<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 25, 1998.
REGISTRATION NO. 333-______
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
--------------------------
ROCK FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
MICHIGAN 6162 38-2603955
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
----------------------
30600 TELEGRAPH ROAD, FOURTH FLOOR
BINGHAM FARMS, MICHIGAN 48025
(248) 540-8000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
DANIEL GILBERT
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
ROCK FINANCIAL CORPORATION
30600 TELEGRAPH ROAD, FOURTH FLOOR
BINGHAM FARMS, MICHIGAN 48025
(248) 540-8000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
COPIES TO:
ALAN S. SCHWARTZ DANIEL G. BERICK
HONIGMAN MILLER SCHWARTZ AND COHN BERICK, PEARLMAN & MILLS CO., L.P.A.
2290 FIRST NATIONAL BUILDING 1350 EATON CENTER, 1111 SUPERIOR AVENUE
DETROIT, MICHIGAN 48226-3583 CLEVELAND, OHIO 44114
(313) 256-7663 (216) 861-4900
FAX NO.: (313) 962-0176 FAX NO: (216) 861-4929
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act, check the following box. [ ]
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, check the
following box and list the Securities Act registration statement
number of the earlier effective registration statement for the
same offering. [ ] ___________
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ___________
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ___________
If the delivery of the prospectus is expected to be made pursuant to
Rule 434, check the following box. [ ]
---------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===================================================================================================================================
PROPOSED MAXIMUM
OFFERING PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED (1) SHARE (2) PRICE (2) REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Shares, par value $.01 per share 3,829,500 $10.00 $38,295,000 $11,297.03
===================================================================================================================================
</TABLE>
(1) Includes 499,500 shares which the Underwriters have the option to
purchase to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the registration fee,
based on a bona fide estimate of the maximum public offering price
pursuant to Rule 457(a).
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, FEBRUARY 25, 1998
PROSPECTUS
3,330,000
[LOGO] ROCK FINANCIAL CORPORATION
COMMON SHARES
Of the 3,330,000 common shares, par value $.01 per share (the "Common
Shares"), offered hereby (the "Offering") 3,000,000 shares are being offered by
Rock Financial Corporation ("Rock" or the "Company") and 330,000 shares are
being sold by certain shareholders and option holders of Rock (the "Selling
Shareholders"). See "Principal and Selling Shareholders." Rock will not
receive any of the proceeds from the sale of shares by the Selling
Shareholders, but it will receive approximately $1.5 million of proceeds from
the options exercised by some of the Selling Shareholders to acquire the shares
they are selling. See "Use of Proceeds."
Prior to the Offering, there has been no public market for the Common
Shares. It is currently anticipated that the initial public offering price
will be between $__ and $__ per share. See "Underwriting" for a discussion of
factors to be considered in determining the initial public offering price.
Rock intends to apply to The Nasdaq Stock Market, Inc. to have its Common
Shares quoted in The Nasdaq National Market under the symbol "RCCK."
--------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE
COMMON SHARES OFFERED HEREBY.
--------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
==========================================================================================================================
PROCEEDS
PRICE TO UNDERWRITING PROCEEDS TO TO SELLING
PUBLIC DISCOUNT (1) COMPANY (2) SHAREHOLDERS
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share . . . . . . $____ $0.___ $_____ $_____
- ---------------------------------------------------------------------------------------------------------------------------
Total (3) . . . . . . $__________ $_______ $__________ $__________
==========================================================================================================================
</TABLE>
(1) Rock and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting estimated expenses of $800,000, payable by Rock,
including expenses of the Selling Shareholders. See "Principal and
Selling Shareholders."
(3) Rock has granted the Underwriters a 30-day option to purchase up to
499,500 additional Common Shares, on the same terms and conditions as
set forth above, solely to cover over-allotments, if any. If such
option is exercised in full, the total Price to Public will be
$__________, Underwriting Discount will be $_________, Proceeds to
Company will be $__________ and Proceeds to Selling Shareholders will
be $_________. See "Underwriting."
-------------
The Common Shares are offered subject to prior sale, when, as and if
delivered to and accepted by the Underwriters, and subject to certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
said offer and to reject orders in whole or in part. It is expected that
delivery of the Common Shares will be made on or about ________, 1998 at the
offices of Bear, Stearns & Co. Inc., 245 Park Avenue, New York, New York 10167.
-------------
BEAR, STEARNS & CO. INC.
________, 1998
<PAGE> 3
-----------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR
ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
-----------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE
COMMON SHARES, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING
TRANSACTIONS AND THE IMPOSITION OF PENALTY BIDS. SEE "UNDERWRITING."
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be
read in conjunction with, the more detailed information and financial
statements and notes to financial statements appearing elsewhere in this
Prospectus. Unless the context indicates otherwise, all references in this
Prospectus to "Rock" or the "Company" refer to Rock Financial Corporation.
Except as otherwise specified, all information in this Prospectus (i) assumes
no exercise of the Underwriters' over-allotment option (see "Underwriting"),
and (ii) gives effect to a 1,118.31805-for-one stock split effected January 8,
1997.
THE COMPANY
Rock is a specialty marketing company of debt consolidation and home
financing products secured primarily by first or second mortgages on one- to
four-family, owner-occupied residences. The Company originates loans through
24 stores and branches, one marketing center and one call center. Founded in
1985 by its current Chief Executive Officer and Chairman of the Board, Daniel
Gilbert, Rock originates 100% of its loans through its retail operations,
marketing its loans directly to consumers. The Company uses proprietary
marketing methods and technology to increase its market penetration. Rock
seeks to provide "world class" service to its customers, thereby encouraging
them to return for future loans and refer others to Rock for loans. The
Company also focuses on recruiting, developing and motivating talented people,
recruited from inside and outside the consumer finance industry, to implement
its business strategies. Rock believes it is creating growing brand identities
and a retail franchise that will sustain its loan origination efforts.
As a retail originator of loans, Rock earns a portion of its revenues
from origination points and processing fees charged to its customers. Rock
does not currently securitize its loans. Rather, it sells its loans in large
bulk and whole loan sales for cash premiums in the secondary market. During
1997, Rock had revenues of $52.1 million, pre-tax income of $11.4 million and
pro forma net income of $7.0 million. During 1997, Rock closed $1.2 billion
(12,950 units) of loans. As of January 31, 1998, Rock had 717 employees,
including 286 loan officers.
Rock currently operates through three major divisions. Rock
originates loans to individuals with impaired credit characteristics, high
levels of debt service to income, unfavorable past credit experience, limited
credit history, limited employment history or unverifiable income ("Sub-Prime
Home Equity Loans") through its Fresh Start(TM) division. Rock owns the
registered trademark for the name "Fresh Start Financial Services(R)" and has
applied for a registered service mark for the name "Fresh Start(TM)." Rock
originates home equity second mortgage loans to individuals with good credit
histories but little or no equity in their homes ("High Loan-to-Value Loans" or
"High LTV Loans") through its Specialty Lending division. During 1997, Rock
closed $335.3 million (6,232 units, representing 49% of the total units closed)
of Sub-Prime Home Equity Loans and High LTV Loans (together, "Non-Prime
Loans"). Rock also originates loans that generally conform to Federal National
Mortgage Association ("FNMA") or Federal Home Loan Mortgage Corporation
("Freddie Mac") underwriting standards, or that generally meet such standards
except for maximum loan size guidelines ("Conventional Loans"), through its
Conventional Mortgage Lending division. During 1997, Rock closed $867.5
million (6,513 units) of Conventional Loans. Although only 28% of the total
loan closings (by dollar volume) were Non-Prime Loans in 1997, revenues from
Non-Prime Loans equaled 63% of total revenues due to the higher profit margins
and interest rates associated with Non-Prime Loans. In addition, Rock began to
increase its government insured lending operations in 1997, primarily making
mortgage loans that meet the underwriting standards for Federal Housing
Administration ("FHA") insurance.
3
<PAGE> 5
Rock's business in each division is supported by an infrastructure of
sophisticated technology, highly-trained people and specialized marketing,
including multimedia advertising and direct marketing operations. To identify
potential customers, Rock uses internal and external databases of information
regarding past and potential customers and their needs. Rock then develops
proprietary customer profiles which it uses together with information from
outside sources to tailor and direct its marketing efforts for each of its
divisions. Rock believes that its focused marketing approach makes more
efficient use of its marketing resources and leads to a higher marketing
success rate than broad indiscriminate marketing aimed at a wide range of
consumers.
FRESH START(TM) DIVISION
Created in 1994, the Fresh Start(TM) division focuses on customers
whose borrowing needs are not served by traditional financial institutions due
to impaired credit profiles or other factors. Sub-Prime Home Equity Loans are
used typically to consolidate debt (such as credit card debt) and to finance
home improvements, home purchases and other consumer needs. By originating
loans to individuals with impaired credit profiles, Rock is able to charge
higher interest rates on its Sub-Prime Home Equity Loans than for its
Conventional Loans.
The Fresh Start(TM) division originates Sub-Prime Home Equity Loans
through its network of retail loan origination stores. The majority of the
Fresh Start(TM) stores are located in retail strip malls or office buildings
with substantial signage. Rock supports its Fresh Start(TM) store network with
an array of marketing, including multimedia advertising campaigns and direct
marketing to build local awareness of the Fresh Start(TM) brand name and to
grow loan volume within each market.
As of January 31, 1998, Rock had 19 Fresh Start(TM) stores, including
five stores opened before 1997, nine stores opened during 1997, and five stores
opened during January 1998. In addition, in November 1997, Rock opened a pilot
marketing center located within a large national retail superstore. Rock's
Fresh Start(TM) division is using the "Fresh Start(TM)" name, adopted in 1997,
in its advertising outside of Michigan and plans to convert its current Michigan
"Boulder Financial" stores to Fresh Start(TM) stores in 1998. Stores that were
open before 1997 closed an average of $11.4 million of Sub-Prime Home Equity
Loans per store during the fourth quarter of 1997. Rock believes that its new
stores mature over a twelve- to eighteen-month time period.
The Fresh Start(TM) division closed $269.3 million (4,196 units) of
Sub-Prime Home Equity Loans during 1997, including $91.0 million (1,453 units)
closed during the fourth quarter. Based on information provided by the
National Mortgage News, Rock believes it was one of the 20 largest retail
originators of Sub-Prime Home Equity Loans in the United States in 1997.
SPECIALTY LENDING DIVISION
The Specialty Lending division, which commenced its current operations
in March 1997, originates High LTV Loans secured primarily by second mortgages
and with combined loan-to-value ratios (including the first mortgage balance)
of up to 125% of the estimated value of the underlying property. Because High
LTV Loans have little, if any, equity cushion (unlike Sub-Prime Home Equity
Loans), Rock's underwriting relies principally on the creditworthiness of the
customer for repayment. High LTV Loans are typically used to consolidate debt
(such as credit card debt) and to finance home improvements, education, and
other consumer needs.
4
<PAGE> 6
The Specialty Lending division markets High LTV Loans to consumers
through its call center located in Bingham Farms, Michigan. During 1997, Rock
closed $66.0 million (2,036 units) of High LTV Loans, including $29.1 million
(883 units) closed during the fourth quarter. As of January 31, 1998, Rock was
soliciting High LTV Loans in eight states and was licensed to do business in
eight others. Rock uses extensive direct-mail marketing and significant
multimedia advertising campaigns to generate inbound call volume into its call
center. At various times, outbound telemarketing programs also are launched to
targeted lists of consumers. The Specialty Lending division uses a specially
trained sales force and relies heavily on technology and systems designed
specifically for Rock. Although the current focus of the Specialty Lending
division is High LTV Loans, the infrastructure of the division and the call
center are designed with the ability to change focus to, or add, other types of
loan products as appropriate.
CONVENTIONAL MORTGAGE LENDING DIVISION
Since its inception in 1985, Rock has originated Conventional Loans
through its Conventional Mortgage Lending division. During 1997, Rock
originated $867.5 million (6,513 units) of Conventional Loans. Rock believes
that it is the largest non-depositary-affiliated retail lender of one- to
four-family residential mortgage loans in southeast Michigan. The Conventional
Mortgage Lending division originates loans through five branches all located
in southeast Michigan. Conventional Loans generally conform to the
underwriting guidelines of FNMA or Freddie Mac, or they generally conform
except for maximum loan size, and they are generally made to finance the
purchase of a home or to refinance a home mortgage.
Over the past 13 years, Rock has used marketing and advertising to
create and enhance brand name recognition for the Rock Financial name. In
conjunction with its multimedia advertising, Rock coordinates extensive direct
marketing campaigns. Rock has developed third-party relationships with real
estate brokers, home builders, attorneys, accountants, and financial planners,
which generate referral business. Rock is also an approved, unsupervised
seller/servicer of FNMA and Freddie Mac Conventional Loans and a Department of
Housing and Urban Development ("HUD")-approved lender.
BUSINESS STRATEGY
Rock's business strategy to sustain its growth in profitability while
continuing to build its consumer lending operations includes: (i) enhancing
consumer recognition of its "Fresh Start(TM)" and "Rock Financial" brand names
in its current markets and establishing brand name recognition in new markets,
(ii) increasing the number of Fresh Start(TM) stores and expanding its call
center operations into additional states, (iii) expanding the cross-selling of
existing products and expanding the products offered through existing
distribution channels, (iv) exploring establishing additional distribution
channels, (v) providing "world class" service, and thereby distinguishing
itself from its competitors, (vi) continuing to invest heavily in technology
and marketing, and (vii) maintaining consistent underwriting standards, and
thereby maintaining secondary market interest in Rock's loans.
Simultaneously with the closing of this Offering, Rock will cease to
be taxed as an S corporation under Subchapter S (an "S corporation") of the
Internal Revenue Code of 1986, as amended (the "Code"), and will become subject
to federal and state income taxation as a C corporation. In connection with
the termination of its S corporation status, Rock will pay previously earned
and undistributed taxable income (the "Shareholder Distribution Amount") out of
the net proceeds of the Offering to Rock's shareholders existing immediately
before the closing of this Offering (the "Existing Shareholders") and an
accounting
5
<PAGE> 7
adjustment will be made. Rock was incorporated in the State of Michigan on
June 21, 1985. Rock's principal executive offices are located at 30600
Telegraph Road, Fourth Floor, Bingham Farms, Michigan 48025. Its telephone
number is (248) 540-8000.
RISK FACTORS
Before making an investment decision, prospective investors should
carefully consider all of the information set forth in this Prospectus and, in
particular, should evaluate the factors set forth in "Risk Factors."
THE OFFERING
Common Shares offered by:
Rock . . . . . . . . . . . . . . 3,000,000 shares
The Selling Shareholders . . . . 330,000 shares*
Common Shares to be outstanding
after the Offering . . . . . . . 13,330,000 shares*
Use of Proceeds: . . . . . . . . . . . . To fund a distribution to the
Existing Shareholders in
connection with termination of
Rock's status as an S corporation
($18.0 million as of December 31,
1997 and expected to increase by the
time of the distribution) and to
repay a portion of the amounts
outstanding under Rock's warehouse
line of credit used to finance, and
secured by, a portion of Rock's
inventory of loans. See "Use of
Proceeds."
Proposed Nasdaq National Market Symbol. . "RCCK"
- ------------------------
*Excludes an aggregate of up to 4,500,000 Common Shares reserved for issuance
under Rock's 1996 Stock Option Plan, under which options to acquire 2,492,184
Common Shares were outstanding as of January 31, 1998 (see Note 11 of Notes to
Financial Statements). The 330,000 Common Shares being sold by the Selling
Shareholders will be acquired by them on the closing date of this Offering upon
exercise of stock options previously granted to them, and Rock has granted to
them, effective as of the closing date of this Offering, immediately
exercisable replacement options to purchase 450,000 Common Shares at the
initial public offering price of the Common Shares in this Offering. At the
closing of the Offering, options to purchase 2,612,184 Common Shares will be
outstanding.
6
<PAGE> 8
SUMMARY FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, (1)
---------------------------------------------------------------------
STATEMENT OF INCOME DATA: 1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenue:
Interest income ...................................... $ 2,724 $ 2,310 $ 3,003 $ 4,267 $ 8,083
Interest expense ..................................... 1,819 1,746 3,012 3,669 5,150
----------- ---------- --------- ---------- ----------
Net interest margin ................................. 905 564 (9) 598 2,933
Provision for credit losses -- -- -- -- (300)
----------- ---------- --------- ---------- ----------
Net interest margin after provision for credit losses 905 564 (9) 598 2,633
Loan fees and gains and losses on sale of mortgages 16,251 10,348 17,788 27,960 47,084
Net gain on sale of mortgage servicing (2) ........... -- 2,465 5,728 -- --
Net gain (loss) on sale of marketable securities (3).. 356 (202) 346 991 2,222
Other income ......................................... 677 1,348 399 6 171
----------- ---------- --------- ---------- ----------
18,189 14,523 24,252 29,555 52,110
----------- ---------- --------- ---------- ----------
Expenses:
Salaries, commissions and employee benefits .......... 10,306 9,514 11,272 16,425 24,811
General and administrative expenses .................. 2,761 3,159 3,726 4,646 7,630
Marketing expenses ................................... 967 1,465 1,339 2,393 5,370
Depreciation and amortization ........................ 390 510 506 663 1,292
----------- ---------- --------- ---------- ----------
14,424 14,648 16,843 24,127 39,103
----------- ---------- --------- ---------- ----------
Income (loss) before stock and option holders' bonuses 3,765 (125) 7,409 5,428 13,007
Stock and option holders' bonuses .................... 2,026 142 546 2,297 1,592
----------- ---------- --------- ---------- ----------
Net income (loss) ................................... 1,739 (267) 6,863 3,131 11,415
Pro forma income tax expense (benefit) (4) ............. 687 (105) 2,642 1,205 4,395
----------- ---------- --------- ---------- ----------
Pro forma net income (loss) ......................... $ 1,052 $ (162) $ 4,221 $ 1,926 $ 7,020
=========== ========== ========= ========== ==========
PER SHARE INFORMATION:
Pro forma net income per share:
Basic ............................................... $ 0.53
==========
Diluted ............................................. $ 0.49
==========
Weighted average number of shares outstanding:
Basic ............................................... 13,330,000
==========
Diluted ............................................. 14,434,692
==========
OPERATING DATA:
Principal amount of loan closings:
Fresh Start(TM) ...................................... $ -- $ 11,703 $ 64,403 $ 147,676 $ 269,275
Specialty Lending .................................... -- -- -- -- 66,043
Conventional Mortgage Lending . ...................... 997,615 677,024 740,408 892,672 867,520
Other ................................................ -- -- 15,860 36,943 16,599
----------- ---------- --------- ---------- ----------
Total ............................................... $ 997,615 $ 688,727 $ 620,671 $1,077,291 $1,219,437
=========== ========== ========= ========== ==========
Weighted average interest rate (fixed rate):
Fresh Start(TM) ...................................... -- 12.58% 12.42% 12.64% 12.69%
Specialty Lending .................................... -- -- -- -- 15.22%
Conventional Mortgage Lending ........................ 7.36% 7.85% 8.18% 7.86% 7.99%
Other ................................................ -- -- 8.03% 8.48% 8.42%
Weighted average interest rate (adjustable rate):
Fresh Start(TM) ...................................... -- 10.25% 10.91% 10.33% 11.09%
Conventional Mortgage Lending ........................ 4.68% 6.27% 6.90% 6.51% 6.83%
Other ................................................ -- -- 6.90% 7.07% 7.08%
Total number of employees at year end .................. 260 255 266 399 667
Number of branches at year end: (5)
Fresh Start(TM) Stores ............................... -- 1 3 5 14
Conventional Mortgage Lending Branches ............... 3 8 9 4 5
</TABLE>
7
<PAGE> 9
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED (1)
-----------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
1997 QUARTERLY STATEMENT OF INCOME DATA:
Revenues:
Net interest margin after provision for credit losses .... $ 405 $ 454 $ 829 $ 945
Loan fees and gains and losses on sale of mortgages ...... 7,173 10,895 12,150 16,866
Net gain (loss) on sale of marketable securities (3) ..... 685 (18) 1,587 (32)
Other income ............................................. 50 52 48 21
---------- ----------- ----------- -----------
8,313 11,383 14,614 17,800
---------- ----------- ----------- -----------
Expenses ................................................... 6,700 7,669 11,222 13,512
---------- ----------- ----------- -----------
Income before stock and option holders' bonuses ............ 1,613 3,714 3,392 4,288
Stock and option holders' bonuses .......................... 492 493 227 380
---------- ----------- ----------- -----------
Net income ............................................... 1,121 3,221 3,165 3,908
Pro forma income tax expense (4) .......................... 432 1,240 1,218 1,505
---------- ----------- ----------- -----------
Pro forma net income ..................................... $ 689 $ 1,981 $ 1,947 $ 2,403
========== =========== =========== ===========
PER SHARE INFORMATION:
Pro forma net income per share:
Basic ................................................. $0.05 $0.15 $0.15 $0.18
===== ===== ===== =====
Diluted ............................................... $0.05 $0.14 $0.13 $0.17
===== ===== ===== =====
Weighted average number of shares outstanding:
Basic ................................................. 13,330,000 13,330,000 13,330,000 13,330,000
========== =========== =========== ==========
Diluted ............................................... 14,434,692 14,434,692 14,434,692 14,434,692
========== =========== =========== ==========
OPERATING DATA:
Principal amount of loan closings:
Fresh Start(TM) .......................................... $ 48,212 $ 57,499 $ 72,790 $ 90,773
Specialty Lending ........................................ 1,118 12,575 23,273 29,078
Conventional Mortgage Lending ............................ 184,147 193,629 232,050 257,694
Other .................................................... 2,955 3,938 4,490 5,215
---------- ----------- ----------- ----------
Total ................................................. $ 236,432 $ 267,641 $ 332,603 $ 382,760
========== =========== =========== ==========
Weighted average interest rate (fixed rate):
Fresh Start(TM) .......................................... 12.62% 12.98% 12.84% 12.40%
Specialty Lending ........................................ 15.38% 15.33% 15.19% 15.21%
Conventional Mortgage Lending ............................ 8.19% 8.47% 7.94% 7.69%
Other .................................................... 8.41% 8.93% 8.40% 8.19%
Weighted average interest rate (adjustable rate):
Fresh Start(TM) .......................................... 10.55% 11.10% 11.21% 11.30%
Conventional Mortgage Lending ............................ 6.60% 7.01% 6.87% 6.88%
Other .................................................... 7.14% 7.38% 7.02% 6.82%
Total number of employees .................................. 423 482 579 667
Number of branches at quarter end: (5)
Fresh Start(TM) Stores ................................... 5 6 10 14
Conventional Mortgage Lending Branches ................... 4 4 5 5
</TABLE>
8
<PAGE> 10
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------
ACTUAL AS ADJUSTED (6)
------ ---------------
<S> <C> <C>
SELECTED BALANCE SHEET DATA:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,947 $ 11,947
Mortgage loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . 121,344 121,344
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,138 11,211
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144,429 144,502
Warehouse financing facilities . . . . . . . . . . . . . . . . . . . . . . . 97,455 85,184
Drafts payable and other liabilities . . . . . . . . . . . . . . . . . . . . 31,866 31,866
Shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,108 27,452
</TABLE>
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(1) Rock commenced operations in its Fresh Start(TM) division in 1994 and
commenced current operations in its Specialty Lending division in
1997. Of the 14 Fresh Start(TM) stores open at December 31, 1997,
nine were opened during 1997 (eight of which were opened since July 1,
1997).
(2) During 1993 and 1994, Rock elected to retain, rather than sell, the
servicing rights to its loans and received lower sales prices as a
result. In 1994 Rock sold some of its servicing rights, and in 1995
Rock sold all of its remaining servicing rights and recognized a net
gain on the sale of servicing rights. In 1996 and 1997, Rock sold its
loans servicing released.
(3) Before the end of 1997, Rock invested some of its excess cash in
marketable securities. During 1995, 1996 and 1997, Rock sold a
portion of its portfolio of marketable securities and recognized net
gains of $346,000, $991,000 and $2,222,000, respectively.
(4) Pro forma income taxes reflect adjustments for federal and state
income taxes as if Rock had been taxed as a C corporation rather than
an S corporation. See "Termination of S Corporation Status." No pro
forma adjustments have been made for the non-recurring net gains on
sales of marketable securities and stock and option holders' bonuses,
or estimated earnings from the net proceeds received from the
Offering.
(5) Two are combined Fresh Start(TM) stores and Conventional Mortgage
Lending branches. Does not include one Fresh Start(TM) marketing
center opened in 1997.
(6) As adjusted to give effect to (i) a distribution to the Existing
Shareholders of the Shareholder Distribution Amount in the aggregate
amount of approximately $18.0 million (calculated as of December 31,
1997), (ii) the creation of a deferred tax asset in the amount of $1.7
million (calculated as of December 31, 1997) arising in connection
with Rock's termination of its S corporation status, (iii) the receipt
by Rock of approximately $1.5 million upon exercise by the Selling
Shareholders of 330,000 options at $4.68 a share to acquire the Common
Shares they are selling in the Offering, and (iv) the sale of the
Common Shares offered by Rock by this Prospectus and the application
of the estimated net proceeds to Rock therefrom as described under
"Use of Proceeds." In addition, Daniel Gilbert expects to repay the
balance of his loans from Rock ($1.6 million as of December 31, 1997)
with his share of the Shareholder Distribution Amount, and Rock
expects to use that cash to repay a portion of the amounts outstanding
under its warehouse line of credit. The adjusted amounts give effect
to Rock's use of that cash to reduce its warehouse line of credit.
The amounts do not include additional borrowings or additional S
corporation income (which is expected to increase the Shareholder
Distribution Amount) since December 31, 1997. See "Termination of S
Corporation Status," "Use of Proceeds," and "Capitalization."
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RISK FACTORS
An investment in the Common Shares of Rock involves certain risks.
Prospective investors should carefully consider the following risk factors, in
addition to the other information contained in this Prospectus, in evaluating an
investment in the Common Shares offered by this Prospectus.
DEPENDENCE ON LOAN SALES
Rock currently expects to sell substantially all of its loans to
independent whole or bulk loan buyers and expects that the gain recognized from
such sales will continue to represent a significant portion of Rock's revenues
and net earnings. Further, Rock is dependent on the cash generated from such
sales to fund its future loan closings and repay borrowings under its warehouse
financing facilities. The price Rock receives for its loans varies from time to
time and may be materially adversely affected by several factors, including,
without limitation, any significant reduction in the number of potential buyers
of Rock's loans, any significant increase in the amount of similar loans
available for sale, general conditions in the loan securitization market, in the
secondary market for loans in general or for Rock's loans in particular, which
make Rock's loans less desirable to potential buyers, and increased prepayments
of, or defaults under, loans in general, the types of loans being sold by Rock
or loans previously sold by Rock. A prolonged, substantial reduction in the size
of the secondary market for loans of the types closed by Rock may adversely
affect Rock's ability to sell loans in the secondary market, with a consequent
adverse impact on Rock's profitability and ability to fund future loan closings.
Any significant decrease in the prices paid to Rock upon sale of its loans could
materially adversely affect its business, operations, financial condition and
results of operations. Five loan buyers purchased an aggregate of approximately
91.6% of the Sub-Prime Home Equity Loans sold by Rock in 1997, of which the
largest of such buyers purchased approximately 36.5% of such Sub- Prime Home
Equity Loans. Two loan buyers purchased approximately 93.5% of the High LTV
Loans sold by Rock in 1997. The loss of any of these buyers or any significant
reduction in the prices these buyers are willing to pay for Rock's loans could
have an adverse effect on Rock's business, financial condition and results of
operations.
Rock's ability to complete sales of its loans will depend on a number of
factors, including conditions in the secondary market generally. Adverse changes
in the secondary market could impair Rock's ability to sell its loans on a
favorable or timely basis and could have a material adverse effect upon Rock's
business, financial condition and results of operations. Furthermore, because
Rock's management expects that an important component of Rock's income will be
gain on sale of loans, Rock's quarterly operating results may fluctuate
significantly as a result of the timing and size of loan sales. If such sales do
not close when expected, Rock's results of operations may be materially
adversely affected for that period.
ABILITY TO SUSTAIN AND MANAGE GROWTH
Although Rock has experienced rapid and substantial growth in loan closings
and total revenues in recent years, there can be no assurance that Rock can
sustain these rates of growth or that it will be able to create an
infrastructure or recruit and retain sufficient personnel to keep pace with a
prolonged period of growth. Rock's growth and expansion is expected to place a
significant strain on Rock's management, customer service, operations, human
resources personnel, sales, marketing and administrative personnel and other
resources. In order to serve the needs of its existing and future customers,
Rock has increased and will continue to increase its workforce, which requires
Rock to attract, train, motivate and manage qualified employees. Rock's ability
to manage its planned growth depends
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upon Rock's success in continuing to expand its operating, management,
information, human resources, marketing and financial systems. If Rock is unable
to keep pace in these areas with its rate of growth in revenues, its business,
financial condition and results of operations could be materially adversely
affected.
Rock's recent and rapid growth may have a distortive impact on some of
Rock's ratios and financial statistics and may make period-to-period comparisons
difficult. In light of Rock's growth, historical performance of Rock's earnings
may be of little relevance in predicting future performance. Furthermore, Rock's
financial statistics may not be indicative of Rock's results in future periods.
Any credit or other problems associated with the large number of loans closed in
the recent past may not become apparent until sometime in the future.
CONCENTRATION OF OPERATIONS
During the year ended December 31, 1997, 91.7% of Rock's loan closings (as
measured by the number of loans closed) were secured by properties located in
Michigan. To the extent that properties underlying such loans are located in the
same geographic region, such loans may be subject to a greater risk of
delinquency or default in the event of adverse economic, political or business
developments and natural hazard risks that may affect such region. If the
region's real estate market should experience an overall decline in property
values, the rates of delinquency, foreclosure, bankruptcy and loss on the loans
may be expected to increase substantially, which could negatively impact Rock's
ability to originate loans or sell them in the secondary market. Any impact on
Rock's ability to originate or sell loans could materially adversely affect
Rock's business, financial condition and results of operations.
PREPAYMENT AND RECAPTURE RISK
Decreases in prevailing interest rates or increases in competition could
increase prepayments of Rock's loans as customers refinance their loans with
lower interest rate loans. An increase in prepayments of Rock's loans or of
similar loans in the industry in general could reduce the prices wholesale
purchasers are willing to pay for Rock's loans. Also, an increase in prepayments
could increase Rock's recapture risk, as, in connection with some Non-Prime Loan
sales, Rock agrees to repay to the purchaser of the loan a portion of the
premium paid for the loan if the loan is prepaid within the first year after
sale. The repayment obligation is generally proportional to the part of the year
that the loan was outstanding. An unexpected increase in prepayments of such
loans could have a material adverse effect on Rock's business, financial
condition and results of operations.
COMPETITION
The consumer lending industry is highly competitive and fragmented. Rock
faces intense competition, primarily from commercial banks, savings and loan
associations, credit unions, insurance companies, mortgage brokers, mortgage
bankers and other consumer finance companies. If Rock expands into additional
geographic markets, it will face competition from consumer lenders with
established positions in such markets. There can be no assurance that Rock will
be able to compete successfully with these consumer lenders.
Competition can take place on various levels, including convenience in
obtaining a loan, service, marketing, pricing (including the interest rates,
closing costs and processing fees offered) and range of products. Many of Rock's
competitors in the consumer lending industry are better established,
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substantially larger and have significantly more capital and other resources
than Rock. In addition, FNMA and Freddie Mac are currently developing
technologies and business practices that will expand the scope of mortgage loans
eligible to be purchased by them, including, potentially, Sub-Prime Home Equity
Loans. The effect of these purchases on the consumer lending industry and profit
margins is not presently determinable, but such expanded scope could attract
additional competitors into the market and significantly erode profit margins.
Barriers to entry into the consumer lending industry are low, and the current
level of gains realized by Rock and its existing competitors on the sale of
loans could attract additional competitors into the market. Consequently, there
are many recent market entrants seeking these relatively attractive profit
margins. Increases in the number of companies seeking to originate consumer
loans could lower the rates of interest or reduce the amount of origination
points and fees Rock can charge customers, thereby reducing the potential
profitability of such loans. Competition might also reduce Rock's loan closing
volume. In addition, during periods of declining interest rates, competitors
which have "locked in" low borrowing costs may have a competitive advantage.
There can be no assurance that Rock will be able to compete successfully in this
market environment and any failure in this regard could have a material adverse
effect on Rock's business, financial condition and results of operations.
ECONOMIC CONDITIONS
General. Rock's results of operation will depend on, among other things,
the market value of Rock's loans and the supply of, and demand for, such loans.
Prepayment rates, interest rates, borrowing costs and credit losses depend upon
the nature and terms of the loans, the geographic location of the properties
securing the loans, conditions in financial markets, the fiscal and monetary
policies of the United States government, international economic and financial
conditions, competition and other factors, none of which can be predicted with
any certainty.
Risks associated with Rock's business become more acute in any economic
slowdown or recession. An economic downturn or recession may be accompanied by
decreased home purchases, decreased demand for consumer credit and lower real
estate values and increased loan- to-value ratios on loans previously made,
thereby weakening collateral coverage and increasing the possibility of a loss
in the event of a default. Any material decline in real estate values reduces
the ability of customers to use home equity to support borrowings. Furthermore,
the rates of delinquencies and foreclosures and the frequency and severity of
losses generally increase during economic downturns or recessions. Because Rock
lends to some customers who may be credit-impaired, the actual rates of
delinquencies, foreclosures and losses on such loans could be higher, and the
prices paid by buyers of such loans could be lower, under adverse economic
conditions than those for loans in general.
Interest Rates. Rock's profitability may be directly affected by the level
of, and fluctuations in, prevailing interest rates. The market value of a loan
generally declines as interest rates rise, and fixed-rate loans are more
sensitive to changes in market interest rates than adjustable-rate loans. To the
extent an interest rate is established for a loan before it is committed for
sale, a gain or loss on the sale of such loan may result from changes in
interest rates during the period between the establishment of the interest rate
on the loan and the receipt of a commitment to buy the loan. Rock does not hedge
this risk with respect to Non-Prime Loans, and any increase in interest rates
during the period between the establishment of the interest rate on the loan and
the receipt of a commitment to buy the loan would adversely affect the value of
such loans and the price at which Rock would be able to sell them. This risk
increases the longer Rock holds these loans before obtaining a commitment to buy
them. In order to hedge this interest rate risk with respect to its Conventional
Loans (which generally have a lower
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interest spread), Rock sells (on a forward basis), or obtains forward
commitments from investors to purchase, the estimated amount of Conventional
Loans in process for which an interest rate is established that will ultimately
be funded or Rock periodically purchases treasury-based options based on its
estimates of its exposure and the probable principal amount of Conventional
Loans in process for which an interest rate has been fixed that will ultimately
be funded.
To the extent Rock's funding estimates differ from actual experience, the
resulting mismatching of commitments to fund Conventional Loans at certain
interest rates and forward sales or commitments of Conventional Loans with
certain interest rates may have a material adverse effect on Rock's business,
financial condition and results of operations. In addition, to the extent Rock
hedges its exposure to fluctuations in interest rates by purchasing
treasury-based options the movements in the interest rates on those securities
might not match the changes in pricing of loans in the secondary market,
resulting in a potential gain or loss to Rock. An effective hedging strategy is
complex and no hedging strategy can completely insulate Rock from changes in
interest rates. In addition, hedging strategies involve transaction and other
costs, and such costs could increase as the period covered by the hedging
protection increases or in periods of rising and more greatly fluctuating
interest rates. There can be no assurance that profitability of Rock would not
be adversely affected during any period of changes in interest rates.
The profitability of Rock is likely to be adversely affected during any
period of unexpected or rapid changes in prevailing interest rates. The ability
of Rock to close loans, especially in the Conventional Mortgage Lending
division, is directly impacted by increases in prevailing interest rates because
customers might be less willing to borrow money at higher interest rates. In
addition, Rock could experience increasing market pressure to reduce origination
fees, especially for loans closed through Rock's Conventional Mortgage Lending
division. Also, because the interest rates under Rock's warehouse financing
facilities are variable, a rapid or unexpected increase in prevailing interest
rates could increase Rock's interest expense on the borrowings required to fund
its loans before they are sold faster than Rock is able to pass such costs on to
its customers.
DEPENDENCE ON FUNDING SOURCES
Rock funds substantially all of the loans it closes through borrowings
under its warehouse financing facilities and internally generated funds. Rock's
borrowings are in turn repaid with the proceeds received by Rock from loan
sales. Rock is currently, and may in the future continue to be, dependent upon a
few lenders to provide the primary credit facilities for its loans. One of
Rock's current warehouse financing facilities is an uncommitted facility that
may be discontinued at any time and expires in March 1998. The other current
warehouse financing facility expires, with respect to loans committed to be made
by any particular lender, 75 days after that lender demands payment, unless that
lender is replaced. In addition, both of such facilities provide demand loans,
with respect to which the lender may demand repayment at any time. Any demand
for payment, any failure to renew or replace existing financing facilities
before they expire, any failure to obtain adequate funding under these
facilities, any substantial reduction in the size or increase in the cost of
such facilities, or any substantial reduction in the size of, or pricing in, the
market for Rock's loans (which can affect the amounts available for borrowing),
could have a material adverse effect on Rock's business, financial condition and
results of operations. In addition, Rock's ability to increase the volume of
loans it closes is dependent, in part, on Rock's ability to procure, maintain
and manage increasingly larger lines of credit. While Rock believes that the net
proceeds of the Offering, together with the funds available under the warehouse
financing facilities, will be sufficient to fund Rock's operations for the next
twelve months, Rock may need to seek additional financing thereafter if Rock's
future operations are consistent with management's expectations.
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Rock has no existing commitments for any such additional financing, and
there can be no assurance that Rock will be able to obtain any such additional
financing on a favorable or timely basis. Rock may not be able to achieve the
degree of leverage it believes to be optimal, which may cause Rock to be less
profitable than it might be otherwise. Also, a default by Rock under its
warehouse financing facilities could also result in a liquidation of the
collateral securing such facilities, including any cross-collateralized assets,
and a resulting loss of the difference between the value of the collateral and
the amount borrowed.
ENVIRONMENTAL LIABILITIES
Certain properties securing loans may be contaminated by hazardous
substances. As a result, the value of such properties may be diminished. In the
event that Rock is forced to foreclose on a defaulted loan secured by a
contaminated property, Rock may be subject to environmental liabilities
regardless of whether Rock was responsible for the contamination. While Rock
intends to exercise due diligence to discover potential environmental
liabilities before acquiring any property through foreclosure, hazardous
substances or wastes, contaminants, pollutants or sources thereof (as defined by
state and federal laws and regulations) may be discovered on properties during
Rock's ownership or after a sale thereof to a third party. If such hazardous
substances are discovered, Rock may be required to remove those substances or
sources and clean up the property at substantial expense. Rock may also be
liable to tenants and users of neighboring properties. In addition, Rock may
find it difficult or impossible to sell the property before or following any
such clean-up. Rock does not conduct or require any environmental testing on the
properties securing its loans.
POTENTIAL LOSSES IN CONSUMER LENDING
Although Rock currently sells substantially all of the loans it closes on a
nonrecourse basis, it retains some degree of risk with respect to them. As part
of its desire to increase its net interest income Rock began in the last half of
1997 to hold its loans for a period of time pending sale. During this time, Rock
is subject to the various business risks associated with the lending business,
including the risk of customer default, the risk of foreclosure and interest
rate risk.
Fresh Start(TM) and Specialty Lending Loans. Credit risks associated with
the loans made by Rock's Fresh Start(TM) and Specialty Lending divisions may be
greater than those associated with loans made by the Conventional Mortgage
Lending division. The loans made by the Fresh Start(TM) and Specialty Lending
divisions may differ from the other loans with respect to loan-to-value ratios,
the credit and income history of the customers (for the Fresh Start(TM) division
loans), and the documentation required for loan approval. As a result of these
and other factors, the interest rates charged on these divisions' loans are
often higher than those charged for the Conventional Mortgage Lending division's
loans. The combination of different underwriting criteria and higher rates of
interest may lead to higher delinquency rates and/or credit losses for these
categories of loans as compared to the loans made by the Conventional Mortgage
Lending division, which could have a material adverse effect on Rock's business,
financial condition and results of operations.
Real Estate Collateral. Many of the risks of consumer home equity lending
reflect risks of investing directly in the real estate securing the loans. If
there is a default on a loan, the ultimate extent of the loss, if any, may only
be determined after a foreclosure of the mortgage and, if the lender takes title
to the property, the liquidation of the underlying property. Factors such as the
state of title to the property or its physical condition (including
environmental considerations) may make a third party
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unwilling to purchase the property at a foreclosure sale or to pay a price
sufficient to satisfy the related loan obligations. Foreclosure laws in various
states may require a protracted foreclosure process. In addition, the condition
of a property may deteriorate during the period of foreclosure proceedings.
Certain customers may become subject to bankruptcy proceedings, in which case
the amount and timing of loan payments may be materially adversely affected. In
addition, loans closed by Rock's Specialty Lending division may have combined
loan-to-value ratios (including the first mortgage balance) of up to 125%,
making the underlying property value likely to be significantly less than the
loan amount at the time Rock might have to foreclose on such a loan. Even
assuming that the underlying property provides adequate security for the loan,
substantial delays could be encountered in connection with the liquidation of
defaulted loans and a corresponding delay in the receipt and reinvestment of
principal and interest could occur.
CONTINGENT RISKS
Rock may be required to repurchase or substitute loans that is has sold in
the event of a breach of representations and warranties, including any fraud or
any misrepresentation made during the loan origination process. In connection
with some Non-Prime Loan sales, Rock may be required to return a portion of the
premium paid for the loan if the loan is prepaid within the first year after
sale. Otherwise, Rock's loan sales are generally on a non-recourse basis. In
addition, potential losses can arise before the sale from many factors, as
summarized in these Risk Factors, and the effects of such factors generally
increase during any economic downturn or recession.
In the ordinary course of its business, Rock is subject to claims made
against it by customers arising from, among other things, losses that are
claimed to have been incurred as a result of alleged breaches of fiduciary
obligations, misrepresentations, errors and omissions of Rock's employees,
officers and agents (including appraisers), incomplete loan documentation and
failures by Rock to comply with various laws and regulations applicable to its
business. Industry participants are frequently named as defendants in litigation
involving alleged violations of federal and state consumer lending laws and
regulations, or other similar laws and regulations, as a result of the
consumer-oriented nature of the industry in which Rock operates and
uncertainties with respect to the application of various laws and regulations in
certain circumstances.
Some sectors of, and participants in, the consumer finance industry have
been adversely affected by regulatory enforcement actions and private class
action lawsuits regarding various consumer lending practices. These actions and
lawsuits allege violations of the Real Estate Settlement Procedures Act
("RESPA"), the Truth In Lending Act, the Equal Credit Opportunity Act and
various other federal and state lending and consumer protection laws. Some of
the practices which have been the subject of lawsuits against other companies
include, but are not limited to, miscellaneous "add on" fees; truth in lending
calculations and disclosures; escrow and adjustable rate mortgage calculations
and collections; private mortgage insurance calculations, disclosures and
cancellation; forced-placed hazard, flood and optional insurance; payoff
statement, release and reconveyance fees; and unfair lending practices. Rock
believes that its liability with respect to any currently asserted claims or
legal actions is not likely to be material to its financial condition or results
of operations; however, any claims asserted in the future may result in legal
expenses or liabilities which could have a material adverse effect on Rock's
business, financial condition and results of operations.
Texas has newly-enacted laws affecting Non-Prime Loans. As a result of
these new laws there are increased risks associated with Rock's loans secured by
property located in Texas, including (i) risks
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that Rock's Non-Prime Loans will not comply with the provisions permitting
mortgage liens on Texas real estate, making Rock's liens invalid, (ii) risks of
litigation, including class action lawsuits, if Rock's loans, including the
origination points and processing fees charged on such loans, are determined to
violate Texas law, and (iii) risks that secondary market loan buyers will not be
willing to purchase loans secured by Texas real estate or will pay lower prices
for such loans. Rock currently sells Non-Prime Loans originated in Texas on a
flow basis and intends to increase its concentration on originating
Conventional Loans in its Fresh Start(R) branches in Texas until the new laws
are clarified.
DEPENDENCE UPON KEY MANAGEMENT PERSONNEL
Rock's future performance depends in significant part upon the continued
service of its executive officers, including Daniel Gilbert, Chairman of the
Board and Chief Executive Officer, and Steven M. Stone, President, any of whom
would be difficult to replace. The loss of any of these employees or of other
key personnel by Rock could have a material adverse effect on Rock's business,
financial condition and results of operations. In addition, competition for
qualified employees is intense, and an inability to attract, retain and motivate
the additional, highly-skilled employees required for the expansion of Rock's
activities could adversely affect Rock's business, financial condition and
results of operations. There can be no assurance that Rock will be able to
retain its existing personnel or attract the required additional persons on
acceptable terms. Rock has an employment agreement with only one of its
executive officers. Rock maintains $7,650,000 and $2,100,000 of life insurance
on Daniel Gilbert and Lindsay Gross, respectively, in connection with stock
purchase obligations under a former shareholders agreement. Rock expects to sell
these policies for their cash surrender values to Mr. Gilbert and Mr. Gross
after this Offering. Rock does not maintain life insurance on any of its other
executive officers. See "Business--Employees;" and "Management."
POTENTIAL ORIGINATED MORTGAGE SERVICING RIGHTS RISK
Adverse Effect on Cash Flows. Rock would consider selling its loans with
the servicing rights retained if it believes that the value of the servicing
rights is or may become significantly greater than secondary market buyers are
then willing to pay for them. If Rock sold loans with servicing retained, Rock
would recognize a gain on the sale equal to the difference between the carrying
value of the loan sold on Rock's balance sheet and the sum of (i) the cash
received in such sale, and (ii) the amount of an asset recorded on its balance
sheet in an initial amount equal to the present value of the servicing fees it
would expect to collect over the life of the loan (the "Servicing Asset"). If
Rock believes the value of the Servicing Asset in the secondary market becomes
high enough, Rock would consider selling its servicing rights as it did in 1994
and 1995. The Servicing Asset is recognized in the period during which loans are
sold, while cash payments are received by Rock over the life of the loan. Rock,
however, will be required to pay tax on the gain on sale for the year in which
the sale occurs. This difference in the timing of cash flows could cause a cash
shortfall, which may have a material adverse effect on Rock's business,
financial condition and results of operations.
Servicing Asset May Be Overstated. The valuation of any Servicing Asset
would be based on management's estimates relating to the appropriate discount
rate and anticipated average lives of the loans being serviced. To estimate the
anticipated average lives of the loans for which servicing is retained,
management would estimate prepayment and default rates for such loans. If actual
experience varied from management's estimates at the time loans are sold, Rock
would be required to write down the remaining Servicing Asset through a charge
to earnings in the period of adjustment.
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Prepayment rates and default rates may be affected by a variety of economic
and other factors, including prevailing interest rates and the availability of
alternative financing, most of which are not within Rock's control. A decrease
in prevailing interest rates could cause prepayments to increase, thereby
requiring a writedown of the Servicing Asset. Even if actual prepayment rates
and default rates are lower than management's original estimates, the Servicing
Asset would not increase. Furthermore, management's estimates of prepayment
rates and default rates are based, in part, on the historical performance of
Rock's loans. A significant portion of Rock's loans were very recently
originated. No assurance can be given that these loans, as with any new loan,
will perform in the future in accordance with Rock's historical experience. In
addition, if Rock introduces new products, it may have little or no experience
on which it can base its estimates, and thus its estimates may be less reliable.
Accordingly, it is possible that Rock may have to write down its Servicing Asset
in the future, and any such writedown could have a material adverse effect on
Rock's business, financial condition and results of operations.
RISKS OF SECURITIZATION
Rock currently does not securitize its loans. If the prices offered in the
secondary market for Rock's loans decrease significantly relative to the value
Rock believes that it could receive by securitizing such loans, Rock's
management would consider securitizing its loans. Securitization is the process
of pooling closed loans and selling them to a trust for a cash purchase price
and an interest in the loans securitized. The cash purchase price is raised
through an offering of securities by the trust. After the securitization, the
purchasers of the securities receive principal and interest on their securities,
and Rock would receive the excess of (i) the principal and interest payments
made on the pool of mortgages, over (ii) the payments to the purchasers of the
securities, servicing and other fees, if required, and an amount equal to the
estimated credit losses related to the loans. The present value of this amount
would be recorded on Rock's balance sheet as an "Excess Spread Receivable." If
Rock began securitizing its loans, it would be subject to the following risks:
Liquidity. If Rock securitizes its loans its operating cash flow is
expected to decrease as its securitization program grows. Demands on Rock's cash
would increase as a result of (i) reserve accounts, over-collateralization
requirements, fees and expenses incurred in connection with a securitization
program, and (ii) tax payments due on Rock's reported net income, which would
include Rock's non-cash securitization gain on sale, generally equal to the
initial Excess Spread Receivable. The tax would generally be due for the year
the related securitization transaction closes.
Excess Spread Receivable Risk. If Rock were to sell a pool of mortgages in
a securitization transaction, it would recognize a gain on the sale equal to the
difference between the carrying value of the loans sold on Rock's balance sheet
and the sum of (i) the cash received in such sale (which would generally equal
the cash purchase price of the securities sold in the securitization, less any
selling discounts and commissions and expenses of the offering of such
securities), and (ii) the Excess Spread Receivable. This Excess Spread
Receivable would be subject to the same risks described above under the caption
"Potential Originated Mortgage Servicing Rights Risk."
Securitization Market. Securitization transactions may be affected by a
number of factors, some of which are beyond Rock's control, including, among
other things, conditions in the securities markets in general, conditions in the
asset-backed securitization market and the conformity of loan pools to rating
agency requirements and, to the extent that monoline insurance is used, the
requirements of such insurers. Failure to obtain acceptable rating agency
ratings or insurance company credit enhancements, if required, could decrease
the efficiency or affect the timing of any securitizations. In addition, any
delay in the sale
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of a loan pool would postpone the recognition of gain on such loans until their
sale. Such delays could cause Rock's earnings to fluctuate from quarter to
quarter. If Rock were unable to securitize loans due to changes in the secondary
market or the unavailability of credit enhancements, it might be required to
sell its loans in the secondary market for lower than desired prices or Rock's
growth could be materially impaired and its business, financial conditions and
results of operations could be materially adversely affected. In addition, the
securitization market for many types of assets is relatively undeveloped and may
be more susceptible to market fluctuations or other adverse changes than more
developed capital markets.
GOVERNMENT REGULATION
Rock's business is subject to extensive regulation, supervision and
licensing by federal, state and local governmental authorities and is also
subject to various laws and judicial and administrative decisions imposing
requirements and restrictions on part or all of its operations. Regulated
matters include, without limitation, loan origination, marketing efforts, credit
application and underwriting activities, maximum finance and other charges,
disclosure to customers, certain rights of rescission, loan closing, servicing,
collection and foreclosure procedures, qualification and licensing requirements
for doing business in various jurisdictions and other trade practices. Loan
origination activities are subject to the laws and regulations of each of the
states in which those activities are conducted. Activities as a lender are also
subject to various federal laws. The Truth in Lending Act ("TILA") and
Regulation Z promulgated thereunder, as both are amended from time to time,
contain disclosure requirements designed to provide consumers with uniform,
understandable information with respect to the terms and conditions of loans and
credit transactions in order to give them the ability to compare credit terms.
TILA also guarantees consumers a three-day right to cancel certain credit
transactions.
Rock is also required to comply with the Equal Credit Opportunity Act of
1974, as amended ("ECOA"), which prohibits lenders from discriminating against
applicants on the basis of race, color, sex, age or marital status. Regulation B
promulgated under ECOA restricts lenders from obtaining certain types of
information from loan applicants. It also requires certain disclosures by the
lender regarding consumer rights and requires lenders to advise applicants of
the reasons for any credit denial. In instances where the applicant is denied
credit or the rate or charge for a loan increases as a result of information
obtained from a consumer credit agency, the Fair Credit Reporting Act of 1970,
as amended, requires the lender to supply the applicant with a name and address
of the reporting agency. Rock is also subject to RESPA and the Fair Debt
Collection Practices Act and is required to file an annual report with HUD
pursuant to the Home Mortgage Disclosure Act ("HMDA"). Rock is also subject to
the rules and regulations of, and examinations by, HUD, FNMA, Freddie Mac and
state regulatory authorities with respect to originating, processing,
underwriting, selling and servicing loans.
Failure to comply with these requirements can lead to loss of approved
status, termination or suspension of servicing contracts without compensation to
the servicer, demands for indemnification or loan repurchases, certain rights of
rescission, class action lawsuits and administrative and enforcement actions.
There can be no assurance that Rock will maintain compliance with these
requirements, that maintaining compliance will not result in materially
increased expenses, that more restrictive local, state or federal laws, rules
and regulations will not be adopted or that existing laws and regulations will
not be interpreted in a more restrictive manner, which would make compliance
more difficult and more expensive for Rock. In addition, industry participants
are frequently named as defendants in litigation involving alleged violations of
federal and state consumer lending laws and regulations, or other similar laws
and regulations, as a result of the consumer-oriented nature of the industry in
which Rock operates
18
<PAGE> 20
and uncertainties with respect to the application of various laws and
regulations in certain circumstances. If a significant judgment were rendered
against Rock in connection with any litigation, it could have a material adverse
effect on Rock's business, financial condition and results of operations. See
"Business--Government Regulation."
The laws and regulations described above are subject to legislative,
administrative and judicial interpretation, and certain of these laws and
regulations have been infrequently interpreted or only recently enacted.
Infrequent interpretations of these laws and regulations or an insignificant
number of interpretations of recently enacted laws and regulations can result in
ambiguity with respect to permitted conduct under these laws and regulations.
Any ambiguity under the laws and regulations to which Rock is subject may lead
to regulatory investigations or enforcement actions and private causes of
action, such as class action lawsuits, with respect to Rock's compliance with
applicable laws and regulations. Rock may also be subject to regulatory
enforcement actions and private causes of action from time to time with respect
to its compliance with applicable laws and regulations.
POTENTIAL ELIMINATION OF MORTGAGE INTEREST DEDUCTION
Members of Congress and government officials have from time to time
suggested the elimination of the mortgage interest deduction for federal income
tax purposes, either entirely or in part, based on customer income, type of loan
or principal amount. Some of Rock's loans are made to customers for the purpose
of consolidating consumer debt or financing other consumer needs, and the
competitive advantages of tax deductible interest, when compared with
alternative sources of financing, could be eliminated or seriously impaired by
such government action. In addition, the elimination or substantial reduction in
the home mortgage interest deduction could decrease home buying, which in turn
would decrease the demand for home mortgages. The elimination of, or a
substantial reduction in, the current home mortgage interest tax deduction would
curtail the number of Rock's loan closings, which would have a material adverse
effect on Rock's business, financial condition and results of operations.
ABSENCE OF PUBLIC TRADING MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE
There is currently no trading market for the Common Shares and there can be
no assurance that an active trading market for the Common Shares will develop or
that, if developed, will be sustained. The initial public offering price of the
Common Shares offered by this Prospectus will be determined by negotiations
among Rock and the representative of the Underwriters and may not be indicative
of the price at which the Common Shares will trade after the closing of the
Offering. See "Underwriting" for a discussion of the factors to be considered in
establishing the initial public offering price. If a trading market for the
Common Shares develops, the market price of the Common Shares may experience
fluctuations as a result of such factors as quarter-to-quarter variations in
Rock's results of operations, news announcements, changes in general market or
industry condition or other factors unrelated to the ongoing operating
performance of Rock. In particular, the price of the Common Shares may be
affected by general market price movements as well as developments specifically
related to the consumer lending industry such as interest rate movements and
credit quality trends. There can be no assurance that the market price for the
Common Shares will not fall below the initial public offering price.
SUBSTANTIAL DILUTION
Purchasers of Common Shares in this Offering will suffer an immediate and
substantial dilution in the pro forma net tangible book value per share of the
Common Shares from the initial public offering
19
<PAGE> 21
price in the amount of $7.94 per share. See "Dilution."
SHARES ELIGIBLE FOR FUTURE SALE
The 3,330,000 Common Shares sold in the Offering (3,829,500 Common Shares
if the Underwriters' over-allotment option is exercised in full) will be freely
tradable by persons other than "affiliates" of Rock, as that term is defined in
Rule 144 under the Securities Act of 1933, as amended (the "Securities Act"),
without restriction under the Securities Act. Ninety days after the date of this
Prospectus, 10,000,000 Common Shares could become eligible for sale pursuant to
the provisions of Rule 144. However, the holders of these shares have agreed
with the Underwriters not to offer such shares for sale, or sell, pledge or
grant an option to purchase such shares, for a period of 180 days from the date
of this Prospectus without the prior written consent of the representative of
the Underwriters. As of January 31, 1998, options to purchase 2,492,184 Common
Shares were outstanding under Rock's 1996 Stock Option Plan, which will vest on
various dates extending through 2002. At the closing of the Offering, options to
purchase 2,612,184 Common Shares will be outstanding. Pursuant to Rule 701 under
the Securities Act, beginning 90 days after the effective date of this
Prospectus, shares acquired upon exercise of some of such options may be resold
pursuant to Rule 144 without compliance with the current public information,
holding period, volume limitation or Form 144 filing requirements. Sales of
substantial numbers of such shares in the public market, or the perception that
such sales could occur, could adversely affect the market price of the Common
Shares. However, the holders of some of these options have agreed with the
Underwriters not to offer Common Shares they may acquire upon exercise of such
options for sale, or sell, pledge or grant an option to purchase such shares,
for a period of 180 days from the date of this Prospectus without the prior
written consent of the representative of the Underwriters. Rock has reserved up
to 4,500,000 Common Shares for issuance upon exercise of options under Rock's
1996 Stock Option Plan. See "Shares Eligible for Future Sale" and
"Underwriting."
CONTROL OF ROCK
Daniel Gilbert will beneficially own 52.9%, and will have voting control
pursuant to a Shareholders Agreement over 75.0%, of the outstanding Common
Shares of Rock after the closing of the Offering (51.0% and 72.3%, respectively,
if the Underwriters' over-allotment option is exercised in full). Accordingly,
Mr. Gilbert will have effective control of Rock, with the ability to approve
fundamental corporate transactions, including mergers, share exchanges and sales
of assets, and to elect the members of the Board of Directors. See "Principal
and Selling Shareholders." In addition, as long as Mr. Gilbert is the
controlling shareholder of Rock, third parties will not be able to gain control
of Rock through purchases of Common Shares not beneficially owned or otherwise
controlled by Mr. Gilbert. Accordingly, the price of the Common Shares will not
reflect any premium which may be attributable to such ability to exercise or
obtain control over Rock.
POTENTIAL ANTI-TAKEOVER EFFECTS OF CHARTER, BYLAW AND STATUTORY PROVISIONS
The Board of Directors has the authority, pursuant to Rock's Restated
Articles of Incorporation and without further approval of Rock's shareholders,
to issue preferred shares (the "Preferred Shares") having such rights,
preferences and privileges as the Board of Directors may determine. Any such
issuance of Preferred Shares could, under certain circumstances, have the effect
of delaying or preventing a change in control of Rock and may adversely affect
the rights of holders of Common Shares. In addition, Rock is subject to Michigan
statutes regulating business combinations, takeovers and control share
acquisitions which might also hinder or delay a change in control of Rock.
Anti-takeover
20
<PAGE> 22
provisions that could be included in the Preferred Shares when issued and the
Michigan statutes regulating business combinations, takeovers and control share
acquisitions can have a depressive effect on the market price of Rock's
securities and can limit shareholders' ability to receive a premium on their
shares by discouraging takeover and tender offer bids, even if such events could
be viewed as beneficial by Rock's shareholders. See "Description of Capital
Stock."
The Directors of Rock serve staggered three year terms, and Directors may
not be removed without cause. The Articles of Incorporation also set the minimum
and maximum number of directors constituting the entire Board at three and
fifteen, respectively, and require approval of holders of 90% of Rock's voting
shares to amend these provisions. In addition, Rock's bylaws require advance
notice of any nominations for director of Rock, along with information about the
nominee and the shareholder. These provisions could have an anti-takeover effect
by making it more difficult to acquire Rock by means of (i) a tender offer, a
proxy contest or otherwise and (ii) the removal of incumbent officers and
directors. These provisions could delay, deter or prevent a tender offer or
takeover attempt that a shareholder might consider in his or her best interests,
including those attempts that might result in a premium over the market price
for the shares held by Rock's shareholders.
YEAR 2000 COMPLIANCE
Rock is engaging a consultant to manage the testing of its equipment and
software to determine whether it is year 2000 compliant and to identify and
resolve any problems discovered. Rock also plans to explore the strategies of
its vendors to discover and resolve any year 2000 problems. Although most of
Rock's hardware and software is less than two years old, because of Rock's
reliance on its technology and systems and the sophistication of its systems,
any significant problems discovered could be expensive, time consuming or both
to fix, and any errors caused by Rock's or its vendors' year 2000 hardware or
software problems could result in liability to Rock. Any of these problems could
have a material adverse effect on Rock's business, financial condition and
results of operations.
RESTRICTIONS ON DIVIDENDS
Under Rock's warehouse line of credit, Rock's ability to pay cash dividends
is limited by requirements that it maintain a minimum tangible effective net
worth, a maximum leverage ratio, a minimum ratio of current assets to current
liabilities, and minimum working capital.
21
<PAGE> 23
TERMINATION OF S CORPORATION STATUS
Since March 1, 1992, Rock has elected to be treated for federal income tax
purposes as an S corporation under Subchapter S of the Code and as an S
corporation for certain state corporate income tax purposes under certain
comparable state laws. As a result, Rock's historical earnings since March 1,
1992 have been taxed directly to Rock's shareholders, at their individual
federal and state income tax rates, rather than to Rock (except for certain
state taxes). Upon the issuance of Common Shares at the closing of the Offering,
Rock's S corporation status will terminate, and Rock will become subject to
federal and state income taxation as a C corporation. At that time, Rock will
record a deferred tax asset on its balance sheet, the amount of which will
depend upon timing differences between tax and book accounting relating
principally to marking loans to market for tax purposes. If the S corporation
status had terminated as of December 31, 1997, the amount of the deferred tax
asset would have been approximately $1.7 million. See "Capitalization."
Since March 1, 1992, Rock has made distributions to shareholders of a
portion of Rock's income primarily to permit the shareholders to pay their taxes
on such income. The aggregate amount of distributions to shareholders, however,
has been less than the aggregate amount of taxable income of Rock during this
period. The amount of this previously earned and undistributed taxable income
(including estimated taxable income up to the closing of the Offering, with
provision for adjustment based on the final determination of such taxable
income) will be distributed to the Existing Shareholders out of the net proceeds
of the Offering promptly following the closing of the Offering. The Shareholder
Distribution Amount as of December 31, 1997 would have been approximately $18.0
million, and it is expected to increase by the time of the distribution as a
result of additional S corporation income.
Rock and the Existing Shareholders have entered into a Tax Indemnification
Agreement (the "Tax Agreement") relating to their respective income tax
liabilities. Because Rock will be fully subject to corporate income taxation
after termination of Rock's S corporation status, any reallocation of income and
deductions between the period during which Rock was treated as an S corporation
and the period during which Rock will be subject to corporate income taxation
may increase the taxable income of one party while decreasing that of another
party. Accordingly, the Tax Agreement is intended to ensure that taxes are borne
either by Rock or the Existing Shareholders to the extent that such parties
received the related income. The Tax Agreement generally provides that, if an
adjustment is made to the taxable income of Rock for a year in which it was
treated as an S corporation, each party will indemnify the other against any
increase in the indemnified party's income tax liability, including interest and
penalties, with respect to such tax year to the extent such increase results in
a related decrease in the income tax liability, including interest and
penalties, of the indemnifying party (whether with respect to the year of the
adjustment or over future years).
Rock will also indemnify the Existing Shareholders for all taxes imposed
upon them as the result of an indemnification payment under the Tax Agreement.
Any payment made by Rock to the Existing Shareholders pursuant to the Tax
Agreement may be considered by the Internal Revenue Service or state taxing
authorities to be non-deductible by Rock for income tax purposes. None of the
parties' obligations under the Tax Agreement is secured, and, therefore, there
can be no assurance that the Existing Shareholders or Rock will have funds
available to make any payments which may become due under the Tax Agreement. A
copy of the Tax Agreement has been filed by Rock as an exhibit to the
Registration Statement of which this Prospectus is a part and should be read in
its entirety by prospective investors in this Offering.
22
<PAGE> 24
USE OF PROCEEDS
The net proceeds to Rock from the sale of the 3,000,000 Common Shares
offered by Rock by this Prospectus are estimated to be $27,100,000 ($31,745,350
if the Underwriters' over- allotment option is exercised in full), after
deducting the underwriting discount and estimated Offering expenses payable by
Rock, assuming an initial public offering price of $10.00 per Common Share. Rock
will not receive any proceeds from the sale of Common Shares by the Selling
Shareholders, but it will receive approximately $1.5 million of proceeds from
the options exercised by some of the Selling Shareholders to acquire the shares
they are selling.
The net proceeds of the Offering will be used (i) to pay the Shareholder
Distribution Amount ($18.0 million calculated as of December 31, 1997) to the
Existing Shareholders in connection with termination of Rock's status as an S
corporation (see "Termination of S Corporation Status"), and (ii) to repay a
portion of the amounts outstanding under Rock's warehouse line of credit used to
finance, and secured by, a portion of Rock's inventory of loans. The Shareholder
Distribution Amount is expected to increase by the distribution date as a result
of additional S corporation income. Daniel Gilbert expects to repay the balance
of his loans from Rock ($1.6 million as of December 31, 1997) with his share of
the Shareholder Distribution Amount, and Rock expects to use that cash to repay
a portion of the amounts outstanding under its warehouse line of credit.
Rock's warehouse line of credit currently provides for up to $125 million
principal amount of demand loans. The loans bear interest at rates that vary,
depending on the type of underlying loan, from the bank's prime rate to 1.5% to
2.5% over the federal funds rate (resulting in a weighted average interest rate
of 6.94% during 1997). The warehouse line of credit expires, with respect to
loans committed to be made by any particular lender, 75 days after that lender
demands payment, unless that lender is replaced. Borrowings under the warehouse
line of credit are used to fund loans closed by Rock. As of January 31, 1998,
Rock had borrowed $37.0 million under this facility.
Pending their ultimate application, the net proceeds to Rock from the
Offering will be invested in short-term, investment grade, interest-bearing
securities, deposit accounts or both.
23
<PAGE> 25
CAPITALIZATION
The following table sets forth, as of December 31, 1997, (i) the actual
capitalization of Rock, and (ii) the pro forma capitalization of Rock as
adjusted to give effect to the conversion of Rock from an S corporation to a C
corporation, to the receipt by Rock of approximately $1.5 million upon exercise
by the Selling Shareholders of 330,000 options at $4.68 a share to acquire the
Common Shares they are selling in the Offering, and to the sale of the Common
Shares offered by Rock by this Prospectus at an assumed initial public offering
price of $10.00 per share, and to the application of the estimated net proceeds
to Rock therefrom. This table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Financial Statements and Notes to Financial Statements included elsewhere in
this Prospectus. See "Termination of S Corporation Status" and "Use of
Proceeds."
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------
ACTUAL AS ADJUSTED (1)
------ ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
SHORT-TERM DEBT:
Warehouse line of credit............................................... $79,294 $67,023
Reverse repurchase agreement........................................... 18,161 18,161
Notes payable.......................................................... 1,945 1,945
Drafts payable......................................................... 21,875 21,875
-------- --------
Total short-term debt............................................. $121,275 $109,004
======== ========
SHAREHOLDERS' EQUITY:
Preferred shares, authorized, 1,000,000 shares of $.01 par value;
no shares issued or outstanding................................... -- --
Common Shares; authorized, 50,000,000 shares of $.01 par value;
issued and outstanding, 10,000,000 shares at December 31,
1997 (13,330,000 shares, as adjusted)............................. 100 133
Additional paid-in capital............................................. 1,424 30,035
Retained earnings...................................................... 13,584 (2,716)
-------- --------
Total shareholders' equity and total capitalization............... $15,108 $27,452
======== ========
</TABLE>
- ---------------------
(1) Assumes that the estimated net proceeds of this Offering are applied
as described in "Use of Proceeds" and "Termination of S Corporation
Status." Also reflects (i) the creation of a deferred tax asset in the
amount of $1.7 million (calculated as of December 31, 1997) arising in
connection with the termination of Rock's S corporation status, and
(ii) the receipt by Rock of approximately $1.5 million upon exercise by
the Selling Shareholders of 330,000 options at $4.68 a share to acquire
the Common Shares they are selling in the Offering. In addition, Daniel
Gilbert expects to repay the balance of his loans from Rock ($1.6
million as of December 31, 1997) with his share of the Shareholder
Distribution Amount, and Rock expects to use that cash to repay a
portion of the amounts outstanding under its warehouse line of credit.
The adjustments include the reduction in the amounts outstanding under
the warehouse line of credit as a result of such use of cash. See
"Termination of S Corporation Status," "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and
Results of Operations."
24
<PAGE> 26
DIVIDEND POLICY
Rock expects that it will pay a quarterly dividend of $.02 per share
beginning in the second quarter of 1998. Even if Rock begins paying such a
dividend, it may discontinue it at any time or it may change the amount of the
dividend at any time. Any determination to pay dividends at all or to change the
amount of any dividend will depend on Rock's financial condition, capital
requirements, results of operations, contractual limitations and any other
factors deemed relevant by the Board of Directors. Under Rock's warehouse line
of credit, Rock's ability to pay cash dividends is limited by requirements that
it maintain a minimum tangible effective net worth, a maximum leverage ratio, a
minimum ratio of current assets to current liabilities, and minimum working
capital.
25
<PAGE> 27
DILUTION
Purchasers of the Common Shares offered hereby will experience an immediate
and substantial dilution in the net tangible book value of the Common Shares
from the initial public offering price. The net tangible book value of Rock as
of December 31, 1997 was approximately $15,108,136, or $1.51 per Common Share
based on 10,000,000 Common Shares outstanding. The net tangible book value per
share represents the amount of total assets less liabilities, excluding
intangible assets, divided by the number of Common Shares outstanding. After
giving effect to (i) the sale by Rock of 3,000,000 Common Shares offered in the
Offering at an assumed initial public offering price of $10.00 per share, after
deducting the underwriting discount and estimated Offering expenses, (ii) the
receipt by Rock of approximately $1.5 million upon exercise by the Selling
Shareholders of 330,000 options at $4.68 a share to acquire the Common Shares
they are selling in the Offering, (iii) the S corporation distribution to the
Existing Shareholders of an aggregate of $18.0 million (calculated as of
December 31, 1997 and expected to increase by the distribution date) in payment
of the Shareholder Distribution Amount, (iv) the creation of a deferred tax
asset in the amount of $1.7 million (calculated as of December 31, 1997) arising
in connection with the termination of Rock's S corporation status, and (v) the
application of the rest of the estimated net proceeds as described under "Use of
Proceeds," the pro forma net tangible book value of Rock as of December 31, 1997
would have been approximately $27,452,536, or $2.06 per share. This represents
an immediate increase in pro forma net tangible book value of $0.55 per share to
existing shareholders of Rock and an immediate and substantial dilution of $7.94
per share to new investors purchasing shares in the Offering. The following
table illustrates this per share dilution:
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed initial public offering price.......................................... $10.00
Net tangible book value as of December 31, 1997....................... $1.51
Decrease due to payment of Shareholder Distribution Amount............ (1.80)
Increase due to deferred tax asset.................................... 0.17
Increase due to option exercise....................................... 0.15
Increase attributable to new investors................................ 2.03
-----
Pro forma net tangible book value after Offering............................... 2.06
------
Dilution to new investors...................................................... $ 7.94
======
</TABLE>
The following table sets forth on a pro forma basis as of December 31, 1997
the difference between existing shareholders and the purchasers of shares in the
Offering with respect to the number of shares issued by Rock and owned by them,
the total consideration received by Rock for those shares and the average price
paid per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------------- ---------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ------------ --------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders....................... 10,000,000 75.0% $1,523,750 4.6% $0.15
Option holders.............................. 330,000 2.5% 1,544,400 4.7% $4.68
New public investors........................ 3,000,000 22.5% 30,000,000 90.7% $10.00
---------- ------ ----------- ------
Total......................... 13,330,000 100.0% $33,068,150 100.0%
========== ====== =========== ======
</TABLE>
The information and tables above exclude the effect of (i) 2,492,184 Common
Shares subject to options outstanding at a weighted average exercise price of
$4.86 per share as of December 31, 1997, and (ii) options to purchase up to an
additional 2,007,816 Common Shares available for issuance under Rock's 1996
Stock Option Plan. To the extent outstanding options are exercised, there may be
further dilution to new investors. The 330,000 Common Shares being sold by the
Selling Shareholders will be acquired by them on the closing date of this
Offering upon exercise of stock options previously granted to them, and Rock has
granted to them, effective as of the closing date of this Offering, immediately
exercisable replacement options to purchase 450,000 Common Shares at the initial
public offering price of the Common Shares in this Offering. See
"Capitalization." Rock will receive approximately $1.5 million of proceeds from
the options exercised by some of the Selling Shareholders to acquire the shares
they are selling.
26
<PAGE> 28
SELECTED FINANCIAL DATA
The following table sets forth selected financial information of Rock as of
December 31, 1993, 1994, 1995, 1996 and 1997, and for each of the five years in
the period ended December 31, 1997. The historical income statement and balance
sheet data are derived from the audited financial statements of Rock, certain of
which appear elsewhere in this Prospectus together with the report of KPMG Peat
Marwick LLP, independent auditors, covering the years 1995, 1996 and 1997. The
historical income statement and balance sheet data for 1993 and 1994 were
audited by Rock's former auditors. The selected financial data should be read in
conjunction with the financial statements and notes thereto and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, (1)
-------------------------------------------------
STATEMENT OF INCOME DATA: 1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenue:
Interest income......................................... $ 2,724 $ 2,310 $ 3,003 $ 4,267 $ 8,083
Interest expense........................................ 1,819 1,746 3,012 3,669 5,150
-------- -------- -------- -------- ----------
Net interest margin................................... 905 564 (9) 598 2,933
Provision for credit losses............................. -- -- -- -- (300)
-------- -------- -------- -------- ----------
Net interest margin after provision for credit losses. 905 564 (9) 598 2,633
Loan fees and gains and losses on sale of mortgages..... 16,251 10,348 17,788 27,960 47,084
Net gain on sale of mortgage servicing (2).............. -- 2,465 5,728 -- --
Net gain (loss) on sale of marketable securities (3).... 356 (202) 346 991 2,222
Other income............................................ 677 1,348 399 6 171
-------- -------- -------- -------- ----------
18,189 14,523 24,252 29,555 52,110
-------- -------- -------- -------- ----------
Expenses:
Salaries, commissions and employee benefits............. 10,306 9,514 11,272 16,425 24,811
General and administrative expenses..................... 2,761 3,159 3,726 4,646 7,630
Marketing expenses...................................... 967 1,465 1,339 2,393 5,370
Depreciation and amortization........................... 390 510 506 663 1,292
-------- -------- -------- -------- ----------
14,424 14,648 16,843 24,127 39,103
-------- -------- -------- -------- ----------
Income (loss) before stock and option holders' bonuses..... 3,765 (125) 7,409 5,428 13,007
Stock and option holders' bonuses....................... 2,026 142 546 2,297 1,592
-------- -------- -------- -------- ----------
Net income (loss)...................................... 1,739 (267) 6,863 3,131 11,415
Pro forma income tax expense (benefit) (4)................. 687 (105) 2,642 1,205 4,395
-------- -------- -------- -------- ----------
Pro forma net income (loss)............................ 1,052 (162) 4,221 1,926 7,020
======== ======== ======== ======== ==========
PER SHARE INFORMATION:
Pro forma net income per share:
Basic................................................. $ 0.53
==========
Diluted............................................... $ 0.49
==========
Weighted average number of shares outstanding:
Basic................................................. 13,330,000
==========
Diluted............................................... 14,434,692
==========
</TABLE>
27
<PAGE> 29
<TABLE>
<CAPTION>
AS OF DECEMBER 31, (1)
-----------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
SELECTED BALANCE SHEET DATA:
Cash and cash equivalents ............. $ 1,254 $ -- $ 686 $ 3,289 $ 11,947
Mortgage loans held for sale .......... 77,456 26,717 73,996 85,009 121,344
Other assets .......................... 5,440 8,173 19,613 12,062 11,138
Total assets .......................... 84,150 34,890 94,295 100,360 144,429
Warehouse financing facilities ........ 47,206 15,732 64,107 67,621 97,455
Drafts payable and other liabilities... 31,805 12,885 13,661 20,393 31,866
Shareholders' equity .................. 5,859 6,273 16,527 12,346 15,108
</TABLE>
(1) Rock commenced operations in its Fresh Start(TM)division in 1994 and
commenced current operations in its Specialty Lending division in 1997.
Of the 14 Fresh Start(TM) stores open at December 31, 1997, nine were
opened during 1997 (eight of which were opened since July 1, 1997).
(2) During 1993 and 1994, Rock elected to retain, rather than sell, the
servicing rights to its loans and received lower sales prices as a
result. In 1994 Rock sold some of its servicing rights, and in 1995
Rock sold all of its remaining servicing rights and recognized a net
gain on the sale of servicing rights. In 1996 and 1997, Rock sold its
loans servicing released.
(3) Before the end of 1997, Rock invested some of its excess cash in
marketable securities. During 1995, 1996 and 1997, Rock sold a portion
of its portfolio of marketable securities and recognized net gains of
$346,000, $991,000 and $2,222,000, respectively.
(4) Pro forma income taxes reflect adjustments for federal and state
income taxes as if Rock had been taxed as a C corporation rather than
corporation. See "Termination of S Corporation Status." No pro forma
adjustments have been made for the non-recurring net gains on sales of
marketable securities and stock and option holders' bonuses, or
estimated earnings from the net proceeds received from the Offering.
28
<PAGE> 30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following analysis of the financial condition and results of operations
of Rock should be read in conjunction with the preceding "Selected Financial
Data." Additionally, Rock's financial statements and notes thereto, as well as
other data included in this Prospectus, should be read and analyzed in
combination with the analysis below. With the exception of historical
information, certain of the matters discussed in this Prospectus are
forward-looking statements that involve risks and uncertainties and actual
results could differ materially from those discussed. The words and phrases
"should be," "will be," "predicted," "believe," "expect," "anticipate" and
similar expressions identify forward-looking statements. These forward-looking
statements reflect Rock's current views in respect of future events in financial
performance, but are subject to many uncertainties and factors relating to
Rock's operations and business environment which may cause its actual results to
differ materially from any future results expressed or implied by such
forward-looking statements.
GENERAL
Rock is a specialty marketing company of debt consolidation and home
financing products secured primarily by first or second mortgages on one- to
four-family, owner-occupied residences. The Company originates loans through 24
stores and branches, one marketing center and one call center. Founded in 1985
by its current Chief Executive Officer and Chairman of the Board, Daniel
Gilbert, Rock originates 100% of its loans through its retail operations,
marketing its loans directly to consumers. The Company uses proprietary
marketing methods and technology to increase its market penetration. Rock seeks
to provide "world class" service to its customers, thereby encouraging them to
return for future loans and refer others to Rock for loans. The Company also
focuses on recruiting, developing and motivating talented people, recruited from
inside and outside the consumer finance industry, to implement its business
strategies. Rock believes it is creating growing brand identities and a retail
franchise that will sustain its loan origination efforts.
Rock currently operates through three major divisions. Rock originates
Sub-Prime Home Equity Loans to individuals with impaired credit characteristics,
high levels of debt service to income, unfavorable past credit experience,
limited credit history, limited employment history or unverifiable income
through its Fresh Start(TM) division, created in 1994. Rock originates home
equity second mortgage loans to individuals with good credit histories but
little or no equity in their homes through its Specialty Lending division, which
commenced its current operations in March 1997. Since its inception in 1985,
Rock has originated Conventional Loans that generally conform to FNMA or Freddie
Mac underwriting standards, or that generally meet such standards except for
maximum loan size guidelines, through its Conventional Mortgage Lending
division. In addition, Rock began to increase its government insured lending
operations in 1997, primarily making mortgage loans that meet the underwriting
standards for FHA insurance.
SEGMENT ANALYSIS
Rock's recent and rapid growth may have a distortive impact on some of
Rock's ratios and financial statistics and may make period-to-period comparisons
difficult. In light of Rock's growth, historical performance of Rock's earnings
may be of little relevance in predicting future performance. Furthermore, Rock's
financial statistics may not be indicative of Rock's results in future periods.
29
<PAGE> 31
During 1997, Rock's growth and expansion of its Fresh Start(TM) store
network, the timing difference between loan closings and loan sales and the
seasonality of Rock's business caused its quarterly results to vary
significantly. The timing difference between loan closings and loan sales was
more significant in the third and fourth quarters of 1997, with larger bulk
sales of Fresh Start(TM) loans. The store openings created operating expenses
that were absorbed by the earnings of the then existing store network. A new
store opening requires Rock to incur monthly expenses in excess of revenues
generated by the new store until enough loans are closed for the store to reach
break even. For a description of the average closings per store during 1997, see
"Business--Operating Divisions--Fresh Start(TM) Division-- Fresh Start(TM)
Stores." Because of the seasonality of its business, Rock does not expect the
trend in its quarterly revenue or income growth during the four quarters of 1997
to continue at the same level in the first quarter of 1998, if at all. See
"Business--Seasonality."
The following table shows the contribution to revenues and expenses of each
of Rock's divisions for each quarter of fiscal 1997:
<TABLE>
<CAPTION>
Year Ended December 31, 1997
-----------------------------------------------------------------------
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Total
---------- ----------- ---------- ----------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C>
FRESH START(TM):
Revenue ........................................... $ 3,570.8 $ 6,365.9 $ 6,677.5 $ 9,323.9 $ 25,938.1
Expenses .......................................... (2,479.4) (3,033.3) (4,520.6) (5,865.4) (15,898.7)
---------- ---------- ---------- ---------- -----------
Division contribution ........................... 1,091.4 3,332.6 2,156.9 3,458.5 10,039.4
---------- ---------- ---------- ---------- -----------
SPECIALTY LENDING:
Revenue ........................................... 79.5 1,267.1 2,293.9 3,405.3 7,045.8
Expenses .......................................... (188.5) (593.9) (1,221.3) (1,751.0) (3,754.7)
---------- ---------- ---------- ---------- -----------
Division contribution ........................... (109.0) 673.2 1,072.6 1,654.3 3,291.1
---------- ---------- ---------- ---------- -----------
CONVENTIONAL MORTGAGE LENDING:
Revenue ........................................... 3,796.5 3,548.4 3,938.0 5,050.7 16,333.6
Expenses .......................................... (2,261.0) (2,128.5) (2,869.3) (3,099.3) (10,358.1)
---------- ---------- ---------- ---------- -----------
Division contribution ........................... 1,535.5 1,419.9 1,068.7 1,951.4 5,975.5
---------- ---------- ---------- ---------- -----------
Other revenue ..................................... 867.5 200.5 1,703.9 20.6 2,792.7
Other expenses .................................... (2,263.9) (2,405.5) (2,837.8) (3,175.9) (10,683.1)
---------- ---------- ---------- ---------- -----------
Pre-tax income .................................. 1,121.5 3,220.7 3,164.3 3,908.9 11,415.4
========== ========== ========== ========== ===========
</TABLE>
The Fresh Start(TM) division began to sell loans by bulk sales in the
second quarter of 1997. Bulk sales generate higher premiums than sales of
individual loans. In addition, the principal amount of loan sales in the second
quarter increased 71% over the first quarter. There can be no assurance that the
rate of growth in originations and sales of Sub-Prime Home Equity Loans or the
premiums received on sales of such loans in 1997 will continue at the same
levels in 1998. See "Risk Factors--Dependence on Loan Sales." The nine stores
opened during 1997 incurred approximately $1.8 million of expenses in excess of
revenues in the third and fourth quarters of 1997. In addition, the Fresh
Start(TM) division opened five more stores in the first quarter of 1998. The
direct costs for these new stores started late in the fourth quarter of 1997.
During the fourth quarter, the principal amount of loan sales increased by 44%
over the third quarter. The 1997 revenues were reduced by the provision for
premium recapture of
30
<PAGE> 32
approximately $600,000 for the estimated amount of premium recapture associated
with loans that prepay within the first year after sale. For a description of
risks involving the Fresh Start(TM) division's Texas stores, see "Risk
Factors--Contingent Risks."
Because 13 stores and one marketing center have opened since July 1, 1997
(including four stores in the fourth quarter of 1997 and five in the first
quarter of 1998), Rock expects these stores to contribute significantly less to
its revenues and net income and more to its expenses in the first and possibly
the second and third quarters of 1998 than stores that have been in operation
for at least twelve months. The stores opened in 1998 and some of the stores
opened late in 1997 are expected to operate at a net loss in the first quarter
of 1998.
The Specialty Lending division commenced its current operations in the
first quarter of 1997. The staffing and expenses of the start-up were incurred
in the first quarter of 1997 with minimal contribution to revenues. The
subsequent quarters demonstrated a consistent contribution as a percent of
revenues. There can be no assurance that the rate of growth in originations and
sales of High LTV Loans or the premiums received on sales of such loans in 1997
will continue at the same levels in 1998.
See "Risk Factors--Dependence on Loan Sales."
The Conventional Mortgage Lending division increased its loan officers from
the first quarter to the third quarter of 1997. Additionally, a branch was
opened in Michigan during the fourth quarter. The impact of these costs to
expand this division are reflected in the third and fourth quarter expenses of
the Conventional Mortgage Lending division. Rock's Conventional Mortgage Lending
revenues and division contribution increased in the fourth quarter due to
increased production resulting, in part, from the favorable interest rate
environment.
Other revenue includes the net contribution from sales of marketable
securities and government insured lending. Most of the $2.8 million of other
revenue consisted of non-recurring gains on the sale of marketable securities
held for sale, all of which were sold by December 31, 1997.
Other expenses include expenses not directly allocable to a particular
division, such as the costs associated with Rock's legal, marketing, facilities,
information services, executive, human resources, secondary marketing and
general and administrative support teams. Included in other expenses was
approximately $1.6 million of bonuses to Rock's shareholders and option holders;
Rock does not intend to pay aggregate bonuses of that magnitude to these persons
after 1997. Other expenses in the third and fourth quarters also include
increases in costs of recruiting management members, costs of temporary
employees, and increased depreciation and travel expenses as compared to the
first half of 1997.
TERMINATION OF S CORPORATION STATUS AND INCOME TAXES
Simultaneously with the closing of the Offering, Rock will cease to be
taxed as an S corporation under the Code. In connection with the termination of
its S corporation status, Rock will pay the Shareholder Distribution Amount out
of the net proceeds of this Offering to the Existing Shareholders. The
Shareholder Distribution Amount would have been $18.0 million calculated as of
December 31, 1997. The Shareholder Distribution Amount is expected to increase
by the distribution date as a result of additional S corporation income. See
"Use of Proceeds" and "Termination of S Corporation Status."
As an S corporation, Rock's income, whether or not distributed, was taxed
at the shareholder level for federal and state tax purposes. Upon termination of
its S corporation status, Rock will be
31
<PAGE> 33
subject to federal and state income taxation and will record a deferred tax
asset on its balance sheet. The amount of the deferred tax asset to be recorded
as of the date of termination of the S corporation status will depend upon
timing differences between tax and book accounting relating principally to
marking loans to market for tax purposes. If the S corporation status had been
terminated as of December 31, 1997, the amount of the deferred tax asset would
have been approximately $1.7 million. The pro forma provision for income taxes
in the selected consolidated financial data shows results as if Rock had been
subject to federal and state taxation at the tax rates effective for the periods
presented.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED DECEMBER 31, 1997
VERSUS FISCAL YEAR ENDED DECEMBER 31, 1996
The following table sets forth the revenues and expenses and pre-tax income
for Rock for the years ended December 31, 1996 and 1997:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1997
-------- --------
(In thousands)
<S> <C> <C>
Total revenue before gains on sale of
marketable securities .............................. $ 28,564 $ 49,888
Net gain on sale of marketable securities ............ 991 2,222
-------- --------
Total revenue ........................................ 29,555 52,110
Total expenses ....................................... (26,424) (40,695)
-------- --------
Pre-tax income ....................................... 3,131 11,415
Add back stock and option holders'
bonuses ............................................ 2,297 1,592
-------- --------
Pre-tax income before stock and
option holders' bonuses ............................ $ 5,428 $ 13,007
======== ========
</TABLE>
Rock's total revenues increased to $52.1 million in 1997 from $29.6 million
in 1996, an increase of $22.5 million, or 76.3%, which included a net increase
of $1.2 million in gains on sales of marketable securities over 1996. Excluding
gains on sales of marketable securities, Rock's total revenues increased to
$49.9 million in 1997 from $28.6 million in 1996, an increase of $21.3 million,
or 74.7%. The increase in revenues is primarily due to (i) an increased portion
of the loans closed by Rock consisting of Non-Prime Loans (27.5% of the total
dollar volume of loans closed in 1997, compared to 13.7% in 1996), which have
higher origination fees and with respect to which Rock receives a higher premium
on sale than Rock's Conventional Loans, (ii) an increase of $121.6 million, or
82.3%, in the volume of Sub- Prime Home Equity Loans closed by Rock in 1997, and
(iii) an increase in bulk sales of loans (which generally resulted in higher
premiums than sales of individual loans). In 1997, the Fresh Start(TM)
division's revenues as a percentage of total revenue increased to 49.8%,
compared to 40% in 1996.
Total expenses increased from $26.4 million in 1996 to $40.7 million in
1997, an increase of $14.3 million, or 54.0%, primarily due to increased
commissions, increased occupancy costs for store openings and increases in
general and administrative expenses that fluctuate with increases in volumes of
loans closed. As a result of the increased revenues, proportionally lower
expenses and lower bonuses, pre-tax income before stock and option holders'
bonuses increased 139.6%, from $5.4 million in 1996 to $13.0 million in 1997.
32
<PAGE> 34
Because 13 stores and one marketing center have opened since July 1, 1997
(including four stores in the fourth quarter of 1997 and five in the first
quarter of 1998), Rock expects these stores to contribute significantly less to
its revenues and net income and more to its expenses in the first and possibly
the second and third quarters of 1998 than stores that have been in operation
for at least twelve months. The stores opened in 1998 and some of the stores
opened late in 1997 are expected to operate at a net loss in the first quarter
of 1998. Also, because of the seasonality of its business (see "Business--
Seasonality"), Rock does not expect the trend in its quarterly revenue or income
growth during the four quarters of 1997 to continue at the same level in the
first quarter of 1998, if at all.
Stock and option holders' bonuses decreased from $2.3 million in 1996 to
$1.6 million in 1997, a decrease of $0.7 million, or 30.7%. During 1996 and
1997, Rock paid bonuses to option holders in accordance with their employment
agreements. The agreements do not require these bonuses after December 31, 1997.
In addition, Rock paid bonuses to all three of its shareholders in 1996 and one
of its shareholders in 1997, partially in recognition of cumulative past
services. Rock does not intend to pay aggregate bonuses of this magnitude to
these persons after 1997.
The following table sets forth information regarding the components of
Rock's revenues for the years ended December 31, 1996 and 1997:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1997
-------- --------
(in thousands)
<S> <C> <C>
Interest income .......................................... $ 4,267 $ 8,083
Interest expense ......................................... (3,669) (5,150)
-------- --------
Net interest margin ................................. 598 2,933
Provision for credit losses .............................. -- (300)
-------- --------
Net interest margin after provision for
credit losses...................................... 598 2,633
Loan fees and gains and losses on sale of mortgages ...... 27,960 47,084
Net gain on sale of marketable securities ................ 991 2,222
Other income ............................................. 6 171
-------- --------
Total revenue ....................................... $ 29,555 $ 52,110
======== ========
</TABLE>
Net interest margin increased to $2.9 million in 1997 from $0.6 million in
1996, an increase of $2.3 million, or 390.0%. The increase was primarily due to
(i) the increase in the dollar volume of loans closed by Rock, and (ii) a change
in the manner of selling loans from "flow" sales to "bulk" sales and assignment
of trade sales, resulting in an increase in the length of time loans were held
before sale, which allowed Rock to take advantage of the positive net interest
margin. "Flow" sales are sales of loans underwritten by a third party who
commits to purchase each individual loan its underwriters approve. "Bulk" sales
are sales of loans underwritten to Rock's underwriting standards that are pooled
and then sold to third parties for cash by Rock. Assignment of trade sales are
sales of Conventional Loans to a third party who exchanges them with FNMA or
Freddie Mac for their securities. The increase in net interest margin is also
due to (i) higher weighted average interest rates charged on the loans as a
result of the increased proportion of Non-Prime Loans, which generally have
higher interest rates, (ii) a decrease in the weighted average interest rates
charged on Rock's borrowing facilities (from 7.26% in 1996 to 7.03% in 1997),
and (iii) Rock's increased use of internally-generated cash to fund its loans.
Rock has employed, and expects to continue to employ, strategies to attempt to
increase its net interest margin, including holding its loans longer before it
sells them, closing a higher volume of loans, closing a higher proportion of
Non-Prime Loans, which generally have higher interest rates, negotiating lower
33
<PAGE> 35
borrowing rates and using available cash to fund loans without borrowing
additional money. Although this strategy enhances Rock's net interest margin, it
exposes Rock to a greater risk of delinquencies. Loans that become delinquent
generally can not be sold to third parties increasing the likelihood of
foreclosures and charge-offs.
Rock may be required to repurchase or substitute loans in the event of a
breach of representations and warranties, including any fraud or any
misrepresentation made during the loan origination process. Rock recorded a
provision for credit losses of $300,000 in 1997 for future repurchase or
substitution requirements relating to loans sold before December 31, 1997 and
credit risk for loans held for sale and investment. During 1997, two loans were
reclassified as real estate owned, resulting in a $30,000 charge against the
reserve.
Loan fees and gains and losses on sale of mortgages increased to $47.1
million in 1997 from $28.0 million in 1996, an increase of $19.1 million, or
68.4%. This increase is primarily due to an increased portion of the loans
closed by Rock consisting of Non-Prime Loans, with respect to which Rock
receives higher loan fees and a higher premium on sale, the introduction of
Specialty Lending in 1997, resulting in $66.0 million of High LTV Loans closed
in 1997 for which Rock also receives relatively higher loan fees and premiums on
sale, and the higher volume of loans closed in 1997. The dollar volume of
Non-Prime loans increased in 1997 compared to 1996 primarily as a result of an
increase in Fresh Start(TM) stores, loan officers, and marketing and the
beginning of Rock's Specialty Lending division in 1997. The average premium
received by Rock on all loans sold during 1997 also increased, primarily due to
changes in the way Rock sold its loans in 1997 and favorable market conditions.
Rock sold a majority of its Non-Prime Loans through bulk sales, rather than on a
flow basis. In addition, Rock began selling its Conventional Loans pursuant to
an assignment of trade, rather than on a flow basis.
The increase in loan fees and gains and losses on sale of mortgages was
partially offset by an increase in Rock's recapture reserve in 1997. Some
Non-Prime Loan sales require Rock to return a portion of the premium received by
Rock on the sale of the loan if the loan is prepaid by the customer within the
first year after sale. Rock records a provision for this risk based on its
evaluation of the terms of its sale contracts and its assumptions concerning
prepayments. Rock increased its reserve, and decreased its loan fees and gains
and losses on sale of mortgages, by $603,000 for this risk in 1997, compared to
an increase of $317,000 in 1996. In addition, by increasing net interest margin
by holding loans for longer periods of time, Rock is subject to a higher risk of
delinquencies and resulting foreclosure losses.
Rock currently does not securitize its loans. Rock sells its loans in large
bulk and whole loan sales for cash premiums in the secondary market. If the
prices offered in the secondary market for Rock's loans decrease significantly
relative to the value Rock believes that it could receive by securitizing such
loans, Rock's management would consider securitizing its loans. If Rock began to
securitize its loans, it would be subject to the risks described in "Risk
Factors--Risks of Securitization."
Rock currently services the loans it closes between the date of closing and
the date of sale of the loan and the related servicing. Through 1997, Rock sold
all of its loans servicing released (i.e., without retaining the right to
service the loan) or sells the loan servicing rights separately. Rock would
consider selling its loans with the servicing rights retained if it believes
that the value of the servicing rights is or may become significantly greater
than secondary market buyers are then willing to pay for them. If Rock sold
loans with servicing retained, Rock would recognize a gain on the sale equal to
the difference between the carrying value of the loan sold on Rock's balance
sheet and the sum of (i) the cash received
34
<PAGE> 36
in such sale, and (ii) the amount of an asset recorded on its balance sheet
in an initial amount equal to the present value of the servicing fees it would
expect to collect over the life of the loan (the "Servicing Asset"). If Rock
believes the value of the Servicing Asset in the secondary market becomes high
enough, Rock would consider selling its servicing rights as it did in 1994 and
1995. If Rock began to sell its loans with servicing retained, it would be
subject to the risks described in "Risk Factors--Potential Originated Mortgage
Servicing Rights Risk."
Net gain on sale of marketable securities increased to $2.2 million in 1997
from $1.0 million in 1996, an increase of $1.2 million, or 124.2%. Before the
end of 1997, Rock had invested some of its excess cash in marketable securities.
During 1996 and 1997, Rock sold a portion of its portfolio of marketable
securities held for sale. No such marketable securities were held by Rock at
December 31, 1997, and, therefore, the gains on sales will not continue in the
future.
The following table sets forth information regarding the components of
Rock's expenses for the years ended December 31, 1996 and 1997:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1996 1997
------- -------
(in thousands)
<S> <C> <C>
Salaries, commissions and employee benefits............................ $16,425 $24,811
General and administrative expenses.................................... 4,646 7,630
Marketing expenses..................................................... 2,393 5,370
Depreciation and amortization.......................................... 663 1,292
Stock and option holders' bonuses...................................... 2,297 1,592
------- -------
Total expenses.................................................... $26,424 $40,695
======= =======
</TABLE>
Salaries, commissions and employee benefits increased from $16.4 million in
1996 to $24.8 million in 1997, an increase of $8.4 million, or 51.1%. The
increase was primarily attributable to Rock hiring additional personnel in order
to generate increased levels of loan closings, increased compensation for new
management team members hired during 1997, and increased commissions due to
increased closings. Rock employed 399 persons as of December 31, 1996, compared
to 667 persons as of December 31, 1997, a 72.5% increase. These expenses are
expected to increase in 1998 as a result of additional employees hired in 1997
and expected to be hired in 1998 in connection with new stores and expansion of
existing operations.
General and administrative expenses consist primarily of occupancy costs,
professional services, office expenses, automobile and delivery expenses and
other expenses, many of which vary with the volume of loan closings. General and
administrative expenses increased from $4.6 million in 1996 to $7.6 million in
1997, an increase of $3.0 million, or 64.2%. The increase was primarily
attributable to an increase in occupancy expenses as a result of opening nine
new Fresh Start(TM) stores and one marketing center in 1997 and one new
Conventional Mortgage Lending branch during 1997 and significantly expanded
Specialty Lending activities in 1997. In addition, recruiting expenses increased
in 1997 primarily due to the opening of the new Fresh Start(TM) stores and the
hiring of new management team members. These expenses are expected to increase
in 1998 as a result of new stores and expansion of existing operations. Also,
legal expenses increased in 1997.
Marketing expenses increased from $2.4 million in 1996 to $5.4 million in
1997, an increase of $3.0 million, or 124.4%. Marketing expenses for the Fresh
Start(TM) and Specialty Lending divisions in
35
<PAGE> 37
1997 increased $1.7 million, or 120.0% and $1.2 million, or 100.0%,
respectively, over 1996. The increase was primarily attributable to Rock's
greater marketing, both in existing markets and in new markets to generate
higher levels of loan closings, as well as the marketing costs associated with
the introduction of Rock's High LTV Loans. This increase is primarily the result
of Rock's increased focus on its Non-Prime Loan business, which required greater
marketing related to new store openings, and ongoing marketing. These expenses
are expected to increase in 1998 in connection with new stores and expansion of
existing operations into new geographic markets.
Depreciation and amortization expenses increased from $0.7 million in 1996
to $1.3 million in 1997, an increase of $0.6 million, or 94.9%. The increase was
primarily attributable to Rock's purchase of a front-end origination computer
system in early 1997 and purchases of additional equipment and leasehold
improvements during 1997 for new stores. These expenses are expected to increase
in 1998 as a result of new stores and expansion of existing operations.
Stock and option holders' bonuses decreased from $2.3 million in 1996 to
$1.6 million in 1997, a decrease of $0.7 million, or 30.7%. During 1996 and
1997, Rock paid bonuses to option holders in accordance with their employment
agreements. The agreements do not require these bonuses after December 31, 1997.
In addition, Rock paid bonuses to all three of its shareholders in 1996 and one
of its shareholders in 1997, partially in recognition of cumulative past
services. Rock does not intend to pay aggregate bonuses of this magnitude to
these persons after 1997.
Upon completion of this Offering Rock's tax status will change from that of
an S corporation to that of a C corporation. As a C corporation, Rock will be
subject to federal and state income taxation. As an S corporation, Rock's
taxable income is included in the individual returns of the shareholders.
FISCAL YEAR ENDED DECEMBER 31, 1996
VERSUS FISCAL YEAR ENDED DECEMBER 31, 1995
The following table sets forth the revenues and expenses and pre-tax income
for Rock for the years ended December 31, 1995 and 1996:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1995 1996
-------- --------
(In thousands)
<S> <C> <C>
Total revenue before gains on sale of mortgage
servicing and marketable securities ................ $ 18,178 $ 28,564
Net gain on sale of mortgage servicing ............... 5,728 --
Net gain on sale of marketable securities ............ 346 991
-------- --------
Total revenue ........................................ 24,252 29,555
Total expenses ....................................... (17,389) (26,424)
-------- --------
Pre-tax income ....................................... 6,863 3,131
Add back stock and option holders'
bonuses ............................................ 546 2,297
-------- --------
Pre-tax income before stock and option
holders' bonuses ................................... $ 7,409 $ 5,428
======== ========
</TABLE>
Rock's total revenues increased to $29.6 million in 1996 from $24.3 million
in 1995, an increase of $5.3 million, or 21.9%, which included a net increase of
$0.6 million in gains on sales of marketable
36
<PAGE> 38
securities over 1995 and a gain on the sale of servicing rights of $5.7
million in 1995. Excluding gains on sales of marketable securities and the gain
on the sale of servicing rights, Rock's total revenues increased to $28.6
million in 1996 from $18.2 million in 1995, an increase of $10.4 million, or
57.1%. The increase in revenues is primarily due to (i) an increased portion of
the loans closed by Rock consisting of Non-Prime Loans (13.7% of the total
dollar volume of loans closed in 1996, compared to 7.9% in 1995), which have
higher origination fees and with respect to which Rock receives a higher premium
on sale than Conventional Loans, and (ii) a 132.0% increase in the volume of
Non-Prime Loans closed by Rock. In 1996, the Fresh Start(TM) division's revenues
as a percentage of total revenue increased to 40%, compared to 14% in 1995.
Total expenses increased from $17.4 million in 1995 to $26.4 million in
1996, an increase of $9.0 million, or 52.0%, primarily due to increased
commissions, increased occupancy costs for a branch opening and increases in
general and administrative expenses that fluctuate with increases in volumes of
loans closed. Included in total revenues for 1995 is a $5.7 million gain on the
sale of mortgage servicing rights and a $346,000 gain on the sale of marketable
securities, and included in total revenues for 1996 is a $991,000 gain on the
sale of marketable securities. As a result of the gain on sale of mortgage
servicing rights in 1995 and proportionately higher expenses, partially offset
by the lower gain on the sale of marketable securities in 1995, pre-tax income
before stock and option holders' bonuses decreased 26.7%, from $7.4 million in
1995 to $5.4 million in 1996.
The following table sets forth information regarding the components of
Rock's revenues for the years ended December 31, 1995 and 1996:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1995 1996
-------- --------
(in thousands)
<S> <C> <C>
Interest income ................................... $ 3,003 $ 4,267
Interest expense .................................. (3,012) (3,669)
-------- --------
Net interest margin .......................... (9) 598
Loan fees and gains and losses on sale
of mortgages..................................... 17,788 27,960
Net gain on sale of mortgage servicing ............ 5,728 --
Net gain on sale of marketable securities ......... 346 991
Other income ...................................... 399 6
-------- --------
Total revenue ................................ $ 24,252 $ 29,555
======== ========
</TABLE>
Net interest margin increased to $598,000 in 1996 from a loss of $9,000 in
1995, an increase of $607,000. The increase was primarily due to (i) higher
weighted average interest rates charged on the loans as a result of the
increased proportion of Non-Prime Loans, which generally have higher interest
rates, (ii) the increase in the dollar volume of loans closed by Rock, and (iii)
Rock's increased use of internally-generated cash to fund its loans.
Loan fees and gains and losses on sale of mortgages increased to $28.0
million in 1996 from $17.8 million in 1995, an increase of $10.2 million, or
57.2%. This increase is primarily due to an increased portion of the loans
closed by Rock consisting of Non-Prime Loans, with respect to which Rock
receives higher loan fees and a higher premium on sale, and an increase of 20.5%
in the dollar volume of loans closed. The dollar volume of Non-Prime loans
increased in 1996 compared to 1995 primarily because of an increase in Fresh
Start(TM) stores, loan officers and marketing.
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<PAGE> 39
The increase in the loan fees and gains and losses on sale of mortgages was
partially offset by an increase in Rock's recapture reserve in 1996. Some
Non-Prime Loan sales require Rock to return a portion of the premium received by
Rock on the sale of the loan if the loan is prepaid by the customer within the
first year after sale. Rock records a provision for this risk based on its
evaluation of the terms of its sale contracts and its assumptions concerning
prepayments. Rock increased its reserve, and decreased its loan fees and gains
and losses on sale of mortgages, by $317,000 for this risk in 1996, compared to
an increase of $205,000 in 1995.
Rock recognized a $5.7 million net gain on the sale of mortgage servicing
in 1995. Rock retained the servicing rights to loans it sold in 1993 and 1994
(and received lower sales prices as a result). In 1995, Rock sold all of its
remaining servicing rights. In 1996, Rock sold all of its loans servicing
released. Other income in 1995 also includes approximately $280,000 of loan
servicing fees for the period during which Rock retained servicing rights in
1995.
Net gain on sale of marketable securities increased to $991,000 in 1996
from $346,000 in 1995, an increase of $645,000, or 186.7%. During 1995 and 1996,
Rock invested some of its excess cash in marketable securities. During 1995 and
1996, Rock sold a portion of its portfolio of marketable securities held for
sale and recognized gains on those sales. The net gain in 1995 included
recognition of a $850,000 loss due to other than temporary impairment.
The following table sets forth information regarding the components of
Rock's expenses for the years ended December 31, 1995 and 1996:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1995 1996
------- -------
(in thousands)
<S> <C> <C>
Salaries, commissions and employee benefits $11,272 $16,425
General and administrative ................ 3,726 4,646
Marketing expenses ........................ 1,339 2,393
Depreciation and amortization ............. 507 663
Stock and option holders' bonuses ......... 545 2,297
------- -------
Total expenses ....................... $17,389 $26,424
======= =======
</TABLE>
Salaries, commissions and employee benefits increased from $11.3 million in
1995 to $16.4 million in 1996, an increase of $5.1 million, or 45.7%. The
increase was primarily attributable to Rock hiring additional personnel in order
to generate increased levels of loan closings, and increased commissions due to
increased closings. Rock employed 266 persons as of December 31, 1995, compared
to 399 persons as of December 31, 1996, a 50% increase.
General and administrative expenses consist primarily of occupancy costs,
professional services, office expenses, automobile and delivery expenses and
other expenses, many of which vary with the volume of loan closings. General and
administrative expenses increased from $3.7 million in 1995 to $4.6 million in
1996, an increase of $0.9 million, or 24.7%. The increase was primarily
attributable to increased occupancy expenses as a result of opening two new
Fresh Start(TM) stores in 1996 and increased expenses required to accommodate
the significantly expanded loan closing volumes experienced by Rock in 1996.
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<PAGE> 40
Marketing expenses increased from $1.3 million in 1995 to $2.4 million in
1996, an increase of $1.1 million, or 78.7%. The increase was primarily
attributable to Rock's greater marketing expenses, both in existing markets and
in new markets to generate higher levels of loan closings. This increase is
primarily the result of Rock's increased focus on its Non-Prime Loan business,
which required greater marketing related to each loan closed and new store
openings, and ongoing marketing.
Depreciation and amortization expenses increased from $0.5 million in 1995
to $0.7 million in 1996, an increase of $0.2 million, or 30.8%. The increase was
primarily attributable to Rock's purchases of additional equipment and leasehold
improvements during 1996 for new stores and expansion of Rock's national support
center.
Stock and option holders' bonuses increased from $0.5 million in 1995 to
$2.3 million in 1996, an increase of $1.8 million. During 1996, Rock paid
bonuses to option holders in accordance with their employment agreements. The
agreements do not require these bonuses after December 31, 1997. In
addition, Rock paid bonuses to all of its shareholders in 1996, partially
in recognition of cumulative past services. Rock does not intend to pay bonuses
of this magnitude to these persons after 1997.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth information concerning Rock's financial
condition as of December 31, 1996 and 1997:
<TABLE>
<CAPTION>
As of December 31,
----------------------
1996 1997
-------- --------
(In thousands)
<S> <C> <C>
Cash and cash equivalents ............... $ 3,289 $ 11,947
Marketable securities ................... 5,954 --
Mortgage loans held for sale ............ 85,009 121,344
Property and equipment, net ............. 2,681 7,011
Other assets ............................ 3,427 4,127
-------- --------
Total assets ........................ $100,360 $144,429
======== ========
Warehouse borrowings .................... $ 67,621 $ 97,455
Drafts payable .......................... 14,897 21,875
Other liabilities ....................... 5,596 9,991
Shareholders' equity .................... 12,346 15,108
-------- --------
Total liabilities and
shareholders' equity ........... $100,360 $144,429
======== ========
</TABLE>
Cash and cash equivalents increased in 1997 primarily due to the cash
generated from operations along with the sale of the remaining marketable equity
securities. Mortgage loans held for sale increased due to higher volume of
originations in 1997 by the Fresh Start(TM) division, which Rock holds for
longer periods of time to accumulate for bulk sales and to increase interest
income. See "Results of Operations." Property and equipment increased due to new
Fresh Start(TM) store openings and the acquisition of a new front-end
origination technology in 1997. Other assets at December 31, 1997 include loans
to a shareholder of approximately $1.6 million, which are expected to be repaid
out of the Shareholder Distribution Amount.
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<PAGE> 41
Warehouse borrowings and drafts payable increased due to the increase in
volumes of originations and holding loans for longer periods of time. See
"Results of Operations." The increase in other liabilities is due to increased
trade payables relating to increases in the volume of loans closed and financing
for equipment acquisitions. Shareholders' equity reflects the increase due to
pre-tax income less distributions to shareholders to pay tax liabilities they
incur as a result of Rock's status as an S corporation and a special, one-time
distribution to shareholders of approximately $4.8 million in 1997.
Net cash provided by operating activities during 1997 before increases or
decreases in loans held for sale was approximately $19.7 million, compared to
approximately $9.2 million in 1996. Cash was provided primarily by (i) Rock's
pre-tax income for 1997 (approximately $10.8 million before depreciation and
amortization, provision for credit losses and net gain on sales of marketable
securities in 1997, compared to approximately $2.8 million in 1996), (ii) an
increase in drafts payable, which represent funds advanced for loan closings
that have not yet been drawn against the warehouse line of credit (approximately
$7.0 million in 1997, compared to approximately $7.5 million in 1996), and (iii)
an increase in accounts payable and accrued expenses and other liabilities,
primarily as a result of the increase in loan closings and the number of stores
opened during 1997 (approximately $2.6 million in 1997, compared to a reduction
of approximately $0.8 million in 1996).
These sources of cash were more than offset primarily by cash used to fund
the increase in loans held for sale resulting from the increased volume of
closings in 1997 (approximately $36.3 million in 1997, compared to approximately
$11.0 million in 1996). Cash was also used during 1997 (i) to purchase
equipment, both for new stores and a marketing center and to upgrade Rock's
computer and telephone systems (approximately $5.6 million in 1997, compared to
approximately $2.1 million in 1996), (ii) to fund distributions to shareholders
both to pay their taxes on Rock's income taxed to them as a result of Rock's S
corporation status and to distribute a portion of the additional earnings
previously taxed to them (approximately $7.2 million in 1997, compared to
approximately $3.5 million in 1996), and (iii) to fund loans to shareholders
(approximately $0.9 million in 1997, compared to payments received on such loans
of approximately $2.0 million in 1996). These uses of cash were financed
primarily by cash generated by operations, proceeds from the sales of marketable
securities and a $2 million loan secured by computer equipment purchased with
the loan proceeds. Increased borrowings under Rock's warehouse financing
facilities (approximately $29.8 million in 1997, compared to approximately $3.5
million in 1996) were used to finance, in part, the higher amount of loans held
for sale.
Rock's operations require continued access to financing sources. Rock's
primary operating cash requirements include the funding of (i) loan closings,
(ii) capital expenditures in connection with the expansion of its stores, (iii)
beginning after this Offering, income tax payments due on Rock's net income,
(iv) ongoing administrative and other operating expenses, including compensation
of additional employees expected to be hired in 1998, and (v) repayments of
borrowings and related interest.
Adequate credit facilities and other sources of funding, which permit Rock
to fund the loans it closes, are essential to the continuation of Rock's ability
to close loans. After using available working capital, Rock borrows money to
fund its loan closings and repays these borrowings as the loans are sold. Loan
origination fees are sometimes included in the principal balance of the loan
closed, although Rock may receive these fees either at the closing of the loan
or at the time of a warehouse line of credit borrowing or reverse repurchase
sale of the loan. Upon the sale of loans and the subsequent repayment of the
borrowings, Rock's working capital and credit facilities then become available
to fund additional loan closings.
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<PAGE> 42
Rock has $225 million of warehouse financing facilities. Rock's warehouse
line of credit currently provides for up to $125 million principal amount of
demand loans secured by loans held for sale and other assets of Rock. Loans
under the warehouse line of credit bear interest at rates that vary depending on
the type of underlying loan, and the loans are subject to sublimits, advance
rates and warehouse terms that vary depending on the type of underlying loan.
Interest rates vary from the bank's prime rate to 1.5% to 2.5% over the federal
funds rate (resulting in a weighted average interest rate of 6.94% during 1997).
The warehouse line of credit requires Rock to maintain a minimum tangible
effective net worth, a maximum leverage ratio, a minimum current ratio and
minimum working capital. The warehouse line of credit expires, with respect to
loans committed to be made by any particular lender, 75 days after that lender
demands payment, unless that lender is replaced. Borrowings under the warehouse
line of credit are used to fund loans closed by Rock. As of January 31, 1998,
Rock had borrowed $37.0 million under this facility and had a maximum of $88.0
million available for additional borrowings and was in compliance with all
associated financial covenants.
In addition to the $125 million warehouse line of credit, Rock's reverse
repurchase arrangement provides that the lender will purchase from Rock at par,
subject to Rock's agreement to repurchase on a daily basis, up to $100 million
of fully-amortizing, first or junior lien residential mortgage loans and home
equity loans that comply with Rock's origination guidelines and conform to whole
and bulk loan sale requirements. This agreement is not a committed facility and
the lender may elect to discontinue the repurchase agreement at any time. The
term of any financing under the repurchase agreement matures and may be renewed
on a daily basis. In any event, the arrangement terminates in March 1998. The
effective weighted average interest rate to Rock of this arrangement in 1997 was
6.88%. Rock uses this facility as a supplemental borrowing facility to fund
loans closed by Rock until they are sold. As of January 31, 1998, Rock had
financed $46.0 million of loans under this facility and an additional $54.0
million was available for future financings.
The net proceeds of the Offering, together with cash flows from operations,
are expected to be sufficient to fund the payment to the Existing Shareholders
of the Shareholder Distribution Amount and Rock's liquidity requirements for the
next 12 months, if Rock's future operations are consistent with management's
expectations. See "Termination of S Corporation Status" and "Use of Proceeds."
Rock, however, expects to continue its expansion and expects that eventually it
will need to arrange for additional sources of capital through the issuance of
debt, equity or additional bank borrowings. Rock has no commitments for any such
additional financings, and there can be no assurance that Rock will be able to
obtain any such additional financing at the times required and on terms and
conditions acceptable to Rock. In such event, Rock's growth and operations could
be curtailed.
If Rock begins to securitize its assets or significantly increases its
retained mortgage servicing rights, Rock's liquidity could be materially
adversely affected. See "Risk Factors--Risks of Securitization" and "--Potential
Originated Mortgage Servicing Rights Risk."
HEDGING
Rock closes loans and subsequently sells them for cash to unaffiliated
wholesale purchasers. If prevailing interest rates rise between the time Rock
closes loans or fixes the interest rates on such loans and the time such loans
are priced for sale, the spread between the amount loaned and the amount the
wholesale purchaser is willing to pay for the loan narrows, resulting in a loss
in value of the loan. To protect against such losses in respect of its
Conventional Loans (where the interest spread is lower), Rock currently enters
into forward sales commitments to fix the sales price of the conventional loans
expected
41
<PAGE> 43
to be closed or hedges the value of those loans through periodic
purchases of short-duration treasury-based options. Before entering into
forward commitments or hedging, Rock performs an analysis of its Conventional
Loans and Conventional Loan applications with committed interest rates taking
into account such factors as the estimated portion of loan applications that
will ultimately be funded, interest rates, inventories of loans and applications
and other factors to determine the type and amount of forward commitment and
hedging transactions. Rock attempts to make forward commitments for or hedge
substantially all of its estimated interest rate risk on its Conventional Loans.
Rock does not believe that hedging its interest rate risk with respect to its
Non-Prime Loans is cost effective as a result of their generally higher interest
spreads combined with their relative lack of sensitivity to changes in market
interest rates and considering the period during which Rock currently intends to
accumulate such loans for sale. See "Risk Factors--Economic Conditions--Interest
Rates."
IMPACT OF INFLATION
Inflation has not had a material effect on Rock's results of operations.
Increases in the inflation rate generally result in increased interest rates.
Because Rock borrows money at variable rates, increased interest rates will
increase the borrowing costs of Rock. Inflation will also increase the operating
costs of Rock. Rock may not be able to pass on the effects of inflation and the
accompanying higher interest rates to its customers due to usury or other
regulatory restrictions or competitive pressures. Profitability may also be
affected by the level of and fluctuation in interest rates, which affect Rock's
ability to earn a spread between interest received on its loans and the costs of
its borrowings. The profitability of Rock is likely to be adversely affected
during any period of unexpected or rapid changes in interest rates. A
substantial and sustained increase in interest rates could adversely affect the
ability of Rock to close loans. Fluctuating interest rates also may affect the
net interest income earned by Rock resulting from the difference between the
yield to Rock on loans held pending sales and the interest paid by Rock for
funds borrowed under Rock's warehouse financing facilities. See "Risk
Factors--Economic Conditions--Interest Rates."
YEAR 2000 COMPLIANCE
Rock does not expect the cost of making its computer systems year 2000
compliant will be material. Because most of Rock's computer hardware and
software is less than two years old, it believes that its exposure to year
2000-related hardware and software problems is lower than if it used older
equipment or software. Nonetheless, Rock is engaging a consultant to manage the
testing of its equipment and software and the identification and resolution of
any problems discovered. Rock also plans to explore the strategies of its
vendors to discover and resolve any year 2000 problems. Rock is already
participating with its loan servicing vendor in its year 2000 evaluation
process. Rock expects to complete this process during 1998. See "Risk
Factors--Year 2000 Compliance."
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share." This Statement specifies the computation, presentation, and disclosure
requirements for earnings per share for entities with publicly- held common
stock or potential common stock. This Statement is effective for financial
statements for both interim and annual periods ending after December 15, 1997
and will be implemented in Rock's financial statements upon completion of the
Offering. The pro forma earnings per share information presented in this
Prospectus is computed in accordance with SFAS No. 128.
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<PAGE> 44
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This Statement establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. This Statement is
effective for fiscal years beginning after December 15, 1997. Reclassification
of financial statements for earlier periods provided for comparative purposes is
required. At this time Rock has determined that this Statement will have no
significant impact on its financial position or results of operations for 1998.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." This statement establishes standards for
the way public business enterprises report information about their operating
segments and requires them to report selected information about operating
segments, products and services, activities in different geographic areas, and
its reliance on major customers. SFAS No. 131 requires a "management approach"
for identifying reportable segments based on the way that management organizes
the segments within the enterprise for making operating decisions and assessing
performance. SFAS No. 131 is effective for financial statements for periods
beginning after December 15, 1997, and will be adopted by Rock in 1998 as
required. Rock has presented the required disclosures of financial information
for its three divisions, Fresh Start(TM), Specialty Lending and Conventional
Mortgage Lending in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
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<PAGE> 45
BUSINESS
OVERVIEW
Rock is a specialty marketing company of debt consolidation and home
financing products secured primarily by first or second mortgages on one- to
four-family, owner-occupied residences. The Company originates loans through 24
stores and branches, one marketing center and one call center. Founded in 1985
by its current Chief Executive Officer and Chairman of the Board, Daniel
Gilbert, Rock originates 100% of its loans through its retail operations,
marketing its loans directly to consumers. The Company uses proprietary
marketing methods and technology to increase its market penetration. Rock seeks
to provide "world class" service to its customers, thereby encouraging them to
return for future loans and refer others to Rock for loans. The Company also
focuses on recruiting, developing and motivating talented people, recruited from
inside and outside the consumer finance industry, to implement its business
strategies. Rock believes it is creating growing brand identities and a retail
franchise that will sustain its loan origination efforts.
As a retail originator of loans, Rock earns a portion of its revenues from
origination points and processing fees charged to its customers. Rock currently
does not securitize its loans. Rather, it sells its loans in large bulk and
whole loan sales for cash premiums in the secondary market. During 1997, Rock
had revenues of $52.1 million, pre-tax income of $11.4 million and pro forma net
income of $7.0 million. During 1997, Rock closed $1.2 billion (12,950 units) of
loans. As of January 31, 1998, Rock had 717 employees, including 286 loan
officers.
Rock currently operates through three major divisions. Rock originates
Sub-Prime Home Equity Loans to individuals with impaired credit characteristics,
high levels of debt service to income, unfavorable past credit experience,
limited credit history, limited employment history or unverifiable income
through its Fresh Start(TM) division. Rock owns the registered trademark for the
name "Fresh Start Financial Services(R)" and has applied for a registered
service mark for the name "Fresh Start(TM)." Rock originates home equity second
mortgage loans to individuals with good credit histories but little or no equity
in their homes through its Specialty Lending division. During 1997, Rock closed
$335.3 million (6,232 units, representing 49% of the total units closed) of
Sub-Prime Home Equity Loans and High LTV Loans. Rock also originates
Conventional Loans that generally conform to FNMA or Freddie Mac underwriting
standards, or that generally meet such standards except for maximum loan size
guidelines, through its Conventional Mortgage Lending division. During 1997,
Rock closed $867.5 million (6,513 units) of Conventional Loans. Although only
28% of the total loan closings (by dollar volume) were Non-Prime Loans in 1997,
revenues from Non-Prime Loans equaled 63% of total revenues due to the higher
profit margins and interest rates associated with Non-Prime Loans. In addition,
Rock began to increase its government insured lending operations in 1997,
primarily making mortgage loans that meet the underwriting standards for FHA
insurance.
Rock's business in each division is supported by an infrastructure of
sophisticated technology, highly-trained people and specialized marketing,
including multimedia advertising and direct marketing operations. To identify
potential customers, Rock uses internal and external databases of information
regarding past and potential customers and their needs. Rock then develops
proprietary customer profiles which it uses together with information from
outside sources to tailor and direct its marketing efforts for each of its
divisions. Rock believes that its focused marketing approach makes more
efficient use of its marketing resources and leads to a higher marketing success
rate than broad indiscriminate marketing aimed at a wide range of consumers.
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<PAGE> 46
BUSINESS STRATEGY
Rock's business strategy to sustain its growth in profitability while
continuing to build its consumer lending operations includes: (i) enhancing
consumer recognition of its "Fresh Start(TM)" and "Rock Financial" brand names
in its current markets and establishing brand name recognition in new markets,
(ii) increasing the number of Fresh Start(TM) stores and expanding its call
center operations into additional states, (iii) expanding the cross-selling of
existing products and expanding the products offered through existing
distribution channels, (iv) exploring establishing additional distribution
channels, (v) providing "world class" service, and thereby distinguishing itself
from its competitors, (vi) continuing to invest heavily in technology and
marketing, and (vii) maintaining consistent underwriting standards, and thereby
maintaining secondary market interest in Rock's loans.
Enhance Consumer Recognition of the "Fresh Start(TM)" and "Rock Financial"
Brand Names. Rock uses advertising and marketing to enhance consumer recognition
of its "Fresh Start(TM)" and "Rock Financial" brand names in each of the current
markets it serves and to establish brand name recognition in new markets it
enters. Rock believes that it can differentiate itself from its competitors
through strong brand names and increase the likelihood that potential customers
will use Rock to meet their financial needs.
Increase the Number of Fresh Start(TM) Stores and Expand Call Center
Operations. Rock plans to increase the number of its Fresh Start(TM) stores and
expand its call center operations into additional states, thereby increasing
loan production and diversifying its operations geographically. Rock believes
that Non-Prime Loans are less dependent on prevailing interest rates and home
purchases and have higher origination fees and margins than Conventional Loans.
Rock opened nine Fresh Start(TM) stores and one marketing center during
1997 and opened an additional five Fresh Start(TM) stores in January 1998. Rock
plans to open additional stores in 1998. As of January 31, 1998, Rock was
soliciting High LTV Loans in eight states and was licensed to do business in
eight others. Rock is analyzing the requirements to do business and originate
Non-Prime Loans in other states.
Expand the Cross-Selling of Existing Products and Expand the Products
Offered Through Existing Distribution Channels. Rock plans to place loan
officers from each of Rock's other divisions in each Fresh Start(TM) store,
thereby enabling Rock to make available a greater variety of products to its
customers at these stores and to allow each of Rock's divisions to benefit from
cross-selling opportunities. Rock also plans to continue to explore new products
which it can cost-effectively originate through each of its existing
distribution channels. As part of this strategy, Rock began to increase its
government insured lending operations through its existing distribution channels
in 1997.
Explore Establishing Additional Distribution Channels. Rock has developed a
marketing and technology infrastructure that management believes will allow Rock
to establish new distribution channels to market financial products directly to
the consumer. Rock will explore creating new channels to market such financial
products.
Provide "World Class" Service. Rock trains its employees in what it calls
its "world class" service philosophy, which is Rock's commitment to provide
superior customer service, to be responsive to customer needs and to make
applying for and closing each loan as quick, efficient and convenient for the
customer as possible. Rock believes that "world class" service is necessary to
distinguish Rock from
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<PAGE> 47
its competitors. Rock also believes that referral and repeat business are
its most important sources of business, and that satisfied customers who
received "world class" service are more likely to refer others to Rock for loans
and to return to Rock for their future financing needs.
Continue to Invest Heavily in Technology and Marketing. Rock has invested
heavily in its technology and marketing to create an infrastructure of
sophisticated technology, highly trained people and specialized marketing and to
create and enhance brand name recognition for the Rock Financial and Fresh
Start(TM) brand names. Rock plans to continue to make significant investments in
its technology and marketing to maintain and enhance that infrastructure.
Maintain Consistent Underwriting Standards. Rock desires to maintain
consistent underwriting standards while it increases the volume of loans closed.
Rock believes that maintaining consistent underwriting standards is important to
develop and maintain its reputation and to maintain secondary market interest in
Rock's loans. Also, Rock seeks to maximize its premium on whole and bulk loan
sales by closely monitoring secondary market buyers' requirements.
KEY COMPONENTS OF ROCK'S RETAIL FRANCHISE
Rock originates 100% of its loans through its retail operations, marketing
its loans directly to consumers. The Company uses proprietary marketing methods
and technology to increase its market penetration. Rock seeks to provide "world
class" service to its customers, thereby encouraging them to return for future
loans and refer others to Rock for loans. The Company also focuses on
recruiting, developing and motivating talented people, recruited from inside and
outside the consumer finance industry, to implement its business strategies.
Through the use of these key components, Rock believes it is creating growing
brand identities and a retail franchise that will sustain its loan origination
efforts.
Marketing and Advertising. Rock makes extensive use of multimedia
advertising campaigns, including television, radio, yellow pages and print
advertising, and direct marketing efforts to support its loan officers' sales
efforts. Rock uses its proprietary customer profiles to focus its advertising
and direct marketing efforts in order to reach its target customer
cost-effectively and generate loan inquiries. Rock also uses advertising to
increase brand name recognition for its Rock Financial and Fresh Start(TM) brand
names. Rock's Fresh Start(TM) division is using the "Fresh Start(TM)" name,
adopted in 1997, in its advertising outside of Michigan and plans to convert its
current Michigan "Boulder Financial" stores to Fresh Start(TM) stores in 1998.
By creating brand name recognition, Rock believes that it is more likely that
consumers will use Fresh Start(TM) or Rock Financial to meet their financial
needs.
Rock has an in-house marketing staff with a marketing product manager
dedicated to each division. Rock's marketing team, together with an outside
advertising agency, produces Rock's graphic art, places virtually all of Rock's
print, radio and television advertising, manages Rock's marketing data base and
acquires lists used for call center and direct marketing efforts.
Rock has also developed and trademarked a proprietary direct mail product
it calls "Mortgage in a Box(R)." After a customer has paid a loan application or
processing fee, Rock mails the customer a colorful Mortgage in a Box(R) package
that contains application forms and instructions. Rock believes its Mortgage in
a Box(R) package simplifies the loan application process and helps customers
return complete information necessary for Rock to make underwriting decisions
regarding the potential loan. Rock characterizes this product as "the world's
most user-friendly loan application kit." Rock has also
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<PAGE> 48
established a web site at http://www.Rockfin.com. The site provides product
information about the loans offered by Rock.
Using Technology and Information Systems for Marketing. Rock believes that
its focused marketing approach makes more efficient use of its marketing
resources and leads to a higher marketing success rate than broad indiscriminate
marketing aimed at a wide range of consumers. To identify potential customers,
Rock uses internal and external databases of information regarding past and
potential customers and their needs. Rock then develops proprietary customer
profiles which it uses to tailor and direct its marketing efforts for each of
its divisions. Rock uses its profiles to attempt to identify homeowners and
potential homeowners believed by management to be likely to have a need for a
Rock product and who are likely to satisfy its underwriting guidelines. Rock
uses these profiles and demographic information to determine where to locate its
stores and how to target its multimedia advertising. Rock also monitors the
effectiveness of its marketing programs and adjusts them based on their
performance.
Call center loan officers make outbound calls using Rock's predictive
dialer systems. Rock's telephone system also routes inbound calls to available
call center loan representatives. The telephone system can also track where
calls originate, who handles the call, the time a customer spends waiting on the
phone and other information about Rock's phone calls. Rock also uses a
customized loan origination system that allows Rock to process loans quickly and
efficiently. The system provides real-time access to the information used by
each team in operations as well as the secondary marketing and financial teams.
Rock also uses these systems to develop computer-generated forms for each of its
various loans in each jurisdiction to make the processing of approved loans
faster and more efficient.
As of January 31, 1998, Rock employed a staff of 41 in its technology team
to allow it to analyze better its information regarding past customers, develop
customer profiles, create and obtain lists of potential customers and track loan
applications, closings and sales. In addition, Rock's software systems help call
center and other loan officers make and keep track of calls and assist them with
their sales presentations and in gathering the information necessary to
determine if a potential customer qualifies for a Rock loan.
High Level of Service and Relationship Selling. Rock seeks to provide
"world class" service to its customers, thereby encouraging them to return for
future loans and to refer others to Rock for loans. Rock strives to recruit and
hire employees who share Rock's commitment to provide "world class" service to
its customers and who have the attitude and the skills Rock considers necessary
to be successful. Through its training programs, Rock seeks to instill in all of
its employees Rock's commitment to provide superior customer service and to be
responsive to customer needs. Rock strives to make applying for and closing each
loan as quick, efficient and convenient for the customer as possible.
Rock believes that "world class" service is necessary to distinguish Rock
from its competitors. The loan products offered by Rock are generally
standardized products offered by many competitors, so potential customers
generally can choose among competitors on the basis of price, convenience and
service. In addition, Rock believes that referrals and repeat business from
satisfied customers are its largest sources of business and that satisfied
customers who received "world class" service are more likely to refer others to
Rock for loans and to return to Rock for their future financing needs. Rock
attempts to measure customers' satisfaction with its service through customer
service ratings and compensates its employees based, in part, on those ratings.
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In addition, Rock attempts to establish third-party relationships with
persons from whom potential customers might seek advice about the types of loans
offered by Rock, such as real estate brokers, home builders and professionals in
order to generate referral business.
Training. Rock focuses on recruiting, developing and motivating talented
people from within and outside the consumer finance industry to implement its
business strategies. Rock is committed to its human resources team and its
efforts to train Rock's employees in Rock's marketing and "world class" service
philosophies. Through its training programs, Rock seeks to instill in all of its
employees Rock's commitment to provide superior customer service and to be
responsive to customer needs. All new employees are required to undergo a
training program. New sales persons are required to take a two to four-week
training class to provide them with knowledge of Rock's products and to provide
them with extensive training in sales and marketing techniques, including
telephone sales techniques, and customer relations. Sales persons are also
provided with periodic ongoing training to keep their skills and product
knowledge up to date. Rock uses its technology and information systems to
provide employees with more standardized training, realistic practice of their
skills and quick feedback. Management also uses its technology and information
systems to monitor employee performance both in training classes and on the job,
which in turn helps Rock assess the ongoing training needs of its employees and
develop more effective training programs.
Ongoing telephone skill training is provided to all loan officers. The
training includes classroom as well as individual training sessions. Employees
are trained to return all calls promptly. Employees, especially call center
employees, are evaluated and compensated based on, among other things, the
number of closed loans, the speed and accuracy of their loan closings, the
percentage of proposed loans submitted that receive underwriting approval and
the customer's evaluation of the service received.
Rock recruits employees who have the attitude and skills Rock considers
necessary to be successful. Rock has established a web site for its recruiting
efforts at http://www.rockcareers.com. It then strives to develop its loan
officers and to promote its most qualified loan officers. Rock monitors the
performance of its loan officers on a daily, weekly, monthly and yearly basis.
Rock also measures the customer service ratings of each of its loan officers
and of its internal staff based on customer feedback at loan closing.
Individual compensation is adjusted based in part on the results of these
ratings.
OPERATING DIVISIONS
Rock currently operates through three major divisions. Rock originates
Sub-Prime Home Equity Loans to individuals with impaired credit characteristics,
high levels of debt service to income, unfavorable past credit experience,
limited credit history, limited employment history or unverifiable income
through its Fresh Start(TM) division. Rock owns the registered trademark for the
name "Fresh Start Financial Services(R)" and has applied for a registered
service mark for the name "Fresh Start(TM)." Rock originates High LTV Loans to
individuals with good credit histories but little or no equity in their homes
through its Specialty Lending division. Rock also originates Conventional Loans
that generally conform to FNMA or Freddie Mac underwriting standards, or that
generally meet such standards except for maximum loan size guidelines, through
its Conventional Mortgage Lending division. In addition, Rock began to increase
its government insured lending operations in 1997, primarily making mortgage
loans that meet the underwriting standards for FHA insurance.
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FRESH START(TM) DIVISION
Rock's Fresh Start(TM) division, which was created in 1994, originates
Sub-Prime Home Equity Loans secured primarily by first liens on one- to
four-family, owner-occupied residences. The Fresh Start(TM) division focuses on
customers whose borrowing needs are not served by traditional financial
institutions due to impaired credit profiles or other factors. The Fresh
Start(TM) division originates Sub-Prime Home Equity Loans through its network
of retail loan origination stores. Rock supports its Fresh Start(TM) store
network with an array of marketing, including multimedia advertising campaigns
and direct marketing to build local awareness of the Fresh Start(TM) brand name
and to grow loan volume within each market. Rock's Fresh Start(TM) division is
using the "Fresh Start(TM)" name, adopted in 1997, in its advertising outside of
Michigan and plans to convert its current Michigan "Boulder Financial" stores to
Fresh Start(TM) stores in 1998. In 1997, this division closed $269.3 million
(4,196 units) of Sub-Prime Home Equity Loans, compared to $147.7 million (2,272
units) of Sub-Prime Home Equity Loans in 1996. Based on information provided by
the National Mortgage News, Rock believes it was one of the 20 largest
retail originators of Sub-Prime Home Equity Loans in the United States in 1997.
Sub-Prime Home Equity Loans. Sub-Prime Home Equity Loans do not generally
meet the underwriting standards for sale to FNMA or Freddie Mac for any of a
variety of reasons, such as impaired credit characteristics, high levels of debt
service to income, unfavorable past credit experience, limited credit history,
employment history or unverifiable income. These loans are used typically to
consolidate debt (such as credit card debt) and to finance home improvements,
home purchases and other consumer needs. By originating loans to individuals
with impaired credit profiles, Rock is able to charge higher interest rates on
its Sub-Prime Home Equity Loans than for its Conventional Loans.
The following table shows, for 1995, 1996 and 1997, various information
concerning the aggregate of the loans closed by Rock's Fresh Start(TM) division:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
(dollars in thousands)
<S> <C> <C> <C>
Principal amount of loans closed ..................... $ 64,403 $ 147,676 $ 269,275
Number of loans closed ............................... 899 2,272 4,196
Average initial loan balance ......................... $72 $65 $64
Fixed rate loans:
Percentage of loans closed (dollars) ............ 50.4% 33.3% 48.8%
Weighted average interest rate .................. 12.4% 12.6% 12.7%
Weighted average initial combined LTV............ 86.8% 81.4% 78.1%
Adjustable rate loans:
Percentage of loans closed (dollars) ............ 49.6% 66.7% 51.2%
Weighted average initial interest rate .......... 10.9% 10.3% 11.1%
Weighted average initial combined LTV............ 77.1% 77.2% 79.0%
Lien position:
Percentage first mortgages ...................... 96.8% 95.2% 80.7%
Percentage second mortgages ..................... 3.2% 4.8% 19.3%
</TABLE>
Fresh Start(TM) Stores. The majority of the Fresh Start(TM) stores are
located in retail strip malls or office buildings with substantial signage.
These stores range in size from approximately 1,400 to 5,400 square feet in
size. In addition, Rock is experimenting with one pilot marketing center, opened
in
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November 1997, that has 638 square feet of space and is located inside a
large national retail superstore. In the future, Rock may use a smaller office
building store in a new geographic area to test a new market because such stores
are generally less expensive to establish and the leases have shorter terms. If
the business is successful in such a test location, Rock may try to relocate
into a 2,500 to 5,000 square foot store in a retail strip mall.
Each store is headed by a store manager, who is responsible for overseeing
all loans originated from that store and is compensated, in part, based on loan
closing volume in his or her store. The loan officers in the store also earn the
majority of their compensation through commissions. Fresh Start(TM) store
managers report to district managers who are responsible for overseeing loan
originations for the entire district and are compensated, in part, based on the
volume of loans closed in that district.
As of December 31, 1997, Rock had 14 Fresh Start(TM) stores (eight in
Michigan, three in Illinois and three in Ohio) and one pilot marketing center in
Illinois. In addition, Rock opened five new Fresh Start(TM) stores in January
1998, one each in Nevada, Missouri and Indiana and two in Texas. Rock plans to
open additional stores in 1998. In addition, Rock plans to place loan officers
from each of Rock's other divisions in each Fresh Start(TM) store, allowing Rock
to provide a greater variety of products to its customers and to use leads
generated by one division to make loans through other divisions, as appropriate.
During 1995, 1996 and 1997, Rock closed 92.5%, 100.0% and 89.9%, respectively,
of the dollar volume of its Sub-Prime Home Equity Loans secured by property
located in Michigan.
Establishing stores in new states requires Rock to familiarize itself
thoroughly with that state's regulatory requirements and to tailor its loan
products and practices to comply with such requirements. Rock must also identify
and train store managers and loan officers through its in-house training
programs for each new office. Rock attempts to locate stores in neighborhoods
where there is a high concentration of likely customers.
The Fresh Start(TM) division also makes extensive use of telephone call
center marketing and direct mail campaigns. Rock focuses its direct marketing
efforts on its profiled customers and those responding to its advertising,
generally in the communities around its stores. The customer profiles, combined
with information from other sources, are used to create mailing and call lists.
The following two tables show, for each calendar quarter of 1997, (i) the
total quarterly loan origination volume for Fresh Start(TM) stores grouped by
when they were opened, and (ii) the average quarterly loan origination volume
per store for Fresh Start(TM) stores grouped by when they were opened, in order
to show the historical increase in loan closings as new stores mature. Rock
believes that its new stores mature over a twelve- to eighteen-month time
period. The following chart does not include the five stores opened in January
1998.
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<TABLE>
<CAPTION>
TOTAL LOAN CLOSINGS
Number of 1997
When New -----------------------------------------------------------------
Stores Opened Stores Opened 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
- ---------------------------- ------------- ------------ ----------- ------------ ------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Before 12/31/96 5 $48,212 $56,067 $56,936 $56,999
1997 - 2nd Quarter 1 -- $3,432 $7,004 $8,827
1997 - 3rd Quarter 4 -- -- $6,658 $17,486
1997 - 4th Quarter 4 -- -- -- $7,653
-- ------ ------ ------ -------
14 $48,212 $59,499 $70,598 $90,965
== ======= ======= ======= =======
<CAPTION>
AVERAGE LOAN CLOSINGS PER INDIVIDUAL STORE
1997
When ------------------------------------------------------------
Stores Opened 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
- --------------------------------------------- ----------- ----------- ----------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Before 12/31/96 $9,642 $11,213 $11,387 $11,400
1997 - 2nd Quarter -- $3,432 $7,004 $8,827
1997 - 3rd Quarter -- -- $1,665 $4,372
1997 - 4th Quarter -- -- -- $1,913
</TABLE>
Underwriting. Rock has developed its own underwriting guidelines for some
of the loans originated through its Fresh Start(TM) division and adjusts these
guidelines to the general standards required by secondary market buyers of such
loans. Rock continually monitors its guidelines and adjusts them to changing
market conditions. Some of the loans originated through the Fresh Start(TM)
division are underwritten by third parties that purchase such loans on a flow
basis.
When underwriting its Fresh Start(TM) division loans, Rock relies
principally on the underlying collateral, and to a lesser extent on the
creditworthiness of the customer. Rock classifies such customers as "A" through
"D" credits for purposes of underwriting and pricing its Sub-Prime Home Equity
Loans. The criteria include the customer's mortgage, installment loan and
revolving debt payment history, employment history, capacity to pay, outstanding
judgments, and charge offs and repossessions, involvement in bankruptcies and
foreclosures. Lower credit rated customers generally must meet higher
underwriting standards to obtain a loan, such as lower LTV and lower maximum
loan amounts, and generally must pay higher interest rates on their loans.
Underwriting reviews and decisions for loans underwritten by Rock are made
by separate Rock underwriters at the national support center. Rock has
guidelines to assist its underwriters in the credit decision process. Although
each loan is secured by a mortgage lien, it is essential that care and
consideration be given to the appraisal of the property securing the loan. Rock
also evaluates the applicant's creditworthiness through the use of a consumer
credit report, verification of employment and a review of the debt-to-income
ratio of the customer. After completion of the documentation necessary for
underwriting review of a loan, Rock's goal is to make underwriting decisions
within 24 to 48 hours. On a case-by-case basis, Rock's underwriters may
determine that a prospective customer warrants an exception from Rock's
underwriting guidelines due to compensating factors.
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SPECIALTY LENDING DIVISION
Rock's Specialty Lending division, which commenced its current operations
in March 1997, originates High LTV Loans secured primarily by second mortgages
and with combined loan-to-value ratios (including the first mortgage balance) of
up to 125% of the estimated value of the underlying property. The Specialty
Lending division markets High LTV Loans to consumers through its call center,
located at Rock's national support center in Bingham Farms, Michigan. As of
January 31, 1998, Rock was soliciting High LTV Loans in eight states and was
licensed to do business in eight others. Rock uses extensive direct-mail
marketing and significant multimedia advertising campaigns to generate inbound
call volume into its call center. At various times, outbound telemarketing
programs also are launched to targeted lists of consumers. The Specialty Lending
division uses a specially trained sales force and relies heavily on technology
and systems designed specifically for Rock. During 1997, Rock closed $66.0
million (2,036 units) of High LTV Loans, including $29.1 million (883 units)
closed during the fourth quarter.
High LTV Loans. The Specialty Lending division's current product focus
is on High LTV Loans (up to 125%, including the first mortgage balance). Rock's
High LTV Loans are typically used to consolidate debt (such as credit card debt)
and to finance home improvements, education and other consumer needs for
customers with good credit histories and high credit scores, generally only
customers Rock rates as "A+", "A" or "B" credits. Specialty Lending division
loans are limited to $100,000 and require the customer to have a total debt to
income ratio of no more than 50%. Although the current focus of the Specialty
Lending division is High LTV Loans, the infrastructure of the division and the
call center are designed with the ability to change focus to, or add, other
types of loan products as appropriate.
The following table shows various information concerning the aggregate of
the loans closed by Rock's Specialty Lending division for each calendar quarter
of 1997. During 1997, Rock's High LTV Loans had an average interest rate of
15.3% and a weighted average combined loan-to-value ratio of 107%. The Specialty
Lending division commenced its current operations in March 1997.
<TABLE>
<CAPTION>
1997
-----------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Principal amount of loans closed... $ 1,118 $12,574 $23,273 $29,078
Number of loans closed ............ 41 396 716 883
Average initial loan balance ...... $27 $32 $33 $33
Weighted average FICO score ....... 675 675 678 673
Weighted average interest rate .... 15.4% 15.3% 15.2% 15.2%
Weighted average initial LTV ...... 91.0% 93.4% 110.4% 109.9%
</TABLE>
During 1997, Rock closed 87.7% and 12.3% of the dollar volume of its
High LTV Loans secured by property located in Michigan and Illinois,
respectively.
Underwriting. Rock has developed its own underwriting guidelines for
some of the loans originated through its Specialty Lending division and adjusts
these guidelines to represent the general standards required by secondary
market buyers of such loans. Rock continually monitors its guidelines
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and adjusts them to changing market conditions. Some of the loans originated
through the Specialty Lending division are underwritten by third parties that
purchase such loans on a flow basis.
Because High LTV Loans have little, if any, equity cushion (unlike
Sub-Prime Home Equity Loans), Rock's underwriting relies principally on the
creditworthiness of the customer for repayment, and to a lesser extent on the
underlying collateral. Rock classifies such customers as "A+", "A" or "B"
credits for purposes of underwriting and pricing its High LTV Loans. The
criteria for such classifications and the evaluation of a customer's
creditworthiness include, as a significant component, the credit evaluation
scoring methodology developed by Fair, Isaac and Company ("FICO"), a consulting
firm specializing in creating default-predictive models through credit scoring
mechanisms. The criteria include the customer's mortgage and revolving debt
payment history, employment history, capacity to pay, outstanding judgments,
involvement in bankruptcies and foreclosures. During 1997, the average FICO
score for a High LTV Loan was 675.
Underwriting reviews and decisions are made by separate Rock
underwriters at the national support center. Rock has guidelines to assist its
underwriters in the credit decision process. Rock generally evaluates the
applicant's creditworthiness through the use of a FICO score, a consumer credit
report, verification of employment and a review of the debt-to-income ratio of
the customer. After completion of the documentation necessary for underwriting
review of a loan, Rock's goal is to make underwriting decisions within 24 to 48
hours. On a case-by-case basis, Rock's underwriters may determine that a
prospective customer warrants an exception from Rock's underwriting guidelines
when compensating factors are present.
CONVENTIONAL MORTGAGE LENDING DIVISION
Since its inception in 1985, Rock has originated Conventional Loans
through its Conventional Mortgage Lending division. The Conventional Mortgage
Lending division originates loans through five branches all located in
southeast Michigan. Over the past 13 years, Rock has used marketing and
advertising to create and enhance brand name recognition for the Rock Financial
name. In conjunction with its multimedia advertising, Rock coordinates
extensive direct marketing campaigns. Rock has developed third-party
relationships with real estate brokers, home builders, attorneys, accountants,
and financial planners, which generate referral business. Conventional Loans
generally conform to the underwriting guidelines of FNMA or Freddie Mac, or
they generally conform except for maximum loan size, and they are generally
made to finance the purchase of a home or to refinance a home mortgage. Rock is
also an approved, unsupervised seller/servicer of FNMA and Freddie Mac
Conventional Loans and a HUD-approved lender. During 1997, Rock originated
$867.5 million (6,513 units) of Conventional Loans. Rock believes that it is
the largest non-depositary-affiliated retail lender of one- to four-family
residential mortgage loans in southeast Michigan.
Conventional Mortgage Lending Branches. As of December 31, 1997, the
Conventional Mortgage Lending division had five southeastern Michigan branches.
One branch is located in a retail strip mall, two are in office buildings and
two are located near residential real estate brokers' offices. The branches,
other than the national support center, range in size from 256 to 6,360 square
feet. Each branch is headed by a branch manager, who is responsible for
overseeing all loans originated from that branch and is compensated, in part,
based on loan closing volume in his or her branch. The loan officers in the
branch also earn the majority of their compensation through commissions.
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The Conventional Mortgage Lending division also makes extensive use of
telephone call center marketing and direct mail campaigns. Over the past 13
years, Rock has used marketing and advertising to create and enhance brand name
recognition for the Rock Financial name. In conjunction with its multimedia
advertising, Rock coordinates extensive direct marketing campaigns. Rock
focuses its direct marketing efforts on its profiled customers and those
responding to its advertising, generally in the communities around its branch
offices. The customer profiles, combined with information from other sources,
are used to create mailing and call lists.
Conventional Loans. The following table shows, for 1995, 1996 and
1997, various information concerning the aggregate of the loans closed by
Rock's Conventional Mortgage Lending division:
<TABLE>
<CAPTION>
1995 1996 1997
-------- --------- ----------
(dollars in thousands)
<S> <C> <C> <C>
Principal amount of loans closed................. $740,408 $892,672 $867,520
Number of loans closed........................... 5,640 6,940 6,513
Average initial loan balance..................... $131 $129 $133
Fixed rate loans:
Percentage of loans closed (dollars)........ 38.7% 37.2% 45.9%
Weighted average interest rate.............. 8.2% 7.9% 8.0%
Weighted average initial LTV................ 75.3% 72.0% 70.1%
Adjustable rate loans:
Percentage of loans closed (dollars)........ 61.3% 62.8% 54.1%
Weighted average initial interest rate...... 6.9% 6.5% 6.8%
Weighted average initial LTV................ 75.7% 72.9% 71.9%
</TABLE>
Substantially all of the Conventional Mortgage Lending division loans
are currently originated in the State of Michigan.
Underwriting. Loans originated through Rock's Conventional Mortgage
Lending division must generally meet the underwriting standards for sale to FNMA
or Freddie Mac or must generally meet such standards except for maximum loan
size. These standards include the customer's mortgage, installment loan and
revolving debt payment history, employment history, capacity to pay, outstanding
judgments, and charge offs and repossessions, involvement in bankruptcies and
foreclosures.
Underwriting reviews and decisions are made by separate Rock
underwriters located at each branch. Although loans are secured by a mortgage
lien, it is essential that care and consideration be given to the appraisal of
the property securing the loan. Also, Rock generally evaluates the applicant's
creditworthiness through the use of a consumer credit report, verification of
employment and a review of the debt-to-income ratio of the customer. After
completion of the documentation necessary for underwriting review of a loan,
Rock's goal is to make underwriting decisions within 24 to 48 hours. On a
case-by-case basis, Rock's underwriters may determine that a prospective
customer warrants an exception from Rock's underwriting guidelines if
compensating factors exist. Also, in January 1998, Rock introduced FNMA's
automated underwriting systems to its Conventional Mortgage Lending division.
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OTHER OPERATIONS
Rock began to increase its government insured lending operations in
1997, primarily making mortgage loans that meet the underwriting standards for
FHA insurance. Rock's FHA loans are generally made to finance or refinance home
purchases. Rock currently originates these loans from three branches in
Michigan that house operations of other divisions. Rock is considering
organizing its government insured lending business as a separate division in
1998. For the year ended December 31, 1997, Rock closed $16.6 million of FHA
loans, representing approximately 1.6% of Rock's total loans, with an average
principal amount of $81,000 and a weighted average interest rate of 7.7%.
COMPLIANCE AND QUALITY CONTROL
Rock's legal/compliance team is responsible for compliance and quality
control. This centralized compliance function allows Rock to control and
supervise regulatory compliance and offer consistency to its customers. The
legal/compliance team also assists in developing underwriting and asset quality
requirements for its loans and in applying those standards in making
underwriting decisions. The legal/compliance team also helps the servicing team
handle delinquencies and foreclosures that occur before a loan is sold.
The quality control personnel review loans that have already been made
(i) to monitor, evaluate and improve the overall quality of loan production,
and (ii) to identify and communicate to the legal/compliance team and management
existing and potential underwriting and loan file problems or areas of concern.
After loans close, the quality control personnel select a percentage of the
closed loans to check them for documentation, accuracy, compliance with law and
potential fraud. The sample is selected so that each loan officer, branch,
store and production employee is checked periodically. The quality control team
also does statistical analyses of closed loans to determine if there are any
patterns or problems. Any problems found are called to the attention of the
legal/compliance team and senior management.
LOAN SERVICING
Rock currently services the loans it closes between the date of making
the loan and the date it sells the loan and the related servicing. Rock employs
Alltel Information Services, Inc. for providing its loan servicing computing
services. Before April 1995, Rock retained the rights to service the
Conventional Loans it sold, and, as a result, had a servicing portfolio of
$640.1 million as of July 28, 1994. Rock, however, sold its servicing rights in
April 1995 and through 1997 sold all of its loans servicing released (i.e.,
without retaining the right to service the loan) or sells the servicing rights
separately. Rock's technology and personnel, however, are capable of servicing
a substantially larger portfolio of loans without significantly increasing
costs. Rock would consider selling its loans with the servicing rights retained
if it believes that the value of the servicing rights is or may become
significantly greater than secondary market buyers are then willing to pay for
them. If Rock sold loans with servicing retained, Rock would recognize a gain
on the sale equal to the difference between the carrying value of the loan sold
on Rock's balance sheet and the sum of (i) the cash received in such sale, and
(ii) the amount of an asset recorded on its balance sheet in an initial amount
equal to the present value of the servicing fees it would expect to collect over
the life of the loan (the "Servicing Asset"). If Rock believes the value of the
Servicing Asset in the secondary market becomes high enough, Rock would consider
selling its servicing rights as it did in 1994 and 1995. If Rock began to sell
its loans with servicing
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<PAGE> 57
retained, it would be subject to the risks described in "Risk Factors--Potential
Originated Mortgage Servicing Rights Risk."
Loan servicing includes collecting payments from customers, accounting
for loan principal and interest, holding custodial funds for payment of
mortgage-related expenses, such as taxes and insurance, inspecting the
mortgaged premises as required, contacting delinquent customers, supervising
foreclosures and property disposition in the event of unremedied defaults, and
otherwise administering the loan.
SALE OF LOANS
Rock closes all of its loans with the intent of selling such loans in
the secondary market. Rock attempts to originate loans with characteristics
which will be sought by unaffiliated purchasers of loans, including banks and
parties seeking loans for securitization pools, at attractive premiums. Sales
of Non-Prime Loans and Conventional Loans are conducted by Rock's secondary
marketing team.
When Rock sells the loans it closes, Rock also reduces its exposure to
default risk (other than some first-payment defaults by customers) and most of
the prepayment risk normally inherent in the consumer lending business. Rock
may be required to repurchase or substitute loans in the event of a breach of
representations and warranties, including representations regarding compliance
with laws, regulations and program standards, accuracy of information, and lack
of fraud or any misrepresentation made during the loan origination process. In
addition, in connection with some Non-Prime Loan sales, Rock may be required to
return a portion of the premium received upon the sale of the loan if the loan
is prepaid by the customer within the first year after sale. Otherwise, Rock's
loan sales are generally on a non-recourse basis. For the year ended December
31, 1997, Rock accrued $603,000 with respect to future premium recapture, and
during the year made $298,000 of recapture payments. The amount remaining as a
reserve with respect to future premium recapture at December 31, 1997 was
$694,000. In addition, Rock recorded a provision for credit losses of $300,000
in 1997 for potential repurchase obligations and the credit risk associated with
holding loans longer before sale. During 1997, two loans were foreclosed and
transferred to real estate owned, resulting in a $30,000 charge to the
allowance.
NON-PRIME LOANS
Rock sells its Non-Prime Loans either through "bulk" sales or "flow"
sales. "Bulk" sales are sales of loans underwritten to Rock's underwriting
standards that are pooled and then sold to third parties for cash by Rock.
"Flow" sales are sales of loans underwritten by a third party who commits to
purchase each individual loan its underwriters approve.
Rock currently does not securitize its loans. If the prices offered in
the secondary market for Rock's loans decrease significantly relative to the
value Rock believes that it could receive by securitizing such loans, Rock's
management would consider securitizing its loans. If Rock began to securitize
its loans, it would be subject to the risks described in "Risk Factors--Risks
of Securitization."
Five loan buyers purchased an aggregate of approximately 91.6% of the
Sub-Prime Home Equity Loans sold by Rock in 1997, of which the largest of such
buyers purchased approximately 36.5% of such Sub-Prime Home Equity Loans. Two
loan buyers purchased approximately 93.5% of the High LTV Loans sold by Rock
in 1997. The loss of any of these buyers or any significant reduction in the
prices these buyers are willing to pay for Rock's loans could have an adverse
effect on Rock's business, financial condition and results of operations.
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CONVENTIONAL LOANS
Rock sells its Conventional Loans either through assignments of trade
or whole loan sales. Currently, Rock's fixed-rate Conventional Loans meeting
FNMA or Freddie Mac guidelines are sold through assignments of trade.
Assignment of trade sales are sales of Conventional Loans to a third party
who exchanges them with FNMA or Freddie Mac for their securities. Loans not
meeting FNMA or Freddie Mac guidelines are sold in whole loan sales. In a whole
loan sale, individual loans are underwritten and sold to a specific buyer on a
committed basis.
INTEREST RATE RISK MANAGEMENT
Rock closes loans and subsequently sells them for cash to unaffiliated
wholesale purchasers. If prevailing interest rates rise between the time Rock
closes loans or fixes the interest rates on such loans and the time such loans
are priced for sale, the spread between the amount loaned and the amount the
wholesale purchaser is willing to pay for the loan narrows, resulting in a loss
in value of the loan. To protect against such losses in respect of its
Conventional Loans (where the interest spread is lower), Rock currently enters
into forward sales commitments to fix the sales price of the Conventional Loans
expected to be closed or hedges the value of those loans through periodic
purchases of short-duration treasury-based options. Before entering into
forward commitments or hedging, Rock performs an analysis of its Conventional
Loans and Conventional Loan applications with committed interest rates taking
into account such factors as the estimated portion of such loan applications
that will ultimately be funded, interest rates, inventories of loans and
applications and other factors to determine the type and amount of forward
commitment and hedging transactions. Rock attempts to make forward commitments
for or hedge substantially all of its estimated interest rate risk on its
Conventional Loans. Rock does not believe that hedging its interest rate risk
with respect to its Non-Prime Loans is cost effective as a result of their
generally higher interest spreads combined with their relative lack of
sensitivity to changes in market interest rates and considering the period
during which Rock intends to accumulate such loans for sale.
See "Risk Factors--Economic Conditions--Interest Rates."
COMPETITION
The consumer lending industry is highly competitive and fragmented.
Rock faces intense competition, primarily from commercial banks, savings and
loan associations, credit unions, insurance companies, mortgage brokers,
mortgage bankers and other consumer finance companies. If Rock expands into
additional geographic markets, it will face competition from consumer lenders
with established positions in such markets. There can be no assurance that Rock
will be able to compete successfully with these consumer lenders.
Competition can take place on various levels, including convenience in
obtaining a loan, service, marketing, pricing (including the interest rates,
closing costs and processing fees offered) and range of products. Rock believes
that pricing, service and convenience are the most important competitive factors
affecting its business. Many of Rock's competitors in the consumer lending
industry are better established, substantially larger and have significantly
more capital and other resources than Rock. In addition, FNMA and Freddie Mac
are currently developing technologies and business practices that will expand
the scope of mortgage loans eligible to be purchased by them, including
Sub-Prime Home Equity Loans. The effect of these purchases on the consumer
lending industry and profit margins is not presently determinable, but such
expanded scope could attract additional competitors into the market and
significantly erode profit margins. Barriers to entry into the consumer lending
industry are low, and the
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current level of gains realized by Rock and its existing competitors on the sale
of loans could attract additional competitors into the market. Consequently,
there are many recent market entrants seeking these relatively attractive profit
margins. Increases in the number of competitors seeking to originate consumer
loans could lower the rates of interest or reduce the amount of origination
points and fees Rock can charge customers, thereby reducing the potential
profitability of such loans. Competition might also reduce Rock's loan closing
volume. In addition, during periods of declining interest rates, competitors
which have "locked in" low borrowing costs may have a competitive advantage.
There can be no assurance that Rock will be able to compete successfully in this
market environment and any failure in this regard could have a material adverse
effect on Rock's business, financial condition and results of operations.
SYSTEMS
Rock is committed to maintaining and enhancing its technology and
systems. As of January 31, 1998, Rock employed a staff of 41 in its technology
team to allow it better to analyze its information regarding past customers,
develop customer profiles, create and obtain lists of potential customers and
track loan applications, closings and sales. Rock's offering of a broad range
of loan products requires the timely delivery of such loan products and careful
monitoring and tracking of loans from their origination through their
ultimate sale. Rock uses a loan origination and administration system that
allows Rock to process loans quickly and efficiently. The system provides
real-time access to the information used by each team in operations as well as
the secondary marketing and financial teams. The system provides loan officers
with information concerning the status of each loan application and reminds them
of the documents and steps needed to close the loan. Rock also uses these
systems to develop computer- generated forms for each of its various loans in
each jurisdiction to make the processing of approved loans faster and more
efficient. Also, in January 1998, Rock introduced FNMA's automated underwriting
systems to its Conventional Mortgage Lending division. Because a loan officer's
compensation is based, in part, on the number of loans closed each month, this
information also provides employees with information about the status of their
compensation for the month and gives them an incentive to be more productive.
Call center loan officers handle both inbound and outbound calls. Most
inbound calls are from homeowners responding to Rock's advertising and direct
mail campaigns. Outbound calls use Rock's computerized predictive dialers with
scripted, interactive sales presentations to solicit homeowners and current
customers. A predictive dialing system is a telecommunications device which
initiates phone calls to pre-selected and randomly selected numbers, predicts
when sales agents are available to receive calls and automatically forwards
calls to an available sales agent. It also routes inbound calls to available
call center loan representatives. The telephone system can track where calls
originate, who handles the call, the time a customer spends waiting on the phone
and other information about Rock's phone calls.
Rock does not expect the cost of making its computer systems year 2000
compliant will be material. Because most of Rock's computer hardware and
software is less than two years old, it believes that its exposure to year
2000-related hardware and software problems is lower than if it used older
equipment or software. Nonetheless, Rock is engaging a consultant to manage the
testing of its equipment and software and the identification and resolution of
any problems discovered. Rock also plans to explore the strategies of its
vendors to discover and resolve any year 2000 problems. Rock is already
participating with its loan servicing vendor in its year 2000 evaluation
process. Rock expects to complete this process during 1998. See "Risk
Factors--Year 2000 Compliance."
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SEASONALITY
Rock is affected by consumer demand for home loans, which is partially
influenced by regional trends, economic conditions and personal preferences.
Rock's business is generally subject to seasonal trends with loan activity
generally decreasing during the winter months, especially loans relating to
home purchases. Rock's lowest revenue and net income levels during the year
have historically been in the first quarter. In addition, Rock believes that
new stores typically require twelve to eighteen months of operations before
their revenues and expenses are at levels comparable to older stores, and that
during their first two to three quarters of operations their expenses might
exceed their contribution to income. Because 13 stores and one marketing
center have opened since July 1, 1997 (including four stores in the fourth
quarter of 1997 and five in the first quarter of 1998), Rock expects these
stores to contribute significantly less to its revenues and net income and more
to its expenses in the first and possibly the second and third quarters of 1998
than stores that have been in operation for at least twelve months. The stores
opened in 1998 and some of the stores opened late in 1997 are expected to
operate at a net loss in the first quarter of 1998.
GOVERNMENT REGULATION
Rock's business is subject to extensive regulation, supervision and
licensing by federal, state and local governmental authorities and will
be subject to various laws and judicial and administrative decisions imposing
requirements and restrictions on part or all of its operations. Regulated
matters include, without limitation, loan origination, marketing efforts,
credit application and underwriting activities, maximum finance and other
charges, disclosure to customers, certain rights of rescission, closing and
servicing loans, collection and foreclosure procedures, qualification and
licensing requirements for doing business in various jurisdictions and other
trade practices.
Loan origination activities are subject to the laws and regulations in
each of the states in which those activities are conducted. Activities as a
lender are also subject to various federal laws. The Truth in Lending Act
("TILA") and Regulation Z promulgated thereunder, as both are amended from
time to time, contain disclosure requirements designed to provide consumers
with uniform, understandable information with respect to the terms and
conditions of loans and credit transactions in order to give them the ability
to compare credit terms. TILA also guarantees consumers a three-day right to
cancel certain credit transactions. If Rock is found not to be in compliance
with TILA, aggrieved customers could have the right to rescind their loan
transactions with Rock and to demand the return of finance charges paid to
Rock.
In September 1994, the Riegle Community Development and Regulatory
Improvement Act of 1994 (the "Riegle Act") was enacted. Among other things,
the Riegle Act makes certain amendments to TILA. The TILA amendments, which
became effective in October 1995, generally apply to mortgage loans
(other than mortgage loans to finance the acquisition or initial construction
of a dwelling) ("covered loans") with (i) total points and fees upon
origination in excess of the greater of eight percent of the loan amount or
$400, or (ii) an annual percentage rate of more than 10 percentage points
higher than comparably maturing United States Treasury securities.
The TILA amendments impose additional disclosure requirements on lenders
originating covered loans and prohibit lenders from originating covered loans
that are underwritten solely on the basis of the customer's home equity without
regard to the customer's ability to repay the loan. Rock applies to all
covered loans underwriting criteria that take into consideration the customer's
ability to repay. The TILA
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amendments also prohibit lenders from including prepayment fee clauses in
covered loans to customers with a debt-to-income ratio in excess of 50% or in
covered loans used to refinance existing loans originated by the same lender.
Rock did not report any prepayment fee revenue in the years ended December 31,
1995, 1996 and 1997. The TILA amendments impose other restrictions on covered
loans, including restrictions on balloon payments and negative amortization
features, which Rock does not believe will have a material affect on its
operations.
Rock is also required to comply with the Equal Credit Opportunity At of
1974, as amended ("ECOA"), which prohibits lenders from discriminating against
applicants on the basis of race, color, sex, age or marital status. Regulation
B promulgated under ECOA restricts lenders from obtaining certain types of
information from loan applicants. It also requires certain disclosures by the
lender regarding consumer rights and requires lenders to advise applicants of
the reasons for any credit denial. In instances where the applicant is denied
credit or the rate or charge for a loan increases as a result of information
obtained from a consumer credit agency, the Fair Credit Reporting Act of 1970,
as amended ("FCRA"), requires the lender to supply the applicant with a name
and address of the reporting agency. Rock is also subject to the Real Estate
Settlement Procedures Act ("RESPA") and the Fair Debt Collection Practices Act
and is required to file an annual report with HUD pursuant to the Home Mortgage
Disclosure Act ("HMDA"). Rock is also subject to the rules and regulations of,
and examinations by, HUD, FNMA, Freddie Mac and state regulatory authorities
with respect to originating, processing, underwriting, selling and servicing
mortgage loans and to various other federal and state laws, rules and
regulations governing among other things, the licensing of, and procedures that
must be followed by, consumer lenders and servicers, and disclosures that must
be made to consumer customers.
Texas has newly-enacted laws affecting Non-Prime Loans. As a result of
these new laws there are increased risks associated with Rock's loans secured by
property located in Texas, including (i) risks that Rock's Non-Prime Loans will
not comply with the provisions permitting mortgage liens on Texas real estate,
making Rock's liens invalid, (ii) risks of litigation, including class action
lawsuits, if Rock's loans, including the origination points and processing fees
charged on such loans, are determined to violate Texas law, and (iii) risks
that secondary market loan buyers will not be willing to purchase loans secured
by Texas real estate or will pay lower prices for such loans. Rock currently
sells Non-Prime Loans originated in Texas on a flow basis and intends to
increase its concentration on originating Conventional Loans in its Fresh
Start(R) branches in Texas until the new laws are clarified.
Failure to comply with these requirements can lead to civil or criminal
liability, loss of approved status, termination or suspension of servicing
contracts without compensation to the servicer, demands for indemnification or
loan repurchases, certain rights of rescission for mortgage loans, class action
lawsuits and administrative and enforcement actions. There can be no assurance
that Rock will maintain compliance with these requirements in the future
without additional expenses, or that more restrictive local, state or federal
laws, rules and regulations will not be adopted or that existing laws and
regulations will not be interpreted in a more restrictive manner, which would
make compliance more difficult and more expensive for Rock.
In addition, industry participants are frequently named as defendants in
litigation involving alleged violations of federal and state consumer lending
laws and regulations, or other similar laws and regulations, as a result of the
consumer-oriented nature of the industry in which Rock operates and
uncertainties with respect to the application of various laws and regulations
in certain circumstances. Some sectors of, and participants in, the consumer
finance industry have been adversely affected by regulatory enforcement actions
and private class action lawsuits regarding various consumer lending
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practices. These actions and lawsuits allege violations of the Real Estate
Settlement Procedures Act, the Truth In Lending Act, the Equal Credit
Opportunity Act and various other federal and state lending and consumer
protection laws. Some of the practices which have been the subject of lawsuits
against other companies include, but are not limited to, miscellaneous "add on"
fees; truth in lending calculations and disclosures; escrow and adjustable rate
mortgage calculations and collections; private mortgage insurance calculations,
disclosures and cancellation; forced-placed hazard, flood and optional
insurance; payoff statement, release and reconveyance fees; and unfair lending
practices. If a significant judgment were rendered against Rock in connection
with any litigation, it could have a material adverse effect on Rock's
business, financial condition and results of operations.
Further, during the course of its business, Rock may acquire properties
securing loans that are in default. To date, Rock has not been required to
perform any environmental investigation or remediation activities, nor has it
been subject to any environmental claims. Rock, however, might be required to
perform such investigations or activities, or become subject to environmental
claims, in the future. There is a risk that hazardous or toxic waste could be
found on properties acquired by Rock. In such event, Rock could be held
responsible for the cost of remediating or removing such waste, and such cost
could exceed the value of the underlying properties.
The laws and regulations described above are subject to legislative,
administrative and judicial interpretation, and certain of these laws and
regulations have been infrequently interpreted or only recently enacted.
Infrequent interpretations of these laws and regulations or an insignificant
number of interpretations of recently enacted laws and regulations can result
in ambiguity with respect to permitted conduct under these laws and
regulations. Any ambiguity under the laws and regulations to which Rock is
subject may lead to regulatory investigations or enforcement actions and
private causes of action, such as class action lawsuits, with respect to Rock's
compliance with applicable laws and regulations. Rock may also be subject to
regulatory enforcement actions and private causes of action from time to time
with respect to its compliance with applicable laws and regulations.
In addition, because Rock's business is highly regulated, the laws, rules
and regulations applicable to Rock are subject to modification and change. Any
changes in such laws, rules and regulations could make compliance much more
difficult or expensive, restrict Rock's ability to originate or sell loans,
limit or restrict the amount of interest and other charges earned on loans
closed or sold by Rock, or otherwise adversely affect the business or prospects
of Rock.
EMPLOYEES
As of January 31, 1998, Rock employed 717 full-time individuals,
including 286 in its sales force. Rock believes that its future success is
dependent, in large part, on its ability to attract and retain
highly-qualified sales, management, marketing, technical and administrative
personnel. Rock's employees are not represented by a union or subject to a
collective bargaining agreement. Rock believes that its relations with its
current employees are good.
PROPERTIES
Rock's executive and administrative offices are located in leased
premises at 30600 Telegraph Road, Fourth Floor, Bingham Farms, Michigan 48025
and consist of approximately 53,560 square feet. Rock expects to amend its
lease to add additional space to its call center and additional office space.
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Rock has options to lease these premises through October 31, 2001, and the
current base monthly rental is approximately $58,600.
As of January 31, 1998, Rock had 19 Fresh Start(TM) stores and one
marketing center (eight in Michigan, four in Illinois, three in Ohio, two in
Texas and one each in Nevada, Missouri and Indiana), and five Conventional
Lending branches (all in southeast Michigan). The Fresh Start(TM) division's
stores are generally located in retail strip malls or office buildings. One
Conventional Lending branch is located in a retail strip mall, two are in
office buildings and two are located near residential real estate brokers'
offices. Rock leases all of its Fresh Start(TM) store, marketing center and
Conventional Lending branch locations pursuant to leases that expire at varying
times from one month after notice from the landlord to July 2002. See
"Operating Divisions--Fresh Start(TM) Division--Fresh Start(TM) Stores" and
"Operating Divisions--Conventional Mortgage Lending Division--Conventional
Mortgage Lending Branches."
Rock believes that its facilities are adequate for its current needs and
that additional space is available for future expansion. For a description of
Rock's store expansion strategy, see "Business Strategy."
SERVICE MARKS
Rock has registered the names "Fresh Start Financial Services(R),"
"Mortgage in a Box(R)," "Mortgage First(R)" and "Mortgage by Mail(R)" as service
marks with the United States Patent and Trademark Office. and has filed
applications for the names "Fresh Start(TM)," "Fresh Start Loan Center," "Lender
for Life" and "PMI Buster." The Registrations of these service mark are
renewable indefinitely. Rock is not aware of any adverse claims concerning its
marks.
LEGAL PROCEEDINGS
Rock is involved from time to time in routine litigation incidental to its
business. Although the amount of any liability that could arise with respect
to these actions cannot accurately be predicted, in the opinion of Rock, any
such liability will not have a material adverse effect on Rock's financial
position.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Board of Directors of Rock is divided into three classes: Class I,
Class II and Class III. After his or her initial term, each director will serve
for a term ending following the third annual meeting following the annual
meeting at which such director is elected and until his or her successor is
elected and qualified, or until his or her earlier death, resignation or
removal. Rock's Restated Articles of Incorporation provide that
Directors may only be removed for cause. The initial terms of office of
directors in Class I, Class II and Class III end after the annual meetings of
shareholders of Rock in 1999, 2000 and 2001, respectively. All officers are
appointed by and serve at the discretion of the Board of Directors. The
following table sets forth certain information regarding the current directors
and executive officers of Rock as of January 31, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION CLASS
- ---- --- -------- -----
<S> <C> <C> <C>
Daniel Gilbert 36 Chairman of the Board of Directors and Chief Executive Officer III
Steven M. Stone 38 President and Director II
David Carroll 35 Chief Operations Officer N/A
Lindsay Gross 35 Executive Vice President, Conventional Lending N/A
Frank E. Plenskofski 39 Treasurer and Chief Financial Officer N/A
Gary L. Gilbert 33 Director I
</TABLE>
- --------------------
*Member of the Compensation Committee and Member of the Audit Committee.
Daniel Gilbert. Mr. Gilbert founded Rock in June 1985 and has served as
its Chief Executive Officer since its inception in June 1985 and as its Chairman
of the Board since December 1992. From February 1986 until February 1998 he
served as Rock's President. Mr. Gilbert has been a director of Rock since its
inception in June 1985. Gary L. Gilbert and Daniel Gilbert are brothers.
Steven M. Stone. Mr. Stone has served as President of Rock since January
1998. He previously served as the President of Rock's Fresh Start(TM) division
from January 1996 until February 1998 and as its Director of Alternative
Lending from June 1994 until January 1996. Before that he served as President,
Home Lending, of Worldwide Mortgage Corporation, a company engaged in
originating sub-prime mortgage loans, from April 1992 until April 1994. Mr.
Stone has been a director of Rock since December 1996. Mr. Stone is a party to
an employment agreement with Rock pursuant to which he is required, during the
term thereof, to be elected to the office with Rock he currently holds.
David Carroll. Mr. Carroll has served as Chief Operations Officer of Rock
since September 1994. From July 1992 until September 1994 he served as Rock's
Operation's Manager. From April 1992 until July 1992 he served as Rock's
Director of Wholesale Lending. Mr. Carroll was a director of Rock from
September 1994 until February 1998.
Lindsay Gross. Mr. Gross has served as Executive Vice President,
Conventional Lending of Rock since December 1992. He also served as Rock's
Secretary from March 1987 until September 1994. Mr. Gross was a director of
Rock from March 1987 until February 1998.
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Frank E. Plenskofski. Mr. Plenskofski is a certified public accountant
and a member of both the American Institute of Certified Public Accountants and
of the Pennsylvania Institute of Certified Public Accountants. He has served
as Rock's Treasurer and Chief Financial Officer since December 1996. From April
1996 until December 1996 he served as Rock's Chief Financial Officer. From
October 1992 until April 1996 he served as Senior Vice President of Secondary
Marketing of Com Net Mortgage Services, Inc., a mortgage banking company and a
subsidiary of Common Wealth Savings Bank.
Gary L. Gilbert. Mr. Gilbert has served as the President and Chief
Executive Officer of Option Home Lending, Inc., a company he founded, since
February 1997. From December 1992 until January 1997 he served as Rock's
Executive Vice President. From March 1987 until December 1992 he served as
Rock's Vice President. Gary L. Gilbert was an employee of Rock from June
1985 until March 1987. Mr. Gilbert has been a director of Rock since March
1987. Pursuant to a Stock Purchase Agreement, dated as of January 17, 1997,
between Gary L. Gilbert and Daniel Gilbert, Daniel Gilbert has agreed to vote
his Common Shares to elect Gary L. Gilbert as a director of Rock until the
closing of this Offering. Gary L. Gilbert and Daniel Gilbert are brothers.
COMMITTEES OF THE BOARD OF DIRECTORS
Rock intends to add two non-employee directors to its Board of Directors
and to establish and Audit Committee and a Compensation Committee with these
directors as members.
The Audit Committee will (i) recommend to the Board the conditions,
compensation and term of appointment of independent certified public
accountants for the audit of Rock's financial statements, (ii) review
examination reports of Rock prepared by regulatory authorities, and (iii)
provide the Board with such assistance as is necessary with respect to Rock's
corporate and reporting practices. The Audit Committee may also from time to
time confer with the auditors to exchange views relating to the scope and
results of the audit.
The Compensation Committee will make recommendations to the Board of
Directors with respect to compensation arrangements and plans for senior
management, officers and directors of Rock and will administer Rock's 1996
Stock Option Plan.
Rock does not have a nominating committee.
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COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information for the year ended December 31,
1997 concerning compensation of (i) Rock's Chief Executive Officer, and (ii)
Rock's four most highly-compensated other executive officers of Rock who were
serving as executive officers of Rock as of December 31, 1997 and whose total
annual salary and bonus exceeded $100,000 in 1997:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
------------
AWARDS
------
ANNUAL COMPENSATION SECURITIES ALL OTHER
NAME AND ------------------- UNDERLYING COMPENSATION
PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) ($) (1)
------------------ ---- --------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Daniel Gilbert, Chairman of the
Board and Chief Executive
Officer . . . . . . . . . 1997 225,000 620,000 (2) -0- 1,900
1996 150,000 1,245,000 -0- 1,385
1995 150,000 377,000 -0- 1,289
Steven M. Stone, President. . . 1997 160,000 540,000 (2) -0- (3) 849
1996 125,000 578,000 1,001,454 -0-
1995 75,385 68,480 -0- -0-
David Carroll, Chief Operations
Officer . . . . . . . . . 1997 130,000 40,000 50,000 950
1996 120,000 30,000 -0- 1,125
1995 100,000 20,000 -0- 1,000
Lindsay Gross, Executive Vice
President, Conventional
Lending . . . . . . . . . 1997 175,000 167,030 -0- 469
1996 180,000 69,000 -0- 286
1995 199,500 50,000 -0- 77
Frank E. Plenskofski, Chief
Financial Officer (4) . . . 1997 120,000 40,000 50,000 62,877
1996 75,170 20,000 -0- 11,000
</TABLE>
- ----------------
(1) Includes $1,900, $849, $950, $469 and $877, contributed by Rock to
Messrs. Gilbert, Stone, Carroll, Gross and Plenskofski, respectively,
pursuant to the matching contribution provisions of Rock's 401(k) plan
for the year ended December 31, 1997. Also, includes $62,000 paid to
Mr. Plenskofski in 1997 to reimburse him for relocation expenses.
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(2) Rock does not intend to pay bonuses of this magnitude to Messrs.
Gilbert and Stone after 1997.
(3) In connection with an amendment to his employment agreement, effective
as of the closing date of this Offering, Rock granted Mr. Stone an
immediately exercisable option to purchase 292,500 Common Shares with
an exercise price equal to the initial public offering price set forth
on the cover page of this Prospectus. See "Employment Contracts and
Termination of Employment and Change-in-Control Arrangements."
(4) Mr. Plenskofski became an executive officer of Rock in December 1996.
COMPENSATION OF DIRECTORS
Following completion of this Offering, Rock intends to pay each
director who is not an officer or employee of Rock ("Outside Directors") a fee
of $1,000 for each Board meeting attended in person, $500 for each telephonic
Board meeting attended, and $500 for each Board committee meeting attended on a
date other than the date of a Board meeting. Rock will also reimburse Outside
Directors for their reasonable expenses of attending Board and Board committee
meetings.
OPTION GRANTS TABLE
The following table sets forth information concerning individual
grants of stock options made during the year ended December 31, 1997 to each of
the executive officers of Rock named in the Summary Compensation Table above:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
- --------------------------------------------------------------------------------------
% of Potential
Total Realizable Value at
Number of Options Assumed Annual
Securities Granted to Rates of Stock Price
Underlying Employees Exercise Appreciation
Options in Fiscal Price Expiration for Option Term
Granted (#) Year ($/Sh) Date ---------------
Name ----------- ---- ------ ---- 5% ($) 10% ($)
---- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Daniel Gilbert . . . . -0- 0.0 N/A N/A N/A N/A
Steven M. Stone . . . . -0- (1) 0.0 N/A N/A N/A N/A
David Carroll . . . . . 50,000 (2) 4.7 $4.68 12/31/06 147,161 372,936
Lindsay Gross . . . . . -0- 0.0 N/A N/A N/A N/A
Frank E. Plenskofski . 50,000 (2) 4.7 $4.68 12/31/06 147,161 372,936
</TABLE>
- -----------------------------
(1) Mr. Stone received an option to purchase 1,001,454 Common Shares in
December 1996, representing approximately 65% of the options granted
in 1996. The option is immediately exercisable in full at $4.68 a
share through December 28, 2006. The value of such option
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assuming 5% and 10% stock price appreciation from the exercise price
over the term of the option would be $2,947,506 and $7,469,560,
respectively. The option will continue to be exercisable for three
years after termination of Mr. Stone's employment without cause and
one year after he ceases to be an employee of Rock because of his
death or disability, but in no event after the termination date of the
option. In connection with an amendment to his employment agreement,
effective as of the closing date of this Offering, Rock granted Mr.
Stone an immediately exercisable option to purchase 292,500 Common
Shares with an exercise price equal to the initial public offering
price set forth on the cover page of this Prospectus. See "Employment
Contracts and Termination of Employment and Change-in-Control
Arrangements."
(2) These options are exercisable in one-fifth cumulative annual
installments beginning December 31, 1997.
(3) With respect to each of the options described above, if upon exercise
of these options Rock must pay any amount for income tax withholding,
in the Compensation Committee's or the Board of Directors' sole
discretion, either the optionee will pay such amount to Rock or the
number of Common Shares delivered by Rock to the optionee will be
appropriately reduced to reimburse Rock for such payment. The
Compensation Committee or the Board of Directors may also permit the
optionee to choose to have such shares withheld or to tender Common
Shares the optionee already owns. The Compensation Committee or the
Board may also make such other arrangements with respect to income tax
withholding as the Compensation Committee shall determine. In
addition, each of the options described above contains provisions
requiring forfeiture of the gain realized upon exercise of the option
if the employee leaves Rock within one year after exercise or engages
in certain activities inimical, contrary or harmful to the interests
of Rock.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE TABLE
The following table sets forth information concerning each exercise of
stock options during the year ended December 31, 1997 by each of the executive
officers named in the Summary Compensation Table above and the value of
unexercised options held by such persons as of December 31, 1997 (at an assumed
market value equal to the estimated initial public offering price of $10.00):
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AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
SHARES FY-END (#) FY-END ($)
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE
- ---- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Daniel Gilbert . . . . -0- -0- -0-/-0- -0-/-0-
Steven M. Stone . . . . -0- -0- 1,001,454/-0- 5,327,735/-0-
David Carroll . . . . . -0- -0- 10,000/40,000 53,200/212,800
Lindsay Gross . . . . . -0- -0- -0-/-0- -0-/-0-
Frank E. Plenskofski . -0- -0- 10,000/40,000 53,200/212,800
</TABLE>
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
Steven M. Stone. As of June 27, 1994, Rock entered into an employment
agreement with Steven M. Stone, which agreement was amended as of December 28,
1996 and as of February 18, 1998. Pursuant to such agreement, he is employed
as President of Rock. Such agreement may be terminated by Mr. Stone or Rock at
any time. Mr. Stone is entitled to a salary and a discretionary bonus
determined by Rock's Chief Executive Officer. Such employment agreement
provided for the payment of special bonuses in the amounts of $540,000 by
December 31, 1996, $180,000 by July 1, 1997 and $360,000 by December 31, 1997,
the grant of a stock option on December 28, 1996 to purchase 1,001,454 Common
Shares at $4.68 per share, and the grant of an immediately exercisable stock
option on the closing date of this Offering to purchase 292,500 Common Shares
at an exercise price equal to the initial public offering price set forth on
the cover page of this Prospectus (the "New Option"). Before the February 18,
1998 amendment, Mr. Stone had the right under the agreement to receive a
"Distribution Bonus" while employed by Rock until the closing of this Offering.
The "Distribution Bonus" was generally equal to the per share amount of any
dividend or other distribution payable to Rock's shareholders multiplied by the
number of shares subject to Mr. Stone's December 28, 1996 option. In exchange
for cancellation of Mr. Stone's right to receive the Distribution Bonus, Rock
(i) agreed to permit Mr. Stone to be one of the Selling Shareholders in this
Offering (see "Principal and Selling Shareholders"), and (ii) agreed to grant
to Mr. Stone the New Option.
Mr. Stone is entitled to various fringe benefits under the agreement
as determined by Rock's Chief Executive Officer. If Mr. Stone terminates his
employment with Rock upon a minimum of 30 days prior written notice and if Mr.
Stone is not then in breach of any provision of the agreement (as determined by
Rock's Chief Executive Officer), Rock will continue to pay Mr. Stone's salary
for four weeks after the date of termination, if Mr. Stone fully cooperates
with Rock during the transition period. Mr. Stone has agreed not to compete
with Rock during his employment and during specified periods following the
termination of his employment, with some exceptions in the event of a Change in
Ownership of Rock (as defined in the agreement).
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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the year ended December 31, 1997, Rock's Board of Directors did
not have a Compensation Committee or any other committee performing similar
functions. Decisions concerning executive compensation for 1997 were made by
the Board of Directors, including Daniel Gilbert, Steven M. Stone, David
Carroll, Lindsay Gross and Gary L. Gilbert. All of the directors were, and
(except for Gary L. Gilbert, who resigned as an officer of Rock effective
January 17, 1997) continue to be, officers and employees of Rock. None of the
executive officers of Rock currently serves on the compensation committee of
another entity or any other committee of the board of directors of another
entity performing similar functions. The directors of Rock have the
relationships with Rock described below:
Indebtedness of Daniel Gilbert, Lindsay Gross and Gary L. Gilbert.
From time to time, Rock has made loans to Daniel Gilbert, Lindsay Gross and
Gary L. Gilbert for personal purposes. The interest charged on such loans is
3% per year. Gary L. Gilbert repaid his loans in full on February 26, 1997,
and Lindsay Gross repaid his loans in full on February 28, 1997. For the years
ended December 31, 1995, 1996 and 1997 the largest amounts of such loans
outstanding for Daniel Gilbert were $2,338,000, $2,689,000 and $6,109,000,
respectively. For the years ended December 31, 1995, 1996 and 1997 the largest
amounts of such loans outstanding for Gary L. Gilbert were $400,000, $745,000
and $970,000, respectively. For the years ended December 31, 1995, 1996 and
1997 the largest amounts of such loans outstanding for Lindsay Gross were
$62,000, $99,000 and $680,000, respectively. As of January 31, 1998, no
amounts were owed by Gary L. Gilbert or Lindsay Gross, and $1,633,000 of
principal and accrued interest were owed by Daniel Gilbert to Rock. Daniel
Gilbert expects to repay the balance of his loans with his share of the
Shareholder Distribution Amount.
Transactions with Title Source, Inc. Title Source, Inc. is a title
insurance agency owned 51.60% by Daniel Gilbert, 10.13% by Steven M. Stone,
9.60% by Gary L. Gilbert, 6.00% by Lindsay Gross, and 3.60% by David Carroll.
Title Source, Inc. was formed to acquire the assets of an existing title
insurance agency, which acquisition occurred as of October 1, 1997. Rock
expects to recommend Title Source, Inc. for substantially all of the title
insurance policies required in connection with its mortgage loans. For the
year ended December 31, 1997, Rock collected $39,000 in fees on behalf of Title
Source, Inc. for its closing services. In addition, customers of Rock paid
$147,300 in premiums for title insurance placed through Title Source, Inc. in
connection with loans closed by Rock. Rock cannot predict with certainty the
amount of business proposed to be done with Title Source, Inc. in 1998. Rock
made a working capital loan to Title Source, Inc. during 1997 bearing interest
at an annual rate of 8.25%. The maximum amount of such loan outstanding
during 1997 was $300,000. This loan was repaid in full before December 31,
1997.
Transactions with Rock Construction Company, Inc. d/b/a Rock Homes
Construction Daniel Gilbert, Gary L. Gilbert and Lindsay Gross were 25%, 12.5%
and 12.5% shareholders of Rock Construction, Inc. d/b/a Rock Homes
Construction, a home building contractor, until November 11, 1996, and Daniel
Gilbert was a Vice President and the Secretary of Rock Construction Company,
Inc. until January 2, 1997. In addition, Gary L. Gilbert is a Vice President
and Lindsay Gross is the Treasurer of Rock Construction Company, Inc. Rock
made working capital loans to Rock Construction Company, Inc. from time to time
during 1995, 1996 and 1997 bearing interest at an annual rate of 8.25%. The
maximum amounts of such loans outstanding during 1995, 1996 and 1997 were
$354,000, $50,000 and $100,000, respectively. All of these loans were repaid
in full before December 31, 1997.
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Severance Arrangements with Gary L. Gilbert. Gary L. Gilbert resigned
as an officer of Rock effective January 17, 1997 and has started a consumer
finance business operating in the Chicago, Illinois area. In connection with
his resignation, Daniel Gilbert agreed, pursuant to a Stock Purchase Agreement
between Daniel Gilbert and Gary L. Gilbert, to cause Rock to (i) continue Gary
L. Gilbert's salary and commissions through February 28, 1997 ($130,000 a
year), (ii) pay Gary L. Gilbert a $200,000 bonus in 1996, (iii) continue Gary
L. Gilbert's medical and dental insurance for as long as he remains a director
of Rock, unless he becomes employed by another entity providing him with such
insurance, (iv) transfer assets valued at $3,500 to Gary L. Gilbert, (v)
declare a dividend (declared on September 1, 1997) that would result in a
distribution to Gary L. Gilbert of at least $1,000,000, and (vi) allow Gary L.
Gilbert to consult with Rock employees concerning areas of Rock's business and
operations that are similar to the business or operations of any mortgage
business formed or acquired by Gary L. Gilbert. Daniel Gilbert also agreed
pursuant to the Stock Purchase Agreement to vote his Common Shares to elect
Gary L. Gilbert as a director of Rock until the closing of this Offering.
STOCK OPTION PLAN
In December 1996, the Board of Directors and shareholders of Rock
adopted the Rock Financial Corporation 1996 Stock Option Plan (the "Plan").
The purpose of the Plan is to provide key employees (including officers),
directors, consultants and advisors of Rock with an increased incentive to make
significant and extraordinary contributions to the long-term performance and
growth of Rock, to join the interests of key employees, directors, consultants
and advisors with the interests of the shareholders of Rock, and to facilitate
attracting and retaining key employees, directors, consultants and advisors of
exceptional ability. The Plan authorizes the granting of incentive stock
options ("Incentive Options") and nonqualified stock options ("Nonqualified
Options") to purchase Common Shares to eligible persons. A total of 4,500,000
Common Shares are authorized for sale upon exercise of options granted under
the Plan. The Plan is currently administered by the Compensation Committee of
the Board of Directors (the "Committee"), which consists of the two
non-employee directors of Rock. The Plan provides for adjustments to the
number of shares and to the exercise price of outstanding options in the event
of stock dividends, stock splits, recapitalizations, mergers, statutory share
exchanges or reorganizations of or by Rock.
Key employees (including officers), directors, consultants and
advisors of or to Rock are eligible to participate in the Plan, and as of
January 31, 1998, 97 employees had been granted options to purchase an
aggregate of 2,492,184 Common Shares pursuant to the Plan. Options to purchase
an aggregate of 1,540,684 Common Shares were granted in December 1996 at an
exercise price of $4.68 per share, including grants of 1,001,454 Nonqualified
Options to Steven M. Stone. Such options were immediately exercisable in full.
Options to purchase an aggregate of 780,000 Common Shares were granted in
January 1997 (as adjusted in March 1997) at an exercise price of $4.68 per
share, including grants of Nonqualified Options to executive officers as
follows: David Carroll (50,000), Richard Chyette (50,000), and Frank E.
Plenskofski (45,000). Such options vest in one-fifth cumulative annual
installments beginning December 31, 1997. Options to purchase an aggregate of
90,000 Common Shares were granted in April 1997 at an exercise price of $4.68
per share, including a grant of Nonqualified Options to Frank E. Plenskofski
(5,000). Such options vest in one-fifth cumulative annual installments
beginning December 31, 1997. Options to purchase an aggregate of 196,500
Common Shares were granted in July 1997 at an exercise price of $7.00 per
share. Such options vest in one-fifth cumulative annual installments beginning
December 31, 1998. In connection with amendments to employment agreements with
three key employees, effective as of the closing date of this Offering, Rock
granted such employees immediately exercisable options to purchase 450,000
Common Shares with an exercise price equal to the
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initial public offering price set forth on the cover page of this Prospectus.
Rock intends to grant additional options effective upon the closing of this
Offering.
No Incentive Option may be granted with an exercise price per share
less than the fair market value of the Common Shares at the date of grant. The
Nonqualified Options may be granted with any exercise price determined by the
Committee administering the Plan. The exercise price of an option may be paid
in cash, or, with the consent of the Committee, (i) in Common Shares, (ii) by
delivery of a promissory note payable to the order of Rock which is acceptable
to the Committee, (iii) by a cash down payment and delivery of a promissory
note in the amount of the unpaid exercise price, (iv) by Rock retaining from
the shares to be delivered upon exercise of the stock option that number of
shares having a fair market value on the date of exercise equal to the option
price of the number of shares with respect to which the participant exercises
the option, (v) by delivery to Rock of written notice of the exercise in such
form as the Committee may prescribe, accompanied by irrevocable instructions to
a stock broker to promptly deliver to Rock full payment for the shares with
respect to which the option is exercised from the proceeds of the stock
broker's sale of or loan against some or all of the shares, or (vi) in such
other manner as the Committee determines is appropriate.
An employee may receive more than one Incentive Option, but the
maximum aggregate fair market value of the Common Shares (determined when the
Incentive Option is granted) with respect to which Incentive Options are first
exercisable by such employee in any calendar year cannot exceed $100,000. In
addition, no Incentive Option may be granted to an employee owning directly or
indirectly stock possessing more than 10% of the total combined voting power of
all classes of stock of Rock, unless the exercise price is set at not less than
110% of the fair market value of the shares subject to such Incentive Option on
the date of grant and such Incentive Option expires not later than five years
from the date of grant. Awards of Nonqualified Options are not subject to
these special limitations.
To the extent required for Incentive Options or to the extent
determined by the Committee, no option granted under the Plan is transferable
otherwise than by will, or by the laws or descent and distribution, or, with
respect to Nonqualified Options, pursuant to a qualified domestic relations
order, and such option is exercisable, during the lifetime of the participant,
only by the participant. The Committee may, however, authorize all or a
portion of any option granted to be on terms which permit transfer by such
optionee to, and the exercise of such option by, (i) the spouse, children or
grandchildren of the optionee ("Immediate Family Members"), (ii) a trust or
trusts for the exclusive benefit of such Immediate Family Members, (iii) a
partnership in which such Immediate Family Members are the only partners, or
(iv) such other persons or entities as determined by the Committee, on such
terms and conditions as the Committee may determine; provided that (y) the
stock option agreement pursuant to which such options are granted must be
approved by the Committee and must expressly provide for transferability in a
manner consistent with the Plan, and (z) subsequent transfers of transferred
options are prohibited except for transfers the original optionee would be
permitted to make.
Subject to the terms of the Plan, each option granted under the Plan
is exercisable at the time or times or in such installments as may be
determined by the Committee. Except as described below options may be
exercised only while the participant is an employee, director, consultant or
advisor of Rock. Subject to the requirements of Incentive Options that are
intended to remain Incentive Options, in connection with a participant ceasing
to be an employee of Rock for any reason, the stock option agreement may
provide for the acceleration of, or the Committee may accelerate, in whole or
in part, the time or times or installments with respect to which any option
shall be exercisable in connection with
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termination of a participant's employment with Rock, subject to any
restrictions, terms and conditions fixed by the Committee.
In connection with a business combination involving Rock, the
dissolution or liquidation of Rock or a capital reorganization or
reclassification such that holders of Common Shares shall be entitled to
receive stock, securities, cash or other assets with respect to or in exchange
for the Common Shares (a "Transaction"), and effective as of a date selected by
the Committee, the Committee may (a) accelerate the time at which stock options
then outstanding may be exercised so that such stock options may be exercised
in full for a limited period of time on or before a specified date fixed by the
Committee after which specified date all unexercised stock options and all
rights of participants thereunder shall terminate; (b) accelerate the time at
which stock options then outstanding may be exercised so that such stock
options may be exercised in full for their then remaining term; or (c) require
the mandatory surrender to Rock of outstanding stock options held by such
participants (irrespective of whether such stock options are then exercisable)
as of a date, before or not later than sixty days after such Transaction,
specified by the Committee, and in such event Rock shall thereupon cancel such
stock options and shall pay to each participant an amount of cash equal to the
excess of the fair market value of the aggregate Common Shares subject to such
stock option, determined as of the date such Transaction is effective, over the
aggregate option price of such shares; provided, however, the Committee shall
not select an alternative (unless consented to by the participant) such that,
if a participant exercised his or her accelerated stock option pursuant to
alternative (a) or (b) and participated in the Transaction or received cash
pursuant to alternative (c), the alternative would result in the participant's
owing any money by virtue of the operation of Section 16(b) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). If all such
alternatives have such a result, the Committee shall take such action to put
such participants in as close to the same position as such participant would
have been in had alternative (a), (b) or (c) been selected but without
resulting in any payment by such participant pursuant to Section 16(b) of the
Exchange Act.
Subject to the other provisions of the Plan, all rights to exercise
options terminate when a participant ceases to be an employee, director,
consultant or advisor of or to Rock for any cause, except that the Committee
may permit the exercise of all or any portion of the options granted to such
participant (i) for a period not to exceed three months following such
termination with respect to Incentive Options that are intended to remain
Incentive Options if such termination is not due to death or permanent
disability of the Participant, (ii) for a period not to exceed one year
following termination of employment with respect to Incentive Options that are
Intended to remain Incentive Options if termination of employment is due to the
death or permanent disability of the Participant, and (iii) for a period not to
extend beyond the expiration date with respect to Nonqualified Options or
Incentive Options that are not intended to remain Incentive Options, all
subject to any restrictions, terms and conditions fixed by the Committee. In
no event, however, shall an option be exercisable after its expiration date,
and, unless the Committee determines otherwise, an option may only be exercised
after termination of a participant's employment, consultation or other service
by or to Rock to the extent exercisable on the date of such termination or to
the extent exercisable as a result of the reason for such termination. If not
sooner terminated, each stock option granted under the Plan shall expire not
more than 10 years from the date of grant.
401(K) SAVINGS PLAN
Effective in March 1987, Rock established Rock's 401(k) Savings Plan
(the "401(k) Plan"), which is intended to comply with Sections 401(a) and
401(k) of the Internal Revenue Code of 1986, as
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amended, and the applicable provisions of the Employee Retirement Income
Security Act of 1974, as amended. Amounts contributed to the 401(k) Plan are
held under a trust intended to be exempt from income tax pursuant to Section
501(a) of the Internal Revenue Code. All full-time and part-time employees of
Rock that have completed at least six months of service and are at least 21
years of age are eligible to participate in the 401(k) Plan. Participating
employees will be entitled to make pre-tax contributions to their accounts in
amounts equal to not less than 1% and not more than 15% of their compensation
each year, subject to certain maximum annual limits imposed by law
(approximately $9,500 in 1997). Rock matches 20% of employee contributions in
amounts of employee contributions up to 5% of their compensation. Rock also
has the right to make certain additional matching contributions in amounts not
to exceed 15% of employee compensation. Matching contributions made by Rock
vest in participating employees over a three-year period after the date of
contribution. Distributions generally are payable in a lump sum after
retirement or death and, in certain circumstances, upon termination of
employment with Rock for other reasons.
CERTAIN TRANSACTIONS
Since its inception, Rock has had business relationships and engaged
in certain transactions with affiliated companies and parties as described
below.
TRANSACTIONS WITH DIRECTORS
See "Compensation--Compensation Committee Interlocks and Insider
Participation" for a description of (i) indebtedness of Daniel Gilbert, Lindsay
Gross and Gary L. Gilbert to Rock, (ii) transactions between Rock and Title
Source, Inc., a company a majority of the shares of which are owned by officers
and employees of Rock, and (iii) various severance arrangements with Gary L.
Gilbert.
TRANSACTIONS WITH SHAREHOLDERS
See "Termination of S Corporation Status" for a description of a Tax
Indemnification Agreement between Rock and the Existing Shareholders.
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PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth information regarding the beneficial
ownership of the Common Shares as of January 31, 1998, and as adjusted to
reflect the sale of the Common Shares offered by this Prospectus, by (i) each
person known by Rock to own more than 5% of Rock's Common Shares, (ii) each of
the Selling Shareholders, (iii) each director of Rock, (iv) each executive
officer of Rock named in the Summary Compensation Table above, and (v) all
directors and executive officers of Rock as a group. The address of each
person listed below is 30600 Telegraph Road, Fourth Floor, Bingham Farms,
Michigan 48025, unless otherwise indicated.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED BEFORE OWNED AFTER
THE OFFERING (1) THE OFFERING (1)
------------------- SHARES --------------------
PERCENT BEING PERCENT
NUMBER OF CLASS OFFERED NUMBER OF CLASS
------ -------- ------- ------ --------
<S> <C> <C> <C> <C> <C>
Daniel Gilbert (2) . . . . . . 10,000,000 100 .0 -0- 10,000,000 75.0
Gary L. Gilbert (2)(3) . . . . 2,077,298 20.8 -0- 2,077,298 15.6
Steven M. Stone (2)(4) . . . . 1,001,454 9.1 214,500 (5) 1,079,454 7.5
Lindsay Gross (2) . . . . . . . 865,601 8.7 -0- 865,601 6.5
Adam Schoener (2)(6) . . . . . 269,615 2.6 57,750 (5) 290,615 2.1
Ross Niskar (2)(7) . . . . . . 269,615 2.6 57,750 (5) 290,615 2.1
David Carroll (8) . . . . . . . 10,000 * -0- 10,000 *
Frank E. Plenskofski (9) . . . 10,000 * -0- 10,000 *
All directors and executive officers
as a group (8 persons) (10) . 11,021,454 100.0 330,000 11,099,454 76.9
</TABLE>
- ------------------------------
* Represents less than 1% of outstanding Common Shares.
(1) Based on 10,000,000 Common Shares outstanding as of January 31, 1998,
before the Offering, and 13,330,000 Common Shares outstanding after
the Offering. Beneficial ownership is determined in accordance with
the rules of the Securities and Exchange Commission (the "Commission")
and generally includes voting or investment power with respect to
securities. Except as indicated in the footnotes to this table, the
persons named in the table have sole investment power with respect to
all Common Shares beneficially owned.
(2) Pursuant to a Shareholders Agreement, expected to be executed as of
the closing date of this Offering, among Rock, Daniel Gilbert, Gary L.
Gilbert, Lindsay Gross, Steven M. Stone, Ross Niskar and Adam
Schoener, each of the shareholder parties to the agreement (other than
Daniel Gilbert) is expected to give Daniel Gilbert all voting power
over all shares currently owned or later acquired by them for ten
years. As of January 31, 1998, Mr. Daniel Gilbert owned 7,057,101
Common Shares of record, or approximately 70.6% of the outstanding
Common Shares before the Offering and approximately 52.9% of the
outstanding Common Shares after this Offering.
(3) Gary L. Gilbert's address is 640 N. LaSalle St., Suite 330, Chicago,
Illinois 60610.
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(4) Includes 1,001,454 Common Shares before the Offering, and 1,079,454
Common Shares after the Offering,that Mr. Stone has the right to
acquire pursuant to stock options exercisable within 60 days of
January 31, 1998.
(5) At the closing of this Offering, each of Messrs. Stone, Schoener and
Niskar will exercise options they currently own to purchase Rock
Common Shares at $4.68 a share in an amount equal to the number of
shares they are selling in this Offering. Rock will receive
approximately $1.5 million of proceeds from the options exercised by
these Selling Shareholders to acquire the shares they are selling.
Pursuant to their amended employment agreements, Rock has granted them
immediately exercisable replacement options effective on the closing
date of this Offering to purchase 450,000 Common Shares at an exercise
price equal to the initial public offering price set forth on the
cover page of this Prospectus (the "New Options"). Each of Messrs.
Stone, Schoener and Niskar cancelled their rights to receive
"Distribution Bonuses" previously required by their employment
agreements with Rock in exchange for Rock's agreement (i) to permit
them to be Selling Shareholders in this Offering, and (ii) to grant
them the New Options. For a description of the former "Distribution
Bonus," see the description of Mr. Stone's employment agreement under
the caption "Management--Executive Compensation-- Employment Contracts
and Termination of Employment and Change-in-Control
Arrangements--Steven M. Stone."
(6) Includes 269,615 Common Shares before the Offering, and 290,615 Common
Shares after the Offering, that Mr. Schoener has the right to acquire
pursuant to stock options exercisable within 60 days of January 31,
1998.
(7) Includes 269,615 Common Shares before the Offering, and 290,615 Common
Shares after the Offering, that Mr. Niskar has the right to acquire
pursuant to stock options exercisable within 60 days of January 31,
1998.
(8) Includes 10,000 Common Shares that Mr. Carroll has the right to
acquire pursuant to stock options exercisable within 60 days of
January 31, 1998.
(9) Includes 10,000 Common Shares that Mr. Plenskofski has the right to
acquire pursuant to stock options exercisable within 60 days of
January 31, 1998.
(10) Includes 1,021,454 Common Shares before the Offering, and 1,099,454
Common Shares after the Offering, that all directors and executive
officers as a group have the right to acquire pursuant to stock
options exercisable within 60 days of January 31, 1998.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital shares of Rock consist of an aggregate of
50,000,000 Common Shares, par value $0.01 per share, and 1,000,000 Preferred
Shares, par value $0.01 per share. 10,000,000 Common Shares and no Preferred
Shares are outstanding as of January 31, 1998. All of the shares being offered
in this Offering are Common Shares.
COMMON SHARES
Holders of Common Shares have one vote per share on each matter
submitted to a vote of the shareholders and the right to participate ratably in
the net assets of Rock upon liquidation. Holders of Common Shares participate
ratably in dividends and distributions as may be declared by the Board of
Directors from funds legally available for that purpose (see "Dividend Policy"),
have no conversion rights, are not redeemable and are not entitled to any
preemptive or subscription rights. The Common Shares currently outstanding are,
and the Common Shares to be issued in connection with this Offering will be,
duly authorized, validly issued, fully paid and non-assessable. Holders of
Common Shares have no cumulative voting rights, and accordingly, holders of a
majority of the outstanding Common Shares are able to elect all of Rock's
Directors.
The Board of Directors is divided into three classes. After his or her
initial term, each director will serve for a term ending at the third Annual
Meeting of Shareholders following the meeting at which such director is elected
and until his or her successor is elected and qualified, or until his or her
earlier death, resignation or removal. Initially, the Class I Director, Gary L.
Gilbert, will hold office until the Annual Meeting of Shareholders to be held in
1999, the Class II Director, Steven M. Stone, will hold office until the for the
Annual Meeting of Shareholders to be held in 2000, and the Class III Directors,
Daniel Gilbert, will hold office until the Annual Meeting of Shareholders to be
held in 2001, and until their successors are elected and qualified, or until
their earlier death, resignation or removal. Directors may not be removed
without cause. Rock's Restated Articles of Incorporation also set the minimum
and maximum number of directors constituting the entire Board at three and
fifteen, respectively, and require approval of holders of 90% of Rock's voting
shares to amend this provision. In addition, Rock's Bylaws require advance
notice of any nominations for director of Rock, along with information about the
nominee and the shareholder.
PREFERRED SHARES
Rock has also authorized the issuance of up to 1,000,000 Preferred
Shares, $0.01 par value per share, none of which is outstanding as of the date
of this Prospectus. The Preferred Shares may be issued from time to time in one
or more series. The Board of Directors is authorized to determine the rights,
preferences, privileges and restrictions granted to, and imposed upon, each
series of Preferred Shares and to fix the number of shares of any series of
Preferred Shares and the designation of any such series. The issuance of
Preferred Shares could be used, under certain circumstances, as a method of
preventing a change in control of Rock and could permit the Board of Directors,
without any action of the holders of the Common Shares, to issue Preferred
Shares which could have a detrimental effect on the rights of holders of the
Common Shares, including loss of voting control. Anti-takeover provisions that
could be included in the Preferred Shares when issued may have a depressive
effect on the market price of Rock's
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securities and may limit shareholders' ability to receive a premium on their
shares by discouraging takeover and tender offer bids. Rock has no present plans
to issue any Preferred Shares.
CHARTER AND BYLAW PROVISIONS
Various provisions in Rock's Restated Articles of Incorporation and
Bylaws could have the effect of delaying, deferring or preventing changes in
control of Rock. See "Risk Factors-- Potential Anti-Takeover Effects of Charter,
Bylaw and Statutory Provisions."
BUSINESS COMBINATION PROVISIONS OF MICHIGAN LAW
Chapters 7A and 7B of the Michigan Business Corporation Act may affect
attempts to acquire control of Rock. In general, under Chapter 7A, "business
combinations" (defined to include, among other transactions, certain mergers,
dispositions of assets or shares and recapitalizations) between covered Michigan
business corporations or their subsidiaries and an "interested shareholder"
(defined as the direct or indirect beneficial owner of at least 10% of the
voting power of a covered corporation's outstanding shares) can only be
consummated if approved by at least 90% of the votes of each class of the
corporation's shares entitled to vote and by at least two-thirds of such voting
shares not held by the interested shareholder or affiliates, unless five years
have elapsed after the person involved became an "interested shareholder" and
unless certain price and other conditions are satisfied. The Board of Directors
has the power to elect to be subject to Chapter 7A as to specifically identified
or unidentified interested shareholders.
In general, under Chapter 7B, an entity that acquires "Control Shares"
of Rock may vote the Control Shares on any matter only if a majority of all
shares, and of all non-"Interested Shares", of each class of shares entitled to
vote as a class, approve such voting rights. Interested Shares are shares owned
by officers of Rock, employee-directors of Rock and the entity making the
Control Share Acquisition. Control Shares are shares that when added to shares
already owned by an entity, would give the entity voting power in the election
of directors over any of the three thresholds: one-fifth, one-third and a
majority. The effect of the statute is to condition the acquisition of voting
control of a corporation on the approval of a majority of the pre-existing
disinterested shareholders. The Board of Directors may amend the bylaws before a
Control Share Acquisition occurs to provide that Chapter 7B does not apply to
Rock. In addition, certain provisions in Rock's bylaws could have the effect of
delaying, deferring or preventing changes in control of Rock. See "Risk
Factors--Potential Anti-Takeover Effects of Charter, Bylaw and Statutory
Provisions."
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Michigan Business Corporation Act permits Michigan corporations to
limit the personal liability of directors for breaches of their fiduciary
duties. The Restated Articles of Incorporation of Rock so limit the liability of
directors. Rock's Bylaws also provide for indemnification of directors and
officers. Rock believes that such indemnification will assist Rock in continuing
to attract and retain talented directors and officers in light of the risk of
litigation directed against directors and officers of publicly-held
corporations.
The Restated Articles of Incorporation limit director liability to the
maximum extent permitted by Michigan law. Michigan law allows the articles of
incorporation of a Michigan corporation to contain a provision eliminating or
limiting a director's liability to the corporation or its shareholders for money
77
<PAGE> 79
damages for any action taken or any failure to take any action as a director,
except for liability for specified acts. As a result of the inclusion of such a
provision, shareholders of Rock may be unable to recover monetary damages
against directors for actions taken by them which constitute negligence or gross
negligence or which are in violation of their fiduciary duties, although it may
be possible to obtain injunctive or other equitable relief with respect to such
actions. If equitable remedies are found not to be available to shareholders in
any particular case, shareholders may not have any effective remedy against the
challenged conduct. These provisions, however, do not affect liability under the
Securities Act.
The Michigan Business Corporation Act authorizes a corporation under
specified circumstances to indemnify its directors and officers (including
reimbursement for expenses incurred). The provisions of Rock's Bylaws relating
to indemnification of directors and executive officers generally provide that
directors and executive officers will be indemnified to the fullest extent
permissible under Michigan law. The provision also provides for the advancement
of litigation expenses at the request of a director or executive officer. These
obligations are broad enough to permit indemnification with respect to
liabilities arising under the Securities Act or the Michigan Uniform Securities
Act.
In addition, Rock has obtained Directors' and Officers' liability
insurance. The policy provides for $5,000,000 in coverage including liabilities
under the Securities Act in connection with this Offering.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling Rock pursuant
to the foregoing provisions, Rock has been informed that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is therefore unenforceable.
TRANSFER AGENT AND REGISTRAR
__________________ is expected to serve as transfer agent and registrar
for the Common Shares. As of January 31, 1998 there were three holders of record
of Rock's Common Shares.
78
<PAGE> 80
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, Rock will have outstanding 13,330,000
Common Shares (13,829,500 Common Shares if the Underwriters' over-allotment
option is exercised in full). The 3,330,000 Common Shares to be sold in the
Offering, and any of the 499,500 Common Shares that may be sold upon exercise of
the Underwriters' over-allotment option, will be freely tradable by persons
other than "affiliates" of Rock, as that term is defined in Rule 144 under the
Securities Act, without restriction or registration under the Securities Act.
The remaining 10,000,000 shares (all such shares being referred to as the
"Restricted Shares") will be held by Rock's current shareholders. The Restricted
Shares may not be sold unless they are registered under the Securities Act or
sold pursuant to an applicable exemption from registration, including an
exemption pursuant to Rule 144 under the Securities Act.
As currently in effect, Rule 144 generally permits the public sale in
ordinary brokers' transactions of "restricted securities" and of securities
owned by "affiliates" beginning 90 days after the date of this Prospectus if the
other restrictions enumerated in Rule 144 are met. Restricted securities are
securities, such as the Restricted Shares, acquired directly or indirectly from
an issuer or an affiliate of the issuer in a transaction not involving a public
offering. In general, under Rule 144, if a period of at least one year has
elapsed since the later of the date the Restricted Shares were acquired from
Rock or an affiliate, as applicable, then the holder of such Restricted Shares
(including an affiliate) is entitled, subject to specified conditions, to sell
within any three-month period a number of shares not exceeding the greater of
(i) 1% of Rock's then outstanding Common Shares, or (ii) the average weekly
trading volume of the shares during the four calendar weeks preceding the filing
of a Form 144 with respect to such sale. Sales under Rule 144 are also subject
to specified manner-of-sale provisions and requirements as to notice and the
availability of current public information about Rock.
Affiliates may sell Common Shares not constituting Restricted Shares in
accordance with the foregoing limitations and requirements but without regard to
the one-year period. However, a person who is not and has not been an affiliate
of Rock at any time during the 90 days preceding the sale of the Restricted
Shares, and who has beneficially owned the Restricted Shares for at least two
years, is entitled to sell such Restricted Shares under Rule 144 without regard
to the volume limitations, manner-of-sale requirements or notice and public
information requirements of Rule 144. Because management believes that all
outstanding shares have been held by the current shareholders for more than one
year, all of such Restricted Shares will become eligible for sale pursuant to
Rule 144 beginning 90 days after the date of this Prospectus. However, the
holders of such shares have agreed during the 180-day period immediately
following the date of this Prospectus not to sell or otherwise dispose of any
securities of Rock without the consent of the representative of the
Underwriters, subject to specified exceptions. See "Risk Factors--Shares
Eligible for Future Sale" and "Underwriting."
Rock has reserved 4,500,000 Common Shares for issuance under the Plan,
of which options to purchase 2,492,184 Common Shares were outstanding at
January 31, 1998. At the closing of the Offering, options to purchase 2,612,184
Common Shares will be outstanding. The 330,000 Common Shares being sold by the
Selling Shareholders will be acquired by them on the closing date of this
Offering upon exercise of stock options previously granted to them, and Rock has
granted to them, effective as of the closing date of this Offering, immediately
exercisable replacement options to purchase 450,000 Common Shares at the initial
public offering price of the Common Shares in this Offering. All of the Common
Shares issued as a result of any grants under this plan will be restricted
securities unless Rock files a registration statement under the Securities Act
relating to the issuance of the shares. Rock currently intends to register the
Common Shares reserved under the Plan. Subject to compliance with
79
<PAGE> 81
Rule 144 by affiliates of Rock, any shares issued upon exercise of options
granted under such employee benefit plans will become freely tradable at the
effective date of the registration statement for the shares reserved under such
plans. In addition, pursuant to Rule 701 under the Securities Act, 90 days after
the date of this Prospectus, Common Shares issued upon exercise of options
granted under the Plan in reliance on Rule 701 may be resold by persons other
than affiliates in reliance on Rule 144, without compliance with the current
public information, holding period, volume or notice requirements of Rule 144,
and by affiliates without compliance with the holding period requirements of
Rule 144. In connection with the Offering, Rock's directors and executive
officers, owning in the aggregate all of the outstanding Common Shares, and the
Selling Shareholders have agreed that they will not sell, contract to sell or
otherwise dispose of any shares of capital stock of Rock for a period of 180
days after the date of this Prospectus without the prior written consent of the
Representative, except for the transfers of shares contemplated by this
Prospectus, subject to specified limited exceptions.
Prior to the Offering, there has been no public market for the Common
Shares, and no prediction can be made as to the effect, if any, that sales of
Common Shares or the availability of Common Shares for sale will have on the
market price prevailing from time to time. Nevertheless, sales of substantial
amounts of Common Shares in the public market could adversely affect prevailing
market prices.
80
<PAGE> 82
UNDERWRITING
The Underwriters of the Offering of the Common Shares (the
"Underwriters"), for whom Bear, Stearns & Co. Inc. is acting as representative
(the "Representative"), have severally agreed, subject to the terms and
conditions of the Underwriting Agreement (the form of which is filed as an
exhibit to the Registration Statement of which this Prospectus is a part, the
"Underwriting Agreement"), to purchase from Rock and the Selling Shareholders
the aggregate number of Common Shares set forth opposite their names below:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF COMMON SHARES
------------ -----------------------
<S> <C>
Bear, Stearns & Co. Inc.............................
---------
---------
Total...................................... 3,330,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that, if any of the
foregoing Common Shares are purchased by the Underwriters pursuant to the
Underwriting Agreement, all such shares must be so purchased. Rock and the
Selling Shareholders have agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments that the Underwriters may be required to make in respect thereof.
Rock has been advised that the Underwriters propose to offer the Common
Shares to the public initially at the initial public offering price set forth on
the cover page of this Prospectus and to certain selected dealers (which may
include the Underwriters) at such initial public offering price less a
concession not to exceed $0.__ per share. The selected dealers may reallow a
concession to certain other dealers not to exceed $0.__ per share. After the
initial Offering to the public, the initial public offering price, the
concession to selected dealers and the reallowance to other dealers may be
changed by the Representative.
Bear Stearns Home Equity Trust, an affiliate of Bear, Stearns & Co.
Inc., currently provides Rock with an uncommitted $100 million reverse
repurchase arrangement pursuant to which Bear Stearns Home Equity Trust will
purchase from Rock, subject to Rock's agreement to repurchase on a daily basis,
up to $100 million of fully-amortizing, first or junior lien residential
mortgage loans and home equity loans that comply with Rock's origination
guidelines and conform to whole and bulk loan sale requirements. This agreement
is not a committed facility and Bear Stearns Home Equity Trust may elect to
discontinue the repurchase agreement at any time. The term of any financing
under the repurchase agreement matures and may be renewed on a daily basis. In
any event, the arrangement terminates on March 1998. Rock uses this facility as
a supplemental borrowing facility to fund loans closed by Rock until they are
sold. As of January 31, 1998, Rock had financed $46.0 million of loans under
this facility and an additional $54.0 million was available for future
financings.
81
<PAGE> 83
Bear, Stearns & Co. Inc. provided Rock with financial advisory services
during 1996 in connection with a reorganization of Rock. Bear, Stearns & Co.
Inc. received a fee of $50,000 from Rock for these financial advisory services.
Rock has granted to the Underwriters an option to purchase up to
499,500 additional Common Shares at the initial public offering price less the
underwriting discount set forth on the cover page of this Prospectus, solely to
cover over-allotments, if any. Such option may be exercised at any time until 30
days after the date of this Prospectus. To the extent that the Underwriters
exercise such option, each of the Underwriters will be committed, subject to
certain conditions, to purchase a number of additional shares proportionate to
such Underwriter's initial commitment as indicated in the preceding table.
Prior to the Offering there has been no public market for any of Rock's
securities. The initial public offering price set forth on the cover page of
this Prospectus will be determined by negotiations among Rock, the Selling
Shareholders and the Representative. In determining such price, consideration
will be given to various factors including (i) the market valuation of
comparable companies, (ii) market conditions for initial public offerings, (iii)
the history of and prospects for Rock's business, (iv) Rock's past and present
operations and earnings, (v) Rock's current financial position, (vi) an
assessment of Rock's management, (vii) the position of Rock in its industry, and
(viii) the market value of Rock's assets. Consideration also was given to the
general condition of the securities markets, the demand for similar securities
of comparable companies and other market factors.
In connection with the Offering, Rock's directors and executive
officers, owning in the aggregate all of the outstanding Common Shares, and the
Selling Shareholders have agreed that they will not sell, contract to sell or
otherwise dispose of any shares of capital stock of Rock for a period of 180
days after the date of this Prospectus without the prior written consent of the
Representative, except for the transfers of shares contemplated by this
Prospectus, subject to specified limited exceptions. See "Shares Eligible For
Future Sale." Also in connection with the Offering, Rock has agreed that it will
not sell, contract to sell or otherwise dispose of any shares of capital stock
of Rock for a period of 180 days after the date of this Prospectus without the
prior written consent of the Representative, except for Common Shares offered
by this Prospectus and except for issuances or sales by Rock under the terms of
the 1996 Stock Option Plan.
The Representative has informed Rock that the Underwriters do not
expect to make sales to accounts over which they exercise discretionary
authority in excess of 5% of the number of Common Shares offered by this
Prospectus.
In order to facilitate the Offering, certain persons participating in
the Offering may engage in transactions that stabilize, maintain or otherwise
affect the price of the Common Shares during and after the Offering.
Specifically, the Underwriters may over-allot or otherwise create a short
position in the Common Shares for their own account by selling more Common
Shares than have been sold to them by Rock. The Underwriters may elect to cover
any such short position by purchasing Common Shares in the open market or by
exercising the over-allotment option granted to the Underwriters. In addition,
such persons may stabilize or maintain the price of the Common Shares by bidding
for or purchasing Common Shares in the open market and may impose penalty bids,
under which selling concessions allowed to syndicate members or other
broker-dealers participating in the Offering are reclaimed if Common Shares
previously distributed in the Offering are repurchased in connection with
stabilization transactions or otherwise. The effect of these transactions may be
to stabilize or maintain the market price of the Common Shares at a level above
that which might otherwise prevail in the open market. The imposition
82
<PAGE> 84
of a penalty bid may also affect the price of the Common Shares to the extent
that it discourages resales thereof. No representation is made as to the
magnitude or effect of any such stabilization or other transactions. Such
transactions may be effected on The Nasdaq National Market or otherwise and, if
commenced, may be discontinued at any time.
LEGAL MATTERS
The validity of the Common Shares to be offered by this Prospectus will
be passed upon for Rock and the Selling Shareholders by Honigman Miller Schwartz
and Cohn, Detroit, Michigan. Certain legal matters in connection with the
Offering will be passed upon for the Underwriters by Berick, Pearlman & Mills
Co., L.P.A., Cleveland, Ohio.
EXPERTS
The financial statements of Rock Financial Corporation as of
December 31, 1996 and 1997, and for each of the years in the three-year period
ended December 31, 1997, included in this Prospectus and elsewhere in the
Registration Statement have been included in this Prospectus and in the
Registration Statement in reliance upon the report of KPMG Peat Marwick LLP,
independent auditors, appearing elsewhere in this Prospectus, and upon the
authority of such firm as experts in accounting and auditing.
CHANGE IN ACCOUNTANTS
Rock engaged KPMG Peat Marwick LLP as its independent accountants after
it terminated its relationship with Coopers & Lybrand LLP in August 1997. In
connection with its audits for 1996 and 1995 and during the interim period
preceding such termination, there were no disagreements between Rock and
Coopers & Lybrand LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Coopers & Lybrand, would
have caused them to make reference thereto in their report on the financial
statements. No report issued by Coopers & Lybrand LLP with respect to Rock's
financial statements contained any adverse opinion or disclaimer of opinion, or
was qualified or modified as to uncertainty, audit scope or accounting
principles. The decision to change accountants was made by management of Rock.
ADDITIONAL INFORMATION
Rock has filed with the Securities and Exchange Commission a
Registration Statement on Form S-1 under the Securities Act, of which this
Prospectus forms a part, with respect to the Common Shares offered by this
Prospectus. This Prospectus omits certain information contained in the
Registration Statement, and reference is made to the Registration Statement for
further information with respect to Rock and the Common Shares offered by this
Prospectus. Statements contained in this Prospectus concerning the provisions of
documents are necessarily summaries of such documents and when any such document
is an exhibit to the Registration Statement, each such statement is qualified in
its entirety by reference to the copy of such document filed with the
Commission. Copies of the Registration Statement may be acquired upon payment of
the prescribed fees or examined without charge at the public reference
facilities of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.
Please call the SEC at 1-800-SEC-0330 for further information on the operation
of the public reference rooms. In addition, the Registration Statement may be
accessed electronically at the Commission's site on the World Wide Web at
http://www.sec.gov.
Upon completion of the Offering, Rock will be subject to the
informational requirements of the Securities Exchange Act of 1934, as amended,
and, in accordance therewith, will file reports, proxy and information
statements with the Commission. Such reports, proxy and information statements
and other information can be inspected and copied at the address and web site
set forth above.
83
<PAGE> 85
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report -- KPMG Peat Marwick LLP............................. F-2
Balance Sheets as of December 31, 1996 and 1997................................... F-3
Statements of Income for the years ended December 31, 1995, 1996 and 1997......... F-4
Statements of Shareholders' Equity for the years ended December 31, 1995, 1996 and 1997 F-5
Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997..... F-6
Notes to Financial Statements..................................................... F-7
</TABLE>
F-1
<PAGE> 86
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Directors of
Rock Financial Corporation:
We have audited the accompanying balance sheets of Rock Financial Corporation
(the "Corporation") as of December 31, 1996 and 1997, and the related statements
of income, shareholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1997. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Corporation as of
December 31, 1996 and 1997, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Detroit, Michigan
February 18, 1998
F-2
<PAGE> 87
ROCK FINANCIAL CORPORATION
BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
ASSETS 1996 1997
------ ------------ ------------
<S> <C> <C>
Cash and cash equivalents.............................................. $3,288,751 $11,946,992
Marketable securities available for sale............................... 5,953,862 --
Mortgage loans held for sale........................................... 85,009,395 121,343,814
Mortgage loans held for investment (net of allowance for losses
of $270,000 in 1997).............................................. -- 810,293
Real estate owned...................................................... -- 158,271
Shareholders' advances................................................. 2,519,342 1,626,519
Property and equipment, net............................................ 2,681,314 7,010,537
Other assets........................................................... 906,846 1,532,471
------------ ------------
Total assets.................................................. $100,359,510 $144,428,897
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities:
Warehouse line of credit.......................................... $67,621,266 $79,293,856
Reverse repurchase agreement...................................... -- 18,161,423
Notes payable..................................................... -- 1,944,445
Drafts payable.................................................... 14,896,675 21,875,184
Accounts payable.................................................. 1,998,939 3,255,503
Accrued expenses and other liabilities............................ 3,496,491 4,790,350
------------ ------------
Total liabilities............................................. 88,013,371 129,320,761
------------ ------------
Shareholders' equity:
Common shares, $.01 par value. Authorized 50,000,000 shares;
issued and outstanding 10,000,000 shares...................... 100,000 100,000
Additional paid-in capital........................................ 1,423,750 1,423,750
Retained earnings................................................. 9,386,020 13,584,386
Unrealized gain on marketable securities.......................... 1,436,369 --
------------ ------------
Total shareholders' equity.................................... 12,346,139 15,108,136
------------ ------------
Total liabilities and shareholders' equity.................... $100,359,910 $144,428,897
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE> 88
ROCK FINANCIAL CORPORATION
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Revenue:
Interest income.............................. $3,002,750 $4,267,824 $8,082,448
Interest expense............................. 3,012,033 3,669,393 5,149,881
---------- ---------- ----------
Net interest margin...................... (9,283) 598,431 2,932,567
Provision for credit losses.................. -- -- 300,000
---------- ---------- ----------
Net interest margin after provision
for credit losses................... (9,283) 598,431 2,632,567
Loan fees and gains and losses on sale of
mortgages................................ 17,788,279 27,959,437 47,084,309
Net gain on sale of mortgage servicing 5,728,411 -- --
Net gain on sale of marketable securities 345,716 991,219 2,221,905
Other income................................. 398,555 6,489 171,085
---------- ---------- -----------
24,251,678 29,555,576 52,109,866
---------- ---------- -----------
Expenses:
Salaries, commissions and employee benefits 11,271,770 16,424,971 24,810,597
General and administrative expenses.......... 3,725,601 4,645,820 7,629,889
Marketing expenses........................... 1,338,752 2,392,994 5,369,515
Depreciation and amortization................ 506,634 663,428 1,292,479
---------- ---------- -----------
16,842,757 24,127,213 39,102,480
---------- ---------- -----------
Income before stock and option
holders' bonuses.................... 7,408,921 5,428,363 13,007,386
Stock and option holders' bonuses............ 545,480 2,297,625 1,592,030
---------- ---------- -----------
Net income............................... $6,863,441 $3,130,738 $11,415,356
========== ========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE> 89
ROCK FINANCIAL CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
Unrealized
Additional Gain on Total
Common Paid-in Retained Marketable Shareholders'
Shares Capital Earnings Securities Equity
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance December 31, 1994 $ 100,000 $ 1,423,750 $ 2,957,767 $ 1,792,046 $ 6,273,563
Year ended December 31, 1995
Net income 6,863,441 6,863,441
Shareholder distributions (67,359) (67,359)
Change in unrealized gain
on marketable securities 3,457,339 3,457,339
------------ ------------ ------------ ------------ ------------
Balance December 31, 1995 100,000 1,423,750 9,753,849 5,249,385 16,526,984
Year ended December 31, 1996
Net income 3,130,738 3,130,738
Shareholder distributions (3,498,567) (3,498,567)
Change in unrealized gain
on marketable securities (3,813,016) (3,813,016)
------------ ------------ ------------ ------------ ------------
Balance December 31, 1996 100,000 1,423,750 9,386,020 1,436,369 12,346,139
Year ended December 31, 1997
Net income 11,415,356 11,415,356
Shareholder distributions (7,216,990) (7,216,990)
Change in unrealized gain
on marketable securities (1,436,369) (1,436,369)
------------ ------------ ------------ ------------ ------------
Balance December 31, 1997 $ 100,000 $ 1,423,750 $ 13,584,386 $ -- $ 15,108,136
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements
F-5
<PAGE> 90
ROCK FINANCIAL CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ........................................................ $6,863,441 $3,130,738 $11,415,356
------------ -------------- --------------
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization ................................. 506,634 663,428 1,292,479
Provision for credit losses ................................... -- -- 300,000
Net gain on sale of mortgage servicing ........................ (5,728,411) -- --
Net gain on sales of marketable securities .................... (345,716) (991,219) (2,221,905)
Change in assets and liabilities:
Mortgage loans held for sale - originations ................ (821,916,358) (1,080,765,776) (1,203,722,723)
Mortgage loans held for sale - sales ....................... 774,638,605 1,069,751,958 1,167,388,304
Other assets ............................................... 40,942 (314,122) (625,625)
Drafts payable ............................................. (3,484,721) 7,513,046 6,978,509
Accounts payable ........................................... 304,475 1,215,113 1,256,564
Accrued expenses and other liabilities ..................... 1,048,546 1,357,558 1,293,858
Accounts payable, broker ................................... 3,354,526 (3,354,526) --
------------ -------------- --------------
Total adjustments ...................................... (51,581,478) (4,924,540) (28,060,539)
------------ -------------- --------------
Net cash used in operating activities .................. (44,718,037) (1,793,802) (16,645,183)
------------ -------------- --------------
Cash flows from investing activities:
Proceeds from sale of marketable securities ....................... 64,201,835 26,056,131 10,846,241
Purchase of marketable securities ................................. (71,564,768) (17,613,113) (4,106,842)
Net increase in real estate owned and loans held for investment ... -- -- (1,268,564)
Purchase of equipment ............................................. (407,975) (2,084,296) (5,621,702)
Proceeds from sale of mortgage servicing .......................... 5,755,610 -- --
Shareholder (advances) repayments ................................. (441,743) (1,978,492) 892,823
------------ -------------- --------------
Net cash provided by (used in) investing activities ........ (2,457,041) 4,380,230 741,956
------------ -------------- --------------
Cash flows from financing activities:
Net borrowings under warehouse line of credit ..................... 48,374,896 3,514,047 11,672,590
Net borrowings under reverse repurchase agreement ................. -- -- 18,161,423
Net (payments) borrowing under notes payable ...................... (445,616) -- 1,944,445
Shareholder distributions ......................................... (67,359) (3,498,567) (7,216,990)
------------ -------------- --------------
Net cash from financing activities ......................... 47,861,921 15,480 24,561,468
------------ -------------- --------------
Net increase in cash and cash equivalents ............................. 686,843 2,601,908 8,658,241
Cash and cash equivalents, beginning of year .......................... -- 686,843 3,288,751
------------ -------------- --------------
Cash and cash equivalents, end of year ................................ $686,843 $3,288,751 $11,946,992
============ ============== ==============
Supplemental disclosure of cash flow information:
Cash paid during the year for interest ............................ $3,078,220 $3,915,704 $4,994,752
============ ============== ==============
Transfers of loans from held for sale to held for investment ...... $ -- $ -- $1,095,293
============ ============== ==============
Transfers of loans from held for investment to real estate
owned ......................................................... $ -- $ -- $173,271
============ ============== ==============
Write-down of marketable securities for other than
temporary impairment .......................................... $846,500 $ -- $ --
============ ============== ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE> 91
ROCK FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
Rock Financial Corporation (the "Corporation") is a specialty marketing
company of debt consolidation and home financing products secured
primarily by first or second mortgages on one- to four-family,
owner-occupied residences. The Corporation markets its loans directly to
consumers. The Corporation's current loan products include "Sub-Prime Home
Equity Loans" and "High LTV Loans" (together, "Non-Prime Loans") and
"Conventional Loans."
The Corporation currently operates through three major divisions. Rock
originates Sub-Prime Home Equity Loans to individuals with impaired credit
characteristics, high levels of debt service to income, unfavorable past
credit experience, limited credit history, limited employment history or
unverifiable income through its Fresh Start(TM) division. Rock originates
High LTV Loans to individuals with good credit histories but little or no
equity in their homes through its Specialty Lending division. Rock also
originates Conventional Loans through its Conventional Mortgage Lending
division. In 1997, the Corporation originated its production from 19 branch
locations operating in Michigan, Illinois and Ohio.
a. CASH EQUIVALENTS
The Corporation considers all highly liquid investments purchased with
a maturity of three months or less to be cash equivalents.
Included in cash was $222,752 and $257,730 of restricted cash for
mortgagor escrows at December 31, 1996 and 1997, respectively.
b. MARKETABLE SECURITIES
The Corporation accounts for marketable securities in accordance with
Statement of Financial Accounting Standards No. 115, Accounting for
Certain Debt and Equity Securities ("SFAS 115"). All marketable
securities are classified as available-for-sale and are carried at
market value. Unrealized gains and losses are included as a separate
component of shareholders' equity. Dividends on equity securities are
recognized on the ex-dividend date.
The Corporation continuously evaluates its marketable investment
securities for other-than-temporary or permanent impairment, which is
defined as being greater than 20 percent impaired for greater
than six consecutive months. When an investment security is determined
to have other-than-temporary or permanent impairment, the loss is
recognized through a charge against income.
c. MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale are valued at the lower of cost or market,
determined on an aggregate basis, based upon commitments from investors
to purchase such loans or upon prevailing market rates. Loans
determined to be non-salable are transferred to loans held for
investment at their estimated fair value at the date of transfer.
F-7
<PAGE> 92
ROCK FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
d. MORTGAGE LOANS HELD FOR INVESTMENT
Mortgage loans held for investment are stated at their principal amount
outstanding, net of an allowance for loan losses. Interest on loans is
accrued daily based on the outstanding principal balance. Loans are
generally placed on a non-accrual basis when principal or interest is
past due 90 days or more and when, in the opinion of management, full
collection of principal and interest is unlikely. At the time a loans
is placed on non-accrual status, interest previously accrued but not
yet collected is charged against current income. Income on such loans
is then recognized only to the extent that cash is received and where
future collection of principal is probable. Loan origination fees and
certain direct loan origination costs are deferred and recognized over
the lives of the related loans as an adjustment of the yield.
e. ALLOWANCE FOR LOSSES
The allowance for losses is based on management's periodic evaluation
of the potential loss exposure associated with the portfolio of
mortgage loans held for investment and costs to be incurred due to
the repurchase of mortgage loans or indemnification of losses based on
alleged violations of representations and warranties customary to the
mortgage banking industry, and reflects an amount that, in management's
opinion, is adequate to absorb such estimated losses. In evaluating
the potential exposure, management takes into consideration numerous
factors, including current economic conditions, prior loss experience,
the provisions of loan sale agreements, the composition of the
portfolio of mortgage loans held for investment, and management's
evaluation of the collectibility of specific mortgage loans held for
investment.
f. REAL ESTATE OWNED
Real estate owned is recorded at the lower of the cost of acquisition
or the asset's fair value, net of disposal cost at the time of
foreclosure, which becomes the property's new basis. Any write-downs
at date of acquisition are charged to the allowance for losses.
Expenses incurred in maintaining assets and subsequent write-downs to
reflect declines in value are charged to general and administrative
expenses.
g. INVESTOR RESERVES
Investor reserves represent reserves for the estimated repayment, where
applicable, of a portion of the premium received from investors on
sales of certain sub-prime loans if such loans are repaid in their
entirety within a specified time period after the sale of the loans
(generally one year). Provisions for premium recapture are determined
based on management's estimates of potential repayments, considering
factors such as historical premium recapture experience, projected
prepayments on loans sales, existence of prepayment penalties to be
paid by the borrower, and general economic conditions. Actual premium
recapture experience may vary from management's estimates.
F-8
<PAGE> 93
ROCK FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
h. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated
depreciation. Depreciation of property and equipment is generally
computed on a straight line basis over the estimated useful lives of
the assets. Upon retirement or sale, the cost of assets disposed of
and the related accumulated depreciation are removed from the accounts;
any resulting gain or loss is credited or charged to operations. Costs
of maintenance and repairs are charged to expense when incurred.
i. REVENUE RECOGNITION
Loan origination revenue and associated incremental direct costs on
loans held for sale are deferred until the related loan is sold.
Gains and losses on loans are recognized at the time of sale and are
based upon the difference between the selling price and the carrying
value of the related loans sold. Loan servicing revenue is earned as
the related principal is collected. Interest on mortgage loans held for
sale and mortgage loans held for investment is credited to income as
earned, and interest expense on related borrowings is expensed as
incurred.
The Corporation adopted the provisions of Statement of Financial
Accounting Standards No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, as of
January 1, 1997. The impact of the adoption of this standard was not
material to the Corporation's financial position or results of
operations.
j. DERIVATIVE FINANCIAL INSTRUMENTS
The Corporation utilizes derivative financial instruments as part of an
overall interest rate risk and mortgage pipeline management strategy.
Derivative financial instruments utilized by the Corporation include
treasury-based options. The Corporation is an end-user of derivative
financial instruments and does not conduct trading activities for
derivatives. These derivative financial instruments involve, to varying
degrees, elements of credit and market risk which are not recognized on
the balance sheet.
Credit risk is defined as the possibility that a loss may occur from
the failure of another party to perform in accordance with the terms of
the contract which exceeds the value of existing collateral, if any.
Market risk is the possibility that future changes in market conditions
may make the derivative financial instrument less valuable. The
Corporation evaluates the risks associated with derivatives in much the
same way as the risks with on-balance sheet financial instruments. The
derivative's risk of credit loss is generally a small fraction of the
notional value of the instrument and is represented by the fair value
of the derivative instrument. The Corporation attempts to limit its
credit risk by dealing with creditworthy counterparties and obtaining
collateral where appropriate.
The Corporation uses treasury-based options in hedging its interest
rate risk exposure. Ultilization of treasury-based options involves
some degree of basis risk. Basis risk is defined
F-9
<PAGE> 94
ROCK FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
as the risk that the hedge instrument's price does not move as expected
relative to the increase or decrease in the market price of the hedged
financial instrument. The Corporation calculates an expected hedge
ratio to attempt to mitigate a portion of this risk.
The Corporation accounts for its options utilizing "Split Accounting."
The option's value is categorized into "intrinsic" and "time value"
components. The intrinsic value is the amount that the option is "in
the money." The time value is the amount by which its price exceeds
its intrinsic value. Split Accounting results in accounting for time
value and intrinsic value separately. The time value is amortized over
the option's exercise period. The intrinsic value is recognized as a
component of the gain or loss on settlement of the option.
k. INCOME TAXES
Effective March 1, 1992, the Corporation elected to have its income
taxed directly to the individual shareholders, in accordance with the
S corporation provisions of the Internal Revenue Code. Accordingly, no
provision for income taxes has been reflected in the financial
statements (see note 18 for a description of pro forma basic and
diluted earnings per share).
l. ADVERTISING COSTS
Advertising costs are incurred for non-direct response advertising.
Accordingly, the costs of producing the advertising are expensed as
incurred, while the costs of communicating the advertising are expensed
when the advertising space or airtime is first used.
m. EARNINGS PER SHARE
Basic earnings per share is computed based on the weighted average
number of common shares outstanding during the year. Diluted earnings
per share is computed based on the weighted average number of common
shares and common share equivalents during the year (see note 18 for a
description of pro forma basic and diluted earnings per share).
n. MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
o. RECLASSIFICATIONS
Certain amounts from the prior year have been reclassified to
conform with current year presentation.
F-10
<PAGE> 95
ROCK FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
2. MARKETABLE SECURITIES:
The marketable securities held by the Corporation at December 31, 1996,
which were all equity securities, had an aggregate cost of $4,517,491 and
an aggregate fair value of $5,953,860, resulting in a net unrealized gain
of $1,436,369, including gross unrealized gains of $1,704,872 and gross
unrealized losses of $268,503.
Realized gains and losses on marketable securities are computed based on
the specific identification method. Realized gains of $4,633,620,
$4,511,466, and $3,156,783 and realized losses of $4,287,904, $3,520,247
and $646,895 on the sale of marketable securities for the years ended
December 31, 1995, 1996 and 1997, respectively, are included in the
determination of net income. Included in realized losses for the year
ended December 31, 1995, was a write-down of approximately $846,500 on a
marketable security for other than temporary impairment.
3. MORTGAGE LOANS HELD FOR SALE AND HELD FOR INVESTMENT
The following summarizes mortgage loans held for sale by type at
December 31, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Conventional prime loans held for sale . . . . . . . . . . . . . . $68,972,367 $74,049,209
Sub-prime loans held for sale . . . . . . . . . . . . . . . . . . . 15,459,184 38,372,558
High LTV loans held for sale . . . . . . . . . . . . . . . . . . . 323,400 9,194,343
----------- ------------
84,754,951 121,616,110
Net deferred loan origination costs (fees) . . . . . . . . . . . . 254,444 (272,296)
----------- ------------
Mortgage loans held for sale . . . . . . . . . . . . . . . . . $85,009,395 $121,343,814
=========== ============
</TABLE>
Included in mortgage loans held for investment at December 31, 1997 was an
allowance for credit losses of $270,000, which was established in 1997
through a provision of $300,000 offset by charge-offs of $30,000.
As of December 31, 1996, one loan classified as held for sale with an
outstanding balance of approximately $45,000 was greater than 90 days past
due. As of December 31, 1997, there were no loans held for sale that were
greater than 90 days past due. As of December 31, 1997, there were
approximately $72,000 of loans held for investment that were greater than 90
days past due (none in 1996), $25,000 of which was classified as nonaccrual
at December 31, 1997.
4. PROPERTY AND EQUIPMENT:
Property and equipment are depreciated over lives ranging from five to seven
years for office furniture, equipment and leasehold improvements. Property
and equipment consist of the following:
F-11
<PAGE> 96
ROCK FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
<TABLE>
<CAPTION>
December 31, December 31,
1996 1997
------------ ------------
<S> <C> <C>
Office furniture and equipment . . . . . . . . . . . . . . . . . . $ 4,133,940 $ 9,779,846
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . 195,252 600,958
Projects in process . . . . . . . . . . . . . . . . . . . . . . . . 489,600 59,595
----------- -----------
Total cost . . . . . . . . . . . . . . . . . . . . . . . . . . 4,818,792 10,440,399
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . 2,137,478 3,429,862
----------- -----------
Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,681,314 $ 7,010,537
=========== ===========
</TABLE>
5. BORROWINGS
Advances under the Corporation's warehouse line of credit are based on a
formula computation, with interest due monthly, are due on demand, and are
collateralized by residential first and second mortgages. Advances may be
drawn for working capital and sub-prime, high LTV, and conventional prime
mortgage loans. Interest rates are variable and are based on the federal
funds rate and prime rate, depending on the type of advance. Interest rates
ranged from 7.16 percent to 8.75 percent at December 31, 1996 and 6.69
percent to 7.69 percent at December 31, 1997, with weighted average interest
rates of 7.29 percent and 6.94 percent at December 31, 1996 and 1997,
respectively.
The maximum outstanding balance permitted under the line was $90,000,000
(with certain sublimits for working capital, non-conforming and second
mortgage loans) at December 31, 1996 and 1997. The Corporation is required
to maintain a minimum tangible net worth and other financial covenants, as
defined in the agreement. The Corporation was in compliance with the
requirements as of December 31, 1996 and 1997.
The Corporation's reverse repurchase agreement entered into in 1997
provides that the lender will purchase from the Corporation, subject to the
Corporation's agreement to repurchase on a daily basis, up to $100 million
of conventional prime and sub-prime mortgage loans at par. Loans subject
to purchase are fixed and adjustable rate, fully-amortizing, first or
junior lien residential mortgage loans and home equity loans that comply
with the Corporation's origination guidelines and conform to whole and bulk
loan sale requirements. This agreement is not a committed facility and the
lender may elect to discontinue the repurchase agreement at any time. The
term of any financing under the repurchase agreement matures and may be
renewed on a daily basis. In any event, the arrangement terminates on
March 1998. Interest rates are variable and are based on the London
Interbank Offered Rate, depending on the type of advance. The interest
rate in effect at December 31, 1997 was 8.25 percent, while the weighted
average interest rate during 1997 was 6.88%.
In February 1997, the Corporation borrowed $2,000,000 for the purchase of
computer equipment and software. The note matures in three years, payments
are based on equal monthly installments plus interest at 75 basis points
over prime, and the loan is collateralized by the Corporation's equipment.
The interest rate in effect at December 31, 1997 was 9.25 percent.
F-12
<PAGE> 97
ROCK FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
Drafts payable represent funds advanced for mortgages closed which have not
yet been drawn against the warehouse line of credit.
6. INVESTOR RESERVES
The following presents the activity in the investor reserves, which are
included in accrued expenses and other liabilities, for the periods
indicated:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Beginning balance . . . . . . . . . . . . . . . $ 25,249 $ 226,809 $ 389,162
Provision for premium recapture . . . . . . . . 204,935 317,262 602,632
Premium recapture paid . . . . . . . . . . . . (3,375) (154,909) (297,954)
---------- ---------- ----------
Ending balance . . . . . . . . . . . . . . . . $ 226,809 $ 389,162 $ 693,840
========== ========== ==========
</TABLE>
7. RELATED PARTY TRANSACTIONS
During the years ended December 31, 1996 and 1997, the Corporation made
short-term advances to certain shareholders that bear interest at 3 percent.
The highest amounts outstanding during the period to any shareholder totaled
approximately $2,700,000 and $6,100,000 in 1996 and 1997, respectively.
Interest income relating to such advances totaled approximately $62,000,
$98,000 and $148,000 for the years ended December 31, 1995, 1996 and 1997,
respectively.
In addition, the Corporation made short-term loans to certain affiliates
during 1996 and 1997. The maximum amounts outstanding during 1996 and 1997
was $50,000 and $400,000, respectively. No balance was remaining
outstanding at either December 31, 1996 or 1997. Interest income relating
to such loans totaled approximately $13,000, $300, and $10,000 for the years
ended December 31, 1995, 1996, and 1997, respectively.
8. OPERATING LEASES
The following is a schedule of future minimum lease payments (for leases
with initial or remaining terms in excess of one year) as of December 31,
1997:
<TABLE>
<S> <C>
1998 $2,500,000
1999 1,700,000
2000 1,200,000
2001 600,000
2002 and thereafter 300,000
----------
Total $6,300,000
Less sublease payments to be received 100,000
----------
Net future minimum lease payments $6,200,000
==========
</TABLE>
F-13
<PAGE> 98
ROCK FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
Total rental expense incurred during the years ended December 31, 1995,
1996 and 1997, was $980,000, $990,000 and $1,580,000, respectively.
9. EMPLOYEE BENEFIT PLAN
The Corporation maintains a defined contribution 401(k) plan covering
substantially all full-time employees. Employees can make elective
contributions to the plan. The plan requires the Corporation to contribute
20 percent of employee contributions to the plan up to a maximum of one
percent of the employee's gross pay. The Corporation's contributions to
the plan for the years ended December 31, 1995, 1996 and 1997 amounted to
$42,000, $43,000 and $83,000, respectively.
10. STOCK PURCHASE AGREEMENT
The Corporation is a party to a Shareholders Agreement with its three
shareholders. The terms of the agreement restrict the sale and pledging of
the shareholders' stock in the Corporation. The agreement also gives the
Corporation the option to purchase the stock of two of the shareholders
upon death. The purchase price is based upon an appraisal of the
Corporation and is partially insured by life insurance policies carried on
the lives of the shareholders (see note 17).
11. STOCK OPTION PLAN AND EMPLOYMENT AGREEMENTS
On December 27, 1996, the Corporation approved a stock option plan in which
3,578,617 common shares have been reserved for issuance (see note 17).
Under the plan, the exercise price of any incentive stock option will not
be less than the fair market value of the common shares on the date of
grant. The exercise price of any nonqualified option and the dates on
which the options are first exercisable are determined by the Stock Option
Committee or the Board of Directors. The term of any option may not exceed
ten years from the date of grant. On December 28, 1996, 1,540,684
immediately exercisable options were granted at $4.68 per share. On
January 31, 1997 (as adjusted in March 1997), 780,000 options were granted,
vesting in one-fifth cumulative annual installments beginning December 31,
1997, at $4.68 per share. On April 30, 1997, 90,000 options were granted,
vesting in one-fifth cumulative annual installments beginning December 31,
1997, at $4.68 per share. On July 30, 1997, 196,500 options were granted,
vesting in one-fifth cumulative annual installments beginning December 31,
1998, at $7.00 per share. At December 31, 1997, 1,086,433 common shares
were reserved for issuance under the plan.
F-14
<PAGE> 99
ROCK FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
Option activity since the plan was adopted in 1996 was as follows:
<TABLE>
<CAPTION>
Number Weighted Average
of Shares Exercise Price
-------- --------- ----------------------
<S> <C> <C>
Options outstanding at December 31, 1995 . . . . . -- N/A
Activity during 1996:
Granted . . . . . . . . . . . . . . . . . . . . 1,540,684 $4.68
Expired . . . . . . . . . . . . . . . . . . . . -- N/A
---------
Options outstanding at December 31, 1996 (all
exercisable) . . . . . . . . . . . . . . . . . 1,540,684 $4.68
Activity during 1997:
Granted . . . . . . . . . . . . . . . . . . . . 1,066,500 $5.11
Expired . . . . . . . . . . . . . . . . . . . . -- --
Forfeited . . . . . . . . . . . . . . . . . . . 115,000 $4.68
---------
Options outstanding at December 31, 1997 (including
exercisable options for 1,691,684 shares) . . . 2,492,184 $4.86
========= =====
</TABLE>
In accordance with SFAS No. 123, Accounting for Stock-Based Compensation, the
Corporation applied the intrinsic value method of accounting, as described in
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, to its stock-based compensation. Accordingly, no compensation
expense has been charged against income for stock option grants. Had
compensation expense been determined based on the fair value at the 1996 and
1997 grant dates, consistent with the fair value methodology of SFAS No. 123,
the Corporation's net income (loss) would have been ($369,262) and $11,065,356
in 1996 and 1997, respectively.
The weighted average fair value of options granted in 1996 and 1997 totalled
$2.30 and $2.50 per share, respectively. The fair value of each option grant
is estimated on the date of grant using the Black-Scholes option pricing model.
The weighted average assumptions used in valuing the option grants for the
years ended December 31, 1996 and 1997, respectively, were expected life, five
years for both years; interest rate 5.40% and 5.30%; and volatility (the
measure by which the stock price has fluctuated or will be expected to
fluctuate during the period), 66% for both years.
At December 31, 1997, 2,492,184 of the outstanding options have exercise prices
that range between $4.68 and $7.00, with a weighted average exercise price of
$4.86. Of these options, 1,691,684 options are exercisable, with a weighted
average exercise price of $4.68 and a weighted average contractual maturity of
8.8 years. The remaining 800,500 outstanding options have exercise prices that
range between $4.68 and $7.00, with a weighted average exercise price of $5.25,
and a weighted average contractual maturity of 8.8 years.
F-15
<PAGE> 100
ROCK FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
Certain option holders who are officers of the Corporation entered into
employment agreements which stipulate a "Distribution Bonus" is entitled to
be paid upon certain conditions. The agreements require the Corporation to
pay the "Distribution Bonus" at the same time as shareholders receive
distributions in respect of their common shares, except for "Excluded
Payments", as long as the officers are employed by the Corporation. The
amount of the "Distribution Bonus" is determined by the number of common
shares of the Corporation that these officers have the right to acquire
multiplied by the per share distributions paid to shareholders. "Excluded
Payments" mean all the following (1) any distribution that is not cash or
property, (2) any distribution of securities issued by the Corporation, (3)
salaries, bonuses or other compensation that one or more shareholders may
receive as consideration for services rendered, (4) distributions to
shareholders to cover their income tax liabilities for the S corporation
status, and (5) distributions of up to $5 million paid to shareholders by
September 1, 1997.
No distributions were made to shareholders in 1995, 1996, or 1997 that
resulted in the required payment of the Distribution Bonus. The
Corporation's shareholders do not intend to receive distributions in the
normal course of business in the foreseeable future in excess of the
Excluded Payments. Therefore, the Distribution Bonuses, which would have
been approximately $70,000 in 1995, $600,000 in 1996, and $1.1 million in
1997, have not been accrued for or recognized as compensation expense in
the accompanying financial statements. Such accrual and corresponding
compensation expense will be recognized when such shareholder distributions
are declared.
In February 1998, the option holders who were entitled to these
Distribution Bonuses entered into an agreement whereby their rights to the
Distribution Bonuses will be eliminated if the Offering (see note 17) is
consummated (if the Offering is not consummated, the prior provisions with
respect to the Distribution Bonuses will be reinstated). These rights were
replaced with the rights to exercise existing options representing
approximately 330,000 of the Corporation's common shares and simultaneously
sell the shares as part of a proposed initial public offering of the
Corporation's stock. In addition, the option holders were granted
additional options for 450,000 common shares at an exercise price equal to
the initial public offering price. As the existing options expected to be
exercised were granted at the fair value of the stock at the date of grant,
and the additional options for 450,000 common shares expected to be granted
are being granted at the fair value at the date of grant, the Corporation
has recognized no compensation expense associated with such options.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures About Fair Value of Financial Instruments,
requires disclosures of the fair value of certain financial instruments for
which it is practical to estimate the value. In cases where quoted market
prices are not available, fair values are based on estimates using present
value or other valuation techniques.
The following tables present the carrying amounts and fair value of
financial instruments at December 31, 1996 and 1997:
F-16
<PAGE> 101
ROCK FINANCIAL CORPORATION
NOTES TO FIANNCIAL STATEMENTS, CONTINUED
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1997
------------------------------- -----------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------ ------------ ------------- --------------
<S> <C> <C> <C> <C>
Cash and cash equivalents . $ 3,288,751 $ 3,290,000 $ 11,949,992 $ 11,950,000
Marketable securities . . . 5,956,471 5,960,000 -- --
Mortgage loans held for sale-
Conventional prime . . 69,343,512 70,300,000 74,475,694 75,500,000
Sub-prime home equity 15,277,512 16,000,000 37,896,640 39,900,000
High LTV second mortgages 388,371 400,000 8,971,480 9,700,000
Mortgage loans held for
investment . . . . . . -- -- 810,293 900,000
Warehouse line of credit . 67,621,266 67,600,000 79,293,856 79,300,000
Reverse repurchase agreement -- -- 18,161,423 18,200,000
Notes payable . . . . . . . -- -- 1,944,445 1,900,000
Calls on U.S. Treasury
securities . . . . . . -- -- 17,000 14,000
</TABLE>
Fair value methods and assumptions for the Corporation's financial instruments
are as follows:
Cash and Cash Equivalents
The carrying amounts reported in the balance sheet for cash and cash
equivalents reasonably approximate those assets' fair values.
Marketable Securities Available for Sale
Fair values for marketable securities available for sale are based on quoted
market prices.
Loans Held for Sale and Loans Held for Investment
For mortgage loans held for sale and investment, fair value is estimated using
quoted market prices for similar loans, adjusted for differences in loan
characteristics, including credit quality. The carrying amount of accrued
interest receivable approximates the assets' fair value.
Borrowings
For borrowings, fair value is estimated based on the discounted value of
contractual cash flows using interest rates currently in effect for similar
maturities and collateral requirements. As all of the borrowings have variable
interest rates that approximate current market interest rates for similar types
of liens of credit and are due upon demand, the carrying amount of these
borrowings approximates their estimated fair values.
F-17
<PAGE> 102
ROCK FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
Off-Balance-Sheet Instruments
The fair value of the calls on U.S. Treasury securities are based on
quoted market prices for similar instruments.
The fair value of commitments to extend credit is estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
customers. For fixed-rate loan commitments, fair value also considers the
difference between current levels of interest rates and the committed
rates. The fair value of commitments to extend credit approximated the book
values at both December 31, 1996 and 1997.
The Corporation had mandatory forward sales commitments for future delivery
of FNMA and Freddie Mac securities of $82,535,000 as of December 31, 1997.
The Corporation's exposure to credit loss in the event of non-performance
by other parties to the mandatory sales commitments represents the
difference between the contractual amount and the fair value of those
agreements based on quoted market prices. The fair value of those
agreements approximated the contractual amount as of December 31, 1997.
13. LOAN SERVICING PORTFOLIO
In April 1995, the Corporation sold its entire remaining loan servicing
portfolio. As a result of the sale, the Corporation recognized a gain of
$5,728,411, net of the related capitalized purchase mortgage servicing
rights.
14. STOCK SPLIT
On January 8, 1997, the Corporation effected a stock split of the
Corporation's common shares on the basis of 1,118.31805 common shares for
each common share formerly issued and outstanding. The financial
statements and related disclosures have been retroactively adjusted to
reflect this split.
15. LOAN FEES AND GAINS AND LOSSES ON THE SALE OF MORTGAGES
Loan fees and gains and losses on the sale of mortgages for the years ended
December 31, 1995, 1996 and 1997 were comprised of the following
components:
<TABLE>
<CAPTION>
1995 1996 1997
------------- -------------- -------------
<S> <C> <C> <C>
Gain on loan sales . . . . . . . . . . . . . . $ 17,016,142 $ 25,613,600 $ 37,728,135
Net loan origination fees . . . . . . . . . . . 977,072 2,663,099 9,958,806
Provision for premium recapture . . . . . . . . (204,935) (317,262) (602,632)
------------- -------------- -------------
$ 17,788,279 $ 27,959,437 $ 47,084,309
============= ============== =============
</TABLE>
F-18
<PAGE> 103
ROCK FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
16. COMMITMENTS AND CONTINGENCIES
The Corporation is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments are loan commitments to extend
credit and treasury-based options. These instruments involve, to varying
degrees, elements of credit risk in excess of the amounts recognized in the
balance sheets.
The Corporation's exposure to credit loss in the event of the
non-performance by the other party to the financial instruments for loan
commitments to extend credit is represented by the contractual amounts of
these instruments, while the risk of credit loss associated with the
Corporation's treasury-based options is a small fraction of the notional
amount of the instrument and is represented by the fair value of such
instruments. The Corporation uses the same credit policies in making
credit commitments as it does for on-balance-sheet loans.
Financial instruments for loan commitments to extend credit whose contract
amounts represent credit risk at December 31, 1996 and 1997, are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1997
-------------------------------- -------------------------------
FIXED-RATE VARIABLE-RATE FIXED-RATE VARIABLE-RATE
---------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Conventional prime loans . $ 59,600,000 $ 43,600,000 $ 58,500,000 $ 17,600,000
Sub-prime loans . . . . . . 300,000 500,000 4,600,000 3,600,000
High LTV loans . . . . . . -- -- 12,300,000 --
------------ ------------ ------------ ------------
$ 59,900,000 $ 44,100,000 $ 75,400,000 $ 21,200,000
============ ============ ============ ============
</TABLE>
Loan commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. The Corporation evaluates each
customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained is based on management's credit evaluation of the
customer. Market risk may arise if interest rates move adversely subsequent
to the extension of loan commitments.
The Corporation held calls on U.S. Treasury securities in the amount of $2
million as of December 31, 1997, to mitigate its interest rate risk on its
conventional mortgage loan pipeline.
The Corporation is subject to various claims and legal proceedings arising
out of the normal course of business, none of which, in the opinion of
management, is expected to have a material effect on the Corporation's
financial position.
17. SUBSEQUENT EVENTS
The Corporation is contemplating an initial public offering of common shares
(the "Offering"). In connection with the proposed Offering, the
Corporation's Board of Directors approved an amendment and restatement of
the Corporation's Restated Articles of Incorporation to (i) increase the
authorized
F-19
<PAGE> 104
ROCK FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
common shares from 20,000,000 to 50,000,000, and (ii) reorganize the
Board of Directors into three classes with staggered terms ending on the
first, second or third succeeding Annual Meeting of Shareholders of
the Corporation and providing that directors may be removed only for
cause. The Corporation's shareholders approved such amendment and
restatement on February 18, 1998. In connection with the proposed
Offering, the Corporation has capitalized approximately $55,000 of costs
directly associated with the Offering.
Also on February 18, 1998, the Corporation's Board of Directors (i)
declared a dividend to the Corporation's then existing shareholders,
subject to, and effective immediately before, the closing of the Offering
and payable out of the proceeds of the Offering, equal to the entire
amount of the Corporation's income taxed or taxable to the existing
shareholders while the Corporation was an S corporation, but not yet
distributed to them (the "Shareholder Distribution Amount"), and (ii)
approved a Tax Indemnification Agreement among the Corporation and its
then existing shareholders. The Tax Indemnification Agreement is intended
to ensure that, if there is any reallocation of taxable income or
deductions between the period during which the Corporation was
taxed as an S corporation and the period after the closing of the
Offering during which it is taxed as a C corporation, income taxes are
borne either by the Corporation or the existing shareholders to the
extent that such parties received the related income.
In addition, on February 18, 1998, the Corporation's Board of Directors
approved a Shareholders Agreement among the Corporation and its existing
shareholders. The terms of the agreement provide that two of the
minority shareholders will vote their common shares in the manner
directed by the majority shareholder.
In addition, on February 18, 1998, the Corporation's Board of Directors
and shareholders amended and restated the Corporation's 1996 Stock Option
Plan to increase the number of shares reserved for issuance under the
plan from 3,578,617 Common Shares to 4,500,000 Common Shares.
18. UNAUDITED PRO FORMA FINANCIAL INFORMATION
The pro forma financial information has been presented to show what the
significant effects on the historical financial position might have been
had the distribution of the Shareholder Distribution Amount and the
termination of the Corporation's S corporation status occurred as of
December 31, 1997, in contemplation of the proposed Offering
described in note 17 and to show what the significant effects on the
historical results of operations might have been had the Corporation not
been treated as an S corporation for income tax purposes as of the
beginning of the earliest year presented.
Pro Forma Balance Sheet - The Corporation's December 31, 1997 balance
sheet would be adjusted for the following pro forma adjustments: (1) the
distribution from retained earnings of the Shareholder Distribution
Amount of approximately $18 million, and (2) the establishment of a
deferred tax asset of approximately $1.7 million in connection with the
proposed termination of the Corporation's S corporation status as of
December 31, 1997, with an offsetting increase in retained earnings. The
principal components of the Corporation's pro forma deferred tax asset
related to the temporary
F-20
<PAGE> 105
ROCK FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
differences between tax and book accounting for recognition of gains on
sales of mortgage loans. The amount of the deferred tax asset to be
recorded will be dependent upon the extent of such temporary
differences at the date of revocation of the Corporation's S
corporation status. In addition, one of the Corporation's shareholders
expects to repay the entire outstanding balance of shareholder advances
($1.6 million as of December 31, 1997) with his share of the
Shareholder Distribution Amount, and the Corporation expects to use
that cash to repay a portion of the amounts outstanding under its
warehouse line of credit.
Pro Forma Net Income - The following presentation of pro forma net
income represents the historical results of operations adjusted to
recognize federal and state income taxes as if the Corporation had been
taxed as a C corporation rather than an S corporation for all of the
periods presented, using a pro forma combined federal and state income
tax rate of approximately 38.5%.
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Historical net income . . . . . . . . . . . . . $ 6,863,441 $ 3,130,738 $ 11,415,356
------------- -------------- -------------
Unaudited pro forma information:
Provision for pro forma income taxes . . . 2,642,425 1,205,334 4,394,912
------------- -------------- --------------
Pro forma net income . . . . . . . . . . $ 4,221,016 $ 1,925,404 $ 7,020,444
============= ============== ==============
Pro forma earnings per share:
Basic . . . . . . . . . . . . . . . . . $ 0.53
=============
Diluted . . . . . . . . . . . . . . . . $ 0.49
=============
Pro forma weighted average number of
shares outstanding
Basic . . . . . . . . . . . . . . . . . 13,330,000
==========
Diluted . . . . . . . . . . . . . . . . 14,434,692
==========
</TABLE>
Pro forma basic earnings per share has been computed by dividing
pro forma net income by the 13,330,000 average shares assumed to be
outstanding including the 3,000,000 shares to be sold by the Corporation
in the proposed Offering and the 330,000 shares to be sold by certain
existing shareholders in the proposed Offering (after exercising options
to purchase those shares from the Corporation). Pro forma diluted
earnings per share has been computed by dividing pro forma net income
by the 14,434,692 average shares assumed to be outstanding, including
the 3,000,000 shares to be sold by the Corporation in the proposed
Offering and the 330,000 shares to be sold by certain existing
shareholders in the proposed Offering (after exercising options to
purchase those shares from the Corporation) as well as the number of
common stock equivalent shares assumed to be outstanding upon exercise
of the Corporation's stock options existing as of December 31, 1997,
using the treasury stock method and an assumed initial public offering
price of $10.00 per share.
F-21
<PAGE> 106
============================================================================
UNTIL _______, 1998 (25 DAYS AFTER THE DATE OF
THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE
REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------------
TABLE OF CONTENTS
PAGE
----
PROSPECTUS SUMMARY . . . . . . . . . . . . . . . . . . 3
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . 10
TERMINATION OF S CORPORATION STATUS . . . . . . . . . . 22
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . 23
CAPITALIZATION . . . . . . . . . . . . . . . . . . . . 24
DIVIDEND POLICY . . . . . . . . . . . . . . . . . . . . 25
DILUTION . . . . . . . . . . . . . . . . . . . . . . . 26
SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS . . . . . . . . . . . . . . . . . . 29
BUSINESS . . . . . . . . . . . . . . . . . . . . . . . 44
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . 63
CERTAIN TRANSACTIONS . . . . . . . . . . . . . . . . . 73
PRINCIPAL AND SELLING
SHAREHOLDERS . . . . . . . . . . . . . . . . . 74
DESCRIPTION OF CAPITAL STOCK . . . . . . . . . . . . . 76
SHARES ELIGIBLE FOR FUTURE
SALE . . . . . . . . . . . . . . . . . . . . . 79
UNDERWRITING . . . . . . . . . . . . . . . . . . . . . 81
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . 83
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . 83
CHANGE IN ACCOUNTANTS . . . . . . . . . . . . . . . . . 83
ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . 83
INDEX TO FINANCIAL STATEMENTS . . . . . . . . . . . . . F-1
--------------------------------
NO DEALER, SALES REPRESENTATIVE, OR ANY OTHER
PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO
MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY ROCK, THE
SELLING SHAREHOLDERS OR ANY OF THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN
THE COMMON SHARES TO WHICH IT RELATES OR AN OFFER TO, OR A
SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH
AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR
THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
============================================================================
============================================================================
3,330,000
[LOGO]
ROCK
CORPORATION
COMMON SHARES
----------------------
PROSPECTUS
----------------------
BEAR, STEARNS & CO. INC.
_________, 1998
============================================================================
<PAGE> 107
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated amounts of expenses to be
borne by Rock in connection with the issuance and distribution of the
securities being registered (other than underwriting discounts and
commissions):
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee . . . $ 11,297
NASD Filing Fee . . . . . . . . . . . . . . . . . . . . . 4,330
Nasdaq Listing Fee . . . . . . . . . . . . . . . . . . . . 15,000
Printing and Engraving Expenses . . . . . . . . . . . . . 150,000
Accounting Fees and Expenses . . . . . . . . . . . . . . . 250,000
Legal Fees and Expenses . . . . . . . . . . . . . . . . . 225,000
Blue Sky Fees and Expenses . . . . . . . . . . . . . . . . 7,500
Transfer Agent's and Registrar's Fees and Expenses . . . . 10,000
Premium on Directors and Officers Insurance . . . . . . . 100,000
Miscellaneous Expenses . . . . . . . . . . . . . . . . . . 26,873
---------
Total . . . . . . . . . . . . . . . . . . . . . . . $ 800,000
=========
</TABLE>
All of these expenses, except the Securities and Exchange Commission
registration fee and the NASD filing fee, represent estimates only.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Sections 561-571 of the Michigan Business Corporation Act,
directors and officers of a Michigan corporation may be entitled to
indemnification by the corporation against judgments, expenses, fines and
amounts paid by the director or officer in settlement of claims brought against
them by third persons or by or in the right of the corporation if those
directors and officers acted in good faith and in a manner reasonably believed
to be in, or not opposed to, the best interests of the corporation or its
shareholders.
Rock is obligated under its bylaws to indemnify a present or former
director or officer of Rock and may indemnify any other person, to the fullest
extent now or hereafter permitted by law in connection with any actual or
threatened civil, criminal, administrative or investigative action, suit or
proceeding arising out of their past or future service to Rock or a subsidiary,
or to another organization at the request of Rock or a subsidiary. In
addition, the Articles of Incorporation of Rock limit certain personal
liabilities of Directors of Rock.
Reference is also made to Section 7 of the Underwriting Agreement (a
form of which is attached to this Registration Statement as Exhibit 1.1) with
respect to undertakings by the Underwriters to indemnify Rock, its directors
and officers and each person who controls Rock within the meaning of the
Securities Act of 1933, as amended (the "Securities Act"), against certain
civil liabilities, including certain liabilities under the Securities Act.
II-1
<PAGE> 108
Rock has obtained Directors' and Officers' liability insurance. The
policy provides for $5,000,000 in coverage including prior acts dating to
Rock's inception and liabilities under the Securities Act in connection with
this Offering.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following securities of Rock were sold by Rock during the past
three years without being registered under the Securities Act:
1. In December 1996, Rock granted options to purchase an
aggregate of 1,540,684 Common Shares at an exercise price of $4.68 a share to
three key employees of Rock. Options to purchase 330,000 of these Common
Shares are expected to be exercised on or before the closing of the Offering.
The options and the underlying Common Shares were not registered, but were
issued in reliance upon the exemption from registration contained in Section
4(2) of the Securities Act.
2. During 1997, Rock granted options to purchase an
aggregate of 1,066,500 Common Shares at exercise prices ranging from $4.68 to
$7.00, to an aggregate of 94 key employees of Rock. Such Common Shares and the
underlying options were not registered, but were issued in reliance upon the
exemption from registration contained in Rule 701 or Section 4(2) under the
Securities Act of 1933.
3. During 1998 and effective on the closing date of this
Offering, Rock granted options to purchase an aggregate of 450,000 Common
Shares at an exercise price equal to the initial public offering price set
forth on the cover page of this Prospectus to three key employees of Rock.
Such Common Shares and the underlying options were not registered, but were
issued in reliance upon the exemption from registration contained in Section
4(2) and Rule 701 under the Securities Act of 1933.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
See Exhibit Index immediately preceding the exhibits.
(b) FINANCIAL STATEMENT SCHEDULES
All schedules are either inapplicable or the information is included
in Rock's financial statements and, therefore, have been omitted.
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes to provide to the
Underwriters, at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Act and is,
II-2
<PAGE> 109
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part
of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under
the Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 110
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Bingham
Farms, State of Michigan, on February 25, 1998.
ROCK FINANCIAL CORPORATION
(Registrant)
By: /s/ Daniel Gilbert
------------------------------
DANIEL GILBERT
Its: Chairman of the Board
and Chief Executive
Officer
-----------------------------
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each of the undersigned
officers and directors of Rock Financial Corporation, a Michigan corporation
("Rock"), hereby constitutes and appoints Daniel Gilbert, Richard Chyette and
Frank E. Plenskofski, and each of them (with full power of substitution and
re-substitution), his or her true and lawful attorneys-in-fact and agents for
each of the undersigned and on his or her behalf and in his or her name, place
and stead, in any and all capacities, with full power and authority in such
attorneys-in-fact and agents and in any one or more of them, to sign, execute
and affix his seal thereto and file with the Securities and Exchange Commission
and any state securities regulatory board or commission the registration
statement on Form S-1 to be filed by Rock under the Securities Act of 1933, as
amended, which registration statement relates to the registration and sale of
Common Shares, par value $0.01 a share, by Rock, any and all amendments or
supplements to such registration statement, including any amendment or
supplement thereto changing the amount of securities for which registration is
being sought, any post-effective amendment, and any registration statement or
amendment to such registration statement for the same offering that is to be
effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933,
with all exhibits and any and all documents required to be filed with respect
thereto with any regulatory authority, including, without limitation, The
Nasdaq Stock Market, the National Association of Securities Dealers, Inc. and
any federal or state regulatory authority pertaining to such registration
statement; granting unto such attorneys-in-fact, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises in order to effectuate the same
as fully to all intents and purposes as he or she might or could do if
personally present, hereby ratifying and confirming all that such
attorneys-in-fact and agents, and each of them and any of their substitutes,
may lawfully do or cause to be done by virtue of this Power of Attorney.
-----------------------------
II-4
<PAGE> 111
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Daniel Gilbert Chairman of the Board, Chief Executive February 25, 1998
- -------------------------------- Officer and Director
DANIEL GILBERT (Principal Executive Officer)
/s/ Frank E. Plenskofski Chief Financial Officer February 25, 1998
- -------------------------------- (Principal Financial Officer and
FRANK E. PLENSKOFSKI Principal Accounting Officer)
/s/ Steven M. Stone Director February 25, 1998
- --------------------------------
STEVEN M. STONE
/s/ Gary L. Gilbert Director February 25, 1998
- --------------------------------
GARY L. GILBERT
</TABLE>
II-5
<PAGE> 112
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description
- ------- -----------
<S> <C>
1.1* Proposed form of Underwriting Agreement.
3(i) Form of Restated Articles of Incorporation of Rock Financial Corporation.
3(ii) Amended and Restated Bylaws of Rock Financial Corporation.
4.1* Specimen Common Share Certificate.
5.1* Opinion of Honigman Miller Schwartz and Cohn concerning the legality of the securities being
offered.
10.1 Amended and Restated Rock Financial Corporation 1996 Stock Option Plan.
10.2 Form of Stock Option Agreement granted under the 1996 Stock Option Plan.
10.3 Employment Agreement, dated as of June 27, 1994, as amended as of December 28, 1996 and as
of February 18, 1998, between Rock Financial Corporation and Steven M. Stone.
10.4 Stock Purchase Agreement, dated as of January 17, 1997, as amended February 26, 1997 and
April 1997, between Daniel Gilbert and Gary L. Gilbert.
10.5 Second Amended and Restated Mortgage Warehousing Agreement, dated as of November 13, 1997, as
amended January 30, 1998, among Rock Financial Corporation, the lenders named therein, and
Comerica Bank, as agent.
10.6 Master Repurchase Agreement and Custody Agreement, dated as of March 26, 1997, between Rock
Financial Corporation and Bear Stearns Home Equity Trust.
10.7 Form of Tax Indemnification Agreement among Rock Financial Corporation and the Existing
Shareholders.
10.8 Form of Shareholders Agreement among Rock Financial Corporation and its shareholders before
this Offering.
16.1 Letter, dated February 24th, 1998, from Coopers & Lybrand LLP to Rock Financial Corporation
and the Securities and Exchange Commission.
23.1 Consent of KPMG Peat Marwick LLP.
23.2* Consent of Honigman Miller Schwartz and Cohn (included in the opinion filed as Exhibit 5.1
to this registration statement).
24.1 Powers of Attorney (included after the signature of the Registrant contained on page II-4 of
this registration statement).
27.1 Financial data schedule.
</TABLE>
- ---------------------
*To be filed by amendment.
1
<PAGE> 1
C&S 510 (Rev. 8/96)
Exhibit 3(i)
MICHIGAN DEPARTMENT OF CONSUMER AND INDUSTRY SERVICES
CORPORATION, SECURITIES AND LAND DEVELOPMENT BUREAU
- --------------------------------------------------------------------------------
Date Received (FOR BUREAU USE ONLY)
- -----------------------------
- -----------------------------
Name
Robert J. Krueger
- ----------------------------------------------
Address Honigman Miller Schwartz and Cohn
2290 First National Building
- ---------------------------------------------- EFFECTIVE DATE:
City State Zip Code
Detroit, Michigan 48226-3583
- -----------------------------------------------------------------
DOCUMENT WILL BE RETURNED TO THE NAME AND ADDRESS YOU ENTER ABOVE
RESTATED ARTICLES OF INCORPORATION
FOR USE BY DOMESTIC PROFIT CORPORATIONS
(Please read information and instructions on the last page)
Pursuant to the provisions of Act 284, Public Acts of 1972, the undersigned
corporation executes the following Articles:
- --------------------------------------------------------------------------------
1. The present name of the corporation is:
Rock Financial Corporation
----------------------------------------------------------------------------
2. The identification number assigned by the Bureau is: 242-863
3. All former names of the corporation are:
Rock Mortgage Corporation
4. The date of filing the original Articles of Incorporation was: June 21, 1985
---------------
- --------------------------------------------------------------------------------
The following Restated Articles of Incorporation supersede the Articles of
Incorporation as amended and shall be the Articles of Incorporation for the
corporation:
ARTICLE I
- --------------------------------------------------------------------------------
The name of the corporation is: Rock Financial Corporation
- --------------------------------------------------------------------------------
ARTICLE II
- --------------------------------------------------------------------------------
The purpose or purposes for which the corporation is formed is to
engage in any activity within the purposes for which corporations may be
organized under the Business Corporation Act of Michigan.
- --------------------------------------------------------------------------------
<PAGE> 2
ARTICLE III
- --------------------------------------------------------------------------------
The total authorized shares:
1. Common Shares 50,000,000, par value $0.01 per share
---------------------------------------------
Preferred Shares 1,000,000, par value $0.01 per share
--------------------------------------------
2. A statement of all or any of the relative rights, preferences and
limitations of the shares of each class is as follows:
a. Preferred Shares. The Board of Directors may cause the
Corporation to issue Preferred Shares in one or more series, each
series to bear a distinctive designation and to have such relative
rights and preferences as shall be prescribed by resolution of the
Board. Such resolutions, when filed, shall constitute amendments to
these Articles of Incorporation.
- --------------------------------------------------------------------------------
ARTICLE IV
- --------------------------------------------------------------------------------
1. The address of the current registered office is:
30600 Telegraph Road Bingham Farms, Michigan 48025
------------------------------------------------- ------------
(Street Address) (City) (ZIP Code)
2. The mailing address of the current registered office, if different than
above:
Michigan
------------------------------------------------- ------------
(Street Address or P.O. Box) (City) (ZIP Code)
3. The name of the current resident agent is: The Corporation Company
-----------------------------
ARTICLE V
- --------------------------------------------------------------------------------
Any action required or permitted by the Act to be taken at an annual or
special meeting of shareholders may be taken without a meeting, without prior
notice, and without a vote, if consents in writing, setting forth the action so
taken, are signed by the holders of outstanding shares having not less than the
minimum number of votes that would be necessary to authorize or take the action
at a meeting at which all shares entitled to vote on the action were present and
voted. The written consents shall bear the date of signature of each shareholder
who signs the consent. No written consents shall be effective to take the
corporate action referred to unless, within 60 days after the record date for
determining shareholders entitled to express consent to or to dissent from a
proposal without a meeting, written consents dated not more than 10 days before
the record date and signed by a sufficient number of shareholders to take the
action are delivered to the Corporation. Delivery shall be to the Corporation's
registered office, its principal place of business, or an officer or agent of
the Corporation having custody of the minutes of the proceedings of its
shareholders. Delivery made to a Corporation's registered office shall be by
hand or by certified or registered mail, return receipt requested.
Prompt notice of the taking of corporate action without a meeting by
less than unanimous written consent shall be given to shareholders who would
have been entitled to notice of the shareholder meeting if the action had been
taken at a meeting and who have not consented in writing.
- --------------------------------------------------------------------------------
<PAGE> 3
ARTICLE VI
- --------------------------------------------------------------------------------
To the full extent permitted by the Michigan Business Corporation Act
or any other applicable laws presently or hereinafter in effect, no director of
the Corporation shall be personally liable to the Corporation or its
shareholders for or with respect to any acts or omissions in the performance of
his or her duties as a director of the Corporation. Any repeal or modification
of this Article VI shall not adversely affect any right or protection of any
director of the Corporation existing immediately prior to, or for, or with
respect to, any acts or omissions occurring before, such repeal or modification.
- --------------------------------------------------------------------------------
ARTICLE VII
- --------------------------------------------------------------------------------
Pursuant to Section 784(1)(b) of the Michigan Business Corporation Act,
the Corporation expressly elects not to be governed by Chapter 7A of the
Michigan Business Corporation Act, being Sections 775 through 784 of the
Michigan Business Corporation Act; provided that the Corporation's Board of
Directors may terminate this election in whole or in part by action of the
majority of directors then in office.
- --------------------------------------------------------------------------------
<PAGE> 4
ARTICLE VIII
- --------------------------------------------------------------------------------
The business and affairs of the Corporation shall be managed by or
under the direction of a Board of Directors consisting of not less than three or
more than fifteen directors, the exact number of directors to be determined from
time to time solely by a resolution adopted by an affirmative vote of a majority
of the directors then in office. The directors shall be divided into three
classes, designated Class I, Class II and Class III. Each class shall consist,
as nearly as may be possible, of one-third of the total number of directors
constituting the entire Board of Directors. At the 1998 Annual Meeting of
Shareholders, Class I directors shall be elected for a one-year term, Class II
directors for a two-year term and Class III directors for a three-year term. At
each succeeding annual meeting of shareholders, commencing in 1999, successors
to the class of directors whose term expires at that annual meeting shall be
elected for a three-year term.
If the number of directors is changed, any increase or decrease shall
be apportioned among the classes of directors so as to maintain the number of
directors in each class as nearly equal as possible, but in no case will a
decrease in the number of directors shorten the term of any incumbent director.
When the number of directors is increased by the Board of Directors and any
newly-created directorships are filled by the Board, the additional directors
shall be classified as provided by the Board.
A director shall hold office until the meeting for the year in which
his or her term expires and until his or her successor shall be elected and
shall qualify, subject, however, to prior death, resignation, retirement,
disqualification or removal from office. Newly-created directorships resulting
from an increase in the number of directors and any vacancy on the Board of
Directors may be filled only by the Board by an affirmative vote of a majority
of the directors then in office. If the number of directors then in office is
less than a quorum, such newly-created directorships and vacancies may be filled
by a majority of the directors then in office, although less than a quorum, or
by the sole remaining director. A director elected by the Board of Directors to
fill a vacancy shall hold office until the next election of the class for which
the director shall have been chosen and until his or her successor shall be
elected and shall qualify. A director or the entire Board of Directors may be
removed only for cause.
Notwithstanding the foregoing, whenever the holders of any one or more
classes of Preferred Shares or series thereof issued by the Corporation shall
have the right, voting separately by class or series, to elect directors at an
annual or special meeting of shareholders, the election, term of office, filling
of vacancies and other features of such directorship shall be governed by the
terms of these Restated Articles of Incorporation applicable thereto, and such
directors so elected shall not be divided into classes pursuant to this Article.
This Article VIII may not be amended by less than unanimous written
consent of shareholders, and may only be amended by the affirmative vote of
holders of 90% of the outstanding Common Shares of the Corporation, in addition
to the vote otherwise required by the Michigan Business Corporation Act.
- --------------------------------------------------------------------------------
ARTICLE IX
- --------------------------------------------------------------------------------
No action by written consent of holders of less than all of the
outstanding shares entitled to vote on such action shall be effective unless the
proposed action shall have been approved by the Board of Directors before the
consent of shareholders is executed.
- --------------------------------------------------------------------------------
<PAGE> 5
(ADDITIONAL PROVISIONS, IF ANY, MAY BE INSERTED HERE; ATTACH ADDITIONAL PAGES
IF NEEDED.)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
5. COMPLETE SECTION (a) IF THE RESTATED ARTICLES WERE ADOPTED BY THE
UNANIMOUS CONSENT OF THE INCORPORATOR(S) BEFORE THE FIRST MEETING OF THE
BOARD OF DIRECTORS; OTHERWISE, COMPLETE SECTION (b). DO NOT COMPLETE
BOTH.
a. [ ] These Restated Articles of Incorporation were duly adopted on the
________ day of __________________, 19_______, in accordance with the
provisions of Section 642 of the Act by the unanimous consent of the
incorporator(s) before the first meeting of the Board of Directors.
Signed this day of , 19 .
---------- ----------------- -----------
------------------------------ --------------------------------------
------------------------------ --------------------------------------
(Signatures of Incorporators; Type or Print Name Under Each Signature)
b. [X] These Restated Articles of Incorporation were duly adopted on the
18th day of February, 1998 in accordance with the provisions of Section
642 of the Act and: (check one of the following)
[ ] were duly adopted by the Board of Directors without a vote of the
shareholders. These Restated Articles of Incorporation only restate
and integrate and do not further amend the provisions of the
Articles of Incorporation as heretofore amended and there is no
material discrepancy between those provisions and the provisions
of these Restated Articles.
[ ] were duly adopted by the shareholders. The necessary number of
shares as required by statute were voted in favor of these Restated
Articles.
[ ] were duly adopted by the written consent of the shareholders having
not less than the minimum number of votes required by statute in
accordance with Section 407(1) of the Act. Written notice to
shareholders who have not consented in writing has been given.
(Note: Written consent by less than all of the shareholders is
permitted only if such provision appears in the Articles of
Incorporation.)
[X] were duly adopted by the written consent of all the shareholders
entitled to vote in accordance with section 407(2) of the Act.
Signed this day of , 1998
--------- -------------
By
-----------------------------------------------------
(Signature of President, Vice-President, Chairperson,
or Vice-Chairperson)
Daniel B. Gilbert, President
-----------------------------------------------------
(Type or Print Name) (Type or Print Title)
<PAGE> 6
C&S 510
Name of person or organization Preparer's name and
remitting fees: business telephone
number:
Rock Financial Corporation Robert J. Krueger
- ----------------------------------- ----------------------
(313) 256-7675
- ----------------------------------- ----------------------
- --------------------------------------------------------------------------------
INFORMATION AND INSTRUCTIONS
1. The articles of incorporation cannot be restated until this form, or a
comparable document, is submitted.
2. Submit one original of this document. Upon filing, the document will be added
to the records of the Corporation, Securities and Land Development Bureau.
The original will be returned to the address appearing in the box on the
front as evidence of filing.
Since this document will be maintained on optical disk media, it is important
that the filing be legible. Documents with poor black and white contrast, or
otherwise illegible, will be rejected.
3. This document is to be used pursuant to sections 641 through 643 of the Act
for the purpose of restating the articles of incorporation of a domestic
profit corporation. Restated articles of incorporation are an integration
into a single instrument of the current provisions of the corporation's
articles of incorporation, along with any desired amendments to those
articles.
4. Restated articles of incorporation which do not amend the articles of
incorporation may be adopted by the board of directors without a vote of the
shareholders. Restated articles of incorporation which amend the articles of
incorporation require adoption by the shareholders. Restated articles of
incorporation submitted before the first meeting of the board of directors
require adoption by all of the incorporators.
5. Item 2 - Enter the identification number previously assigned by the Bureau.
If this number is unknown, leave it blank.
6. The duration of the corporation should be stated in the restated articles of
incorporation only if it is not perpetual.
7. This document is effective on the date endorsed "filed" by the Bureau. A
later effective date, no more than 90 days after the date of delivery, may be
stated as an additional article.
8. If the restated articles are adopted before the first meeting of the board of
directors, item 5(a) must be completed and signed in ink by a majority of the
incorporators. Other restated articles must be signed by the president,
vice-president, chairperson or vice-chairperson of the corporation.
9. FEES: Make remittance payable to the State of Michigan. Include corporation
name and identification number on check or money order.
NONREFUNDABLE FEE......................................................$10.00
TOTAL MINIMUM FEE......................................................$10.00
ADDITIONAL FEES DUE FOR INCREASED AUTHORIZED SHARES ARE:
each additional 20,000 authorized shares or portion thereof.........$30.00
maximum fee per filing for first 10,000,000 authorized shares....$5,000.00
each additional 20,000 authorized shares or portion thereof in excess
of 10,000,000 shares..............................................$30.00
maximum fee per filing for authorized shares in excess of 10,000,000
shares.......................................................$200,000.00
10. Mail form and fee to: The office is located at:
Michigan Department of Consumer and Industry 6546 Mercantile Way
Services Corporation, Securities and Land Lansing, MI 48910
Development Bureau (517) 334-6302
Corporation Division
P.O. Box 30054
Lansing, MI 48909-7554
<PAGE> 1
EXHIBIT 3(ii)
BYLAWS
OF
ROCK FINANCIAL CORPORATION,
a Michigan corporation
<PAGE> 2
BYLAWS
OF
ROCK FINANCIAL CORPORATION,
a Michigan corporation
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE 1 - OFFICES ........................................................ 1
1.1 Registered Office ............................................ 1
1.2 Other Offices ................................................ 1
ARTICLE 2 - MEETINGS OF SHAREHOLDERS ....................................... 1
2.1 Time and Place ............................................... 1
2.2 Annual Meetings .............................................. 1
2.3 Special Meetings ............................................. 1
2.4 Notice of Meetings ........................................... 1
2.5 List of Shareholders ......................................... 1
2.6 Quorum; Adjournment .......................................... 2
2.7 Voting ....................................................... 2
2.8 Proxies....................................................... 2
2.9 Questions Concerning Elections ............................... 2
2.10 Telephonic Attendance ........................................ 2
2.11 Action by Written Consent .................................... 3
ARTICLE 3 - DIRECTORS ...................................................... 3
3.1 Number and Residence ......................................... 3
3.2 Classification, Election and Term ............................ 3
3.3 Resignation .................................................. 3
3.4 Removal....................................................... 3
3.5 Nominations for Director...................................... 3
3.6 Vacancies..................................................... 4
3.7 Place of Meetings............................................. 4
3.8 Annual Meetings .............................................. 5
3.9 Regular Meetings ............................................. 5
3.10 Special Meetings.............................................. 5
3.11 Quorum ....................................................... 5
3.12 Voting ....................................................... 5
3.13 Telephonic Participation ..................................... 5
3.14 Action by Written Consent .................................... 5
3.15 Committees ................................................... 6
3.16 Compensation ................................................. 6
</TABLE>
-i-
<PAGE> 3
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE 4 - OFFICERS ....................................................... 7
4.1 Officers and Agents .............................................. 7
4.2 Compensation ..................................................... 7
4.3 Term ............................................................. 7
4.4 Removal........................................................... 7
4.5 Resignation ...................................................... 7
4.6 Vacancies ........................................................ 7
4.7 Chairperson of the Board ......................................... 7
4.8 Chief Executive Officer .......................................... 7
4.9 President ........................................................ 8
4.10 Executive Vice Presidents and Vice Presidents .................... 8
4.11 Secretary ........................................................ 8
4.12 Treasurer ........................................................ 8
4.13 Assistant Vice Presidents, Secretaries and Treasurers ............ 9
4.14 Execution of Contracts and Instruments ........................... 9
4.15 Voting of Shares and Securities of Other Corporations and
Entities ....................................................... 9
ARTICLE 5 - NOTICES AND WAIVERS OF NOTICE .................................. 9
5.1 Delivery of Notices .............................................. 9
5.2 Waiver of Notice ................................................. 10
ARTICLE 6 - SHARE CERTIFICATES AND SHAREHOLDERS OF RECORD .................. 10
6.1 Certificates for Shares .......................................... 10
6.2 Lost or Destroyed Certificates ................................... 10
6.3 Transfer of Shares ............................................... 11
6.4 Record Date ...................................................... 11
6.5 Registered Shareholders........................................... 12
ARTICLE 7 - INDEMNIFICATION ................................................ 12
ARTICLE 8 - GENERAL PROVISIONS ............................................. 12
8.1 Checks and Funds ................................................. 12
8.2 Fiscal Year ...................................................... 12
8.3 Corporate Seal ................................................... 12
8.4 Books and Records ................................................ 13
8.5 Financial Statements ............................................. 13
ARTICLE 9 - AMENDMENTS ..................................................... 13
ARTICLE 10 -- CONTROL SHARE ACQUISITIONS ................................... 13
10.1 Power to Redeem if no Acquiring Person Statement is Filed ........ 13
10.2 Power to Redeem After Shareholder Vote ........................... 13
10.3 Procedure for Redemption ......................................... 13
10.4 Interpretation of Article 10 ..................................... 14
ARTICLE 11 - SCOPE OF BYLAWS................................................ 14
</TABLE>
-ii-
<PAGE> 4
ROCK FINANCIAL CORPORATION,
a Michigan corporation
ARTICLE 1 - OFFICES
1.1 Registered Office. The registered office of the Corporation shall
be located at such place in Michigan as the Board of Directors from time to time
determines.
1.2 Other Offices. The Corporation may also have offices or branches at
such other places as the Board of Directors from time to time determines or the
business of the Corporation requires.
ARTICLE 2 - MEETINGS OF SHAREHOLDERS
2.1 Time and Place. All meetings of the shareholders shall be held at
such place and time as the Board of Directors determines.
2.2 Annual Meetings. An annual meeting of shareholders shall be held on
a date, not later than 180 days after the end of the immediately preceding
fiscal year, to be determined by the Board of Directors. At the annual meeting,
the shareholders shall elect directors and transact such other business as is
properly brought before the meeting and described in the notice of meeting. If
the annual meeting is not held on its designated date, the Board of Directors
shall cause it to be held as soon thereafter as convenient.
2.3 Special Meetings. Special meetings of the shareholders, for any
purpose, (a) may be called by the Corporation's chief executive officer or the
Board of Directors, and (b) shall be called by the President or Secretary upon
written request (stating the purpose for which the meeting is to be called) of
the holders of a majority of all the shares entitled to vote at the meeting.
2.4 Notice of Meetings. Written notice of each shareholders' meeting,
stating the place, date and time of the meeting and the purposes for which the
meeting is called, shall be given (in the manner described in Section 5.1
below) not less than 10 nor more than 60 days before the date of the meeting to
each shareholder of record entitled to vote at the meeting. Notice of
adjourned meetings is governed by Section 2.6 below.
2.5 List of Shareholders. The officer or agent who has charge of the
stock transfer books for shares of the Corporation shall make and certify a
complete list of the shareholders entitled to vote at a shareholders' meeting or
any adjournment of the meeting. The list shall be arranged alphabetically within
each class and series and shall show the address of, and the
1
<PAGE> 5
number of shares held by, each shareholder. The list shall be produced at the
time and place of the meeting and may be inspected by any shareholder at any
time during the meeting.
2.6 Quorum; Adjournment. At all shareholders' meetings, the
shareholders present in person or represented by proxy who, as of the record
date for the meeting, were holders of shares entitled to cast a majority of the
votes at the meeting, shall constitute a quorum. Once a quorum is present at a
meeting, all shareholders present in person or represented by proxy at the
meeting may continue to do business until adjournment, notwithstanding the
withdrawal of enough shareholders to leave less than a quorum. Regardless of
whether a quorum is present, a shareholders' meeting may be adjourned to another
time and place by a vote of the shares present in person or by proxy without
notice other than announcement at the meeting; provided, that (a) only such
business may be transacted at the adjourned meeting as might have been
transacted at the original meeting and (b) if the adjournment is for more than
60 days or if after the adjournment a new record date is fixed for the adjourned
meeting, a notice of the adjourned meeting must be given to each shareholder of
record entitled to vote at the meeting.
2.7 Voting. Each shareholder shall at every meeting of the shareholders
be entitled to one vote in person or by proxy for each share having voting power
held by such shareholder and on each matter submitted to a vote. A vote may be
cast either orally or in writing. When an action, other than the election of
directors, is to be taken by vote of the shareholders, it shall be authorized by
a majority of the votes cast by the holders of shares entitled to vote on such
action. Directors shall be elected by a plurality of the votes cast at any
election.
2.8 Proxies. A shareholder entitled to vote at a meeting of
shareholders or to express consent or dissent without a meeting may authorize
other persons to act for him or her by proxy. Each proxy shall be in writing and
signed by the shareholder or the shareholder's authorized agent or
representative. A proxy is not valid after the expiration of three years after
its date unless otherwise provided in the proxy.
2.9 Questions Concerning Elections. The Board of Directors may, in
advance of the meeting, or the presiding officer may, at the meeting, appoint
one or more inspectors to act at a shareholders' meeting or any adjournment
thereof. If appointed, the inspectors shall determine the number of shares
outstanding and the voting power of each, the shares represented at the meeting,
the existence of a quorum, the validity and effect of proxies, and shall receive
votes, ballots or consents, hear and determine challenges and questions arising
in connection with the right to vote, count and tabulate votes, ballots or
consents, determine the result, and do such acts as are proper to conduct the
election or vote with fairness to all shareholders.
2.10 Telephonic Attendance. Shareholders may participate in any
shareholders' meeting by means of conference telephone or similar communications
equipment through which all persons participating in the meeting may communicate
with the other participants. All participants shall be advised of the
communications equipment and the names of the participants in the conference
shall be divulged to all participants. Participation in a meeting pursuant to
this Section 2.10 constitutes presence in person at such meeting.
2
<PAGE> 6
2.11 Action by Written Consent. To the extent permitted by the Articles
of Incorporation or applicable law, any action required or permitted to be taken
at any shareholders' meeting may be taken without a meeting, prior notice and a
vote, by written consent of shareholders.
ARTICLE 3 - DIRECTORS
3.1 Number and Residence. The business and affairs of the Corporation
shall be managed by or under the direction of a Board of Directors consisting of
not less than three nor more than fifteen directors, the exact number of
directors to be determined from time to time solely by a resolution adopted by
an affirmative vote of a majority of the directors the in office. Directors need
not be Michigan residents or shareholders of the Corporation.
3.2 Classification, Election and Term. The directors shall be divided
into three classes, designated Class I, Class II and Class III. Each class shall
consist, as nearly as may be possible, of one-third of the total number of
directors constituting the entire Board of Directors. At the 1998 Annual Meeting
of Shareholders, Class I directors shall be elected for a one-year term, Class
II directors for a two-year term and Class III directors for a three-year term.
At each succeeding Annual Meeting of Shareholders, commencing in 1999,
successors to the class of directors whose term expires at that annual meeting
shall be elected for a three-year term. Except as provided in Section 3.6 below,
directors shall be elected at the annual shareholders' meeting. Each director
elected shall hold office until the meeting for the year in which his or her
term expires and until his or her successor is elected and qualified, subject,
however, to prior death, resignation, retirement, disqualification or removal
from office.
If the number of directors is changed, any increase or decrease shall
be apportioned among the classes of directors so as to maintain the number of
directors in each class as nearly equal as possible, but in no case will a
decrease in the number of directors shorten the term of any incumbent director.
When the number of directors is increased by the Board of Directors and any
newly-created directorships are filled by the Board, the additional directors
shall be classified as provided by the Board.
3.3 Resignation. A director may resign by written notice to the
Corporation. A director's resignation is effective upon its receipt by the
Corporation or a later time set forth in the notice of resignation.
3.4 Removal. A director or the entire Board of Directors may be
removed, only for cause, by vote of the holders of a majority of the shares
entitled to vote at an election of directors.
3.5 Nominations for Director. Except as provided in Section 3.6, only
persons who are nominated in accordance with the procedures set forth in this
Section 3.5 shall be eligible for
3
<PAGE> 7
election as directors. Nominations of persons for election to the Board of
Directors of the Corporation may be made at a meeting of shareholders by or at
the direction of the Board of Directors or by any shareholder of the
Corporation entitled to vote for the election of directors at the meeting who
complies with the notice procedures set forth in this Section 3.5. Such
nominations, other than those made by or at the direction of the Board of
Directors, shall be made pursuant to timely notice in writing to the Secretary
of the Corporation. To be timely, a shareholder's notice shall be delivered to,
or mailed and received at, the principal executive offices of the Corporation
not less than 60 days nor more than 90 days before the meeting; provided, that
if less than 70 days' notice or prior public disclosure of the date of the
meeting is given or made to shareholders, notice by the shareholder to be
timely must be so received not later than the close of business on the 10th day
following the day on which such notice of the date of the meeting was mailed or
such public disclosure was made. Such shareholder's notice shall set forth (a)
as to each person whom the shareholder proposes to nominate for election or
re-election as a director, (1) the name, age, business, address and residence
address of such person, (2) the principal occupation or employment of such
person, (3) the class and number of shares of the Corporation which are
beneficially owned by such person and (4) any other information relating to
such person that is required to be disclosed in solicitations of proxies for
election of directors, or is otherwise required, in each case pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended (including
each such person's written consent to being named in the proxy statement as a
nominee and to serving as a director if elected); and (b) as to the shareholder
giving the notice (1) the name and address, as they appear on the Corporation's
books, of such shareholder and (2) the class and number of shares of the
Corporation which are beneficially owned by such shareholder. At the request of
the Board of Directors any person nominated by the Board of Directors for
election as a director shall furnish to the Secretary that information required
to be set forth in a shareholder's notice of nomination which pertains to the
nominee. The presiding officer of the meeting shall, if the facts warrant,
determine and declare to the meeting that a nomination was not made in
accordance with the procedures prescribed by these Bylaws, and if the presiding
officer should so determine, the presiding officer shall so declare to the
meeting and the defective nominations shall be disregarded.
3.6 Vacancies. Newly-created directorships resulting from an increase
in the number of directors and any vacancy on the Board of Directors may be
filled only by the Board by an affirmative vote of a majority of the directors
then in office. If the number of directors then in office is less than a quorum,
such newly-created directorships and vacancies may be filled by a majority of
the directors then in office, although less than a quorum, or by the sole
remaining director. A director elected by the Board of Directors to fill a
vacancy shall hold office until the next election of the class for which the
director shall have been chosen and until his or her successor shall be elected
and shall qualify, subject, however, to prior death, resignation, retirement,
disqualification or removal from office.
3.7 Place of Meetings. The Board of Directors may hold meetings at any
location. The location of annual and regular Board of Directors' meetings shall
be determined by the Board and the location of special meetings shall be
determined by the person calling the meeting.
4
<PAGE> 8
3.8 Annual Meetings. Each newly elected Board of Directors may meet
promptly after the annual shareholders' meeting for the purposes of electing
officers and transacting such other business as may properly come before the
meeting. No notice of the annual directors' meeting shall be necessary to the
newly elected directors in order to legally constitute the meeting, provided a
quorum is present.
3.9 Regular Meetings. Regular meetings of the Board of Directors or
Board committees may be held without notice at such places and times as the
Board or committee determines at least 30 days before the date of the meeting.
3.10 Special Meetings. Special meetings of the Board of Directors may
be called by the chief executive officer, and shall be called by the President
or Secretary upon the written request of two directors, on two days notice to
each director or committee member by mail or 24 hours notice by any other means
provided in Section 5.1. The notice must specify the place, date and time of the
special meeting, but need not specify the business to be transacted at, nor the
purpose of, the meeting. Special meetings of Board committees may be called by
the Chairperson of the committee or a majority of committee members pursuant to
this Section 3.10.
3.11 Quorum. At all meetings of the Board or a Board committee, a
majority of the directors then in office, or of members of such committee,
constitutes a quorum for transaction of business, unless a higher number is
otherwise required by the Articles of Incorporation, these Bylaws or the Board
resolution establishing such Board committee. If a quorum is not present at any
Board or Board committee meeting, a majority of the directors present at the
meeting may adjourn the meeting to another time and place without notice other
than announcement at the meeting. Any business may be transacted at the
adjourned meeting which might have been transacted at the original meeting,
provided a quorum is present.
3.12 Voting. The vote of a majority of the members present at any Board
or Board committee meeting at which a quorum is present constitutes the action
of the Board of Directors or of the Board committee, unless a higher vote is
otherwise required by the Michigan Business Corporation Act, the Articles of
Incorporation, these Bylaws, or the Board resolution establishing the Board
committee.
3.13 Telephonic Participation. Members of the Board of Directors or any
Board committee may participate in a Board or Board committee meeting by means
of conference telephone or similar communications equipment through which all
persons participating in the meeting can communicate with each other.
Participation in a meeting pursuant to this Section 3.13 constitutes presence in
person at such meeting.
3.14 Action by Written Consent. Any action required or permitted to be
taken under authorization voted at a Board or Board committee meeting may be
taken without a meeting if, before or after the action, all members of the Board
then in office or of the Board committee consent to the action in writing. Such
consents shall be filed with the minutes of the proceedings
5
<PAGE> 9
of the Board or committee and shall have the same effect as a vote of the Board
or committee for all purposes.
3.15 Committees. The Board of Directors may, by resolution passed by a
majority of the directors then in office, designate one or more committees, each
consisting of one or more directors. The Board may designate one or more
directors as alternate members of a committee, who may replace an absent or
disqualified member at a committee meeting. In the absence or disqualification
of a member of a committee, the committee members present and not disqualified
from voting, regardless of whether they constitute a quorum, may unanimously
appoint another member of the Board of Directors to act at the meeting in place
of such absent or disqualified member. Any committee, to the extent provided in
the resolution of the Board, may exercise all powers and authority of the Board
of Directors in management of the business and affairs of the Corporation,
except a committee does not have power or authority to:
(a) Amend the Articles of Incorporation.
(b) Adopt an agreement of merger or share exchange.
(c) Recommend to shareholders the sale, lease or exchange of
all or substantially all of the Corporation's property and assets.
(d) Recommend to shareholders a dissolution of the Corporation
or a revocation of a dissolution.
(e) Amend the Bylaws of the Corporation.
(f) Fill vacancies in the Board.
(g) Unless the resolution designating the committee or a later
Board of Directors' resolution expressly so provides, declare a
distribution or dividend or authorize the issuance of shares.
Each committee and its members shall serve at the pleasure of the Board, which
may at any time change the members and powers of, or discharge, the committee.
Each committee shall keep regular minutes of its meetings and report them to the
Board of Directors when required.
3.16 Compensation. The Board, by affirmative vote of a majority of
directors in office and irrespective of any personal interest of any of them,
may establish reasonable compensation of directors for services to the
Corporation as directors, officers or members of a Board committee. No such
payment shall preclude any director from serving the Corporation in any other
capacity and receiving compensation for such service.
6
<PAGE> 10
ARTICLE 4 - OFFICERS
4.1 Officers and Agents. The Board of Directors, at its first meeting
after each annual meeting of shareholders, shall elect a President, a Secretary
and a Treasurer, and may also elect and designate as officers a Chairperson of
the Board, a Vice Chairperson of the Board and one or more Executive Vice
Presidents, Vice Presidents, Assistant Vice Presidents, Assistant Secretaries
and Assistant Treasurers. The Board of Directors may also from time to time
appoint, or delegate authority to the Corporation's chief executive officer to
appoint, such other officers and agents as it deems advisable. The Chairperson
of the Board and Vice Chairperson of the Board, if such offices are filled, amy
be officers of the Corporation or may be Directors who are not officers of the
Corporation, as designated by the Board of Directors. In the absence of sch
designation, the Chairperson of the Board and Vice Chairperson of the board, if
such officer are filled, shall be Directors who are not officers of the
Corporation. Any number of offices may be held by the same person, but an
officer shall not execute, acknowledge or verify an instrument in more than one
capacity if the instrument is required by law to be executed, acknowledged or
verified by two or more officers. An officer has such authority and shall
perform such duties in the management of the Corporation as provided in these
Bylaws, or as may be determined by resolution of the Board of Directors not
inconsistent with these Bylaws, and as generally pertain to their offices,
subject to the control of the Board of Directors.
4.2 Compensation. The compensation of all officers of the Corporation
shall be fixed by the Board of Directors.
4.3 Term. Each officer of the Corporation shall hold office for the
term for which he or she is elected or appointed and until his or her successor
is elected or appointed and qualified, or until his or her death, resignation or
removal. The election or appointment of an officer does not, by itself, create
contract rights.
4.4 Removal. An officer elected or appointed by the Board of Directors
may be removed by the Board of Directors with or without cause. The removal of
an officer shall be without prejudice to his or her contract rights, if any.
4.5 Resignation. An officer may resign by written notice to the
Corporation. The resignation is effective upon its receipt by the Corporation or
at a subsequent time specified in the notice of resignation.
4.6 Vacancies. Any vacancy occurring in any office of the Corporation
shall be filled by the Board of Directors.
4.7 Chairperson of the Board. The Chairperson of the Board, if such
office is filled, shall be a director and shall preside at all shareholders' and
Board of Directors' meetings.
4.8 Chief Executive Officer. The Chairperson of the Board, if any, or
the President, as designated by the Board, shall be the chief executive officer
of the Corporation and shall have
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the general powers of supervision and management of the business and affairs of
the Corporation usually vested in the chief executive officer of a corporation
and shall see that all orders and resolutions of the Board of Directors are
carried into effect. If no designation of chief executive officer is made, or if
there is no Chairperson of the Board, the President shall be the chief executive
officer. The chief executive officer may delegate to the other officers such of
his or her authority and duties at such time and in such manner as he or she
deems advisable.
4.9 President. If the office of Chairperson of the Board is not filled,
the President shall perform the duties and execute the authority of the
Chairperson of the Board. If the Chairperson of the Board is designated by the
Board as the Corporation's chief executive officer, the President shall be the
chief operating officer of the Corporation, shall assist the Chairperson of the
Board in the supervision and management of the business and affairs of the
Corporation and, in the absence of the Chairperson of the Board, shall preside
at all shareholders' and Board of Directors' meetings. The President may
delegate to the officers other than the Chairperson of the Board, if any, such
of his or her authority and duties at such time and in such manner as he or she
deems appropriate.
4.10 Executive Vice Presidents and Vice Presidents. The Executive Vice
Presidents and Vice Presidents shall assist and act under the direction of the
Corporation's chief executive officer, unless otherwise determined by the Board
of Directors or the chief executive officer. The Board of Directors may
designate one or more Executive Vice Presidents and may grant other Vice
Presidents titles which describe their functions or specify their order of
seniority. In the absence or disability of the President, the authority of the
President shall descend to the Executive Vice Presidents or, if there are none,
to the Vice Presidents in the order of seniority indicated by their titles or
otherwise specified by the Board. If not specified by their titles or the Board,
the authority of the President shall descend to the Executive Vice Presidents
or, if there are none, to the Vice Presidents, in the order of their seniority
in such office.
4.11 Secretary. The Secretary shall act under the direction of the
Corporation's chief executive officer and President. The Secretary shall attend
all shareholders' and Board of Directors' meetings, record minutes of the
proceedings and maintain the minutes and all documents evidencing corporate
action taken by written consent of the shareholders and Board of Directors in
the Corporation's minute books. The Secretary shall perform these duties for
Board committees when required. The Secretary shall see to it that all notices
of shareholders' meetings and special Board of Directors' meetings are duly
given in accordance with applicable law, the Articles of Incorporation and these
Bylaws. The Secretary shall have custody of the Corporation's seal and, when
authorized by the Corporation's chief executive officer, President or the Board
of Directors, shall affix the seal to any instrument requiring it and attest
such instrument.
4.12 Treasurer. The Treasurer shall act under the direction of the
Corporation's chief executive officer and President. The Treasurer shall have
custody of the corporate funds and securities and shall keep full and accurate
accounts of the Corporation's assets, liabilities, receipts and disbursements in
books belonging to the Corporation. The Treasurer shall deposit all moneys
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and other valuables in the name and to the credit of the Corporation in such
depositories as may be designated by the Board of Directors. The Treasurer shall
disburse the funds of the Corporation as may be ordered by the Corporation's
chief executive officer, the President or the Board of Directors, taking proper
vouchers for such disbursements, and shall render to the Corporation's chief
executive officer, the President and the Board of Directors (at its regular
meetings or whenever they request it) an account of all his or her transactions
as Treasurer and of the financial condition of the Corporation. If required by
the Board of Directors, the Treasurer shall give the Corporation a bond for the
faithful discharge of his or her duties in such amount and with such surety as
the Board prescribes.
4.13 Assistant Vice Presidents, Secretaries and Treasurers. The
Assistant Vice Presidents, Assistant Secretaries and Assistant Treasurers, if
any, shall act under the direction of the Corporation's chief executive officer,
the President and the officer they assist. In the order of their seniority, the
Assistant Secretaries shall, in the absence or disability of the Secretary,
perform the duties and exercise the authority of the Secretary. The Assistant
Treasurers, in the order of their seniority, shall, in the absence or disability
of the Treasurer, perform the duties and exercise the authority of the
Treasurer.
4.14 Execution of Contracts and Instruments. The Board of Directors may
designate an officer or agent with authority to execute any contract or other
instrument on the Corporation's behalf; the Board may also ratify or confirm any
such execution. If the Board authorizes, ratifies or confirms the execution of a
contract or instrument without specifying the authorized executing officer or
agent, the Corporation's chief executive officer, the President, any Executive
Vice President or Vice President or the Treasurer may execute the contract or
instrument in the name and on behalf of the Corporation and may affix the
corporate seal to such document or instrument.
4.15 Voting of Shares and Securities of Other Corporations and
Entities. Unless the Board of Directors otherwise directs, the Corporation's
chief executive officer shall be entitled to vote or designate a proxy to vote
all shares and other securities which the Corporation owns in any other
corporation or entity.
ARTICLE 5 - NOTICES AND WAIVERS OF NOTICE
5.1 Delivery of Notices. All written notices to shareholders, directors
and Board committee members shall be given personally or by mail (registered,
certified or other first class mail, with postage pre-paid), addressed to such
person at the address designated by him or her for that purpose or, if none is
designated, at his or her last known address. Written notices to directors or
Board committee members may also be delivered at his or her office on the
Corporation's premises, if any, or by overnight carrier, telegram, telex,
telecopy, radiogram, cablegram, facsimile, computer transmission or similar form
of communication, addressed to the address referred to in the preceding
sentence. Notices given pursuant to this Section 5.1 shall be
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deemed to be given when dispatched, or, if mailed, when deposited in a post
office or official depository under the exclusive care and custody of the United
States postal service. Notices given by overnight carrier shall be deemed
"dispatched" at 10:00 a.m. on the day the overnight carrier is reasonably
requested to deliver the notice. The Corporation shall have no duty to change
the written address of any director, Board committee member or shareholder
unless the Secretary receives written notice of such address change.
5.2 Waiver of Notice. Action may be taken without a required notice and
without lapse of a prescribed period of time, if at any time before or after the
action is completed the person entitled to notice or to participate in the
action to be taken or, in the case of a shareholder, his or her
attorney-in-fact, submits a signed waiver of the requirements, or if such
requirements are waived in such other manner permitted by applicable law.
Neither the business to be transacted at, nor the purpose of, the meeting need
be specified in the written waiver of notice. Attendance at any shareholders'
meeting (in person or by proxy) will result in both of the following:
(a) Waiver of objection to lack of notice or defective notice
of the meeting, unless the shareholder at the beginning of the meeting
objects to holding the meeting or transacting business at the meeting.
(b) Waiver of objection to consideration of a particular
matter at the meeting that is not within the purpose or purposes
described in the meeting notice, unless the shareholder objects to
considering the matter when it is presented.
A director's attendance at or participation in any Board or Board committee
meeting waives any required notice to him or her of the meeting unless he or
she, at the beginning of the meeting or upon his or her arrival, objects to the
meeting or the transacting of business at the meeting and does not thereafter
vote for or assent to any action taken at the meeting.
ARTICLE 6 - SHARE CERTIFICATES AND SHAREHOLDERS OF RECORD
6.1 Certificates for Shares. The shares of the Corporation shall be
represented by certificates signed by the Chairperson of the Board,
Vice-chairperson of the Board, President or a Vice-president. The certificates
also may be signed by another officer of the Corporation. The officers'
signatures may be facsimiles if the certificate is countersigned by a transfer
agent or registered by a registrar other than the Corporation or its employee.
If any officer who has signed or whose facsimile signature has been placed upon
a certificate ceases to be such officer before the certificate is issued, it may
be issued by the Corporation with the same effect as if the person were such
officer at the date of issue.
6.2 Lost or Destroyed Certificates. The Board of Directors may direct
or authorize an officer to direct that a new certificate for shares be issued in
place of any certificate alleged
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to have been lost or destroyed. When authorizing such issue of a new
certificate, the Board of Directors or officer may, in its discretion and as a
condition precedent to the issuance thereof, require the owner (or the owner's
legal representative) of such lost or destroyed certificate to give the
Corporation an affidavit claiming that the certificate is lost or destroyed or a
bond in such sum as it may direct as indemnity against any claim that may be
made against the Corporation with respect to such old or new certificate.
6.3 Transfer of Shares. Shares of the Corporation are transferable only
on the Corporation's stock transfer books upon surrender to the Corporation or
its transfer agent of a certificate for the shares, duly endorsed for transfer,
and the presentation of such evidence of ownership and validity of the transfer
as the Corporation requires.
6.4 Record Date. The Board of Directors may fix, in advance, a date as
the record date for determining shareholders for any purpose, including
determining shareholders entitled to (a) notice of, and to vote at, any
shareholders' meeting or any adjournment of such meeting; (b) express consent
to, or dissent from, a proposal without a meeting; or (c) receive payment of a
share dividend or distribution or allotment of a right. The record date shall
not be more than 60 nor less than 10 days before the date of the meeting, nor
more than 10 days after the Board resolution fixing a record date for
determining shareholders entitled to express consent to, or dissent from, a
proposal without a meeting, nor more than 60 days before any other action.
If a record date is not fixed:
(a) the record date for determining the shareholders entitled
to notice of, or to vote at, a shareholders' meeting shall be the close
of business on the day next preceding the day on which notice of the
meeting is given, or, if no notice is given, the close of business on
the day next preceding the day on which the meeting is held; and
(b) if prior action by the Board of Directors is not required
with respect to the corporate action to be taken without a meeting, the
record date for determining shareholders entitled to express consent
to, or dissent from, a proposal without a meeting, shall be the first
date on which a signed written consent is properly delivered to the
Corporation; and
(c) the record date for determining shareholders for any other
purpose shall be the close of business on the day on which the
resolution of the Board of Directors relating to the action is adopted.
A determination of shareholders of record entitled to notice of, or to
vote at, a shareholders' meeting shall apply to any adjournment of the meeting,
unless the Board of Directors fixes a new record date for the adjourned meeting.
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Only shareholders of record on the record date shall be entitled to
notice of, or to participate in, the action to which the record date relates,
notwithstanding any transfer of shares on the Corporation's books after the
record date. This Section 6.4 shall not affect the rights of a shareholder and
the shareholder's transferor or transferee as between themselves.
6.5 Registered Shareholders. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of a share for all purposes, including notices, voting, consents, dividends and
distributions, and shall not be bound to recognize any other person's equitable
or other claim to interest in such share, regardless of whether it has actual or
constructive notice of such claim or interest.
ARTICLE 7 - INDEMNIFICATION
The Corporation shall, to the fullest extent authorized or permitted by
the Michigan Business Corporation Act, (a) indemnify any person, and his or her
heirs, personal representatives, executors, administrators and legal
representatives, who was, is, or is threatened to be made, a party to any
threatened, pending or completed action, suit or proceeding (whether civil,
criminal, administrative or investigative) by reason of the fact that such
person is or was a director or officer of the Corporation or is or was serving
at the request of the Corporation as a director, officer, employee, member or
agent of another corporation, partnership, limited liability company, joint
venture, trust or other enterprise (collectively, "Covered Matters"); and (b)
pay or reimburse the reasonable expenses incurred by such person and his or her
heirs, executors, administrators and legal representatives in connection with
any Covered Matter in advance of final disposition of such Covered Matter. The
Corporation may provide such other indemnification to directors, officers,
employees and agents by insurance, contract or otherwise as is permitted by law
and authorized by the Board of Directors.
ARTICLE 8 - GENERAL PROVISIONS
8.1 Checks and Funds. All checks, drafts or demands for money and notes
of the Corporation must be signed by such officer or officers or such other
person or persons as the Board of Directors from time to time designates. All
funds of the Corporation not otherwise employed shall be deposited or used as
the Board of Directors from time to time designates.
8.2 Fiscal Year. The fiscal year of the Corporation shall end on such
date as the Board of Directors from time to time determines.
8.3 Corporate Seal. The Board of Directors may adopt a corporate seal
for the Corporation. The corporate seal, if adopted, shall be circular and
contain the name of the Corporation and the words "Corporate Seal Michigan". The
seal may be used by causing it or a facsimile of it to be impressed, affixed,
reproduced or otherwise.
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8.4 Books and Records. The Corporation shall keep within or outside of
Michigan books and records of account and minutes of the proceedings of its
shareholders, Board of Directors and Board committees, if any. The Corporation
shall keep at its registered office or at the office of its transfer agent
within or outside of Michigan records containing the names and addresses of all
shareholders, the number, class and series of shares held by each and the dates
when they respectively became recordholders of shares. Any of such books,
records or minutes may be in written form or in any other form capable of being
converted into written form within a reasonable time.
8.5 Financial Statements. The Corporation shall cause to be made and
distributed to its shareholders, within four months after the end of each fiscal
year, a financial report (including a statement of income, year-end balance
sheet, and, if prepared by the Corporation, its statement of sources and
application of funds) covering the preceding fiscal year of the Corporation.
ARTICLE 9 - AMENDMENTS
These Bylaws may be amended or repealed, or new Bylaws may be adopted,
by action of either the shareholders or a majority of the Board of Directors
then in office. The Articles of Incorporation or these Bylaws may from time to
time specify particular provisions of the Bylaws which may not be altered or
repealed by the Board of Directors.
ARTICLE 10 -- CONTROL SHARE ACQUISITIONS
10.1 Power to Redeem if no Acquiring Person Statement is Filed. Control
shares acquired in a control share acquisition, with respect to which no
acquiring person statement has been filed with the Corporation, may, at any time
during the period ending 60 days after the last acquisition of control shares or
the power to direct the exercise of voting power of control shares by the
acquiring person, be redeemed by the Corporation at the fair value of the
shares.
10.2 Power to Redeem After Shareholder Vote. After an acquiring person
statement has been filed and after the meeting at which the voting rights of the
control shares acquired in a control share acquisition are submitted to the
shareholders, the shares are subject to redemption by the Corporation at the
fair value of the shares unless the shares are accorded full voting rights by
the shareholders pursuant to Section 798 of the Michigan Business Corporation
Act.
10.3 Procedure for Redemption. A redemption of shares by the
Corporation pursuant to Sections 10.1 or 10.2 shall be made upon election to
redeem by the Board of Directors. Written notice of the election shall be sent
to the acquiring person within seven days after the election is made. The
determination of the Board of Directors as to fair value shall be conclusive.
Payment shall be made for the control shares subject to redemption within 30
days
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after the election to redeem is made at a date and place selected by the Board
of Directors. The Board of Directors may adopt additional procedures to
accomplish a redemption.
10.4 Interpretation of Article 10. This Article 10 is adopted pursuant
to Section 799 of the Michigan Business Corporation Act, and the terms used in
this Article 10 shall have the meanings of the terms in Section 799.
ARTICLE 11 - SCOPE OF BYLAWS
These Bylaws govern the regulation and management of the affairs of the
Corporation to the extent that they are consistent with applicable law and the
Articles of Incorporation; to the extent they are not consistent, applicable law
and the Articles of Incorporation shall govern.
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EXHIBIT 10.1
AMENDED AND RESTATED
ROCK FINANCIAL CORPORATION
1996 STOCK OPTION PLAN
1. Definitions: As used herein, the following terms shall have
the following meanings:
(a) "Code" shall mean the Internal Revenue Code of 1986, as
amended, and the applicable rules and regulations thereunder.
(b) "Committee" shall mean, (i) with respect to administration
of the Plan regarding Participants who are subject to Section 16(a) and
(b) of the Exchange Act, a committee meeting the standards of Rule
16b-3 of the Rules and Regulations under the Exchange Act, or any
similar successor rule, appointed by the Board of Directors of the
Company to perform any of the functions and duties of the Committee
under the Plan, or the Board of Directors as a whole, and (ii) with
respect to administration of the Plan regarding all other Participants,
such committee or the Board of Directors of the Company, as described
in clause (i), or such other committee or entity appointed by the Board
of Directors of the Company to perform any of the functions and duties
of the Committee under the Plan.
(c) "Common Shares" shall mean the Common Shares, par value
$0.01 per share, of the Company.
(d) "Company" shall mean Rock Financial Corporation, a
Michigan corporation, or any successor thereof.
(e) "Discretion" shall mean the sole discretion of the
Committee, with no requirement whatsoever that the Committee follow
past practices, act in a manner consistent with past practices, or
treat any key employee, director, consultant or advisor in a manner
consistent with the treatment afforded other key employees, directors,
consultants or advisors with respect to the Plan or otherwise.
(f) "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended, and the rules and regulations thereunder.
(g) "Incentive Option" shall mean an option to purchase Common
Shares which meets the requirements set forth in the Plan and also is
intended to be, and qualifies as, an incentive stock option within the
meaning of Section 422 of the Code.
(h) "Nonqualified Option" shall mean an option to purchase
Common Shares which meets the requirements set forth in the Plan but is
not intended to be, or does not qualify as, an incentive stock option
within the meaning of the Code.
<PAGE> 2
(i) "Participant" shall mean any individual designated by the
Committee under Paragraph 6 for participation in the Plan.
(j) "Plan" shall mean this Amended and Restated Rock Financial
Corporation 1996 Stock Option Plan.
(k) "Securities Act" shall mean the Securities Act of 1933, as
amended, and the rules and regulations thereunder.
(l) "Subsidiary" shall mean any corporation or other entity in
which the Company has a direct or indirect ownership interest of 50% or
more of the total combined voting power of all classes of outstanding
voting equity interests.
2. Purpose of Plan: The purpose of the Plan is to provide key employees
(including officers), directors, consultants and advisors of the Company and its
Subsidiaries (collectively, "key employees") with an increased incentive to make
significant and extraordinary contributions to the long-term performance and
growth of the Company and its Subsidiaries, to join the interests of key
employees, directors, consultants and advisors with the interests of the
shareholders of the Company, and to facilitate attracting and retaining key
employees, directors, consultants and advisors of exceptional ability.
3. Administration: The Plan shall be administered by the Committee.
Subject to the provisions of the Plan, the Committee shall determine, from those
eligible to be Participants under the Plan, the persons to be granted stock
options, the amount of stock to be optioned to each such person, the time such
options shall be granted and the terms and conditions of any stock options. Such
terms and conditions may, in the Committee's Discretion, include, without
limitation, provisions providing for termination of the option, forfeiture of
the gain on any option exercises or both if the Participant competes with the
Company or otherwise acts contrary to the Company's interests, and provisions
imposing restrictions, potential forfeiture or both on shares acquired upon
exercise of options granted pursuant to this Plan. The Committee may condition
any grant on the potential Participant's agreement to such terms and conditions.
Subject to the provisions of the Plan, the Committee is authorized to
interpret the Plan, to promulgate, amend and rescind rules and regulations
relating to the Plan and to make all other determinations necessary or advisable
for its administration. Interpretation and construction of any provision of the
Plan by the Committee shall, unless otherwise determined by the Board of
Directors of the Company, be final and conclusive. A majority of the Committee
shall constitute a quorum, and the acts of a majority of the members present at
any meeting at which a quorum is present, or acts approved in writing by a
majority of the Committee, shall be the acts of the Committee.
4. Indemnification: In addition to such other rights of indemnification
as they may have, the members of the Committee shall be indemnified by the
Company in connection with any claim, action, suit or proceeding relating to any
action taken or failure to act under or in
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connection with the Plan or any option granted hereunder to the full extent
provided for under the Company's articles of incorporation or bylaws with
respect to indemnification of directors of the Company.
5. Maximum Number of Shares Subject to Plan: The maximum number of
shares with respect to which stock options may be granted under the Plan shall
be an aggregate of 4,500,000 Common Shares, which may consist in whole or in
part of authorized and unissued or reacquired Common Shares. Unless the Plan
shall have been terminated, shares covered by the unexercised portion of
canceled, expired or otherwise terminated options under the Plan shall again be
available for option and sale.
Subject to Paragraph 16, the number and type of shares subject to each
outstanding stock option, the option price with respect to outstanding stock
options, the aggregate number and type of shares remaining available under the
Plan, and the maximum number and type of shares what may be granted to any
Participant in any fiscal year of the Company pursuant to Paragraph 6, shall be
subject to such adjustment as the Committee, in its Discretion, deems
appropriate to reflect such events as stock dividends, stock splits,
recapitalizations, mergers, statutory share exchanges or reorganizations of or
by the Company; provided that no fractional shares shall be issued pursuant to
the Plan, no rights may be granted under the Plan with respect to fractional
shares, and any fractional shares resulting from such adjustments shall be
eliminated from any outstanding option.
6. Participants: The Committee shall determine and designate from time
to time, in its Discretion, those key employees (including officers), directors,
consultants and advisors of or to the Company or any Subsidiary to whom options
are to be granted and who thereby become Participants under the Plan; provided,
however, that (a) Incentive Options shall be granted only to employees (as
defined in the Code) of the Company or a corporate Subsidiary, to the extent
required by Section 422 of the Code, or any successor provision, and (b) no
Participant may be granted stock options to purchase more than 2,000 Common
Shares in the aggregate in any fiscal year of the Company, subject to any
adjustments provided in the final paragraph of Paragraph 5 and in Paragraph 16.
7. Allotment of Shares: The Committee shall determine and fix the
number of Common Shares to be offered to each Participant; provided that no
Incentive Option may be granted under the Plan to any one Participant which
would result in the aggregate fair market value, determined as of the date the
option is granted, of the underlying stock with respect to which Incentive
Options are exercisable for the first time by such individual during any
calendar year (under all of such plans of the Company and its parent and
Subsidiary corporations) exceeding $100,000.
8. Option Price: Subject to the rules set forth in this Paragraph 8,
the Committee, in its Discretion, shall establish the option price at the time
any option is granted. With respect to an Incentive Option, such option price
shall not be less than 100% of the fair market value of the stock on the date on
which such option is granted; provided that with respect to an
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Incentive Option granted to an employee who at the time of the grant owns (after
applying the attribution rules of Section 425(d) of the Code) more than 10% of
the total combined voting stock of the Company or of any parent or Subsidiary,
the option price shall not be less than 110% of the fair market value of the
stock subject to the Incentive Option on the date such option is granted. With
respect to a Nonqualified Option, the option price shall be not less than the
par value, if any, of the Common Shares. Fair market value of a share shall be
determined by the Committee using any method it deems reasonable, including,
without limitation, an appraisal of the Company by an investment banking firm or
other appraiser, or by using the closing sale price of the Company's stock on
any exchange or other market on which the Common Shares shall be traded on such
date, or if there is no sale on such date, on the next following date on which
there is a sale, or the average of the closing bid and asked prices in any
market or quotation system in which the Common Shares shall be listed or traded
on such date. The option price will be subject to adjustment in accordance with
the provisions of Paragraphs 5 and 16 and of the Plan.
9. Granting and Exercise of Options: The granting of options under the
Plan shall be effected in accordance with determinations made by the Committee
pursuant to the provisions of the Plan, by execution of instruments in writing
in form approved by the Committee. Such instruments shall constitute binding
contracts between the Company and the Participant.
Subject to the terms of the Plan, the Committee, in its Discretion, may
grant to Participants Incentive Options, Nonqualified Options or any combination
thereof. Each option granted under the Plan shall designate the number of shares
covered thereby, if any, with respect to which the option is an Incentive Option
and the number of shares covered thereby, if any, with respect to which the
option is a Nonqualified Option.
Subject to the terms of the Plan, each option granted under the Plan
shall be exercisable at any such time or times or in any such installments as
may be determined by the Committee in its Discretion; provided that the
aggregate fair market value (determined as of the date the option is granted)
of the underlying stock with respect to which Incentive Options are exercisable
for the first time by such individual during any calendar year (under all of
such plans of the Company and its parent and Subsidiary corporations) shall not
exceed $100,000. Except as provided in Paragraph 13, options may be exercised
only while the Participant is an employee, director, consultant or advisor of
the Company or a Subsidiary.
Notwithstanding any other term or provision of this Plan, but subject
to the requirements of the Code with respect to Incentive Options that are
intended to remain Incentive Options, in connection with a Participant ceasing
to be an employee of the Company or a Subsidiary for any reason, the stock
option agreement may provide for the acceleration of, or the Committee may
accelerate, in its Discretion (exercised at the date of the grant of the stock
option or after the date of grant), in whole or in part, the time or times or
installments with respect to which any option granted under this Plan shall be
exercisable in connection with termination of a Participant's employment with
the Company or a Subsidiary, subject to any restrictions, terms and conditions
fixed by the Committee either at the date of the award or at the date it
exercises such Discretion.
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Successive stock options may be granted to the same Participant,
whether or not the option or options previously granted to such Participant
remain unexercised. A Participant may exercise any option granted under the
Plan, if then exercisable, notwithstanding that options granted to such
Participant prior to the option then being exercised remain unexercised.
10. Payment of Option Price: At the time of the exercise in whole or in
part any option granted under this Plan, payment in full in cash, or with the
consent of the Committee, in its Discretion, in Common Shares or by a promissory
note payable to the order of the Company which is acceptable to the Committee,
shall be made by the Participant for all shares so purchased. Such payment may,
with the consent of the Committee, in its Discretion, also consist of a cash
down payment and delivery of such a promissory note in the amount of the unpaid
exercise price. In the Discretion of, and subject to such conditions as may be
established by, the Committee, payment of the option price may also be made by
the Company retaining from the shares to be delivered upon exercise of the stock
option that number of shares having a fair market value on the date of exercise
equal to the option price of the number of shares with respect to which the
Participant exercises the option. In the Discretion of the Committee, a
Participant may exercise an option, if then exercisable, in whole or in part, by
delivery to the Company of written notice of the exercise in such form as the
Committee may prescribe, accompanied by irrevocable instructions to a stock
broker to promptly deliver to the Company full payment for the shares with
respect to which the option is exercised from the proceeds of the stock broker's
sale of or loan against some or all of the shares. Such payment may also be made
in such other manner as the Committee determines is appropriate, in its
Discretion. No Participant shall have any of the rights of a shareholder of the
Company under any option until the actual issuance of shares to such
Participant, and prior to such issuance no adjustment shall be made for
dividends, distributions or other rights in respect of such shares, except as
provided in Paragraphs 5 and 16.
11. Transferability of Option: Except as otherwise provided in this
Paragraph 11, to the extent required by Section 422 of the Code, or any
successor section, but only with respect to Incentive Options, or to the extent
determined by the Committee in its Discretion (either by resolution or by a
provision in, or amendment to, the option), (i) no option granted under the
Plan to a Participant shall be transferable by such Participant otherwise than
by will, or by the laws of descent and distribution or, with respect to
Nonqualified Options only (unless permitted by Section 422 of the Code or any
successor section), pursuant to a qualified domestic relations order as defined
in the Code or Title I of the Employee Retirement Income Security Act, or the
rules thereunder, and (ii) such option shall be exercisable, during the
lifetime of the Participant, only by the Participant.
The Committee may, in its Discretion, authorize all or a portion of the
options to be granted to an optionee to be on terms which permit transfer by
such optionee to, and the exercise of such option by, (i) the spouse, children
or grandchildren of the optionee ("Immediate Family Members"), (ii) a trust or
trusts for the exclusive benefit of such Immediate Family Members, (iii) a
partnership in which such Immediate Family Members are the only partners, or
(iv) such other persons or entities as determined by the Committee, in its
Discretion, on such terms and
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<PAGE> 6
conditions as the Committee, in its Discretion, may determine; provided that (y)
the stock option agreement pursuant to which such options are granted must be
approved by the Committee and must expressly provide for transferability in a
manner consistent with this Paragraph 11, and (z) subsequent transfers of
transferred options shall be prohibited except for transfers the original
optionee would be permitted to make (if he or she were still the owner of the
option) in accordance with this Paragraph 11.
Following transfer, any such options shall continue to be subject to
the same terms and conditions as were applicable immediately before transfer,
provided that for purposes of Paragraphs 9, 10, 14, 16 and 18 the term
"Participant" shall be deemed to refer to the transferee. The events of
termination of employment of Paragraph 13 shall continue to be applied with
respect to the original optionee, following which the options shall be
exercisable by the transferee only to the extent, and for the periods,
specified in Paragraph 13. The original optionee shall remain subject to
withholding taxes and related requirements upon exercise provided in Paragraph
15. The Company shall have no obligation to provide any notice to any
transferee, including, without limitation, notice of any termination of the
option as a result of termination of the original optionee's employment with,
or other service to, the Company.
12. Continuance of Employment; No Right to Continued Employment: The
Committee may require, in its Discretion, that any Participant under the Plan to
whom an option shall be granted shall agree in writing as a condition of the
granting of such option to remain in his or her position as an employee,
director, consultant or advisor of the Company or a Subsidiary for a designated
minimum period from the date of the granting of such option as shall be fixed by
the Committee.
Nothing contained in the Plan or in any option granted pursuant to the
Plan, nor any action taken by the Committee hereunder, shall confer upon any
Participant any right with respect to continuation of employment, consultation
or other service by or to the Company or a Subsidiary nor interfere in any way
with the right of the Company or a Subsidiary to terminate such person's
employment, consultation or other service at any time.
13. Termination of Employment; Expiration of Options: Subject to the
other provisions of the Plan, including, without limitation, Paragraphs 9 and
16 and this Paragraph 13, all rights to exercise options shall
terminate when a Participant ceases to be an employee, director, consultant or
advisor of or to the Company or a Subsidiary for any cause, except that the
Committee may, in its Discretion, permit the exercise of all or any portion of
the options granted to such Participant
(i) for a period not to exceed three months following such
termination with respect to Incentive Options that are intended to
remain Incentive Options if such termination is not due to death or
permanent disability of the Participant,
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<PAGE> 7
(ii) for a period not to exceed one year following termination
of employment with respect to Incentive Options that are Intended to
remain Incentive Options if termination of employment is due to the
death or permanent disability of the Participant, and
(iii) for a period not to extend beyond the expiration date
with respect to Nonqualified Options or Incentive Options that are not
intended to remain Incentive Options,
all subject to any restrictions, terms and conditions fixed by the Committee
either at the date of the award or at the date it exercises such Discretion. In
no event, however, shall an option be exercisable after its expiration date,
and, unless the Committee in its Discretion determines otherwise (pursuant to
Paragraph 9 or Paragraph 16), an option may only be exercised after
termination of a Participant's employment, consultation or other service by or
to the Company to the extent exercisable on the date of such termination or to
the extent exercisable as a result of the reason for such termination. The
Committee may evidence the exercise of its Discretion under this Paragraph 13
in any manner it deems appropriate, including by resolution or by a provision
in, or amendment to, the option.
If not sooner terminated, each stock option granted under the Plan
shall expire not more than 10 years from the date of the granting thereof;
provided that with respect to an Incentive Option granted to a Participant who,
at the time of the grant, owns (after applying the attribution rules of Section
425(d) of the Code) more than 10% of the total combined voting stock of all
classes of stock of the Company or of any parent or Subsidiary, such option
shall expire not more than 5 years after the date of granting thereof.
14. Investment Purpose: If the Committee in its Discretion determines
that as a matter of law such procedure is or may be desirable, it may require a
Participant, upon any exercise of any option granted under the Plan or any
portion thereof and as a condition to the Company's obligation to deliver
certificates representing the shares subject to exercise, to execute and deliver
to the Company a written statement, in form satisfactory to the Committee,
representing and warranting that the Participant's purchase of Common Shares
upon exercise thereof shall be for such person's own account, for investment and
not with a view to the resale or distribution thereof and that any subsequent
sale or offer for sale of any such shares shall be made either pursuant to (a) a
Registration Statement on an appropriate form under the Securities Act, which
Registration Statement has become effective and is current with respect to the
shares being offered and sold, or (b) a specific exemption from the registration
requirements of the Securities Act, but in claiming such exemption the
Participant shall, prior to any offer for sale or sale of such shares, obtain a
favorable written opinion from counsel for or approved by the Company as to the
availability of such exemption. The Company may endorse an appropriate legend
referring to the foregoing restriction upon the certificate or certificates
representing any shares issued or transferred to the Participant upon exercise
of any option granted under the Plan.
15. Withholding Payments: If upon the exercise of any Nonqualified
Option or a disqualifying disposition (within the meaning of Section 422 of the
Code) of shares acquired upon
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<PAGE> 8
exercise of an Incentive Option, there shall be payable by the Company or a
Subsidiary any amount for income tax withholding, in the Committee's Discretion,
either the Participant shall pay such amount to the Company, or the amount of
Common Shares delivered by the Company to the Participant shall be appropriately
reduced, to reimburse the Company or such Subsidiary for such payment. The
Company or any of its Subsidiaries shall have the right to withhold the amount
of such taxes from any other sums or property due or to become due from the
Company or any of its Subsidiaries to the Participant upon such terms and
conditions as the Committee shall prescribe. The Company may also defer issuance
of the stock upon exercise of such option until payment by the Participant to
the Company of the amount of any such tax. The Committee may, in its Discretion,
permit Participants to satisfy such withholding obligations, in whole or in
part, by electing to have the amount of Common Shares delivered or deliverable
by the Company upon exercise of a stock option appropriately reduced, or by
electing to tender Common Shares back to the Company subsequent to exercise of a
stock option to reimburse the Company for such income tax withholding, subject
to such rules and regulations, if any, as the Committee may adopt. The Committee
may make such other arrangements with respect to income tax withholding as it
shall determine.
16. Extraordinary Transactions: In case the Company (i) consolidates
with or merges into any other corporation or other entity and is not the
continuing or surviving entity of such consolidation or merger, or (ii) permits
any other corporation or other entity to consolidate with or merge into the
Company and the Company is the continuing or surviving entity but, in connection
with such consolidation or merger, the Common Shares are changed into or
exchanged for stock or other securities of any other corporation or other entity
or cash or any other assets, or (iii) transfers all or substantially all of its
properties and assets to any other corporation or other person or entity, or
(iv) dissolves or liquidates, or (v) effects a capital reorganization or
reclassification in such a way that holders of Common Shares shall be entitled
to receive stock, securities, cash or other assets with respect to or in
exchange for the Common Shares, then, and in each such case, proper provision
shall be made so that, each Participant holding a stock option upon the exercise
of such option at any time after the consummation of such consolidation, merger,
transfer, dissolution, liquidation, reorganization or reclassification (each
transaction, for purposes of this Paragraph 16, being herein called a
"Transaction"), shall be entitled to receive (at the aggregate option price in
effect for all Common Shares issuable upon such exercise immediately prior to
such consummation and as adjusted to the time of such Transaction), in lieu of
Common Shares issuable upon such exercise prior to such consummation, the stock
and other securities, cash and assets to which such Participant would have been
entitled upon such consummation if such Participant had so exercised such stock
option in full immediately prior thereto (subject to adjustments subsequent to
such Transaction provided for in Paragraph 5).
Notwithstanding anything in the Plan to the contrary, in connection
with any Transaction and effective as of a date selected by the Committee, which
date shall, in the Committee's judgment, be far enough in advance of the
Transaction to permit Participants holding stock options to exercise their
options and participate in the Transaction as a holder of Common Shares, the
Committee, acting in its Discretion without the consent of any Participant, may
effect one or more of the following alternatives with respect to all of the
outstanding stock options
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<PAGE> 9
(which alternatives may be made conditional on the occurrence of the applicable
Transaction and which may, if permitted by law, vary among individual
Participants): (a) accelerate the time at which stock options then outstanding
may be exercised so that such stock options may be exercised in full for a
limited period of time on or before a specified date fixed by the Committee
after which specified date all unexercised stock options and all rights of
Participants thereunder shall terminate; (b) accelerate the time at which stock
options then outstanding may be exercised so that such stock options may be
exercised in full for their then remaining term; or (c) require the mandatory
surrender to the Company of outstanding stock options held by such Participants
(irrespective of whether such stock options are then exercisable) as of a date,
before or not later than sixty days after such Transaction, specified by the
Committee, and in such event the Company shall thereupon cancel such stock
options and shall pay to each Participant an amount of cash equal to the excess
of the fair market value of the aggregate Common Shares subject to such stock
option, determined as of the date such Transaction is effective, over the
aggregate option price of such shares; provided, however, the Committee shall
not select an alternative (unless consented to by the Participant) such that, if
a Participant exercised his or her accelerated stock option pursuant to
alternative (a) or (b) and participated in the Transaction or received cash
pursuant to alternative (c), the alternative would result in the Participant's
owing any money by virtue of the operation of Section 16(b) of the Exchange Act.
If all such alternatives have such a result, the Committee shall, in its
Discretion, take such action to put such Participants in as close to the same
position as such Participant would have been in had alternative (a), (b) or (c)
been selected but without resulting in any payment by such Participant pursuant
to Section 16(b) of the Exchange Act. Notwithstanding the foregoing, with the
consent of affected Participants, each with respect to such Participant's option
only, the Committee may in lieu of the foregoing make such provision with
respect to any Transaction as it deems appropriate.
17. Effectiveness of Plan: This Plan shall be effective on the date the
Board of Directors of the Company adopts this Plan, provided that the
shareholders of the Company approve the Plan within 12 months before or after
its adoption by the Board of Directors. Options may be granted before
shareholder approval of this Plan, but each such option shall be subject to
shareholder approval of this Plan. No option granted under this Plan shall be
exercisable unless and until this Plan shall have been approved by the Company's
shareholders.
18. Termination, Duration and Amendments to the Plan: The Plan may be
abandoned or terminated at any time by the Board of Directors of the Company.
Unless sooner terminated, the Plan shall terminate on the date ten years after
the earlier of its adoption by the Board of Directors or its approval by the
shareholders of the Company, and no stock options may be granted under the Plan
thereafter. The termination of the Plan shall not affect the validity of any
option which is outstanding on the date of termination.
For the purpose of conforming to any changes in applicable law or
governmental regulations, or for any other lawful purpose, the Board of
Directors shall have the right, with or without approval of the shareholders of
the Company, to amend or revise the terms of this Plan or any option agreement
under this Plan at any time; provided, however, that (i) to the extent required
by Section 162(m) of the Code and related regulations, or any successor rule,
but only
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<PAGE> 10
with respect to amendments or revisions affecting Participants whose
compensation is subject to Section 162(m) of the Code, and to the extent
required by Section 422 of the Code, or any successor section, but only with
respect to Incentive Options, no such amendment or revision shall increase the
maximum number of shares in the aggregate which are subject to this Plan
(subject, however, to the provisions of Paragraphs 5 and 16) without the
approval or ratification of the shareholders of the Company, and (ii) no such
amendment or revision shall change the option price (except as contemplated by
Paragraphs 5 and 16) or alter or impair any option which shall have been
previously granted under this Plan, in a manner adverse to a Participant,
without the consent of such Participant.
As adopted by the Board of Directors on December 27, 1996 and amended
on February 18, 1998.
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<PAGE> 1
EXHIBIT 10.2
STOCK OPTION AGREEMENT
Dated as of: March 6, 1997
To: Optionee~
Pursuant to the 1996 Stock Option Plan ("1996 Plan") of Rock Financial
Corporation (the "Company") and with the approval of the Company's Compensation
Committee in accordance with the 1996 Plan, the Company hereby grants to you an
option (the "Option") to purchase Shares Words~ (Shares Number~) Common Shares,
par value $0.01 per share, of the Company (the "Shares") at $4.68 per Share,
upon the terms and conditions contained in this Stock Option Agreement and in
the 1996 Plan, a copy of which is attached to, and, as amended from time to
time, is made a part of, this Stock Option Agreement. You agree that this Option
is not in lieu of any salary or other compensation for services rendered or to
be rendered by you to the Company or any Subsidiary. Capitalized terms not
otherwise defined in this Stock Option Agreement shall have the meanings given
them in the 1996 Plan.
1. Nonqualified Option. The Option is intended to be a
Nonqualified Option, as defined in the 1996 Plan.
2. Vesting and Term.
(a) Vesting. Subject to the other terms of this Option and the
1996 Plan, you may exercise the Option in accordance with the following
schedule:
(1) Between the date of this option and December 31, 1997,
none of the Shares may be purchased.
(2) Commencing December 31, 1997, one-fifth (1/5) of the
Shares may be purchased.
(3) Commencing December 31, 1998, an additional one-fifth
(1/5) of the Shares may be purchased.
(4) Commencing December 31, 1999, an additional one-fifth
(1/5) of the Shares may be purchased.
(5) Commencing December 31, 2000, an additional one-fifth
(1/5) of the shares may be purchased.
(6) Commencing December 31, 2001, the final one-fifth
(1/5) of the Shares may be purchased.
(b) Term. The Option shall expire (to the extent not
previously exercised), and all rights to exercise any unexercised portion of
this Option shall cease, on the earliest of (i) December 31, 2006, (ii) the date
you cease to be an employee of the Company or a Subsidiary
<PAGE> 2
because of termination for "cause" (as defined in Section 2.(c) or because of
your retirement, resignation or other termination by you of employment with the
Company (other than by your death or disability), (iii) only with respect to
the portion of this Option, if any, that is not exercisable at the date of
termination of your employment with the Company or a Subsidiary, the date you
cease to be an employee of the Company or a Subsidiary for any reason or for no
reason, and (iv) only with respect to the portion of this Option, if any, that
is exercisable at the date of termination of your employment with the Company,
(A) one year after such termination, if such termination is a result of your
death or permanent disability, and (B) 90 days after such termination, if such
termination is by the Company without "cause" (as defined in Section 2.(c).
(c) Cause. For purposes of this Option, "cause" has the same
meaning as in your employment agreement with the Company, if any, or if you do
not have an employment agreement with the Company, "cause" means the occurrence
of any of the following:
(1) A material breach of any term or provision of
your employment agreement, if any, with the Company or a Subsidiary,
the Company's Employee Handbook, or this Stock Option Agreement.
(2) Your failure to perform your duties of employment
in a reasonable and business-like manner.
(3) Your conviction of a felony or any crime
involving moral turpitude, including, without limitation, crimes
involving drugs or liquor, regardless of whether appealed.
(4) Your commission of, or participation in, any act
of fraud, false pretense, forgery, embezzlement or dishonesty against
the Company or any Subsidiary.
(5) Your commission of, or participation in, any
other act or omission, wantonly, willfully, or recklessly, or in a
manner that is negligent against, and having an adverse effect upon,
the affairs of the Company or any Subsidiary.
(6) Your substantial dependence on any mind altering
or other harmful substance, including, without limitation, alcohol,
marijuana, amphetamines, barbiturates, LSD, cocaine, narcotic drugs, or
any natural or synthetic substance having the same or similar effects
as any of the foregoing, to the extent that such use would constitute
reasonable cause for termination under applicable law.
(d) Special Termination Provisions. The purpose of the 1996
Plan is to provide key employees with an increased incentive to make significant
and extraordinary contributions to the long-term performance and growth of the
Company and its Subsidiaries, to join the interests of key employees with the
interests of the shareholders of the Company, and to facilitate attracting and
retaining key employees of exceptional ability. You acknowledge that the Company
expends considerable time, money and resources in recruiting, training and
developing
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<PAGE> 3
the skills and abilities of its employees, developing business relationships
with referral sources and customers so as to improve the good will of the
Company, establishing and maintaining close business relationships between
employees and the Company's customers and obtaining, compiling and developing
confidential customer lists, various internal computer reports and other
proprietary business information not readily available to the public or through
other sources. You agree that the provisions in this Section 2.(d) are
necessary to preserve and protect the legitimate business interests of the
Company. In return for granting this Option to you, notwithstanding any other
term of this Option to the contrary, you agree to the following:
(1) Forfeiture of Option Gain if You Leave the
Company Within One Year After Exercise. If you exercise any portion of
this Option and your employment with the Company terminates within one
year after such exercise for any reason except death, disability,
normal retirement or termination by the Company without "cause", then
the gain represented by the fair market value of a Share, determined
pursuant to Paragraph 8 of the 1996 Plan, on the date of such exercise
over the exercise price, multiplied by the number of Shares you
purchased ("option gain"), without regard to any subsequent increase or
decrease in fair market value, shall be paid by you to the Company.
(2) Forfeiture of Option Gain and Unexercised Options if
You Engage In Certain Activities. If, at any time within (i) one year
after termination of your employment with the Company, or (ii) one year
after you exercise any portion of this Option, whichever is later, you
engage in any activity in competition with any activity of the Company
or inimical, contrary or harmful to the interests of the Company,
including, but not limited to,
(A) conduct related to your employment for which
either criminal or civil penalties against you may be sought,
(B) violation of published Company policies,
including, without limitation, the Company's insider trading
policy,
(C) owning, maintaining, operating or engaging in the
same or similar line of business or activity as the Company or
any Subsidiary or in any business or activity that competes
with the Company or any Subsidiary ("Competing Business") in
any county of any state in which the Company or any Subsidiary
is operating a prime or sub-prime mortgage loan origination
office or is engaged in telemarketing operations or call
center operations,
(D) accepting employment with or serving as a
consultant, advisor or in any other capacity to an employer
(including, without limitation, any individual, firm, agency,
partnership, limited liability company, unincorporated
association, corporation or pre-incorporated association
("Person or Entity")) that
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<PAGE> 4
is a Competing Business or is acting against the
interests of the Company or any Subsidiary,
(E) undertaking any efforts or activities toward
pre-incorporating, incorporating, financing or commencing any
Competing Business,
(F) advising, serving, or consulting with any Person
or Entity which is or will be undertaking efforts towards
incorporating, financing or commencing any Competing Business
or activity which engages in a Competing Business,
(G) employing, offering employment to, soliciting for
the purpose of employing or recruiting any present, former or
future employee of the Company or any Subsidiary for or on
behalf of any Person or Entity,
(H) calling upon, soliciting, diverting or referring
to any Person or Entity customers or referral sources of the
Company or any Subsidiary who have conducted business with the
Company or any Subsidiary within the two years before the time
in question,
(I) disclosing, copying, communicating, distributing,
revealing, or using any confidential information, material,
trade secrets, proprietary information, or confidential
business information concerning the Company, any Subsidiary or
any of their customers ("Confidential Information"), except as
your employment duties with the Company or a Subsidiary may
require during your employment with the Company or a
Subsidiary,
(J) failing to return any Confidential Information or
any documents, records, files, lists and the like (including
originals and copies) containing Confidential Information
immediately upon your termination or separation of employment
with the Company or any Subsidiary, or
(K) participating in a hostile takeover attempt of the
Company or any Subsidiary,
then (y) this Option shall terminate effective on the date on which you
enter into such activity, unless terminated sooner by operation of
another term or condition of this Stock Option Agreement or the 1996
Plan, and (z) any option gain realized by you from exercising all or a
portion of this Option shall be paid by you to the Company.
(3) Right of Set-off. By accepting this Option, you
consent to a deduction from any amounts the Company or any Subsidiary
owes to you from time to time (including amounts owed to you as wages
or other compensation, fringe benefits, or vacation pay, as well as any
other amounts owed to you by the Company or any Subsidiary), to the
extent of the amounts you owe the Company under Sections 2.(d)(1)
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<PAGE> 5
and 2.(d)(2) above. Whether or not the Company elects to make
any set-off in whole or in part, if the Company does not recover by
means of set-off the full amount you owe it, calculated as set forth
above, you agree to pay immediately the unpaid balance to the Company.
(4) Committee Discretion. You may be released from all
or any portion of your obligations under Sections 2.(d)(1), 2(d)(2) and
2.(d)(3) above only if the Committee (or its duly appointed agent) determines
in its Discretion that such action is in the best interests of the Company.
3. Exercise of the Option. The Option shall be exercised by giving a
written notice of exercise to the Treasurer of the Company. Such notice shall
specify the number of Shares to be purchased and shall be accompanied by payment
in full in cash (or in such other manner as is approved by the Committee
pursuant to the 1996 Plan) of the aggregate option price for the number of
Shares purchased and by the representation required by Paragraph 14 of the 1996
Plan if the Shares to be issued under the 1996 Plan have not been registered
under the Securities Act of 1933. Such exercise shall be effective only upon the
actual receipt of such written notice, such exercise price and an executed
shareholders agreement (on terms and conditions consistent with this Stock
Option Agreement or otherwise mutually acceptable to you and the Company) and no
rights or privileges of a shareholder of the Company in respect of any of the
Shares issuable upon the exercise of any part of the Option shall inure to you,
or any other person entitled to exercise the Option, unless and until
certificates representing such Shares shall have been issued.
4. Miscellaneous Representations, Warranties and Covenants.
(a) Investment Purpose. It is your current intention to, and,
if the Company has not both (i) closed a public offering of its securities
registered under the Securities Act of 1933, as amended (an "IPO"), and (ii)
registered the Shares under the Securities Act of 1933, as amended, at the time
of exercise of this Option (the "Registration Events") you will, acquire any of
the Shares subject to the Option for investment and not with a view toward their
sale in connection with any distribution thereof. If the Registration Events
have not occurred, any Shares you acquire pursuant to this Option will be
acquired for your own account, and no one else will have any interest in such
Shares. You acknowledge that, as of the date of this Stock Option Agreement, the
Shares have not been registered under federal or state law, have no ready marked
for resale, and may not be resold without registration under state and federal
securities laws or applicable exemptions from such registration requirements.
You also acknowledge that the Company is relying on these representations,
warranties and covenants for purposes of determining whether you are eligible to
receive this Option or purchase any Shares without registration under applicable
state and federal securities laws.
(b) Ability to Bear Risk; Sophistication; Access to
Information. If, at the time you exercise all or any part of this Option, the
Registration Events have not occurred, you represent, warrant and covenant that
you will be able to bear the economic risk of any investment in the Shares for
an indefinite period. In addition, if the Registration Events have not occurred,
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<PAGE> 6
you represent, warrant and covenant that at the time you exercise this Option,
you, or your financial advisor, will have such knowledge and experience in
financial and business matters that you will be capable of evaluating the merits
and risks of the prospective investment in the Shares. In addition, if the
Registration Events have not occurred, you represent, warrant and covenant that
at the time you exercise this Option, you will have, or your financial advisor
will have, carefully reviewed all of the information regarding the Company,
access to which will be accorded to you, and you will be thoroughly familiar
with the business, operations, properties, financial condition, results of
operations, prospects and risks of the Company and its business by virtue of
your review and of your relationship with the Company as an employee and will
have discussed with officers of the Company any questions you may have with
respect to the Company or its securities.
(c) Opinion of Counsel for Transfers. You will not dispose of
all or any part of or any interest in this Option or any of the Shares you
acquire upon exercise of this Option, or encumber, pledge, hypothecate, sell or
transfer this Option, any of such Shares or any interest therein, unless you
furnish the Company, upon its request, with an opinion of counsel in form and
substance satisfactory to the Company to the effect that the disposition will
not require registration of any of the Shares. The Company may refuse to
transfer any Shares if its believes that such transfer will require registration
or qualification of the Shares under any securities laws or result in a breach
of any of your representations, warranties or covenants in this Stock Option
Agreement.
5. No Exercise Until Required Registrations, Listings, and Approvals
Obtained. This Option is subject to the requirement that, if at any time the
Committee shall determine, in its Discretion, that the listing, registration, or
qualification of the Shares with any securities exchange or association or under
any state or federal law, or the consent or approval or any governmental
regulatory body, or imposed by any securities underwriter, is necessary or
desirable as a condition of, or in connection with, the granting of this Option
or the issue or purchase of the Shares pursuant to this Option, this Option may
not be exercised in whole or in part unless such listing, registration,
qualification, consent or approval shall have been effected or obtained free of
any conditions not acceptable to the Committee. The Company shall use its best
efforts to obtain expeditiously any such registration, qualification, consent or
approval.
6. No Employment Rights Created. It is understood and agreed that
nothing contained in the 1996 Plan or in this Stock Option Agreement, nor any
action taken by the Committee, shall confer upon you any right with respect to
the continuation of your employment by the Company or any Subsidiary, nor
interfere in any way with the right of the Company or a Subsidiary to terminate
your employment at any time.
7. Income Tax Withholding Requirements. Pursuant to the 1996 Plan, if
upon or as a result of your exercise of this Option there shall be payable by
the Company or any Subsidiary any amount for income tax withholding, you will
pay such amount to the Company to reimburse it for such income tax withholding.
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8. Restrictions on Sale or Transfer. You agree that you shall not sell,
assign, pledge, encumber, hypothecate, make a gift of, exchange, dispose of, or
otherwise transfer or alienate, by operation of law or otherwise (each a
"transfer"), all or any part of this Option, any right to exercise this Option
or any of the Shares you may acquire upon exercise of this Option (collectively,
the "Securities"), except for any transfer described in, and made in accordance
with (i) Section 8.(g), and (ii) one or more of the other subsections of this
Section 8. Any purported transfer in violation of this Section 8 will be void,
and if you try to make any purported transfer in violation of any of the terms
of this Section 8, you will retain beneficial ownership of such Securities,
including the right to vote any Shares you may acquire upon exercise of this
Option and to receive dividends and liquidation proceeds upon such Shares, and
you will continue to report the income or loss allocated to such Shares by the
Company in accordance with the relevant sections of the Internal Revenue Code
of 1986, as amended (the "Code"), as long as the Company is taxed as an S
corporation under the Code.
(a) Permitted Transfer With First Refusal Rights. You and any
person or entity to whom any of your Securities are transferred (each such
person or entity is referred to in this Section 8(a) as a "transferor") may
transfer all or any part of any Shares you may acquire upon exercise of
this Option to any person or entity if (i) the transfer is made pursuant to,
and in accordance with, the terms of this Section 8.(a), (ii) the purchase
price for such Shares, if any, shall consist only of cash, a promissory note or
some combination of the foregoing, and (iii) the only security for any
indebtedness in connection with any such transfer shall be the Shares being
transferred.
(1) Notice. The transferor shall first give written
notice to the Company and to the each of the other holders of
outstanding common shares of the Company (the "Shareholders") of
any such proposed transfer, which notice shall state the name and
address of the proposed transferee (such person or entity is referred
to in this Section 8.(a) as the "transferee"), the number of Shares
proposed to be transferred, and the price, terms of payment, and other
terms and conditions of such proposed transfer. Attached to such
notice shall be a copy of the offer and all other pertinent documents
in connection with the proposed transfer of the Shares.
(2) First Refusal Rights.
(A) Daniel B. Gilbert. Daniel B. Gilbert
shall have the exclusive option for a period of 30 days after
receipt of such a notice under Section 8.(a)(1) in which to
purchase all or any part of the Shares proposed to be
transferred at the same price and on the same terms
(including, without limitation, payment terms) as are offered
by the proposed transferee for the Shares.
(B) Company. To the extent Daniel B. Gilbert
does not exercise such option to purchase all of the Shares
proposed to be transferred, the Company shall have the
exclusive option for a period of 30 days immediately after the
expiration of Daniel B. Gilbert's 30-day option to purchase
all or any part of the
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<PAGE> 8
Shares proposed to be transferred and not being purchased by
Daniel B. Gilbert pursuant to his option, at the same price
and on the same terms (including, without limitation, payment
terms) as are offered by the proposed transferee for the
Shares.
(C) Other Shareholders. To the extent Daniel
B. Gilbert and the Company do not exercise their options to
purchase all of the Shares proposed to be transferred, the
remaining Shareholders shall have the exclusive option for a
period of 30 days immediately after the expiration of the
Company's 30-day option to purchase all or any part of the
Shares proposed to be transferred and not being purchased by
Daniel B. Gilbert or the Company pursuant to their options, at
the same price and on the same terms (including, without
limitation, payment terms) as are offered by the proposed
transferee for the Shares.
(D) All or None. Notwithstanding anything to
the contrary in this Section 8.(a)(2), Daniel B. Gilbert, the
Company and the remaining Shareholders (other than Daniel B.
Gilbert and the transferor) must exercise their options to
purchase, in the aggregate, all or none of the Shares
proposed to be transferred pursuant to this Section 8.(a). If
the options described in this Section 8.(a) are not exercised
to purchase, in the aggregate, all of the Shares
proposed to be transferred pursuant to this Section 8.(a),
within the time periods provided in this Section 8.(a)(2),
such options shall expire unexercised, and the transferor may
transfer all of the Shares proposed to be transferred
pursuant to Section 8.(a)(5).
(3) Allocation of Option Among Other Shareholders.
Subject to Section 8.(a)(2)(D), the right of the Shareholders (other
than the transferor and Daniel B. Gilbert) to purchase such Shares, if
any, shall be in proportion to their relative ownership of Shares;
provided that if such Shareholders do not initially elect to purchase
all of the Shares available to them, each of such Shareholders
purchasing all of the Shares available to him shall have the right to
purchase the remaining Shares available in proportion to his relative
ownership of Shares until such Shareholders have exercised their
options to purchase all of the Shares available to them in connection
with such transfer. If the options described in Section 8.(a)(2) are
not exercised to purchase all of the Shares, pursuant to Section
8(a)(2)(D), all of the options shall expire unexercised.
(4) Exercise of First Refusal Rights. The options in
favor of Daniel B. Gilbert, the Company and the Shareholders (other
than the transferor and Daniel B. Gilbert), described in this Section
8.(a), shall be exercised by giving written notice of such exercise to
the transferor, to the Company, and to any other Shareholders. Such
notice shall also specify a date for closing which shall be not more
than thirty days after the date the option to purchase all of the
remaining Shares being transferred is exercised. The closing of any
sale pursuant to the exercise of the options described in this Section
8.(a) will be made at the Company's principal executive offices or
such other place as may be agreed upon by the applicable parties. On
the closing date, the transferor will, upon
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<PAGE> 9
receipt of the consideration for the Shares being sold, transfer,
assign and deliver to the person exercising the option certificates for
the Shares being transferred, together with such assignments separate
from certificate and such other documents and instruments as the person
exercising the option may reasonably request to properly and validly
effectuate or evidence such transfer.
(5) Right to Transfer. To the extent Daniel B.
Gilbert, the Company and the other Shareholders do not elect to
purchase all of the Shares proposed to be transferred pursuant to this
Section 8.(a), then the transferor shall be free, for thirty days
immediately after the expiration of the option periods provided in
this Section 8.(a), to sell all of the Shares proposed to be
transferred to the proposed transferee, on the same terms and
conditions described in the notice of such transfer; provided that (i)
the transferee shall take such Shares subject to all the restrictions
of this Section 8 as though such transferee were an original signatory
to this Stock Option Agreement, (ii) the transferee agrees in writing
to comply with, and be bound by, the terms and conditions of this
Section 8 as if such transferee were you, and that any Shares owned by
any such transferee will be subject to such terms and conditions, and
(iii) such transferee shall be treated for all purposes of this
Section 8 as you. Such written agreement must be delivered to the
Company and the other Shareholders on or before the date of such
transfer to such transferee. If such transfer is not consummated
within such thirty-day period, the restrictions and options provided
in this Section 8.(a) shall be restored and shall continue in full
force and effect with respect to any transfer of such Shares.
(b) Permitted Transfers To Daniel B. Gilbert. You and all
transferees deemed to be you pursuant to this Section 8 or any agreement by
which such transferees agree to be bound by this Section 8 may transfer any
Shares you may acquire upon exercise of this Option or any interest in any
Shares you may acquire upon exercise of this Option to Daniel B. Gilbert on any
terms and conditions.
(c) Transfers Pursuant to Your Death or Termination of Your
Employment. Upon your death, upon any exercise of this Option after your death,
upon the termination of your employment with the Company and upon any exercise
of this Option after the termination of your employment with the Company (each
an "Event"), Daniel B. Gilbert, the Company, and the other Shareholders shall
have a right to purchase all of the Shares acquired upon exercise of this
Option (regardless of whether acquired before or after the Event occurs and
regardless of who owns them at the time the Event occurs) on the same terms and
conditions set forth in Section 8.(a) as if you owned all of such Shares and
had given notice of a proposed transfer of all of such Shares, except as such
terms and conditions are modified by the remaining provisions of this Section
8.(c). The Option may be transferred only by will or by the laws of descent and
distribution; provided that (i) the transferee shall take such Option and any
Shares acquired upon exercise of this Option subject to all the restrictions of
this Section 8 as though such transferee were an original signatory to this
Stock Option Agreement, (ii) the transferee agrees in writing to comply with,
and be bound by, the terms and conditions of this Section 8 as if such
transferee were you, and that this Option and any Shares owned by any such
transferee will be subject to
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<PAGE> 10
such terms and conditions, and (iii) such transferee shall be treated for all
purposes of this Section 8 as you. During your lifetime, however, the Option is
exercisable only by you.
(1) Notice and Period for First Option. You, your
representative or agent or the person to whom this Option is
transferred by will or by the laws of descent and distribution, as the
case may be (the "Agent"), shall give written notice to the Company
and to the other Shareholders of the occurrence of the Event, which
notice shall identify the Event, state when the Event occurred, and
state the number of Shares that are subject to the provisions of this
Section 8.(c) as a result of the Event. Attached to such notice shall
be a copy of all pertinent documents in connection with the Event. The
first exclusive option period shall begin on the date of the Event and
shall end 30 days after receipt of the notice described in this
Section 8.(c)(1).
(2) Purchase Price. The purchase price to anyone
exercising his option will be an appraised price determined in
accordance with this Section 8.(c)(2). The appraised price shall be
determined by one business appraiser selected by mutual agreement of
(i) the persons with options to purchase Shares pursuant to this
Section 8.(c), and (ii) the Agent, or, if the parties are unable to
agree on an appraiser, the Company's independent public accountants at
the time of such determination (or, if they decline so to serve, an
appraiser selected by the Company's independent public accountants)
(the "Appraiser"). The Appraiser shall determine the appraised value
by (i) determining the fair market value of the Company as an
operating entity as of the date of the Event, (ii) dividing such
amount by the number of Shares outstanding as of the date of the
Event, and (iii) multiplying such amount by the number of Shares being
transferred. Such appraised value shall not include (i) any discounts
and premiums based on the size of the shareholdings being transferred,
or (ii) any increase in value of the Company resulting from any life
insurance proceeds received by the Company as a result of the Event or
of your prior death. The appraisal provided for in this Section
8.(c)(2) shall be final and binding and shall be in lieu of any other
settlement procedure with respect to the valuation of the applicable
Shares under this Section 8 or otherwise. Any determination of such
appraised value pursuant to this Section 8.(c)(2) shall be deemed to
be, and shall have the same effect as, an arbitration pursuant to
Michigan Compiled Laws Annotated Section 600.5001, and a judgment of
any Michigan Circuit Court may be rendered upon any appraisal made
pursuant to this Section 8.(c)(2).
(3) Right to Maintain Life Insurance. While this
Section 8.(c) is in effect, the Company may, but shall not be required
to, maintain in full force and effect at its sole cost and expense,
life insurance on your life in an amount it deems appropriate to pay
the exercise price of any option it might have pursuant to this
Section 8.(c). The Company shall be the absolute owner of each policy
of life insurance issued in accordance with the terms of this Section
8.(c)(3), shall pay all premiums on such policies and, subject to the
provisions of this Section 8.(c), shall have the exclusive right to
exercise every privilege or right set forth in such policy or
policies, which privileges and rights shall be exercised only by and
for the benefit of the Company by the Board of Directors
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<PAGE> 11
or its designee. This Section 8.(c)(3) shall apply to all policies of
insurance issued on your life for purposes of this Section 8.(c)(3).
The Company is not obligated to obtain or continue in force any
insurance policies on your life. You will cooperate with the Company
in connection with its obtaining such life insurance (including having
a physical examination).
(4) Payment of the Purchase Price. At the closing,
any purchaser exercising his purchase option, must pay in cash, by
check or by wire transfer the total purchase price for the Shares being
purchased by him.
(5) Closing Place and Time. The closing of such
purchase and sale shall take place at the offices of the Company on the
date designated by the person or entity purchasing the Shares in the
notice of exercise of the option. Such closing date shall be not more
than 120 days after the date options to purchase all of the Shares
being transferred have been exercised.
(6) Transfers Upon Death After Failure to Exercise
First Refusal Rights. To the extent such first refusal rights are not
exercised after your death, such Shares may be transferred pursuant to
your will or by the applicable laws of descent and distribution or
pursuant to your trust holding such Shares, as the case may be, if (i)
the transferee takes such Shares subject to all the restrictions of
this Section 8 as though such transferee were an original signatory to
this Stock Option Agreement, and (ii) such transferee first agrees in
writing to comply with, and be bound by, the terms and conditions of
this Section 8 as if such transferee were you, and that any Shares
owned by any such transferee will be subject to such terms and
conditions. Such transferee shall be treated for all purposes of this
Section 8 as you. Such written agreement must be delivered to the
Company and the other Shareholders on or before the date of such
transfer to such transferee.
(d) Transfers Pursuant to Sale of the Company. Daniel B.
Gilbert shall have the right to request that you and all transferees
deemed to be you pursuant to this Section 8 or any agreement by which such
transferees agree to be bound by this Section 8 transfer or cause to be
transferred all of the Company common shares then held by any of the foregoing
in connection with a sale of all of the Company's common shares to a third
party (a "Sale Request"). Upon receipt by any of the foregoing of a Sale
Request, each of the foregoing shall transfer or cause to be transferred all of
his Company common shares for the consideration per common share, and otherwise
on the same terms and conditions, received by Daniel B. Gilbert. Such transfers
shall not be subject to any of the transfer restrictions contained in any other
section of this Section 8, and, upon the closing of such transfer, the
transferee shall acquire such common shares free of the restrictions contained
in this Section 8, and this Section 8 shall terminate.
(e) Transfers to Revocable Inter Vivos Trusts. You may
transfer during your lifetime all or part of the Shares you may acquire upon
exercise of this Option to a revocable inter vivos trust, the terms of which
trust provide that you are the grantor, the sole trustee and
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<PAGE> 12
the sole beneficiary of the trust during your lifetime, and that you have the
power at any time during your lifetime to withdraw your Shares from the trust.
In case of any such transfer, you, as trustee of such trust, shall receive and
hold such Shares subject to, and the trust and the Shares transferred to the
trust, shall be bound by, the terms and conditions of this Section 8, and any
reference to you in this Section 8 shall include the trust and the trustee.
Upon any transfer into such a trust, the trust and the trustee (i) shall take
such Shares subject to all the restrictions of this Section 8 as though such
trust and trustee were original signatories to this Stock Option Agreement,
(ii) shall agree in writing to comply with, and be bound by, the terms and
conditions of this Section 8 as if such trust and trustee were you, and that
any Shares owned by any such trust and trustee will be subject to such terms
and conditions, and (iii) shall be treated for all purposes of this Section
8 as you. Such written agreement must be delivered to the Company and the other
Shareholders on or before the date of such transfer to such trust and trustee.
Such trust may also transfer all or any part of such Shares back to you upon
any withdrawal of such Shares from such trust, upon any revocation of the
trust, upon any distribution from the trust, or pursuant to the terms of the
trust. Any distribution of Shares from the trust to the beneficiaries upon your
death shall be subject to Section 8.(c).
(f) Transfer with Consent. You may transfer all or any part of
the Shares you may acquire upon exercise of this Option with the prior express
written consent of the Company and all of the other Shareholders, if such
transfer occurs within 30 days after such consent is given. Any such transferee
shall take such Shares subject to all the restrictions of this Section 8 as
though such transferee were an original signatory to this Stock Option
Agreement, and the transferee must agree in writing to comply with, and be
bound by, the terms and conditions of this Section 8 as if such transferee were
you, and that any Shares owned by any such transferee will be subject to such
terms and conditions. Such transferee shall be treated for all purposes of this
Section 8 as you. Such written agreement must be delivered to the Company and
the other Shareholders on or before the date of such transfer to such
transferee.
(g) Overriding Subchapter S Transfer Restriction; Termination
of S Corporation election.
(1) Transfer Restriction. Except as otherwise
provided in Section 8.(g)(2), as a condition to every transfer of
Shares, so long as the Company continues to be taxed as an S
corporation, you agrees that you (i) will not transfer any or all of
any Shares you may acquire upon exercise of this Option to any
person or entity if the ownership of Shares by the transferee would
result in the loss of the Company's election to be taxed as an S
corporation under the provisions of the Code, and (ii) will not
transfer any or all of any Shares you may acquire upon exercise of
this Option unless the Company has first obtained from counsel
approved by the Company an opinion, satisfactory in form and substance
to the Company, to the effect that your proposed transfer will not
cause the Company's S corporation election to terminate under the
provisions of the Code in effect at the time of such transfer.
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<PAGE> 13
(2) Termination of Election. The Company's election
to be taxed as an S corporation under the provisions of the Code shall
terminate upon either of the following events: (i) the approval of such
termination by written consent of the holders of a majority of the
outstanding Company common shares at any time, or (ii) upon the closing
of an IPO. After such termination, if you are a holder of Company
common shares, you shall file such documents with the IRS and any other
authorities consenting to the Company's termination of its S
corporation election. If the S corporation election is terminated, but
this Section 8 is not terminated, all references in this Section 8 to
actions required or permitted in connection with the S corporation
election shall be of no further force or effect, including, without
limitation, all of the provisions of this Section 8 providing
restrictions relating to the Company's maintenance of its status as an
S corporation, this Section 8.(g) and Section 9.
(h) Endorsement on Stock Certificates. Each certificate
representing Shares issuable upon exercise of this Option now or later held by
you while this Section 8 is in effect, except as otherwise provided in this
Section 8, shall be endorsed with a legend in substantially the following form:
"The securities represented by this certificate are subject to
the terms of the Stock Option Agreement, dated as of January 10, 1997,
between Rock Financial Corporation, a Michigan corporation, and
Optionee~ (the "Agreement"). The Agreement imposes restrictions on any
sale, assignment, pledge, encumbrance, hypothecation, gift, exchange,
disposition, or other transfer or alienation, by operation of law or
otherwise, of the common shares represented by this certificate and
restrictions to preserve the Company's S corporation election. Any
purported transfer in violation of the Agreement will be void. Any
person accepting an interest in these securities, by accepting such
interest, will be deemed to agree to, and become bound by, all of the
provisions of Section 8 of the Agreement. A copy of the Agreement is on
file and is available for examination at the principal office of Rock
Financial Corporation."
(i) Termination. This Section 8 shall terminate upon the
occurrence of any of the following events: (i) dissolution of the
Company, (ii) final, and unappealed from, adjudication of bankruptcy of the
Company, (iii) joint written agreement of the Company and the Shareholders,
(iv) joint written agreement of Daniel B. Gilbert and Gary Gilbert, (v)
pursuant to Section 8.(d), or (vi) the closing of an IPO. Upon the termination
of this Section 8, you shall surrender to the Company the certificate or
certificates for any Shares you have acquired upon exercise of this Option, and
the Company shall issue to you in lieu of such certificate or certificates a
new certificate for an equal number of Shares without the endorsement set forth
in Section 8.(h). The remedies contained in this Section 8 shall survive and
remain in full force and effect after the termination of this Section 8. You
shall have the right within 30 days after the termination of this Section 8 to
purchase from the Company any existing policies of insurance on your life at a
price equal to then cash surrender value of those policies as of the date of
such termination. Upon receipt of the purchase price, the Company shall deliver
the policies to you
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<PAGE> 14
and shall execute any necessary instruments of transfer. You shall have no
further rights in any policies not purchased within the above 30-day period.
9. Maintaining Election of S Corporation Status. You consent to the
election that the Company be taxed as an S corporation under the provisions of
the Code. If you exercise this Option, you will, in your capacity as a
shareholder of the Company, sign any documents, agreements, certificates, or
communications that may be reasonably requested by the Company so that the
Company will continue to be taxed as an S corporation under the provisions of
the Code, including, without limitation, such elections to be filed with the
Internal Revenue Service ("IRS") for the Company to continue to be treated as an
S corporation under the Code. You will sign such elections or requests to be
filed with the IRS for the Company to be treated as continuing to be an S
corporation notwithstanding inadvertent termination of its status as such, to
the extent reasonably requested by the Company consistent with this Stock Option
Agreement. Unless and until the Company's S corporation election is terminated
in a manner which is either contemplated by or consistent with the provisions of
this Stock Option Agreement, you will not, in your capacity as a shareholder of
the Company, sign any document (including, without limitation, any election to
be filed with the IRS) indicating your consent to a revocation of the Company's
status as an S corporation under the Code or take any other action which is
inconsistent with the foregoing, and you shall cooperate and work with the other
Shareholders to make the benefits of the Company's S corporation election as
fully available to all of the Shareholders as possible.
(a) Two or More Taxable Years. The Board of Directors of the
Company shall determine whether or not to treat the taxable year of the Company
in which the interest of any Shareholder is terminated or is subject to a
qualifying disposition (within the meaning of Section 1.1368-1(g) of the
Treasury Regulations) as two or more separate taxable years (depending on the
number of events of termination) pursuant to Section 1377(a)(2) of the Code or
Section 1.1368-1(g) of the Treasury Regulations, as the case may be. If the
Board of Directors decides to treat such taxable year as two or more separate
taxable years pursuant to Section 1377(a)(2) of the Code or Section 1.1368-1(g)
of the Treasury Regulations, then if you have exercised this Option, you shall
execute and file any and all consents and other documents required by Section
1377(a)(2) of the Code, the underlying Treasury Regulations or Section
1.1368-1(g) of the Treasury regulations to effectuate the purposes of this
Section 9.(a).
(b) Beneficial Ownership. You represent and warrant that if
you exercise this Option, you will be the sole beneficial owner of the Shares
you acquire upon such exercise and that no person (including your spouse) or
entity will have any right, title or interest in or to such Shares.
10. Injunctive Relief. The terms, covenants and obligations of this
Stock Option Agreement relate to special, unique and extraordinary matters, and
a violation of any of the terms, covenants and obligations of this Stock Option
Agreement will cause the Company and its Shareholders irreparable injury in an
amount which would be difficult, if not impossible, to estimate or determine and
for which adequate compensation could not be fashioned. Therefore,
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<PAGE> 15
the Company and the other Shareholders will be entitled, jointly and severally,
to an injunction, restraining order or other equitable relief as a matter of
course from any court of competent jurisdiction, restraining you and any other
person(s) the court may order from committing any violation or threatened
violation of the terms, covenants or obligations in this Stock Option
Agreement. The Company's and the Shareholders' rights and remedies under this
Section 10 are cumulative and are in addition to any other rights and remedies
that the Company or any Shareholder may have under this Stock Option Agreement
or any other agreement or at law or in equity.
11. Indemnification. You and your his personal representatives,
guardians, conservators, heirs, devisees, successors and assigns (collectively,
"Successors") shall indemnify and hold harmless the Company, its successors and
assigns and any of its officers, agents, employees and directors and each of the
other Shareholders (collectively, the "Indemnified Parties"):
(a) against any and all damages, liabilities, claims, losses,
taxes and expenses (including reasonable attorneys' fees, court costs, interest
and expenses) incurred by any Indemnified Party arising out of or relating to
any breach by you or by any of your Successors of any of your representations,
warranties, covenants, terms or agreements in this Stock Option Agreement or any
document executed in connection with this Stock Option Agreement, including,
without limitation, any such breach which results in or causes the S corporation
election of the Company to terminate in an manner inconsistent with the terms
and conditions of this Stock Option Agreement;
(b) against any and all damages, liabilities, claims, losses,
taxes and expenses (including reasonable attorneys' fees, court costs, interest,
judgments, fines and amounts paid in settlement) incurred by any Indemnified
Party in connection with any threatened, pending or completed action, suit or
proceeding (whether civil, criminal, administrative or investigative) instituted
by the Internal Revenue Service, any state tax authority or any other third
party relating to or arising out of any actual or alleged breach by you or any
of your Successors of the representations, warranties, covenants, terms or
agreements in this Stock Option Agreement or any document executed in connection
with this Stock Option Agreement; and
(c) against any and all damages, liabilities, claims, losses
and expenses, including reasonable attorneys' fees and court costs) incurred by
any Indemnified Party in connection with any action, suit or proceeding in which
any Indemnified Party either enforces or defends the validity of this Stock
Option Agreement or any other document executed in connection with this Stock
Option Agreement against you or any of your Successors.
12. Severability. It is the desire and intent of the parties to this
Stock Option Agreement that the terms, provisions, conditions, covenants,
representations, warranties and remedies contained in this Stock Option
Agreement will be enforceable to the fullest extent permitted by law. The
provisions of this Stock Option Agreement will be deemed severable, and if any
term, provision, condition, covenant, representation, warranty or remedy in this
Stock
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<PAGE> 16
Option Agreement or the application thereof to any person or circumstance will,
to any extent, be construed to be illegal, invalid or unenforceable, in whole or
in part, then such term, provision, condition, covenant, representation,
warranty or remedy may be changed to the extent necessary to make such term,
provision, condition, covenant, representation, warranty or remedy, as so
changed, legal, valid, binding and enforceable and such term, provision,
condition, covenant, representation, warranty or remedy will be construed in a
manner so as to permit its enforceability under the applicable law to the
fullest extent permitted by such law. If a court or agency determines that all
or any part of Section 2 is unreasonable or unenforceable, you agree to be bound
by a less restrictive covenant within the stated covenants as shall be permitted
by law and which a court shall specifically enforce. If any term, provision,
condition, covenant, representation, warranty or remedy of this Stock Option
Agreement is held illegal, void, invalid or unenforceable in its entirety, the
remaining terms, provisions, conditions, covenants, representations, warranties
and remedies of this Stock Option Agreement and the application thereof to any
person or circumstance, except those which have been held illegal, invalid or
unenforceable, will not in any way be affected or impaired but will remain
valid, binding and enforceable in accordance with their terms.
13. Entire Agreement. This Stock Option Agreement, including the 1996
Plan, are the entire agreement between you and the Company with respect to the
subject matter of this Stock Option Agreement, and any prior or contemporaneous
understandings, arrangements or agreements are superseded by this Stock Option
Agreement and the 1996 Plan and are merged into this Stock Option Agreement.
14. Governing Law and Choice of Forum. The laws of the State of
Michigan shall govern this Stock Option Agreement, its construction, and the
determination of any rights, duties or remedies of the parties arising out of or
relating to this Stock Option Agreement. The parties acknowledge that the United
States District Court for the Eastern District of Michigan or the Michigan
Circuit Court for the County of Oakland shall have exclusive jurisdiction over
any case or controversy arising out of or relating to this Stock Option
Agreement and that all litigation arising out of or relating to this Stock
Option Agreement shall be commenced in the United States District Court for the
Eastern District of Michigan or the Oakland County (Michigan) Circuit Court. You
irrevocably consent to the jurisdiction of the United States District Court for
the Eastern District of Michigan and the Oakland County (Michigan) Circuit Court
in connection with all actions and proceedings arising out of, or in any way
related to this Stock Option Agreement.
15. Notices. Any and all notices, designations, consents, offers,
acceptances or other communications provided for in this Stock Option Agreement
shall be given in writing and shall be delivered in person, sent by certified or
registered mail, sent by facsimile or similar method of transmission or sent by
overnight courier, addressed in the case of the Company to its principal office
and in the case of you or a Shareholder to his address appearing on the stock
records of the Company or such other address as may be designated by you or such
Shareholder.
-16-
<PAGE> 17
16. Counterparts. This Stock Option Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
17. Interpretation. The headings contained in this Stock Option
Agreement are solely for the purpose of reference, are not part of the agreement
of the parties and shall not in any way affect the meaning or interpretation of
this Stock Option Agreement. Wherever in this Stock Option Agreement, words,
including pronouns, are used in the masculine, they shall be read and construed
in the feminine or neuter whenever they would so apply, and wherever in this
Stock Option Agreement, words, including pronouns, are used in the singular or
plural, they shall be read and construed in the plural or singular,
respectively, wherever they would so apply.
18. No Waiver. No waiver of any Section or provision of this Stock
Option Agreement will be valid unless in a writing signed by the party to be
charged and only to the extent set forth in that writing. Unless such a writing
expressly provides otherwise, no waiver of any breach of any agreement or
provision contained in this Stock Option Agreement shall be deemed a waiver of
any preceding or succeeding breach of this Stock Option Agreement or of any
other agreement or provision contained in this Stock Option Agreement, and no
such waiver shall constitute a course of conduct which may be relied upon to
justify any subsequent breach of this Stock Option Agreement. No extension of
time for the performance of any obligations or acts shall be deemed an extension
of time for the performance of any other obligations or acts.
19. Binding Effect; Assignment. This Stock Option Agreement, and the
rights and duties under it, shall be binding upon and inure to the benefit of
the parties to this Agreement and (i) the Company's successors and assigns,
(ii) your beneficiaries, personal representatives, guardians, conservators,
heirs, and devisees, and (iii) and any transferee of yours permitted under
this Stock Option Agreement, regardless of whether such transferee has agreed
in writing to be bound by this Stock Option Agreement or any portion of this
Stock Option Agreement. You may not assign or transfer any of your rights or
delegate any of your duties or obligations under this Stock Option Agreement,
except that you may both assign your rights and delegates your duties under
Section 8 in connection with a transfer of Shares that is permitted by, and is
made in accordance with, the provisions of Section 8, and then only to the
extent of such transfer. Any purported assignment or transfer by you contrary
to the preceding sentence shall be void.
20. Subsequent Documents. The parties agree that they will, at any
time, duly execute and deliver to any party any additional documents and
instruments that such party may reasonably determine to be necessary in
connection with the transactions contemplated in this Stock Option Agreement,
and the failure of a party to demand such documents or instruments on or before
the date of this Stock Option Agreement shall not alleviate the obligation of
any party to execute and deliver such documents or instruments at any time, upon
the written demand of a party.
21. Counsel. You acknowledge that you have had an opportunity to obtain
separate counsel before execution of this Stock Option Agreement. This Stock
Option Agreement is made voluntarily and without duress of any kind.
-17-
<PAGE> 18
22. Committee and Board of Directors Determinations Conclusive. Each
determination, interpretation, or other action made or taken pursuant to the
provisions of the 1996 Plan by the Committee or the Company's Board of Directors
shall be final and shall be binding and conclusive for all purposes on you and
the Company and our respective successors in interest.
Very truly yours,
ROCK FINANCIAL CORPORATION,
a Michigan corporation
By:
-------------------------------
Its:
--------------------------
The above is agreed to and accepted.
- -----------------------------
Optionee~
Dated:
------------------------
-18-
<PAGE> 1
EXHIBIT 10.3
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as
of this 27th day of June, 1994 by and between ROCK FINANCIAL CORPORATION, a
Michigan corporation ("Employer"), and STEVEN STONE ("Employee").
RECITALS:
Employer has established a separate, independently operated,
unincorporated, nonconforming mortgage lending division known as "Boulder
Financial" ("Boulder").
Employer maintains separate books and records, and prepares separate
financial statements, for Boulder.
Employer wishes to employ Employee to perform services for Boulder, and
Employee desires to accept such employment with Employer, upon the terms and
conditions set forth in this Agreement.
NOW, THEREFORE, for and in consideration of the mutual covenants and
agreements set forth below, Employer and Employee agree as follows:
1. TERMS OF EMPLOYMENT
A. Engagement: Employer hereby employs Employee to perform, on a full-time
basis, for and on behalf of Boulder, such services ("Services") as are
customarily performed by executive-level employees of mortgage lending
institutions (including, but not necessarily limited to, those described in
Section 1D below) or as may from time-to-time be assigned to him by the
President of Employer to whom Employee shall report, and Employee hereby accepts
such employment and agrees to perform such Services on a full-time basis, all
upon the terms and conditions set forth in this Agreement.
B. Full-Time Employment: Employee acknowledges that Employer is employing him
on a full-time basis, and Employee agrees to devote all of his business time,
attention and skills to, and to use his best efforts in, the performance of the
Services. For the purposes of this Agreement, "full-time" refers to Employer's
regularly-established business hours plus such additional time as is necessary
for Employee to fulfill his duties, obligations and responsibilities under this
Agreement.
C. Term: For purposes of this Agreement, Employee's "Employment Commencement
Date" shall be June 27, 1994. The term of Employer's employment of Employee (the
"Term") shall commence on the Employment Commencement Date and shall end on the
date employment is terminated or otherwise discontinued in accordance with
Section 3A below.
D. Position: Employee's title shall be "Director of Alternative Lending". In
such capacity, Employee is an executive and administrative employee of Employer
and his responsibilities shall include, among other things: (i) overseeing,
managing, and directing the day-to-day operations of
Employment Agreement: Page 1 of 11 Initials _______
<PAGE> 2
Boulder; (ii) budgeting loan production expenses and operational expenses; (iii)
maximizing Boulder's quality of customer service; (iv) implementing
cost-effective marketing strategies; (v) reporting to Employer with data and in
formats designated by Employer; (vi) maximizing the level and market share of
Boulder's non-conforming residential loan production; (vii) assisting in site
location and the coordination of the opening of new locations; (viii)
maintaining investor relations and investor agreements on terms favorable to
Boulder; (ix) ensuring all Boulder loans are originated, documented, processed
and closed in compliance with all applicable federal and state laws and
regulations and in conformity with Employer's policies; (x) ensuring all loans
are originated, documented, processed and closed in compliance with the terms
and guidelines of the applicable investors and warehouse lenders; (xi) avoiding
any secondary market losses, loan repurchases, and funding/warehouse problems;
(xii) developing and marketing referral sources to improve Boulder's
non-conforming residential loan business; (xiii) personally assisting in and
supervising the day-to-day processing and closing of loans; (xiv) properly
managing, evaluating, supervising and directing the subordinate staff and
employees of Employer assigned to Boulder; (xv) effectively recruiting and
staffing operations and recommending the hiring, disciplinary action and
termination of subordinate loan officers and staff members of Employer assigned
to Boulder in compliance with all applicable state and federal laws; (xvi)
working with the officers, managers, and employees of Employer to facilitate an
efficient, beneficial and cooperative working relationship with all other
divisions of Employer; and (xvii) effectively and efficiently carrying out the
missions, goals and directives of Employer as directed by Employer's President.
Employee shall report to the President of Employer and to such other person or
persons as the President of Employer may designate from time-to-time.
E. Standard of Care: Employee shall use his best efforts to make Boulder a
profitable division of Employer. Employee specifically acknowledges that as
Boulder's Director of Alternative Lending, he is employed in a fiduciary
capacity and is charged with a duty of loyalty and trust to Employer. Employee
shall discharge his duties in good faith, with the care that an ordinarily
prudent person in a like position would exercise under similar circumstances,
and in a manner he reasonably believes is in the best interests of Employer.
F. Adherence to Rules and Regulations: Employee agrees to adhere to and comply
with: (i) all applicable state and federal regulations affecting lending
institutions and the origination and closing of residential mortgage loans; (ii)
generally accepted residential mortgage lending practices, and (iii) all
policies, rules and regulations of Employer (including, without limitation, any
applicable quality control plans and employee handbooks of Employer or Boulder)
which have been, or in the future may be, adopted. Employee acknowledges that it
is his responsibility to properly maintain any licenses or certifications
necessary for him to perform the Services. Employee shall notify Employer of any
change in the status of such licenses or certifications.
G. Employee Status: Notwithstanding any provision of this Agreement to the
contrary, Employee shall perform the Services as an employee of Employer and not
as an independent contractor, and Employer shall withhold appropriate federal,
state and local withholding taxes from all sums which Employer shall pay to or
on behalf of Employee, pay its share of Social Security taxes, pay all
unemployment insurance, and make any other contributions which may be required
of Employer in an employer/employee relationship.
Employment Agreement: Page 2 of 11 Initials________
<PAGE> 3
2. COMPENSATION
A. Compensation: For all Services to be rendered by Employee under this
Agreement, Employer shall, during the Term, compensate Employee as follows:
(i) Salary: Employer shall pay Employee a salary ("Salary") on a
biweekly basis in an amount to be determined and established by the President of
Employer on a periodic basis in his sole discretion.
(ii) Discretionary Bonus: Employer may pay Employee a discretionary
bonus (the "Discretionary Bonus") in such amount, if any, and at such times, and
subject to such conditions, as the President may, in his sole discretion,
determine.
(iii) Distribution Bonus: Employer may pay Employee a "Distribution
Bonus", at such time as the shareholders of Employer receive a
distribution from Employer (other than any salaries, bonuses or other
compensation which one or more shareholders may receive as consideration for any
services rendered by such shareholders to Employer and any distributions which
Employer declares in order to provide its shareholders with funds with which to
pay any federal, state and/or local taxes for which they are responsible as a
result of Employer's status as an "S Corporation"), if such distribution reduces
the retained earnings of Boulder (as determined by the President of the Employer
in his sole discretion), and if, but only if, Employee is still employed by
under this Agreement on the date of such distribution, in an amount
equal to eighteen percent (18%) of the amount by which Boulder's retained
earnings have been reduced by such distribution (as determined by the President
of Employer in his sole discretion).
B. Benefits: During the Term, Employee may participate in such employee
benefits plans, at such times, and, subject to such rules, conditions,
modifications, and/or cancellations as determined by the President of the
Employer in his sole discretion.
3. TERMINATION OF EMPLOYMENT
A. Termination: Notwithstanding any provision of this Agreement to the
contrary, either Employer or Employee may terminate Employee's employment under
this Agreement at any time, with or without cause, for any reason whatsoever.
B. Severance Pay: Upon the termination of Employee's employment under this
Agreement, and if, but only if: (i) Employee is not in breach of any provision
of this Agreement (as determined by the President of Employer in his sole
discretion) on the date of such termination; (ii) the employment relationship
was terminated by Employee; and (iii) Employee provided Employer with a minimum
of thirty (30) days prior written notice, Employer shall continue to pay
Employee his biweekly Salary for four (4) weeks after the date of such
termination (the "Severance Pay"); provided, however, that Employer shall have
no obligations under this Section 3B whatsoever unless, during such four week
period, Employee fully and completely cooperates with Employer and Boulder in
the transition period. Any provision of this Agreement to the contrary
notwithstanding, Employee shall not be entitled to any Severance Pay in the
event Boulder
Employment Agreement: Page 3 of 11 Initials________
<PAGE> 4
becomes a separate legal entity or is "spun-off" as a subsidiary or affiliate of
Employer and (a) Employer or one or more of Employer's shareholders retains an
equity interest in the resultant entity, and (b) Employee is employed by or
offered employment with such resultant entity.
C. Severance Pay upon Death or Disability: Upon the death of Employee or in
the event Employee becomes disabled during the term of this Agreement, the
Company shall pay Employee, or his estate, as the case may be, in five (5) equal
annual installments, without interest, an aggregate amount equal to eighteen
percent (18%) of Boulder's retained earnings on the last day of Employer's last
fiscal quarter preceding Employee's death or the date Employee is first deemed
to be disabled (the "Effective Date") less any bonuses, subsequently paid or
accrued to or on behalf of Employee or any other employee of Boulder prior to
the Effective Date. The first such installment shall be paid within one (1) year
of the Effective Date, and the remaining four (4) installments shall be paid on
the second, third, fourth and fifth anniversaries of such Effective Date. For
the purposes of this Section 3C, Employee shall be deemed to be disabled if he
becomes unable to perform his duties under this Agreement by reason of physical
or mental incapacity or other cause for 120 consecutive days or more. In the
event a disagreement arises as to whether Employee is or is not disabled, the
President of Employer shall make the final determination, and such determination
shall be binding upon the Company and Employee. Prior to making such
determination, the President of Employer shall have the right to have a
physician and/or a psychiatrist conduct an independent examination of Employee's
physical and/or medical condition. In the event Employee refuses to submit to
such examination, the President of Employer may, in his sole discretion, and
without regard to whatever other information is available, conclude that
Employee is not disabled.
D. Return of Property: Employee acknowledges that the following shall be, are
and shall remain the exclusive property of Employer:
(i) All Employer and Boulder documents, manuals, handbooks and
marketing materials (including, without limitation, all form documents such as
Employer's compliance agreement, loan pricing disclosure agreements,
status-grams and the like); books, records, reports and files (including,
without limitation, applications, appraisals, credit reports, VOE's and the
like); office equipment and supplies (including beepers, phones, keys, credit
cards, lists, training materials, computer diskettes and alike); and documents,
records, files, lists and the like (including originals and copies thereof)
containing trade secrets or proprietary or confidential business information of
Employer, obtained by Employee in the course of Employee's employment with
Employer; and
(ii) All marketing and advertising ideas, designs, programs,
improvements, literature and the like which pertain to or relate to the Business
and products of Employer or Boulder and which Employee makes, develops or
contributes to while employed by Employer.
Upon the termination of Employee's employment under this Agreement for any
reason, Employee shall immediately, without demand, return and deliver to
Employer all of Employer's property in his possession.
Employment Agreement: Page 4 of 11 Initials_______
<PAGE> 5
4. COVENANT NOT TO COMPETE AND RELATED MATTERS
A. Employee's Acknowledgment: Employee acknowledges that Employer has expended
considerable time, money and resources in initiating and commencing the
operations of Boulder; recruiting, training and developing the skills and
abilities of the employees assigned to Boulder; developing business
relationships with investors, referral sources and customers so as to improve
the goodwill of Boulder; establishing and maintaining close business
relationships between Employer and its customers; and obtaining, compiling and
developing confidential customer lists, various internal computer reports, and
other proprietary business information not readily available to the public or
through other sources. Employee further acknowledges that Employer is entitled
to keep the results of such efforts for its exclusive use. Accordingly, Employee
agrees to the provisions of this Section 4 and agrees that such provisions are
necessary to preserve and protect the legitimate business interests of Employer.
B. Employee's Covenant: Employee represents, warrants, covenants and agrees,
for the benefit of Employer and its affiliates, successors and assigns, that
during the Term and continuing for a period of two (2) years thereafter (the
"Covenant Period"), he shall not, either directly or indirectly, whether on his
on behalf or on behalf of any other person, business or entity whatsoever:
(i) engage in, or have any interest in or be associated with (whether
as an officer, director, shareholder, partner, member, associate, employee,
consultant, advisor, owner or otherwise), any corporation, partnership, limited
liability company, association, trust, firm or other enterprise (including any
pre-incorporated association): (a) which is engaged in the same or similar lines
of business as Employer (the "Business") or any facet of such Business, anywhere
in the Geographic Area (defined in Section 4C below), or (b) which competes
during the Covenant Period anywhere in the Geographic Area with Employer or
Boulder or any of Employer's affiliates (without first obtaining the express
written consent of the President of Employer); except that notwithstanding the
foregoing, Employee may invest in any publicly-held corporation engaged in the
Business, if such investment does not exceed one (1%) percent in the aggregate
in value of the issued and outstanding capital stock of such corporation;
(ii) divert from the Business of Employer, or by aid of others, do
anything which would tend to divert from the Business of Employer, any trade or
business with any customer or vendor with whom Employer, Boulder or Employee has
or, at any time within two (2) years immediately preceding the end of the Term,
had any contact or association in connection with the Business;
(iii) solicit, induce or attempt to induce any employee of Employer
(excluding Ross Niskar and/or Adam Schoener, but specifically including any
former employee of Employer who left the employ of Employer at any time within
one (1) year immediately preceding the end of the Term), to leave the employment
of Employer or enter into the employ of (i) Employee, (ii) any entity of or to
which Employee is an employee, consultant or advisor or in which Employee
otherwise has any interest whatsoever, or (iii) any competitor of Employer;
(iv) use, copy, publish, disseminate, distribute or otherwise disclose
any proprietary or confidential information of Employer or Boulder, of any
kind or nature whatsoever, including,
Employment Agreement: Page 5 of 11 Initials_______
<PAGE> 6
without limitation, all Employer and Boulder business and marketing plans,
customer and prospect lists, information concerning loans in process,
information and lists concerning referral sources and investors, computer
programs, internal business reports (including, without limitation, pipeline
reports, lock/expiration reports, closed loan reports, warehousing reports,
application aging reports and the like), agreements, manuals, loan documents
(including, without limitation, form documents such as Employer's compliance
agreement, loan pricing disclosure agreements and the like), training materials,
marketing materials (including, without limitation, status-grams and the like),
information concerning financial arrangements with outside lending institutions,
terms of vendor agreements, internal pricing, fee and cost information and the
like, and any and all other information which is confidential, treated as
confidential by Employer or not generally known in the industry; or
(v) undertake any efforts or activities toward, or advise, assist or
consult with any person, business or entity which is or will be undertaking
efforts towards, pre-incorporating, incorporating, organizing, financing or
otherwise commencing any business which will engage in the Business or any facet
of such Business or compete with Employer.
C. Geographic Area: For the purposes of this Section 4, the term "Geographic
Area" shall mean (i) during the Term, the continental United States, and (ii)
during the remainder of the Covenant Period, (a) Oakland, Macomb, Wayne,
Genesee, Washtenaw, Ottawa, Kent, Monroe and Livingston Counties in the State of
Michigan; (b) Lucas, Ottawa, Cuyahoga, Summit, Lake, Geagua, Franklin, Madison,
Licking and Delaware Counties in the State of Ohio; and (c) any other county in
any other state in which Employer or Boulder is operating or non-conforming
mortgage loan origination office at the end of the Term.
D. Distinct Covenants: Employer and Employee intend that the covenants set
forth in Section 4B above (the "Covenants") shall be deemed to be a series of
separate covenants with respect to the Business of the Employer, one for each
and every political subdivision of each state and county to which such Covenants
apply. Employee acknowledges and agrees that the Covenants are reasonable and
valid in geographical and temporal scope and in all other respects. If any court
determines that any Covenant, or any portion of any Covenant, is invalid or
unenforceable, the remainder of the Covenants shall not be affected and shall be
given full force and effect, without regard to the invalid Covenant or the
invalid portion. If any court determines that any Covenant, or any portion of
any Covenant, is unenforceable because of its duration or geographic scope, such
court shall have the power to reduce such duration or scope, as the case may be,
and, enforce such Covenant or portion in such reduced form. Employee intends to
and hereby confers jurisdiction to enforce the Covenants above upon the courts
of any jurisdiction within the geographical scope of such Covenants. If the
courts of any one or more of such jurisdictions hold the Covenants, or any
portion of any Covenant, unenforceable by reason of their breadth of scope or
otherwise, it is the intention of the Employee that such determination not bar
or in any way affect the right of Employer to the relief provided above in the
courts of any other jurisdiction within the geographical scope of such Covenants
as to breaches of such Covenants in such other respective jurisdictions.
Employment Agreement: Page 6 of 11 Initials_______
<PAGE> 7
E. Breach of Covenants Constitutes Breach of Agreement/Specific Enforcement:
Employee covenants and agrees that a breach or attempted breach of any of the
Covenants, constitutes a breach of this Agreement.
(i) In the event of a breach of Employee's Covenant under only Sections
4B(i) and/or 4B(v), Employee shall not be entitled to nor shall Employer be
obligated to pay any consideration, monies, or further compensation in whatever
form whatsoever to Employee, and Employee shall immediately forfeit, relinquish,
surrender, release and waive any all rights, claims or demands to any and all
consideration, monies, or compensation which Employee may be or is eligible for
or owed (whether or not such consideration could be considered accrued or
vested) under Section 4F of this Agreement and under any other provision of this
Agreement. Employer's sole remedy for a breach of Employee's Covenant under only
Sections 4B(i) and/or 4B(v) shall be that which is described in this Section
4E(i).
(ii) In the event of a breach of any other Employee Covenant or any
other provision of this Agreement: in addition to the remedies set forth in
Section 4E(i) and any and all legal and equitable rights available to Employer,
such Covenants may be specifically enforced by a temporary and/or permanent
injunction in an action in equity. Employee hereby acknowledges that remedies at
law for such a breach or threatened breach of Employee Covenants, except as
provided above in Section 4E(i), are inadequate.
F. Consideration: In consideration for the Covenants, Employer shall, upon the
termination of Employee's employment with Employer for any reason whatsoever
(other than death or disability requiring the payment of Severance Pay pursuant
to Section 3C), pay Employee, in five (5) equal annual installments, without
interest, an aggregate amount equal to the product of: (i) eighteen percent
(18%) of Boulder's retained earnings on the last day of Employer's last fiscal
quarter preceding the termination of Employee's employment with Employer less
any bonuses subsequently paid or accrued to or on behalf of Employee or any
other employee of Boulder prior to the termination date, and (ii) a percentage
which shall be determined from the table set forth below, based upon the number
of years of/Employee's service to the Employer (based on the Employment
Commencement Date) and whether Employee terminated his employment with the
Employer or Employer terminated Employee's employment with Employer:
<TABLE>
<CAPTION>
PERCENTAGE IF EMPLOYMENT
PERCENTAGE IF EMPLOYEE TERMINATED BY THE
YEARS OF SERVICE TERMINATES EMPLOYMENT COMPANY
<S> <C> <C>
Less than 1 year 0% 0%
1, but less than 4 years 25% 50%
4, but less than 7 years 50% 70%
7, but less/than 10 75% 85%
years
10 or more years 100% 100%
</TABLE>
Employment Agreement: Page 7 of 11 Initials________
<PAGE> 8
The first such installment shall be paid within ninety (90) days after the date
of such termination, and the remaining four (4) installments shall be paid on
the second, third, fourth and fifth anniversaries of the first installment pay
date; provided, however, that Employee shall not be entitled to and Employer
shall have no obligation whatsoever to make further installment payments
pursuant to this Section 4F if Employee breaches, violates or fails to comply in
full with any provision of this Agreement, including, without limitation, the
Covenants.
5. Change In Control
A. Bonus Upon Change In Control: Upon the occurrence of any of the following
events, Employee shall (provided Employee is employed by Employer under the
terms of this Agreement upon the date of said event) be entitled to a
"Change-In-Control Bonus" in an amount equal to eighteen percent (18%) of the
"New Worth" of the Boulder division as determined by the "Methods for
Determining Net Worth" of the Boulder division specified below:
(i) the sale of all or substantially all of the assets of Employer,
(ii) Employer's sale of Boulder or all or substantially all of
Boulder's assets,
(iii) An initial public offering of Employer's stock, or
(iv) A Change-In-Control (defined in Section 5B below) of Employer.
B. Definition: For the purposes of this Section 5, a "Change-In-Control" shall
be any transaction pursuant to which, and upon the consummation of which, more
than fifty percent (50%) of the issued and outstanding shares of Employer's
voting capital stock are owned by a person or persons (other than parents,
grandparents, children, grandchildren, aunts, uncles, nieces, nephews or first
cousins of, or trusts established by or for the benefit of, shareholders of
Employer) who, immediately prior to such transaction, were not shareholders of
Employer.
C. Methods For Determining Net Worth Of Boulder Division: For purposes of
calculating Employee's Change-In-Control Bonus upon the occurrence of an event
mentioned above, the Net Worth of the Boulder Division shall be determine
pursuant to the following methods/factors:
(i) the purchaser's opinion as to the net worth of the Boulder
division as it relates to the transaction and/or relative to the
Employer as a whole;
(ii) the opinion of the investment banking firm, if any, involved in
the transaction as to the net worth of the Boulder division as
it relates to the transaction and/or relative to the Employer as
a whole;
(iii) the opinion of a qualified business appraiser as to the net
worth of the Boulder division as it relates to the transaction
and/or relative to the Employer as a whole; and
Employment Agreement: Page 8 of 11 Initials_______
<PAGE> 9
(iv) the net worth of the Boulder division as it relates to the
transaction and/or relative to the Employer as a whole as
determined by way of negotiation and conferral with Employee.
After evaluating the foregoing methods/factors and conferring with Employee, the
President of Employer shall, within his reasonable business judgment, make a
final determination of Boulder's Net Worth.
D. Form of Change-In-Control Bonus Payment: Upon the occurrence of any of the
events mentioned above in which Employer becomes obligated to pay a
Change-In-Control Bonus, in the event that the triggering event involves a
transaction in which shares of stock are being issued by the Employer or shares
of stock are being received by the Employer, the Employer may in its sole
discretion pay any portion of the Change-In-Control Bonus in shares of stock
being issued or received by the Employer, in lieu of cash.
E. Other Payment Obligations Terminated: Upon making the payment called for by
Section 5A above, Employer shall have no further obligation under this Agreement
to pay Employee any Distribution/Bonus or Severance Pay or to make the
installment payments called for by Section 4F above; provided, however, that the
restrictions and Covenants of Section 4 shall continue to apply to Employee.
6. ADDITIONAL TERMS
A. Agreement Binding: The terms and conditions of this Agreement shall be
binding upon and inure to the benefit of Employer, Employee and their respective
heirs, executors, administrators, personal representatives, successors and
permitted assigns, as the case may be.
B. Authority: Employee represents and warrants to Employer that (i) he has
full right, power and authority to execute and to perform his obligations under
this Agreement; and (ii) be is neither a party to nor bound by or subject to any
other agreement, written or oral, which would preclude him from entering into
this Agreement and working for Employer.
C. Choice of Law: This Agreement has been executed in, and shall be construed
and enforced in accordance with, the laws of the State of Michigan, without
giving effect to the conflict of laws principles of such state.
D. Amendments: This Agreement may not be modified or amended except pursuant
to a written instrument executed by both Employee and the President of Employer.
E. Entire Agreement: This Agreement sets forth the entire understanding and
agreement of Employer and Employee with respect to its subject matter and
supersedes all prior understandings and agreements, whether written or oral, in
respect thereof.
F. Headings: The section headings and captions used in this Agreement are for
convenience of reference only and shall not be considered in construing this
Agreement.
Employment Agreement: Page 9 of 11 Initials_______
<PAGE> 10
G. No Assignment: Employee may not assign his rights, duties and obligations
under this Agreement to a third-party (including, without limitation, Employee's
beneficiaries and legal representatives) without the prior written consent of
the President of Employer. Employer may assign its rights, duties and
obligations under this Agreement.
H. Severability: If any provision of this Agreement shall be held by a court
of competent jurisdiction to be invalid, illegal or unenforceable, such
provision shall be modified so as to be enforceable to the fullest extent
permitted by applicable law, and the validity, legality and enforceability of
the remaining provisions of this Agreement shall not in any way be affected or
impaired thereby.
I. Breach by Employee: Upon Employee's breach or violation of, or failure to
comply with, any provision of this Agreement, Employer shall have, in addition
to any other remedies provided in this Agreement, no further obligation under
this Agreement to pay Employee any Discretionary Bonus, Distribution Bonus or
Severance Pay or to make the installment payments called for by Section 4F above
or the payment called for by Section 5A above. This Section 61 shall not be
construed to limit any other remedies which Employer may have at law or in
equity, except as specifically provided in Section 4E(i).
J. Breach by Employer: Employee agrees that he shall not commence any legal
action or proceeding relating to or arising out of this Agreement or his
employment relationship with Employer (including, without limitation, any and
all claims for compensation or employment discrimination or claims based upon a
violation or alleged violation of any other labor- or employment-related
federal, state or local law) more than one hundred eighty (180) days after the
date such claim first arises, and Employee hereby voluntarily waives any
statutes or periods of limitations to the contrary. Employee's sole remedy for
any alleged breach of this Agreement by Employer shall be limited to the amount
of Severance Pay which otherwise would have been payable.
K. Indemnity: Employee represents, warrants, covenants and agrees, for the
benefit of Employer and its affiliates, successors and assigns, that (i) he will
not utilize, in connection with his employment under this Agreement, any
materials, confidential business information or trade secrets which may be
deemed to be confidential or proprietary information of any other person or
entity, and (ii) he will not engage (or direct or cause Employer or Boulder to
engage) in any illegal activities in connection with his employment under this
Agreement. Employee agrees to indemnify, defend and hold Employer (and its
officers, directors, shareholders, employees, agents, successors, assigns and
affiliates) harmless from and against any and all losses, liabilities, claims,
causes of action, damages or expenses, including attorneys' fees, whether known
or unknown, accrued or unaccrued, liquidated or unliquidated, contingent or
certain, suffered or incurred (or to be suffered or incurred) by any such
persons in connection with Employee's violation or alleged violation of the
foregoing sentence.
L. Counter parts: This Agreement may be executed in counterparts, each of
which shall be deemed an original and all of which together shall constitute one
and the same agreement.
Employment Agreement: Page 10 of 11 Initials_______
<PAGE> 11
M. Financial Information: Unless otherwise provided in this Agreement, in
those circumstances in which the terms and conditions of this Agreement call for
the retained earnings or other financial information of or concerning Boulder
to be determined, such information shall be determined by Employer's
regularly-employed independent or in-house accountants (the "Accountants") from
financial statements which shall be prepared, in accordance with generally
accepted accounting principles applied consistently with the manner in which
such principles have been applied to Employer itself, for Boulder, as if Boulder
was a separate and distinct entity apart from Employer, after taking into
account all items which are and may be reasonably attributed and apportioned to
Boulder, including, but not necessarily limited to, all taxes to which Employer
is subject which are attributable and apportioned to Boulder, salaries and
operational expenses attributable and apportioned to Boulder, and the corporate
allocation of expenses and overhead, as determined in the sole judgment of the
Accountants in accordance with generally accepted accounting principles
consistently applied. In the event Employee disagrees with the Accountants'
determination of Boulder's retained earnings or other financial information,
such disagreement shall be resolved by the President of Employer in his sole
discretion, and such resolution shall be binding upon Employee and Employer.
IN WITNESS WHEREOF, Employer and Employee have executed this Agreement as
of the day and year first above written.
In the Presence of: "EMPLOYEE":
/s/ Adam Schoener /s/ STEVEN STONE
- --------------------------------- -------------------------------------
STEVEN STONE
Print Name: Adam Schoener
----------------------
In the Presence of: "EMPLOYER":
/s/ Charlene Callagy ROCK FINANCIAL CORPORATION,
- --------------------------------- a Michigan corporation
Print Name: Charlene Callagy
----------------------
By: /s/ Daniel Gilbert
--------------------------------
Print Name:
Its:
--------------------------------
Employment Agreement: Page 11 of 11 Initials
---------
<PAGE> 12
AMENDMENT TO EMPLOYMENT AGREEMENT
THIS AMENDMENT TO EMPLOYMENT AGREEMENT (the "Amendment") is made as of
December 28, 1996 by and between Rock Financial Corporation, a Michigan
corporation ("Employer"), and Steven Stone ("Employee").
RECITALS:
A. Employer and Employee have entered into an Employment Agreement,
dated as of June 27, 1994 (the "Agreement"). Capitalized terms used in this
Amendment, but not otherwise defined in this Amendment, shall have the meanings
set forth in the Agreement.
B. Employer and Employee desire to revise the Agreement, on the terms
and conditions set forth in this Amendment, to, among other things, revise the
Distribution Bonus and substitute an option to purchase common shares of
Employer and a special bonus for various compensation under the Agreement based
on the retained earnings of Boulder.
THEREFORE, Employer and Employee agree as follows:
1. Change in Title. The first sentence of Section 1.D. of the
Agreement is hereby amended to read as follows:
"Employee's title shall be "President of Boulder Financial"."
2. Revised Distribution Bonus. Section 2.A.(iii) of the Agreement is
hereby amended and restated, effective as of the date of this Amendment, to read
as follows:
"(iii) Distribution Bonus: Employer shall pay Employee
"Distribution Bonuses", at the same times as the shareholders of
Employer receive distributions from Employer in respect of their common
shares of Employer, except for "Excluded Payments" (as defined below),
if, but only if, Employee is still employed by Employer under this
Agreement on the date of such distribution. The amount of each
Distribution Bonus payable to Employee shall be (i) the number of
common shares of Employer that Employee has the right to acquire
pursuant to the unexercised portion of the option granted to Employee
pursuant to Section 2.C. as of the record date for the applicable
distribution, multiplied by (ii) the "Per Share Distribution Amount"
(as defined below).
"For purposes of this Section 2.A.(iii), the "Per Share
Distribution Amount" shall equal (i) the actual amount distributed to
Employer's shareholders, excluding any Excluded Payments, as determined
by the President of Employer in his sole discretion based on the cash
distributed and the fair market value of any property distributed,
divided by (ii) the aggregate number of common shares of Employer
outstanding as of the record date for the applicable distribution.
<PAGE> 13
"For purposes of this Section 2.A.(iii), "Excluded Payments"
means all of the following: (i) any distribution that is not in cash or
property of Employer, (ii) any distribution of securities issued by
Employer, (iii) salaries, bonuses or other compensation that one or
more shareholders may receive as consideration for any services
rendered by such shareholders to Employer, (iv) any distributions which
Employer declares in order to provide its shareholders with funds with
which to pay any federal, state and/or local taxes for which they are
responsible as a result of Employer's status as an "S corporation" (the
purpose for such distribution to be determined by the President of
Employer in his sole discretion), and (v) one distribution by Employer
payable to Shareholders of record on or before September 1, 1997 in an
aggregate amount not to exceed $5,000,000 (as designated by the
President of Employer in his sole discretion).
After the closing date of a public offering of common shares
of Employer registered under the Securities Act of 1933, as amended (an
"IPO"), this Section 2.A.(iii) shall terminate, and it shall not apply
to any distributions payable to shareholders of record on or after the
closing of the IPO.
3. Removal of Severance Pay Upon Death or Disability. Section 3.C. of
the Agreement is hereby amended and restated, effective as of June 27, 1994, to
read as follows:
"C. [RESERVED]."
4. Removal of Separate Non-Compete Consideration. Section 4.F. of the
Agreement is hereby amended and restated, effective as of June 27, 1994, to read
as follows:
"F. [RESERVED]."
5. Removal of Change in Control Provisions. Section 5 of the Agreement
is hereby amended and restated, effective as of June 27, 1994, to read as
follows:
"5. [RESERVED]."
6. Removal of Financial Information Section. Section 6.M. of the
Agreement is hereby amended and restated, effective as of June 27, 1994, to read
as follows:
"M. [RESERVED]."
7. Removal of Reference to Section 4.F in Section 4.E.(i). Section
4.E.(i) of the Agreement is hereby amended and restated, effective as of June
27, 1994, to read as follows:
"(i) In the event of a breach of Employee's Covenant under
only Sections 4B(i) and/or 4B(v), Employee shall not be entitled to nor
shall Employer be obligated to pay any consideration, monies, or
further compensation in
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<PAGE> 14
whatever form whatsoever to Employee, and Employee shall immediately
forfeit, relinquish, surrender, release and waive any and all rights,
claims or demands to any and all consideration, monies, or compensation
which Employee may be or is eligible for or owed (whether or not such
consideration could be considered accrued or vested) under any
provision of this Agreement, except for the special bonuses provided in
Section 11 of the Amendment, which shall be non-forfeitable.
Notwithstanding anything in this Agreement to the contrary, Employer's
sole remedy for a breach of Employee's Covenant under only Sections
4B(i) and/or 4B(v) shall be that which is described in this Section
4E(i)."
8. Removal of Reference to Section 4.F and Section 5.A. in Section
6.I. Section 6.I. of the Agreement is hereby amended and restated, effective as
of June 27, 1994, to read as follows:
"I. Breach by Employee: Upon Employee's breach or violation of, or
failure to comply with, any provision of this Agreement, Employer
shall have, in addition to any other remedies provided in this
Agreement, no further obligation under this Agreement to pay Employee
any Discretionary Bonus or Severance Pay. This Section 6I shall not be
construed to limit any other remedies which Employer may have at law
or in equity, except as specifically provided in Section 4E(i)."
9. Exception to Non-Competition. Section 4.B. of the Agreement is
hereby amended by adding the following to the end of Section 4.B.:
"Notwithstanding anything in this Section 4.B. to the contrary, Section
4.B.(i), (ii) and (v) shall not apply after the termination of
Employee's employment with Employer, if (i) Employee terminates his
employment with Employer, or (ii) Employer terminates Employee's
employment with Employer without "cause" (as defined in Section 2(c) of
the Stock Option Agreement between Employer and Employee, dated the
same date as the Amendment), in either case within one year after a
"Change in Ownership".
"For purposes of this Agreement, a "Change in Ownership"
occurs when, as a result of a voluntary transaction (i) (A) by Daniel
B. Gilbert, a single person or entity owns more of Employer's
outstanding voting equity securities than Daniel B. Gilbert and takes
operational control of Employer, or (B) by Employer, all or
substantially all of Employer's assets are sold to a third party, not
in the ordinary course of Employer's business, and such third party
takes operational control of Employer's business, and (ii) Employee is
not permitted continued employment with Employer or such third party,
as the case may be, on substantially the same terms and conditions as
set forth in this Agreement and on terms that require Employer or such
third party, as the case may be, to (A) employ Employee for a year
after such change in operational control occurs at the salary in effect
immediately before such change in operational control occurs, (B)
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<PAGE> 15
provide Employee with a continuation of Employee's salary through one
year after such change in operational control occurs at the rate in
effect immediately before such change in operational control occurs if
Employer or such third party, as the case may be, terminates Employee's
employment without "cause" (as defined in Section 2(c) of the Stock
Option Agreement between Employer and Employee, dated the same date as
the Amendment) (in lieu of any other severance compensation due to
Employee under this Agreement or otherwise), or (C) any combination of
the foregoing."
10. Current Salary Pursuant to Section 2.A.(i) of the Agreement the
President of Employer has determined and established Employee's salary,
beginning January 1, 1997, at $160,000 a year.
11. Special Bonuses. Employer shall pay Employee the following amounts
on or before the following dates as special bonuses: (i) $540,000 on or before
December 31, 1996, (ii) $180,000 on or before July 1, 1997, and (iii) $360,000
on or before December 31, 1997. Such special bonuses shall be non-forfeitable.
12. Additional Compensation Provisions. Section 2 of the Agreement is
hereby amended by adding the following additional Sections to the end of Section
2 effective as of the date of this Amendment:
"C. Stock Option. Effective as of the date of this Amendment, Employer
shall grant to Employee an option to purchase 895.50 common shares of
employer at $5,233.73 a share pursuant to the Rock Financial
Corporation 1996 Stock Option Plan and a Stock Option Agreement in
substantially the form attached as Exhibit A.
"D. Interest in Gary Gilbert's New Business. Employer shall cause
Daniel B. Gilbert to transfer to Employee, all of his and any of his
affiliates' right, title and interest in that portion of any option
granted to Daniel B. Gilbert or any of his affiliates by Gary Gilbert
to purchase a 3% equity interest in a mortgage business that is formed
or acquired by Gary Gilbert (the "Business"). The option granted to
Employee shall be exercisable at any time within 80 days after Gary
Gilbert notifies Daniel B. Gilbert in writing that he has both formed
or acquired the Business and signed a lease for the premises from
which the Business will be operated. The exercise price of Employee's
option will be the same cost per share paid by Gary Gilbert for his
interest.
"This right is not transferable by Employee without Daniel B.
Gilbert's consent, and if not exercised by Employee within the 80-day
exercise period, may be exercised by Daniel B. Gilbert or his
affiliates, as the case may be, on his own behalf, in whole or in part,
or Daniel B. Gilbert or his affiliates, as the case may be, may
transfer all or any portion of such equity interest, such option or any
-4-
<PAGE> 16
combination of the foregoing to any person or entity without obtaining
the consent of any person or entity.
"If Employee desires to sell or transfer all or any part of
such equity interest (other than to a revocable inter vivos trust for
the benefit of Employee and of which Employee is the sole trustee,
which trust shall be treated for all purposes as the Employee for
purposes of this Section 2.D., and such trust and the shares
transferred to the trust, shall be bound by the terms and conditions
of this Section 2.D.), he must first give written notice to Daniel B.
Gilbert of such proposed sale or transfer, which notice shall state
the name and address of the proposed transferee, the amount of the
equity interest, and the price, terms of payment, and conditions of
such proposed sale or transfer. Daniel B. Gilbert shall have the
exclusive option for a period of sixty days after receipt of such
notice in which to purchase all or none of such equity interest
proposed to be sold or transferred at the price and on the other
terms and conditions stated in such notice. Such option shall be
exercised by giving written notice thereof to Employee. If Daniel B.
Gilbert fails to exercise his option within such sixty-day period,
Employee shall be free, for the next sixty days after the expiration
of the sixty-day option period, to sell or transfer such equity
interest to the proposed person or entity on the proposed terms and
conditions free of any restrictions under this Agreement. If the sale
or transfer is not consummated within such sixty-day period, the
restrictions and option provided in this Section 2.D. shall again
apply."
"E. Election as a Director. Employer will cause its Board of
Directors to increase its size by one member and appoint Employee
to fill the newly-created vacancy, effective as of the date of this
Amendment."
13. Information. At all times following Employee's initial contact
with Employer pertaining to this Amendment, Employer has made available to
Employee the opportunity to ask questions of, and receive answers from, Employer
and persons acting on its behalf concerning the terms and conditions of the
transactions contemplated by this Amendment, concerning the transactions
described in Section 14, and concerning the Employer (including its financial
condition, results of operations, cash flows, prospects, business, products,
facilities, management, principals, business risks, securities, capitalization,
financial needs and shareholders), and to obtain any additional information, to
the extent Employer possessed such information or could acquire it without
unreasonable effort or expense, that was necessary to verify the information
furnished about the foregoing to Employee by Employer. Employee acknowledges
receipt of a copy of this Amendment, Employer's audited financial statements for
the fiscal year ended December 31, 1995 and Employer's unaudited financial
statements for the nine months ended September 30, 1996. Employee is assuming
responsibility, and is not relying on Employer in any manner whatsoever, to
analyze and evaluate any information Employee has received and any additional
information Employee desires to obtain. Employee has been furnished, or will
obtain, all information Employee requests or desires to know before entering
into this Amendment.
-5-
<PAGE> 17
Employee has had the opportunity to consult with counsel concerning the terms
and conditions of this Amendment and the transactions described in this
Amendment.
14. Purchase Price. Employee acknowledges and accepts that the
exercise price for the option being granted to Employee pursuant to Section 2.C.
of the Agreement has been determined by negotiations between Employer and
Employee based primarily on the implied valuation of Employer used in connection
with two purchases of common shares of Employer by Daniel B. Gilbert from other
shareholders of Employer entered into at substantially the same time as this
Amendment. Employee acknowledges and accepts that such exercise price is not
necessarily related to Employer's asset value, net worth, earnings potential or
other established criteria of value. Employee acknowledges that such exercise
price has been determined without obtaining a full valuation of Employer or
Employee's potential interest in Employer. Employee further acknowledges that he
is aware that Employer has received a preliminary indication of the range of its
valuation under various circumstances from an investment banking firm that may
differ from those on which the option exercise price is based. Notwithstanding
the foregoing, Employee has satisfied himself regarding the exercise price for
the option granted pursuant to Section 2.C. of the Agreement, and Employee
agrees that he is assuming sole responsibility to evaluate the fairness of such
exercise price.
15. Release. As of the date of this Amendment, Employee acknowledges
and agrees that no amounts are owing to Employee by Employer under the Agreement
or otherwise, except for (i) any accrued, but unpaid salary with respect to the
period after the period covered by the last regular payroll payment made by
Employer to Employee, (ii) any amounts due to Employee under Employer's employee
benefit plans, payable in the ordinary course of Employer's business, and (iii)
any amounts provided in this Amendment (collectively, the "Exceptions"). As of
the date of this Amendment, Employee releases Employer and its directors,
officers, employees, affiliates, representatives, agents and attorneys, and
their successors and assigns from all causes of action, claims, and damages
based on any facts existing at the date of this Amendment, except for the
Exceptions. As of the date of this Amendment, Employer releases Employee and his
successors and assigns from all causes of action, claims, and damages based on
any facts existing at the date of this Amendment, except for any claims under
the Agreement, as amended by this Amendment.
16. No Other Change. Except as modified by this Amendment, the
Agreement shall continue in full force according to its terms and is ratified.
17. Counterparts. This Amendment may be signed in counterparts, both
of which together will be deemed an original of this Amendment. This Amendment
will also be effective if evidenced by signed copies transmitted by telecopier
or facsimile transmission.
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<PAGE> 18
IN WITNESS WHEREOF, Employer and Employee have signed this Amendment as
of the date set forth in the introductory paragraph of this Amendment.
ROCK FINANCIAL CORPORATION
By: /s/ Daniel B. Gilbert
------------------------
Daniel B. Gilbert
Its: President
/s/ Steven Stone
---------------------------
Steven Stone
The undersigned is signing this Amendment solely to agree to the
provisions applicable to the undersigned contained in the portion of Section 12
adding Section 2.D. to the Agreement.
/s/ Daniel B. Gilbert
---------------------------
Daniel B. Gilbert
-7-
<PAGE> 19
SECOND AMENDMENT TO EMPLOYMENT AGREEMENT
THIS SECOND AMENDMENT TO EMPLOYMENT AGREEMENT (the "Amendment') is made
as of February 18, 1998 by and between Rock Financial Corporation, a Michigan
corporation ("Employer"), and Steven Stone ("Employee").
RECITALS:
A. Employer and Employee have entered into an Employment Agreement,
dated as of June 27, 1994 and amended as of December 28, 1996 (the "Agreement").
Capitalized terms used in this Amendment, but not otherwise defined in this
Amendment, shall have the meanings set forth in the Agreement.
B. Employer and Employee desire to revise the Agreement, on the terms
and conditions set forth in this Amendment, to, among other things, delete the
Distribution Bonus and substitute an option to purchase common shares of
Employer and the right to sell common shares in the initial public offering of
common shares of Employer registered under the Securities Act of 1933, as
amended (an "IPO"), all subject to the terms and conditions of this Amendment.
THEREFORE, Employer and Employee agree as follows:
1. Change in Title. Effective as of the "Effective Date" (as defined
in Section 5 below), the reference in Section 1.E. of the Agreement to
"Boulder's Director of Alternative Lending" is changed to "Employer's
President". Effective as of the "Effective Date" (as defined in Section 5
below), the first sentence of Section 1.D. of the Agreement is amended to read
as follows: "Employee's title shall be "President"."
2. Deletion of Distribution Bonus. Effective as of the "Effective
Date" (as defined in Section 5 below), Section 2.A.(iii) of the Agreement is
amended and restated to read as follows:
"(iii) [RESERVED]."
3. Additional Compensation Provisions. If the "Effective Date" (as
defined in Section 5 below) occurs, Section 2 of the Agreement is hereby amended
by adding the following additional Sections to the end of Section 2:
"F. Stock Option. Effective as of the closing date of the IPO,
Employer shall grant to Employee pursuant to the Rock Financial
Corporation 1996 Stock Option Plan and a Stock Option Agreement in
substantially the form attached as Exhibit A an option to purchase
292,500 common shares of Employer at an exercise price per share equal
to the public offering price per share of the common shares in the
IPO."
"G. Right to Participate in the IPO. Employer shall use its best
efforts to cause the underwriters in its IPO to permit Employee to
sell 214,500 common shares in
<PAGE> 20
the IPO. If Employee is permitted to sell such common shares in the
IPO, Employee shall acquire such shares by exercising stock options he
owns to purchase that number of shares on or before the closing date of
the IPO and shall deliver certificates representing such shares, free
of any adverse claims (as defined in the Michigan Uniform Commercial
Code) to the underwriters on the closing date of the IPO, duly endorsed
for transfer or accompanied by stock powers. Employee shall also enter
into an underwriting agreement with such underwriters and such other
documents and agreements as are reasonably requested by Employer or the
underwriters in connection with the IPO."
4. Change of References to President. Effective as of the "Effective
Date" (as defined in Section 5 below), all references in the Agreement to
"President" (other than the references to "President" in the first sentence of
Section 1.D. of the Agreement and in Section 1.E. of the Agreement) are amended
and restated to read "Chief Executive Officer", including those references in
Sections 1.A., 1.D. (except the first sentence of Section 1.D.), 2.A.(i),
2.A.(ii), 2.B., 3.B., and 6.G. of the Agreement. In addition, effective as of
the "Effective Date" (as defined in Section 5 below), all references in the
Stock Option Agreement, dated as of December 28, 1996 between Employer and
Employee to "President" are amended and restated to read "Chief Executive
Officer", including those references in Sections 2(d)(2)(D) and 2(d)(2)(F) in
such Stock Option Agreement.
5. Conditional Effectiveness of Amendment. The "Effective Date" shall
be March 15, 1998, if and only if, the closing date of the IPO occurs on or
before June 30, 1998. If the closing date of the IPO does not occur on or before
June 30, 1998, this Amendment shall be void and shall be treated as if it never
existed without any liability or obligation of Employer or Employee under this
Amendment.
6. Information. At all times following Employee's initial contact with
Employer pertaining to this Amendment, Employer has made available to Employee
the opportunity to ask questions of, and receive answers from, Employer and
persons acting on its behalf concerning the terms and conditions of the
transactions contemplated by this Amendment, concerning the transactions
described in Sections 2 and 3, and concerning the Employer (including its
financial condition, results of operations, cash flows, prospects, business,
products, facilities, management, principals, business risks, securities,
capitalization, financial needs and shareholders), and to obtain any additional
information, to the extent Employer possessed such information or could acquire
it without unreasonable effort or expense, that was necessary to verify the
information furnished about the foregoing to Employee by Employer. Employee
acknowledges receipt of a copy of this Amendment and Employer's financial
statements for the fiscal year ended December 31, 1997. Employee is assuming
responsibility, and is not relying on Employer in any manner whatsoever, to
analyze and evaluate any information Employee has received and any additional
information Employee desires to obtain. Employee has been furnished, or will
obtain, all information Employee requests or desires to know before entering
into this Amendment. Employee has had the opportunity to consult with counsel
concerning the terms and conditions of this Amendment and the transactions
described in this Amendment.
-2-
<PAGE> 21
7. Release. As of the date of this Amendment, Employee acknowledges and
agrees that no amounts are owing to Employee by Employer under the Agreement or
otherwise, except for (i) any accrued, but unpaid salary with respect to the
period after the period covered by the last regular payroll payment made by
Employer to Employee, (ii) any amounts due to Employee under Employer's employee
benefit plans, payable in the ordinary course of Employer's business, and (iii)
any amounts provided in this Amendment (collectively, the "Exceptions"). As of
the date of this Amendment, Employee releases Employer and its directors,
officers, employees, affiliates, representatives, agents and attorneys, and
their successors and assigns from all causes of action, claims, and damages
based on any facts existing at the date of this Amendment, except for the
Exceptions. As of the date of this Amendment, Employer releases Employee and his
successors and assigns from all causes of action, claims, and damages based on
any facts existing at the date of this Amendment, except for any claims under
the Agreement, as amended by this Amendment.
8. No Other Change. Except as modified by this Amendment, the Agreement
shall continue in full force according to its terms and is ratified.
9. Counterparts. This Amendment may be signed in counterparts, both of
which together will be deemed an original of this Amendment. This Amendment will
also be effective if evidenced by signed copies transmitted by telecopier or
facsimile transmission.
IN WITNESS WHEREOF, Employer and Employee have signed this Amendment as
of the date set forth in the introductory paragraph of this Amendment.
ROCK FINANCIAL CORPORATION
By: /s/ Daniel B. Gilbert
-----------------------------
Daniel B. Gilbert
Its: President
/s/ Steven Stone
--------------------------------
Steven Stone
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<PAGE> 1
EXHIBIT 10.4
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (the "Agreement") is made as of January
17, 1997 between Gary Gilbert ("Seller") and Daniel B. Gilbert ("Buyer").
R E C I T A L S
A. Seller is the owner of record of 3,099,978 common shares of Rock
Financial Corporation, a Michigan corporation (the "Company").
B. Seller desires to sell to Buyer, and Buyer desires to purchase from
Seller, 1,022,680 common shares of the Company on the terms and conditions set
forth in this Agreement.
THEREFORE, the parties agree as follows:
1 PURCHASE AND SALE OF STOCK.
1.1 Agreement to Purchase and Sell Stock. Upon the terms and subject to
the conditions of this Agreement, at the Closing, as defined in Section 1.3,
Buyer shall buy from Seller, and Seller shall sell and deliver to Buyer,
1,022,680 common shares of the Company (the "Shares"). The certificates for the
Shares shall, when so delivered by Seller, be duly endorsed for transfer to
Buyer or have executed stock powers endorsed to Buyer attached to the Shares,
and Seller shall have paid or provided for all requisite documentary and/or
stock transfer stamps. Such certificates for the Shares shall also be
accompanied by any other documents that are necessary to transfer to Buyer good
and marketable title to the Shares.
1.2 Purchase Price. The purchase price for the Shares shall be
$4,242,500. If, on or before the Closing Date, Bear Stearns & Co., Inc. or
another similar financing source shall have funded a loan to Buyer sufficient
to pay the entire purchase price for the Shares or if Buyer otherwise desires
to pay the entire purchase price in cash at the Closing, such purchase price
shall be payable in cash, by check or by wire transfer delivered by Buyer to
Seller at the Closing, subject to the provisions of Section 3.2. If, on or
before the Closing Date, Bear Stearns & Co., Inc. or another similar financing
source shall not have funded a loan to Buyer sufficient to pay the entire
purchase price for the Shares and Buyer does not otherwise desire to pay the
entire purchase price in cash at the Closing, such purchase price shall be
payable as follows:
1.2.1 payment of $300,000 in cash, by check or by wire
transfer delivered by Buyer to Seller at the Closing, subject to the provisions
of Section 3.2; and
1.2.2 delivery to Seller at the Closing of a promissory note
in the principal amount of $3,942,500, maturing on August 31, 1998, bearing
interest at the annual rate of 9%, in substantially the form attached as
Exhibit 1.2.2.
.
1.3 The Closing. The Closing under this Agreement shall be held at
10:00 a.m. at the offices of Rock Financial Corporation, 30600 Telegraph Road,
Fourth Floor, Bingham Farms,
<PAGE> 2
Michigan 48025, on the earlier of (i) February 28, 1997, or (ii) two business
days after Bear Stearns & Co., Inc. or another similar financing source funds a
loan to Buyer sufficient to pay the purchase price for the Shares, or such
other day and time as Buyer and Seller shall mutually agree upon in writing, or
such date as extended pursuant to Section 4.1.2 or Section 4.2.2. The
consummation of the transactions set forth in this Agreement at such place and
time are sometimes referred to in this Agreement as the "Closing", and such
date is sometimes referred to as the "Closing Date". At the Closing, Seller
shall deliver the Shares pursuant to Section 1.1, Buyer shall pay or deliver
the purchase price pursuant to Section 1.2, and Buyer and Seller shall comply
with the covenants and conditions to closing set forth in Sections 3 and 4.
2 REPRESENTATIONS AND WARRANTIES.
2.1 Seller's Representations and Warranties. Seller hereby represents
and warrants the following to Buyer as of the date of this Agreement and as of
the Closing Date:
2.1.1 Authority Relative to This Agreement. Seller has full
power and authority to execute, deliver and perform the terms of this Agreement.
No other action on the part of Seller or any other individual, person or entity,
is necessary to authorize this Agreement or the performance by Seller of the
terms of this Agreement. This Agreement has been duly and validly executed and
delivered by Seller and constitutes a valid and binding agreement of Seller.
2.1.2 Consents and Approvals; No Violation. Except for the
consent of the other shareholders pursuant to the Rock Financial Corporation
Stock Purchase Agreement, dated as of June 29, 1987, among Buyer, Seller, Ronald
Berman, Lindsay Gross and the Company (the "Shareholder Agreement"), neither the
execution and delivery by Seller of this Agreement nor the performance by Seller
of the terms of this Agreement, (i) will require any authorization, consent or
approval of any governmental or regulatory authority or of any other person or
entity, (ii) will breach any provision of, constitute a default under, or result
in the creation of any lien or security interest under any of the terms or
conditions of any license, agreement, evidence of indebtedness, mortgage,
security agreement, lease or other obligation to which Seller is a party, or by
which Seller or any of his properties or assets may be bound, or (iii) will
violate any order, writ, injunction, decree, judgment or arbitration award or
any statute, rule, regulation or ruling of any court or governmental authority,
applicable to Seller or to his property or assets.
2.1.3 Ownership of the Shares. The Shares are all of the
issued and outstanding shares of capital stock of the Company of any class or
nature whatsoever and all rights to acquire any such shares owned of record or
beneficially by Seller, except for the 2,077,298 common shares of the Company
retained by Seller. The transfer of the Shares pursuant to this Agreement will
effectively transfer full and complete ownership of the Shares to Buyer. All of
the Shares are validly issued, fully paid, nonassessable, and free of preemptive
rights. Seller has, and upon consummation of the sale of the Shares to Buyer,
Buyer will acquire, good title to all of the Shares, free and clear of all
pledges, warrants, calls, options, rights, commitments, subscriptions,
contracts, agreements, understandings, arrangements, voting trusts or
agreements, proxies, unpaid taxes, adverse claims and other claims and options
of whatever nature, except for any such rights
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in favor of Buyer. Seller has owned the Shares since at least February 1992, and
fully paid the purchase price for the Shares on or before February 1992.
2.1.4 Sophistication. Seller has substantial prior investment
experience, including investments in non-listed and non-registered securities of
corporations and partnership interests in various partnerships, and Seller has
such knowledge and experience in financial and business matters that he is
capable of evaluating the merits and risks of the potential sale of Seller's
Shares.
2.1.5 Independent Decision. Seller will make his own
investment decision concerning the sale of the Shares and the sale price of the
Shares. Seller has not received, and has not and will not rely on, any
representations, opinions or recommendations from Buyer concerning the sale,
except as otherwise provided in this Agreement, including, without limitation,
concerning the Shares, Buyer or the Company.
2.1.6 Information. At all times following Seller's initial
contact with Buyer pertaining to the Shares, Buyer and the Company have made
available to Seller the opportunity to ask questions of, and receive answers
from, Buyer, the Company and persons acting on its behalf concerning the terms
and conditions of the transactions contemplated by this Agreement, concerning
the transactions described in Section 2.1.7 and concerning the Company
(including its financial condition, results of operations, cash flows,
prospects, business, products, facilities, management, principals, business
risks, securities, capitalization, financial needs and shareholders), and to
obtain any additional information, to the extent Buyer or the Company possessed
such information or could acquire it without unreasonable effort or expense,
that was necessary to verify the information furnished about the foregoing to
Seller by Buyer or the Company. Seller acknowledges receipt of a copy of this
Agreement, the Company's audited financial statements for the fiscal year ended
December 31, 1995 and the Company's unaudited financial statements for the nine
months ended September 30, 1996. Seller is assuming responsibility, and is not
relying on Buyer in any manner whatsoever, to analyze and evaluate any
information Seller has received and any additional information Seller desires
to obtain. Seller has been furnished, or will obtain, all information Seller
requests or desires to know before selling any Company common shares or other
equity securities. Seller has had the opportunity to consult with counsel
concerning the terms and conditions of this Agreement and the transactions
described in this Agreement.
2.1.7 Purchase Price. Seller acknowledges and accepts that the
purchase price for the Shares has been determined by negotiations between Seller
and Buyer based primarily on the net proceeds Seller desires to receive and the
amount Buyer is willing to pay, and the price is not necessarily related to the
Company's asset value, net worth, earnings potential or other established
criteria of value. Seller acknowledges that he is selling the Shares without
obtaining a full valuation of the Company or Seller's interest in the Company.
Seller further acknowledges that he is aware (i) that the Company has received a
preliminary indication of the range of its valuation under various circumstances
from an investment banking firm that may differ from those on which Seller's
purchase price is based, (ii) that the Company is discussing potential
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capital raising transactions, including, without limitation, a potential initial
public offering, that might occur as soon as 6 to 18 months after the date of
this Agreement, which, if done, could be based on implied valuations that are
significantly higher than those on which Seller's purchase price is based, and
(iii) that management's projections indicate a significant increase in revenues
and income in the near future. However, as with any estimate or projection, the
numbers in the estimated valuations and projections are estimates and reflect
numerous assumptions, including various assumptions with respect to the
anticipated future performance of the Company, industry performance, general
business and economic conditions, interest rates, buyers' interests in the
Company's business and other matters, most of which are beyond the control of
the Company. In addition, unanticipated events and circumstances may affect the
actual financial results of the Company. Notwithstanding the foregoing, Seller
has satisfied himself regarding the purchase price for the Shares, and Seller
agrees that he is assuming sole responsibility to evaluate the fairness of the
purchase price. To Buyer's knowledge, there are no current agreements or
commitments for an initial public offering of the Company's securities or a
business combination involving the Company.
2.2 Buyer's Representations and Warranties. Buyer hereby represents and
warrants the following to Seller as of the date of this Agreement and as of the
Closing Date:
2.2.1 Authority Relative to This Agreement. Buyer has full
power and authority to execute, deliver and perform the terms of this Agreement.
No other action on the part of Buyer or any other individual, person or entity,
is necessary to authorize this Agreement or the performance by Buyer of the
terms of this Agreement. This Agreement has been duly and validly executed and
delivered by Buyer and constitutes a valid and binding agreement of Buyer.
2.2.2 Consents and Approvals; No Violation. Except for the
consent of the other shareholders pursuant to the Shareholder Agreement, neither
the execution and delivery by Buyer of this Agreement nor the performance by
Buyer of the terms of this Agreement, (i) will require any authorization,
consent or approval of any governmental or regulatory authority or of any other
person or entity, (ii) will breach any provision of, constitute a default under,
or result in the creation of any lien or security interest under any of the
terms or conditions of any license, agreement, evidence of indebtedness,
mortgage, security agreement, lease or other obligation to which Buyer is a
party, or by which Buyer or any of his properties or assets may be bound, or
(iii) will violate any order, writ, injunction, decree, judgment or arbitration
award or any statute, rule, regulation or ruling of any court or governmental
authority, applicable to Buyer or to his property or assets.
2.2.3 Accredited Investor. Buyer is an "accredited investor"
as such term is defined in Rule 501 of Regulation D promulgated under the
Securities Act of 1933, as amended (the "Securities Act"). Buyer is an
individual with a net worth (including Buyer's spouse's net worth) is in excess
of $1,000,000, and with individual income was in excess of $200,000 (or $300,000
with Buyer's spouse's income) for each of 1994 and 1995 and is reasonably
expected to be so for 1996.
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2.2.4 Sophistication. Buyer has substantial prior investment
experience, including investments in non-listed and non-registered securities of
corporations, and Buyer has such knowledge and experience in financial and
business matters that he is capable of evaluating the merits and risks of the
potential purchase of Seller's Shares.
2.2.5 Investment Intent; Resale. Buyer is purchasing Seller's
Shares for Buyer's own account, and not with a view to, or for sale in
connection with, any distribution of the Shares, unless the Shares are
registered under the Securities Act of 1933, as amended, or an exemption from
the registration requirements of such act is available.
2.2.6 Independent Decision. Buyer will make his own investment
decision concerning the purchase of the Shares and the purchase price of the
Shares. Buyer has not received, and has not and will not rely on, any
representations, opinions or recommendations from Seller concerning the
purchase, except as otherwise provided in this Agreement, including, without
limitation, concerning the Shares, Seller or the Company.
3 COVENANTS.
3.1 Additional Loans. Buyer shall cause the Company to make additional
officer loans available to Seller at any time between the date of this Agreement
and the Closing Date in an aggregate outstanding principal amount not to exceed
$225,000 at the same interest rate (3% per year) and on the same terms and
conditions as other loans outstanding from the Company to Seller.
3.2 Repayment of Loans from the Company. On the Closing Date, Seller
shall repay, or cause to be repaid, all indebtedness, including, without
limitation, all accrued interest, of Seller to the Company (collectively, the
"Indebtedness"), including without limitation, (i) the officer loan from the
Company to Seller in the original principal amount of $545,000, plus accrued
interest, and (ii) any loans made pursuant to Section 3.1 and all accrued
interest with respect to such loans. If any of the Indebtedness is not repaid
before the purchase price for the Shares is paid, Seller authorizes Buyer
to pay to the Company, on behalf of Seller, that portion of the purchase price
for the Shares equal to all remaining unpaid Indebtedness to the Company (but
not more than the entire purchase price). Such payment shall be credited to the
purchase price for the Shares, and Buyer's obligations under Section 1.2 shall
be reduced by the amount of such payment. Notwithstanding anything in this
Section 3.2 to the contrary, if Buyer pays a portion of the purchase price for
the Shares under this Agreement by delivery to Seller at the Closing of a
promissory note, (i) Seller's obligation to repay any Indebtedness shall be
deferred (and shall continue to accrue interest at the same rate as before the
Closing Date) until Buyer makes principal payments under the promissory note
described in Section 1.2.2, and (ii) if any of the Indebtedness remains unpaid
at the time such principal payments are made on such promissory note, Seller
authorizes Buyer to pay to the Company, on behalf of Seller, that portion of
the amount due under such promissory note equal to all remaining unpaid
Indebtedness to the Company (but not more than the entire amount of such
principal payment under such promissory
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note). Such payment shall be credited to the amount due under such promissory
note, and Buyer's obligations under such promissory note shall be reduced by the
amount of such payment.
3.3 Resignation. Buyer shall cause the Company to continue to employ
Seller as its Executive Vice President in charge of the Rock Direct division at
an annual salary of $130,000 until the date of this Agreement (the "Resignation
Date"). After the Resignation Date, Seller shall not perform any duties for the
Company, including, without limitation, directing the activities of any other
employee of the Company; provided that, from the Resignation Date through
February 28, 1997, Seller shall continue to perform only such duties for the
Company and only at such times as are requested by Buyer on behalf of the
Company. On or before the Resignation Date, Seller shall resign from all of his
positions with the Company, except as a director of the Company, pursuant to a
resignation substantially in the form of the attached Exhibit 3.3. Seller shall
deliver a copy of such resignation to Buyer at the Closing. Buyer shall cause
the Company to provide the following to Seller as his exclusive severance
compensation:
3.3.1 Salary. The ratable portion of Seller's $130,000 per
year annual salary through February 28, 1997, payable in accordance
with the Company's usual payroll procedures.
3.3.2 Loan Officer Commissions. Seller's loan officer
commissions for loans closed on or before February 28, 1997, on the
same basis and at the same times as Seller has been paid such
commissions in the past.
3.3.3 Bonus. A $200,000 bonus, payable on or before
December 31, 1996.
3.3.4 Use of Office. Continued use of Seller's office at the
Company through July 1, 1997 for personal purposes or for purposes of
carrying on non-Company business; provided that Seller shall reimburse
the Company for any extraordinary, incremental (i.e., beyond those
incurred if Seller were not using such office) out-of-pocket expenses
the Company must pay to third party vendors as a result of Seller's
presence in, or use of, that office or his activities in connection
with the use of that office. Such purposes may include Seller's use of
such office to train his employees for his Business (as defined in
Section 3.6).
3.3.5 Medical Insurance. Continued medical and dental
insurance for as long as Seller remains a director of the Company,
except that (i) if Seller resigns as a director of the Company as
described in Section 3.5, the Company will continue to provide such
insurance for one year after the date Seller resigns as a director of
the Company, and (ii) notwithstanding anything in this Section 3.3.5
to the contrary, the Company's obligation (and Buyer's obligation to
cause the Company) to provide Seller with such insurance shall end on
the date Seller is employed by another entity providing health
coverage.
3.3.6 Office Furniture. Effective on the Resignation Date, Buyer
will cause the Company to transfer to Seller all of its right, title
and interest in the furniture in Seller's
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office at the Company on the date of this Agreement. Buyer and Seller
agree that the value of such furniture is $3,500, and Seller will, and
Buyer will cause the Company to, use that value for federal income tax
purposes.
3.3.7 Additional Severance Compensation. The Company has
provided, or Buyer will cause the Company to provide, Darren Schwartz
and Louis Rubin with their loan officer commissions, overrides and
other normal severance compensation (not including any continuation of
salary beyond the dates on which their respective employments with the
Company terminated) for loans closed on or before January 31, 1997, on
the same basis and at the same times as they have been paid such
amounts in the past. In addition, Buyer will cause the Company to pay
$20,000 in additional severance compensation to each of Darren Schwartz
and Louis Rubin on or before July 1, 1997. Also, the Company has
provided, or Buyer will cause the Company to provide, Jay Farner and
Jeff Perry with their loan officer commissions, overrides and other
normal severance compensation (not including any continuation of salary
beyond the dates on which their respective employments with the Company
terminate) for loans closed on or before 30 days after the termination
of their employment with the Company if they are offered employment in
Seller's Business (as defined in Section 3.6) and agree to be so
employed, on the same basis and at the same times as they have been
paid such amounts in the past.
3.4 Dividend. Buyer will cause the Company to declare a dividend,
payable on or before September 1, 1997, that will result in Seller receiving a
distribution of $1,000,000, and will cause the Company to pay such $1,000,000
distribution to Seller.
3.5 Service as a Director of the Company. Buyer will vote his common
shares in the Company to elect Seller as a director of the Company until the
earlier of (i) the date on which a company of which Seller is a director,
officer, key employee or at least 10% shareholder engages in a business similar
to that of the Company and has annual gross revenues of at least $10,000,000,
and (ii) the date the Company closes a public offering of its securities
registered under the Securities Act of 1933, as amended, pursuant to a
registration statement filed with the Securities and Exchange Commission (each a
"Terminating Event"). On the date of any Terminating Event, at the request of
Buyer, Seller will resign as a director of the Company.
3.6 Consulting with Company Employees. Buyer will cause the Company to
permit (i) Seller, and (ii) if Buyer is informed in advance, including, without
limitation, by voice mail message, Darren Schwartz and Louis Rubin, if they
become executive officers of Seller's Business (as defined below), and (iii)
with Buyer's advance permission, any other executive officer of Seller's
Business (as defined below), at any time through December 31, 1998 (and
thereafter as Buyer, Seller and the Company may agree), to consult with Company
employees concerning areas of the Company's business and operations that are
similar to the business or operations of any mortgage business formed or
acquired by Seller and that is consistent with Seller's obligations under
Section 3.8 (the "Business"); provided that (i) such consultation shall not
disrupt the Company's business, (ii) such right to consult shall expire when
the Business has annual gross revenues in any year of at least $10,000,000,
(iii) if such consultation requires more
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than occasional personal or telephone conversations or sporadic meetings with
Company employees, Seller must (A) obtain Buyer's prior consent to such
consultation, and (B) pay fair market value for the consulting services provided
to Seller, and (iv) any request for any documentation or anything else in
writing must be made through Buyer, including, without limitation, any requests
for books, memoranda and forms of agreements.
3.7 Reimbursement for Costs of Outstanding Promises. Seller shall
indemnify, defend and save and hold harmless the Company from and against any
damage, liability, loss, claim, cost, debt, expense, obligation, tax,
assessment, public charge, lawsuit, contract, agreement, undertaking, deficiency
of any kind or nature, demand, lawsuit, action or cause of action, whether
known or unknown, fixed, actual, accrued, or contingent, liquidated or
unliquidated (including but not limited to, interest, penalties, reasonable
attorneys' fees and other actual reasonable costs and expenses incident to
proceedings or investigations or the defense of any claim, whether or not
litigation has commenced) arising out of, resulting from, or relating to, and
will pay the Company on demand the full amount of any sum which the Company pays
or becomes obligated to pay on account of, (i) Seller's written commitments on
behalf of the Company to provide Stuart Perlman and A. Steven Shapiro with
mortgage loans at fixed rates and with specified maturities, which rates and/or
maturities differ from the loans actually made to them, or (ii) any other
written commitment made by Seller on behalf of the Company outside of the
ordinary course of the Company's business that is similar to those described in
clause (i).
3.8 Covenant Not to Compete and Related Matters.
3.8.1 Seller's Acknowledgment. Seller acknowledges that the
Company has expended considerable time, money and resources in initiating and
commencing the operations of the Company; recruiting, training and developing
the skills and abilities of the employees of the Company; developing business
relationships with investors, referral sources and customers so as to improve
the goodwill of the Company; establishing and maintaining close business
relationships between the Company and its customers; and obtaining, compiling
and developing confidential customer lists, various internal computer reports,
and other proprietary business information not readily available to the public
or through other sources. Seller further acknowledges that, except as otherwise
provided in this Section 3.8, the Company is entitled to keep the results of
such efforts (to the extent they represent protectable proprietary information
or other protectable intellectual property of the Company) for its exclusive
use. Accordingly, Seller agrees to the provisions of this Section 3.8
and agrees that such provisions are necessary to preserve and protect the
legitimate business interests of the Company.
3.8.2 Seller's Non-Compete Covenant. Seller represents,
warrants, covenants and agrees, for the benefit of Buyer, the Company and their
affiliates, successors and assigns, that from the date of this Agreement through
December 31, 1998 (the "Covenant Period'), he shall not, either directly or
indirectly, whether on his own behalf or on behalf of any other person, business
or entity whatsoever, engage in, or have any interest in or be associated with
(whether as an officer, director, shareholder, partner, member, associate,
employee, consultant, advisor, owner or otherwise), any corporation,
partnership, limited liability company, association, trust,
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firm or other enterprise (including any pre-incorporated association) which is
engaged in originating any loans secured by any property located in the State of
Michigan (the "Mortgage Activity") without first obtaining the express written
consent of the President of the Company; except that notwithstanding the
foregoing, Seller may (i) invest in any publicly-held corporation engaged in the
Competing Activity, if such investment does not exceed one (1%) percent in the
aggregate in value of the issued and outstanding capital stock of such
corporation, and (ii) continue to own the interest in the Company he owns as of
the date of this Agreement.
3.8.3 Seller's Non-Solicitation Covenant. Seller represents,
warrants, covenants and agrees, for the benefit of Buyer, the Company and their
affiliates, successors and assigns, that from the date of this Agreement
through two years after the Closing Date, he shall not, either directly or
indirectly, whether on his own behalf or on behalf of any other person,
business or entity whatsoever, solicit, induce or attempt to induce any present
employee of the Company or any former employee of the Company who left the
employ of the Company at any time within one year immediately preceding the
date of this Agreement to leave the employment of the Company or enter into the
employ of (i) Seller, (ii) any entity of or to which Seller is an employee,
member, officer, consultant or advisor or in which Seller otherwise has any
interest whatsoever, or (iii) any competitor of the Company, without the
Company's prior written consent, except that Seller may (A) during the 30-day
period beginning on the date Seller notifies Buyer that such period is starting
(which must be on or before June 1, 1997), talk about the possibility of
employment by the Business (subject to the restrictions described in Section
3.8) to Darren Schwartz, Louis Rubin, Jay Farner, Jeff Perry and any four
additional employees, provided that only three of such four additional
employees may be employed in the Company's Boulder Financial division (the
"Additional Employees"), outside of the Company's offices only (except that he
may talk to Darren Schwartz, Louis Rubin, Jay Farner and Jeff Perry at any time
before the beginning of such 30-day period through the end of such 30-day
period), and (B) hire, only during the same 30-day period, any of such persons
for such Business, if they agree to be so employed and if no more than two of
the Additional Employees hired for such Business were employed in the Company's
Boulder Financial division; and Buyer shall cause the Company to waive any of
its non-competition restrictions prohibiting such persons from being so
employed, but not otherwise. If Jay Farner and Jeff Perry are offered such
employment and agree to be so employed, Buyer will cause the Company, at no
cost to Seller or the Business, to allow them to participate in the Company's
Boulder Financial division's normal training program.
3.8.4 Seller's Confidentiality Covenant. Seller represents,
warrants, covenants and agrees, for the benefit of Buyer, the Company and their
affiliates, successors and assigns, that before, on and after the date of this
Agreement, he shall not, either directly or indirectly, whether on his own
behalf or on behalf of any other person, business or entity whatsoever use,
copy, publish, disseminate, distribute or otherwise disclose any proprietary
information, customer lists, advertising materials or copy, trademarks, service
marks, copyrights, logos, packaging, trade secrets or other intellectual
property of the Company, including, without limitation, any of the foregoing
relating to any of the Company's proprietary applications packages, such as
"MORTGAGE IN A BOX(R)" products and forms (collectively, "Proprietary
Information"); provided that the parties agree the Proprietary Information does
not include any of the following:
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(i) internal Company documents, such as management report forms, employee
handbooks and similar documents, or (ii) standardized industry and other
non-proprietary legal forms, other than those relating to any of the Company's
proprietary application kits, such as "MORTGAGE IN A BOX(R)" products and forms
and other than those containing any Company trademarks, service marks,
copyrights, logos, proprietary packaging or similar rights.
3.8.5 Distinct Covenants. Buyer, Seller and the Company intend
that the covenants set forth in this Section 3.8 (the "Covenants") shall be
deemed to be a series of separate covenants with respect to the Mortgage
Activities of the Company, one for each and every political subdivision of each
state and county to which such Covenants apply. Seller acknowledges and agrees
that the Covenants are reasonable and valid in geographical and temporal scope
and in all other respects. If any court determines that any Covenant, or any
portion of any Covenant, is invalid or unenforceable, the remainder of the
Covenants shall not be affected and shall be given full force and effect,
without regard to the invalid Covenant or the invalid portion. If any court
determines that any Covenant, or any portion of any Covenant, is unenforceable
because of its duration or geographic scope, such court shall have the power to
reduce such duration or scope, as the case may be, and, enforce such Covenant
or portion in such reduced form. Seller intends to and hereby confers
jurisdiction to enforce the Covenants above upon the courts of any jurisdiction
within the geographical scope of such Covenants. If the courts of any one or
more of such jurisdictions hold the Covenants, or any portion of any Covenant,
unenforceable by reason of their breadth of scope or otherwise, it is the
intention of Seller that such determination not bar or in any way affect the
right of Buyer or the Company to the relief provided above in the courts of any
other jurisdiction within the geographical scope of such Covenants as to
breaches of such Covenants in such other respective jurisdictions.
3.8.6 Breach of Covenants Constitutes Breach of
Agreement/Specific Enforcement. Seller covenants and agrees that a breach or
attempted breach of any of the Covenants, constitutes a breach of this
Agreement. In the event of a breach of any Covenant or any other provision of
this Agreement, in addition to any and all legal and equitable rights available
to Buyer, the Company or both, such Covenants may be specifically enforced by a
temporary and/or permanent injunction in an action in equity. Seller hereby
acknowledges that remedies at law for such a breach or threatened breach of the
Covenants are inadequate.
3.9 Rock Insurance Interest. Buyer hereby grants Seller an option to
purchase, at any time within 90 days after a time chosen by Buyer, but the time
chosen by Buyer must be on or before March 31, 1997 (because Buyer intends to
address the capitalization of Rock Insurance Company during the first quarter of
1997), sufficient shares of Buyer's Rock Insurance Company stock so that Seller
would own 30% of the combined Rock Insurance Company shares owned by Seller and
Buyer on the date of the exercise of such option. The exercise price of such
option is payable by Seller to Buyer, in cash at the time of such exercise, and
equals the same average cost per share paid by Buyer for his equity interest in
Rock Insurance Company through the first date such option is exercisable.
Notwithstanding the preceding sentence, if Buyer pays a portion of the purchase
price for the Shares under this Agreement by delivery to Seller at the Closing
of a promissory note, Seller may pay such exercise price by delivery of a
promissory note in the
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principal amount equal to such exercise price, maturing on August 31, 1998, and
bearing interest at the annual rate of 9%, in substantially the form attached as
Exhibit 1.2.2, except that Buyer and Seller would be reversed and the principal
amount would be adjusted to equal the option exercise price. This option is not
transferrable by Seller without Buyer's consent. It is a condition to the
exercise of such option that Seller enter into a shareholders agreement among
Rock Insurance Company's shareholders with respect to their interests in Rock
Insurance Company on the same terms and conditions as the agreement among the
Company's shareholders as of the date of such exercise, except as modified by
mutual agreement of the parties to such shareholders agreement.
If Seller exercises such option and desires to sell or transfer all or
any part of such shares (other than to a revocable inter vivos trust for the
benefit of Seller and of which Seller is the sole trustee, which trust shall be
treated for all purposes as the Seller for purposes of this Section 3.9, and
such trust and the shares transferred to the trust, shall be bound by the terms
and conditions of this Section 3.9), he must first give written notice to Buyer
of such proposed sale or transfer, which notice shall state the name and
address of the proposed transferee, the amount of the equity interest, and the
price, terms of payment, and conditions of such proposed sale or transfer.
Buyer shall have the exclusive option for a period of sixty days after receipt
of such notice in which to purchase all or none of such shares proposed to be
sold or transferred at the price and on the other terms and conditions stated
in such notice. Such option shall be exercised by giving written notice thereof
to Seller. If Buyer fails to exercise his option within such sixty-day period,
Seller shall be free, for the next sixty days after the expiration of the
sixty-day option period, to sell or transfer such equity interest to the
proposed person or entity on the proposed terms and conditions free of any
restrictions under this Agreement. If the sale or transfer is not consummated
within such sixty-day period, the restrictions and option provided in this
Section 3.9 shall again apply.
3.10 Interest in Seller's New Business. Seller hereby grants Buyer an
option to purchase, at any time within 90 days after Seller notifies Buyer in
writing that he has both formed the Business and signed a lease for the premises
from which the Business will be operated, a 17% equity interest in the Business,
at the same average cost per share paid by Gary Gilbert for his interest. Until
the later of two years after the Closing Date and six months after Seller
provides Buyer with the notice described in the preceding sentence (the
"Period"), Buyer may sell or transfer all or any portion of such equity
interest, such option or any combination of the foregoing to Lindsay Gross,
Steven Stone, Adam Schoener, Ross Niskar, or any combination of the foregoing,
without obtaining the consent of any person or entity and without providing any
person or entity a right of first refusal with respect to such sale or transfer.
During the Period, no other sale or transfer of such equity interest, such
option or any combination of the foregoing shall be permitted without Seller's
consent. It is a condition to the exercise by any person (including, Buyer,
Lindsay Gross, Steven Stone, Adam Schoener, Ross Niskar, or any combination of
the foregoing, as the case may be) of such option that such person enter into a
Shareholders Agreement among the shareholders of the Business on the same terms
and conditions as the agreement among the Company's shareholders as of the date
of such exercise (except that Seller would be substituted for Buyer and Buyer
would be substituted for Seller in
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<PAGE> 12
the new agreement), except as modified by mutual agreement of the parties to
such Shareholders Agreement.
After the end of the Period, if Buyer desires to sell or transfer all
or any part of such equity interest (other than to a revocable inter vivos
trust for the benefit of Buyer and of which Buyer is the sole trustee, which
trust shall be treated for all purposes as the Buyer for purposes of this
Section 3.10, and such trust and the shares transferred to the trust, shall be
bound by the terms and conditions of this Section 3.10), he must first give
written notice to Seller of such proposed sale or transfer, which notice shall
state the name and address of the proposed transferee, the amount of the equity
interest, and the price, terms of payment, and conditions of such proposed sale
or transfer. Seller shall have the exclusive option for a period of sixty days
after receipt of such notice in which to purchase all or none of such equity
interest proposed to be sold or transferred at the price and on the other terms
and conditions stated in such notice. Such option shall be exercised by giving
written notice thereof to Buyer. If Seller fails to exercise his option within
such sixty-day period, Buyer shall be free, for the next sixty days after the
expiration of the sixty-day option period, to sell or transfer such equity
interest to the proposed person or entity on the proposed terms and conditions
free of any restrictions under this Agreement. If the sale or transfer is not
consummated within such sixty-day period, the restrictions and option provided
in this Section 3.10 shall again apply.
3.11 Consent. Buyer, Seller and the Company are all parties to the Rock
Financial Corporation Stock Purchase Agreement, dated as of June 29, 1987 (the
"Shareholders Agreement"). Each of Buyer, Seller and the Company has received,
has read and understands this Agreement. Each of Buyer, Seller and the Company
agrees that this Section 3.11 constitutes prior written consent of the Company,
Buyer and Seller (i.e., the Corporation, as defined in the Shareholders
Agreement, and two of the Shareholders, as defined in the Shareholders
Agreement) pursuant to Section 1 of the Shareholders Agreement with respect to
the transactions described in this Agreement. Each of Buyer, Seller and the
Company consents to the sale and transfer of the Shares to Buyer pursuant to
the terms and conditions of this Agreement, notwithstanding any restrictions on
sale or transfer of such Shares or any options to purchase such equity interest
or Shares pursuant to the Shareholders Agreement, all of which are hereby
waived. Each of Buyer, Seller and the Company also agrees that the provisions
of Section 3 of the Shareholders Agreement shall not apply to the Shares being
sold pursuant to this Agreement as a result of Seller's resignation as an
employee of Rock Financial Corporation.
3.12 Subchapter S Filings. If the Company's Board of Directors
determines to treat the taxable year of the Company in which Seller's interest
in the Shares is sold to Buyer as two taxable years pursuant to Section
1377(a)(2) of the Internal Revenue Code of 1986, as amended (the "Code") or
Section 1.1368-1(g) of the Treasury Regulations, then Seller shall execute and
file any and all consents and other documents required by Section 1377(a)(2) of
the Code, the underlying Treasury Regulations or Section 1.1368-1(g) of the
Treasury Regulations as may be necessary to effect such determination.
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<PAGE> 13
3.13 Further Assurances. Each of the parties will promptly prepare,
execute and deliver to the other party such lists, instruments and documents and
cooperate with the other party in such other respects as the other party may
from time to time, before or after the Closing, reasonably request.
4 CONDITIONS TO CLOSING.
4.1 Conditions to Buyer's Obligations. The obligations of Buyer under
this Agreement are subject to the satisfaction of the following conditions at or
before the Closing, provided that Buyer may waive the satisfaction of any such
condition pursuant to a writing signed by Buyer:
4.1.1 Accuracy of Seller's Representations and Warranties. All
representations and warranties made by Seller in this Agreement, including,
without limitation, the representations and warranties in Section 2.1, shall be
true, accurate and correct in all material respects at and as of the Closing
Date, with the same force and effect as though such representations and
warranties had been made at and as of the Closing Date.
4.1.2 Compliance with Covenants. All actions, undertakings,
covenants or agreements required to be performed by Seller, on or before the
Closing Date, including, without limitation, the covenants of Seller in Section
3, shall have been so performed or complied with in all material respects
within 30 days after Buyer notifies Seller in writing of any failure of such
performance or compliance by Seller, and Seller shall have delivered evidence
of such performance or compliance on the Closing Date. The parties agree to
extend the Closing Date until the earlier of the expiration of such 30-day
period or the date such failure is cured.
4.1.3 Resignation. Seller shall have signed and delivered the
resignation described in Section 3.3 and shall have delivered a copy of such
executed resignation to Buyer.
4.2 Conditions to Seller's Obligations. The obligations of Seller under
this Agreement are subject to the satisfaction of the following conditions at or
before the Closing, provided that Seller may waive the satisfaction of such
conditions pursuant to a writing signed by Seller:
4.2.1 Accuracy of Buyer's Representations and Warranties. All
representations and warranties made by Buyer in this Agreement, including,
without limitation, the representations and warranties in Section 2.2, shall be
true, accurate and correct in all material respects at and as of the Closing
Date, with the same force and effect as though such representations and
warranties had been made at and as of the Closing Date.
4.2.2 Compliance with Covenants. All actions, undertakings,
covenants or agreements required to be performed by Buyer, on or before the
Closing Date, including, without limitation, the covenants of Buyer in Section
3, shall have been so performed or complied with in all material respects
within 30 days after Seller notifies Buyer in writing of any failure of such
performance or compliance by Buyer, and Buyer shall have delivered evidence of
such
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<PAGE> 14
performance or compliance on the Closing Date. The parties agree to extend the
Closing Date until the earlier of the expiration of such 30-day period or the
date such failure is cured.
4.3 Remedy for Failure of a Condition. If any condition to Buyer's
obligations under this Agreement, as set forth in Section 4.1, is not met on or
before the Closing Date, Buyer's sole and exclusive remedy shall be to
terminate this Agreement by written notice to Seller. If any condition to
Seller's obligations under this Agreement, as set forth in Section 4.2, is not
met on or before the Closing Date, Seller's sole and exclusive remedy shall be
to terminate this Agreement by written notice to Buyer. If this Agreement is
terminated pursuant to this Section 4.3, this Agreement shall be void and
treated as if it never existed; for example, Seller's resignation pursuant to
Section 3.3 shall be void and treated as if it had never been given.
5 INDEMNITY. Notwithstanding the Closing, and regardless of any investigation
made at any time by or on behalf of either party, each of the parties shall
indemnify, defend and save and hold harmless the other party from and against
any damage, liability, loss, claim, cost, debt, expense, obligation, tax,
assessment, public charge, lawsuit, contract, agreement, undertaking, deficiency
of any kind or nature, demand, lawsuit, action or cause of action, whether known
or unknown, fixed, actual, accrued, or contingent, liquidated or unliquidated
(including but not limited to, interest, penalties, reasonable attorneys' fees
and other actual reasonable costs and expenses incident to proceedings or
investigations or the defense of any claim, whether or not litigation has
commenced) arising out of, resulting from, or relating to, and to pay the other
party on demand the full amount of any sum which the other party pays or becomes
obligated to pay on account of (i) any breach by such party of the terms,
provisions, conditions, representations, warranties or covenants contained in
this Agreement, or (ii) any actions of such party, or his agents or
representatives inconsistent with such terms, provisions, conditions,
representations, warranties or covenants. Notwithstanding anything in this
Section 5 to the contrary, no party (the "Paying Party") shall be liable to
indemnify, defend and save and hold harmless any other party under this Section
5 unless (i) the Paying Party shall have received notice of a claim under this
Section 5, which notice identifies the breach or actions giving rise to such
claim, and (ii) such breach or actions shall not have been cured within 30 days
after the Paying Party receives such notice.
6 RELEASE. As of the Closing Date, Seller releases Buyer, the Company and the
Company's directors, officers, employees, affiliates, representatives, agents
and attorneys, and their successors and assigns from all causes of action,
claims, and damages based on any facts existing at the Closing Date, except for
any claims under this Agreement. As of the Closing Date, Buyer and the Company
release Seller and his successors and assigns from all causes of action, claims,
and damages based on any facts existing at the Closing Date, except for any
claims under this Agreement.
7 DISCLAIMER. Neither party is recommending the purchase or sale of the Shares
to the other party or giving the other party any representations, warranties or
opinions whatsoever, including any concerning such purchase and sale, the
purchase price, or the Shares, except for those explicitly contained in this
Agreement. Each party has determined and evaluated the
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<PAGE> 15
purchase price for the Shares himself. Seller is assuming full responsibility to
independently evaluate its sale of the Shares and the sale price of the Shares
without any reliance on Buyer, and to obtain, verify and evaluate all material
information necessary or desired by Seller to make his decision, including,
without limitation, information concerning Buyer, the Company, its directors,
officers and principal shareholders, its related party transactions, its
financial condition and needs, its business, its products, markets, customers,
suppliers, and competitors, its facilities, its contingent obligations, its
securities and their relative rights, preferences and privileges, and any
potential issuance of additional securities. The parties agree that no
representations or warranties are made regarding the transactions described in
this Agreement, except for those representations and warranties explicitly
contained in this Agreement.
8 MISCELLANEOUS.
8.1 Transfer or Other Taxes. Any sales, use, stock transfer, excise or
other taxes payable in connection with the sale of the Shares to Buyer and
consummation of the transactions described in this Agreement shall be paid by
Seller, and evidence of the payment of such taxes shall be furnished to Buyer
upon its request.
8.2 Finder's Fee. Buyer and Seller each represents and warrants that no
broker, finder or other person is entitled to any brokerage fee, commission, or
finder's fee in connection with the transactions contemplated by this Agreement.
Buyer and Seller shall each pay or discharge and shall indemnify and hold the
other harmless from and against any and all claims or liabilities for brokerage
commissions or finder's fees incurred in any action taken by him.
8.3 Survival of Provisions. The representations, warranties and
covenants of the parties contained in this Agreement shall survive the Closing,
and each of them shall be binding upon the parties at all times after the
execution of this Agreement, including, without limitation, after the Closing,
and they shall be enforceable against each of the parties by the other party at
all times after the execution of this Agreement, including, without limitation,
after the Closing.
8.4 Governing Law and Forum. The laws of the State of Michigan shall
govern this Agreement, its construction, and the determination of any rights,
duties or remedies of the parties arising out of or relating to this Agreement.
The parties acknowledge that the United States District Court for the Eastern
District of Michigan or the Michigan Circuit Court of the County of Oakland
shall have exclusive jurisdiction over any case or controversy arising out of or
relating to this Agreement and that all litigation arising out of or relating to
this Agreement shall be commenced in the United States District Court for the
Eastern District of Michigan or in the Oakland County (Michigan) Circuit Court.
8.5 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
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<PAGE> 16
8.6 Interpretation. The headings contained in this Agreement are solely
for the purpose of reference, are not part of the agreement of the parties and
shall not in any way affect the meaning or interpretation of this Agreement.
8.7 Entire Agreement. This Agreement, including the exhibits and other
documents referred to in this Agreement, embodies the entire agreement and
understanding of the parties to this Agreement with respect to the subject
matter of this Agreement. There are no restrictions, promises, representations,
warranties, covenants or undertakings, other than those expressly set forth in
this Agreement. This Agreement supersedes all prior agreements and
understandings between the parties with respect to such subject matter, and any
such prior agreements or understandings are merged into this Agreement.
8.8 Severability. If any provision of this Agreement is determined to
be illegal or invalid, such illegality or invalidity shall have no effect on the
other provisions of this Agreement, which shall remain valid, operative and
enforceable.
8.9 Notices. Any notice required or permitted to be given pursuant to
this Agreement shall be delivered in person, sent by certified or registered
mail, sent by facsimile or similar method of transmission or sent by overnight
courier, (i) if to Buyer, to Daniel B. Gilbert, c/o Rock Financial Corporation,
30600 Telegraph Road, Fourth Floor, Bingham Farms, MI 48025 (fax number (810)
540-9113), and (ii) if to Seller, to Gary Gilbert, 584 Hanna, Birmingham,
Michigan 48009. Such notice shall be deemed given as of the earliest of (i) when
received, (ii) three business days after sent by certified or registered mail,
(iii) the day sent by facsimile or similar transmission, and (iv) the date by
which the overnight courier guaranties delivery. Either party may change his
address for such notice by notice to the other party.
8.10 No Waiver. No waiver of any breach of any agreement or provision
contained in this Agreement shall be deemed a waiver of any preceding or
succeeding breach of this Agreement or of any other agreement or provision
contained in this Agreement. No extension of time for the performance of any
obligations or acts shall be deemed an extension of time for the performance of
any other obligations or acts.
8.11 Binding Effect; Assignment. This Agreement shall be binding upon
and inure to the benefit of the parties to this Agreement and their respective
successors. Neither party may assign or transfer any of his rights or delegate
any of his obligations under this Agreement without the prior written consent of
the other party, and any purported assignment or transfer by either party
without such consent shall be void.
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<PAGE> 17
IN WITNESS WHEREOF, Buyer and Seller have executed this Agreement as of
the date set forth in the introductory paragraph of this Agreement.
/s/ Daniel B. Gilbert
-------------------------
Daniel B. Gilbert
"Buyer"
/s/ Gary Gilbert
-------------------------
Gary Gilbert
"Seller"
The undersigned is signing this Agreement solely to agree to the
provisions of Sections 3.11 and 6.
ROCK FINANCIAL CORPORATION
By: /s/ Daniel Gilbert
-----------------------
Its: President
------------------
The undersigned is signing this Agreement solely to agree to the
provisions of Section 3.11.
/s/ Lindsay Gross
--------------------------
Lindsay Gross
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<PAGE> 18
EXHIBIT 1.2.2
PROMISSORY NOTE
$3,942,500
Date of Note: February 28, 1997 Bingham Farms, Michigan
FOR VALUE RECEIVED, Daniel B. Gilbert ("Buyer"), promises to pay to
Gary Gilbert (the "Seller"), (i) the principal sum of Three Million Nine Hundred
Forty-Two Thousand Five Hundred Dollars ($3,942,500) on or before August 31,
1998 (the "Maturity Date"), and (ii) accrued, but unpaid, interest on the unpaid
principal from time to time outstanding from and including the date of this
Promissory Note (the "Note") until the full amount of principal has been paid,
all as specified below, and all subject to the prepayment provisions specified
below.
Buyer will pay interest on the indebtedness outstanding under this Note
from time to time (calculated on the basis of a year of 365 or 366 days, as
applicable, for the actual number of days elapsed) at an annual interest rate of
nine percent (9%) until paid; provided that such annual interest rate shall be
twelve percent (12%) on any installment of principal or interest due (including
by acceleration) and not paid by 10 days after its due date, from the date the
installment was due until the date it is paid. All accrued interest shall be
payable on the first day of each month beginning April 1, 1997, and on the
Maturity Date, but not at the date of any prepayment under this Note.
This Note may also be prepaid, in whole or in part, at any time and
from time to time at Buyer's discretion without any prepayment charge, premium
or penalty, except that this Note may not be prepaid without Seller's consent
before January 1, 1998. Any partial prepayment shall be applied first against
the principal amount outstanding under this Note and then against the accrued
interest under this Note.
If any payment of interest made under this Note or made in connection
with the indebtedness evidenced by this Note, or if any law that applies to this
loan and which sets maximum loan charges, shall at any time be determined by a
competent court to be in excess of the amount which can lawfully be charged
under applicable law, then any such payment, to the extent of such excess, shall
be credited to the payment of principal, or, at the election of the Seller,
returned to Buyer. Any such amounts credited to the payment of principal shall
be treated as a partial prepayment.
Both principal and interest shall be payable in lawful money of the
United States of America at the Seller's address set forth in the Stock Purchase
Agreement, dated as of January 17, 1997, between Buyer and Seller (the "Stock
Purchase Agreement"), or at such other place as the Seller may from time to time
designate in writing.
Buyer will be in default under this Note if he does not pay the full
amount of each payment (principal, interest or both) within 10 days after the
date it is due. If Buyer is in default, unless such default is remedied, Seller
may require Buyer to pay immediately the full amount of
<PAGE> 19
principal under this Note which has not been paid and all interest that Buyer
owes on that amount. Seller's exercise of this right shall be by written notice
to Buyer. Even if, at a time when Buyer is in default, Seller does not require
Buyer to pay immediately in full as described above, Seller will still have the
right to do so if Buyer is in default at a later time. Seller will also have all
rights and remedies afforded by law or available under this Note upon any
default under this Note. The Seller shall not, by any act or omission, be deemed
to waive any of his rights, remedies or powers under this Note or otherwise,
unless such waiver is in writing signed by the Seller. Any written waiver of a
default shall not be construed as a waiver of such default in the future or of
any other default.
Buyer agrees to pay all costs of enforcement of this Note, including
reasonable attorneys' fees and court costs.
This Note is subject to the terms and conditions of Section 3.2 of the
Stock Purchase Agreement.
Unless applicable law requires a different method, any notice that must
be given under this Note will be given in the manner described in Section 8.9
of the Stock Purchase Agreement.
This Note shall not be transferable or assignable by Buyer or Seller
without the prior written consent of the other party.
No party shall be deemed, by an act or omission to have waived any
right or remedy under this Note, unless the waiver is in writing and signed by
such party, and then only to the extent specifically set forth in that writing.
A waiver with reference to one event shall not be construed as continuing, or as
a bar or waiver to any right or remedy as to a subsequent event.
This Note is executed and delivered in the State of Michigan, and the
laws of the State of Michigan shall govern this Note, its construction, and the
determination of any rights, duties or remedies of the parties arising out of or
relating to this Note. Buyer and Seller acknowledge that the United States
District Court for the Eastern District of Michigan or the Michigan Circuit
Court of the County of Oakland shall have exclusive jurisdiction over any case
or controversy arising out of or relating to this Note and that all litigation
arising out of or relating to this Note shall be commenced in the United States
District Court for the Eastern District of Michigan or in the Oakland County
(Michigan) Circuit Court.
Buyer waives presentment, notice of dishonor and nonpayment of this
Note.
All references in this Note to the Seller or the Buyer shall apply to
their respective successors and assigns.
--------------------------
Daniel B. Gilbert
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<PAGE> 20
EXHIBIT 3.3
RESIGNATION
Effective January 17, 1997, I, Gary Gilbert, resign from all of my
positions with, including, without limitation, as Executive Vice President of,
Rock Financial Corporation, a Michigan corporation (the "Company"), except as a
director of the Company. Effective January 17, 1997, I, Gary Gilbert, also
resign from all of my positions with, including, without limitation, as trustee
of, and from any other fiduciary capacity with, any of the Company's employee
benefit plans.
IN WITNESS WHEREOF, I have signed this Resignation as of January 17,
1997.
----------------------
Gary Gilbert
<PAGE> 21
AMENDMENT TO STOCK PURCHASE AGREEMENT
THIS AMENDMENT TO STOCK PURCHASE AGREEMENT (the "Amendment") is made as
of February 26, 1997 between Gary Gilbert ("Seller") and Daniel B. Gilbert
("Buyer").
R E C I T A L S
A. Seller and Buyer have entered into the Stock Purchase Agreement,
dated as of January 17, 1997 (the "Agreement").
B. Neither Bear Stearns & Co., Inc. nor any other similar financing
source has funded a loan to Buyer sufficient to pay the entire purchase price
for the Shares (as defined in the Agreement), and Buyer and Seller desire to
revise the provisions of the Agreement concerning the payment of the purchase
price for the Shares.
THEREFORE, the parties agree as follows:
1. Purchase Price. Section 1.2 of the Agreement is deleted and
restated to read as follows:
"1.2 Purchase Price. The purchase price for the Shares shall
be $4,242,500. Such purchase price shall be payable as follows:
"1.2.1 payment in cash, by check or by wire transfer
delivered by Buyer to Seller at the Closing, subject to the
provisions of Section 3.2, of (i) $2,000,000, plus (ii) an amount
of cash equal to all indebtedness, including, without limitation,
all accrued interest, of Seller to the Company as of the Closing
Date; and
"1.2.2 delivery to Seller at the Closing of 142,857 shares of
iCat Corporation, a Delaware corporation, Series C Convertible
Preferred Stock, par value $.001 per share, valued for purposes of
this Agreement at $3.50 a share (the "iCat Shares"). The
certificates for the iCat Shares shall, when so delivered by
Buyer, be duly endorsed for transfer to Seller or have executed
stock powers endorsed to Seller attached to the iCat Shares, and
Buyer shall have paid or provided for all requisite documentary
and/or stock transfer stamps. Such certificates for the iCat
Shares shall also be accompanied by any other documents that are
necessary to transfer to Seller good and marketable title to the
Shares.
1.2.2.1 Buyer represents, warrants and covenants that
(i) he is the legal and beneficial owner of the iCat Shares, (ii)
the iCat Shares are free and clear of all liens, encumbrances,
security interests, mortgages, pledges, rights, options, warrants,
and adverse claims of any nature whatsoever, except that the iCat
Shares are restricted securities under the Securities Act of 1933
and are subject to the terms and conditions of a Shareholders
Agreement and a Registration Rights Agreement, both dated as of
January 11, 1994, as amended,
<PAGE> 22
among iCat Corporation and its shareholders listed on the
signature pages to the agreements, as amended, (iii) Buyer's
assignment of the iCat Shares will vest in Seller valid title to
such iCat Shares without the approval, agreement, consent,
authorization, or similar action of any party which has not been
obtained (assuming Seller executes and delivers an investment
representation required by iCat Corporation at the Closing), (iv)
the assignment of the iCat Shares will not violate any applicable
law, ordinance, rule, regulation, or iCat Corporation bylaw, and
(v) all expenses imposed by third parties to register the transfer
of the iCat Shares from Buyer to Seller will be paid by Buyer.
1.2.2.2 Seller represents, warrants and covenants that
(i) the iCat Shares will be acquired for investment for Seller's
own account, not as a nominee or agent, and not with a view to
distributing all or any part of such iCat Shares, (ii) Seller has
no present intention of selling, granting any participation in or
otherwise distributing any of the iCat Shares in any manner
contrary to the Securities Act of 1933 or any applicable state
securities law, (iii) Seller does not have any contract,
undertaking, agreement or arrangement with any person to sell,
transfer or grant participations to such person or to any third
person with respect to any of the iCat Shares, (iv) Seller is
solely responsible for his own due diligence investigation of iCat
Corporation and its business, and his analysis of the merits and
risks of the investment in the iCat Shares, (v) Seller is a
current shareholder of iCat Corporation, has access to full and
complete information regarding iCat Corporation and has used such
access to his satisfaction for the purpose of obtaining
information about iCat Corporation, (vi) Seller, either alone or
with the assistance of his professional advisor, is a
sophisticated investor, is able to fend for himself in the
acquisition of the iCat Shares pursuant to this Agreement, and has
such knowledge and experience in financial and business matters
that he is capable of evaluating the merits and risks of the
prospective investment in the iCat Shares, and (vii) Seller is a
natural person whose individual net worth at the time of the
acquisition of the iCat Shares exceeds $1,000,000; and
"1.2.3 delivery to Seller at the Closing of a promissory
note in the principal amount equal to (i) $4,242,500, minus (ii)
(A) $2,000,000, (B) an amount equal to all indebtedness,
including, without limitation, all accrued interest, of Seller to
the Company as of the Closing Date, and (C) $499,999.50. The
promissory note shall mature one year after the Closing Date, bear
interest at the annual rate of 9%, payable quarterly, and be in
substantially the form attached as Exhibit 1.2.3."
2. Repayment of Loans. Section 3.2 of the Agreement is deleted and
restated to read as follows:
"3.2 Repayment of Loans from the Company. On the Closing
Date, Seller shall repay, or cause to be repaid, all indebtedness,
including, without
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<PAGE> 23
limitation, all accrued interest, of Seller to the Company
(collectively, the "Indebtedness"), including without limitation,
(i) the officer loan from the Company to Seller in the original
principal amount of $545,000, plus accrued interest, and (ii) any
loans made pursuant to Section 3.1 and all accrued interest with
respect to such loans. If any of the Indebtedness is not repaid
before the purchase price for the Shares is paid, Seller
authorizes Buyer to pay to the Company, on behalf of Seller, that
portion of the purchase price for the Shares equal to all
remaining unpaid Indebtedness to the Company (but not more than
the entire purchase price). Such payment shall be credited to the
purchase price for the Shares, and Buyer's obligations under
Section 1.2 shall be reduced by the amount of such payment."
3. Rock Insurance. The first paragraph of Section 3.9 of the
Agreement is deleted and restated to read as follows:
"3.9 Rock Insurance Interest. Buyer hereby grants Seller an
option to purchase, at any time within 90 days after a time chosen
by Buyer, but the time chosen by Buyer must be on or before March
31, 1997 (because Buyer intends to address the capitalization of
Rock Insurance Company during the first quarter of 1997),
sufficient shares of Buyer's Rock Insurance Company stock so that
Seller would own 30% of the combined Rock Insurance Company shares
owned by Seller and Buyer on the date of the exercise of such
option. The exercise price of such option is payable by Seller to
Buyer, in cash at the time of such exercise, and equals the same
average cost per share paid by Buyer for his equity interest in
Rock Insurance Company through the first date such option is
exercisable. This option is not transferrable by Seller without
Buyer's consent. It is a condition to the exercise of such option
that Seller enter into a shareholders agreement among Rock
Insurance Company's shareholders with respect to their interests
in Rock Insurance Company on the same terms and conditions as the
agreement among the Company's shareholders as of the date of such
exercise, except as modified by mutual agreement of the parties to
such shareholders agreement."
4. Promissory Note. Exhibit 1.2.2 to the Agreement is deleted and
restated to read as follows:
EXHIBIT 1.2.3
PROMISSORY NOTE
$
------------
Date of Note: February 26, 1997 Bingham Farms, Michigan
-3-
<PAGE> 24
FOR VALUE RECEIVED, Daniel B. Gilbert ("Buyer"), promises to pay to
Gary Gilbert (the "Seller"), (i) the principal sum of ___________________
($____________) on or before [February 28, 1998] (the "Maturity Date"), and (ii)
accrued, but unpaid, interest on the unpaid principal from time to time
outstanding from and including the date of this Promissory Note (the "Note")
until the full amount of principal has been paid, all as specified below, and
all subject to the prepayment provisions specified below.
Buyer will pay interest on the indebtedness outstanding under this Note
from time to time (calculated on the basis of a year of 365 or 366 days, as
applicable, for the actual number of days elapsed) at an annual interest rate of
nine percent (9%) until paid; provided that such annual interest rate shall be
twelve percent (12%) on any installment of principal or interest due (including
by acceleration) and not paid by 10 days after its due date, from the date the
installment was due until the date it is paid. All accrued interest shall be
payable on May 31, 1997, August 31, 1997, November 30, 1997 and the Maturity
Date, but not at the date of any prepayment under this Note.
This Note may also be prepaid, in whole or in part, at any time and
from time to time at Buyer's discretion without any prepayment charge, premium
or penalty, except that this Note may not be prepaid in any amount without
Seller's consent before January 1, 1998. Any partial prepayment shall be applied
first against the principal amount outstanding under this Note and then against
the accrued interest under this Note.
If any payment of interest made under this Note or made in connection
with the indebtedness evidenced by this Note, or if any law that applies to this
loan and which sets maximum loan charges, shall at any time be determined by a
competent court to be in excess of the amount which can lawfully be charged
under applicable law, then any such payment, to the extent of such excess, shall
be credited to the payment of principal, or, at the election of the Seller,
returned to Buyer. Any such amounts credited to the payment of principal shall
be treated as a partial prepayment.
Both principal and interest shall be payable in lawful money of the
United States of America at the Seller's address set forth in the Stock Purchase
Agreement, dated as of January 17, 1997, between Buyer and Seller (the "Stock
Purchase Agreement"), or at such other place as the Seller may from time to time
designate in writing.
Buyer will be in default under this Note if he does not pay the full
amount of each payment (principal, interest or both) within 10 days after the
date it is due or if Buyer breaches the Stock Purchase Agreement and fails to
cure such breach within 10 days after notice of such breach from Seller to
Buyer. If Buyer is in default, unless such default is remedied, Seller may
require Buyer to pay immediately the full amount of principal under this Note
which has not been paid and all interest that Buyer owes on that amount.
Seller's exercise of this right shall be by written notice to Buyer. Even if, at
a time when Buyer is in default, Seller does not require Buyer to pay
immediately in full as described above, Seller will still have the right to do
so if Buyer is in default at a later time. Seller will also have all rights and
remedies afforded by law
-4-
<PAGE> 25
or available under this Note upon any default under this Note. The Seller shall
not, by any act or omission, be deemed to waive any of his rights, remedies or
powers under this Note or otherwise, unless such waiver is in writing signed by
the Seller. Any written waiver of a default shall not be construed as a waiver
of such default in the future or of any other default.
Buyer agrees to pay all costs of enforcement of this Note, including
reasonable attorneys' fees and court costs.
Unless applicable law requires a different method, any notice that must
be given under this Note will be given in the manner described in Section 8.9 of
the Stock Purchase Agreement.
This Note shall not be transferable or assignable by Buyer or Seller
without the prior written consent of the other party.
No party shall be deemed, by an act or omission to have waived any
right or remedy under this Note, unless the waiver is in writing and signed by
such party, and then only to the extent specifically set forth in that writing.
A waiver with reference to one event shall not be construed as continuing, or as
a bar or waiver to any right or remedy as to a subsequent event.
This Note is executed and delivered in the State of Michigan, and the
laws of the State of Michigan shall govern this Note, its construction, and the
determination of any rights, duties or remedies of the parties arising out of or
relating to this Note. Buyer and Seller acknowledge that the United States
District Court for the Eastern District of Michigan or the Michigan Circuit
Court of the County of Oakland shall have exclusive jurisdiction over any case
or controversy arising out of or relating to this Note and that all litigation
arising out of or relating to this Note shall be commenced in the United States
District Court for the Eastern District of Michigan or in the Oakland County
(Michigan) Circuit Court.
Buyer waives presentment, notice of dishonor and nonpayment of this
Note.
All references in this Note to the Seller or the Buyer shall apply to
their respective successors and assigns.
-------------------------------
Daniel B. Gilbert
5. No Other Change. Except as modified by this Amendment, the Agreement
shall continue in full force according to its terms and is ratified.
6. Counterparts. This Amendment may be signed in counterparts, both of
which together will be deemed an original of this Amendment. This Amendment will
also be effective if evidenced by signed copies transmitted by telecopier or
facsimile transmission.
-5-
<PAGE> 26
IN WITNESS WHEREOF, Buyer and Seller have executed this Amendment as of
the date set forth in the introductory paragraph of this Amendment.
/s/ Daniel B. Gilbert
----------------------------
Daniel B. Gilbert
"Buyer"
/s/ Gary Gilbert
----------------------------
Gary Gilbert
"Seller"
-6-
<PAGE> 27
SECOND AMENDMENT TO STOCK PURCHASE AGREEMENT
THIS SECOND AMENDMENT TO STOCK PURCHASE AGREEMENT (the "Amendment") is
made as of April 1997 between Gary Gilbert ("Seller") and Daniel B. Gilbert
("Buyer").
R E C I T A L S
A. Seller and Buyer have entered into the Stock Purchase Agreement,
dated as of January 17, 1997, as amended by the Amendment to Stock Purchase
Agreement, dated as of February 26, 1997 (as amended, the "Agreement").
B. Buyer does not currently intend to change the capitalization of Rock
Insurance Company, and neither Buyer nor Seller currently owns any interest in
Rock Insurance Company. Therefore, Buyer and Seller desire to eliminate the
provisions of the Agreement concerning Rock Insurance Company.
THEREFORE, the parties agree as follows:
1. Rock Insurance. Section 3.9 of the Agreement, as amended, is
deleted and restated to read as follows:
"3.9 [RESERVED]."
2. No Other Change. Except as modified by this Amendment, the
Agreement shall continue in full force according to its terms and is ratified.
3. Counterparts. This Amendment may be signed in counterparts, both
of which together will be deemed an original of this Amendment. This Amendment
will also be effective if evidenced by signed copies transmitted by telecopier
or facsimile transmission.
IN WITNESS WHEREOF, Buyer and Seller have executed this Amendment as of
the date set forth in the introductory paragraph of this Amendment.
/s/ Daniel B. Gilbert
---------------------------------
Daniel B. Gilbert
"Buyer"
/s/ Gary Gilbert
---------------------------------
Gary Gilbert
"Seller"
<PAGE> 1
EXHIBIT 10.5
SECOND AMENDED AND RESTATED
MORTGAGE WAREHOUSING AGREEMENT
COMERICA BANK
CORESTATES BANK, N.A.
NORWEST BANK MINNESOTA, N.A.
RESIDENTIAL FUNDING CORPORATION
AND
ROCK FINANCIAL CORPORATION
NOVEMBER 13, 1997
<PAGE> 2
SECOND AMENDED AND RESTATED
MORTGAGE WAREHOUSING AGREEMENT
THIS SECOND AMENDED AND RESTATED MORTGAGE WAREHOUSING AGREEMENT is made
and entered into as of this 13th day of November, 1997, by and between Comerica
Bank, a Michigan banking corporation ("Comerica"), CoreStates Bank, N.A., a
national banking association ("CBNA"), Residential Funding Corporation, a
Delaware corporation ("RFC") and Norwest Bank Minnesota, National Association, a
national banking association ("Norwest") (collectively, Comerica, CBNA, RFC and
Norwest are referred to as "Lenders"), Comerica Bank, as Agent for Lenders (in
such capacity, "Agent"), and Rock Financial Corporation, a Michigan corporation
("Borrower").
WITNESSETH
WHEREAS, Agent, Lenders and Borrower previously entered into that
certain Amended and Restated Mortgage Warehousing Agreement dated August 23,
1994, as amended by Amendment No. 1 dated November 10, 1994, Amendment No. 2
dated February 21, 1996, Amendment No. 3 dated July 26, 1996 and Amendment No. 4
dated November 12, 1996 (as amended, the "Existing Loan Agreement"), under which
the Lenders have extended credit to Borrower to finance the origination,
purchase and sale of Mortgage Warehousing Loans (as defined below); and
WHEREAS, Agent, Lenders and Borrower desire to amend and restate in its
entirety the Existing Loan Agreement;
NOW, THEREFORE, in consideration of the premises and mutual promises
herein contained, Agent, Lenders and Borrower agree that the Existing Loan
Agreement is amended and restated to read in its entirety as follows:
1. DEFINITIONS.
1.01 For all purposes of this Agreement, except as otherwise expressly
provided or unless the context otherwise requires, the terms defined in this
Paragraph shall have the meanings assigned to them in this Paragraph and include
the plural as well as the singular.
1.02 The terms which follow have the meanings herein ascribed to them:
Accumulated Funding Deficiency means a funding deficiency described in
section 302 of ERISA.
Advance means each separate advance of the Loan made hereunder from
time to time.
<PAGE> 3
Affiliate means, as to any Person, any other person directly or
indirectly controlling, controlled by or under direct or indirect common control
with, such Person, whether through the ownership of voting securities, by
contract or otherwise. "Control" as used herein means the power to direct the
management and policies of such Person.
Aged Mortgage Loan means a Mortgage Loan (i) which would be an Eligible
Mortgage Loan except for noncompliance with subsections (d) and (q) of the
definition of Eligible Mortgage Loan, (ii) which could be a Second Mortgage Loan
except for noncompliance with subsection (c) of the definition of Second
Mortgage Loan, (iii) which is not a High LTV Second Mortgage Loan, (iv) has not
been included in the Borrowing Base for more than two hundred seventy (270)
days, and (v) with respect to which no payment is more than one hundred twenty
(120) days past due the payment due date set forth in the underlying promissory
note and deed of trust or mortgage, and no foreclosure proceedings have been
instituted.
Aged Mortgage Loan Advance means an Advance against the Borrowing Base
Value of Aged Mortgage Loans.
Agreement means this Agreement as executed as of the date first above
written or, if amended or supplemented as herein provided, as so amended or
supplemented.
Bailee Letter means a letter in the form of Exhibit G attached hereto.
Bear Stearns Custodial Agreement means the Custodial Agreement by and
among Borrower, Comerica, as custodian, and Bear Stearns dated __________, 1997,
as the same may be amended from time to time.
Borrowing Base means:
(a) For Committed Mortgage Loan Advances, 99% of the lesser of (i)
the principal amount of, or (ii) the Committed Purchase Price
for, (A) all Committed Mortgage Loans in Agent's possession,
and (B) all Committed Pre-warehouse Loans, plus
(b) For Conforming Mortgage Loan Advances which are Uncommitted
Mortgage Loan Advances, the lesser of (i) 95% of the principal
amount or Cost (if applicable), whichever is less, of (A) all
Uncommitted Mortgage Loans in Agent's possession, and (B) all
Uncommitted Pre-warehouse Loans, and (ii) One Million Dollars
($1,000,000.00), plus
(c) For Non-Conforming Mortgage Loan Advances, the lesser of (i)
ninety-eight percent (98%) of the lesser of (A) the principal
amount of, or (B) the Committed Purchase Price (when a
Take-Out Commitment exists with respect thereto), for, each
Non-Conforming Mortgage Loan, or (ii) Fifty Million Dollars
($50,000,000), plus
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<PAGE> 4
(d) For Second Mortgage Loan Advances, the lesser of
(i) (A) with respect to all Second Mortgage
Loans other than Title I Second Mortgage
Loans and High LTV Second Mortgage Loans,
ninety-five percent (95%) of the lesser of
(1) the principal amount of, or (2) the
Committed Purchase Price for, each such
Second Mortgage Loan, plus
(B) with respect to Title I Second Mortgage
Loans and High LTV Second Mortgage Loans,
the lesser of (1) ninety-five percent (95%)
of the lesser of (x) the principal amount
of, or (y) the Committed Purchase Price for,
each such Second Mortgage Loan, or (2) Ten
Million Dollars ($10,000,000), or
(ii) Fifteen Million Dollars ($15,000,000),
(e) For Aged Mortgage Loan Advances, the lesser of
(i) (A) with respect to all Aged Mortgage Loans
with respect to which any payment
thereunder is sixty (60) days or more past
due the payment due date set forth in the
underlying promissory note and deed of
trust (or mortgage), eighty percent (80%)
of the least of (1) the principal amount
of, or (2) if said Aged Mortgage Loan meets
all FNMA or FHLMC conditions for purchase
at the time made, the Market Value for,
each such Aged Mortgage Loan, plus
(b) with respect to all Aged Mortgage Loans with
respect to which any payment thereunder is
less than sixty (60) days past due the
payment due date set forth in the underlying
promissory note and deed of trust (or
mortgage), ninety percent (90%) of the least
(1) the principal amount of, or (2) if said
Aged Mortgage Loan meets all FNMA or FHLMC
conditions for purchase at the time made,
the Market Value for, each such Aged
Mortgage Loan, or
(ii) One Million Dollars ($1,000,000),
provided, however, that the principal amount of all Pre-warehouse Loans included
in the Borrowing Base shall not exceed $18,000,000, and provided that no
Unfunded Drafts may be used to calculate the Borrowing Base.
Borrowing Base Certificate means a certificate in form satisfactory to
Lenders showing a calculation of the Borrowing Base as of a certain date.
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<PAGE> 5
Borrowing Base Report means a report prepared by Agent which summarizes
the contents of the Borrowing Base, in form satisfactory to Agent.
Closing Media means a title company, closing attorney or other entity
which would disburse funds at settlement and insure the lien of the Mortgage.
Collateral means Mortgage Loans, Mortgage Notes, Mortgages and all
other documents, property rights, proceeds and payments relating to (a) Mortgage
Loans which secure the Loan and (b) all other collateral of Borrower hereinafter
described in Section 3.01.01 of this Agreement, and/or from time to time
deposited with, delivered or to be delivered to or held by or for Agent pursuant
to this Agreement, and the proceeds thereof in each case, whether now or
hereafter arising.
Committed Mortgage Loan means an Eligible Mortgage Loan as to which
Agent has received a Take-Out Commitment identifying the Investor and the
Committed Purchase Price.
Committed Mortgage Loan Advance means an Advance against the Borrowing
Base value of Committed Mortgage Loans.
Committed Pre-warehouse Loan means a Pre-warehouse Loan as to which
Agent has received a Take-Out Commitment.
Committed Purchase Price means, with respect to a Mortgage Loan, the
price at which the Investor under the applicable Take-Out Commitment has agreed
to purchase said Mortgage Loan.
Conforming Mortgage Loan shall be an Eligible Mortgage Loan or
Pre-warehouse Loan which meets all FNMA or FHLMC conditions for purchase at the
time made, except for conditions regarding the loan amount in the case of Jumbo
Loans and Super Jumbo Loans.
Conforming Mortgage Loan Advance means an Advance against the Borrowing
Base value of Mortgage Warehousing Loans other than Non-Conforming Mortgage
Loans.
Cost means the acquisition price of a Mortgage Loan net of discount
points and fees associated with yield.
Current Assets means, as of any applicable date of determination, all
assets of a person that should be classified as current in accordance with GAAP,
including without limitation cash, non-affiliated customer receivables, United
States government securities, claims against the United States government, and
inventories, but excluding:
(a) all Mortgage Loans owned by Borrower;
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<PAGE> 6
(b) Investments or securities in any corporation not
listed on the New York Stock Exchange, NASDAQ National Market or
American Stock Exchange;
(c) Investments or securities in any limited
liability company, partnership, limited partnership, joint venture or
other business venture or legal entity;
(d) Investments or securities in any options or derivatives;
(e) Investments or securities in any corporation to the extent to
which the cost basis of Borrower's securities exceeds twenty five
percent (25%) of the Tangible Effective Net Worth of Borrower as
calculated without the inclusion of such investments or securities; and
(f) Investments or securities in any corporation in which
Borrower owns in excess of a four percent (4%) ownership interest.
Current Liabilities means, as of any applicable date of determination,
all liabilities of a person that should be classified as current in accordance
with GAAP, including without limitation any portion of the principal of the
Notes classified as current, but excluding indebtedness owed by Borrower
relating to the Mortgage Loans.
Current Ratio means Current Assets divided by Current Liabilities.
DDA Account means Borrower's demand deposit account with Agent.
Debtor's Property in Possession of Agent or Lenders means goods,
securities, stocks, bonds, notes, instruments, documents, policies and
certificates of insurance, deposits, money or other property now owned or later
acquired by Borrower or in which Borrower now has or later acquires an interest
and which are now or later in the possession of Agent or Lenders, or as to which
Agent or Lenders now or later control possession by documents or otherwise;
excluding, however, any such items held by Comerica under the Bear Stearns
Custodial Agreement.
Draft means a draft on Borrower's Restricted Account which is signed by
the Borrower and presented to a title company or other closing agent for purpose
of closing a Mortgage Loan.
Eligible Mortgage Loan means a Mortgage Loan with respect to which each
of the following statements shall be accurate and complete (and Borrower by
including such Mortgage Loan in any computation of the Borrowing Base shall be
deemed to so represent and warrant to the Agent and the Lenders as of the date
of such computation):
5
<PAGE> 7
(a) Said Mortgage Loan is a binding and valid obligation of the obligor
thereon, in full force and effect and enforceable in accordance with its terms.
(b) Said Mortgage Loan is genuine in all respects as appearing on its
face and as represented in the books and records of Borrower and all information
set forth therein is true and correct.
(c) Said Mortgage Loan is free of any default of any party thereto
(including Borrower), other than as expressly permitted pursuant to subparagraph
(d) below, counterclaims, offsets and defenses and from any rescission,
cancellation or avoidance, and all right thereof, whether by operation of law or
otherwise.
(d) No payment under said Mortgage Loan is more than fifty-nine (59)
days past due the payment due date set forth in the underlying promissory note
and deed of trust (or mortgage).
(e) Said Mortgage Loan contains the entire agreement of the parties
thereto with respect to the subject matter thereof, has not been modified or
amended in any respect and is free of concessions or understandings with the
obligor thereon of any kind not expressed in writing therein.
(f) Said Mortgage Loan is in all respects as required by and in
accordance with all applicable laws and regulations governing the same,
including, without limitation, the federal Consumer Credit Protection Act and
the regulations promulgated thereunder and all applicable usury laws and
restrictions, and all notices, disclosures and other statements or information
required by law or regulation to be given, and any other act required by law or
regulation to be performed, in connection with said Mortgage Loan have been
given and performed as required.
(g) All advance payments and other deposits required to be paid on said
Mortgage Loan have been paid in cash, and no part of said sums has been loaned,
directly or indirectly, by Borrower to the obligor and there have been no
prepayments on account of said Mortgage Loan.
(h) At all times said Mortgage Loan will be free and clear of all
liens, except in favor of the Agent for the benefit of the Lenders.
(i) The property covered by said Mortgage Loan is insured against loss
or damage by fire, flood (when required by the Investor) and all other hazards
normally included within standard extended coverage in accordance with the
provisions of said Mortgage Loan with Borrower named as a loss payee thereon.
(j) The property covered by said Mortgage Loan is free and clear of all
liens except (a) Borrower's first mortgage loan, (b) liens for real estate
taxes, special
6
<PAGE> 8
assessments and the like which are not delinquent, and (c) liens which are
subordinate to the lien of the Mortgage Loan.
(k) As to those Mortgage Loans represented by Borrower to be covered by
a Take-Out Commitment, the Take-Out Commitment is in full force and effect, and
Borrower and the Mortgage Loan are in full compliance therewith.
(l) The date of the underlying promissory note is no earlier than one
hundred twenty (120) days prior to the date said Mortgage Loan is first included
in the Borrowing Base.
(m) If said Mortgage Loan is FHA insured or VA guaranteed, such
insurance or guaranty (or a binding commitment to issue such insurance or
guaranty) is in full force and effect.
(n) The improvements on the property consist of a completed one-to-four
unit single family residence, including but not limited to a condominium,
planned unit development or townhouse but excluding in any event a co-op.
(o) There has been delivered to the Agent the Required Documents or the
Prewarehouse Required Documents.
(p) Said Mortgage Loan is not subject to any servicing arrangement with
any person other than Borrower nor are any servicing rights relating to said
Mortgage Loan subject to any lien, claim, interest or negative pledge in favor
of any person other than Agent for and on behalf of Lenders.
(q) Said Mortgage Loan has not been included in the Borrowing Base for
more than ninety (90) days.
(r) Said Mortgage Loan has not previously been included in the
Borrowing Base.
(s) The Borrower has obtained an appraisal in connection with the
origination of said Mortgage Loan which would satisfy all appraisal requirements
for said Mortgage Loan if such had been originated by a federally insured
depository institution; provided, however, that no such appraisal shall be
required for a Second Mortgage Loan (i) where the Investor for such Second
Mortgage Loan has issued a Take-Out Commitment therefor and has not required an
appraisal for such Second Mortgage Loan, or (ii) with an original principal
amount of less than $40,000.
(t) If the Mortgage Loan has been sent to an Investor, not more than
forty-five (45) days have elapsed from the date of delivery, unless the Mortgage
Loan has been returned to the Agent.
7
<PAGE> 9
(u) If the Mortgage Note or other Required Document has been released
to Borrower, not more than ten (10) days shall have elapsed from the date of
delivery to Borrower.
(v) Super Jumbo Loans shall be Eligible Mortgage Loans only if a
Take-Out Commitment exists for such loans.
(w) Jumbo Loans which satisfy all of the above conditions shall be
Eligible Mortgage Loans.
ERISA means the Employee Retirement Income Security Act of 1974, as the
same may from time to time be supplemented or amended, and the rules and
regulations issued thereunder, as in effect from time to time.
ERISA Affiliate means each trade or business, including Borrower,
whether or not incorporated, that, together with Borrower would be treated as a
single employer under section 4001 of ERISA.
Event of Default means an event or condition listed under Section 9.01
of this Agreement.
Excess Advances shall have the meaning given the term in Section 2.06
hereof.
FHA means the Federal Housing Administration and any successor thereto
or to the functions thereof.
FHA Mortgage Loans means Mortgage Loans within acceptable limits to and
insured, or committed to be insured, by the FHA, and evidenced by instruments
and documents which comply, and arising from a transaction which complies, in
all respects, with the requirements of the FHA.
FHLMC means the Federal Home Loan Mortgage Corporation and any
successor thereto or to the functions thereof.
FNMA means the Federal National Mortgage Association and any successor
thereto or to the functions thereof.
GAAP means generally accepted accounting principles consistently
applied.
Gestation Loan means a gestation repurchase agreement financing or "As
Soon As Pooled" transaction under the FNMA Selling and Servicing Guidelines.
GNMA means the Government National Mortgage Association and any
successor thereto or to the functions thereof.
8
<PAGE> 10
Governmental Authority means any nation or government, any state or
other political subdivision thereof, and any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government.
High LTV Second Mortgage Loan means a Second Mortgage Loan (i) having a
loan to value ratio which is greater than .90 to 1.0 but which does not exceed
1.25 to 1.0 and (ii) which is covered by a Take-Out Commitment.
Indebtedness means any and all sums, indebtedness and liabilities of
any and every kind now owing or later to become due from Borrower to Agent or
the Lenders under this Agreement, whether joint or several, contingent or
absolute, now existing or later arising, and however created incurred,
evidenced, acquired or arising, and any and all modifications, renewals or
extensions of it.
Investor means a bank, trust company, savings and loan association,
pension fund, governmental authority, insurance company, institutional investor,
investment brokerage firm, mortgage banker, or other entity, determined by
Majority Lenders, in their sole discretion, to be acceptable. A list of approved
Investors for Conforming Mortgage Loans and Non-Conforming Mortgage Loans is
attached hereto as Exhibit E, which list may be changed from time to time by
Majority Lenders.
Jumbo Loan means a Mortgage Loan which exceeds the maximum loan amount
permitted by then current FNMA or FHLMC purchase guidelines but otherwise meets
FHLMC or FNMA purchase criteria and does not exceed $750,000.
Lenders' Allocation Amount means $32,727,273 as to Comerica,
$12,272,727 as to CBNA, $24,545,455 as to Norwest, and $20,454,545 as to RFC.
Leverage Ratio means a fraction, determined as of the pertinent
financial statement date, the numerator of which is the sum total of Borrower's
outstanding liabilities plus the unadvanced amount of the Loan and the
denominator of which is Tangible Effective Net Worth, all determined in
accordance with GAAP.
Liabilities means all indebtedness that, in accordance with generally
accepted accounting principles consistently applied, should be classified as
liabilities on a balance sheet of Borrower.
Loan means a $90,000,000 demand mortgage warehouse facility of which
Comerica shall advance up to $32,727,273, CBNA shall advance up to $12,272,727,
Norwest shall advance up to $24,545,455 and RFC shall advance up to $20,454,545,
in each case subject to the terms and conditions of this Agreement.
Loan Documents means this Agreement and all documents evidencing or
securing the Loan.
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<PAGE> 11
Majority Lenders means the Lender or Lenders whose individual or
aggregate Percentage Share respectively is at least sixty-six and two thirds
percent (66 2/3%).
Market Value means an amount determined by Agent from time to time, in
its sole discretion, to be the amount an Investor would pay to purchase a
particular Mortgage Loan.
Maximum Loan Amount means $90,000,000, subject to Section 12 hereof.
Mortgage means a mortgage or a deed of trust on real estate, and
securing a Mortgage Loan and also creating a valid first lien on the fee simple
title to real estate referred therein subject only to (a) liens for taxes, not
yet due and payable, special assessments or similar governmental charges not yet
due and payable or still subject to payment without interest or penalty, (b)
zoning restrictions, utility easements, covenants, or conditions and
restrictions of record, which shall neither defeat nor render invalid such lien
or the priority thereof, nor materially impair the marketability or value of
such real estate, nor be violated by the existing improvements or the intended
use thereof; (c) subordinate liens, (d) in the case of Second Mortgage Loans, a
first mortgage; and (e) such other liens as may have been approved in writing by
Lenders.
Mortgage Loan means a loan evidenced by a Mortgage Note and secured by
a Mortgage covering a fee simple interest in residential (1-4 unit single
family) real property and all improvements located thereon located in the United
States.
Mortgage Note means a valid and binding note, bond or other evidence of
indebtedness evidencing a Mortgage Loan and secured by a Mortgage, which (a) was
executed by a bona fide third person who has capacity to contract (b) matures in
30 years or less, and (d) complies with any other terms as may be required in
writing in advance of the closing date by Lenders, from time to time.
Mortgage Warehousing Advance means a Conforming Mortgage Loan Advance,
a Non-Conforming Mortgage Loan Advance, a Committed Mortgage Loan Advance, an
Uncommitted Mortgage Loan Advance, a Second Mortgage Loan Advance or an Aged
Mortgage Loan Advance made in accordance with the terms of this Agreement.
Mortgage Warehousing Loan means a Conforming Mortgage Loan, a
NonConforming Mortgage Loan, a Committed Mortgage Loan, an Uncommitted Mortgage
Loan, a Pre-warehouse Loan, a Second Mortgage Loan or an Aged Mortgage Loan.
Multiemployer Plan means a plan described in section 4001(a)(3) of
ERISA to which Borrower or any ERISA Affiliate is required to contribute on
behalf of any of its employees.
Non-Conforming Mortgage Loan shall be a Mortgage Loan which (i) is a
Committed Mortgage Loan or an Uncommitted Mortgage Loan, but which does not meet
all FNMA or FHLMC conditions for purchase at the time made, (ii) at the time of
origination had a principal balance that (A) did not exceed 80% of the appraised
value of the real estate and
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<PAGE> 12
improvements securing such Mortgage Loan unless private mortgage insurance was
obtained covering such Mortgage Loan or the Investor did not require such
insurance, or if such Mortgage Loan is an Uncommitted Mortgage Loan, an ordinary
and prudent Investor would not require such insurance as determined by Agent,
and (B) did not exceed 95% of such appraised value in any event, (iii) has a
term of not more then thirty (30) years, (iv) if Agent has received a Take-Out
Commitment with respect to the Mortgage Loan identifying the Investor and the
Committed Purchase Price, the Mortgage Loan meets all of the then current
requirements for sale to an Investor purchasing such type of Mortgage Loan from
Borrower, (v) has an outstanding principal balance of less than $600,000 on the
date the Required Documents are delivered to Agent, and (vi) has not been
included in the Borrowing Base for more than one hundred twenty (120) days.
Non-Conforming Mortgage Loan Advance means an Advance against the
Borrowing Base value of Non-Conforming Mortgage Loans.
Note or Notes means the instruments described in Section 2.08 hereof,
as they may be amended, restated, extended, replaced or renewed from time to
time.
Overnight-based Rate means a per annum interest rate equal to (i) in
the case of Conforming Mortgage Loan Advances, 1.5% above the Overnight Rate,
(ii) in the case of Non-Conforming Mortgage Loan Advances, 1.875% above the
Overnight Rate, and (iii) in the case of Second Mortgage Loan Advances, 2.5%
above the Overnight Rate.
Overnight Rate means, for any day, a per annum rate of interest
determined by Agent, in its sole discretion, to be the prevailing overnight
federal funds rate on such date. Changes in the overnight federal funds rate
during any day after Agent has determined the prevailing overnight federal funds
rate for that day shall not change the interest rate for that day.
PBGC means the Pension Benefit Guaranty Corporation established
pursuant to Subtitle A of Title IV of ERISA and any successor thereto.
Percentage Share means, for each Lender, a percentage equal to the
Lender's Allocation Amount divided by the Maximum Loan Amount (currently 36.36%
for Comerica, 27.27% for Norwest, 22.73% for RFC and 13.64% for CBNA).
Person means any corporation, natural person, firm, joint venture,
partnership, trust, unincorporated organization or any governmental entity or
body.
Plan means any plan (other than a Multiemployer Plan) subject to Title
IV of ERISA maintained for employees of Borrower or any ERISA Affiliate (and any
such plan no longer maintained by Borrower or any of its ERISA Affiliates to
which Borrower or any of its ERISA Affiliates has made or was required to make
any contributions during the five (5) years preceding the date on which such
plan ceased to be maintained.
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Pre-warehouse Loan means a loan which (i) would be an Eligible Mortgage
Loan or a Second Mortgage Loan, except that the Required Documents have not been
delivered to Agent, and (ii) has not been included in the Borrowing Base for
more than five (5) business days.
Pre-warehouse Required Documents means a Request for Pre-warehouse
Advance and Security Agreement.
Prime Rate means the per annum interest rate established by Agent as
its prime rate, as such rate may vary from time to time, which rate is not
necessarily the lowest rate on loans made by Agent at any such time.
Prime-based Advance means an Advance which bears interest at the
Prime-based Rate.
Prime-based Rate means, for any day, a per annum interest rate which is
equal to the Prime Rate.
Prohibited Transaction means any transaction described in section 406
of ERISA that is not exempt by reason of section 408 of ERISA or the
transitional rules set forth in section 414(c) of ERISA and any transaction
described in section 4975(c)(1) of the Code that is not exempt by reason of
section 4975(c)(2) or section 4975(d) of the Code, or the transitional rules of
section 2003(c) of ERISA.
Reportable Event means any of the events set forth in section 4043(b)
of ERISA or the regulations thereunder, a withdrawal from a Plan described in
section 4063 of ERISA, a cessation of operations described in section 4068(f) of
ERISA, an amendment to a Plan necessitating the posting of security under
section 401(a)(29) of the Code, or a failure to make a payment required by
section 412(m) of the Code and section 302(e) of ERISA when due.
Request for Advance means the form attached hereto as Exhibit D, or
such other form as Agent may require from time to time, filled in and executed
by Borrower to the satisfaction of Agent.
Request for Pre-warehouse Advance and Security Agreement means the form
attached hereto as Exhibit H, or such other form as Agent may require from time
to time, filled in and executed by Borrower to the satisfaction of Agent.
Required Documents means all of the following:
(a) the original Mortgage Note endorsed by Borrower in blank
(including all interim endorsements, if applicable);
(b) a copy of the Mortgage;
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(c) a title policy, title commitment or first lien letter
insuring the Mortgage Loan to be a first lien on the
property;
(d) an original executed assignment in recordable form of the
Mortgage to Agent on behalf of the Lenders;
(e) copies of all interim assignments of the Mortgage; and
(f) any other loan documents required by Lenders.
Restricted Account means a DDA Account to be maintained with Agent on
Borrower's behalf, as to which Borrower shall not have the ability to write
drafts or withdraw funds, except for Drafts to title companies.
Second Mortgage Loan means a Mortgage Loan which would be an Eligible
Mortgage Loan except for noncompliance with the requirements of paragraph (j) of
the definition of Eligible Mortgage Loan, and with respect to which each of the
following statements shall be accurate and complete (and Borrower by including
such Mortgage Loan in any computation of the Borrowing Base shall be deemed to
so represent and warrant to the Agent and the Lenders as of the date of such
computation):
(a) The property covered by said Mortgage Loan is free and clear
of all liens except (i) a first mortgage loan, (ii)
Borrower's second mortgage loan, (iii) liens for real estate
taxes, special assessments and the like which are not
delinquent, and (iv) liens which are subordinate to the lien
of the Mortgage Loan.
(b) The principal amount of the Mortgage Loan does not exceed
One Hundred Thousand Dollars ($100,000).
(c) The Mortgage Loan has not been included in the Borrowing
Base for more than sixty (60) days.
(d) The Mortgage Loan has a loan to value ratio which does not
exceed .90 to 1.0, except in the case of a High LTV Second
Mortgage Loan, which shall have a loan to value ratio which
does not exceed 1.25 to 1.0.
Second Mortgage Loan Advance means an Advance against the Borrowing
Base value of Second Mortgage Loans.
Securities Margin means a fraction, the numerator of which shall be
total dollar amount borrowed from any Persons in connection with any and all
investments or securities (excluding Mortgage Loans), which has not been paid
and discharged in full, and
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the denominator of which shall be the market value of Borrower's entire
portfolio of investments and securities (excluding Mortgage Loans).
Security Agreement means that certain Amended and Restated Security
Agreement (Negotiable Collateral) by and between Borrower and Agent, for and on
behalf of Lenders, dated as at the date hereof.
Servicing Portfolio means, as of any date, the portfolio of Mortgage
Loans with respect to which the Borrower has direct servicing rights.
Stockholder's Equity means the following, as set forth in Borrower's
balance sheet prepared in accordance with GAAP: (a) the par or stated value of
all outstanding capital stock; plus (b) capital surplus; plus (c) retained
earnings; less (d) declared dividends not yet paid.
Subsidiary means a corporation of which 50% or more of the outstanding
voting stock (except for directors' qualifying shares, if and to the extent
required by law) is owned, at the time of determination, directly or indirectly,
by Borrower.
Super Jumbo Loan means a Mortgage Loan which would be a Jumbo Loan
except that the amount thereof exceeds $750,000, but is less than $1,000,000.
Take-Out Commitment means (i) an existing written commitment to
Borrower in form and substance satisfactory to Lenders from an Investor
satisfactory to Lenders, under the terms of which the such Investor agrees to
purchase Mortgage Notes or a specific Mortgage Note, (ii) a certified commitment
representation, or (iii) a trade confirmation by an Investor committing to
purchase a participation certificate or mortgage backed security, each of which
must identify the Investor and the Committed Purchase Price.
Tangible Effective Net Worth means, at any time, Stockholders' Equity
determined in accordance with GAAP, less the sum of:
(a) Any surplus resulting from any write-up of assets, except
any such surplus which constitutes Stockholders' Equity in
accordance with GAAP;
(b) Goodwill including any amounts, however designated on a
balance sheet of the Borrower, representing the excess of
the purchase price paid for assets or stock acquired over
the value assigned thereto on the books of the Borrower;
(c) Patents, trademarks, trade names and copyrights;
(d) Any amount at which shares of capital stock of the Borrower
appear as an asset on the Borrower's balance sheet;
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(e) Loans and advances to stockholders, directors, officers,
employees or affiliated companies;
(f) Deferred expenses;
(g) Assets, the marketability, and/or liquidity value of which
are not readily ascertainable, in Lenders' sole discretion;
(h) Investments or securities in any corporation not listed on
the New York Stock Exchange, NASDAQ National Market or
American Stock Exchange;
(i) Investments or securities in any limited liability company,
partnership, limited partnership, joint venture or other
business venture or legal entity;
(j) Investments or securities in any options or derivatives;
(k) Investments or securities in any corporation to the extent
to which the cost basis of Borrower's securities exceeds
twenty-five percent (25%) of the Tangible Effective Net
Worth of Borrower as calculated without the inclusion of
such investments or securities; and
(l) Investments or securities in any corporation in which
Borrower owns in excess of a four percent (4%) ownership
interest.
Title I Second Mortgage Loans means a Second Mortgage Loan which
qualifies under the Housing and Urban Development Title I Program.
Trust Receipt means a receipt in the form of Exhibit I attached hereto.
Uncommitted Mortgage Loan means an Eligible Mortgage Loan as to which a
Take-Out Commitment does not exist.
Uncommitted Mortgage Loan Advance means an Advance against the
Borrowing Base value of Uncommitted Mortgage Loans.
Uncommitted Pre-warehouse Loan means a Pre-warehouse Loan as to which a
Take-Out Commitment does not exist.
Unfunded Draft means a Draft which has not been honored by Agent.
VA means the Veterans Administration and any successor thereto or to
the functions thereof.
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VA Mortgage Loans means Mortgage Loans within acceptable limits to and
guaranteed by the VA, and evidenced by instruments and documents which comply,
and arising from a transaction which complies, in all respects, with the
requirements of the VA.
Working Capital means, as of any applicable date of determination,
Current Assets less Current Liabilities.
2. THE LOAN.
2.01 The Loan. Subject to the terms and conditions of this Agreement,
Lenders each agree that they shall make Advances to Borrower (severally and not
jointly) in the aggregate at any date outstanding such that the total Advances
for any Lender then outstanding (taking into account any current request for
advance), shall not exceed the lesser of
(a) Each Lender's Allocation Amount; or
(b) Each Lender's Percentage Share of (i) the Borrowing Base at
such date, less (ii) the aggregate Advances then
outstanding.
2.02 Request for Advance. Borrower shall deliver to Agent a Request
for Advance no later than 10:30 a.m. on the proposed funding date.
2.03 Advances.
(a) Subject to all of the terms and conditions of this
Agreement, including but not limited to Sections 2.01 and 2.02, above,
Agent will make requested Advances on the same business day that a
Request for Advance is submitted. Immediately upon
(i) the occurrence of an Event of Default,
(ii) a Request for Advance which if made would result in
Agent exceeding its Allocation Amount,
(iii) each Friday based upon the Loan outstanding as of the
prior Business Day, or
(iv) Agent's demand, Lenders shall deliver to Agent by wire
transfer immediately available funds in an amount
sufficient to restore each Lender's loan balance to
their respective Percentage Share of the Loan.
(b) If a Draft is presented to Agent for closing a Mortgage
Warehouse Loan, Agent shall be obligated to honor such Draft only if,
(i) Borrower instructs
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Agent to pay the Draft, and (ii) by 2:30 p.m., Detroit, Michigan time,
Agent shall have received the Required Documents or the Pre-warehouse
Required Documents for the Mortgage Loan to which such Draft relates.
2.04 Borrowing Base Conformity.
(a) In support of its obligation to repay the Loan hereunder,
Borrower shall cause to be maintained with the Agent a
Borrowing Base such that (i) the Borrowing Base is not less
than, at any date, the sum of the aggregate outstanding
principal amount of the Loan and (ii) the Borrowing Base for
Committed Mortgage Loan Advances, Uncommitted Mortgage Loan
Advances, Non-Conforming Mortgage Loan Advances, Pre-Warehouse
Loans, Second Mortgage Loan Advances and Aged Mortgage Loan
Advances are each not less than, at any date, the sum of the
aggregate outstanding principal amounts of Committed Mortgage
Loan Advances, Uncommitted Mortgage Loan Advances,
Non-Conforming Mortgage Loan Advances, Pre-Warehouse Loans and
Second Mortgage Loan Advances respectively.
(b) Borrower shall prepay the Loan to the Agent on behalf of
the Lenders, on any day (i) in the amount by which the
aggregate outstanding principal amount of the Loan exceeds the
Borrowing Base, or (ii) in the amount by which the aggregate
outstanding principal amount of Committed Mortgage Loan
Advances, Uncommitted Mortgage Loan Advances, Non-Conforming
Mortgage Loan Advances, Pre-Warehouse Loans and Second
Mortgage Loan Advances, Aged Mortgage Loan Advances exceeds
the Borrowing Base for Committed Mortgage Loan Advances,
Uncommitted Mortgage Loan Advances, Non-Conforming Mortgage
Loan Advances, Pre-Warehouse Loans, Second Mortgage Loan
Advances and Aged Mortgage Loan Advances respectively.
(c) Provided Borrower is not then in default hereunder, in
lieu of prepaying the Loan as required above, Borrower may
deliver to the Agent on such date additional Eligible Mortgage
Loans such that the Borrowing Base, after giving effect to the
inclusion of such Eligible Mortgage Loans in the Borrowing
Base, shall be in compliance with the requirements of (a) and
(b) above.
2.05 Payments. All payments made on account of the Loan shall be made
without setoff or counterclaim in lawful money of the United States of America
in immediately available same day funds, free and clear of and without deduction
for any taxes, fees or other charges of any nature whatsoever and must be
received by the Agent by 3:00 p.m. on the day of payment, it being expressly
agreed and understood that if a payment is received after 3:00 p.m. by the
Agent, such payment will be considered to have been made on the next succeeding
business day and interest thereon shall be payable at the then
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applicable rate until such date. The proceeds from the sale of Mortgage Loans
securing the Loan shall be paid directly to the Restricted Account and applied
against the Loan by Agent on a daily basis.
2.06 Allocation of Payments Received. All amounts received by the Agent
on account of the Loan shall be disbursed by the Agent to the Lenders in
accordance with their Percentage Shares, provided, however, that if advances by
Comerica under section 2.03, above, result in Comerica having advanced more than
its Percentage Share of the Loan ("Excess Advances"), payments first shall be
disbursed to Comerica to the extent of Excess Advances and interest thereon.
2.07 [Reserved]
2.08 The Notes. The Loan, which shall be in the form of a revolving
credit, shall be evidenced by Borrower's demand promissory note to each Lender
in the amount of each Lender's Allocation Amount (hereinafter called the
"Notes"), in form and content satisfactory to Lenders. All terms of the Notes
are incorporated herein. The Notes shall be dated the date of this Agreement,
shall bear interest payable at the rate and in the manner provided for in
Section 2.10 hereof, and shall evidence advances of the Loan. Borrower agrees
that the date and amount of each advance of the Loan shall be as set forth in
the books and records of Agent relating to such matters which shall be presumed
accurate but subject to verification and correction by Borrower within 30 days
of Borrower's receipt of a statement.
2.09 Use of Proceeds. The proceeds of the Loan shall be used by
Borrower solely to finance its making of Mortgage Warehousing Loans pending sale
thereof to Investors. Use of Loan proceeds for any other purpose, including but
not limited to, the repurchase of loans purchased by an Investor and
subsequently returned to Borrower, shall be an Event of Default under this
Agreement.
2.10 Rate of Interest. Borrower shall pay to Agent for the benefit of
the Lenders interest on the daily outstanding principal balance of the Loan at a
per annum rate equal to the following:
(a) For Conforming Mortgage Loan Advances, Non-Conforming
Mortgage Loan Advances and Second Mortgage Loan Advances,
the Overnight-based Rate.
(b) For Aged Mortgage Loan Advances, the Prime-based Rate.
Agent shall determine the daily Borrowing Base value for Conforming
Mortgage Loan Advances, Non-Conforming Mortgage Loan Advances Second
Mortgage Loan Advances and Aged Mortgage Loan Advances to
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calculate the interest owed using Agent's records, which records
shall be conclusive evidence thereof, absent manifest error.
After demand or an Event of Default, and during the continuation
thereof, the Advances shall bear interest, payable on demand, at a
rate per annum equal to three percent (3%) above the otherwise
applicable rate of interest. A late payment charge of five percent
(5%) of each late payment may be charged on any payment not received
by Agent within ten (10) calendar days after payment is due. Interest
shall continue to accrue on the unpaid principal balance even if all
sums due hereunder are accelerated and reduced to judgment.
2.11 Balance Credit. Comerica (but no other Lender) may in its sole
discretion, but shall not be obligated to, grant to Borrower a reduced interest
rate (which shall not be less than 5% per year) on a portion of Comerica's
Advances to Borrower in consideration of Borrower maintaining deposit accounts
with Comerica.
2.12 Automatic Charges to Borrower's Account. Interest shall be due and
payable on the first day of each month at which date Agent may at its option
direct charge Borrowers's DDA Account for (a) interest calculated as aforesaid
on the daily outstanding principal balances for the preceding month; and, (b)
Agent's fee in the amount agreed upon between Borrower and Agent.
2.13 Banker's year. All interest and fee calculations shall be based on
a 360 day year for the actual days elapsed.
3. COLLATERAL.
3.01 The Indebtedness and Borrower's obligations hereunder and under
the other Loan Documents shall be secured and supported by the following, all of
which shall be in form and substance satisfactory to Lenders:
3.01.01 Security Agreements and financing statements in favor of
the Agent for the benefit of the Lenders creating (subject in the case of
Mortgage Loans to delivery of the Notes to Agent following the 21 day period of
automatic perfection) a first priority lien on the following:
1. All Mortgage Loans, now owned or hereafter acquired or
originated by Borrower, including, without limitation, the promissory
notes or other instruments or agreements evidencing the indebtedness of
obligors thereon, all mortgages, deeds to secure debt, trust deeds and
security agreements related thereto, all rights to payment thereunder,
all rights in the properties securing payment of the indebtedness of
the obligors thereon, all rights under documents related thereto, such
as guaranties and insurance policies (issued by governmental agencies
or otherwise), including, without limitation, mortgage and title
insurance policies, fire
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and extended coverage insurance policies (including the right to any
return premiums) and FHA insurance and VA guaranties, and all rights
in cash deposits consisting of impounds, insurance premiums or other
funds held on account thereof;
2. All rights of Borrower (but not its obligations) under all
Take-Out Commitments, now existing or hereafter arising, covering any
part of the Collateral, all rights to deliver Mortgage Loans to
Investors and other purchasers pursuant thereto and all proceeds
resulting from the disposition of such Collateral pursuant thereto;
3. All now existing and hereafter arising accounts, chattel
paper, contracts rights and general intangibles constituting or
arising in connection with any of the Collateral;
4. All now existing and hereafter acquired files, documents,
instruments, surveys, certificates, correspondence, appraisals,
computer programs, tapes, discs, cards, accounting records and other
books, records, information and data of the Debtor relating to the
Collateral;
5. All insurance policies and guarantees relating to any of
the Collateral;
6. All amounts in the DDA Account and Restricted Account and
in Debtor's operating accounts with Agent and Lenders;
7. Debtor's Property in Possession of Agent or Lenders;
8. All property substituted for any of the Collateral or for
any part thereof; and
9. All proceeds of all of the aforementioned.
3.02 Lenders release Daniel B. Gilbert and Gary L. Gilbert from their
obligations to each Lender under the Guaranies executed and delivered by Daniel
B. Gilbert and Gary L. Gilbert to each Lender dated August 23, 1994.
4. CONDITIONS OF LENDING.
4.01 Documentation Required Prior to First Advance Only. Delivery by
Borrower of each of the following to Agent shall be conditions precedent to the
making of the first Advance:
4.01.01 A duly executed copy of this Agreement, the Security
Agreement and the Notes.
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4.01.02 Duly executed copies of all financing statements and other
documents, instruments and agreements, properly executed, deemed necessary or
appropriate by the Agent, in its reasonable discretion, to obtain for the Agent
on behalf of the Lenders a perfected, first priority security interest in and
lien upon the Collateral.
4.01.03 Such credit applications, financial statements,
authorizations and such information concerning the (financial and otherwise)
condition of Borrower as any Lender may reasonably request.
4.01.04 Certified copies of a resolution of the Board of Directors
of Borrower approving the execution and delivery of the Loan Documents to which
such person is a party, the performance of the obligations thereunder and the
consummation of the transactions contemplated thereby.
4.01.05 A duly completed Borrowing Base Certificate dated as of
the date of the first Advance hereunder.
4.01.06 An opinion of counsel for Borrower (in a form and content
satisfactory to Lenders) as to all the matters referenced in Section 5 hereof,
excepting only 5.02 and 5.04.
4.01.07 (i) A true, complete and correct copy of Borrower's
Articles of Incorporation and all amendments thereto; (ii) a true, complete and
correct copy of Borrower's By-Laws and all amendments thereto; (iii) a
Certification by Borrower's Secretary as to the incumbency and specimen
signatures of each party executing this Agreement and any endorsements or
assignments to be executed in the performance of this Agreement; (iv) a
certificate issued by the Secretary of the State of Borrower's state of
incorporation as to the good standing and continued existence of Borrower; (v)
certificates of the appropriate officials of each state in which Borrower
conducts business as to the qualification of the Borrower to transact business
and its good standing and as a foreign corporation in said jurisdiction.
4.01.08 Evidence of Borrower's receipt of FNMA seller approval
certification.
4.02 Delivery of Documents to Investor. For each Mortgage Loan which is
the subject of an Advance, Borrower shall deliver directly to the Investor
within the time frame permitted by the applicable Take Out Commitment all
documents required by the Investor. Agent shall deliver Mortgage Notes to
Investors under a Bailee Letter.
4.03 Continuing Warranties. At the time any Advance is requested by
Borrower, and as a precondition to the making of any advance hereunder, no
default by Borrower shall have occurred and be continuing, and no event shall
have occurred which, with the lapse of time or notice or both, shall constitute
such default; and Borrower shall have paid all fees and charges payable by
Borrower hereunder.
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4.04 Other Requested Documents. Borrower shall deliver directly to
Agent any documents pertaining to each Mortgage Loan which Agent reasonably
specifically requests.
4.05 Trade Confirmations. Each request for delivery of a Mortgage
Warehousing Loan to an Investor, in which it is contemplated that a
participation certificate (PC) or mortgage backed security (MBS) will be issued
in lieu of cash, shall be accompanied by a trade confirmation committing to
purchase the PC/MBS identifying the purchaser (which must be acceptable to
Lenders) and the purchase price.
4.06 Financing Statements. Borrower will execute one or more financing
statements covering the Collateral pursuant to the Uniform Commercial Code, in
form satisfactory to Lenders, and will pay the cost of filing the same in all
public offices.
4.07 Limited Power of Attorney. Borrower hereby irrevocably makes,
constitutes and appoints Agent its attorney-in-fact with full power of
substitution for and on behalf and in the name of Borrower (which Agent is under
no obligation to use) if an Event of Default has occurred hereunder to endorse
any checks, instruments or other papers in Agent's possession representing
payments on assigned Mortgage Notes and Mortgages or TakeOut Commitments to
purchase Mortgage Notes and Mortgages; to complete, execute, deliver and record
any assignment or other document, including financing statements covering the
Collateral; to endorse any Mortgage Note in the name of Borrower and do every
other act or thing necessary or desirable to effect transfer of a Mortgage Note,
Mortgage or any related Collateral and/or to protect the interest of Lenders in
the Collateral; to take all necessary and appropriate action in Borrower's name
with respect to any Advances hereunder and servicing of Mortgage Notes and
Mortgages or sale of Collateral under any Commitment; to take any and all action
which Agent deems appropriate to commence, prosecute, settle, discontinue,
defend or otherwise dispose of any claim relating to any Commitment, insurance
or guarantee, assigned Mortgage Note, Mortgage or other Collateral; and to sign
Borrower's name whenever and wherever appropriate to the performance of this
Agreement, including, but not limited to, whether or not Borrower is in default,
execution in Borrower's name of any document necessary to perfect or protect
Lender's security interest granted hereunder. This appointment shall be deemed
coupled with an interest but shall only extend to dealings with regard to the
Collateral.
4.08 Perfecting Lenders' Lien. Borrower hereby agrees, upon Agent's
request, to sign any additional documents which the Agent, any Lender, or any of
their counsel, deems necessary to evidence or perfect the lien on any
Collateral, or which may be required by GNMA, FNMA, FHLMC or other investor in
order to secure the investor's acknowledgment and recognition of the lien on the
Collateral.
5. CONTINUING REPRESENTATIONS AND WARRANTIES.
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In order to induce Lenders to enter into this Agreement and to make the
Loan, Borrower warrants and represents that as of the date hereof and, at the
time of the making of each Advance hereunder, that:
5.01 Borrower's Organization. Borrower is a corporation duly organized
and existing and in good standing under the laws of the place of its
incorporation, and Borrower is qualified as a foreign corporation and in good
standing in every other jurisdiction where its business or operations requires
such qualification. The execution, delivery and performance of this Agreement,
the Notes and other documents required of Borrower have been duly authorized by
all requisite action and will not violate the charter or by-laws of Borrower or
any applicable statutes or regulations or any agreements or judgements to which
Borrower is a party. This Agreement and the Notes are valid and binding
obligations of Borrower, enforceable in accordance with their terms except as
may be limited by bankruptcy, insolvency, moratorium, reorganization and other
similar laws or equitable principles affecting generally the enforcement of
creditors, rights, and the consent or approval of governmental authorities or of
third parties is not required for the validity of Borrower's obligations
hereunder or thereunder or, if required, has been obtained; nor does this
Agreement or the Notes violate any applicable Federal, state or local law, rule
or regulation relating to usury.
5.02 Financial Statements. All financial statements and financial
information heretofore delivered to Agent or any Lender are true and correct in
all material respects as of the date made. As of the date of this Agreement and
as of the date of any borrowing hereunder, there has not been, nor does Borrower
anticipate the occurrence of, any material change of an adverse nature
sufficient to impair Borrower's ability to repay the Loan or to continue to
conduct its business as it is being conducted on the date hereof. Borrower has
no material contingent liabilities or unusual forward or long-term commitments
which are not disclosed by or reserved against in said financial statements
furnished to Lenders or have not been disclosed to Lenders in writing. At the
date of this Agreement and at the date of each Advance requested by Borrower
hereunder, Borrower warrants and reaffirms there are no material unrealized or
anticipated losses from any commitments of the Borrower except as previously
disclosed in writing to Lenders.
5.03 Authority. All requisite action for the authorization, execution
and delivery by Borrower of this Agreement and the Notes, and for the assigning
and endorsing by Borrower of the Collateral as provided for hereunder, has been
duly taken and has not been rescinded.
5.04 Title to Collateral. Borrower is or will be the legal and
beneficial owner (subject only to potential claims of an Investor arising solely
out of a Take-Out Commitment) of the Mortgage Loans and the Collateral at the
time pledged, free and clear of all adverse security interests, liens and
encumbrances, and has the right to assign the same to Agent for the benefit of
the Lenders as contemplated by the Agreement.
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5.05 Compliance with Laws of Applicable Jurisdiction. Borrower is fully
familiar with the requirements of the laws of the applicable jurisdiction(s)
from which all Mortgage Loans assigned as Collateral hereunder originate and all
Mortgage Loans assigned as Collateral hereunder have been made in strict
compliance with the provisions of any act, law or regulation which governs
lending practices enacted by the applicable jurisdiction.
5.06 Borrower's Locations. The address of Borrower set forth above in
this Agreement is its chief executive office; and the addresses indicated on
Exhibit A, if any, attached hereto are all of the Borrower's offices or
locations;
5.07 No Subsidiaries. Borrower has no Subsidiaries other than those
designated and described in writing to Agent on or prior to the date hereof.
5.08 No Default. Borrower has no knowledge of any default under any
material term or provision of any agreement to which it is a party or by which
it is bound or to which any of its property is subject, which default would have
a material adverse effect on Borrower's creditworthiness.
5.09 Outstanding Judicial Proceedings. Except as disclosed on Exhibit F
hereto, there are no outstanding criminal proceedings pending or threatened, or
judgements, actions or proceedings pending or threatened before any court or
governmental authority, bureau or agency, with respect to or affecting the
Borrower wherein damages alleged or owed exceed $50,000.00, nor are there any
such actions or proceedings in which Borrower is a plaintiff or complainant
(excepting routine foreclosures) wherein damages alleged exceed the sum of
$50,000.00.
5.10 Accuracy of Submitted Information; No Material Omissions. No
financial statements, nor any certificate, opinion or any other statement made
or furnished to Agent or any Lender by or on behalf of the Borrower in
connection with this Agreement or the transaction contemplated herein, contains
any untrue statement of a material fact, or omits a material fact necessary in
order to make the statements contained therein or herein not misleading.
5.11 Loan Not Usurious. The Loan as contemplated herein is not
usurious.
5.12 [Reserved].
5.13 Title to Assets. Borrower has good and marketable title to all
property and assets reflected in the financial statements referred to in Section
5.02 hereof, except property and assets sold or otherwise disposed of in the
ordinary course of business subsequent to the respective dates thereof and
property subject to a capital lease made in the ordinary course of business.
Borrower does not have outstanding liens on any of its property or assets, and
is not a party to any security agreements or title retention agreements whether
in the form of leases or otherwise, of any personal property, except as
permitted under Section 7.02 hereof.
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5.14 Taxes. Borrower and each of its Subsidiaries, if any, have filed
or caused to be filed all tax returns that are required to be filed and have
paid all taxes shown to be due and payable on such returns, or on any
assessments made against them or any of their property, other than taxes and
assessments that are being contested in good faith by appropriate proceedings
and as to which the Borrower or such Subsidiary has established adequate
reserves in conformance with GAAP.
5.15 Investment Company Act. Borrower is not an "investment company"
within the meaning of the Investment Company Act of 1940, as amended.
5.16 ERISA.
(a) No Prohibited Transactions, Accumulated Funding
Deficiencies, withdrawals from Multiemployer Plans, or Reportable
Events have occurred with respect to any Plans or Multiemployer Plans
that, in the aggregate, could subject Borrower to any material tax,
penalty or other liability where such tax, penalty, or liability is
not covered in full, for the benefit of Borrower or such Subsidiary,
by insurance;
(b) no notice of intent to terminate a Plan has been filed,
nor has any Plan been terminated under Section 4041 of ERISA, nor has
the PBGC instituted proceedings to terminate, or appointed a trustee to
administer, a Plan and no event has occurred or condition exists that
might constitute grounds under Section 4042 of ERISA for the
termination of, or the appointment of a trustee to administer, any
Plan;
(c) the present value of all benefits liabilities (as defined
in Section 4001(a) (16) of ERISA) under all Plans (based on the
actuarial assumptions used to fund the Plans) does not exceed the
assets of the Plans; and
(d) the execution, delivery, and performance by Borrower of
the Loan Documents and the borrowing of the Loans hereunder and the use
of the proceeds thereof will not involve any Prohibited Transaction.
6. AFFIRMATIVE COVENANTS.
Borrower covenants and agrees:
6.01 Loan Payments. To pay the Loan (as provided in the Notes and this
Agreement) when due including but not limited to interest upon the Loan on the
first day of each month.
6.02 Casualty Insurance. To place, or cause to be placed, and
maintained at all times, such fire and extended coverage insurance on all real
estate forming the basis of
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the Collateral as may be required by the Investor or if there is no Investor, by
the Lenders but in no event less than the Mortgage Loan amount, to the extent
permitted by law.
6.03 Other Insurance. To maintain (a) errors and omissions insurance or
mortgage impairment insurance and blanket bond coverage, with such companies and
in such amounts as satisfy prevailing FNMA and FHLMC requirements applicable to
a qualified mortgage originating institution, even though Borrower may not be
approved by that agency, and (b) liability insurance and fire and other hazard
insurance on its properties, with responsible insurance companies approved by
the Agent, in such amounts and against such risks as is customarily carried by
similar businesses operating in the same vicinity; and (c) within thirty (30)
days after notice from the Agent, will obtain such additional insurance as the
Agent shall reasonably require, all at the sole expense of the Borrower. Copies
of such policies shall be furnished to the Agent without charge upon request of
the Agent.
6.04 Enforcement of Mortgage Notes. To enforce payment and collection,
at Borrower's expense, of all Mortgage Notes assigned to Agent hereunder as
Collateral.
6.05 Costs of Collection. To pay the reasonable cost of collection
(including attorneys' fees) of any of the Collateral, the enforcement of
collection of which has been undertaken by Agent or any of the Lenders.
6.06 Notation of Mortgage Assignments. To make appropriate notations on
its books of all assignments to Agent hereunder, and to give such notice hereof
as Agent may from time to time reasonably require.
6.07 Execution of Additional Documents. To execute such additional
instruments or assignments of the Collateral as Agent may from time to time
reasonably require.
6.08 Submission of Financial Statements and Reports. To deliver the
following to the Lenders, in form satisfactory to the Lenders:
6.08.01 Quarterly Financial Statements. Within forty-five (45)
days after the close of each quarterly accounting period in each fiscal year:
(a) an income statement of the Borrower for such quarterly period; (b) a balance
sheet of the Borrower as of the end of such quarterly period; (c) a year-to-date
Mortgage Loan closing report and (d) a servicing portfolio report; all in
detail, subject to year end audit adjustments and prepared by Borrower, and
certified true, correct and in compliance with the terms and conditions of the
Loan Documents during any such period and on the date thereof, by Borrower's
chief financial officer or President.
6.08.02 Year End Financial Statement. Within ninety (90) days
after the close of each fiscal year: (a) a statement of stockholders' equity;
(b) an income statement of the Borrower for such fiscal year; (c) a cash flow
statement for such fiscal period; and (d) a balance sheet of the Borrower as of
the end of such fiscal year, all in reasonable
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detail, including all supporting schedules and comments and the accountant's
management letter on internal procedures and controls; the statements and
balance sheet to be audited by an independent certified public accountant
selected by the Borrower and acceptable to Lenders; and accompanied by such
accountant's opinion letter satisfactory to Lenders.
6.08.03 Quarterly Compliance Certificate. Within forty-five (45)
days after the close of each quarterly accounting period in each fiscal year, a
Compliance Certificate showing Borrower's (a) Tangible Effective Net Worth, (b)
Leverage Ratio and (c) Current Ratio, accompanied by calculations supporting the
reported results. The calculations and results shall be certified as true,
correct and in compliance with the terms and conditions of the Loan Documents
during any such period and on the date thereof, by Borrower's chief financial
officer or President.
6.08.04 [RESERVED].
6.08.05 Brokerage Statements. Within forty-five (45) days after
the close of the second quarterly accounting period in each fiscal year,
provided that at such time the market value of the Borrower's marketable
securities portfolio is greater than $750,000, brokerage statements from each
and every broker of Borrower, certified by Borrower to be true, correct and in
compliance with the terms and conditions of the Loan Documents during any such
period and on the date thereof, by Borrower's chief financial officer or
president.
6.08.06 Monthly Mark-to-Market Reports. Within seven (7) days
after and as of the end of each calendar month, provided that at such time the
market value of the Borrower's marketable securities portfolio is greater than
$750,000, a mark-to-market report regarding the Borrower's marketable securities
portfolio prepared by Borrower, and certified by Borrower to be true, correct
and in compliance with the terms and conditions of the Loan Documents during any
such period and on the date thereof, by Borrower's chief financial officer or
president.
6.08.07 Monthly Delinquency Reports. Within seven (7) days after
and as of the end of each calendar month, a mortgage loan delinquency report in
form satisfactory to Agent.
6.9 Maintenance Books and Records. To maintain adequate books, accounts
and records in accordance with GAAP with appropriate notations thereon of all
assignments to Agent; and to permit Agent, any Lender or their representatives
at any reasonable time to inspect or examine or audit the books, accounts and
records of Borrower.
6.10 Compliance with Administrative Requests. To comply with such
reasonable administrative directions as Agent may give in order to provide
proper servicing of the Advances hereunder.
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6.11 Submission of Pipe Line Report. To provide when requested by any
Lender, a copy of the Borrower's pipeline report in form and substance
satisfactory to Lenders.
6.12 [Reserved].
6.13 Notification of Borrower's Default. To advise Lenders in writing
within three business days after the expiration of any applicable cure period,
of any uncured material default known to Borrower in connection with any loan or
line of credit whether from Lenders or not in excess of $50,000.
6.14 Maintenance of Take-Out Commitments. To keep all Take-Out
Commitments in full force and effect and subject to no lien, assignment or other
interest (other than that to Agent for the benefit of the Lenders).
6.15 Financial Covenants. To maintain at all times:
(i) Tangible Effective Net Worth in the minimum amount of Seven
Million Five Hundred Thousand Dollars ($7,500,000),
(ii) a Leverage Ratio not to exceed 12.0 to 1.0.
(iii) a Current Ratio of not less than 1.5:1.0.
(iv) Working Capital of not less than Three Million Dollars
($3,000,000).
(v) a Securities Margin not to exceed .35.
6.16 Tax Returns. To furnish Lenders with copies of federal income tax
returns previously filed by the Borrower, within ten (10) days of a Lender's
written request.
6.17 Payment of Taxes. To pay or cause to be paid when due, all taxes,
assessments and charges or levies imposed upon it or on any of its property or
which it is required to withhold and pay over, except where contested in good
faith by appropriate proceedings with adequate reserves therefor having been set
aside on its books provided, however that the Borrower shall pay or cause to be
paid all such taxes, assessments, charges or levies forthwith whenever
foreclosure on any lien that attaches (or security therefor) appears imminent.
6.18 New Locations and Subsidiaries. To furnish Lenders, when required
to furnish the financial statements required by Section 6.08.01 hereof, the
names and addresses of all new offices, locations, and subsidiaries.
6.19 Changes to Authorizational Documents. To promptly furnish to each
Lender copies of any changes to the documents required by Paragraph 4.01.07
hereof, which
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copies shall be certified to be true and correct by the applicable governmental
agency responsible for recording such documents.
6.20 Mortgage Banker's Financial Reporting Form. To provide Lenders
within 60 days of the end of each quarterly accounting period, with a copy of
the quarterly Mortgage Banker's Financial Reporting Form (either FNMA Form 1002
or FHLMC Form 1055, as applicable).
6.21 Additional Reports. To promptly furnish Agent and each Lender with
such reports and information as any of them deems reasonably necessary from time
to time.
6.22 Demand Deposit Account. To maintain operating accounts, the
Restricted Account and the DDA Account with Agent.
6.23 FNMA, FHLMC and HUD Audits. To provide to Lenders within thirty
(30) days of receipt copies of all FNMA, FHLMC and HUD audit reports.
6.24 Compliance With Laws. To comply with all present and future Laws
applicable to it in the operation of its business, and all material agreements
to which it is subject.
6.25 Notice of Litigation. To give immediate notice to the Lenders of:
(1) any litigation in which it is a party if an adverse decision therein would
require it to pay over more than $50,000 or deliver assets the value of which
exceeds such sum (whether or not the claim is considered to be covered by
insurance); and (2) the institution of any other suit or any administrative
proceeding involving it that might materially and adversely affect its
operations, financial conditions, property or business.
6.26 Payment of Obligations When Due. To pay when due (or within
applicable grace periods) all indebtedness due third persons, except when the
amount thereof is being contested in good faith, by appropriate proceedings and
with adequate reserves therefor being set aside on the books of the Borrower.
6.27 [Reserved.]
6.28 Operational Reviews. To, from time to time upon request, permit
access to its premises, records and employees (including internal staff
accountants) by Agent, Lenders or their representatives, for the purpose of
conducting a review of Borrower's general mortgage business methods, policies,
and procedures, auditing loan files, and reviewing financial and operational
aspects of Borrower's business.
6.29 Third Party Originations. To, on a quarterly basis, provide
Lenders with a then current list of all third party loan originators. Lenders
reserve the right to advise Borrower, from time to time in its sole discretion,
that they elect not to include any Mortgage Loans originated by any or all third
party originator(s) in the Borrowing Base.
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6.30 Exchange of Information. That so long as any sums due Lenders
shall remain outstanding, Agent, Lenders or their successors may exchange credit
and/or collateral information relating to Borrower, with any of Borrower's other
creditors.
6.31 [Reserved.]
6.32 Preservation of Corporate Existence. To preserve and maintain its
corporate existence, rights, franchises and privileges in the jurisdiction of
its incorporation, and qualify and remain qualified as a foreign corporation in
each jurisdiction in which such qualification is necessary in view of its
business operation or ownership of its properties.
6.33 Subordinate Debt. To subordinate to Borrower's Indebtedness to
Agent and Lenders hereunder, any and all debts to shareholders, officers,
employees or affiliates of Borrower.
6.34 Maintenance of Approvals, Filings and Registrations. At all times
maintain in effect, renew and comply with, and cause each of its Subsidiaries,
if any, to effect, renew and comply with all the terms and conditions of all
consents, licenses, approvals and authorizations as may be necessary under any
applicable law or regulation for the execution, delivery and performance of this
Agreement, the Security Agreement and the Notes and to make this Agreement and
such other documents legal, valid, binding and enforceable.
7. NEGATIVE COVENANTS.
Without the prior written consent of Agent, Borrower will not:
7.01 No Compromise of Collateral. Make any compromise, adjustment or
settlement in respect of any of the Collateral or accept anything other than
cash in payment or liquidation of the Collateral.
7.02 No Other Liens. Permit any lien or financing statement covering
all or any part of the Collateral to be on file or recorded in any public
office, or pledge, grant or permit to exist a security interest or lien upon any
of its assets of any kind, real or personal, tangible, intangible, now owned or
hereafter acquired, except:
(a) liens created in favor of Agent on behalf of Lenders hereunder;
(b) liens or charges for current taxes, assessments or other
governmental charges that are not delinquent or that remain payable without
penalty;
(c) purchase money liens on specific equipment;
(d) liens shown on Exhibit C attached;
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(e) liens on its investments and securities which are not Collateral
and which have been margined by Borrower for working capital purposes, provided
that Borrower complies with Section 6.15(v) of this Agreement; and
(f) liens on any of its assets other than the Collateral where such
liens secure indebtedness in the aggregate of not more than $75,000.
7.03 No Change in Borrower's Name or Organizational Status. Change its
name or liquidate, dissolve, consolidate or merge, reorganize, recapitalize or
reclassify its capital stock, nor permit any subsidiary to do so, nor acquire,
or permit any subsidiary to acquire, substantially all the assets of another
entity.
7.04 No Sale of Assets or Capital Stock. Sell, transfer, lease or
otherwise dispose of or cancel all or (except in the ordinary course of
business) any material part of its assets or capital stock.
7.05 Improper Use of Proceeds. Use the proceeds of the Loan, or permit
them to be used, for any purpose other than as permitted by Section 2.09 hereof.
7.06 No Additional Loans. Incur, create, assume or permit to exist any
mortgage warehousing loans, working capital loans or gestation loans except (a)
to Lenders under the terms of this Agreement, (b) liens on its investments and
securities which have been margined by Borrower for working capital purposes,
provided that the Borrower complies with Section 6.15(v) of this Agreement, (c)
gestation-type or sale-purchase loan facilities for the purpose of temporarily
bulking/accumulating Non-Conforming Mortgage Loans previously funded by the
Lenders under the terms of this Agreement, and (d) loans secured by liens
permitted under Section 7.02 hereof.
7.07 No Misleading Information. Furnish to Agent or any Lender any
certificate or document that contains any untrue statement of material fact or
omits a material fact necessary to make it not misleading in light of the
circumstances under which it was furnished.
7.08 No Guarantees. Become liable directly or indirectly, as guarantor,
surety, endorser or otherwise for any obligation of any other entity or person
in excess of $20,000.
7.09 No Change in Management, Ownership or Control. Change in any
material respect its executive management, ownership or control of its business
operations.
7.10 [Reserved].
7.11 Regulation U. Use the proceeds of any Advance, directly or
indirectly, for the purpose, whether immediate, incidental, or ultimate, of
buying or carrying any "margin stock" within the meaning of Regulation U of the
Board of Governors of the Federal
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Reserve System of the United States or any successor thereto, as in effect from
time to time.
7.12 No Pledge of Servicing. Pledge, assign or grant a security
interest or lien on all or any part of Borrower's Servicing Portfolio to anyone
other than Agent for and on behalf of Lenders.
7.13 No Prepayment of Subordinated Debt. Prepay any debt subordinated
to Borrower's indebtedness to Agent and Lenders under the Loan Documents.
7.14 Transactions with Affiliates. Directly or indirectly enter into,
or permit any of its Subsidiaries directly or indirectly to enter into, any
transaction (including the purchase, sale, lease, or exchange of any property,
the making or borrowing of any loan or the rendering of any service) with any
Affiliate on terms that are less favorable to Borrower or such Subsidiary than
those that might be obtained at the time from Persons who are not Affiliates.
7.15 No Loss of Agency Approvals and Licenses. Take any of the
following actions:
(a) Terminate or withdraw from any Plan, so as to result in any
material liability to the PBGC;
(b) Engage in or permit any person to engage in any Prohibited
Transaction involving any Plan that would subject Borrower or any of its
subsidiaries to any material tax, penalty, or other liability;
(c) Incur or suffer to exist any material Accumulated Funding
Deficiency involving any Plan;
(d) Amend any Plan, so as to require the posting of security under
section 401(a)(29) of the Code; or
(e) Fail to make payments required under section 412(m) of the Code and
section 302(e) of ERISA that would subject Borrower or any of its Subsidiaries
to any material tax, penalty or other liability.
7.16 Repurchase of Mortgage Loans. Fail to repurchase a Mortgage Loan
when requested by the Investor or otherwise required to do so pursuant to any
agreement between Borrower and the Investor, except, in the case of a repurchase
requested by an Investor, for so long as Borrower shall in good faith contest
its obligation to comply with such request under the terms of the agreement with
the Investor.
8. AGENT.
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8.01 Appointment of Agent. Lenders irrevocably appoint and authorize
the Agent to act on behalf of Lenders under this Agreement and the Loan
Documents and to exercise such powers hereunder and thereunder as are
specifically delegated to Agent by the terms hereof and thereof, together with
such powers as may be reasonably incidental thereto, including without
limitation the power to execute or authorize the execution of financing or
similar statements or notices, and other documents. In performing its functions
and duties under this Agreement, the Agent shall act solely as agent of the
Lenders and does not assume and shall not be deemed to have assumed any
obligation towards or relationship of agency or trust with or for Borrower. With
respect to Mortgage Notes for Mortgage Loans in Agents possession from time to
time, Agent shall be deemed to hold them as bailee for the Lenders for the
purpose of perfection under the Uniform Commercial Code, provided, however, that
Agent shall have only those duties and responsibilities expressly stated in this
Agreement and shall retain all rights, protections and indemnities provided
herein. Each Lender agrees (which agreement shall survive any termination of
this Agreement) to reimburse Agent for all reasonable out-of-pocket expenses
(including outside attorneys' fees and disbursements) incurred by Agent
hereunder or in connection herewith or with an Event of Default under this
Agreement or in enforcing the obligations of Borrower under this Agreement or
the Loan Documents or any other instrument executed pursuant hereto, and for
which Agent is not reimbursed by Borrower, pro rata according to such Lender's
Percentage Share. Agent shall not be required to take any action under the Loan
Documents, or to prosecute or defend any suit in respect of the Loan Documents,
unless indemnified to its satisfaction by the Lenders against loss, costs,
liability and expense. If any indemnity furnished to Agent shall become
impaired, they may call for additional indemnity and cease to do the acts
indemnified against until such additional indemnity is given.
8.02 Deposit Account with Agent. Borrower hereby authorizes Agent, in
Agent's sole discretion, to charge its general deposit account(s) if any,
maintained with Agent for the amount of any principal, interest, or other
amounts or costs due under this Agreement when the same becomes due and payable
under the terms of this Agreement or the Notes.
8.03 Scope of Agent's Duties. The Agent shall have no duties or
responsibilities except those expressly set forth herein, and shall not, by
reason of this Agreement or otherwise, have a fiduciary relationship with any
Lender (and no implied covenants or other obligations shall be read into this
Agreement against the Agent). Neither Agent nor any of its directors, officers,
employees or agents shall be liable to any Lender for any action taken or
omitted to be taken by it under this Agreement or any document executed pursuant
hereto, or in connection herewith or therewith with the consent or at the
request of the Majority Lenders or in the absence of their own gross negligence
or wilful misconduct, nor be responsible for or have any duties to ascertain,
inquire into or verify (a) any recitals or warranties herein or therein, (b) the
effectiveness, enforceability, validity or due execution of this Agreement or
any document executed pursuant hereto or any security thereunder, (c) the
performance by Borrower of its obligations hereunder or thereunder, or (d) the
satisfaction of any condition hereunder or thereunder. Agent shall be entitled
to rely upon any certificate, notice, document or other communication (including
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any cable, telegraph, telex, facsimile transmission or oral communication)
believed by it to be genuine and correct and to have been sent or given by or on
behalf of a proper person. Agent may employ agents and may consult with legal
counsel, independent public accountants and other experts selected by it and
shall not be liable to the Lenders (except as to money or property received by
them or their authorized agents), for the negligence or misconduct of any such
agent selected by it with reasonable care or for any action taken or omitted to
be taken by it in good faith in accordance with the advice of such counsel,
accountants or experts.
Agent agrees to review the eligibility of Mortgage Loan collateral
consistent with Agent's practices for loans made for its sole account, but will
not be liable to the Borrower or any Lender for any loss, costs, liability, or
expense which arises from or is the consequence of any act or omission made by
Agent in connection with such review.
8.04 Successor Agent. Agent may resign as such at any time upon at
least 30 days prior notice to Borrower and Lenders. If Agent at any time shall
resign or if the office of Agent shall become vacant for any other reason, all
Lenders shall, by written instrument, appoint successor agent(s) (satisfactory
to such Lenders) which shall have an office in the Detroit metropolitan area,
and which shall thereupon become the Agent hereunder, as applicable, and shall
be entitled to receive from the prior Agent such documents of transfer and
assignment as such successor Agent may reasonably request. Lenders agree that
any Lender may withhold approval of a proposed successor agent on the basis that
the proposed successor agent is not a participant or assignee holding a material
portion of the Loan. Such successor Agent shall succeed to all of the rights and
obligations of the resigning Agent as if originally named. The resigning Agent
shall duly assign, transfer and deliver to such successor Agent all moneys at
the time held by the resigning Agent hereunder after deducting therefrom its
expenses for which it is entitled to be reimbursed. Upon such succession of any
such successor Agent, the provisions of this Section 8 shall continue in effect
for the benefit of the resigning Agent in respect of any actions taken or
omitted to be taken by it while it was acting as Agent.
8.05 Loans by Agent. Comerica, in its capacity as a Lender hereunder,
shall have the same rights and powers hereunder as any other Lender and may
exercise or refrain from exercising the same as though it were not the Agent.
Comerica and its affiliates may (without having to account therefor to any
Lender) accept deposits from, lend money to, and generally engage in any kind of
banking, trust, financial advisory or other business with Borrower as if it were
not acting as Agent hereunder, and may accept fees and other consideration
therefor without having to account for the same to the Lenders.
8.06 Credit Decisions. Each Lender acknowledges that it has,
independently of Agent and each other Lender and based on the financial
statements of Borrower and such other documents, information and investigations
as it has deemed appropriate, made its own credit decision to extend credit
hereunder from time to time. Each Lender also acknowledges that it will,
independently of Agent and each other Lender and based on such other documents,
information and investigations as it shall deem appropriate at any
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time, continue to make its own credit decisions as to exercising or not
exercising from time to time any rights and privileges available to it under
this Agreement or any document executed pursuant hereto.
8.07 Agent's Fees. Borrower shall pay to Agent a monthly Agent fee for
Agent's services hereunder, pursuant to a separate agreement between Borrower
and Agent.
8.08 Authority of Agent to Enforce Notes and This Agreement. Each
Lender, subject to the terms and conditions of this Agreement, authorizes the
Agent with full power and authority as attorney-in-fact to institute and
maintain actions, suits or proceedings for the collection and enforcement of the
Notes and to file such proofs of debt or other documents as may be necessary to
have the claims of the Lenders allowed in any proceeding relative to Borrower or
its creditors or affecting its properties, and to take such other actions which
Agent consider to be necessary or desirable for the protection, collection and
enforcement of the Notes, this Agreement or the Loan Documents.
8.09 Indemnification. The Lenders agree to indemnify the Agent (to the
extent not reimbursed by Borrower, but without limiting any obligation of
Borrower to make such reimbursement) ratably according to their respective
percentages, from and against any and all claims, damages, losses, liabilities,
costs or expenses of any kind or nature whatsoever (including, without
limitation, fees and disbursements of counsel) which may be imposed on, incurred
by, or asserted against the Agent in any way relating to or arising out of this
Agreement, any of the Loan Documents or the transactions contemplated hereby or
any action taken or omitted by the Agent under this Agreement or any of the Loan
Documents, provided, however, that no Lender shall be liable for any portion of
such claims, damages, losses, liabilities, costs or expenses resulting from the
Agent's gross negligence or willful misconduct. Without limitation of the
foregoing, each Lender agrees to reimburse the Agent promptly upon demand for
its Percentage Share of any out-of-pocket expenses (including, without
limitation, fees and expenses of counsel) incurred by the Agent in connection
with the preparation, execution, delivery, administration, modification,
amendment or enforcement (whether through negotiations, legal proceedings or
otherwise) of, or legal advice in respect of rights or responsibilities under,
this Agreement or any of the Loan Documents, to the extent that the Agent is not
reimbursed for such expenses by Borrower, but without limiting the obligation of
Borrower to make such reimbursement. Each Lender agrees to reimburse the Agent
promptly upon demand for its Percentage Share of any amounts owing to the Agent
by the Lenders pursuant to this Section. If the indemnity furnished to the Agent
under this Section shall, in the judgment of the Agent, be insufficient or
become impaired, the Agent may call for additional indemnity from the Lenders
and cease, or not commence, to take any action until such additional indemnity
if furnished.
8.10 Knowledge of Default. It is expressly understood and agreed that
the Agent shall be entitled to assume that no Event of Default has occurred and
is continuing, unless the officers of the Agent immediately responsible for
matters concerning this Agreement shall have been notified in writing specifying
such Event of Default and stating that such
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notice is a "notice of default" by a Lender or by Borrower. Upon receiving such
a notice, the Agent shall promptly notify each Lender of such Event of Default.
If any Lender acquires actual knowledge of an Event of Default, such Lender
shall promptly notify the other Lenders and Agent.
8.11 Agent's Authorization; Action by Lenders. Except as otherwise
expressly provided herein, whenever the Agent is authorized and empowered
hereunder on behalf of the Lenders to give any approval or consent, or to make
any request, or to take any other action on behalf of the Lenders (including
without limitation the exercise of any right or remedy hereunder or under the
other Loan Documents), the Agent shall be required to give such approval or
consent, or to make such request or to take such other action only when so
requested in writing by the Majority Lenders or all Lenders, as applicable
hereunder. Action that may be taken by the Majority Lenders or all of the
Lenders, as the case may be (as provided for hereunder) may be taken (i)
pursuant to a vote at a meeting (which may be held by telephone conference call)
as to which all of the Lenders have been given reasonable advance notice, or
(ii) pursuant to the written consent of the requisite percentages of the Lenders
as required hereunder, provided that all of the Lenders are given reasonable
advance notice of the requests for such consent.
8.12 Enforcement Actions by the Agent. Except as otherwise expressly
provided under this Agreement or in any of the other Loan Documents and subject
to the terms hereof, Agent will take such action, assert such rights and pursue
such remedies under this Agreement and the other Loan Documents as the Lenders
shall direct, provided, however, that the Agent shall not be required to act or
omit to act if, in the judgment of the Agent, such action or omission may expose
the Agent to personal liability or is contrary to this Agreement, any of the
Loan Documents or applicable law. Except as expressly provided above or
elsewhere in this Agreement or the other Loan Documents, no Lender (other than
the Agent, acting in its capacity as agent) shall be entitled to take any
enforcement action of any kind under any of the Loan Documents.
8.13 Agent shall provide to Lenders a monthly Borrowing Base Report.
9. DEFAULT.
9.01 Events of Default. Borrower shall be in default under this
Agreement upon the happening of any of the following events or conditions (each
an "Event of Default"):
9.01.01 Default in the payment of any of the Notes or payment
or performance of any other obligation, covenant or liability of Borrower
contained or referred to herein, or in any other obligation owed by Borrower to
Lenders or Agent;
9.01.02 Any warranty, representation or statement furnished to
Lenders by or on behalf of Borrower in connection with this Agreement proves to
have been false in any material respect when made or furnished;
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<PAGE> 38
9.01.03 Loss, theft, substantial damage, destruction,
abandonment, sale (except as permitted by this Agreement) or encumbrances to or
of the Collateral or any substantial part thereof, or the making of any levy,
seizure or attachment thereof, or thereon;
9.01.04 Dissolution, termination of existence, insolvency,
business failure, appointment of a receiver for benefit of creditors by, or the
commencement of any case or proceeding under any bankruptcy or insolvency law by
or against Borrower unless said proceeding, if commenced against Borrower, is
dismissed within 30 days from the date it is filed;
9.01.05 Occurrence of any material adverse change in the
financial or operating condition of Borrower;
9.01.06 If presently held or later obtained, subsequent loss
for cause of FNMA and/or FHLMC certification;
9.01.07 Failure of Borrower or any shareholder or director of
Borrower to observe the terms of or perform any agreement with Lenders;
9.01.08 Borrower's default under the terms and conditions of
any loan or credit agreement with any third party for over $50,000; or
9.01.09 If any one of the following shall occur: (a) Any
Reportable Event or a Prohibited Transaction shall occur with respect to any
Plan; (b) a notice of intent to terminate a Plan under section 4041 of ERISA
shall be filed; (c) a notice shall be received by the plan administrator of a
Plan that the PBGC has instituted proceedings to terminate a Plan or appoint a
trustee to administer a Plan; (d) any other event or condition shall exist that
might, in the opinion of the Majority, constitute grounds under section 4042 of
ERISA for the termination of, or the appointment of a trustee to administer, any
Plan; (e) Borrower or any ERISA Affiliate shall withdraw from a Multiemployer
Plan under circumstances that the Majority Lenders determine could have a
material adverse effect on the financial condition of Borrower; and in case of
the occurrence of any event or condition described in clauses (a) through (e)
above, such event or condition together with all other such events or
conditions, if any, could subject Borrower to any tax, penalty, or other
liabilities in the aggregate business, operations, property, or financial or
other condition of Borrower and its Subsidiaries, taken as a whole.
9.02 Remedies Upon Default. Upon the occurrence and during the
continuation of an Event of Default, at the direction of the Majority Lenders,
(i) Lenders may refuse to make additional advances, and (ii) Agent may terminate
this Agreement, declare all sums now or hereafter owed by Borrower to Lenders to
be immediately due and payable, charge Borrower's DDA Account and Restricted
Account for any or all sums due and owing to Lenders, and exercise all rights
and remedies upon default, in foreclosure and otherwise, of a secured party
under the Uniform Commercial Code and other applicable law, in
37
<PAGE> 39
addition to the rights and remedies provided herein or in any other instrument
or paper executed by Borrower to the extent allowed by applicable law,
including, at its option and in its sole discretion, until all sums now or
hereafter owed Agent or to Lenders are paid in full, the right or rights to:
9.02.01 Communicate with and notify the mortgagors under the
Mortgage Loans comprising the Collateral of Borrower's assignments hereunder,
and note any such assignment on Borrowers records;
9.02.02 Take over the exclusive right to collect the
Collateral at the sole expense of the Borrower, without any obligation to
preserve rights against third parties. For any acts done or not done incident to
such collection or liquidation, Agent shall not be liable in any manner. Agent
shall have the right to settle, compromise, or adjust Collateral and the claims
or right of Borrower thereunder and accept return of the real estate involved,
and in turn sell and dispose of all said real estate without notice to or
approval of Borrower, Agent may employ agents and attorneys to collect or
liquidate any Collateral, and Agent shall not be liable for such Collateral or
defaults of any such agents and attorneys;
9.02.03 To effect collection of the Loan, take possession of
and open any mail addressed to Borrower whether on Borrower's premises or
elsewhere and to remove, collect, and apply all payments therein contained and
as attorney in fact for Borrower, sign the Borrower's name to any receipts,
checks, notes, agreements, assignments or other instruments or letters, in order
to collect, sell or liquidate the Collateral. This power shall be irrevocable;
9.02.04 Require Borrower to assemble all books and records of
account relating to the Collateral and make them available to Agent at its
office herein set forth or such other place as may be designated by Agent;
9.02.05 Enter the office of Borrower and take possession of
any of the Collateral including any records that pertain to the Collateral;
9.02.06 Undertake to service any one or more of the Mortgage
Loans comprising the Collateral and upon the happening of such, Borrower shall
transfer to Agent all escrow funds, records, and any other documents relating to
any such Mortgage Loans then held by it;
9.02.07 Rescind any acceleration of the maturity of the Loan
previously declared (but the tender and acceptance of partial payments of the
Loan shall not rescind or affect in any way any such acceleration of maturity);
9.02.08 Institute legal proceedings to foreclose upon and
against the lien and security interest granted by this Agreement and the
Security Agreement, to recover judgment for all amounts then due and owing on
the Loan, and to collect the same out of any of the Collateral or the proceeds
of any sale thereof;
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<PAGE> 40
9.02.09 Institute legal proceedings for the sale, under the
judgment of decree of any court of competent jurisdiction, of any or all of the
Collateral;
9.02.10 Personally or by agents, attorneys, or appointment of
a receiver enter upon any premises where the collateral or any part of it may
then be located, and take possession of all or any part of it and/or render it
unusable; and without being responsible for loss or damage to such Collateral,
(a) hold, store, and keep idle, or lease, operate, remove or
otherwise use or permit the use of the Collateral or any
part of it, for that time and upon those terms as Agent,
in its sole discretion, deems to be in its own best
interest, and demand, collect and retain all resulting
earnings and other sums due and to become due from any
party, accounting only for net earnings, if any (unless
the Collateral is retained in satisfaction of the Loan,
in which case not accounting will be necessary), arising
from that use (which net earnings may be applied against
the amounts outstanding on the Loan) and charging
against all receipts from the use of the Collateral or
from its sale, by court proceeds or pursuant to
subsection (b) below, all other costs, expenses charges,
damages and other losses resulting from that use; and/or
(b) sell, lease dispose of, or cause to be sold, leased or
disposed of, all or any part of the Collateral at one or
more public or private sales, leasings or other
dispositions, at places and times and on terms and
conditions as Agent may deem fit, without any previous
demand or advertisement; and except as provided in this
Agreement and the Security Agreement, all notice of
sale, lease or other disposition, and advertisement, and
other notice or demand, any right or equity of
redemption, and any obligation of a prospective
purchaser or lessee to inquire as to the power and
authority of Agent to sell, lease or otherwise dispose
of the Collateral or as to the application by Agent of
the proceeds of sale or otherwise, which would otherwise
be required by, or available to Borrower under,
applicable law are expressly waived by Borrower to the
fullest extent permitted.
At any sale pursuant to or permitted by this Section 9.02, whether under the
power of sale, by virtue of judicial proceedings or otherwise, it shall not be
necessary for Agent or a public officer under order of a court to have present
physical or constructive possession of the Collateral to be sold. The recitals
contained in any conveyances and receipts made and given by Agent or the public
officer to any purchaser at any sale made pursuant to this Agreement shall, to
the extent permitted by applicable law, conclusively establish the truth and
accuracy of the matters stated with regard to the Loan or the conduct of sale
(including, without limit, as to the amounts of the principal of and interest on
the Loan, the accrual and nonpayment of it and advertisement and conduct of the
sale); and all
39
<PAGE> 41
prerequisites to the sale shall be presumed to have been satisfied and
performed. Upon any sale of any of the Collateral, the receipt of the officer
making the sale under judicial proceedings or Agent shall be sufficient
discharge to the purchaser for the purchase money, and the purchaser shall not
be obligated to see to the application of the money. Any sale of any of the
Collateral under this Agreement or the Security Agreement shall be a perpetual
bar against Borrower with respect to that Collateral; and/or
9.03 Remedies Cumulative. All remedies available to Agent
shall be cumulative not alternate in that the exercise of one or more of them
shall not preclude exercising one or more of the others. Further, nothing in
this Default section or elsewhere in this Agreement shall affect the demand
nature of Borrower's obligations to Lenders or preclude the Lenders from
demanding full payment of all sums due by Borrower to Lenders, at any time.
9.04 Allocation of Amounts Received. All amounts received by
Agent after an Event of Default shall be allocated as follows:
(a) First, to the payment of reasonable costs and
expenses incurred by the Agent in the performance of its
duties and enforcement of its rights under the Loan Documents,
including, without limitation, all costs and expenses of
collection, attorney's fees, court costs and foreclosure
expenses;
(b) Second, to Comerica to the extent of Excess Advances
and interest thereon;
(c) Third, to the Lenders, pro rata in accordance with
their respective Percentage Shares until the Loan shall
have been paid in full; and
(d) Fourth, to such persons as may be legally entitled
thereto.
10. Sale of Mortgage Notes.
So long as Borrower is not in default hereunder Agent shall:
10.01 Delivery of Mortgage Notes by Agent. Upon sale by Borrower of any
Mortgage Loan assigned to Agent hereunder, deliver the Mortgage Note as
requested by Borrower to the Investor under a Bailee Letter. Agent agrees to
send the original Mortgage Note together with the loan document delivery package
received from Borrower directly to the pertinent Investor no later than one
business day after receipt of the request from Borrower. Delivery by Agent as
aforesaid shall be deemed a conditional delivery to the Investor conditioned on
receipt by Agent of the sale proceeds from the Investor. Borrower directs Agent
to apply said proceeds to the principal balance of the Loan. Agent may require
Borrower to deliver a cover letter, in form satisfactory to Agent, directing
Investor to make payment directly to Agent.
40
<PAGE> 42
11. Collections.
Upon default if so requested by Agent, in writing, Borrower shall act,
as the representative of, and in trust for, Agent in receiving and collecting
all monies payable on any Mortgage Loan held as part of the Collateral and after
collection thereof shall deposit the same in a special account at Agent in the
name of the Borrower, and the same shall be held by Agent as part of the
Collateral hereunder. Agent, upon deposit in such special account of any monies
payable on any such Mortgage Loan, may, in its sole discretion, apply all or any
part thereof to the payment of Borrower's obligations.
12. Termination; Demand for Payment.
Borrower may terminate this Agreement at any time upon thirty (30) days
written notice to the Agent and the Lenders, upon which date all sums then
outstanding all be immediately due and payable.
Whether or not an Event of Default exists and without affecting
Lenders' rights upon the occurrence of an Event of Default, any Lender may at
any time, upon seventy-five (75) days prior written notice to Agent, Borrower
and the other Lenders, demand payment of such Lender's unpaid and outstanding
Advances and interest. By the effective date of such demand, any other Lender
may elect, in its sole discretion, to (i) demand payment of its unpaid and
outstanding Advances and interest, upon seventy-five days prior notice to
Borrower and all nondemanding Lenders, (ii) purchase the demanding Lender's
Allocation Amount, in which event this Agreement shall continue in effect, or
(iii) locate an assignee of the demanding Lender's Allocation Amount, which
shall purchase the demanding Lender's Allocation Amount, in which case the
assignee shall be substituted for the demanding Lender and this Agreement shall
continue in effect. If a demanding Lender's Allocation Amount is not purchased
or assigned, and one or more Lenders have not elected to demand payment, then
this Agreement shall continue in effect, the Maximum Loan Amount will be reduced
by the amount of the demanding Lender(s) Allocation Amount(s), and the
nondemanding Lender(s) Percentage Share(s) shall increase accordingly. Should
all Lenders elect to demand payment, this Agreement shall terminate.
Termination of this Agreement by Borrower or Lenders as described above
will not alter or affect any of the rights or obligations of the parties hereto
in respect of any transactions then pending hereunder, particularly the
indebtedness or obligation of Borrower or the right of Lenders to the
Collateral, or the right to enforce and use the provisions of this Agreement in
respect of the enforcement and collection of the Collateral.
13. Miscellaneous.
13.01 Notices. Except as to routine business matters, any and all
communications between the parties hereto or notices provided herein to be given
in writing shall be (i) delivered in person, (ii) sent by both certified or
registered mail, return receipt requested, and by regular mail, or (iii) by
overnight courier service that provides for proof of delivery; addressed as
follows:
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<PAGE> 43
Comerica:
Comerica Bank
500 Woodward Ave., MC 3256
Detroit, MI 48226
Attention: Von L. Ringger
CBNA:
CoreStates Bank, N.A.
Banking and Finance Company Group
1339 Chestnut St.
F.C. 1-8-12-7
Philadelphia, PA 19107-3579
Attention: Edmund J. Furphy
Norwest:
Norwest Bank Minnesota, N.A.
7900 Xerxes Avenue South, Ste. 300
Minneapolis, MN 55431
Attention: Heidi Bye
RFC:
Residential Funding Corporation
4800 Montgomery Lane, Ste. 300
Bethesda, Maryland 20814
Attention: Barbara Repetti
Borrower:
Rock Financial Corporation
30600 Telegraph Road, Suite 4000
Bingham Farms, Michigan 48025
Attention: Daniel B. Gilbert
With a copy to:
Rock Financial Corporation
30600 Telegraph Road, Suite 4000
Bingham Farms, Michigan 48025
Attention: Corporate Counsel
or to such other address as any party may by notice indicate to the other from
time to time. Unless sooner received, all notices shall be deemed delivered two
(2) days after mailing, as herein set forth. Actual knowledge of the contents of
the notice, however received, shall constitute proper notice hereunder.
13.02 Successors and Assigns. The terms and provisions of this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective
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<PAGE> 44
successors and assigns. All representations, warranties, covenants (affirmative
and negative) and agreements herein contained on the part of Borrower shall
survive the execution of the Notes, and shall be effective as long as any sums
remain due and owing Agent or any Lender.
13.03 Delay - No Waiver. No delay in exercising, or failure to exercise
any right, power or remedy accruing to Agent or any Lender, as applicable,
through any breach or default of Borrower under this Agreement, or any
acquiescence to any such breach or default, or to any similar breach or default
thereafter occurring, shall impair any such right, power or remedy of Agent or
any Lender, as applicable; nor shall any waiver of any single breach or default
be deemed a waiver of any breach or default thereafter occurring. Any waiver,
permit, consent or approval of any kind or character on the part of Agent or any
Lender, as applicable, of any provision or condition of the Agreement, must be
in writing and shall be effective only to the extent of such writing
specifically set forth. The forgoing two sentences shall be deemed to be
applicable to Agent, the Lenders and Borrower. In the event Agent is required to
take any action to collect sums due under the Notes or to enforce, renegotiate,
restructure or modify the terms of this Agreement, or is required to institute,
defend or otherwise participate in any action at law or suit in equity in
relation to this Agreement, or any Mortgage Loan forming part of the Collateral,
Borrower, in addition to all other sums which it may be called upon to pay, will
pay Agent's attorneys' fees and costs. Nothing in this Agreement shall be deemed
any waiver or prohibition of Agent's or any Lender's right of lien or set-off,
except that Agent and each Lender agrees to not set-off against any legitimate
custodial or escrow account in which Borrower accumulates funds owned by
individual mortgagors or other third parties.
13.04 (a) Entire Agreement-Supplemental Policies and Procedures. This
Agreement, together with the other agreements referred to herein, set forth the
entire agreement among the parties hereto, and there are no other agreements,
express or implied, written or oral, except as set forth herein. This Agreement
may not be amended, altered or changed except in writing by all parties hereto.
It is contemplated that from time to time Borrower and Lenders will enter into
supplemental agreements establishing policies and procedures to carry out the
terms of this agreement. Such agreements shall constitute amendments hereto
provided they are signed by all parties.
(b) Partial Invalidity. The inapplicability or unenforceability of any
provision of this Agreement shall not limit or impair the operation or validity
of any other provisions of this Agreement.
(c) Counterparts. This Agreement and any amendments hereto may be
executed in any number of counterparts, each of which, when executed and
delivered, shall be an original, but such counterparts shall together constitute
one and the same instrument.
(d) No Assignment by Borrower. This Agreement shall not be assignable
by Borrower without the express written approval of Agent and all Lenders.
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<PAGE> 45
(e) Materiality/Reliance by Lenders. All covenants, agreements and
representations made herein and in documents delivered in support of this
Agreement, now or in the future, shall be deemed to have been material and
relied on by Agent and the Lenders and shall not merge with this Agreement.
(f) No Third Party Beneficiary. The parties hereto understand and agree
that there is no intention to confer any benefits upon any person or legal
entity not a party to this Agreement.
(g) Confidentiality. All information and materials provided to Lenders
by Borrower shall be treated with the same degree of confidentiality as Lenders
maintain with regard to similar information of its other customers generally.
Nothing contained herein shall prevent Lenders from releasing to actual or
proposed loan participants such information regarding Borrower as Lenders may
deem pertinent and necessary.
13.05 Interpretation of Accounting Terms. Each accounting term used in
this Agreement which is not specifically defined shall have the meaning
customarily given to it in accordance with generally accepted accounting
principles.
13.06 Michigan Law/Consent to Jurisdiction and Service. This Agreement
and the Notes shall be governed by the laws of the State of Michigan. Borrower
agrees and consents to the exclusive jurisdiction of the Oakland County Circuit
Court and/or the United States District Court for the Eastern District of
Michigan. Furthermore, BORROWER HEREBY WAIVES ALL RIGHT TO DEMAND A JURY TRIAL
IN ANY AND ALL ACTIONS AND PROCEEDINGS WHETHER ARISING HEREUNDER OR UNDER ANY
OTHER AGREEMENT OR UNDERTAKING and irrevocably agrees to service of process sent
by certified mail, return receipt requested, and regular mail to the address set
forth herein, or such address as may appear in Agent's records.
13.07 Assignment; Participation. No Lender shall assign its rights or
obligations hereunder. Comerica may grant participations in its portion of the
Loan, in Comerica's sole discretion, provided that Comerica shall at all times
retain at least $10,000,000 for the Loan for its own account. With Agent's prior
written consent, which consent will not be unreasonably withheld, Lenders (other
than Comerica) may grant participations in their respective portions of the
Loan.
13.08 Amendments; Waivers. Any term, covenant, agreement or condition
of the Loan Documents may be amended, and any right under the Loan Documents may
be waived, if, but only if, such amendment or waiver is in writing and is signed
by (a) the Majority Lenders and, if the rights and duties of the Agent are
affected thereby, by the Agent, and (b) in the case of an amendment, by the
Borrower; provided, however, that no amendment or waiver shall be effective,
unless in writing and signed by each Lender
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<PAGE> 46
affected thereby, to the extent it (i) changes the amount of such Lender's
Allocation Amount, (ii) reduces the principal of or the rate of interest on the
Loan, (iii) postpones any date fixed for any payment of principal of or interest
on the Loan, (iv) releases any Collateral, (v) waives any default under Section
9.01.01, (vi) changes the definition of "Majority Lenders", or (vii) amends this
Section 13.08 or any other provision of this Agreement requiring the consent or
other action of all of the Lenders.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the day and year first above written.
ROCK FINANCIAL CORPORATION COMERICA BANK
By: /s/ Daniel B. Gilbert By: /s/ Von L. Ringger
----------------------------- -----------------------------
Daniel B. Gilbert Von L. Ringger
Its: President Its: First Vice President
CORESTATES BANK, N.A.
By: /s/
------------------------------
Its:
------------------------------
NORWEST BANK MINNESOTA, N.A.
By: /s/
------------------------------
Its:
------------------------------
RESIDENTIAL FUNDING CORPORATION
By: /s/
------------------------------
Its:
------------------------------
45
<PAGE> 47
EXHIBIT A (SECTION 5.06)
SCHEDULE OF BORROWER'S OFFICES
Rock Financial Corporation
30600 Telegraph Road
Fourth Floor
Bingham Farms, MI 48025
Rock Financial Corporation
25201 Chargrin Blvd.
Suite 180
Beachwood, OH 44122
Rock Financial Corporation
43681 Ford Road
Canton, MI 48187
Rock Financial Corporation
14229 Torrey Road
Fenton, MI 48430
Rock Financial Corporation
410 W. University
Rochester, MI 48307
Rock Financial Corporation
One East Campus View Blvd.
Suite 230
Columbus, OH 43235
46
<PAGE> 48
EXHIBIT C (SECTION 7.04)
OTHER LIENS
$2,000,000 line of credit with Michigan National Bank evidenced by ___________,
the proceeds of which finance construction of offices of the Borrower and
purchase of computer systems.
<PAGE> 49
EXHIBIT D
REQUEST FOR ADVANCE
<PAGE> 50
EXHIBIT E (SECTION 1.02)
APPROVED INVESTORS
<TABLE>
<CAPTION>
====================================================================================================
Conforming Mortgage Loans: Non-Conforming Mortgage Loans:
- ----------------------------------------------------------------------------------------------------
<S> <C>
American Residential Advanta (Colonial National Bank)
Anchor Mortgage Chase Residential Mortgage
Bancboston ContiMortgage
Banc One Mortgage D&N Savings Bank
Barclays American Mortgage First Security Savings Bank
Capstead Mortgage Ford
Chase Home Mortgage GE Home Equity
Chemical Bank Portfolio Acceptance Corp. (Nationsbank)
Citicorp Mortgage Prudential Home Mortgage
Citifed Mortgage Saxon Mortgage
Countrywide Unicor (United Lending)
FHLMC
First Federal of Rochester
First Nationwide Bank
First Security Savings Bank
First Union Mortgage
FNMA
General Electric
Hamilton Financial
Loan America
Merrill Lynch
NationsBank
Norwest Funding
Prudential Home Mortgage
Residential Funding Corp.
Saxon Mortgage
====================================================================================================
High LTV Second Mortgage Loans:
- ----------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 51
EXHIBIT F (SECTION 5.09)
SCHEDULE OF JUDGMENTS, ACTIONS AND PROCEEDINGS
1. Victoria McNeill (Plaintiff/Counter Defendent) vs. Rock Financial
Corporation (Defendent/Counter Plaintiff), Oakland County Court Case No.
97-544583-NZ.
50
<PAGE> 52
EXHIBIT G
BAILEE LETTER
[Agent's Letterhead]
[Date]
[Investor]
RE: ROCK FINANCIAL CORPORATION
Account #: 1840-13366-2
Gentlemen:
Enclosed please find for your review and inspection, the following complete
mortgage files:
Comerica Bank, as Agent for and on behalf of Lenders ("Agent"), has a security
interest in the enclosed mortgage note(s), mortgage(s) and in their proceeds.
The mortgage notes are sent to you for your inspection and purchase. Pending
your purchase of the enclosed loans, you agree to hold the mortgage loans as
bailee on behalf of Agent. All documents pertaining to mortgages not purchased
by you must be returned directly to Agent, no later than twenty-one (21) days
from the date of this letter.
UNDER NO CIRCUMSTANCES ARE ANY OF THE ENCLOSED FILES TO BE RETURNED TO THE
ORIGINATING MORTGAGE COMPANY.
Any purchase you elect to make will be free of the Agent's security interest,
however, your payment, which is proceeds of the Agent's collateral, must be sent
directly to the Bank and NOT to the mortgage company.
Please direct your payment to: Comerica Bank, 500 Woodward Avenue, MC:3256,
Detroit, MI 48226, Attention: _____, Mortgage Warehouse Operations Officer. ABA
#072-000-096.
If you are unable to complete the purchase of any of the enclosed loans within
fourteen (14) business days from the date of this letter, kindly return the
unpurchased loan files to Agent.
Please acknowledge receipt of the above mortgage loans and your acceptance of
and consent to the terms upon which the mortgage loans have been sent to you, by
signing the enclosed copy of this letter and return it in the enclosed
self-addressed envelope.
If you have any questions, please call this department at 313/222/6111.
Sincerely,
- ---------------
Mortgage Warehouse Operations Officer
Acknowledged and
Agreed to: By: Date , 199
-------------------------- ------------------ --
Its: Phone No:
-------------------------- ------------------
<PAGE> 53
EXHIBIT H
REQUEST FOR PRE-WAREHOUSE ADVANCE AND SECURITY AGREEMENT
<PAGE> 54
EXHIBIT I
TRUST RECEIPT
<PAGE> 55
AMENDMENT NO. 1 TO
SECOND AMENDED AND RESTATED MORTGAGE WAREHOUSING AGREEMENT
(ROCK FINANCIAL CORPORATION)
THIS AMENDMENT ("Amendment") is dated as of January 30, 1998, by and
among Comerica Bank, a Michigan banking corporation ("Comerica"), Corestates
Bank, N.A., a national banking association ("CBNA"), Residential Funding
Corporation, a Delaware corporation ("RFC") and Norwest Bank Minnesota, National
Association, a national banking association ("Norwest"), (collectively,
Comerica, CBNA, RFC and Norwest are referred to as "Lenders"), Comerica Bank, as
Agent for Lenders (in such capacity, "Agent"), and Rock Financial Corporation, a
Michigan corporation ("Borrower").
R E C I T A L S :
A. Borrower, Agent and Lenders entered into a certain Second
Amended and Restated Mortgage Warehousing Agreement dated
November 13, 1997 (the "Agreement").
B. Borrower, Agent and Lenders desire to amend the Agreement as
hereinafter set forth.
NOW THEREFORE, the parties agree as follows:
1. The definition of "Lenders' Allocation Amount" in Section 1.02 of
the Agreement is amended and restated in its entirety as follows:
"Lenders' Allocation Amount means $48,000,000 as to Comerica,
$21,000,000 as to CBNA, $24,000,000 as to Norwest, and $32,000,000 as
to RFC."
2. The definition of "Loan" in Section 1.02 of the Agreement is amended
and restated in its entirety as follows:
"Loan means a demand mortgage warehouse facility in the amount
of up to the Maximum Loan Amount, of which each Lender shall advance up
to its Lender's Allocation Amount, in each case subject to the terms
and conditions of this Agreement."
3. The definition of "Maximum Loan Amount" in Section 1.02 of the
Agreement is amended and restated in its entirety as follows:
"Maximum Loan Amount means $125,000,000, subject to Section 12
hereof."
<PAGE> 56
4. The Percentage Share, as defined in the Agreement, on the effective
date of this Amendment, shall be 38.40% for Comerica, 19.20% for Norwest, 25.60%
for RFC and 16.80% for CBNA.
5. Borrower hereby represents and warrants that, after giving effect to
the amendments and waivers contained herein, (a) execution, delivery and
performance of this Amendment, and any other documents and instruments required
under this Amendment, or the Agreement are within the Borrower's corporate
powers, have been duly authorized, are not in contravention of law or the terms
of Borrower's Articles of Incorporation or Bylaws, and do not require the
consent or approval of any governmental body, agency or authority; and this
Amendment and any other documents and instruments required under this Amendment
or the Agreement will be valid and binding in accordance with their terms; (b)
the continuing representations and warranties of Borrower set forth in Section 5
of the Agreement (Sections 5.01-5.16) are true and correct on and as of the date
herewith, with the same force and effect as if made on and as of the date
herewith; and (c) no Event of Default, or condition or event which, with the
giving of notice or the running of time, or both, would constitute an Event of
Default under the Agreement, has occurred and is continuing on or as of the date
hereof.
6. Except as expressly modified by this Amendment, all of the terms and
conditions of the Agreement shall remain in full force and effect.
7. This Amendment shall not become effective until the Agent shall have
received, in form and substance satisfactory to the Agent:
(a) duly executed counterpart originals of this Amendment;
(b) duly executed replacement Notes, which replacement Notes shall
amend, restate and supersede in their entirety all of the
existing Notes; and
(c) certificates of the Secretary of the Borrower as to (i)
resolutions of the Board of Directors authorizing the
execution and delivery of this Amendment and the replacement
Notes and the performance by the Borrower of its obligations
under the Agreement as amended hereby, and (ii) the incumbency
and signature of those of its officers authorized to execute
and deliver this Amendment and the replacement Notes.
8. Capitalized terms not defined herein shall have the meanings
ascribed to them in the Agreement.
9. This Amendment may be signed in any number of counterparts and by
different parties on separate counterparts, and each such counterpart when
executed and delivered shall constitute an original but all such counterparts
shall together constitute one and the same Amendment.
<PAGE> 57
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date set forth above.
COMERICA BANK, AS AGENT AND ROCK FINANCIAL CORPORATION
LENDER
By: /s/ Von L. Ringger By: /s/ Daniel B. Gilbert
----------------------------- ------------------------------
Von L. Ringger Daniel B. Gilbert
Its: First Vice President Its: President
CORESTATES BANK, N.A.
By: /s/
----------------------------
Its:
--------------------------
NORWEST BANK MINNESOTA, N.A.
By: /s/
----------------------------
Its:
---------------------------
RESIDENTIAL FUNDING CORPORATION
By: /s/
-----------------------------
Its:
----------------------------
<PAGE> 1
EXHIBIT 10.6
MASTER REPURCHASE AGREEMENT
Dated as of March 26, 1997
Between:
BEAR STEARNS HOME EQUITY TRUST 1996-1
and
ROCK FINANCIAL CORPORATION
1. APPLICABILITY
From time to time the parties hereto may enter into transactions in
which Rock Financial Corporation (herein referred to as "Seller") agrees to
transfer to Bear Stearns Home Equity Trust 1996-1 ("Buyer") Mortgage Loans (as
defined herein) against the transfer of funds by Buyer, with a simultaneous
agreement by Buyer to transfer to Seller such Mortgage Loans at a date certain
or on demand, against the transfer of funds by Seller. Each such transaction
shall be referred to herein as a "Transaction" and shall be governed by this
Agreement, as the same shall be amended from time to time.
2. DEFINITIONS
(a) "A Quality Non-Conforming Mortgage Loans", Mortgage
Loans qualified under the relevant sections of the Rock Financial
Corporation Guide;
(b) "Act of Insolvency", with respect to either Buyer or Seller, (i)
the commencement by such party as debtor of any case or proceeding under any
bankruptcy, insolvency, reorganization, liquidation, dissolution or similar law,
or such party seeking the appointment of a receiver, trustee, custodian or
similar official for such party or any substantial part of its property, or (ii)
the commencement of any such case or proceeding against such party, or another
seeking such an appointment, or the filing against a party of an application for
a protective decree under the provisions of the Securities Investor Protection
Act of 1970, which (A) is consented to or not timely contested by such party,
<PAGE> 2
(B) results in the entry of an order for relief, such an appointment, the
issuance of such a protective decree or the entry of an order having a similar
effect, or (C) is not dismissed within 15 days, (iii) the making by a party of a
general assignment for the benefit of creditors, or (iv) the admission in
writing by a party of such party's inability to pay such party's debts as they
become due;
(c) "Additional Purchased Mortgage Loans", Mortgage Loans
provided by Seller to Buyer pursuant to Paragraph 4(a) hereof;
(d) "B Quality Non-Conforming Mortgage Loans", Mortgage
Loans qualified under the relevant sections of the Rock Financial
Corporation Guide;
(e) "Business Day", any day other than a Saturday, Sunday and any day
on which banks located in the State of New York are authorized or required to
close for business;
(f) "Buyer's Margin Amount", with respect to any Transaction as of any
date, the amount obtained by application of a percentage, agreed to by Buyer and
Seller prior to entering into the Transaction and specified in the related
Request/Confirmation, to the Repurchase Price for such Transaction as of such
date;
(g) "C Quality Non-Conforming Mortgage Loans", Mortgage
Loans qualified under the relevant sections of the Rock Financial
Corporation Guide;
(h) "Custodian", the custodian named in the Custody
Agreement and any permitted successor thereto;
(i) "Custody Agreement", the Custody Agreement among Buyer, Seller and
the Custodian providing for the custody of records relating to the Purchased
Mortgage Loans;
(j) "FNMA", the Federal National Mortgage Association;
(k) "Income", with respect to any Mortgage Loan at any time, any
principal thereof then due and payable and all payments of interest and other
distributions thereon or proceeds thereof then due and payable;
(l) "Loan Schedule", a schedule of Mortgage Loans identifying each
Mortgage Loan by Seller's loan number, Mortgagor's name and address (including
the state and zip code) of the mortgaged property, whether such Mortgage Loan is
an A Quality Non-Conforming Mortgage Loan, a B Quality Non-Conforming Mortgage
Loan or a C Quality Non-Conforming Loan, the outstanding principal amount as of
a specified date, the initial interest rate borne by such Mortgage Loan, the
original principal balance
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<PAGE> 3
thereof, the current scheduled monthly payment of principal and interest, the
maturity of the related Note, the property type, the occupancy status, the
original term to maturity and whether or not the Mortgage Loan (including the
related Note) has been modified; provided, however, that the items of
information set forth on the Loan Schedule may be expanded or contracted by
mutual agreement of Buyer and Seller.
(m) "Margin Deficit", the meaning specified in Paragraph 4(a) hereof;
(n) "Market Value", with respect to any Mortgage Loans as of any date,
the fair market value of such Mortgage Loans on such date as reasonably
determined in good faith by Buyer in accordance with its current practices for
determining the fair market value of similar residential loans from time to time
and at such times as it may elect in its sole discretion; provided, however,
that a Market Value of zero shall be assigned to (i) any Mortgage Loan that has
been delinquent for at least eighty-nine (89) days, (ii) any Mortgage Loan that
has been subject to this Agreement for more than one hundred and eighty (180)
days in aggregate or (iii) any Mortgage Loan with respect to which there is a
breach of a representation or warranty made by Seller in this Agreement or the
Custody Agreement that materially adversely affects Buyer's interests hereunder.
(o) "Mortgage", the mortgage, deed of trust or other instrument
creating a first or junior lien on an estate in fee simple interest in real
property securing a Note;
(p) "Mortgage File", the meaning specified in the Custody Agreement;
(q) "Mortgage Loan", the mortgage loans secured by first liens on
single family residential real property (including, without limitation,
condominiums and planned unit developments) delivered to the Custodian pursuant
to the Custody Agreement and shall be either A Quality Non-Conforming Mortgage
Loans, B Quality Non-Conforming Mortgage Loans or C Quality Non-Conforming
Mortgage Loans;
(r) "Mortgaged Property", the property (real, personal or mixed)
encumbered by the Mortgage which secures the Note evidencing a secured Mortgage
Loan;
(s) "Mortgagor", the obligor on a Note;
(t) "Note", the Note or other evidence of indebtedness evidencing the
indebtedness of a Mortgagor under a Mortgage Loan;
(u) "Price Differential", with respect to any Transaction hereunder as
of any date, the aggregate amount obtained by daily
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<PAGE> 4
application of the Pricing Rate for such Transaction to the Purchase Price for
such Transaction on a 360 day per year basis for the actual number of days
during the period commencing on (and including) the Purchase Date for such
Transaction and ending on (but excluding) the date of determination (reduced by
any amount of such Price Differential previously paid by Seller to Buyer with
respect to such Transaction);
(v) "Pricing Rate", the per annum percentage rate for determination of
the Price Differential, which rate shall be specified in the related
Request/Confirmation;
(w) "Prime Rate", the prime rate of U.S. money center commercial banks
as published in The Wall Street Journal;
(x) "Purchase Date", the date with respect to each Transaction on which
Purchased Mortgage Loans are sold by Seller to Buyer hereunder;
(y) "Purchase Price", (i) on the Purchase Date, the price at which
Purchased Mortgage Loans are sold by Seller to Buyer hereunder, and (ii)
thereafter, such price decreased by the amount of any cash transferred by Seller
to Buyer pursuant to Paragraph 4(a) hereof;
(z) "Purchased Mortgage Loans", the Mortgage Loans sold by Seller to
Buyer in a Transaction hereunder, and any Mortgage Loans substituted therefor in
accordance with Paragraph 9 hereof. The term "Purchased Mortgage Loans" with
respect to any Transaction at any time also shall include Additional Purchased
Mortgage Loans delivered pursuant to Paragraph 4(a);
(aa) "Qualified Subservicer", a subservicer engaged by Seller to
service all or part of the Purchased Mortgage Loans that has been approved in
writing by Buyer.
(ab) "Replacement Mortgage Loans", the meaning specified in Paragraph
11(e)(ii) hereof;
(ac) "Repurchase Date", the date on which Seller is to repurchase the
Purchased Mortgage Loans from Buyer, including any date determined by
application of the provisions of Paragraphs 3(e) or 11 hereof;
(ad) "Repurchase Price", the price at which Purchased Mortgage Loans
are to be resold by Buyer to Seller upon termination of a Transaction, which
will be determined in each case (including Transactions terminable upon demand)
as the sum of the Purchase Price and the Price Differential as of the date of
such determination, increased by any amount determined by the application of the
provisions of Paragraph 11 hereof;
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<PAGE> 5
(ae) "Request/Confirmation", the request and confirmation substantially
in the form of Exhibit A hereto delivered pursuant to Paragraph 3 hereof;
(af) "Rock Financial Corporation Guide", the Seller's origination
procedures previously provided in writing to Buyer, as such guide may hereafter
from time to time be amended with the written approval of Buyer;
(ag) "Seller", Rock Financial Corporation.
3. INITIATION; REQUEST/CONFIRMATION; TERMINATION; TRANSACTIONS
OPTIONAL
(a) Any agreement to enter into a Transaction shall be made in writing
at the initiation of Seller. In the event that Seller desires to enter into a
Transaction hereunder, Seller shall deliver to Buyer prior to 5:00 p.m., New
York City time, on the Business Day prior to the proposed Purchase Date, a
Request/Confirmation complete in every respect except for any terms to be
completed by Buyer and the signature of an authorized representative of Buyer.
Buyer shall, upon its receipt and approval thereof, promptly execute and return
the signed Request/Confirmation to Seller.
(b) The Request/Confirmation shall describe the Purchased Mortgage
Loans in a manner satisfactory to Buyer (which may be by attaching a Loan
Schedule thereto), identify Buyer and Seller and set forth (i) the Purchase
Date, (ii) the Purchase Price, (iii) the Repurchase Date, unless the Transaction
is to be terminable on demand, (iv) the Pricing Rate or Repurchase Price
applicable to the Transaction, and (v) any additional terms or conditions of the
Transaction mutually agreeable to Buyer and Seller.
(c) Each Request/Confirmation shall be binding upon the parties hereto
unless written notice of objection is given by the objecting party to the other
party within one (1) Business Day after Buyer has delivered the completed
Request/Confirmation to Seller.
(d) In the event of any conflict between the terms of a
Request/Confirmation and this Agreement, such Request/Confirmation shall
prevail.
(e) In the case of Transactions terminable upon demand, such demand
shall be made by Buyer or Seller, no later than such time as is customary in
accordance with market practice, by telephone or otherwise on or prior to the
Business Day immediately preceding the day on which such termination will be
effective. On the date specified in such demand, or on the date fixed for
termination in the case of Transactions having a fixed
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<PAGE> 6
term, termination of the Transaction will be effected by resale by Buyer to
Seller or its agent of the Purchased Mortgage Loans and any Income in respect
thereof received by Buyer (and not previously credited or transferred to, or
applied to the obligations of, Seller hereunder) against the transfer of the
Repurchase Price to an account of Buyer.
(f) Notwithstanding any provision of this Agreement or the Custody
Agreement to the contrary, the initiation of each Transaction is subject to the
approval of Buyer in its sole discretion. Buyer may, in its sole discretion,
reject any Mortgage Loan from inclusion in a Transaction hereunder for any
reason.
4. MARGIN MAINTENANCE
(a) If at any time the aggregate Market Value of all Purchased Mortgage
Loans subject to all Transactions hereunder is less than the aggregate Buyer's
Margin Amount for all such Transactions (a "Margin Deficit"), then Buyer may by
notice to Seller require Seller in such Transactions, at Seller's option, to
transfer to Buyer cash or additional Mortgage Loans reasonably acceptable to
Buyer ("Additional Purchased Mortgage Loans"), so that the cash and aggregate
Market Value of the Purchased Mortgage Loans, including any such Additional
Purchased Mortgage Loans, will thereupon equal or exceed such aggregate Buyer's
Margin Amount.
(b) If the notice to be given by Buyer to Seller under subparagraph (a)
above is given at or prior to 10:00 a.m. New York City time on a Business Day,
Seller shall transfer cash or Additional Purchased Mortgage Loans to Buyer prior
to the close of business in New York City on the date of such notice, and if
such notice is given after 10:00 a.m. New York City time, Seller shall transfer
cash or Additional Purchased Mortgage Loans prior to the close of business in
New York City on the Business Day following the date of such notice.
(c) Any cash transferred pursuant to this Paragraph shall be held by
Buyer as though it were Additional Purchased Mortgage Loans and, unless Buyer
shall otherwise consent, shall not reduce the Repurchase Price of the related
Transaction.
5. INCOME PAYMENTS
Where a particular Transaction's term extends over an Income payment
date on the Mortgage Loans subject to that Transaction, all payments and
distributions, whether in cash or in kind, made on or with resect to the
Purchased Mortgage Loans shall, unless otherwise mutually agreed by Buyer and
Seller and so long as an Event of Default on the part of Seller shall not have
occurred and be continuing, be paid directly to Seller by the related
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<PAGE> 7
Mortgagor. Buyer shall not be obligated to take any action pursuant to the
preceding sentence to the extent that such action would result in the creation
of a Margin Deficit, unless prior thereto or simultaneously therewith Seller
transfers to Buyer, at Buyer's option, cash or Additional Purchased Mortgage
Loans sufficient to eliminate such Margin Deficit.
6. SECURITY INTEREST
Although the parties intend that all Transactions hereunder be sales
and purchases and not loans, in the event any such Transactions are deemed to be
loans, Seller shall be deemed to have pledged to Buyer as security for the
performance by Seller of its obligations under each such Transaction, and shall
be deemed to have granted to Buyer a security interest in, all of the Purchased
Mortgage Loans with respect to all Transactions hereunder and all proceeds
thereof. Seller shall pay all fees and expenses associated with perfecting such
security interest including, without limitation, the cost of filing financing
statements under the Uniform Commercial Code and recording assignments of
mortgage as and when required by Buyer in its sole discretion. In the event that
any such fees and expenses are incurred directly by Buyer, Seller shall promptly
reimburse Buyer for such fees and expenses upon the presentation by Buyer to
Seller of invoices or other documentation indicating the services rendered and
the fees and expenses incurred.
7. PAYMENT AND TRANSFER
(a) Unless otherwise mutually agreed, all transfers of funds hereunder
shall be in immediately available funds. All Mortgage Loans transferred by one
party hereto to the other party shall be transferred by notice to the Custodian
to the effect that the Custodian is now holding for the benefit of the
transferee the related documents and assignment forms delivered to it under the
Custody Agreement.
8. SEGREGATION OF DOCUMENTS RELATING TO PURCHASED MORTGAGE LOANS
All documents relating to Purchased Mortgage Loans in the possession of
Seller shall be segregated on its books and records from other documents and
securities in its possession and shall be identified as being subject to this
Agreement. Ownership of all Purchased Mortgage Loans shall pass to Buyer and
nothing in this Agreement shall preclude Buyer from engaging in repurchase
transactions with the Purchased Mortgage Loans or otherwise pledging or
hypothecating the Purchased Mortgage Loans, but no such transaction shall
relieve Buyer of its obligations to resell and transfer Purchased Mortgage Loans
to Seller pursuant to the terms hereof and no such transaction shall have a
maturity date
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<PAGE> 8
later than the Repurchase Date unless such transaction permits the substitution
of collateral.
Buyer hereby grants to Seller the right to perform in Buyer's stead
under any repurchase, reverse repurchase, loan or similar transaction in which
Buyer has sold, pledged or otherwise transferred the Mortgage Loans, in the
event that Buyer has defaulted on its obligations to repurchase or accept
redelivery of such Mortgage Loans in conformity with the terms of any such
transaction and so long as an Event of Default under this Agreement by Seller
shall not have occurred and be continuing. Buyer further acknowledges that each
Mortgage Loan identified on a Loan Schedule and included in a Transaction
hereunder is unique and identifiable on the date of the related Transaction and
that an award of money damages would be insufficient to compensate Seller for
the losses and damages incurred by Seller in the event of Buyer's failure to
transfer and deliver the Mortgage Loans as provided in Paragraphs 3(e) or 11
hereof.
9. SUBSTITUTION
Seller may, subject to agreement with and acceptance by Buyer,
substitute other Mortgage Loans for any Purchased Mortgage Loans. Such
substitution shall be made by transfer to Buyer of such other Mortgage Loans and
transfer to Seller of such Purchased Mortgage Loans. After substitution, the
substituted Mortgage Loans shall be deemed to be Purchased Mortgage Loans.
10. REPRESENTATIONS, WARRANTIES AND COVENANTS
(a) Buyer and Seller each represents and warrants, and shall on and as
of the Purchase Date of any Transaction be deemed to represent and warrant, to
the other that:
(i) it is duly authorized to execute and deliver this Agreement,
to into the Transactions contemplated hereunder and to perform
its obligations hereunder and has taken all necessary action to
authorize such execution, delivery and performance;
(ii) it will engage in such Transactions as principal (or, if
agreed in writing in advance of any Transaction by the other party
hereto, as agent for a disclosed principal);
(iii) the person signing this Agreement on its behalf is duly
authorized to do so on its behalf (or on behalf of any such disclosed
principal);
(iv) it has obtained all authorizations of any governmental body
required in connection with this Agreement and the Transactions
hereunder and such authorizations are in full force and effect; and
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<PAGE> 9
(v) the execution, delivery and performance of this Agreement
and the Transactions hereunder will not violate any law, ordinance,
charter, by-law or rule applicable to it or any agreement by which it
is bound or by which any of its assets are affected.
(b) Seller represents and warrants to Buyer, and shall on and as of the
Purchase Date of any Transaction be deemed to represent and warrant, as follows:
(i) The documents disclosed by Seller to Buyer pursuant to this
Agreement are either original documents or genuine and true copies
thereof;
(ii) Seller is a separate and independent corporate entity from the
Custodian, Seller does not own a controlling interest in the Custodian
either directly or through affiliates and no director or officer of
Seller is also a director or officer of the Custodian;
(iii) None of the Purchase Price for any Mortgage Loan will be used
either directly or indirectly to acquire any security, as that term is
defined in Regulation T of the Regulations of the Board of Governors of
the Federal Reserve System, and Seller has not taken any action that
might cause any Transaction to violate any regulation of the Federal
Reserve Board;
(iv) Each Mortgage Loan was underwritten in accordance with the
written underwriting standards of Seller furnished by Seller to Buyer,
and no change to such underwriting standards has occurred since the
date of the last written revision to such standards was furnished to
Buyer by Seller;
(v) Seller shall be at the time it transfers to Buyer any Mortgage
Loans for any Transaction the legal and beneficial owner of such
Mortgage Loans, free of any lien, security interest, option or
encumbrance; and
(vi) Seller used no selection procedures that identified the
Mortgage Loans relating to a Transaction as being less desirable or
valuable than other comparable assets in Seller's portfolio on the
related Purchase Date.
(c) Seller makes the representations and warranties set forth at
Exhibit B with respect to the Mortgage Loans as of the related Purchase Date.
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<PAGE> 10
(d) Seller covenants with Buyer, from and after the date hereof, as
follows:
(i) Seller shall immediately notify Buyer if an Event of Default
shall have occurred;
(ii) Seller shall deliver to Buyer a current Loan Schedule with
respect to all Mortgage Loans subject to this Agreement with such
frequency as Buyer may reasonably require; and
(iii) Not withstanding any other provision of the Agreement, no
Mortgage Loan shall be subject to this Agreement for more than 180 days
in aggregate.
11. EVENTS OF DEFAULT; EVENT OF TERMINATION
(a) The following events shall constitute events of default (each an
"Event of Default") hereunder with respect to Buyer or Seller, as applicable:
(i) Seller fails to repurchase or Buyer fails to transfer Purchased
Mortgage Loans upon the applicable Repurchase Date pursuant to the
terms hereof;
(ii) Seller or Buyer fails, after one (1) Business Day's notice, to
comply with Paragraph 4 hereof;
(iii) An Act of Insolvency occurs with respect to Seller or Buyer
or any controlling entity thereof;
(iv) Any representation or warranty made by Seller or Buyer shall
have been incorrect or untrue in any material respect when made or
repeated or deemed to have been made or repeated; provided, however,
that in the case of representations and warranties made with respect to
the Purchased Mortgage Loans, such circumstance shall not constitute an
Event of Default if, after determining the Market Value of the
Purchased Mortgage Loans without taking into account the Purchased
Mortgage Loans with respect to which such circumstance has occurred, no
other Event of Default shall have occurred and be continuing;
(v) Any covenant shall have been breached in any material respect;
provided, however, that in the case of covenants made with respect to
the Purchased Mortgage Loans, such circumstance shall not constitute an
Event of Default if, after determining the Market Value of the
Purchased Mortgage Loans without taking into account the Purchased
Mortgage Loans with respect to which such circumstance has
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<PAGE> 11
occurred, no other Event of Default shall have occurred and
be continuing;
(vi) Buyer shall have reasonably determined that Seller is or will
be unable to meet its commitments under this Agreement, shall have
notified Seller of such determination and Seller shall not have
responded with appropriate information to the contrary to the
satisfaction of Buyer within one (1) Business Day;
(vii) This Agreement shall for any reason cease to create a valid,
first priority security interest in any of the Purchased Mortgage Loans
purported to be covered hereby;
(viii) A final judgment by any competent court in the United States
of America for the payment of money in an amount of at least $100,000
is rendered against Seller, and the same remains undischarged for a
period of sixty (60) days during which execution of such judgment is
not effectively stayed;
(ix) Any event of default or any event which with notice, the
passage of time or both shall constitute an event of default shall
occur and be continuing under any repurchase or other financing
agreement for borrowed funds or indenture for borrowed funds by which
Seller is bound or affected shall occur and be continuing;
(x) In the reasonable judgment of Buyer a material adverse change
shall have occurred in the business, operations, properties, prospects
or condition (financial or otherwise) of Seller;
(xi) Seller shall be in default with respect to any normal and
customary covenants under any debt contract or agreement, any servicing
agreement or any lease to which it is a party, which default could
materially adversely affect the financial condition of Seller (which
covenants include, but are not limited to, an Act of Insolvency of
Seller or the failure of Seller to make required payments under such
contract or agreement as they become due);
(xii) Seller shall fail to promptly notify Buyer of (i) the
acceleration of any debt obligation or the termination of any credit
facility with respect to which Seller is the debtor and involving an
amount in excess of $1,000,000 (each a "Debt Obligation"); (ii) the
amount and maturity of any such Debt Obligation assumed after the date
hereof; (iii) the filing of any class action law suit naming Seller as
a defendant or respondent; (iv) the filing of any law suit with an
amount in controversy in excess of $1,000,000 naming Seller as a
defendant or respondent; (v) the occurrence
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adverse developments with respect to existing litigation involving
Seller; and (vi) any other developments which might materially and
adversely affect the financial condition of Seller;
(xiii) Any Mortgage Loan shall have been subject to the Agreement
or the Custody Agreement for more than 180 days in aggregate; or
(xiv) Seller shall have failed to comply in any material respect
with its obligations under the Custody Agreement.
(b) If an Event of Default shall have occurred and be continuing, then,
at the option of the nondefaulting party, exercised by written notice to the
defaulting party (which option shall be deemed to have been exercised, even if
no notice is given, immediately upon the occurrence of an Act of Insolvency),
the Repurchase Date for each Transaction hereunder shall be deemed immediately
to occur.
(c) In all Transactions in which the defaulting party is Seller, if
Buyer is deemed to have exercised the option referred to in subparagraph (b) of
this Paragraph, (i) Seller's obligations hereunder to repurchase all Purchased
Mortgage Loans in such Transactions shall thereupon become immediately due and
payable, (ii) to the extent permitted by applicable law, the Repurchase Price
with respect to each such Transaction shall be increased by the aggregate amount
obtained by daily application of (x) the greater of the Pricing Rate for such
Transaction or the Prime Rate to (y) the Repurchase Price for such Transaction
as of the Repurchase Date as determined pursuant to subparagraph (b) of this
Paragraph (decreased as of any day by (A) any amounts retained by Buyer with
respect to such Repurchase Price pursuant to clause (iii) of this subparagraph,
(B) any proceeds from the sale of Purchased Mortgage Loans pursuant to
subparagraph (e)(i) of this Paragraph, and (C) any amounts credited to the
account of Seller pursuant to subparagraph (f) of this Paragraph) on a 360 day
per year basis for the actual number of days during the period from and
including the date of the Event of Default giving rise to such option to but
excluding the date of payment of the Repurchase Price as so increased, (iii) all
Income paid after such exercise or deemed exercise shall be payable to and
retained by Buyer applied to the aggregate unpaid Repurchase Prices owed by
Seller, and (iv) Seller shall immediately deliver or cause the Custodian to
deliver to Buyer any documents relating to Purchased Mortgage Loans subject to
such Transactions then in Seller's possession.
(d) In all Transactions in which the defaulting party is Buyer, upon
tender by Seller of payment of the aggregate Repurchase Prices for all such
Transactions, Buyer's right, title and interest in all Purchased Mortgage Loans
subject to such
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Transactions shall be deemed transferred to Seller, and Buyer shall deliver or
cause the Custodian to deliver all documents relating to such Purchased Mortgage
Loans to Seller.
(e) After one (1) Business Day's notice to the defaulting party (which
notice need not be given if an Act of Insolvency shall have occurred, and which
may be the notice given under subparagraph (b) of this Paragraph or the notice
referred to in clause (ii) of the first sentence of subparagraph (a) of this
Paragraph), the nondefaulting party may:
(i) as to Transactions in which the defaulting party is Seller, (A)
immediately sell on a servicing released or servicing retained basis as
Buyer deems desirable, in a recognized market (in a commercially
reasonable manner) at such price or prices as Buyer may deem
satisfactory, any or all Purchased Mortgage Loans subject to such
Transactions and apply the proceeds thereof to the aggregate unpaid
Repurchase Prices and any other amounts owing by Seller hereunder or
(B) in its sole discretion elect, in lieu of selling all or a portion
of such Purchased Mortgage Loans, to give Seller credit for such
Purchased Mortgage Loans in an amount equal to the Market Value
therefor on such date against the aggregate unpaid Repurchase Prices
and any other amounts owing by Seller hereunder; and
(ii) as to Transactions in which the defaulting party is Buyer, (A)
purchase mortgage loans of substantially the same type ("Replacement
Mortgage Loans") having substantially the same outstanding principal
amount, maturity and interest rate as any Purchased Mortgage Loans that
are not transferred by Buyer to Seller as required hereunder or (B) in
its sole discretion elect, in lieu of purchasing Replacement Mortgage
Loans, to be deemed to have purchased Replacement Mortgage Loans at the
price therefor on such date, calculated as the average of the prices
obtained from three (3) nationally recognized registered broker/dealers
that buy and sell mortgage loans of substantially the same type in the
secondary market.
(f) As to Transactions in which the defaulting party is Buyer, Buyer
shall be liable to Seller (i) with respect to Purchased Mortgage Loans (other
than Additional Purchased Mortgage Loans), for any excess of the price paid (or
deemed paid) by Seller for Replacement Mortgage Loans therefor over the
Repurchase Price for such Purchased Mortgage Loans and (ii) with respect to
Additional Purchased Mortgage Loans, for the price paid (or deemed paid) by
Seller for the Replacement Mortgage Loans therefor. In addition, Buyer shall be
liable to Seller for interest on such remaining liability with respect to each
such purchase (or deemed purchase) of Replacement Mortgage Loans from the date
of such purchase (or deemed purchase) until paid in full
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<PAGE> 14
by Buyer. Such interest shall be at a rate equal to the greater of the Pricing
Rate for such Transaction or the Prime Rate.
(g) For purposes of this Paragraph 11, and except as provided in
Paragraph 11(f), the Repurchase Price for each Transaction hereunder in respect
of which the defaulting party is Buyer shall not increase above the amount of
such Repurchase Price for such Transaction determined as of the date of the
exercise or deemed exercise by Seller of its option under subparagraph (b) of
this Paragraph.
(h) The defaulting party shall be liable to the nondefaulting party for
the amount of all reasonable out-of-pocket legal or other expenses incurred by
the nondefaulting party in connection with or as a consequence of an Event of
Default, together with interest thereon at a rate equal to the greater of the
Pricing Rate for the relevant Transaction or the Prime Rate. Expenses incurred
in connection with an Event of Default shall include without limitation those
costs and expenses incurred by the nondefaulting party as a result of the early
termination of any repurchase agreement or reverse repurchase agreement entered
into by the nondefaulting party in connection with the Transaction then in
default.
(i) The nondefaulting party shall have, in addition to its rights
hereunder, any rights otherwise available to it under any other agreement or
applicable law.
(j) At the option of Buyer, exercised by forty-five (45) day's prior
written notice to Seller, the Repurchase Date for any or all Transactions shall
be deemed to immediately occur in the event that the senior debt obligations or
short-term debt obligations of Bear Stearns Companies, Inc. shall be rated below
the four highest generic grades (without regard to any pluses or minuses
reflecting gradations within such generic grades) by any nationally recognized
statistical rating organization.
(k) The exercise by any party of remedies after the occurrence of an
Event of Default shall be conducted in a commercially reasonable manner.
12. SERVICING OF THE PURCHASED MORTGAGE LOANS
(a) The parties hereto agree and acknowledge that, notwithstanding the
purchase and sale of the Purchased Mortgage Loans contemplated hereby, Seller
shall service, or cause a Qualified Subservicer to service, the Purchased
Mortgage Loans for the benefit of Buyer and, if Buyer shall exercise its rights
to sell the Purchased Mortgage Loans pursuant to this Agreement prior to the
related Repurchase Date, Buyer's assigns; provided, however, that the obligation
of Seller to service, directly or indirectly, Purchased Mortgage Loans for the
benefit of Buyer as
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<PAGE> 15
aforesaid shall cease upon the payment to Buyer of the Repurchase Price
therefor. Seller shall remain responsible to Buyer for the servicing of the
Purchased Mortgage Loans without diminution by reason of Seller's having engaged
one or more Qualified Subservicers.
(b) Seller shall service and administer the Purchased Mortgage Loans
and shall have full power and authority, acting alone, to do any and all things
in connection with such servicing which Seller may deem necessary or desirable
and consistent with the terms of this Agreement, and shall retain all principal
prepayments and Income received by Seller with respect to such Purchased
Mortgage Loans pursuant to the terms hereof. Seller, in administering and
servicing the Purchased Mortgage Loans, shall employ procedures (including
collection procedures) and exercise the same care it customarily employs and
exercises in servicing and administering the same type of mortgage loans for its
own account, in accordance with accepted residential mortgage loan servicing
practices of prudent lending institutions and giving due consideration to
Buyer's reliance on Seller. Seller will provide Buyer with monthly reports, in a
form substantially similar to FNMA's standard form of remittance report and
reasonably acceptable to Buyer, with respect to all Purchased Mortgage Loans
then involved in any Transaction hereunder.
(c) Buyer may, in its sole discretion if an Event of Default shall have
occurred and be continuing, without payment of any termination fee or any other
amount to Seller or any Qualified Subservicer, (i) sell the Mortgage Loans on a
servicing released basis or (ii) terminate Seller or any Qualified Subservicer
as the servicer of the Purchased Mortgage Loans with or without cause.
13. SINGLE AGREEMENT
Buyer and Seller acknowledge that, and have entered hereinto and will
enter into each Transaction hereunder in consideration of and in reliance upon
the fact that, all Transactions hereunder constitute a single business and
contractual relationship and have been made in consideration of each other.
Accordingly, each of Buyer and Seller agrees (i) to perform all of its
obligations in respect of each Transaction hereunder, and that a default in the
performance of any such obligations shall constitute a default by it in respect
of all Transactions hereunder, (ii) that each of them shall be entitled to set
off claims and apply property held by them in respect of any Transaction against
obligations owing to them in respect of any other Transactions hereunder and
(iii) that payments, deliveries and other transfers made by either of them in
respect of any Transaction shall be deemed to have been made in consideration of
payments, deliveries and other transfers in respect of any other Transactions
hereunder, and the obligations to make any such payments,
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<PAGE> 16
deliveries and other transfers may be applied against each other and netted.
14. NOTICES AND OTHER COMMUNICATIONS
Except as otherwise expressly provided herein, all such notices or
communications shall be in writing (including, without limitation, telegraphic,
facsimile or telex communication) or confirmed in writing and such notices and
other communications shall, when mailed, telegraphed, communicated by facsimile
transmission or telexed, be effective when received at the address for notices
for the party to whom such notice or communications is to be given as follows:
if to Seller:
Rock Financial Corporation
30600 Telegraph Road, 4th Floor
Bingham Farms, MI 48025
Attn: Frank Plenskofski
(810) 540-8000
(810) 258-6455
if to Buyer:
Bear Stearns Home Equity Trust 1996-1
c/o Bear Stearns Mortgage Capital Corporation
245 Park Avenue
New York, New York 10167
Attn: John Garzone
Telephone: (212) 272-3853
Telecopy: (212) 272-2053
Notwithstanding the foregoing, however, any notice sent by facsimile
transmission shall be deemed to be received when transmitted so long as the
transmitting machine has provided an electronic confirmation of such
transmission, and provided further, however, that all financial statements
delivered shall be hand-delivered or sent by first-class mail. Either party may
revise any information relating to it by notice in writing to the other party,
which notice shall be effective on the third business day following receipt
thereof.
15. PAYMENT OF EXPENSES
Seller shall pay on demand all reasonable fees and expenses (including,
without limitation, the fees and expenses for legal services of any kind
whatsoever) incurred by Buyer or the Custodian in connection with this Agreement
and the Custody Agreement and the transactions contemplated hereby and thereby,
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<PAGE> 17
whether or not any Transactions are entered into hereunder, including, by way of
illustration and not by way of limitation, the fees and expenses incurred in
connection with (i) the preparation, reproduction and distribution of this
Agreement and the Custody Agreement and any opinions of counsel, certificates of
officers or other documents contemplated by the aforementioned agreements and
(ii) any Transaction under this Agreement; provided, however, that Seller shall
not be required to pay the fees and expenses of Buyer incurred as a result of
Buyer's default under this Agreement; and provided further, however, that Seller
shall not be required to pay the fees and expenses of Buyer in excess of
$15,000. The obligation of Seller to pay such fees and expenses incurred prior
to or in connection with the termination of this Agreement shall survive the
termination of this Agreement.
16. OPINIONS OF COUNSEL
Seller shall, on the Purchase Date of the first Transaction hereunder
and, upon the request of Buyer, on the Purchase Date of any subsequent
Transaction, cause to be delivered to Buyer, with reliance thereon permitted as
to any person or entity that purchases the Mortgage Loans from Buyer in a
repurchase transaction, a favorable opinion of counsel with respect to the
matters set forth in Exhibit C hereto, in form and substance acceptable to Buyer
and its counsel.
17. FURTHER ASSURANCES; ADDITIONAL INFORMATION
(a) Seller shall promptly provide such further assurances or agreements
as Buyer may reasonably request in order to effect the purposes of this
Agreement.
(b) At any reasonable time, Seller shall permit Buyer, its agents or
attorneys, at Buyer's expense, to inspect and copy any and all documents and
data in its possession pertaining to each Purchased Mortgage Loan that is the
subject of such Transaction. Such inspection shall occur upon the request of
Buyer at a mutually agreeable location during regular business hours and on a
date not more than two (2) Business Days after the date of such request.
(c) Seller agrees to provide Buyer or its agents, from time to time,
with such information concerning Seller of a financial or operational nature as
Buyer may reasonably request.
(d) Seller shall provide Buyer or its agents, with copies of all
filings made by or on behalf of Seller or any entity that controls Seller, with
the Securities and Exchange Commission pursuant to the Securities Exchange Act
of 1934, as amended, promptly upon making such filings.
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<PAGE> 18
18. BUYER AS ATTORNEY-IN-FACT
After the occurrence and during the continuation of an Event of
Default, Buyer will automatically be appointed the attorney-in-fact of Seller
for the purpose of carrying out the provisions of this Agreement and taking any
action and executing any instruments that Buyer may deem necessary or advisable
to accomplish the purposes hereof, which appointment as attorney-in-fact will be
irrevocable and coupled with an interest. Without limiting the generality of the
foregoing, Buyer shall have the right and power during the occurrence and
continuation of any Event of Default to receive, endorse and collect all checks
made payable to the order of Seller representing any payment on account of the
principal of or interest on any of the Purchased Mortgage Loans and to give full
discharge for the same.
19. APPOINTMENT OF AGENT
Buyer hereby appoints Bear Stearns Mortgage Capital Corporation as its
agent for purposes of issuing Requests/Confirmations, determining Market Value,
exercising Buyer's rights under any margin maintenance provision of this
Agreement and such other purposes as Buyer may direct. The appointment of such
agent shall not relieve Buyer of its obligations hereunder.
20. WIRE INSTRUCTIONS
(a) Any amounts to be transferred by Buyer to Seller hereunder shall be
sent by wire transfer in immediately available funds to the account of Seller
identified in the Request/Confirmation for the related Transaction.
(b) Any amounts to be transferred by Seller to Buyer hereunder shall be
sent by wire transfer in immediately available funds to the account of Buyer at:
FNB Chicago/Bear Stearns MBS
ABA #: 071-000-013
Attn.: John Garzone
Acct.: 5801230
(c) Amounts received after 3:00 p.m., New York City time, on any
Business Day shall be deemed to have been paid and received on the next
succeeding Business Day.
21. ENTIRE AGREEMENT; SEVERABILITY
This Agreement shall supersede any existing agreements between the
parties containing general terms and conditions for repurchase transactions.
Each provision and agreement herein shall be treated as separate and independent
from any other
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provision or agreement herein and shall be enforceable notwithstanding the
unenforceability of any such other provision or agreement.
22. NON-ASSIGNABILITY; TERMINATION
(a) The rights and obligations of the parties under this Agreement and
under any Transaction shall not be assigned by either party without the prior
written consent of the other party. Subject to the foregoing, this Agreement and
any Transactions shall be binding upon and shall inure to the benefit of the
parties and their respective successors and assigns.
(b) This Agreement and all Transactions outstanding hereunder shall
terminate automatically without any requirement for notice on the date occurring
three hundred and sixty-four (364) days after the date as of which this
Agreement is entered into; provided, however, that this Agreement and any
Transaction outstanding hereunder may be extended by mutual agreement of Buyer
and Seller; and provided further, however, that no such party shall be obligated
to agree to such an extension.
23. COUNTERPARTS
This Agreement may be executed in any number of counterparts, each of
which counterparts shall be deemed to be an original, and such counterparts
shall constitute but one and the same instrument.
24. GOVERNING LAW
This Agreement shall be governed by the laws of the State of New York
without giving effect to the conflict of law principles thereof.
25. NO WAIVERS, ETC.
No express or implied waiver of any Event of Default by either party
shall constitute a waiver of any other Event of Default and no exercise of any
remedy hereunder by any party shall constitute a waiver of its right to exercise
any other remedy hereunder. No modification or waiver of any provision of this
Agreement and no consent by any party to a departure herefrom shall be effective
unless and until such shall be in writing and duly executed by both of the
parties hereto. Without limitation on any of the foregoing, the failure to give
a notice pursuant to subparagraph 4(a) hereof will not constitute a waiver of
any right to do so at a later date.
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<PAGE> 20
26. USE OF EMPLOYEE PLAN ASSETS
(a) If assets of an employee benefit plan subject to any provision of
the Employee Retirement Income Security Act of 1974 ("ERISA") are intended to be
used by either party hereto (the "Plan Party") in a Transaction, the Plan Party
shall so notify the other party prior to the Transaction. The Plan Party shall
represent in writing to the other party that the Transaction does not constitute
a prohibited transaction under ERISA or is otherwise exempt therefrom, and the
other party may proceed in reliance thereon but shall not be required so to
proceed.
(b) Subject to the last sentence of subparagraph (a) of this Paragraph,
any such Transaction shall proceed only if Seller furnishes or has furnished to
Buyer its most recent available audited statement of its financial condition and
its most recent subsequent unaudited statement of its financial condition.
(c) By entering into a Transaction pursuant to this Paragraph, Seller
shall be deemed (i) to represent to Buyer that since the date of Seller's latest
such financial statements, there has been no material adverse change in Seller's
financial condition which Seller has not disclosed to Buyer, and (ii) to agree
to provide Buyer with future audited and unaudited statements of its financial
condition as they are issued, so long as it is a Seller in any outstanding
Transaction involving a Plan Party.
27. INTENT
(a) The parties intend and acknowledge that each Transaction is a
"repurchase agreement" as that term is defined in Section 101 of Title 11 of the
United States Code, as amended (except insofar as the type of Mortgage Loans
subject to such Transaction or the term of such Transaction would render such
definition inapplicable), and a "securities contract" as that term is defined in
Section 741 of Title 11 of the United States Code, as amended.
(b) It is understood that either party's right to liquidate Mortgage
Loans delivered to it in connection with Transactions hereunder or to exercise
any other remedies pursuant to Paragraph 11 hereof, is a contractual right to
liquidate such Transaction as described in Sections 555 and 559 of Title 11 of
the United States Code, as amended.
28. LIMITED ROLE OF TRUSTEE; SUCCESSOR TRUSTEE
(a) The execution and delivery of this Agreement by the undersigned
Trustee is solely and strictly in its capacity as Trustee under that certain
Trust Agreement dated as of March 29, 1996 (the "Trust Agreement") by and
between State Street Bank and
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Trust Company of California, N.A., (the "Trustee") and Bear Stearns Mortgage
Capital Corporation, as Depositor (the "Depositor"), and not individually, and
has been undertaken at the direction of the Depositor pursuant to the terms of
the Trust Agreement. It is hereby expressly acknowledged that any obligations,
liabilities, covenants, duties, representations and warranties hereunder are
those of Buyer only and not of the Trustee. There shall be no individual or
corporate liability against or on the part of the Trustee (or any of its
officers, directors or employees) under this Agreement, and there shall be no
recourse against the Trustee in its individual or corporate capacity (or any of
its directors, officers or employees) or against any of its properties or
assets, for recovery of or as a result of any claim, debt, liability or
obligation (whether of payment or performance) of or against Buyer under or
pursuant to this Agreement (whether arising out of or relating to any covenant,
agreement, representation or warranty, or otherwise). Recourse against Buyer for
any claims, liabilities, debts or obligations under this Agreement is limited to
the trust established by the Trust Agreement. Bear Stearns Mortgage Capital
Corporation, as the depositor and owner of 100% of the equity of the trust
established under the Trust Agreement, is liable for all fees, expenses, taxes,
indemnity payments and other liabilities of the trust.
(b) With regard to Section 22(a) hereof, Seller hereby acknowledges and
consents that any and all rights and remedies of Buyer under this Agreement
shall automatically transfer to and vest in any successor trustee under the
Trust Agreement in the event of the removal or resignation of the Trustee as
trustee thereunder.
29. DISCLOSURE RELATING TO CERTAIN FEDERAL PROTECTIONS
The parties acknowledge that they have been advised that:
(a) in the case of Transactions in which one of the parties is
a broker or dealer registered with the Securities and Exchange
Commission ("SEC") under Section 15 of the Securities Exchange Act of
1934 ("1934 Act"), the Securities Investor Protection Corporation has
taken the position that the provisions of the Securities Investor
Protection Act of 1970 ("SAPPY") do not protect the other party with
respect to any Transaction hereunder;
(b) in the case of Transactions in which one of the parties is
a government securities broker or a government securities dealer
registered with the SEC under Section 15C of the 1934 Act, SAPPY will
not provide protection to the other party with respect to any
Transaction hereunder; and
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(c) in the case of Transactions in which one of the parties is
a financial institution, funds held by the financial institution
pursuant to a Transaction hereunder are not a deposit and therefore are
not insured by the Federal Deposit Insurance Corporation, the Federal
Savings and Loan Insurance Corporation or the National Credit Union
Share Insurance Fund, as applicable.
BEAR STEARNS HOME EQUITY TRUST 1996-1 ROCK FINANCIAL
By: State Street Bank and Trust CORPORATION
Company of California, N.A.,
as Trustee solely and not
individually
By /s/ By /s/
---------------------------- --------------------------
Title Title
------------------------- -----------------------
Date Date
-------------------------- ------------------------
22
<PAGE> 23
EXHIBIT A
REQUEST/CONFIRMATION
TO: Rock Financial Corporation
____________________________
____________________________
Attention: _________________
FROM: Bear Stearns Home Equity Trust 1996-1
RE: Request/Confirmation under Master Repurchase
Agreement, dated as of March __, 1997 between
Bear Stearns Home Equity Trust 1996-1 and Rock
Financial Corporation
Bear Stearns Home Equity Trust 1996-1 ("Buyer") is pleased to confirm your sale
and its purchase of the Mortgage Loans described below and listed on the
attached Loan Schedule pursuant to the above-referenced Master Repurchase
Agreement under the following terms and conditions:
Additional
ORIG. PRINCIPAL AMOUNT OF MORTGAGE LOANS: ________
CURRENT PRINCIPAL AMOUNT OF MORTGAGE LOANS: ________
PURCHASE DATE: ________
REPURCHASE DATE: ________
PURCHASE PRICE: ________
PRICING RATE: ________
MINIMUM REQUIRED MARGIN PERCENTAGE: ________
PRICE DIFFERENTIAL DUE DATE: ________
Wire transfer instructions of Rock Financial Corporation:
Bank Name: __________
ABA No.: ____________
Account No.: ________
Attention: __________
Reference: __________
A-1
<PAGE> 24
The Master Repurchase Agreement is incorporated by reference into this
Request/Confirmation and made a part hereof as if it were fully set forth
herein. All capitalized terms used herein but not otherwise defined shall have
the meanings specified in the Master Repurchase Agreement.
BEAR STEARNS HOME EQUITY TRUST 1996-1
By: Bear Stearns Mortgage Capital
Corporation, as agent
BY: _______________________________
NAME: _____________________________
TITLE: ____________________________
A-2
<PAGE> 25
EXHIBIT B
REPRESENTATIONS AND WARRANTIES
RELATING TO THE PURCHASED MORTGAGE LOANS
(a) Mortgage Loan Information. The information with respect to each
Mortgage Loan set forth in the Loan Schedule is true and correct in all
material respects as of the date specified on such Loan Schedule.
(b) Delivery of Mortgage Loan Documents. All of the original or
certified documentation required to be delivered to the Custodian on or
prior to the related Purchase Date or as otherwise provided in this
Agreement has or will be so delivered.
(c) Payments Current. No scheduled payments on the Mortgage Loans are
delinquent eighty-nine (89) days or more based on the terms under which
the related Mortgage Loans have been made. Seller has not advanced
funds, or induced, solicited or knowingly received any advance of funds
from a party other than Buyer, directly or indirectly, for the payment
of any amount required by any Mortgage Loan.
(d) No Waiver or Modification. The terms of each Note and Mortgage have
not been impaired, waived, altered or modified in any respect, except
by written instruments reflected in the Custodian's Mortgage Loan File
and no provision of any Mortgage or Note has been "whited out" or
erased unless such modification has been initialed by each of the
parties to the related Mortgage Loan. No instrument of waiver,
alteration, modification or assumption has been executed except for the
instruments that are part of the Mortgage File and the terms of which
are reflected in the Mortgage File.
(e) No Defenses. No Note or Mortgage is subject to any set-off,
counterclaim or defense, including the defense of usury, nor will the
operation of any of the terms of any Note or Mortgage, or the exercise
of any right thereunder, render such Note or Mortgage unenforceable, in
whole or in part, or subject to any right of rescission, set-off,
counterclaim or defense, including the defense of usury, and to the
best of Seller's knowledge, no such right of rescission, set-off,
counterclaim or defense has been asserted in any proceeding or was
asserted in any state or federal bankruptcy or insolvency proceeding at
the time the related Mortgage Loan was originated.
B-1
<PAGE> 26
(f) Compliance with Laws. Any and all requirements of any federal,
state or local law applicable to each Mortgage Loan have been complied
with including, without limitation, all consumer, usury,
truth-in-lending, consumer credit protection, equal credit opportunity
or disclosure laws applicable to each Mortgage Loan; each Mortgage Loan
was originated in compliance with all applicable laws and no fraud or
misrepresentation was committed by any Person in connection therewith;
any Mortgage Loan originated in the State of Texas, was originated
pursuant to Chapter 6 of the Texas Consumer Credit Code.
(g) No Satisfaction or Release of Lien. No Mortgage has been satisfied,
canceled, subordinated or rescinded, in whole or in part. No Mortgaged
Property has been released from the lien of the related Mortgage, in
whole or in part, nor has any instrument been executed that would
effect any such release, cancellation, subordination or rescission,
other than the subordination of the lien of a Mortgage securing a
Mortgage Loan, with respect to which a related superior lien was
released in connection with the refinancing of the mortgage loan
relating to such superior lien.
(h) Valid Lien. Each Note is secured by a Mortgage and each Mortgage is
or creates a valid, subsisting and enforceable lien on the related
Mortgaged Property, including, in the case of a Mortgage securing a
property improvement loan, the land and all buildings on the Mortgaged
Property.
(i) Validity of Mortgage Loan Documents. Each Note and each Mortgage is
genuine and each is the legal, valid and binding obligation of the
related Mortgagor, enforceable in accordance with its terms, except as
enforceability may be limited by bankruptcy, insolvency, reorganization
or other similar laws affecting creditors' rights in general and by
general principles of equity. All parties to each Note and each
Mortgage had legal capacity at the time to enter into the related
Mortgage Loan and to execute and deliver such Note and Mortgage, and
such Note and Mortgage have been duly and properly executed by such
parties.
(j) Full Disbursement of Proceeds. The proceeds of each Mortgage Loan
have been fully disbursed and there is no requirement for future
advances thereunder, all costs, fees and expenses incurred in making or
closing each Mortgage Loan and the recording of the Mortgage were
disbursed, the Mortgagor is not entitled to any refund of any amounts
paid or due under the Note or any related Mortgage and any and all
requirements set forth in the related Mortgage Loan documents have been
complied with.
B-2
<PAGE> 27
(k) Ownership. Immediately prior to the conveyance thereof to Buyer,
Seller had good and marketable title to each Mortgage Loan, Note and
Mortgage, was the sole owner thereof and had full right to sell each
Mortgage Loan, Note and Mortgage to Buyer and upon the conveyance
thereof by Seller to Buyer, Buyer became the sole owner of each
Mortgage Loan, Note and Mortgage free and clear of any encumbrance,
equity, lien, pledge, charge, claim or security interest.
(l) No Defaults. Except with respect to any delinquent scheduled
payment which is not more than eighty-nine (89) days delinquent as of
the applicable Purchase Date, there is no default, breach, violation or
event of acceleration existing under any Mortgage or any Note and, to
the best of Seller's knowledge, there is no event which, with the
passage of time or with notice and/or the expiration of any grace or
cure period, would constitute such a default, breach, violation or
event of acceleration and neither Seller nor its predecessors have
waived any such default, breach, violation or event of acceleration,
except as set forth in an instrument of waiver, alteration,
modification or assumption that is included in the Mortgage File.
(m) No Condemnation or Damage. To the best of Seller's knowledge, the
physical condition of each Mortgaged Property has not deteriorated
since the date of origination of the related Mortgage Loan (normal wear
and tear excepted) and there is no proceeding pending for the total or
partial condemnation of any Mortgaged Property.
(n) Mortgage Remedies Adequate. Each Mortgage contains customary and
enforceable provisions such as to render the rights and remedies of the
holder thereof adequate for the realization against the related
Mortgaged Property of the benefits of the security provided thereby,
including, (i) in the case of a Mortgage designated as a deed of trust,
by trustee's sale, and (ii) otherwise, by judicial foreclosure.
(o) Underwriting of Mortgage Loans. Each Mortgage Loan has been
underwritten by the originator thereof in accordance with such
originator's then current underwriting guidelines.
(p) Terms of Mortgage Loans. Each Note has an original term to maturity
of not less than __ months nor more than __ years and __ days from the
date of origination; each Note is payable in monthly installments of
principal and interest, with interest payable in arrears, and requires
a monthly payment which is sufficient to amortize the original
principal balance over the original term and to pay interest at the
related interest rate borne by the Note; and no Note provides for any
extension of the original term.
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<PAGE> 28
(q) Security. No Note is, or has been, secured by any collateral except
the lien of the related Mortgage.
(r) Deed of Trust. If a Mortgage constitutes a deed of trust, a
trustee, duly qualified under applicable law to serve as such, has been
properly designated and currently so serves as such and is named in the
Mortgage, or a valid substitution of trustee has been recorded or may
be recorded and no extraordinary fees or expenses are, or will become,
payable by Seller to the trustee under the deed of trust, except in
connection with default proceedings and a trustee's sale after default
by the related Mortgagor.
(s) Value. Except with respect to conditions and circumstances
expressly permitted pursuant to the applicable underwriting guidelines,
Seller has no knowledge of any conditions or circumstances (that are
not reflected in the Mortgage File or in the files of the related
servicer) that could reasonably be expected to materially and adversely
affect the value of the related Mortgaged Property with respect to any
Mortgage Loan.
(t) Servicing Practices. Each Mortgage Loan has been serviced in
accordance with all applicable laws and, to the best of Seller's
knowledge, no fraud or misrepresentation was committed by any Person in
connection therewith.
(u) No Bulk Transfer. The sale, transfer, assignment, conveyance and
grant of the Notes and the Mortgages by Seller to Buyer were not
subject to the bulk transfer laws or any similar statutory provisions
in effect in any applicable jurisdiction.
(aa) Relief Act Matters. No Mortgagor has notified Seller, and Seller
has no knowledge of any relief requested or allowed to an Mortgagor
under the Soldiers' and Sailors' Civil Relief Act of 1940.
(bb) Selection Criteria. The Mortgage Loans were not selected by Seller
for sale to Buyer on any basis intended to adversely affect Buyer.
(cc) REMIC Qualification. With respect to each Mortgage Loan, either:
(i) the original principal balance of the Mortgage Loan as of the date
of origination thereof was less than 125% of the value of the Mortgaged
Property attributable to only the real property securing such Mortgage
Loan less the amount of all indebtedness secured by such Mortgaged
Property which is senior or pari passu with the lien of such Mortgage
Loan; or (ii) substantially all of the proceeds of such Mortgage Loan
were used to acquire or to improve or protect an interest in real
property that, at
B-4
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the date of origination of such Mortgage Loan, was the only
security therefor.
B-5
<PAGE> 30
EXHIBIT C
OPINION OF COUNSEL TO ROCK FINANCIAL CORPORATION
1. Rock Financial Corporation ("Seller) is duly organized and validly
existing as a corporation in good standing under the laws of the State of
__________ and has power and authority to enter into and perform its obligations
under this Agreement and the Custody Agreement. Seller is duly qualified to do
business and is in good standing in each jurisdiction in which the character of
the business transacted by it requires such qualification and in which the
failure so to qualify would have a material adverse effect on the business,
properties, assets or condition (financial or other) of Seller and its
subsidiaries, considered as a whole.
2. This Agreement and the Custody Agreement have each been duly
authorized, executed and delivered by Seller, and each constitutes a valid and
legally binding obligation of Seller enforceable against Seller in accordance
with its terms, subject, as to enforcement, to bankruptcy, insolvency,
reorganization and other laws of general applicability relating to or affecting
creditors' rights generally and to general equity principles.
3. No consent, approval, authorization or order of any state or federal
court or government agency or body is required to be obtained by Seller for the
consummation of the transactions contemplated by this Agreement or the Custody
Agreement.
4. The consummation of any of the transactions contemplated by this
Agreement and the Custody Agreement will not conflict with, result in a breach
of, or constitute a default under the articles of incorporation or bylaws of
Seller or the terms of any indenture or other agreement or instrument known to
us to which Seller is party or bound, or any order known to such counsel to be
applicable to Seller or any regulations applicable to Seller, of any state or
federal court, regulatory body, administrative agency, governmental body or
arbitrator having jurisdiction over Seller.
5. There is no pending or threatened action, suit or proceeding before
any court or governmental agency, authority or body or any arbitrator involving
Seller or relating to the transaction contemplated by this Agreement or the
Custody Agreement which, if adversely determined, would have a material adverse
effect on Buyer.
6. Seller is duly registered as a finance company in each state in
which Mortgage Loans were originated, to the extent such registration is
required by applicable law.
C-1
<PAGE> 31
7. Each Mortgage Loan will have been endorsed in a manner which
satisfies any requirement of endorsement in order to transfer all right, title
and interest in and to that Mortgage Loan from Seller to Buyer. Each assignment
of Mortgage related to each such Mortgage Loan is in recordable form and is
sufficient under applicable law to validly and effectively transfer all right,
title and interest of Seller to Buyer. This Agreement together with (a) the
delivery of such related Mortgage Loans to Custodian, (b) the endorsement of
such Mortgage Loans to Buyer and (c) the delivery of the assignments of
Mortgages related to the Mortgage Loans to the Custodian in recordable form
assigning such Mortgages to Buyer, creates a valid, perfected security interest
in such Mortgage Loans in favor of Buyer. Such security interest will have the
same priority and will be subject to the same security interests and liens as
apply to such Mortgage Loans in the hands of Seller.
C-2
<PAGE> 32
CUSTODY AGREEMENT
among
ROCK FINANCIAL CORPORATION
Seller
BEAR STEARNS HOME EQUITY TRUST 1996-1,
Buyer
and
COMERICA BANK
as Custodian
Dated as of March 26, 1997
<PAGE> 33
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
RECITALS .................................................................................... 1
SECTION 1. Definitions......................................................................... 1
SECTION 2. Delivery of Mortgage Files to Custodian............................................. 4
SECTION 3. The Custodian's Receipt, Examination and
Certification of Mortgage Files and
Issuance of Trust Receipt .................................................... 6
SECTION 4. Possession of Mortgage Files ....................................................... 8
SECTION 5. Release of Custodian's Mortgage Files for Servicing................................. 10
SECTION 6. Review and Deposit of Additional Mortgage Loans..................................... 10
SECTION 7. Waiver by the Custodian............................................................. 11
SECTION 8. Right of Inspection by Buyer and Third Persons ..................................... 11
SECTION 9. Custodian's Fees and Expenses....................................................... 11
SECTION 10. Termination of Agreement ........................................................... 12
SECTION 11. Resignation and Removal of Custodian. .............................................. 12
SECTION 12. Limitation on Obligations of the Custodian ......................................... 14
SECTION 13. Notices ............................................................................ 15
SECTION 14. No Assignment or Delegation by the Custodian ....................................... 15
SECTION 15. Controlling Law .................................................................... 15
SECTION 16. Agreement for the Exclusive Benefit of
</TABLE>
i
<PAGE> 34
<TABLE>
<S> <C> <C>
Parties ........................................................................... 16
SECTION 17. Entire Agreement .................................................................. 16
SECTION 18. Exhibits. ......................................................................... 16
SECTION 19. Indulgences, Not Waivers .......................................................... 16
SECTION 20. Titles Not to Affect Interpretation ............................................... 16
SECTION 21. Provisions Separable............................................................... 16
SECTION 22. Representations and Warranties of the Custodian ................................... 17
SECTION 23. Limited Role of Trustee; Successor Trustee......................................... 18
SECTION 24. Counterparts....................................................................... 19
EXHIBITS
EXHIBIT A - LETTER OF TRANSMITTAL ............................................ A-1
EXHIBIT B - NOTICE TO THE CUSTODIAN .......................................... B-1
EXHIBIT C - TRUST RECEIPT .................................................... C-1
EXHIBIT D - NOTICE OF TERMINATION ............................................ D-1
EXHIBIT E - NOTICE OF DEFAULT CERTIFICATE .................................... E-1
EXHIBIT F - LETTER TO CUSTODIAN RE: BUYER'S TRUST RECEIPT ................... F-1
EXHIBIT G - LETTER TO CUSTODIAN RE: ENDORSEE'S TRUST RECEIPT................. G-1
EXHIBIT H - REQUEST FOR RELEASE OF DOCUMENTS ................................. H-1
EXHIBIT I - CONFIRMATION OF RESALE AND RECEIPT ............................... I-1
</TABLE>
ii
<PAGE> 35
THIS CUSTODY AGREEMENT entered into as of March 26, 1997, by and among
ROCK FINANCIAL CORPORATION (herein referred to as "Seller"), BEAR STEARNS HOME
EQUITY TRUST 1996-1 ("Buyer"), and COMERICA BANK (the "Custodian"), recites and
provides:
RECITALS
Seller and Buyer have entered into a Master Repurchase Agreement dated as
of March 26, 1997 and a Request/Confirmation between Seller and Buyer with
respect to each transaction thereunder. The Master Repurchase Agreement and
the Request/Confirmations are hereinafter referred to collectively as the
"Repurchase Agreement."
Seller is obligated to service the Mortgage Loans pursuant to the terms
and conditions of the Repurchase Agreement.
Seller desires to deposit with the Custodian all Notes and Mortgages
evidencing the Mortgage Loans, together with the other documents included in
the Mortgage Files related to the Mortgage Loans, to be held by the Custodian
as custodian for Buyer and its assigns until otherwise instructed by Buyer, all
in connection with transactions under the Repurchase Agreement (each a
"Transaction").
Buyer may transfer its interest in the Mortgage Loans to one or more Third
Persons and the Custodian shall act as custodian for such Third Persons.
Custodian desires and is able to perform the duties and obligations as
custodian for Buyer as set forth herein.
NOW, THEREFORE, in consideration of the mutual promises and covenants
hereinafter set forth, and for good and valuable consideration the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
1. Definitions. For the purposes of this Agreement, the following terms
shall have the indicated meanings unless the context or use indicates another
or different meaning and intent, the definitions of such terms are equally
applicable to the singular and the plural forms of such terms, the words
"herein," "hereof" and "hereunder" and other words of similar import refer to
this Agreement as a whole and not to any particular section or other
subdivision, and section references refer to sections of this Agreement. All
terms used herein and not defined shall have the respective meanings set forth
in the Repurchase Agreement.
"A Quality Non-Conforming Mortgage Loans" shall refer to Mortgage Loans
qualified under the relevant sections of the Rock Financial Corporation Guide.
"Agreement" shall mean this Custody Agreement, as supplemented or amended
from time
3
<PAGE> 36
to time.
"B Quality Non-Conforming Mortgage Loans" shall refer to Mortgage Loans
qualified under the relevant sections of the Rock Financial Corporation Guide;
"Business Day" shall mean any day excluding Saturday, Sunday and any day
which is a legal holiday under the laws of the States of New York, Michigan or
the Commonwealth of Massachusetts or any day on which a bank located in the
States of New York, Michigan or the Commonwealth of Massachusetts or the New
York Stock Exchange is authorized or permitted to close for business.
"C Quality Non-Conforming Mortgage Loans" shall refer to Mortgage Loans
qualified under the relevant sections of the Rock Financial Corporation Guide;
"Custodial Register" shall mean the register maintained by Custodian
pursuant to Section 4(f), which reflects as to each Mortgage Loan the Person to
whom the related Trust Receipt has been issued.
"Custodian" shall mean COMERICA BANK, or its successor custodian.
"Lender" shall mean the original lender as set forth in the Note, or any
successor or assignee under such Note.
"Loan Number" shall have the meaning set forth in Section 2(a) of this
Agreement.
"Loan Schedule" shall mean a schedule of Mortgage Loans identifying each
Mortgage Loan by Seller's loan number, Mortgagor's name and address (including
the state and zip code) of the mortgaged property, whether such Mortgage Loan
is an A Quality Non-Conforming Mortgage Loan, a B Quality Non-Conforming
Mortgage Loan or a C Quality Non-Conforming Mortgage Loan, the outstanding
principal amount as of a specified date, the initial interest rate borne by
such Mortgage Loan, the original principal balance thereof, the current
scheduled monthly payment of principal and interest, the maturity of the
related Note, the property type, the occupancy status, the original term to
maturity and whether or not the Mortgage Loan (including the related Note) has
been modified; provided, however, that the items of information set forth on
the Loan Schedule may be expanded or contracted by mutual agreement of Buyer
and Seller.
"Mortgage" means the mortgage, deed of trust or other instrument creating
a first or second lien on an estate in fee simple interest in real property
securing the Note.
"Mortgage Assignment" shall mean an assignment of the Mortgage in
recordable form, sufficient under the laws of the jurisdiction wherein the
related Mortgaged Property is located to
4
<PAGE> 37
reflect the sale of the Mortgage.
"Mortgage File" shall have the meaning set forth in Section 2(b) hereof.
"Mortgage Loan" shall mean the mortgage loans secured by first or second
liens on single family residential real property (including, without
limitation, condominiums and planned unit developments), delivered to the
Custodian pursuant to this Agreement, and shall be either A Quality
Non-Conforming Mortgage Loans, B Quality Non-Conforming Mortgage Loans or C
Quality Non-Conforming Mortgage Loans.
"Mortgaged Property" shall mean the real property securing repayment of a
Mortgage Loan.
"Mortgagor" shall mean the obligor on a Note.
"Note" shall mean any promissory note or other evidence of indebtedness
evidencing the indebtedness of a Mortgagor under a Mortgage Loan.
"Notice Loan Schedule" shall have the meaning set forth in Section 4(b) of
this Agreement.
"Notice of Termination" shall mean the notice substantially in the form of
Exhibit D hereto.
"Officer's Certificate" shall mean a certificate signed by (i) an officer
or an employee, authorized to sign an officer's certificate, of Seller or other
Person having officers, submitting a Mortgage File to the Custodian or (ii) the
closing attorney for the Mortgage Loan. (The text of any particular Officer's
Certificate may be stamped upon a document constituting a portion of a Mortgage
File so long as such stamped text is signed by manual or facsimile signature by
an officer or an employee authorized to sign an Officer's Certificate.)
"Person" shall mean any individual, corporation, partnership, joint
venture, association, joint stock company, trust (including any beneficiary
thereof), unincorporated organization or government or any agency or political
subdivision thereof.
"Request/Confirmation" shall mean a written confirmation of a Transaction
substantially in the form attached as an exhibit to the Repurchase Agreement.
"Rock Financial Corporation Guide" shall refer to the Rock Financial
Corporation origination procedures previously provided in writing to Buyer, as
such guide may hereafter from time to time be amended with the written approval
of Buyer;
5
<PAGE> 38
"Seller" shall have the meaning set forth in the first paragraph of this
Agreement.
"Servicer" shall mean Seller in its capacity as servicer of the Mortgage
Loans.
"Third Person" shall mean a Person other than Seller, Buyer or the
Custodian which Person has acquired an interest in any Mortgage Loans from
Buyer and continues to have an interest in such Mortgage Loans.
"Trust Receipt" shall mean an instrument substantially in
the form of Exhibit C hereto.
2. Delivery of Mortgage Files to Custodian.
(a) Representations of Seller. With respect to each Transaction, Seller
represents that it has, prior to the sale of any Mortgage Loans to Buyer
pursuant to the Repurchase Agreement, delivered to the Custodian those
documents designated in items 1--7 below (to the extent applicable to such
Mortgage Loans). All documents delivered to the Custodian shall have been
placed by Seller or its representative in an appropriate file folder, properly
secured, marked with the name of the Mortgaged Property and the loan number
(the "Loan Number") and placed in the same order as referenced in the Loan
Schedule.
(b) By delivery of a Letter of Transmittal, substantially in the form of
Exhibit A hereto, Seller will from time to time certify that it has delivered
and released to the Custodian the related Mortgage Files for the Mortgage Loans
referred to in such Letter of Transmittal and has in its possession the other
documents with respect to the Mortgage Loans identified in the mortgage loan
schedule attached to the Letter of Transmittal as Schedule 1 (the "Loan
Schedule"). The Loan Schedule is the Loan Schedule referred to in the
Repurchase Agreement.
"Mortgage File" means the following documents (all of which together
constitute an original mortgage file):
(1) the original Note, endorsed, "Pay to the order of __________,
without recourse" and signed, by facsimile or manual signature, in the
name of Seller by an authorized officer. If the Note has been signed by
a Person on behalf of the Mortgagor, the original power of attorney or
other instrument that authorized and empowered such Person to sign or a
copy of such power of attorney together with an Officer's Certificate
certifying that such copy represents a true and correct copy and that
such original has been duly recorded in the appropriate records
depository for the jurisdiction in which the Mortgaged Property is
located. To the extent that there is no room on the face of the Note for
endorsements, the endorsement may be contained on an allonge, if the law
by which such Note is governed so permits. Such allonge shall be firmly
affixed to the Note so as to become a part thereof;
6
<PAGE> 39
(2) the original of any loan agreement and guarantee(s) executed in
connection with the Note;
(3) the original Mortgage, with evidence of recording thereon, or,
if the original Mortgage has not yet been returned from the recording
office, a copy of the original Mortgage together with an Officer's
Certificate (which may be a blanket Officer's Certificate of Seller
covering all such Mortgage Loans) certifying that the copy is a true copy
of the original of the Mortgage which has been delivered for recording in
the appropriate recording office of the jurisdiction in which the
Mortgaged Property is located, or a copy of the Mortgage certified by the
public recording office in those instances where the original Mortgage
has been lost, destroyed or retained by the public recording office; and
if the Mortgage has been signed by a Person on behalf of the Mortgagor,
the original power of attorney or other instrument that authorized and
empowered such Person to sign or a copy of such power of attorney
together with an Officer's Certificate certifying that such copy
represents a true and correct copy and that such original has been duly
recorded in the appropriate records depository for the jurisdiction in
which the Mortgaged Property is located;
(4) the original Mortgage Assignment assigned in blank for each
Mortgage Loan, in form and substance acceptable for recording (except for
the name of the assignee) and signed in the name of the last endorsee by
an authorized officer;
(5) the originals of all intervening assignments of mortgage, if
any, with evidence of recording thereon or copies thereof certified by
the related recording office or, if the original of any such assignment
has not yet been returned from the recording office, a copy of the
original of any such assignment without evidence of recording thereon
together with an Officer's Certificate (which may be a blanket Officer's
Certificate of Seller covering all such Mortgage Loans) certifying that
the copy is a true copy of the original of any such assignment which has
been delivered by a closing attorney, such officer or a title insurance
company for recording in the appropriate recording office of the
jurisdiction in which the Mortgaged Property is located, or a copy of the
intervening assignment certified by the public recording office in those
instances where the original recorded intervening assignment has been
lost, destroyed or retained by the public recording office;
(6) the originals of all assumption, modification, consolidation or
extension agreements, if any, with evidence of recording thereon or, if
the original of any such agreement has not yet been returned from the
recording office, a copy of the original of any such agreement without
evidence of recording thereon together with an Officer's Certificate
(which may be a blanket Officer's Certificate of Seller covering all such
Mortgage Loans) certifying that the copy is a true copy of the original
of any such agreement which has been delivered by a closing attorney,
such officer or a title insurance
7
<PAGE> 40
company for recording in the appropriate recording office of the
jurisdiction in which the Mortgaged Property is located, or a copy of
such agreement certified by the public recording office in those
instances where the original recorded agreement has been lost, destroyed
or retained by the public recording office.
(7) as to each Mortgage Loan, (I) the original mortgagee title
insurance policy or (ii) if such policy has not been issued, (a) a first
lien letter, a written commitment or binder for such policy issued by a
title insurer and an officer's certificate of the title insurer
certifying that all of the requirements specified in such commitment have
been satisfied or (b) a preliminary title report issued by a title
insurer in anticipation of issuing a title insurance policy which
evidences existing liens and gives a preliminary opinion as to the
absence of any encumbrance on title to the Mortgaged Property except
liens to be removed on or before purchase by the Mortgagor or which
constitute customary exceptions acceptable to lenders generally.
3. The Custodian's Receipt, Examination and Certification of Mortgage
Files and Issuance of Trust Receipt.
(a) The Custodian shall examine the documents received by it and confirm,
as of the date of the Trust Receipt, that on their faces:
(1) the Note and Mortgage each bears an original signature or
signatures purporting to be the signature or signatures of the Person or
Persons named as the maker and mortgagor or grantor or, in the case of
copies of the Mortgage permitted under Section 2, that such copies bear a
reproduction of such signature or signatures;
(2) (a) the principal amount of the indebtedness secured by the
Mortgage is identical to the original principal amount of the Note and
the original principal amount on the Loan Schedule; (b) the Note term is
the same as set forth on the Loan Schedule; and (c) the initial interest
rate on the Note is the same as set forth on the Loan Schedule;
(3) the Note bears original endorsements, by either manual or
facsimile signature, which complete the chain of ownership from the
original holder or payee to either the owner of the related Trust Receipt
or in blank;
(4) the original of the Mortgage Assignment and any intervening
mortgage assignment bears the original signature purporting to be the
signature of the named mortgagee or beneficiary (and any other necessary
party, including subsequent assignors) or in the case of copies permitted
under Section 2, that such copies bear a reproduction of such signature
or signatures and that the Mortgage Assignment and any intervening
mortgage assignment complete the chain of title from the originator to
Seller and from Seller in blank;
8
<PAGE> 41
(5) the power of attorney (if any), as specified in Sections 2(b)(1)
and 2(b)(3), (A) bears an original signature purporting to be the
signature of the maker of the Note and the mortgagor or grantor of the
Mortgage and (B) bears evidence that such power of attorney was recorded
in the appropriate records depository for the jurisdiction where the
Mortgaged Property is located or, in case of copies permitted under
Sections 2(b)(1) and (2)(b)(3), that such copies bear a reproduction of
such signatures and such evidence of recordation; and
(6) if a Note or a Mortgage was executed by an attorney-in-fact, the
power of attorney specified in Sections 2(b)(1) and 2(b)(3) is included
and conforms to the requirements of such section.
(b) If the Custodian has determined that all the required documents are
included in the Mortgage Files delivered to it and that such related documents
on their faces satisfy the requirements enumerated in Sections 3(a)(1) through
3(a)(6) hereof, the Custodian shall (i) sign a copy of the related Letter of
Transmittal and return the Letter of Transmittal to Seller, and (ii) remit to
Buyer or its designee a Trust Receipt with respect to such Mortgage Files
signed by the Custodian. If upon examination of the documents included in any
Mortgage File, the Custodian determines that such documents do not satisfy the
above requirements, or is unable to confirm that such documents satisfy such
requirements, the Custodian shall mark such Mortgage Loan as an exception on
its Trust Receipt. Except as set forth in the preceding sentence, the Trust
Receipt of the Custodian with respect to each Mortgage File shall be deemed to
include a certification that the documents reviewed by the Custodian appear
regular on their face and relate to the Mortgage Loan described in the Mortgage
File and are in the possession and control of the Custodian. Custodian shall
have no responsibility for curing any exception relating to a Mortgage Loan
other than notifying Buyer and Seller of Custodian's receipt of documents.
(c) Under no circumstances shall the Custodian be obligated to verify the
authenticity of any signature on any of the documents received or examined by
it in connection with this Agreement or the authority or capacity of any person
to execute or issue any such document, nor shall the Custodian be responsible
for the value, form, substance, validity, perfection, priority, effectiveness
or enforceability of any of such documents or of any Mortgage Loan.
(d) Any provision of this Agreement to the contrary notwithstanding,
Seller shall notify the Custodian of the need to examine a Mortgage File and
deliver a related Trust Receipt not less than two (2) full Business Days prior
to the date on which such Trust Receipt is required to be delivered.
(e) With respect to any Trust Receipt delivered to Buyer hereunder, the
Custodian shall revise its own internal books and records from time to time to
reflect its receipt or release of Mortgage Loans under the terms of this
Agreement so that the applicable Loan Schedule for any
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<PAGE> 42
such Trust Receipt shall always accurately reflect the Mortgage Loans held by
the Custodian under this Agreement.
4. Possession of Mortgage Files.
(a) Possession of Mortgage Files on Behalf of Buyer. Upon payment by
Buyer of the Purchase Price, the Custodian shall segregate and retain
possession and custody of the Mortgage Files for the exclusive use and benefit
of Buyer and as agent and bailee of and custodian for Buyer for all purposes
until otherwise notified by Buyer pursuant to subsection (b) hereof. The
Custodian shall also make appropriate notations in the Custodian's books and
records reflecting that the Mortgage Files are owned by Buyer unless otherwise
notified by Buyer pursuant to subsection (b) hereof. The Custodian shall not
release any portion of the Mortgage Files to Seller or to any other party
without the prior written authorization of the owner of the Trust Receipt.
(b) Possession of Mortgage Files on Behalf of Third Persons. The
Custodian acknowledges that Buyer may transfer its interest in the Mortgage
Loans to one or more Third Persons. Upon receipt of written notice from Buyer,
substantially in the form of Exhibit B hereto, that Buyer has transferred its
interest in the Mortgage Loans identified on a schedule to such notice (the
"Notice Loan Schedule") to a Third Person together with the Trust Receipt for
amendment of the Schedule attached thereto, the Custodian will promptly issue a
Trust Receipt to such Third Person and shall issue an amended Trust Receipt to
Buyer, each of which will reflect the transfer of Buyer's interest in certain
Mortgage Loans to such Third Person. The notice sent by Buyer to the Custodian
shall be in substantially the form of Exhibit B hereto and shall (i) specify
the name of the Third Person, (ii) specify the address of the Third Person,
which may be an address in care of Buyer and (iii) have attached the Notice
Loan Schedule. Upon receipt of any such notice from Buyer, the Custodian shall
(a) segregate and retain possession and custody of the Mortgage Files with
respect to the Mortgage Loans in the Notice Loan Schedule as agent and bailee
of and custodian for such Third Person, and (b) make appropriate notations in
the Custodian's books and records reflecting that the Mortgage Files identified
in the Notice Loan Schedule are owned by such Third Person. The Custodian
shall segregate and maintain continuous custody of all Mortgage Files for the
benefit of the Person to whom it has issued a Trust Receipt. Buyer's
agreements with each holder of a Trust Receipt other than an affiliate of Buyer
(each such holder, a "Transferee") will specify that the Transferee cannot
issue instructions regarding the Mortgage Loans or Mortgage Files unless Buyer
has defaulted on Buyer's obligations to such Transferee. Accordingly, the
Custodian may not act on requests from a Transferee to withdraw or otherwise
dispose of Mortgage Loans unless the Transferee delivers to the Custodian an
executed Notice of Default Certificate in the form of Exhibit E hereto. The
Custodian shall be entitled to presume conclusively that the Notice of Default
Certificate is properly executed and that when delivered to the Custodian an
Event of Default exists under Buyer's agreement with its Transferee.
Notwithstanding the above, nothing contained in this section shall obligate
Custodian to provide the custodial services contemplated pursuant to this
Custody Agreement to such Third Person once Custodian has received a Notice of
Default
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<PAGE> 43
Schedule from such Third Person, provided however, that Custodian shall provide
such Third Person with not less than sixty (60) days notice of Custodian's
intent to terminate this Custody Agreement subject, in any event, to Section 11
hereof.
(c) Upon surrender of the Trust Receipt by Buyer to the Custodian, Buyer
may issue instructions regarding the Mortgage Loans designated in the
applicable Trust Receipt, including instructions to withdraw Mortgage Loans.
(d) In the event a Trust Receipt is lost, destroyed or otherwise
unavailable for surrender to the Custodian, Buyer will present to the Custodian
documentation in the form attached as Exhibit F or Exhibit G hereto. Upon
receipt by the Custodian of such documentation, Buyer will have the right to
issue instructions regarding the Mortgage Loans covered by a Trust Receipt
without surrender of the related Trust Receipt.
(e) The Custodian understands that Buyer may need to examine Mortgage
Loans subject to a Trust Receipt on a periodic basis. Such examination shall
take place on the premises of the Custodian. Buyer will give the Custodian two
(2) Business Days' notice before Buyer makes an examination. Buyer's
agreements with each Transferee will grant Buyer the right to make such
examinations.
(f) The Custodian shall cause to be kept at its office records in the
form, scope and substance of a register (the "Custodial Register") in which,
subject to such reasonable regulations as it may prescribe, the Custodian shall
reflect the ownership of Mortgage Loans as confirmed by Trust Receipts as
herein provided. The Custodial Register shall be deemed to contain proprietary
information and only Custodian and Buyer shall have access to such information.
(g) With respect to the repurchase of any Mortgage Loan by Seller from
Buyer under the Repurchase Agreement, the interest of any Third Person in any
such Mortgage Loan shall automatically terminate simultaneously with the
payment to Buyer of the Repurchase Price for such Mortgage Loan under the
Repurchase Agreement and any such interest shall be deemed to have been
transferred to Buyer as of such time, except with respect to any Mortgage Loans
delivered to a Third Person pursuant to the Notice of Default Certificate
attached hereto as Exhibit E. Pursuant to the preceding sentence, the interest
of any Third Person shall automatically terminate irrespective of whether such
Third Person receives the appropriate payment for such Mortgage Loan.
5. Release of Custodian's Mortgage Files for Servicing. From time to time
and as appropriate for the servicing of any of the Mortgage Loans by Seller,
the Custodian is hereby authorized, upon written request and receipt of Seller
and consent and acknowledgement of Buyer (to the extent required by Exhibit H)
in the form of Exhibit H, to release to Seller or its designee the related
Mortgage File, or any documents contained therein, set forth in such receipt to
Seller; provided that there shall not be more than ten (10) Mortgage Files
outstanding to
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<PAGE> 44
Seller, or its designee at any one time. All documents so released to Seller
or its designee shall be held by it in trust for the benefit of Buyer and Third
Persons from time to time. Seller or its designee shall return to the
Custodian the Mortgage File or such documents when Seller's need therefor in
connection with servicing no longer exists but in no event later than ten (10)
Business Days after their release by the Custodian as provided herein.
Custodian shall notify Buyer of any Mortgage Files outstanding more than ten
(10) Business Days, but shall not be responsible to actively pursue the return
of Mortgage Files not returned within ten (10) Business Days.
Upon the payment in full of any Mortgage Loan by the mortgagor, and upon
receipt by the Custodian of Seller's request for release and acknowledgement by
Buyer in the form of Exhibit H, the Custodian shall promptly release the
related Mortgage File to Seller.
Seller agrees that, at the time any request for release of Mortgage Files
is made to the Custodian under this Agreement, Buyer shall be so notified and a
copy of any written request for release shall be furnished to Buyer by Seller.
Upon its receipt of any released Mortgage Files, Seller shall so notify Buyer.
6. Review and Deposit of Additional Mortgage Loans.
(a) If, pursuant to the Repurchase Agreement, Seller is required to
deliver additional Mortgage Loans to the Custodian to cure a Margin Deficit or
if Seller and Buyer agree to cause additional Mortgage Loans to become subject
to the Repurchase Agreement ("Additional Mortgage Loans"), the Custodian shall
retain possession and custody of the Mortgage Files relating thereto pursuant
to Section 4 hereof and, upon receipt and review thereof, shall transmit to
Buyer a Trust Receipt that shall supersede any Trust Receipt bearing an earlier
date and have attached thereto a complete Loan Schedule revised so as to give
effect to the transaction contemplated by such Trust Receipt.
(b) Two (2) full Business Days prior to the delivery of any Additional
Mortgage Loans, Seller will advise the Custodian whether the Custodian will be
required to review any Additional Mortgage Loans. Seller undertakes to use its
best efforts to make available for review any such Additional Mortgage Loans as
soon as is reasonably possible. Upon receipt thereof, the Custodian shall
perform its review of the Mortgage Files relating to any Additional Mortgage
Loans in the manner contemplated by Section 3 hereof.
(c) Seller covenants and agrees to provide to the Custodian at the time
Seller delivers any Additional Mortgage Loans under this Agreement, and at the
time any Mortgage Loans are transferred to Seller pursuant to Section 4(c)
hereof, a revised Loan Schedule reflecting current information with respect to
all Mortgage Loans subject to the applicable Trust Receipt, after giving effect
to the related delivery or transfer.
7. Waiver by the Custodian. Notwithstanding any other provisions of this
Agreement,
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<PAGE> 45
the Custodian shall not at any time exercise or seek to enforce any claim,
right or remedy, including any statutory or common law rights of set-off, if
any, that the Custodian might otherwise have against all or any part of a
Mortgage File or the proceeds thereof. The Custodian warrants that it
currently holds, and during the existence of this Agreement shall hold, no
adverse interest, by way of a security interest or otherwise, in any Mortgage
Loan.
8. Right of Inspection by Buyer and Third Persons. Upon reasonable notice
to the Custodian (which in no event shall be less than two (2) Business Days
notice), the Person or Persons for whom the Custodian is acting as custodian,
or their duly authorized representatives, may at any time, during ordinary
business hours, inspect and examine the Mortgage Files in the possession and
custody of the Custodian at such place or places where such Mortgage Files are
deposited.
9. Custodian's Fees and Expenses. The Custodian hereby acknowledges that
Seller has agreed to pay all fees due and owing to, and except as otherwise
provided herein, any expenses incurred by the Custodian under this Agreement.
The fees due to the Custodian for its services hereunder shall be as set forth
in a separate letter agreement between the Custodian and Seller. In addition
to the fees referred to in the two foregoing sentences, Seller has agreed to
pay all out-of-pocket expenses incurred by the Custodian in connection with the
review of each Mortgage File by it or its agent pursuant to the terms of this
Agreement and its issuance of a Trust Receipt relating thereto. Neither Buyer
nor any Third Person shall have any liability or obligation to pay any such
fees or expenses, and the duties of the Custodian hereunder shall be
independent of Seller's performance of its obligations to the Custodian in
respect of such fees and expenses.
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<PAGE> 46
10. Termination of Agreement. This Agreement shall become effective on
and as of the date hereof and shall terminate upon the earlier of (i) the
Custodian's receipt of written Notice of Termination signed by the Person or
all of the Persons to whom the Custodian has issued Trust Receipts and on whose
behalf the Custodian is acting as agent, bailee and custodian, (ii) the removal
of all Mortgage Files from the possession of the Custodian pursuant to the
instructions of the Person or Persons entitled to request such removal pursuant
to this Agreement. The Custodian shall be entitled to rely, and shall be
protected in relying, on any such Notice of Termination delivered to it by such
Person or Persons and (iii) if such Mortgage Loan is repurchased by Seller from
Buyer, the receipt by Buyer of the Repurchase Price for such Mortgage Loan
under the Repurchase Agreement. If this Agreement terminates with respect to
any Mortgage Loan by operation of clause (i) above, the Custodian shall deliver
the related Mortgage File then subject to this Agreement to the Person
indicated in the Notice of Termination. If any Mortgage Loan is repurchased by
Seller from Buyer pursuant to clause (iii) above, then Buyer shall execute and
deliver to the Custodian a document in substantially the form of Exhibit I
which confirms the receipt of the Repurchase Price for such Mortgage Loan and
the termination and release of all of Buyer's right, title and interest in such
Mortgage Loan, and the Custodian upon receipt of such document shall deliver
the related Mortgage File for such Mortgage Loan to Seller or such other Person
as Seller so directs. Upon such termination the Custodian shall deliver all
Mortgage Files then subject to this Agreement to the Person indicated in such
Notice of Termination or if no such Person is indicated, then to the Person or
Persons to whom the Custodian has issued Trust Receipts and for whom the
Custodian is acting on such date and the Custodian shall endorse the Notes
without recourse, representation and warranties and execute mortgage
assignments pursuant to any instruction by the Person on whose behalf the
Custodian is acting as agent and bailee pursuant to this Agreement.
11. Resignation and Removal of Custodian.
(a) Resignation. The Custodian shall have the right, with or without
cause, to resign as the Custodian under this Agreement upon sixty (60) days'
prior written notice to Seller, Buyer and, to the extent of its interest, any
Third Person. Following any such resignation, the Custodian shall continue to
act as the "Custodian" under this Agreement until it delivers the Mortgage
Files to a duly appointed successor Custodian as provided in (c) below, if any,
or to any designee specified by Buyer or any Third Person, as applicable.
(b) Removal. Buyer and, to the extent of its interest, any Third Persons
may remove and discharge the Custodian from the performance of its duties under
this Agreement, by providing thirty (30) days' written notice to the Custodian,
signed jointly by Buyer and any Third Person or Persons with any interest in
the Mortgage Loans, as evidenced by the holding of a Trust Receipt, with a copy
to Seller. Following any such removal, the Custodian shall continue to act as
the "Custodian" under this Agreement until it delivers the Mortgage Files to a
duly appointed successor Custodian as provided in (c) below, if any, or to any
designee specified by Buyer or any Third Person, as applicable.
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<PAGE> 47
(c) Appointment of Successor Custodian; Transfer of Mortgage Loans. Upon
resignation or removal of the Custodian, Buyer and, to the extent of its
interest and if permitted by Section 4 hereof, any Third Person shall have 60
days in which to appoint and designate a successor to take possession of their
respective Mortgage Files or select one or more designees to take possession
thereof. Upon receipt of written direction regarding the foregoing from Buyer
and any Third Person with respect to the Mortgage Loans in which they have an
interest, as applicable, the Custodian shall deliver all Mortgage Files to the
person so designated within 10 Business Days following delivery to the
Custodian of such written notice. If a successor Custodian is appointed, the
Custodian shall deliver the Mortgage Files in accordance with the written
instructions of Buyer and the Third Persons, if any, having interests in the
Mortgage Loans to the extent such Third Persons are permitted to take action
with respect thereto under Section 4 hereof setting forth the name and address
of the successor Custodian. If Buyer and, to the extent of its interest, any
such Third Person, fail to jointly designate a successor Custodian or specify
one or more designees within such 60-day period, then the Custodian shall
deliver possession and custody to Buyer and, if otherwise permitted under
Section 4 hereof, any Third Person, of their respective Mortgage Files, as
applicable, at the address specified in the Custodian's records. The Custodian
shall, as part of the transfer of the Mortgage Files, deliver the Mortgage
Assignment for each Mortgage Loan in recordable form and shall endorse the Note
without recourse, representation and warranties in accordance with Buyer's or
the applicable Third Person's instructions. Any successor Custodian hereunder
shall be a financial institution whose deposits are insured by FDIC, have a net
worth of not less than $10,000,000 and shall have secure vault storage
facilities located in the States of New York or Michigan or such other State as
Buyer and Seller may agree, in which the Mortgage Files are to be retained.
12. Limitation on Obligations of the Custodian. The Custodian shall have
no duties or obligations other than those specifically set forth herein, and no
further duties or obligations shall arise by implication or otherwise. The
Custodian agrees to use its best judgment and good faith in the performance of
such obligations and duties and shall incur no liability to Seller for its acts
or omissions hereunder, except as may result from its gross negligence or
willful misconduct. In no event shall Custodian be liable, directly or
indirectly, for any special or consequencial damages, even if Custodian has
been advised of the possibility of such damages. The Custodian shall also be
entitled to rely (and shall be protected in relying) upon written advice of its
legal counsel and to rely upon any written notice, document, correspondence,
request or directive received by it from Buyer, any Third Person (if
applicable), or Seller, as the case may be, that the Custodian believes to be
genuine and to have been signed or presented by the proper and duly authorized
officer or representative thereof, and shall not be obligated to inquire as to
the authority or power of any Person so executing or presenting such documents
or as to the truthfulness of any statements set forth therein. No provision of
this Agreement shall require the Custodian to expend or risk its own funds or
otherwise incur financial liability in the performance of its duties hereunder
if it shall have reasonable grounds for believing that repayment of such funds
or adequate indemnity is not reasonably assured to it. Seller agrees to
15
<PAGE> 48
indemnify, defend and hold the Custodian harmless from and against any claim,
legal action, liability or loss that is initiated against or incurred by the
Custodian, including court costs and reasonable attorney's fees and
disbursements, and all of the Custodian's other cost, damage or expense
incurred in connection with the Custodian's performance of its duties under
this Agreement, but excluding any such claim, legal action, liability, loss,
cost, damage or expense caused by Custodian's gross negligence or willful
misconduct. Custodian shall be under no responsibility or duty with respect to
any Mortgage Loans or documents relating thereto once the Mortgage Loan has
been delivered by Custodian to Buyer or its designee in accordance with any of
the provisions of this Agreement.
The Custodian shall at its own expense maintain at all times during the
existence of this Agreement and keep in full force and effect (a) fidelity
insurance, (b) theft and loss of documents insurance, (c) forgery insurance,
and (d) errors and omissions insurance. All such insurance shall be in
amounts, with standard coverage and subject to deductibles, as are customary
for insurance typically maintained by banks which act as the Custodian in
similar transactions. The Custodian shall, upon written request, provide to
Seller, or to any other Person as Seller shall direct, a certificate signed by
an authorized officer of the Custodian certifying that the foregoing insurance
policies are in full force and effect. The Custodian shall use its best
efforts to ensure that such insurance shall not terminate prior to receipt by
Buyer by registered mail of 30 days' prior written notice thereof.
13. Notices. Any notice, demand or consent required or permitted by this
Agreement shall be in writing and shall be effective and deemed delivered only
when received by the party to which it is sent. Any such notice, demand or
consent shall be delivered in person or transmitted by a recognized private
courier service or deposited with the United States Postal Service, certified
mail, postage prepaid, return receipt requested, addressed as follows, unless
such address is changed by written notice hereunder:
If to Seller:
Rock Financial Corporation
30600 Telegraph Road, 4th Fl.
Bingham Farms, MI 48025
Attn: Mr. Frank Plenskofski
Telephone: (810) 258-2300
Telecopy: (810) 540-9113
If to Buyer:
Bear Stearns Home Equity Trust 1996-1
c/o Bear Stearns Mortgage Capital Corporation
245 Park Avenue
16
<PAGE> 49
New York, New York 10167
Attn: Mr. John Garzone
Telephone:(212) 272-3853
Telecopy:(212) 272-7803
If to the Custodian:
COMERICA BANK
P.O.Box 75000
Detroit, Michigan 48275-3226
Attn: Ms. Patricia Cvornyeh
Telephone: (313) 222-6111
Telecopy: (313) 222-9889
14. No Assignment or Delegation by the Custodian. The Custodian shall not
assign, transfer, pledge or grant a security interest in any of its rights,
benefits or privileges hereunder nor delegate or appoint any other person to
perform or carry out any of its duties, responsibilities or obligations under
this Agreement; any act or instrument purporting to effect any such assignment,
transfer, pledge, grant, delegation or appointment shall be void.
15. Controlling Law. This Agreement and all questions relating to
validity, interpretation, performance and enforcement shall be governed by and
construed, interpreted and enforced in accordance with the laws of the State of
New York, without regard to any New York or other conflict-of-law provisions.
16. Agreement for the Exclusive Benefit of Parties. This Agreement is for
the exclusive benefit of the parties hereto, and their respective successors
and permitted assigns, and shall not be deemed to create or confer any legal or
equitable right, remedy or claim upon any other person whatsoever except a
Third Person to the extent rights are explicitly conferred on any one or more
Third Persons pursuant to this Agreement.
17. Entire Agreement. This Agreement contains the entire agreement among
the parties hereto with respect to the subject matter hereof, and supersedes
all prior and contemporaneous agreements, understandings, inducements and
conditions, express or implied, oral or written, of any nature whatsoever with
respect to the subject matter hereof, including any prior custody agreements.
The express terms hereof control and supersede any course of performance and/or
usage of the trade inconsistent with any of the terms hereof. This Agreement
may not be modified or amended other than by an agreement in writing signed by
Buyer, Seller and the Custodian.
18. Exhibits. All Exhibits referred to herein or attached hereto are
hereby incorporated by reference into, and made a part of, this Agreement.
19. Indulgences, Not Waivers. Neither the failure nor any delay on the
part of a party
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<PAGE> 50
hereto to exercise any right, remedy, power or privilege under this Agreement
shall operate as a waiver thereof, nor shall any single or partial exercise of
any right, remedy, power or privilege preclude any other or further exercise of
the same or of any other right, remedy, power or privilege, nor shall any
waiver of any right, remedy, power or privilege with respect to any occurrence
be construed as a waiver of such right, remedy, power or privilege with respect
to any other occurrence. No waiver shall be effective unless it is in writing
and is signed by the parties asserted to have granted such waiver.
20. Titles Not to Affect Interpretation. The titles of sections and
subsections contained in this Agreement are for convenience only, and they
neither form a part of this Agreement nor are they to be used in the
construction or interpretation hereof.
21. Provisions Separable. The provisions of this Agreement are
independent of and separable from each other, and no provision shall be
affected or rendered invalid or unenforceable by virtue of the fact that for
any reason any other provision or provisions may be invalid or unenforceable in
whole or in part.
22. Representations and Warranties of the Custodian. The Custodian
represents, warrants to, and covenants with Buyer that on the date hereof, and
on the date of the issuance of any Trust Receipt by the Custodian:
(1) The Custodian is (i) a Michigan banking corporation duly
organized, validly existing and in good standing under the laws of the
State of Michigan and (ii) duly qualified and in good standing and in
possession of all requisite authority, power, licenses, permits and
franchises in order to execute, deliver and comply with its obligations
under the terms of this Agreement;
(2) The execution, delivery and performance of this Agreement have
been duly authorized by all necessary corporate action and the execution
and delivery of this Agreement by the Custodian in the manner
contemplated herein and the performance of and compliance with the terms
hereof by it will not (i) violate, contravene or create a default under
any applicable laws, licenses or permits to the best of its knowledge, or
(ii) violate, contravene or create a default under any charter document
or bylaw of the Custodian or to the best of the Custodian's knowledge any
contract, agreement, or instrument to which the Custodian or by which any
of its property may be bound and will not result in the creation of any
lien, security interest or other charge or encumbrance upon or with
respect to any of its property;
(3) The execution and delivery of this Agreement by the Custodian
and the performance of and compliance with its obligations and covenants
hereunder do not require the consent or approval of any governmental
authority or, if such consent or approval is required, it has been
obtained;
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<PAGE> 51
(4) This Agreement, and the original Trust Receipt issued hereunder,
when executed and delivered by the Custodian will constitute valid, legal
and binding obligations of the Custodian, enforceable against the
Custodian in accordance with their respective terms, except as the
enforcement thereof may be limited by applicable debtor relief laws and
that certain equitable remedies may not be available regardless of
whether enforcement is sought in equity or at law;
(5) Custodian does not believe, nor does it have any reason or cause
to believe, that it cannot perform each and every covenant contained in
this Agreement;
(6) To Custodian's knowledge after due inquiry, there is no
litigation pending or threatened which, if determined adversely to
Custodian, would adversely affect the execution, delivery or
enforceability of this Agreement, or any of the duties or obligations of
Custodian thereunder, or which would have a material adverse effect on
the financial condition of Custodian;
23. Limited Role of Trustee; Successor Trustee.
(a) The execution and delivery of this Agreement by the undersigned
Trustee is solely and strictly in its capacity as Trustee under that certain
Trust Agreement dated as of March 29, 1996 (the "Trust Agreement") by and
between State Street Bank and Trust Company of California, N.A., as Trustee
(the "Trustee") and Bear Stearns Mortgage Capital Corporation, as Depositor
(the "Depositor"), and not individually, and has been undertaken at the
direction of the Depositor. It is hereby expressly acknowledged that any
obligations, liabilities, covenants, duties, representations and warranties
hereunder are those of Buyer only and not of the Trustee. There shall be no
individual or corporate liability against or on the part of the Trustee (or any
of its officers, directors or employees) under this Agreement, and there shall
be no recourse against the Trustee in its individual or corporate capacity (or
any of its directors, officers or employees), or against any of its properties
or assets, for recovery of or as a result of any claim, debt, liability or
obligation (whether of payment or performance) of or against Buyer under or
pursuant to this Agreement (whether arising out of or relating to any covenant,
agreement, representation or warranty, or otherwise). Recourse against Buyer
for any claims, liabilities, debts or obligations under this Agreement is
limited to the trust established by the Trust Agreement. Bear Stearns Mortgage
Capital Corporation, as the depositor and owner of 100% of the equity of the
trust established under the Trust Agreement, is liable for all fees, expenses,
taxes, indemnity payments and other liabilities of the trust.
(b) It is hereby acknowledged that the rights and remedies of Buyer
under or pursuant to this Agreement shall automatically be transferred to and
vest in any successor trustee under the Trust Agreement, in the event of the
resignation or removal of the Trustee as trustee thereunder.
24. Counterparts. For the purpose of facilitating the execution of this
Agreement as herein provided and for other purposes, this Agreement may be
executed simultaneously in any
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<PAGE> 52
number of counterparts, each of which counterpart shall be deemed to be an
original, and such counterparts shall constitute and be one and the same
instrument.
20
<PAGE> 53
IN WITNESS WHEREOF, the parties have entered into this Agreement as of the
date set forth above.
ROCK FINANCIAL CORPORATION
By: /s/
------------------------------
Name:
Title:
COMERICA BANK
as Custodian
By: /s/
------------------------------
Name:
Title:
BEAR STEARNS HOME EQUITY TRUST
1996-1
By: State Street Bank and Trust
Company of California, N.A.,
as Trustee solely and not
individually
By: /s/
------------------------------
Name:
Title:
21
<PAGE> 54
EXHIBIT A
LETTER OF TRANSMITTAL
To: COMERICA BANK From: Rock Financial Corporation
[Address] [Address]
Pursuant to the Custody Agreement dated as of March 26, 1996 the "Custody
Agreement") among COMERICA BANK (the "Custodian"), Rock Financial Corporation
("Seller"), and Bear Stearns Home Equity Trust 1996-1, Seller hereby delivers
to you (i) the documents described below in connection with the Mortgage Loans
identified on the attached schedule and (ii) an updated Loan Schedule
identifying each Mortgage Loan in your custody (including the Mortgage Loans
referred to in clause (i) above).
We understand that the list set forth below indicates in summary fashion
the materials for transmittal; it is not intended to describe fully all the
required characteristics of each item. We further understand that each item
sent to the Custodian must comply with the applicable requirements of the
Custody Agreement, and that all required documents must be delivered together
before the Custodian will accept the Mortgage Loans.
With respect to each of the Mortgage Loans referred to in clause (i)
above, Seller has delivered, to the extent required by the Custody Agreement,
the following documents:
Section 2
(1) Letter of Transmittal (original and one copy)
(2) Original Note (endorsed in blank), including all intervening endorsements
Power of Attorney (if applicable)
(3) Original of any loan agreement and guarantee executed in connection with
the Notes, if applicable
(4) Mortgage
original, or
Conformed Copy, together with the appropriate certificate
(5) Assignment of Mortgage in blank
original, or
Conformed Copy, together with the appropriate certificate
22
<PAGE> 55
(6) Intervening Mortgage Assignment, if any
original, or
Conformed Copy, together with the appropriate certificate
(7) originals of all assumption, modification, consolidation or extension
agreements
(8) Lender's Title Insurance Policy
original, or
Written commitment issued by the title insurance company, together with
the appropriate certificate, or
Preliminary Title Report
(9) other.
Submitted The Custodian acknowledges
By:_____________________________ receipt of the documents
referred to and agrees to
Date: __________________________ hold and retain possession
thereof pursuant to the
Telephone Number:_______________ terms of the Custody
Agreement.
COMERICA BANK, as Custodian
By:______________________
Name:
Title:
23
<PAGE> 56
EXHIBIT B
NOTICE TO THE CUSTODIAN
TO: COMERICA BANK, as Custodian
FROM: Bear Stearns Home Equity Trust 1996-1
DATE:____________________
Pursuant to the Custody Agreement dated as of March 26, 1997, among Rock
Financial Corporation, Bear Stearns Home Equity Trust 1996-1 and COMERICA BANK,
as Custodian ("Custody Agreement"), the undersigned hereby notifies you that it
has transferred its interest in the Mortgage Files with respect to the Mortgage
Loans identified in the mortgage loan schedule attached hereto (the "Notice
Loan Schedule") to [TRANSFEREE NAME AND ADDRESS].
Included with this notice is the original Trust Receipt for amendment of
the Loan Schedule attached thereto. Capitalized terms used herein without
definition are as defined in the Custody Agreement.
BEAR STEARNS HOME EQUITY TRUST
1996-1
By: State Street Bank and Trust
Company of California, N.A.,
as Trustee
By:________________________________
Name:
Title:
[Name of transferee] hereby acknowledges
that (i) the Mortgage Loans listed on the
Notice Loan Schedule are being held for it
by the Custodian pursuant to the terms of
the Custody Agreement, (ii) it agrees to
be bound by the Custody Agreement, (iii)
the Custodian shall not comply with the
request of a Third Person to deliver
Mortgage Files unless
B-1
<PAGE> 57
such Third Person has delivered to the
Custodian an executed Notice of Default
Certificate and (iv) it is responsible for
payment of any fees and expenses of the
Custodian incurred in connection with the
issuance of periodic reports to it or in
complying with its requests.
[NAME OF TRANSFEREE]
By: ______________________________
Name: ____________________________
Title: ___________________________
cc: Rock Financial Corporation
<PAGE> 58
EXHIBIT C
TRUST RECEIPT
[Date]
Bear Stearns Home Equity Trust 1996-1
Re: Custody Agreement dated as of March 26, 1997, among Rock Financial
Corporation, Bear Stearns Home Equity Trust 1996-1 and COMERICA BANK,
as Custodian
Gentlemen:
In accordance with the provisions of Paragraph 3 of the above-referenced
Custody Agreement (the "Custody Agreement"), the undersigned, as Custodian,
hereby certifies that as to each Mortgage Loan described in the Loan Schedule,
a copy of which is attached hereto, it has reviewed the Mortgage File and has
determined that, except as set forth on the Exception Report attached hereto,
(i) all documents required to be delivered to it pursuant to the Custody
Agreement are in its possession, (ii) such documents have been reviewed by it
and appear regular on their face and relate to such Mortgage Loan, and (iii)
based on its examination of the foregoing documents, such documents on their
face satisfy the requirements set forth in Sections 3(a)(1) through 3(a)(6) of
the Custody Agreement.
The Custodian hereby confirms that it is holding each such Mortgage File
as agent and bailee of and custodian for and for the exclusive use and benefit
of Bear Stearns Home Equity Trust 1996-1 ("BS Trust") or its transferee
pursuant to the terms of the Custody Agreement.
This Trust Receipt is not a negotiable instrument. BS Trust may, however,
transfer this receipt by a special endorsement to one other party. The party
that takes this receipt from BS Trust or its affiliate by special endorsement
may only transfer this receipt by a second endorsement in BS Trust's or its
affiliate's favor.
The Custodian will accept and act on instructions with respect to the
Mortgage Loans only upon surrender of this receipt at its Corporate Trust
Office, [ADDRESS], Attention: _________________. If the receipt has been
endorsed and is held by a Person other than BS Trust or one of its affiliates,
we will accept and act on instructions from the endorsee only if the attached
Notice of Default Certificate is executed and delivered to us stating that an
Event of Default has occurred under a repurchase agreement relating to this
Trust Receipt between BS Trust and the endorsee.
<PAGE> 59
All initially capitalized terms used herein shall have the meanings
ascribed to them in the above-referenced Custody Agreement.
COMERICA BANK,
as Custodian
By:________________________________
Name:
Title:
<PAGE> 60
EXHIBIT D
NOTICE OF TERMINATION
[date]
TO: COMERICA BANK, as Custodian
FROM: Bear Stearns Home Equity Trust 1996-1
[and, one or more Third Persons, if applicable]
DATE:____________________
You are hereby notified that the Custody Agreement, dated as of 26, 1997,
among Rock Financial Corporation, Bear Stearns Home Equity Trust 1996-1 and
COMERICA BANK as Custodian, is terminated pursuant to Section 10 of such
Agreement and you are instructed to deliver all property in your possession
with respect to such Agreement to [the undersigned Person or Persons as their
interests in the Mortgage Loans appear on your records].
BEAR STEARNS HOME EQUITY TRUST
1996-1
By: State Street Bank and Trust
Company of California, N.A.,
as Trustee
By:________________________________
Name:
Title:
[_________________________________]
By:________________________________
Name:
Title:
cc: Rock Financial Corporation
D-1
<PAGE> 61
EXHIBIT E
NOTICE OF DEFAULT CERTIFICATE
_____________, 199__
COMERICA BANK,
as Custodian
[ADDRESS]
Gentlemen:
As the transferee of a Trust Receipt for certain Mortgage Loans, which
Trust Receipt is attached hereto, we hereby notify you that an event of
default has occurred under our agreement with ________________________ and we
are entitled to receive the Mortgage Loans subject to the aforementioned Trust
Receipt.
[_________________________________]
By:________________________________
Name:
Title:
Notice Received by Custodian
on [Date]:
By:________________________________
Title:
Date:
<PAGE> 62
EXHIBIT F
COMERICA BANK,
as Custodian
[ADDRESS]
Re: Custody Agreement dated as of March 26, 1997, among
Rock Financial Corporation, Bear Stearns Home Equity Trust
1996-1 and COMERICA BANK, as Custodian
Gentlemen:
On [date] you issued a trust receipt in the name of BS Trust evidencing
entitlement to the Mortgage Loans described on Schedule A hereto and held by
you as Custodian. You issued that receipt pursuant to our agreement with Rock
Financial Corporation dated as of March 26, 1997. The trust receipt has been
[lost, destroyed, etc.]. Every effort was made to recover the receipt; those
efforts were unsuccessful. It is, therefore, now unavailable for surrender to
you.
At the time of its [loss, destruction, etc.], the receipt was held by us
under [the terms of original issue, special endorsement]. Since its [issuance,
endorsement] to us, we have not sold, assigned, transferred, pledged or
otherwise granted an interest in the trust receipt that has not been released
prior to the date hereof. Accordingly, this letter authorizes you to act on
our instructions regarding such Mortgage Loans without surrender of the receipt
to you.
We hereby agree to indemnify and hold you harmless against any loss,
liability or expense that you may incur as a result of acting on our
instructions regarding such Mortgage Loans without our surrender of the receipt
to you, excluding, however, any such loss, liability or expense caused by your
gross negligence or willful misconduct.
<PAGE> 63
If the trust receipt is ever recovered by us, we will immediately notify
you, cancel the receipt and surrender the receipt to you.
BEAR STEARNS HOME EQUITY TRUST
1996-1
By: State Street Bank and Trust
Company of California, N.A.,
as Trustee
By:________________________________
Name:
Title:
<PAGE> 64
EXHIBIT G
COMERICA BANK,
as Custodian
[ADDRESS]
Re: Custody Agreement dated as of March 26, 1997, among
Rock Financial Corporation, Bear Stearns Home Equity Trust
1996-1 and COMERICA BANK, as Custodian
Gentlemen:
On [date] you issued a trust receipt in the name of Bear Stearns Home
Equity Trust 1996-1 ("BS Trust") evidencing entitlement to the Mortgage Loans
described on Schedule __ hereto and held by you in the name of
____________________, as Custodian. You issued that receipt pursuant to our
agreement with Rock Financial Corporation dated as of March 26, 1997. The
trust receipt has been [lost, destroyed, etc.]. Every effort was made to
recover the receipt; those efforts were unsuccessful. It is, therefore, now
unavailable for surrender to you.
At the time of its [loss, destruction, etc.], the receipt was held by
[name of transferee] under a special endorsement by us. We have attached to
this letter a special endorsement, from [name of transferee] conveying to us
its interest in the trust receipt and authorizing us to issue instructions
regarding the Mortgage Loans subject thereto without surrender of the receipt.
[name of transferee] has represented to us that it has not sold, assigned,
transferred, pledged or otherwise granted an interest in the trust receipt to
any party other than BS Trust. Accordingly, this letter authorizes you to act
on our instructions regarding such Mortgage Loans without surrender of the
receipt to you.
We hereby agree to indemnify and hold you harmless against any loss,
liability or expense that you may incur as a result of acting on our
instructions regarding such Mortgage Loans without our surrender of the receipt
to you, excluding, however, any such loss, liability or expense caused by your
gross negligence or willful misconduct.
<PAGE> 65
If the trust receipt is ever recovered by us, we will immediately notify
you, cancel the receipt and surrender the receipt to you.
BEAR STEARNS HOME EQUITY TRUST
1996-1
By: State Street Bank and Trust
Company of California, N.A.,
as Trustee
By: ___________________________
Name:
Title:
<PAGE> 66
EXHIBIT H
REQUEST FOR RELEASE OF DOCUMENTS
To: COMERICA BANK,
as Custodian
[ADDRESS]
Re: Custody Agreement dated as of March 26, 1997, among
Rock Financial Corporation, Bear Stearns Home Equity Trust
1996-1 and COMERICA BANK, as Custodian
In connection with the administration of Mortgage Loans held by you
as Custodian for Buyer and Third Persons from time to time pursuant to the
above-referenced Custodial Agreement, we hereby request the release, and
acknowledge receipt, of the [specify documents] [related Mortgage Files] for
the Mortgage Loans described in the attached Loan Schedule, for the reason
indicated.
Mortgagor's Name Address and Zip Code:
Mortgage Loan Number:
Reason for Requesting Documents (check one):
25. Mortgage Loan paid in full. (The Custodian shall delete the Mortgage
Loan from the applicable Loan Schedule and send the amended Loan Schedule
to Buyer and any related Third Person.)
26. Repurchase of Mortgage Loan pursuant to the Repurchase Agreement. (The
Custodian shall delete the Mortgage Loan from the applicable Loan Schedule
and send the amended Loan Schedule to Buyer and any related Third Person.)
27. Delivery of substituted Mortgage Loan. (The Custodian is hereby
authorized to delete the Mortgage Loan from the applicable Loan Schedule
attached hereto and send the amended Loan Schedule to Buyer and any
related Third Person.)
28. Mortgage Loan liquidated by . (The Custodian is hereby
authorized to delete the Mortgage Loan from the applicable Loan Schedule
attached hereto and send the amended Loan Schedule to Buyer and any
related Third Person.)
29. Mortgage Loan in foreclosure or otherwise released for servicing.
If box 1, 2, 3 or 4 above is checked, and if all or part of the Mortgage Files
were previously
<PAGE> 67
released to Seller, please release to Seller its previous request and receipt
on file with you, as well as any additional documents in your possession
relating to the specified Mortgage Loan.
If box 5 above is checked, upon the return of all of the above documents
to you as the Custodian, please acknowledge your receipt by signing in the
space indicated below, and returning this form.
Seller understands and agrees that all documents delivered to Seller or
its subservicer pursuant to this request for release (other than with respect
to Items 1-4) shall be returned to the Custodian no later than twenty-one (21)
days from the date hereof. Capitalized terms used and not otherwise defined
herein shall have the meanings set forth in the Custody Agreement.
ROCK FINANCIAL CORPORATION
By:_______________________
Name______________________
Title_____________________
Date:_____________________
Acknowledged and Agreed:
BEAR STEARNS HOME EQUITY TRUST
1996-1
By: State Street Bank and Trust
Company of California, N.A.,
as Trustee
(Required if documentation relating to more than three (3) Mortgage Files are
outstanding or the release of a Note or Mortgage Assignment is requested.)
By:________________
Name:______________
Title:_____________
Date:______________
<PAGE> 68
Acknowledgement of documents returned to the Custodian, for the reasons listed
in item 5:
COMERICA BANK
as Custodian
By:_______________________
Name:_____________________
Title:____________________
Date:_____________________
<PAGE> 69
EXHIBIT I
CONFIRMATION OF RESALE AND RECEIPT
To: COMERICA BANK, as Custodian
ROCK FINANCIAL CORPORATION, as Seller
Date: ________, 199__
Re: Custody Agreement, dated as of March 26, 1997, among Bear Stearns
Home Equity Trust 1996-1 (the "Buyer"), Rock Financial Corporation (the
"Seller") and COMERICA BANK, as custodian thereunder
Buyer hereby:
30. Acknowledges receipt of $______________ in immediately available funds
on behalf of Seller;
(b) Acknowledges that the funds referred to in clause (a) above
constitute sufficient consideration under the terms of the Master Repurchase
Agreement, dated as of March 26, 1997, among Buyer and Seller, for the release
by Buyer of its interest in the Mortgage Loans listed on Schedule A hereto;
(c) Confirms that it has released to Seller all of its right, title and
interest in and to the Mortgage Loans listed on Schedule A hereto; and
(d) Confirms that it has not granted or created any interest in the
Mortgage Loans listed on Schedule A hereto other than interests that have been
fully discharged or satisfied on or prior to the date hereof.
Dated: ___ _, 199_ BEAR STEARNS HOME EQUITY TRUST
By: Bear Stearns Mortgage Capital
Corporation, as agent
By:_______________________________
Name______________________________
Title_____________________________
<PAGE> 1
EXHIBIT 10.7
TAX INDEMNIFICATION AGREEMENT
This Tax Indemnification Agreement (this "Agreement") is made this ___ day of
____________, 1998, by and among Rock Financial Corporation, a Michigan
corporation ("Rock"), and each of Daniel Gilbert, Gary Gilbert and Lindsay
Gross (collectively, the "Shareholders").
R E C I T A L S
A. Rock made an election to be treated as an S corporation within the meaning
of Section 1361 of the Internal Revenue Code of 1986, as amended (the "Code"),
and corresponding provisions of state income tax law, for the period commencing
March 1, 1992, to the date of termination of such election upon Rock's issuance
of stock to the public pursuant to an initial public offering ("IPO") of such
stock (the "S Period").
B. Rock will be a C corporation within the meaning of Section 1361 of the
Code and corresponding provisions of state income tax law from and after the
date of termination of Rock's S election.
C. Pursuant to Section 1362(e)(2) of the Code, Rock's income or loss for all
of 1998 will be pro rated among the days in 1998 for purposes of allocating
Rock's income for 1998 between (i) the period commencing on January 1, 1998,
and ending on the last day of the S Period and (ii) the balance of the year,
provided that such allocation is not required under Section 1362(e)(6)(D) of
the Code to be based on a closing of the books.
D. The Board of Directors of Rock is expected to declare a dividend, payable
to shareholders of record on the date preceding the day that Rock's S election
is revoked, in the amount determined by Rock to be Rock's "accumulated
adjustments account" within the meaning of Section 1368(e) of the Code, which
accumulated adjustments account includes (is increased by) the amount of Rock's
taxable income allocable to the Shareholders during the S Period.
NOW, THEREFORE, in consideration of the premises and of the mutual agreements
contained herein, the parties hereto agree as follows:
1. Covenants of Rock.
(a) Promptly following the issuance of stock to the public pursuant to the
IPO, Rock shall distribute to the Shareholders cash in the amount of Rock's
accumulated adjustments account as of the end of 1997, adjusted for Rock's
estimate of income or loss for the period from January 1, 1998 through the
last day of the S Period, taking into account Rock's projection of income or
loss for all of 1998 and the allocation of such income or loss ratably over
the days in 1998.
<PAGE> 2
(b) Rock shall, as soon as practical following the end of 1998, determine
(i) Rock's income or loss for 1998, (ii) the allocation of such income or
loss as between (A) the period commencing on January 1, 1998 and ending on
the last day of the S Period and (B) the balance of 1998, using the method
prescribed by Section 1362(e) of the Code and (iii) the balance, if any, of
Rock's accumulated adjustments account.
(c) Promptly following the determination and allocation of Rock's income
or loss for 1998 pursuant to (b) above, but in any event within the one year
"post-termination transition period" as defined in Section 1377(b)(1) of the
Code, Rock shall pay, to the Shareholders, the balance of Rock's accumulated
adjustments account, if any, as determined pursuant to (b) above.
2. Representations, Warranties and Covenants of Shareholders. The
Shareholders jointly and severally represent, warrant and covenant to Rock
that:
(a) The Shareholders have duly and timely filed, or will duly and timely
file, their personal income tax returns for each period with or within which
ends any taxable year of Rock included in the S period ("Shareholder Tax
Returns").
(b) The Shareholders have duly included, or will duly include, in their
Shareholder Tax Returns their respective shares of Rock's taxable income from
all sources through and including the last business day of the S Period (the
"S Corporation Taxable Income").
(c) There are no audits, inquiries, investigations or examinations
relating to any of the Shareholder Tax Returns pending, and there are no
claims which have been asserted relating to any of the Shareholder Tax
Returns which, if determined adversely, would result in the assertion by the
Internal Revenue Service, Michigan Department of Treasury or any other tax
authority or agency of any income tax ("Tax") deficiency against Rock.
(d) To the extent that the amount distributed to them pursuant to Section
1(a) above exceeds the amount of Rock's accumulated adjustments account as
determined pursuant to Section 1(b) above (but without taking into account
the distribution pursuant to Section 1(a) above), the Shareholders shall
promptly remit the difference to Rock.
3. Indemnifications.
Following the "post termination transition period" as defined in Section
1377(b)(1) of the Code:
(a) The Shareholders, jointly and severally, shall be responsible for and
shall indemnify and save and hold harmless Rock from and against all Tax,
interest and penalties imposed on Rock resulting from a final determination
of an adjustment to the
2
<PAGE> 3
Shareholders' taxable income resulting in a decrease in the Shareholders' S
Corporation Taxable Income and a corresponding increase in Rock's taxable
income.
(b) Rock shall indemnify and save and hold harmless each Shareholder from
and against all Tax, interest and penalties imposed on such Shareholder
resulting from a final determination of an adjustment to Rock's taxable
income resulting in a decrease in Rock's taxable income and a corresponding
increase in such Shareholder's S Corporation Taxable Income. Further, Rock
shall indemnify and hold harmless each Shareholder from and against Tax
incurred by such Shareholder resulting from the receipt of any
indemnification payments made to such Shareholder pursuant hereto.
(c) The Shareholders or Rock, as the case may be, shall make any payment
required under this Section 3 within thirty (30) days after receipt of notice
from the other party that a payment is due by such party to the appropriate
taxing authority.
(d) If a Tax audit is commenced with respect to the S Period or any Tax is
claimed for which the Shareholders would be required to indemnify Rock,
written notice thereof shall be given to the Shareholders as promptly as
practicable; provided, however, that the failure to give timely notice shall
not affect rights to indemnification hereunder except to the extent that the
Shareholders demonstrate actual damage caused by such failure. After such
notice, if the Shareholders shall acknowledge in writing to Rock that they
are obligated under the terms of their indemnity hereunder in connection with
such audit or claim, then the Shareholders shall be entitled, if they so
elect, to take control of the defense and investigation of such audit or
claim and to employ and engage attorneys of their own choice to handle and
defend the same, at the Shareholders' cost, risk and expense provided that
the Shareholders and their counsel shall proceed with diligence and in good
faith with respect thereto. Rock shall cooperate in all reasonable respects
with the Shareholders and such attorneys in the defense and investigation of
such audit or claim and any appeal arising therefrom, and shall not enter
into any agreement with any tax authority with respect to such audit or claim
without the prior consent of the Shareholders; provided, however, that Rock
may, subject to the Shareholders' control of the defense and investigation of
such audit or claim, at its own cost, participate in the defense and
investigation of such audit or claim and any appeal arising therefrom.
4. Notice. All notices and other communications made in connection with this
Agreement shall be in writing and shall be deemed given when delivered
personally or sent by facsimile transmission to the numbers indicated below (if
physical confirmation of transmission is retained) or on the third succeeding
business day after being mailed by registered or certified mail, deposited in
the United States mail, postage prepaid, return receipt requested, to the
appropriate party at its or his address below or at such other address for such
party as shall be specified by written notice when in fact delivered pursuant
hereto:
If to Rock, at:
3
<PAGE> 4
Dan Gilbert
c/o Rock Financial Corporation
30600 Telegraph Road
Fourth Floor
Bingham Farms, Michigan 48025
Fax: (248) 540-9113
If to the Shareholders, at:
Dan Gilbert
c/o Rock Financial Corporation
30600 Telegraph Road
Fourth Floor
Bingham Farms, Michigan 48025
Fax: (248) 540-9113
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
and year first above written.
ROCK FINANCIAL CORPORATION,
a Michigan corporation
By:
------------------------------
Its:
---------------------------
---------------------------------
DAN GILBERT
---------------------------------
GARY GILBERT
---------------------------------
LINDSAY GROSS
4
<PAGE> 1
EXHIBIT 10.8
ROCK FINANCIAL CORPORATION
SHAREHOLDERS AGREEMENT
THIS ROCK FINANCIAL CORPORATION SHAREHOLDERS AGREEMENT (the
"Agreement") is made as of April __, 1998, among Gary Gilbert, Lindsay Gross,
Steven Stone, Ross Niskar and Adam Schoener (individually a "Shareholder", and
collectively, the "Shareholders"), Daniel Gilbert and Rock Financial
Corporation, a Michigan corporation (the "Company").
R E C I T A L S
A. Daniel Gilbert, Gary Gilbert and Lindsay Gross are the beneficial
owners and holders of record of an aggregate of 10,000,000 Common Shares, $0.01
par value per share, of the Company. The Company's Common Shares outstanding
from time to time are referred to in this Agreement as the "Shares".
B. Each of Daniel Gilbert's, Gary Gilbert's and Lindsay Gross's current
individual ownership of Shares (after giving effect to the initial public
offering of the Company's Common Shares (the "IPO")) is as follows:
<TABLE>
<CAPTION>
Common Shares
$0.01 Par Value Owned
---------------------
<S> <C>
Daniel B. Gilbert 7,057,101
Gary Gilbert 2,077,298
Lindsay Gross 865,601
-----------
10,000,000
===========
</TABLE>
C. Steven Stone, Ross Niskar and Adam Schoener are the holders of
options to purchase an aggregate of 1,660,684 Common Shares, $0.01 par value per
share, of the Company. Each of Steven Stone's, Ross Niskar's and Adam Schoener's
current individual ownership of options to purchase Common Shares (after giving
effect to the initial public offering of the Company's Common Shares (the
"IPO")) is as follows:
<TABLE>
<CAPTION>
Options to Purchase
Common Shares
$0.01 Par Value Owned
---------------------
<S> <C>
Steven Stone 1,079,454
Ross Niskar 290,615
Adam Schoener 290,615
-----------
1,660,684
===========
</TABLE>
<PAGE> 2
D. The Shareholders, Daniel Gilbert and the Company desire to provide
for continuity in, and harmonious management of, the affairs of the Company by
providing certain restrictions on the voting rights of some of the Shareholders.
THEREFORE, the Shareholders, Daniel Gilbert and the Company agree as
follows:
1 Voting. From the date of this Agreement until the termination of this
Agreement pursuant to Section 4, each Shareholder and "Transferee" (as defined
below) shall vote all of his, her or its Shares and any other voting shares of
the Company's stock owned by such Shareholder or Transferee, upon any matter
submitted to the shareholders of the Company at any annual or special meeting of
the shareholders of the Company, or by written consent, as directed by Daniel
Gilbert. The voting rights set forth in this Section 1 shall be irrevocable
until the termination of this Agreement pursuant to Section 4. For purposes of
this Agreement, "Transferee" means any person or entity to whom or to which any
Shares are transferred by any Shareholder, other than (i) in a public offering
registered under the Securities Act of 1933, as amended (the "Act"), or (ii) in
a transaction complying with Rule 144 under the Act.
2 All Shares Held or Acquired By a Shareholder Are Subject to Agreement.
Any shares of the stock of the Company sold or transferred to, or otherwise
acquired by, any of the Shareholders or any Transferee at any time shall be,
become and remain subject to all the provisions of this Agreement in the same
manner and to the same extent as though owned by such Shareholder at the date of
the execution of this Agreement.
3 Endorsement on Stock Certificates. Each certificate representing Shares
now or later held by the Shareholders and each certificate representing Shares
now or later held by a Transferee during the term of this Agreement, except as
otherwise provided in this Agreement, shall be endorsed with a legend in
substantially the following form:
"The securities represented by this certificate are subject to the
terms of the Rock Financial Corporation Shareholders Agreement, dated
as of April __, 1998, among Rock Financial Corporation, a Michigan
corporation, Daniel Gilbert, Gary Gilbert, Lindsay Gross, Steven Stone,
Ross Niskar and Adam Schoener (the "Agreement"). The Agreement imposes
restrictions on the voting of the common shares represented by this
certificate. Except as described in the Agreement, any person accepting
an interest in these securities, by accepting such interest, will be
deemed to agree to, and become bound by, all of the provisions of the
Agreement. A copy of the Agreement is on file and is available for
examination at the principal office of Rock Financial Corporation."
4 Termination. This Agreement shall terminate upon the occurrence of
any of the following events:
4.1 Dissolution of the Company; or
-2-
<PAGE> 3
4.2 Final, and unappealed from, adjudication of bankruptcy of the
Company; or
4.3 Joint written agreement of the Company, Daniel Gilbert and the
Shareholders; or
4.4 Ten years after the date of this Agreement.
Upon the termination of this Agreement, each Shareholder and each Transferee
shall surrender to the Company the certificate or certificates for his Shares,
and the Company or its transfer agent shall issue to him, her or it in lieu of
such certificate or certificates a new certificate for an equal number of Shares
without the endorsement set forth in Section 3. The indemnities and remedies
contained in this Agreement shall survive and remain in full force and effect
after the termination of this Agreement.
5 Injunctive Relief. The terms, covenants and obligations of this
Agreement relate to special, unique and extraordinary matters, and a violation
of any of the terms, covenants and obligations of this Agreement will cause the
Company, Daniel Gilbert and the Shareholders irreparable injury in an amount
which would be difficult, if not impossible, to estimate or determine and for
which adequate compensation could not be fashioned. Therefore, the Company,
Daniel Gilbert and the other Shareholders will be entitled, jointly and
severally, to an injunction, restraining order or other equitable relief as a
matter of course from any court of competent jurisdiction, restraining each
Shareholder and any other person(s) the court may order from committing any
violation or threatened violation of the terms, covenants or obligations in this
Agreement. The Company's, Daniel Gilbert's and the Shareholders' rights and
remedies under this Section 5 are cumulative and are in addition to any other
rights and remedies that the Company, Daniel Gilbert or any Shareholder may have
under this Agreement or any other agreement or at law or in equity.
6 Indemnification. Each Shareholder and his, her or its Transferees,
personal representatives, guardians, conservators, heirs, devisees, successors
and assigns (collectively, "Successors") indemnifies and holds harmless the
Company and Daniel Gilbert, their successors and assigns, any of the Company's
officers, agents, employees and directors and each of the other Shareholders
(collectively, the Indemnified Parties"):
6.1 against any and all damages, liabilities, claims, losses, taxes
and expenses (including reasonable attorneys' fees, court costs, interest and
expenses) incurred by any Indemnified Party arising out of or relating to any
breach by such Shareholder or by any of his Successors of any of the
representations, warranties, covenants, terms or agreements in this Agreement or
any document executed in connection with this Agreement;
6.2 against any and all damages, liabilities, claims, losses and
expenses, including reasonable attorneys' fees and court costs) incurred by any
Indemnified Party in connection with any action, suit or proceeding in which any
Indemnified Party either enforces or defends the validity of this Agreement or
any other document executed in connection with this Agreement against the
Shareholder or any of his Successors.
-3-
<PAGE> 4
7 Employment. Nothing in this Agreement shall be construed to allow or
guarantee any Shareholder any rights to employment with the Company.
8 Notices. Any and all notices, designations, consents, offers,
acceptances or other communications provided for in this Agreement shall be
given in writing and shall be delivered in person, sent by certified or
registered mail, sent by facsimile or similar method of transmission or sent by
overnight courier, addressed in the case of the Company to its principal office
and in the case of a Shareholder or Daniel Gilbert to his address appearing on
the stock records of the Company or such other address as may be designated by
him.
9 Severability. It is the desire and intent of the parties to this
Agreement that the terms, provisions, conditions, covenants, representations,
warranties and remedies contained in this Agreement will be enforceable to the
fullest extent permitted by law. If any term, provision, condition, covenant,
representation, warranty or remedy of this Agreement or the application thereof
to any person or circumstance will, to any extent, be construed to be illegal,
invalid or unenforceable, in whole or part, then such term, provision,
condition, covenant, representation, warranty or remedy will be construed in a
manner so as to permit its enforceability under the applicable law to the
fullest extent permitted by such law. In any case, the remaining terms,
provisions, conditions, covenants, representations, warranties and remedies of
this Agreement or the application thereof to any person or circumstance, except
those which have been held illegal, invalid or unenforceable, will remain in
full force and effect.
10 Amendment. No change or modification of this Agreement shall be valid
unless it is in writing and signed by the Company, Daniel Gilbert and all of the
Shareholders. As soon as practicable after this Agreement has been amended,
copies of such amendment shall be furnished to Daniel Gilbert and each of the
Shareholders then parties to this Agreement.
11 Governing Law and Forum. The laws of the State of Michigan shall
govern this Agreement, its construction, and the determination of any rights,
duties or remedies of the parties arising out of or relating to this Agreement.
The parties acknowledge that the United States District Court for the Eastern
District of Michigan or the Michigan Circuit Court of the County of Oakland
shall have exclusive jurisdiction over any case or controversy arising out of or
relating to this Agreement and that all litigation arising out of or relating to
this Agreement shall be commenced in the United States District Court for the
Eastern District of Michigan or in the Oakland County (Michigan) Circuit Court.
Each Shareholder irrevocably consents to the jurisdiction of the United States
District Court for the Eastern District of Michigan and the Oakland County
(Michigan) Circuit Court in connection with all actions and proceedings arising
out of, or in any way related to this Agreement.
12 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
-4-
<PAGE> 5
13 Interpretation. The headings contained in this Agreement are solely for
the purpose of reference, are not part of the agreement of the parties and shall
not in any way affect the meaning or interpretation of this Agreement. Wherever
in this Agreement, words, including pronouns, are used in the masculine, they
shall be read and construed in the feminine or neuter whenever they would so
apply, and wherever in this Agreement, words, including pronouns, are used in
the singular or plural, they shall be read and construed in the plural or
singular, respectively, wherever they would so apply.
14 Entire Agreement. This Agreement embodies the entire agreement and
understanding of the parties to this Agreement with respect to the subject
matter of this Agreement. There are no restrictions, promises, representations,
warranties, covenants or undertakings, other than those expressly set forth in
this Agreement. This Agreement supersedes all prior discussions, agreements,
promises, representations, warranties, statements and understandings between the
parties with respect to such subject matter, including, without limitation, the
Rock Financial Corporation Shareholders Agreement, dated as of January 17, 1997,
among Daniel Gilbert, Gary Gilbert, Lindsay Gross and the Company (which
agreement shall no longer have any effect), and any such prior discussions,
agreements, promises, representations, warranties, statements and understandings
are merged into this Agreement.
15 No Waiver. No waiver of any Section or provision of this Agreement will
be valid unless in a writing signed by the party to be charged and only to the
extent set forth in that writing. Unless such a writing expressly provides
otherwise, no waiver of any breach of any agreement or provision contained in
this Agreement shall be deemed a waiver of any preceding or succeeding breach of
this Agreement or of any other agreement or provision contained in this
Agreement, and no such waiver shall constitute a course of conduct which may be
relied upon to justify any subsequent breach of this Agreement. No extension of
time for the performance of any obligations or acts shall be deemed an extension
of time for the performance of any other obligations or acts.
16 Binding Effect; Assignment. This Agreement, and the rights and duties
under it, shall be binding upon and inure to the benefit of the parties to this
Agreement and (i) the Company's successors and assigns, (ii) the beneficiaries,
personal representatives, guardians, conservators, heirs, and devisees of Daniel
Gilbert or any Shareholder, and (iii) any Transferee. This Agreement may not be
assigned by any party (other than Daniel Gilbert) without the prior written
consent of the other parties.
17 Subsequent Documents. The parties agree that they will, at any time,
duly execute and deliver to any party any additional documents and instruments
that such party may reasonably determine to be necessary in connection with the
transactions contemplated in this Agreement, and the failure of a party to
demand such documents or instruments on or before the date of this Agreement
shall not alleviate the obligation of any party to execute and deliver such
documents or instruments at any time, upon the written demand of a party.
-5-
<PAGE> 6
18 Counsel. All parties acknowledge that they have had an opportunity to
obtain separate counsel before execution of this Agreement. This Agreement is
made voluntarily and without duress of any kind.
IN WITNESS WHEREOF, the Company, Daniel Gilbert and the Shareholders
have signed this Agreement as of the day and year set forth in the introductory
paragraph of this Agreement.
In the Presence of: ROCK FINANCIAL CORPORATION
By:
- ----------------------------- ------------------------------
Daniel B. Gilbert
Its: President
------------------------
- ----------------------------- ------------------------------
Daniel Gilbert, Shareholder
- ----------------------------- ------------------------------
Gary Gilbert, Shareholder
- ----------------------------- ------------------------------
Lindsay Gross, Shareholder
- ----------------------------- ------------------------------
Steven Stone, Shareholder
- ----------------------------- ------------------------------
Ross Niskar, Shareholder
- ----------------------------- ------------------------------
Adam Schoener, Shareholder
-6-
<PAGE> 1
EXHIBIT 16.1
[COOPERS & LYBRAND L.L.P. LETTERHEAD]
February 24, 1998
Securities and Exchange Commission
450 Fifth Street N.W.
Washington, D.C. 20549
Gentlemen:
We have read the statements made by Rock Financial Corporation (copy attached),
which we understand will be filed with the Commission, pursuant to Item 11 of
Form S-1, as part of the corporation's registration statement on Form S-1. We
agree with the statements concerning our firm in such Form S-1.
Very truly yours,
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
<PAGE> 2
of a penalty bid may also affect the price of the Common Shares to the extent
that it discourages resales thereof. No representation is made as to the
magnitude or effect of any such stabilization or other transactions. Such
transactions may be effected on The Nasdaq National Market or otherwise and, if
commenced, may be discontinued at any time.
LEGAL MATTERS
The validity of the Common Shares to be offered by this Prospectus will
be passed upon for Rock and the Selling Shareholders by Honigman Miller Schwartz
and Cohn, Detroit, Michigan. Certain legal matters in connection with the
Offering will be passed upon for the Underwriters by Berick, Pearlman & Mills
Co., L.P.A., Cleveland, Ohio.
EXPERTS
The financial statements of Rock Financial Corporation as of
December 31, 1996 and 1997, and for each of the years in the three-year period
ended December 31, 1997, included in this Prospectus and elsewhere in the
Registration Statement have been included in this Prospectus and in the
Registration Statement in reliance upon the report of KPMG Peat Marwick LLP,
independent auditors, appearing elsewhere in this Prospectus, and upon the
authority of such firm as experts in accounting and auditing.
CHANGE IN ACCOUNTANTS
Rock engaged KPMG Peat Marwick LLP as its independent accountants after
it terminated its relationship with Coopers & Lybrand LLP in August 1997. In
connection with its audits for 1996 and 1995 and during the interim period
preceding such termination, there were no disagreements between Rock and
Coopers & Lybrand LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Coopers & Lybrand, would
have caused them to make reference thereto in their report on the financial
statements. No report issued by Coopers & Lybrand LLP with respect to Rock's
financial statements contained any adverse opinion or disclaimer of opinion, or
was qualified or modified as to uncertainty, audit scope or accounting
principles. The decision to change accountants was made by management of Rock.
ADDITIONAL INFORMATION
Rock has filed with the Securities and Exchange Commission a
Registration Statement on Form S-1 under the Securities Act, of which this
Prospectus forms a part, with respect to the Common Shares offered by this
Prospectus. This Prospectus omits certain information contained in the
Registration Statement, and reference is made to the Registration Statement for
further information with respect to Rock and the Common Shares offered by this
Prospectus. Statements contained in this Prospectus concerning the provisions of
documents are necessarily summaries of such documents and when any such document
is an exhibit to the Registration Statement, each such statement is qualified in
its entirety by reference to the copy of such document filed with the
Commission. Copies of the Registration Statement may be acquired upon payment of
the prescribed fees or examined without charge at the public reference
facilities of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.
Please call the SEC at 1-800-SEC-0330 for further information on the operation
of the public reference rooms. In addition, the Registration Statement may be
accessed electronically at the Commission's site on the World Wide Web at
http://www.sec.gov.
Upon completion of the Offering, Rock will be subject to the
informational requirements of the Securities Exchange Act of 1934, as amended,
and, in accordance therewith, will file reports, proxy and information
statements with the Commission. Such reports, proxy and information statements
and other information can be inspected and copied at the address and web site
set forth above.
83
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Rock Financial Corporation:
We consent to the use of our report included herein and to the
reference to our firm under the headings "Selected Financial Data" and
"Experts" in the prospectus.
/s/ KPMG Peat Marwick LLP
Detroit, Michigan
February 25, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF ROCK FINANCIAL CORPORATION AS OF, AND FOR THE YEAR
ENDED, DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS AND ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 11,946,992
<SECURITIES> 0
<RECEIVABLES> 1,626,519
<ALLOWANCES> 0
<INVENTORY> 121,343,814
<CURRENT-ASSETS> 0
<PP&E> 10,440,399
<DEPRECIATION> 3,429,862
<TOTAL-ASSETS> 144,428,897
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 100,000
<OTHER-SE> 15,008,136
<TOTAL-LIABILITY-AND-EQUITY> 144,428,897
<SALES> 0
<TOTAL-REVENUES> 52,109,866
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 300,000
<INTEREST-EXPENSE> 5,149,881
<INCOME-PRETAX> 11,415,356
<INCOME-TAX> 0
<INCOME-CONTINUING> 11,415,356
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,415,356
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
