walls, towel, paper and sanitary napkin dispensers, and receptacles, and wash as required. (e) Empty and clean paper towel and sanitary disposal receptacles. (f) Fill toilet tissue holders, soap dispensers and towel dispensers, material to be furnished by Landlord. 2. Empty and clean all waste receptacles and ash trays. 3. Furniture will be dusted and desk tops will be wiped clean. However, desks with loose papers on the top will not be cleaned. Window sills and baseboards to be dusted and washed when necessary. 4. Remove all rubbish and trash from Premises. The Tenant will remove all extraordinary rubbish and trash. 5. Carpets will be swept daily and vacuumed weekly. 6. All uncarpeted areas will be swept daily. 7. Damp mop and/or vacuum floors in entrance foyers, elevator lobbies, and public corridors, if applicable. 8. Keep locker, storage and slop sink rooms in a clean and orderly manner. WEEKLY: 1. Remove all finger marks and smudges from paneled vestibule surfaces whenever and wherever practicable. MONTHLY: 1. High Dusting: Dust clean all exposed pipes, air conditioning louvers, ducts and other areas not reached in nightly cleaning. SEMI-ANNUALLY: 1. Wash interior of all windows. ANNUALLY: 1. Wash exterior of all windows. EXHIBIT E HOLIDAY SCHEDULE NEW YEAR'S DAY WASHINGTON'S BIRTHDAY GOOD FRIDAY MEMORIAL DAY INDEPENDENCE DAY LABOR DAY THANKSGIVING DAY CHRISTMAS DAY EXHIBIT F THE dbi PLAN EX-10.31.6 4 b55558hcexv10w31w6.txt EX-10.31.6 AMENDMENT NO.9 TO THE AMENDED AND RESTATED MASTER LOAN AND SECURITY AGREEMENT EXHIBIT 10.31.6 AMENDMENT NUMBER NINE to the Amended and Restated Master Loan and Security Agreement Dated as of March 27, 2000 among HANOVER CAPITAL MORTGAGE HOLDINGS, INC. HANOVER CAPITAL PARTNERS, LTD and GREENWICH CAPITAL FINANCIAL PRODUCTS, INC. This AMENDMENT NUMBER NINE is made this 15th day of April, 2005, among HANOVER CAPITAL MORTGAGE HOLDINGS, INC. and HANOVER CAPITAL PARTNERS, LTD, each having an address at 379 Thornall Street, Edison, New Jersey 08837 (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 March 27, 2000, by and between the Borrowers and the Lender, as amended (the "Agreement"). Capitalized terms used but not otherwise defined herein shall have the meanings assigned to such terms in the Agreement. RECITALS WHEREAS, the Borrowers have requested that the Lender agree to amend the Agreement, subject to the terms hereof, to extend the term thereof to May 2, 2005 and the Lender has agreed to such request, and the Borrowers and the Lender have agreed to make such additional modifications to the Agreement as more expressly set forth below. WHEREAS, as of the date of this Amendment Number Nine, the Borrowers represent to the Lender that they are in compliance with all of the representations and warranties and all of the affirmative and negative covenants set forth in the Agreement. NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and of the mutual covenants herein contained, the parties hereto hereby agree as follows: SECTION 1. Effective as of April 25, 2005, the definition of "Termination Date" in Section 1 of the Agreement is hereby amended to read in its entirety as follows: "Termination Date" shall mean May 2, 2005 or such earlier date on which this Loan Agreement shall terminate in accordance with the provisions hereof or by operation of law. SECTION 2. Defined Terms. Any terms capitalized but not otherwise defined herein shall have the respective meanings set forth in the Agreement. SECTION 3. Fees and Expenses. The Borrowers agree to pay to the Lender all fees and out of pocket expenses incurred by the Lender in connection with this Amendment Number Nine (including all reasonable fees and out of pocket costs and -2- expenses of the Lender's legal counsel incurred in connection with this Amendment Number Nine), in accordance with Section 11.03 of the Agreement SECTION 4. Limited Effect. Except as amended hereby, the Agreement shall continue in full force and effect in accordance with its terms. Reference to this Amendment Number Nine need not be made in the Agreement or any other instrument or document executed in connection therewith, or in any certificate, letter or communication issued or made pursuant to, or with respect to, the Agreement, any reference in any of such items to the Agreement being sufficient to refer to the Agreement as amended hereby. SECTION 5. Representations. The Borrowers hereby represent to the Lender that as of the date hereof, the Borrowers are in full compliance with all of the terms and conditions of the Agreement and no Default or Event of Default has occurred and is continuing under the Agreement. SECTION 6. Governing Law. This Amendment Number Nine 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 (other than Sections 5-1401 and 5-1402 of the New York General Obligations Law). SECTION 7. Counterparts. This Amendment Number Nine may be executed by each of the parties hereto on any number of separate counterparts, each of which shall be an original and all of which taken together shall constitute one and the same instrument. [REMAINDER OF THIS PAGE LEFT INTENTIONALLY BLANK] -3- IN WITNESS WHEREOF, the Borrowers and the Lender have caused this Amendment Number Nine 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: /s/ John A. Burchett ----------------------------------------- Name: John A. Burchett Title: Chief Executive Officer and President HANOVER CAPITAL PARTNERS, LTD (Borrower) By: /s/ John A. Burchett ----------------------------------------- Name: John A. Burchett Title: Chief Executive Officer GREENWICH CAPITAL FINANCIAL PRODUCTS. INC. (Lender) By: /s/ Anthony Palmisano ----------------------------------------- Name: Anthony Palmisano Tltle: Managing Director EX-10.31.7 5 b55558hcexv10w31w7.txt EX-10.31.7 AMENDMENT NO.10 TO THE AMENDED AND RESTATED MASTER LOAN AND SECURITY AGREEMENT EXHIBIT 10.31.7 AMENDMENT NUMBER TEN to the Amended and Restated Master Loan and Security Agreement Dated as of March 27, 2000 among HANOVER CAPITAL MORTGAGE HOLDINGS, INC. HANOVER CAPITAL PARTNERS, LTD and GREENWICH CAPITAL FINANCIAL PRODUCTS, INC. This AMENDMENT NUMBER TEN is made this 2nd day of May, 2005, among HANOVER CAPITAL MORTGAGE HOLDINGS, INC. and HANOVER CAPITAL PARTNERS, LTD, each having an address at 379 Thornall Street, Edison, New Jersey 08837 ( 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 March 27, 2000, by and between the Borrowers and the Lender, as amended (the "Agreement"). Capitalized terms used but not otherwise defined herein shall have the meanings assigned to such terms in the Agreement. RECITALS WHEREAS, the Borrowers have requested that the Lender agree to amend the Agreement, subject to the terms hereof, to extend the term thereof to May 16, 2005 and the Lender has agreed to such request, and the Borrowers and the Lender have agreed to make such additional modifications to the Agreement as more expressly set forth below. WHEREAS, as of the date of this Amendment Number Ten, the Borrowers represent to the Lender that they are in compliance with all of the representations and warranties and all of the affirmative and negative covenants set forth in the Agreement. NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and of the mutual covenants herein contained, the parties hereto hereby agree as follows: SECTION 1. Effective as of May 2, 2005, the definition of "Termination Date" in Section 1 of the Agreement is hereby amended to read in its entirety as follows: "Termination Date" shall mean May 16, 2005 or such earlier date on which this Loan Agreement shall terminate in accordance with the provisions hereof or by operation of law. SECTION 2. Defined Terms. Any terms capitalized but not otherwise defined herein shall have the respective meanings set forth in the Agreement. SECTION 3. Fees and Expenses. The Borrowers agree to pay to the Lender all fees and out of pocket expenses incurred by the Lender in connection with this -2- Amendment Number Ten (including all reasonable fees and out of pocket costs and expenses of the Lender's legal counsel incurred in connection with this Amendment Number Ten), in accordance with Section 11.03 of the Agreement SECTION 4. Limited Effect. Except as amended hereby, the Agreement shall continue in full force and effect in accordance with its terms. Reference to this Amendment Number Ten need not be made in the Agreement or any other instrument or document executed in connection therewith, or in any certificate, letter or communication issued or made pursuant to, or with respect to, the Agreement, any reference in any of such items to the Agreement being sufficient to refer to the Agreement as amended hereby. SECTION 5. Representations. The Borrowers hereby represent to the Lender that as of the date hereof, the Borrowers are in full compliance with all of the terms and conditions of the Agreement and no Default or Event of Default has occurred and is continuing under the Agreement. SECTION 6. Governing Law. This Amendment Number Ten 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 (other than Sections 5-1401 and 5-1402 of the New York General Obligations Law). SECTION 7. Counterparts. This Amendment Number Ten may be executed by each of the parties hereto on any number of separate counterparts, each of which shall be an original and all of which taken together shall constitute one and the same instrument. [REMAINDER OF THIS PAGE LEFT INTENTIONALLY BLANK] -3- IN WITNESS WHEREOF, the Borrowers and the Lender have caused this Amendment Number Ten 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: /s/ John A. Burchett ----------------------------------------- Name: John A. Burchett Title: Chief Executive Officer and President HANOVER CAPITAL PARTNERS, LTD (Borrower) By: /s/ John A. Burchett ----------------------------------------- Name: John A. Burchett Title: Chief Executive Officer GREENWICH CAPITAL FINANCIAL PRODUCTS. INC (Lender) By /s/ Anthony Palmisano ------------------------------------------ Name: Anthony Palmisano Title: Managing Director EX-10.31.8 6 b55558hcexv10w31w8.txt EX-10.31.8 AMENDMENT NO.11 TO THE AMENDED AND RESTATED MASTER LOAN AND SECURITY AGREEMENT EXHIBIT 10.31.8 AMENDMENT NUMBER ELEVEN to the Amended and Restated Master Loan and Security Agreement Dated as of March 27, 2000 among HANOVER CAPITAL MORTGAGE HOLDINGS, INC. HANOVER CAPITAL PARTNERS LTD. and GREENWICH CAPITAL FINANCIAL PRODUCTS, INC. This AMENDMENT NUMBER ELEVEN is made this 16th day of May, 2005, among HANOVER CAPITAL MORTGAGE HOLDINGS, INC. and HANOVER CAPITAL PARTNERS LTD. each having an address at 379 Thornall Street, Edison, New Jersey 08837 (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 March 27, 2000, by and between the Borrowers and the Lender, as amended (the "Agreement"). Capitalized terms used but not otherwise defined herein shall have the meanings assigned to such terms in the Agreement. RECITALS WHEREAS, the Borrowers have requested that the Lender agree to amend the Agreement, subject to the terms hereof, to extend the term thereof to May 15, 2006 and the Lender has agreed to such request, and the Borrowers and the Lender have agreed to make such additional modifications to the Agreement as more expressly set forth below. WHEREAS, in order to induce the Lender to enter into this Amendment Number Eleven the Borrowers have agreed to pay the Lender a facility fee in an amount equal to $500,000. WHEREAS, as of the date of this Amendment Number Eleven, the Borrowers represent to the Lender that they are in compliance with all of the representations and warranties and all of the affirmative and negative covenants set forth in the Agreement. NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and of the mutual covenants herein contained, the parties hereto hereby agree as follows: SECTION 1. Effective as of May 16, 2005, the definition of "Termination Date" in Section 1 of the Agreement is hereby amended to read in its entirety as follows: "Termination Date" shall mean May 15, 2006 or such earlier date on which this Loan Agreement shall terminate in accordance with the provisions hereof or by operation of law. -2- SECTION 2. Effective as of May 16, 2005, Section 3.06 of the Agreement is hereby amended by deleting such section in its entirety and replacing it with the following: 3.06 Facility Fee. On May 16, 2005, the Borrowers shall pay to the Lender a facility fee in connection with the extension of the Termination Date hereunder, equal to $500,000. Such facility fee shall not be subject to offset or credit against any underwriting fees earned by the Lender at any time. The extension of the Termination Date to May 15, 2006 shall become effective upon receipt by the Lender of such facility fee. SECTION 3. Defined Terms. Any terms capitalized but not otherwise defined herein shall have the respective meanings set forth in the Agreement. SECTION 4. Fees and Expenses. The Borrowers agree to pay to the Lender all fees and out of pocket expenses incurred by the Lender in connection with this Amendment Number Eleven (including all reasonable fees and out of pocket costs and expenses of the Lender's legal counsel incurred in connection with this Amendment Number Eleven), in accordance with Section 11.03 of the Agreement SECTION 5. Facility Fee. In order to induce the Lender to enter into this Amendment Number Eleven, the Borrowers hereby agree to pay to the Lender, in addition to any other amounts required pursuant to the Agreement, the facility fee required pursuant to Section 2 of this Amendment Number Eleven, to be paid to the Lender upon execution of this Amendment Number Eleven. Such facility fee shall be paid in dollars, in immediately available funds, in accordance with the Lender's instructions, This Amendment Number Eleven shall be effective upon the Lender's receipt of such facility fee. SECTION 6. Limited Effect. Except as amended hereby, the Agreement shall continue in full force and effect in accordance with its terms. Reference to this Amendment Number Eleven need not be made in the Agreement or any other instilment or document executed in connection therewith, or in any certificate, letter or communication issued or made pursuant to, or with respect to, the Agreement, any reference in any of such items to the Agreement being sufficient to refer to the Agreement as amended hereby. SECTION 7. Representations. The Borrowers hereby represent to the Lender that as of the date hereof, the Borrowers are in full compliance with all of the terns and conditions of the Agreement and no Default or Event of Default has occurred and is continuing under the Agreement. SECTION 8. Governing Law. This Amendment Number Eleven 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 (other than Sections 5-1401 and 5-1402 of the New York General Obligations Law). -3- SECTION 9. Counterparts. This Amendment Number Eleven may be executed by each of the parties hereto on any number of separate counterparts, each of which shall be an original and all of which taken together shall constitute one and the same instrument. [REMAINDER OF THIS PAGE LEFT INTENTIONALLY BLANK] -4- IN WITNESS WHEREOF, the Borrowers and the Lender have caused this Amendment Number Eleven 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: /s/ Irma N. Tavares ----------------------------------------- Name: Irma N. Tavares Title: Chief Operating Officer HANOVER CAPITAL PARTNERS LTD. (Borrower) By: /s/ Joyce S. Mizerak ----------------------------------------- Name: Joyce S. Mizerak Title: President GREENWICH CAPITAL FINANCIAL PRODUCTS, INC. (Lender) By: /s/ Anthony Palmisano ----------------------------------------- Name: Anthony Palmisano Title: Managing Director EX-31.1 7 b55558hcexv31w1.txt EX-31.1 SECTION 302 CERTIFICATE OF CEO EXHIBIT 31.1 CERTIFICATION BY JOHN A. BURCHETT PURSUANT TO SECURITIES EXCHANGE ACTRULE 13A-14(A), AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, John A. Burchett, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Hanover Capital Mortgage Holdings, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e), and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; and b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; and c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's control over financial reporting. 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ John A. Burchett --------------------------------- John A. Burchett President and Chief Executive Officer Date: August 9, 2005 EX-31.2 8 b55558hcexv31w2.txt EX-31.2 SECTION 302 CERTIFICATION OF CFO EXHIBIT 31.2 CERTIFICATION BY HAROLD F. MCELRAFT PURSUANT TO SECURITIES EXCHANGE ACT RULE 13A-14(A), AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Harold F. McElraft, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Hanover Capital Mortgage Holdings, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e), and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; and b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; and c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's control over financial reporting. 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Harold F. McElraft --------------------------------- Harold F. McElraft Chief Financial Officer and Treasurer Date: August 9, 2005 EX-32.1 9 b55558hcexv32w1.txt EX-32.1 SECTION 906 CERTIFICATION OF CEO AND CFO EXHIBIT 32.1 HANOVER CAPITAL MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 John A. Burchett, President and Chief Executive Officer, and Harold F. McElraft, Chief Financial Officer and Treasurer, of Hanover Capital Mortgage Holdings, Inc. (the "Company"), certify to each such officer's knowledge, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 that: 1. The Quarterly Report on Form 10-Q of the Company for the quarter ended June 3, 2005 (the "Report") fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: August 9, 2005 By: /s/ JOHN A. BURCHETT ------------------------------------- John A. Burchett President and Chief Executive Officer Date: August 9, 2005 By: /s/ HAROLD F. MCELRAFT ------------------------------------- Harold F. McElraft Chief Financial Officer and Treasurer A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the quarterly period ended June 30, 2005

		or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the transition period from to


Maryland		13-3950486
(State or other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)


PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Controls and Procedures
PART II. OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
	Item 3. Defaults Upon Senior Securities
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 5. Other Information
	Item 6. Exhibits
Signatures
EXHIBIT INDEX
Ex-10.13.5 Sixth Modification of Lease Agreement
Ex-10.17 Office Lease Agreement dated August 3, 2005
EX-10.31.6 Amendment No.9 to the Amended and Restated Master Loan and Security Agreement
EX-10.31.7 Amendment No.10 to the Amended and Restated Master Loan and Security Agreement
EX-10.31.8 Amendment No.11 to the Amended and Restated Master Loan and Security Agreement
EX-31.1 Section 302 Certificate of CEO
Ex-31.2 Section 302 Certification of CFO
Ex-32.1 Section 906 Certification of CEO and CFO


		June 30,			December 31,
		2005			2004
		(Unaudited)			(Note 2)

Assets
Cash and cash equivalents		$	39,212		$	20,604
Accounts receivable			3,151			2,153
Accrued interest receivable			1,054			1,036
Mortgage loans
	Held for sale		25,555			175
	Collateral for CMOs		15,930			40,926
Mortgage securities pledged under repurchase agreements
	Available for sale		60,217			54,312
	Trading		98,015			99,142
Mortgage securities, not pledged
	Trading		—			11,126
Equity investment in unconsolidated affiliates			634			3,067
Other assets			14,054			9,597

		$	257,822		$	242,138

Liabilities
Repurchase agreements		$	146,696		$	130,102
Collateralized mortgage obligations (CMOs)			13,142			35,147
Dividends payable			—			2,514
Accounts payable, accrued expenses and other liabilities			2,654			3,156
Line of credit			3,706			—
Liability to subsidiary trust issuing preferred securities			20,619			—

			186,817			170,919

Minority interest in equity of consolidated affiliate			232			—

Stockholders’ Equity
Preferred stock: $0.01 par value, 10 million shares authorized, no shares issued and outstanding			—			—
Common stock: $0.01 par value, 90 million shares authorized, 8,421,940 and 8,381,583 shares issued and outstanding as of June 30, 2005 and December 31, 2004, respectively			84			84
Additional paid-in capital			104,211			103,126
Notes receivable from related parties			—			(583	)
Retained earnings (deficit)			(32,106	)		(30,779	)
Deferred stock-based compensation			(208	)		—
Accumulated other comprehensive (loss) income			(1,208	)		(629	)

			70,773			71,219

		$	257,822		$	242,138


			Three Months Ended						Six Months Ended
			June 30,						June 30,

			2005			2004			2005			2004

Revenues
	Interest income		$	3,832		$	3,124		$	7,664		$	6,227
	Interest expense			1,986			836			3,558			1,656

		Net interest income		1,846			2,288			4,106			4,571
	Loan loss provision			14			9			21			20

		Net interest income after loan loss provision		1,832			2,279			4,085			4,551
	Gain on sale of mortgage assets			1,886			2,114			4,166			5,572
	Gain (loss) on mark to market of mortgage assets			1,262			(1,226	)		(366	)		(1,283	)
	(Loss) gain on freestanding derivatives			(2,044	)		717			(1,336	)		(349	)
	Due diligence fees			2,726			1,729			4,719			3,109
	Assignment fees			428			710			977			1,295
	Technology			961			238			1,515			626
	Loan brokering and advisory services			336			902			848			1,393
	Reimbursed out-of-pocket expenses			570			410			1,033			753
	Other income			135			96			191			188

		Total revenues		8,092			7,969			15,832			15,855

Expenses
	Personnel			3,556			3,709			5,816			6,014
	Subcontractors			1,496			1,128			2,677			2,177
	Legal and professional			642			820			1,562			1,407
	General and administrative			439			388			827			835
	Depreciation and amortization			325			223			606			439
	Occupancy			136			126			271			244
	Technology			515			141			810			238
	Travel and entertainment			94			110			196			250
	Out-of-pocket expenses reimbursed			570			410			1,033			753
	Other			275			203			574			349

		Total expenses		8,048			7,258			14,372			12,706

		Operating income		44			711			1,460			3,149
Equity in loss of unconsolidated affiliates				(104	)		(64	)		(200	)		(40	)
Minority interest in loss of consolidated affiliate				(14	)		—			(14	)		—

Income before income tax provision (benefit)				(46	)		647			1,274			3,109
Income tax provision (benefit)				117			34			74			(49	)

Net Income (Loss)			$	(163	)	$	613		$	1,200		$	3,158

Basic Earnings (Loss) Per Share			$	(0.02	)	$	0.07		$	0.14		$	0.38

Diluted Earnings (Loss) Per Share			$	(0.02	)	$	0.07		$	0.14		$	0.38


							Notes									Accumulated
	Common Stock				Additional		Receivable			Retained			Deferred			Other
					Paid-In		from			Earnings			Stock-Based			Comprehensive
	Shares		Amount		Capital		Related Parties			(Deficit)			Compensation			(Loss) Income			Total

Balance, December 31, 2004		8,381,583	$	84	$	103,126	$	(583	)	$	(30,779	)	$	—		$	(629	)	$	71,219

Forgiveness of notes receivable from four executive officers (Principals)								583			—			—			—			583

Common stock earned by Principals						761		—			—			—			—			761

Common stock grants to key employees		20,000				215		—			—			(215	)		—			—

Amortization of deferred stock grant to key employees								—			—			7			—			7

Exercise of stock options		18,000				84		—			—			—			—			84

Stock issued under Executive Compensation Plan		2,357				25		—			—			—			—			25

Net income						—		—			1,200			—			—			1,200

Other comprehensive income						—		—			—			—			(579	)		(579	)

Dividends declared						—		—			(2,527	)		—			—			(2,527	)


Balance, June 30, 2005		8,421,940	$	84	$	104,211	$	—		$	(32,106	)	$	(208	)	$	(1,208	)	$	70,773


Mortgage loans acquired at fair market value	$	20,139
Principal value of mortgage loans		19,529

Premium paid	$	610


	June 30, 2005								December 31, 2004

	Fixed		Adjustable						Fixed		Adjustable
	Rate		Rate			Total			Rate		Rate		Total

Principal amount of mortgage loans	$	17,669	$	8,610		$	26,279		$	12	$	163	$	175
Net premium (discount) and deferred financing costs		339		(1,063	)		(724	)		—		—		—

Carrying value of mortgage loans	$	18,008	$	7,547		$	25,555		$	12	$	163	$	175


	Three Months					Six Months
	Ended					Ended
	June 30,					June 30,

	2005			2004		2005			2004

Balance, beginning of period	$	431		$	405	$	424		$	407
Loan loss provision		14			9		21			20
Sales		(157	)		—		(157	)		—
Charge-offs		(8	)		—		(8	)		(13	)

Balance, end of period	$	280		$	414	$	280		$	414


	Available for Sale				Trading

	June 30,		December 31,		June 30,		December 31,
	2005		2004		2005		2004

Mortgage securities classified as
Fixed-Rate Agency Mortgage-Backed Securities	$	—	$	—	$	98,015	$	110,268
Fixed-Rate Subordinate Mortgage-Backed Securities		17,538		11,844		—		—
Adjustable-Rate Subordinate Mortgage-Backed Securities		42,679		42,468		—		—

Carrying value of mortgage securities	$	60,217	$	54,312	$	98,015	$	110,268


	Committed		December 31,					June 30,		Carrying Value
	Borrowing		2004		Net			2005		of Underlying
Lender	Available		Balance		Change			Balance		Collateral		Type of Collateral

Lender A	$	100,000	$	—	$	13,317		$	13,317	$	13,943		Mortgage Loans
Lender B		20,000		5,691		237			5,928		8,881	Retained CMO Securities, Mortgage Securities
Lender B				16,080		(1,888	)		14,192		22,470		Mortgage Securities
Lender C				395		3,596			3,991		6,329		Mortgage Securities
Lender D				1,742		(1,742	)		—		—		Mortgage Securities
Lender E				99,076		(1,658	)		97,418		103,783		Mortgage Securities
Lender F				376		(376	)		—		—		Mortgage Securities
Lender G				1,181		8,648			9,829		14,971		Mortgage Securities
Lender H				524		(524	)		—		—		Mortgage Securities
Lender I				2,823		(1,525	)		1,298		2,037		Mortgage Securities
Lender J				2,214		(2,214	)		—		—		Mortgage Securities
Lender K				—		723			723		973		Mortgage Securities

Total	$	120,000	$	130,102	$	16,594		$	146,696	$	173,387


9.	Liability to subsidiary trust issuing preferred securities


Trust Preferred Securities Outstanding at June 30, 2005		$20 million
Interest Rate as of June 30, 2005		8.51%
Redemption period, at Hanover’s option		After March 15, 2010
Maturity date		March 15, 2035


10.	Stockholders’ Equity and Related Parties Transactions


Net Income — six months ended June 30, 2005		$	1,200
	Add (deduct) differences
	Loss on mark to market of mortgage assets		197
	Gain on freestanding derivatives		1,336
	Loan loss provision — net		13
	Losses in subsidiaries not consolidated for tax purposes — net		1,263
	Bonuses expensed not yet paid		15
	Value of common stock and loan forgiveness earned by Principals, net of amortization of amounts capitalized for tax purposes		1,247
	Stock options exercised		(96	)
	Other		(44	)

Estimated taxable income — six months ended June 30, 2005		$	5,131


Item 1.	*Financial Statements*


1.	Business


2.	Basis of Presentation


4.	Mortgage Loans


Cash and cash equivalents	$	1,216
Accounts receivable		33
Mortgage loans, held for sale		6,241
Other assets		727
Accounts payable and accrued expenses		(326	)
Line of credit		(3,681	)

Net assets acquired		4,210
Less: Investment prior to acquisition		(3,906	)
Less: Minority interest		(246	)

Total purchase price	$	58


13.	Supplemental Disclosures for Statements of Cash Flows (dollars in thousands, except share data)


			Three Months Ended June 30, 2005 (Dollars in thousands)

			Hanover Capital
			Mortgage			Hanover Capital
			Holdings, Inc.			Partners Ltd.			HanoverTrade, Inc.			Eliminations			Consolidated

Revenues
	Interest income		$	3,992		$	3		$	—		$	(163	)	$	3,832
	Interest expense			1,986			15			148			(163	)		1,986

		Net interest income		2,006			(12	)		(148	)		—			1,846
	Loan loss provision			14			—			—			—			14

		Net interest income after loan loss provision		1,992			(12	)		(148	)					1,832
	Gain on sale of mortgage assets			1,886			—			—						1,886
	Gain on mark to market of mortgage assets			1,262			—			—						1,262
	Gain (loss) on freestanding derivatives			(2,044	)		—			—			—			(2,044	)
	Due diligence fees			—			2,726			—			—			2,726
	Assignment fees			—			428			—			—			428
	Technology			—			—			961			—			961
	Loan brokering and advisory services			—			2			334			—			336
	Reimbursed out-of-pocket expenses			—			570			—			—			570
	Other income (loss)			14			169			86			(134	)		135

		Total revenues		3,110			3,883			1,233			(134	)		8,092

Total expenses				2,675			3,601			1,906			(134	)		8,048

		Operating income (loss)		435			282			(673	)		—			44
Equity in income (loss) of unconsolidated affiliates				(104	)		—			—			—			(104	)
Minority interest in loss of consolidated affiliate				(14	)		—			—			—			(14	)

Income before income tax provision (benefit)				345			282			(673	)		—			(46	)
Income tax provision (benefit)				—			117			—			—			117

Net income			$	345		$	165		$	(673	)	$	—		$	(163	)


			Three Months Ended June 30, 2004 (Dollars in thousands)

			Hanover Capital
			Mortgage			Hanover Capital
			Holdings, Inc.			Partners Ltd.			HanoverTrade, Inc.			Eliminations			Consolidated

Revenues
	Interest income		$	3,208		$	2		$	—		$	(86	)	$	3,124
	Interest expense			836			17			69			(86	)		836

		Net interest income		2,372			(15	)		(69	)		—			2,288
	Loan loss provision			9			—			—			—			9

		Net interest income after loan loss provision		2,363			(15	)		(69	)		—			2,279
	Gain on sale of mortgage assets			2,114			—			—			—			2,114
	Loss on mark to market of mortgage assets			(1,226	)		—			—			—			(1,226	)
	Gain (loss) on freestanding derivatives			717			—			—			—			717
	Due diligence fees			—			1,729			—			—			1,729
	Assignment fees			—			710			—			—			710
	Technology			—			—			238			—			238
	Loan brokering and advisory services			—			—			907			(5	)		902
	Reimbursed out-of-pocket expenses			—			410			—			—			410
	Other income (loss)			18			6			95			(23	)		96

		Total revenues		3,986			2,840			1,171			(28	)		7,969

Total expenses				2,767			2,755			1,764			(28	)		7,258

		Operating income		1,219			85			(593	)		—			711
Equity in loss of unconsolidated affiliates				(64	)		—			—			—			(64	)

Income before income tax provision (benefit)				1,155			85			(593	)		—			647
Income tax provision (benefit)				—			34			—			—			34

Net income			$	1,155		$	51		$	(593	)	$	—		$	613


			Six Months Ended June 30, 2005 (Dollars in thousands)

			Hanover Capital
			Mortgage			Hanover Capital
			Holdings, Inc.			Partners Ltd.			HanoverTrade, Inc.			Eliminations			Consolidated

Revenues
	Interest income		$	7,961		$	6		$	—		$	(303	)	$	7,664
	Interest expense			3,558			24			279			(303	)		3,558

		Net interest income		4,403			(18	)		(279	)		—			4,106
	Loan loss provision			21			—			—			—			21

		Net interest income after loan loss provision		4,382			(18	)		(279	)		—			4,085
	Gain on sale of mortgage assets			4,166			—			—			—			4,166
	Loss on mark to market of mortgage assets			(366	)		—			—			—			(366	)
	Gain (loss) on freestanding derivatives			(1,336	)		—			—			—			(1,336	)
	Due diligence fees			—			4,719			—			—			4,719
	Assignment fees			—			977			—			—			977
	Technology			—			—			1,515			—			1,515
	Loan brokering and advisory services			—			4			846			(2	)		848
	Reimbursed out-of-pocket expenses			—			1,028			5			—			1,033
	Other income (loss)			14			196			159			(178	)		191

		Total revenues		6,860			6,906			2,246			(180	)		15,832

Total expenses				4,211			6,736			3,605			(180	)		14,372

		Operating income (loss)		2,649			170			(1,359	)		—			1,460
Equity in loss of unconsolidated affiliates				(200	)		—			—			—			(200	)
Minority interest in loss of consolidated affiliate				(14	)		—			—			—			(14	)

Income before income tax provision (benefit)				2,463			170			(1,359	)		—			1,274
	Income tax provision (benefit)			—			74			—						74

Net income			$	2,463		$	96		$	(1,359	)	$	—		$	1,200


			Six Months Ended June 30, 2004 (Dollars in thousands)

			Hanover Capital
			Mortgage			Hanover Capital
			Holdings, Inc.			Partners Ltd.			HanoverTrade, Inc.			Eliminations			Consolidated

Revenues
	Interest income		$	6,393		$	4		$	—		$	(170	)	$	6,227
	Interest expense			1,656			34			136			(170	)		1,656

		Net interest income		4,737			(30	)		(136	)		—			4,571
	Loan loss provision			20			—			—			—			20

		Net interest income after loan loss provision		4,717			(30	)		(136	)		—			4,551
	Gain on sale of mortgage assets			5,572			—			—			—			5,572
	Loss on mark to market of mortgage assets			(1,283	)		—			—			—			(1,283	)
	Gain (loss) on freestanding derivatives			(349	)		—			—			—			(349	)
	Due diligence fees			—			3,109			—			—			3,109
	Assignment fees			—			1,295			—			—			1,295
	Technology			—			—			626			—			626
	Loan brokering and advisory services			—			—			1,398			(5	)		1,393
	Reimbursed out-of-pocket expenses			—			753			—			—			753
	Other income (loss)			45			13			163			(33	)		188

		Total revenues		8,702			5,140			2,051			(38	)		15,855

Total expenses				4,093			5,313			3,338			(38	)		12,706

		Operating income		4,609			(173	)		(1,287	)		—			3,149
Equity in loss of unconsolidated affiliates				(40	)		—			—			—			(40	)

Income before income tax provision (benefit)				4,569			(173	)		(1,287	)		—			3,109
	Income tax provision (benefit)			—			(49	)		—			—			(49	)

Net income			$	4,569		$	(124	)	$	(1,287	)	$	—		$	3,158


Item 2.	*Management’s Discussion and Analysis of Financial Condition and Results of Operations*


	•	Hanover Capital Mortgage Holdings, Inc., which we refer to as “Hanover”, has as its primary business objective the generation of interest income from a leveraged investment portfolio, consisting of subordinate mortgage-backed securities, which we refer to as “Subordinate MBS”, mortgage loans (including mortgage loans from the termination of the 1999-A Collateralized Mortgage Obligation, mortgage loans underlying the 1999-B Collateralized Mortgage Obligation and distressed mortgage loans held through HDMF-I LLC), which we refer to as “Mortgage Loans”, and whole pool Fannie Mae and Freddie Mac mortgage-backed securities, which together we refer to as “Agency MBS”.

	•	Hanover Capital Partners Ltd., which we refer to as “HCP”, provides consulting and outsourcing services, which we refer to as “COS”, for third parties in the mortgage industry.

	•	HanoverTrade, Inc., which we refer to as “HT”, provides loan sale advisory services, which we refer to as “LSA”, and technology software for third parties in the mortgage industry.


	Principal		Carrying				Net
Portfolio(1)	Balance		Value		Financing		Equity(2)

Mortgage Loans	$	42,693	$	41,485	$	31,392	$	10,093
Subordinate MBS		91,052		60,217		38,941		21,276
Agency MBS		96,784		98,015		93,211		4,804

Total	$	230,529	$	199,717	$	163,544	$	36,173


(1)	Our Subordinate MBS portfolio is classified in our Consolidated Balance Sheets as “Mortgage securities pledged under repurchase agreements Available for sale”. Our Mortgage Loans portfolio is classified on our Consolidated Balance Sheets as “Mortgage Loans Held for sale” and “Mortgage Loans Collateral for CMOs”. Our Agency MBS portfolio is classified on our Consolidated Balance Sheets as “Mortgage securities pledged under repurchase agreements Trading” and “Mortgage securities, not pledged Trading”.

(2)	Net equity is the difference between the carrying value of an asset and the amount of financing specific to that asset.


	•	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 for investment and CMO collateral are reported at amortized cost, net of allowance for loan losses.


	•	Mortgage securities designated as available for sale are recorded at estimated fair value on the balance sheet with unrealized gains and losses recorded in stockholders’ equity as a component of “Accumulated other comprehensive income”.

	•	Mortgage securities designated as trading are reported at estimated fair value. Gains and losses resulting from changes in fair value are recorded as income or expense in the income statement.

	•	Mortgage securities classified as held to maturity are carried at amortized cost with the amortization of premiums or accretions of discounts included as a component of interest income in the income statement. If a decline in value is deemed other-than-temporary, the carrying value is reduced and the amounts recorded as unrealized losses in the income statement.


	Net Interest Income and Total Gains (Losses) For Interest Earning Assets


	June 30, 2005

	Three			Six
	Months			Months
	Ended			Ended

Net interest income	$	578		$	1,304
Gain(loss) on mark to market of mortgage assets		1,344			(181	)
Other loss (forward sales)		(1,980	)		(1,278	)

Total	$	(58	)	$	(155	)


Item 3.	*Quantitative and Qualitative Disclosures About Market Risk*


Item 2.	*Unregistered Sales of Equity Securities and Use of Proceeds*


Item 4.	*Submission of Matters to a Vote of Security Holders*


Terms Expiring in 2008	Votes For		Votes Withheld

Joyce S. Mizerak		7,996,147		143,692
James F. Stone		7,992,685		147,154
Irma N. Tavares		7,996,478		143,361


	Terms expiring in 2006: John A. Burchett, John A. Clymer and Saiyid T. Naqvi.

	Terms expiring in 2007: Joseph J. Freeman, Douglas L. Jacobs, George J. Ostendorf and John N. Rees.


Votes For	Votes Against	Abstentions

8,050,546	52,002	37,291