Hannover House Inc (HHSE)

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Default, and that the Obligation then owed to TCA of $358,734.27, would be restructured by creating two “Replacement Notes,” in substitution for (but not the elimination of) the Note (Exhibit G). The First Amendment also reiterated and reaffirmed all of the remaining conditions and terms of the Loan Documents.

19. Since the execution of the First Amendment, the Corporate Defendants have failed to make all payments due pursuant to the Replacement Notes; have failed to satisfy the Lock Box provisions, have failed to keep their SEC filings current; and have failed to fulfill the other conditions required by the First Amendment and the balance of the Loan Documents. These failures each and in combination constitute defaults under the Loan Documents.

20. TCA (or its assigns) has the right to convert its Note or Replacement Notes into common shares of the Corporate Defendants at a conversion rate formula set forth in the Credit Agreement. The Credit Agreement required that the Corporate Defendants affirmatively covenant, maintain and replenish its authorized shares in a Share Reserve to satisfy the potential conversion by TCA. Exhibit A, Section 10.20. In the event of a shortfall of the authorized shares, the Corporate Defendants were required to take the steps necessary to increase the authorized shares to the required levels. On numerous occasions, the Corporate Defendants violated this covenant, despite demands by TCA, resulting in the inability to effectuate conversions.

21. Additionally, the Corporate Defendants had the obligation both under the Credit Agreement, the other Loan documents and SEC rules, to maintain accurate financial statements according to Generally Accepted Accounting Principles, and be current in its reporting requirements. The failure to maintain such accurate records and filings place the Corporate Defendants in jeopardy of being sanctioned by SEC, which in turn would have a depressing effect on the value of its common stock. In turn, this would negatively impact the value of TCA conversion rights in the Corporate Defendants, as well as the collectability of the Obligation.

22. To insure that the covenants enumerated in the Credit Agreement were satisfied, the Corporate Defendants were required to provide TCA on a monthly basis with a certificate signed by one of the Individual Defendants that all covenants had been satisfied. The Corporate and Individual Defendants either failed to provide such certificates, or the certificates provided were false.



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