<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------------ -------------------
Commission file number 000-23887
ROCK FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2603955
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
30600 TELEGRAPH ROAD, FOURTH FLOOR
BINGHAM FARMS, MICHIGAN
48025
(Address of principal executive offices)
(Zip Code)
(248) 540-8000
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ ] No [X]
Number of common shares outstanding as of June 12, 1998: 13,829,500
Page 1 of 28 pages
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ROCK FINANCIAL CORPORATION
Table of Contents
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I--FINANCIAL INFORMATION................................................................................... 3
ITEM 1. FINANCIAL STATEMENTS.......................................................................... 3
BALANCE SHEETS................................................................................ 3
STATEMENTS OF INCOME.......................................................................... 4
STATEMENTS OF CASH FLOWS...................................................................... 5
NOTES TO FINANCIAL STATEMENTS................................................................. 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS........................................................... 9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK................................................................................... 23
PART II--OTHER INFORMATION...................................................................................... 24
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS..................................................... 24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS....................................................................................... 26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.............................................................. 27
SIGNATURES...................................................................................................... 28
</TABLE>
Page 2 of 28 pages
<PAGE> 3
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ROCK FINANCIAL CORPORATION
BALANCE SHEETS
DECEMBER 31, 1997 AND MARCH 31, 1998
<TABLE>
<CAPTION>
Pro Forma
March 31,
December 31, March 31, 1998
ASSETS 1997 1998 (Note 5)
-------------- -------------- ---------------
(Audited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
Cash and cash equivalents ............................... $ 11,946,992 $ 2,994,955 $ 2,994,955
Mortgage loans held for sale ............................ 121,343,814 123,206,026 123,206,026
Mortgage loans held for investment (net of allowance for
losses of $270,000 and $383,519 at December 31,
1997 and March 31, 1998, respectively) ............. 810,293 1,183,447 1,183,447
Real estate owned ....................................... 158,271 204,151 204,151
Shareholders' advances .................................. 1,626,519 1,626,519 --
Property and equipment (net of accumulated depreciation of
$3,429,862 and $3,972,517 at December 31, 1997 and
March 31, 1998, respectively) ...................... 7,010,537 8,871,758 8,871,758
Deferred income taxes ................................... -- -- 1,800,000
Other assets ............................................ 1,532,471 1,868,845 1,868,845
------------- ------------- -------------
Total assets ............................................ $ 144,428,897 $ 139,955,701 $ 140,129,182
============= ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Warehouse line of credit ........................... $ 79,293,856 $ 68,745,717 $ 59,509,948
Reverse repurchase agreement ....................... 18,161,423 4,710,367 4,710,367
Notes payable ...................................... 1,944,445 1,927,778 1,927,778
Drafts payable ..................................... 21,875,184 35,389,681 35,389,681
Accounts payable ................................... 3,255,503 4,176,510 4,176,510
Accrued expenses and other liabilities ............. 4,790,350 5,795,224 5,795,224
------------- ------------- -------------
Total liabilities .............................. 129,320,761 120,745,277 111,509,508
------------- ------------- -------------
Shareholders' equity:
Common shares, $.01 par value. Authorized 50,000,000
shares; issued and outstanding 10,000,000 shares 100,000 100,000 138,295
Additional paid-in capital ......................... 1,423,750 1,423,750 33,975,205
Retained earnings (deficit) ........................ 13,584,386 17,686,674 (5,493,826)
------------- ------------- -------------
Total shareholders' equity ..................... 15,108,136 19,210,424 28,619,674
------------- ------------- -------------
Total liabilities and shareholders' equity .............. $ 144,428,897 $ 139,955,701 $ 140,129,182
============= ============= =============
</TABLE>
Page 3 of 28 pages
<PAGE> 4
ROCK FINANCIAL CORPORATION
STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 1997 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three-Month
Periods Ended March 31,
-------------------------
1997 1998
----------- -----------
Revenue:
<S> <C> <C>
Interest income ......................................... $ 1,269,821 $ 3,099,267
Interest expense ........................................ 863,823 1,737,637
----------- -----------
Net interest margin ................................. 405,998 1,361,630
Provision for credit losses ............................. -- 114,470
----------- -----------
Net interest margin after provision for credit losses 405,998 1,247,160
Loan fees and gains on sale of mortgages ................ 7,172,611 17,663,331
Net gain on sale of marketable securities ............... 685,059 --
Other income ............................................ 49,537 10,420
----------- -----------
8,313,205 18,920,911
----------- -----------
Expenses:
Salaries, commissions and employee benefits ............. 5,018,778 8,494,324
General and administrative expenses ..................... 1,316,125 2,881,938
Marketing expenses ...................................... 644,205 2,899,706
Depreciation and amortization ........................... 213,630 542,655
----------- -----------
7,192,738 14,818,623
----------- -----------
Net income .......................................... $ 1,120,467 $ 4,102,288
=========== ===========
Pro forma information (note 5):
Provision for pro forma income taxes .................... 403,368 1,476,824
----------- -----------
Pro forma net income .................................... $ 717,099 $ 2,625,464
=========== ===========
Pro forma earnings per share:
Basic ................................................... $ 0.05 $ 0.19
=========== ===========
Diluted ................................................. $ 0.05 $ 0.18
=========== ===========
Pro forma weighted average number of shares outstanding:
Basic ................................................... 13,829,500 13,829,500
=========== ===========
Diluted ................................................. 14,911,994 14,911,994
=========== ===========
</TABLE>
Page 4 of 28 pages
<PAGE> 5
ROCK FINANCIAL CORPORATION
STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1997 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three-Month
Periods Ended March 31,
-------------------------------
1997 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................................ $ 1,120,467 $ 4,102,288
------------- -------------
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization ......................................... 213,630 542,655
Provision for credit losses ........................................... -- 114,470
Net gain on sales of marketable securities ............................ (685,059) --
Change in assets and liabilities:
Mortgage loans held for sale - originations ...................... (232,514,506) (459,741,771)
Mortgage loans held for sale - sales ............................. 252,068,817 457,879,559
Other assets ..................................................... 89,551 (336,374)
Drafts payable ................................................... 1,949,865 13,514,497
Accounts payable ................................................. (576,631) 921,007
Accrued expenses and other liabilities ........................... 791,586 1,004,874
------------- -------------
Total adjustments ............................................ 21,337,253 13,898,917
------------- -------------
Net cash provided by operating activities 22,457,720 18,001,205
------------- -------------
Cash flows from investing activities:
Proceeds from sale of marketable securities ............................... 2,271,758 --
Purchase of marketable securities ......................................... (1,152,600) --
Net increase in real estate owned and loans
held for investment ................................................... -- (533,504)
Purchase of equipment ..................................................... (893,571) (2,403,876)
Shareholder (advances) repayments ......................................... (893,530) --
------------- -------------
Net cash used in investing activities ............................ (667,943) (2,937,380)
------------- -------------
Cash flows from financing activities:
Net (payments) borrowings under warehouse line of credit .................. (20,879,677) (10,548,139)
Net (payments) borrowings under reverse repurchase agreement............... -- (13,451,056)
Net (payments) borrowing under notes payable .............................. 1,994,444 (16,667)
------------- -------------
Net cash from financing activities ............................... (18,885,233) (24,015,862)
------------- -------------
Net increase (decrease) in cash and cash equivalents ........................... 2,904,544 (8,952,037)
Cash and cash equivalents, beginning of period ................................. 3,288,751 11,946,992
------------- -------------
Cash and cash equivalents, end of period ....................................... $ 6,193,295 $ 2,994,955
============= =============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest ................................. $ 1,017,035 $ 1,651,630
============= =============
Transfers of loans from held for sale to held
for investment ........................................................ $ -- $ 478,085
============= =============
Transfers of loans from held for investment to
real estate owned ..................................................... $ -- $ 45,880
============= =============
</TABLE>
Page 5 of 28 pages
<PAGE> 6
ROCK FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. FINANCIAL STATEMENT PRESENTATION:
The accompanying unaudited interim financial statements of
Rock Financial Corporation (the "Company") have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission.
Accordingly, such financial statements do not include all of the
information and footnotes normally included in the Company's annual
financial statements prepared in accordance with generally accepted
accounting principles, although the Company believes that the
disclosures are adequate to make the information presented not
misleading.
The accompanying unaudited interim financial statements
reflect all adjustments which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods
presented. All such adjustments are of a normal recurring nature,
except those not material to the Company's financial condition or
results of operations. Operating results for the three-month period
ended March 31, 1998 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1998. The unaudited
interim financial statements should be read in conjunction with the
audited financial statements and footnotes to such financial statements
for the year ended December 31, 1997 included in the Company's
Registration Statement on Form S-1 (file no. 333-46885), effective May
1, 1998.
2. MORTGAGE LOANS HELD FOR SALE AND HELD FOR INVESTMENT:
The following summarizes mortgage loans held for sale by type
at December 31, 1997 and March 31, 1998:
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
------------- --------------
<S> <C> <C>
Prime loans held for sale ................ $ 74,049,209 $ 91,870,443
Sub-prime loans held for sale ............ 38,372,558 23,678,928
High LTV loans held for sale ............. 9,194,343 7,812,110
------------- -------------
121,616,110 123,361,481
Net deferred loan origination costs (fees) (272,296) (155,455)
------------- -------------
Mortgage loans held for sale ......... $ 121,343,814 $ 123,206,026
============= =============
</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. Included in mortgage loans held for investment
at March 31, 1998 was an allowance for credit losses of $383,519, which
included a provision of $114,470 in the first quarter of 1998, offset
by charge-offs of $951.
Page 6 of 28 pages
<PAGE> 7
ROCK FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
As of December 31, 1997 and March 31, 1998, 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, $25,000 of which
was classified as nonaccrual. As of March 31, 1998, there were
approximately $80,000 of loans held for investment that were greater
than 90 days past due, all of which were classified as nonaccrual.
3. INITIAL PUBLIC OFFERING AND RELATED MATTERS:
On May 6, 1998, the Company completed its initial public
offering (the "Offering") of 3,829,500 Common Shares, including 330,000
Common Shares sold by selling shareholders and 3,499,500 newly-issued
Common Shares sold by the Company, at a price of $10.00 per share, for
gross proceeds to the Company of $34,995,000, not including the
$1,544,400 received by the Company upon exercise by the selling
shareholders of options to purchase 330,000 common shares at $4.68 per
share. These options were exercised by the selling shareholders to
acquire the common shares they sold in the Offering. The estimated net
proceeds to the Company from the sale of shares offered by it in the
Offering, after deducting the underwriting discount and the estimated
expenses of the Offering, were approximately $31,045,350. The Offering
was underwritten by a group of underwriters for which Bear, Stearns &
Co. Inc., Prudential Securities Incorporated and Roney & Co. served as
representatives. The December 31, 1997 and March 31, 1998 balance
sheets include approximately $55,000 and $435,000 of capitalized costs
directly associated with the Offering. For a description of the pro
forma effects of the offering on the Company's financial statements,
see note 5.
4. RELATED PARTY TRANSACTIONS:
On May 6, 1998, the Company's short-term advances to a
shareholder were repaid in full out of the proceeds of a dividend to
the Company's then existing shareholders, effective immediately before
the closing of the Offering and payable out of the proceeds of the
Offering, equal to the entire amount of the Company's income taxed or
taxable to the existing shareholders while the Company was an S
corporation, but not yet distributed to them (the "Shareholder
Distribution Amount").
5. 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,
the termination of the Company's S corporation status, the exercise of
options by the Selling Shareholders in connection with the Offering,
and the sale of the Common Shares offered by the Company in the
Offering, occurred as of March 31, 1998, in connection
Page 7 of 28 pages
<PAGE> 8
ROCK FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
with the Offering described in note 3 and to show what the significant
effects on the historical results of operations might have been had the
Company not been treated as an S corporation for income tax purposes as
of the beginning of the earliest period presented.
Pro Forma Balance Sheet - The Company's March 31, 1998 balance
sheet is adjusted for the following pro forma adjustments: (1) the
distribution from retained earnings of the Shareholder Distribution
Amount of $25.0 million (including the $5.4 million tax distribution to
existing shareholders on April 10, 1998), (2) the establishment of a
deferred tax asset of $1.8 million in connection with the termination
of the Company's S corporation status as of March 31, 1998, with an
offsetting increase in retained earnings, (3) although he was not
required to do so, the repayment by one of the Company's shareholders
of the entire outstanding balance of shareholder advances
(approximately $1.6 million as of March 31, 1998) with his share of the
Shareholder Distribution Amount, and the Company's use of that cash to
repay a portion of the amounts outstanding under its warehouse line of
credit, (4) the receipt by the Company of approximately $1.5 million
upon exercise by certain of the Company's option holders of 330,000
options at $4.68 a share to acquire the Common Shares they sold in the
Offering and the Company's application of the estimated net proceeds
therefrom to repay a portion of the amounts outstanding under its
warehouse line of credit, and (5) the sale of the Common Shares offered
by the Company in the Offering and the application of the estimated net
proceeds therefrom to fund the Shareholder Distribution Amount and
repay a portion of the amounts outstanding under its warehouse line of
credit. Due to the payment of the estimated accumulated Subchapter S
corporate earnings paid to the shareholders in the Shareholder
Distribution Amount of $25.0 million, the Company does not expect to
have any undistributed "S" corporation earnings. The principal
component of the Company's pro forma deferred tax asset related to
the temporary differences between tax and book accounting for
recognition of gains on sales of mortgage loans. The amount of the
deferred tax asset recorded is based on the amount of such temporary
differences at May 6, 1998, the date of revocation of the Company's
S corporation status.
Pro Forma Net Income - The presentation of pro forma net
income represents the historical results of operations adjusted to
recognize federal and state income taxes as if the Company 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 36.0%.
Pro forma basic earnings per share has been computed by
dividing pro forma net income by the 13,829,500 average shares assumed
to be outstanding including the 3,499,500 shares sold by the Company in
the Offering and the 330,000 shares sold by certain existing
shareholders in the Offering (after exercising options to purchase
those shares from the Company). Pro forma diluted earnings per share
has been computed by dividing pro forma net income by the 14,911,994
average shares assumed to be outstanding, including the 3,499,500
shares sold by the Company in the Offering and the 330,000 shares to be
sold by certain existing shareholders in the Offering (after
exercising options to purchase those shares from the Company) as well
as the number of common stock equivalent shares assumed to be
outstanding upon exercise of the Company's stock options existing as of
March 31, 1998, using the treasury stock method and the initial public
offering price of $10.00 per share.
Page 8 of 28 pages
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
With the exception of historical information, certain of the matters
discussed in this Management's Discussion and Analysis of Financial Condition
and Results of Operations 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 the Company's current views in respect of
future events in financial performance, but are subject to many risks,
uncertainties and factors relating to the Company's operations and business
environment which may cause its actual results to differ materially from
historical results or any future results expressed or implied by such forward-
looking statements. Such risks and uncertainties include the factors described
under the caption "Risk Factors" and elsewhere in the Company's Registration
Statement on Form S-1 (file no. 333-46885) effective May 1, 1998 and elsewhere
in this Report.
GENERAL
The Company is a specialty finance company marketing conventional and
sub-prime debt consolidation and home financing loans, secured primarily by
first or second mortgages on one- to four-family, owner-occupied residences. The
Company originates loans through 26 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, the Company originates 100% of its loans
through its retail operations, marketing its loans directly to consumers.
The Company currently operates through three major divisions. The
Company 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. The
Company originates home equity second mortgage loans to individuals with good
credit histories but little or no equity in their homes ("High LTV Loans")
through its Specialty Lending division, which commenced its current operations
in March 1997. Since its inception in 1985, the Company 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, the
Company began to increase its government insured lending operations in 1997,
primarily making mortgage loans that meet the underwriting standards for FHA
insurance.
TERMINATION OF S CORPORATION STATUS AND INCOME TAXES
Simultaneously with the closing of the Company's initial public
offering on May 6, 1998 (the "Offering"), the Company ceased to be taxed as an
S corporation under the Internal Revenue Code of 1986, as amended (the "Code").
In connection with the termination of its S corporation status, the Company
paid previously-earned and undistributed taxable income (the
Page 9 of 28 pages
<PAGE> 10
"Shareholder Distribution Amount") out of the net proceeds of the
Offering to the Company's shareholders existing immediately before the closing
of the Offering (the "Existing Shareholders"). The Shareholder Distribution
Amount (including the approximately $5.4 million tax distribution to existing
shareholders on April 10, 1998) was approximately $25.0 million, and is subject
to adjustment upon final determination of the amount of previously-earned and
undistributed taxable income through May 5, 1998.
As an S corporation, the Company's income, whether or not distributed,
was taxed at the shareholder level for federal and state tax purposes. As a
result of the termination of its S corporation status, the Company is subject to
federal and state income taxation and has recorded a $1.8 million deferred tax
asset on its balance sheet in the second quarter of 1998. The amount of the
deferred tax asset is based on timing differences between tax and book
accounting relating principally to marking loans to market for tax purposes. The
pro forma provision for income taxes in the interim statements of income show
results as if the Company had been subject to federal and state taxation at the
tax rates effective for the periods presented.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998
VERSUS THREE MONTHS ENDED MARCH 31, 1997
The following table sets forth the revenues and expenses and pre-tax
income for the Company for the three months ended March 31, 1997 and 1998:
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1997 1998
---------- ----------
(In thousands)
<S> <C> <C>
Total revenue before gains on sale of
marketable securities ................. $ 7,628 $ 18,921
Net gain on sale of marketable securities 685 --
-------- --------
Total revenue ........................... 8,313 18,921
Total expenses .......................... (7,193) (14,819)
-------- --------
Pre-tax income .......................... $ 1,120 $ 4,102
======== ========
</TABLE>
During the first quarter of 1998, the Company closed $482.9 million of
loans (5,008 loans), an increase of $246.5 million, or 104.2%, from the $236.4
million of loans (2,090 loans) closed in the first quarter of 1997. The
Company's total revenues increased to $18.9 million in the first quarter of
1998 from $8.3 million in the first quarter of 1997, an increase of $10.6
million, or 127.7%, which included a net decrease of $0.7 million in gains on
sales of marketable securities over 1997. Excluding gains on sales of
marketable securities, the Company's total revenues increased to $18.9 million
in the first quarter of 1998 from $7.6 million in the first quarter of 1997, an
increase of $11.3 million, or 148.0%. The increase in revenues is primarily due
to (i) an increase of $186.0 million, or 101.0%, in the volume of Conventional
Loans closed by the Company in the first quarter of 1998 compared to the first
Page 10 of 28 pages
<PAGE> 11
quarter of 1997, (ii) an increase of $54.4 million, or 110.2%, in the
volume of Sub-Prime Loans closed by the Company in the first quarter of 1998
compared to the first quarter of 1997, and (iii) the Company's sale of $25.1
million fewer loans than it closed, including $35.0 million fewer Conventional
Loans than it closed and $11.1 million more Sub-Prime Loans than it closed, in
the first quarter of 1998, compared to the Company's sale of $15.6 million more
loans than it closed, including $25.8 million more Conventional Loans than it
closed and $10.6 million fewer Sub-Prime Loans than it closed in the first
quarter of 1997.
Total expenses increased from $7.2 million in the first quarter of 1997
to $14.8 million in the first quarter of 1998, an increase of $7.6 million, or
106.0%, primarily due to increased commissions, increased occupancy costs for
new stores and increases in general and administrative expenses that fluctuate
with increases in volumes of loans closed and numbers of employees.
The 13 stores, one marketing center and two branches that have opened
since July 1, 1997 (including four stores in the fourth quarter of 1997, five
stores in January 1998 and two branches in the second quarter of 1998),
contributed significantly less to the Company's revenues and net income in the
first quarter of 1998 than stores that have been in operation for at least
twelve months. The stores opened in January 1998 and some of the stores opened
late in 1997 operated at a net loss aggregating approximately $1.6 million in
the first quarter of 1998. The Company believes that its new stores generally
mature over a twelve- to eighteen-month time period.
The following table sets forth information regarding the components of
the Company's revenues for the three months ended March 31, 1997 and 1998:
<TABLE>
<CAPTION>
Three Months
Ended March 31,
---------------------
1997 1998
-------- ---------
(in thousands)
<S> <C> <C>
Interest income .......................................... $ 1,269 $ 3,099
Interest expense ......................................... (864) (1,738)
-------- --------
Net interest margin ................................. 405 1,361
Provision for credit losses .............................. -- (114)
-------- --------
Net interest margin after provision for credit losses 405 1,247
Loan fees and gains on sale of mortgages ................. 7,173 17,663
Net gain on sale of marketable securities ................ 685 --
Other income ............................................. 50 10
-------- --------
Total revenue ....................................... $ 8,313 $ 18,920
======== ========
</TABLE>
Net interest margin increased to $1.4 million in the first quarter of
1998 from $0.4 million in the first quarter of 1997, an increase of
$1.0 million, or 235.4%. The increase was primarily due to (i) the increase in
the dollar volume of loans closed by the Company, (ii) an increase in the
portion of loans sold on a "bulk" or assignment of trade basis, rather than on
a
Page 11 of 28 pages
<PAGE> 12
"flow" basis, resulting in an increase in the length of time loans were
held before sale, which allowed the Company to take advantage of the positive
net interest margin, (iii) higher weighted average interest rates charged
on the loans as a result of the increased proportion of Sub-Prime Loans, which
generally have higher interest rates, (iv) a decrease in the weighted average
interest rates charged on the Company's borrowing facilities (from 7.05% in the
first quarter of 1997 to 6.93% in the first quarter of 1998), and (v) the
Company's increased use of internally-generated cash to fund its loans.
The Company 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. In addition, by
increasing net interest margin by holding loans for longer periods of time, the
Company is subject to a higher risk of delinquencies and resulting foreclosure
losses. The Company did not record a provision for credit losses in the first
quarter of 1997 and recorded a provision for credit losses of approximately
$114,000 in the first quarter of 1998 for future repurchase or substitution
requirements relating to loans sold before March 31, 1997 and 1998,
respectively, and credit risk for loans held for sale and investment. During the
first quarters of 1997 and 1998, zero and two loans, respectively, were
reclassified as real estate owned, resulting in no charges against the reserve
in the first quarter of 1997 and charges of $951 in the first quarter of 1998.
Loan fees and gains on sale of mortgages increased to $17.7
million in the first quarter of 1998 from $7.2 million in the first quarter of
1997, an increase of $10.5 million, or 146.3%. This increase is primarily due to
a $184.1 million, or 100.0%, increase in the volume of Conventional Loans closed
by the Company in the first quarter of 1998, compared to the first quarter of
1997, and a $54.4 million, or 110.2%, increase in the volume of Sub- Prime Loans
closed by the Company in the first quarter of 1998 compared to the first quarter
of 1997. During the first quarter of 1998, the Company sold $23.9 million fewer
loans than it closed, including $35.0 million fewer Conventional Loans than it
closed and $11.1 million more Sub-Prime Loans than it closed.
The increase in loan fees and gains on sale of mortgages was partially
offset by an increase in the Company's recapture reserve in the first quarter
of 1998. Some Sub-Prime Loan sales require the Company to return a portion of
the premium received by the Company on the sale of the loan if the loan is
prepaid by the customer within the first year after sale. The Company records a
provision for this risk based on its evaluation of the terms of its sale
contracts and its assumptions concerning prepayments. The Company increased its
reserve, and decreased its loan fees and gains on sale of mortgages, by
approximately $224,000 for this risk in the first quarter of 1998, compared to
an increase of approximately $141,000 in the first quarter of 1997.
Net gain on sale of marketable securities was approximately $685,000 in
the first quarter of 1997. Before the end of 1997, the Company had invested some
of its excess cash in marketable securities. During 1997, the Company sold its
remaining portfolio of marketable securities held for sale. No such marketable
securities were held by the Company at
Page 12 of 28 pages
<PAGE> 13
December 31, 1997 or at March 31, 1998, and, therefore, the gains on sakes will
not continue in the future.
The following table sets forth information regarding the componenets of
the Company's expenses for the three months ended March 31, 1997 and 1998:
<TABLE>
<CAPTION>
Three Months
Ended March 31,
---------------------------
1997 1998
------ -----
(in thousands)
<S> <C> <C>
Salaries, commissions and employee benefits............................ $5,019 $8,494
General and administrative expenses.................................... 1,316 2,882
Marketing expenses..................................................... 644 2,900
Depreciation and amortization.......................................... 214 543
----- -----
Total expenses.................................................... $7,193 $14,819
====== =======
</TABLE>
Salaries, commissions and employee benefits increased from $5.0 million
in the first quarter of 1997 to $8.5 million in the first quarter of 1998, an
increase of $3.5 million, or 69.3%. The increase was primarily attributable to
the Company hiring additional personnel in order to generate increased levels of
loan closings, increased compensation for new management team members, and
increased commissions due to increased closings. The Company employed 423
persons as of March 31, 1997, compared to 770 persons as of March 31, 1998, an
82.0% increase. These expenses are expected to continue to increase in 1998 as a
result of additional employees hired in 1997 and expected to be hired in 1998 in
connection with the opening of new stores and branches 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 $1.3 million in the first quarter of
1997 to $2.9 million in the first quarter of 1998, an increase of $1.6 million,
or 119.0%. 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, five new Fresh Start(TM) stores in January 1998, one
new Conventional Mortgage Lending branch during 1997 and two new Conventional
Mortgage Lending branches in the second quarter of 1998 and to significantly
expanded Specialty Lending activities in 1997 and 1998. In addition, recruiting
expenses increased in 1998 primarily due to the opening of the new Fresh
Start(TM) stores. These expenses are expected to increase in 1998 as a result of
new stores and branches and expansion of existing operations.
Marketing expenses increased from $0.6 million in the first quarter of
1997 to $2.9 million in the first quarter of 1998, an increase of $2.3 million,
or 350.1%. The increase was primarily attributable to the Company's greater
marketing of Sub-Prime Loans, 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 the Company's High LTV Loans. This increase
is
Page 13 of 28 pages
<PAGE> 14
primarily the result of the Company's increased focus on its Sub-Prime Loan
business, which required greater marketing related to new store openings, and
ongoing marketing. These expenses are expected to continue to increase in 1998
in connection with new stores and branches and expansion of existing operations
into new geographic markets.
Depreciation and amortization expenses increased from $0.2 million in
the first quarter of 1997 to $0.5 million in the first quarter of 1998, an
increase of $0.3 million, or 154.0%. The increase was primarily attributable to
the Company's purchase of a front-end origination computer system in 1997 and
purchases of additional equipment and leasehold improvements during 1997 and
1998 for new stores. These expenses are expected to continue to increase in 1998
as a result of new stores and branches and expansion of existing operations.
Effective May 6, 1998, the Company's tax status changed from that of an
S corporation to that of a C corporation. As a C corporation, the Company will
be subject to federal and state income taxation. As an S corporation, the
Company's taxable income is included in the individual returns of the
shareholders.
SEGMENT ANALYSIS
The Company's recent and rapid growth may have a distortive impact on
some of the Company's ratios and financial statistics and may make
period-to-period comparisons difficult. In light of the Company's growth,
historical performance of the Company's earnings may be of little relevance in
predicting future performance. Furthermore, the Company's financial statistics
may not be indicative of the Company's results in future periods. Additionally,
the sensitivity of Conventional Loans to interest rates and the effect of
interest rates on the volume of loan production will impact period to period
comparisons.
Management expects that the factors enumerated above will continue and
expects segment contributions to vary from period to period. In order to
demonstrate the effect these varying factors have on loan production, revenue
and profits, management has elected, where appropriate, to disclose more than
year to year comparisons, to show the results of its divisions.
The following table shows the contribution to revenues and expenses and
the loan closings of each of the Company's divisions for the quarters ended
March 31, 1997, December 31, 1997 and March 31, 1998:
Page 14 of 28 pages
<PAGE> 15
<TABLE>
<CAPTION>
For the Quarter Ended
-----------------------------------------
March 31, December 31, March 31,
1997 1997 1998
------------- ------------- -----------
(In thousands)
<S> <C> <C> <C>
FRESH START(TM):
Revenue ..................... $ 3,569.8 $ 9,323.9 $ 9,275.6
Expenses .................... (2,479.4) (5,865.4) (5,856.3)
------------ ---------- ----------
Division contribution ... 1,090.4 3,458.5 3,419.3
------------ ---------- ----------
SPECIALTY LENDING:
Revenue ..................... 79.5 3,405.3 2,753.8
Expenses .................... (188.5) (1,751.0) (1,841.1)
------------ ---------- ----------
Division contribution ... (109.0) 1,654.3 912.7
------------ ---------- ----------
CONVENTIONAL MORTGAGE LENDING:
Revenue ..................... 3,796.5 5,050.7 6,663.1
Expenses .................... (2,261.0) (3,099.3) (3,807.2)
------------ ---------- ----------
Division contribution ... 1,535.5 1,951.4 2,855.9
------------ ---------- ----------
OTHER REVENUE .................... 867.5 20.6 228.3
OTHER EXPENSES ................... (2,263.9) (3,175.9) (3,313.9)
------------ ---------- ----------
Pre-tax income .............. 1,120.5 3,908.9 4,102.3
PROVISION FOR PRO FORMA INCOME
TAX............................... 403.4 1,407.2 1,476.8
------------ ---------- ----------
PRO FORMA NET INCOME ............. $ 717.1 $ 2,501.7 $ 2,625.5
============ ========== ==========
LOAN CLOSINGS:
Fresh Start(TM) ............. $ 48,212 $ 90,774 $ 80,495
Specialty Lending ........... 1,118 29,078 23,203
Conventional Mortgage Lending 184,147 257,694 368,234
Other ....................... 2,955 5,215 9,090
------------ ---------- ----------
Total Loan Closings ..... $ 236,432 $382,761 $481,022
============ ========== ==========
</TABLE>
Although revenues increased in the first quarter of 1998 compared to
the fourth quarter of 1997 and the first quarter of 1997, the contribution by
segment differed from quarter to quarter. In the first quarter of 1998, the
Conventional Mortgage Lending division contributed $6.7 million, or 35.2%, of
revenues, compared to $5.1 million, or 28.4%, in the fourth quarter of 1997 and
$3.8 million, or 45.7%, in the first quarter of 1997. The Fresh Start(TM)
division contributed $9.3 million, or 49.0%, of revenues in the first quarter of
1998, compared to $9.3 million, or 52.3%, in the fourth quarter of 1997 and $3.6
million, or 43.0%, in the first quarter of 1997. The Specialty Lending division
contributed $2.8 million, or 14.6%, of revenues in the first quarter of 1998
compared to $3.4 million, or 19.1%, of revenues in the fourth quarter of 1997
and $79,500, or 1.0%, in the first quarter of 1997. The Company's pro forma net
income increased from $2.5 million in the fourth quarter of 1997 to $2.6 million
in the first quarter of
Page 15 of 28 pages
<PAGE> 16
1998, an increase of $0.1 million, or 5.0%, and increased from $0.7 million in
the first quarter of 1997, an increase of $1.9 million, or 266.6%.
THREE MONTHS ENDED MARCH 31, 1998
VERSUS THREE MONTHS ENDED MARCH 31, 1997
FRESH START(TM): The Fresh Start(TM) division generated $9.3 million in
revenue in the first quarter of 1998 versus $3.6 million of revenue in the first
quarter of 1997. The 159.8% increase in revenue is mainly attributable to a
138.6% increase in sales of Sub-Prime Home Equity Loans in the first quarter of
1998 compared to the first quarter of 1997, and to the division beginning to
sell loans by bulk sales in the second quarter of 1997, which generate higher
premiums than sales of individual loans. The greater loan sales are primarily
attributable to (i) an increase in Sub-Prime Home Equity Loan closings as a
result of more stores open in the first quarter of 1998 than in the first
quarter of 1997 and an increase in same store loan closings, and (ii) the sale
of $9.6 million more Sub-Prime Home Equity Loans in the first quarter of 1998
than were closed, compared to $10.4 million fewer in the first quarter of 1997.
Stores that were open before January 1, 1997 closed an average of $9.9 million
of Sub-Prime Home Equity Loans during the first quarter of 1998 compared to $9.6
million in the first quarter of 1997.
Direct expenses of the Fresh Start(TM) division were $5.9 million on
closings of $80.5 million (7.3%) in the first quarter of 1998 compared to $2.5
million on closings of $48.2 million (5.1%) in the first quarter of 1997. The
136.2% increase in expenses is partially attributable to the 67.0% increase in
the volume of closed Sub-Prime Home Equity Loans and the opening of 13 new
stores and one marketing center since July 1, 1997. Due to these new store
openings (including four stores in the fourth quarter of 1997 and five stores in
January 1998), the Company expects these stores to contribute significantly less
to its revenues and net income and more to its expenses in the second and
possible 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 operated at a net loss aggregating approximately $1.6 million in
the first quarter of 1998.
SPECIALTY LENDING: The Specialty Lending division commenced its current
operations in the first quarter of 1997. The staffing and expenses of the
start-up were incurred with minimal contribution to revenues. Therefore, period
to period comparisons are less meaningful. The division sold $1.5 million more
High LTV Loans in the first quarter of 1998 than were closed, compared to $0.2
million fewer sold in the first quarter of 1997 than were closed.
CONVENTIONAL MORTGAGE LENDING: The Conventional Mortgage Lending
division generated $6.7 million in revenue in the first quarter of 1998 versus
$3.8 million of revenue in the first quarter of 1997. The 75.5% increase in
revenue is mainly attributable to a 59.6% increase in sales of Conventional
Loans in the first quarter of 1998 compared to the first quarter of 1997. The
greater loan sales are primarily attributable to an increase in Conventional
Loan closings as a result of a more favorable interest rate environment, the
hiring of additional
Page 16 of 28 pages
<PAGE> 17
loan officers, and, to some extent, the significant efficiencies gained
through the implementation of automated underwriting systems and other
proprietary technology, partially offset by the sale of $35.0 million fewer
Conventional Loans in the first quarter of 1998 than were closed, compared to
$25.8 million more sold in the first quarter of 1997 than were closed.
Management believes that a significant increase in interest rates could reduce
the volume of Conventional Loans closed by the division as a result of a
decrease in refinancing of existing mortgages by consumers.
Direct expenses of the Conventional Mortgage Lending division were $3.8
million on closings of $368.2 million (1.03%) in the first quarter of 1998
compared to $2.3 million on closings of $184.1 million (1.23%) in the first
quarter of 1997. The 68.4% increase in expenses is primarily attributable to
the 100.0% increase in the volume of closed Conventional Loans. The Company
believes that greater volumes contributed significantly to reducing expenses as
a percentage of closings (1.03% in the first quarter of 1998 verses 1.23% in
the first quarter of 1997) and, to some extent, implementation of automated
underwriting systems and other proprietary technology contributed to increased
efficiencies in its operations. Management believes that a significant increase
in interest rates could reduce the volume of Conventional Loans closed by the
division and, therefore, increase its per loan cost to originate Conventional
Loans, reducing its profitability.
OTHER REVENUE: Other revenue includes contributions from sales of
marketable securities and government insured lending. Most of the other revenue
in the first quarter of 1997 consisted of non-recurring (approximately $685,000)
gains on sales of marketable securities. The first quarter of 1998 reflected the
activity of government insured lending, including the gain on sale of government
insured loans.
OTHER EXPENSES: Other expenses include expenses not directly allocable
to a particular division, such as the costs associated with the Company's legal,
marketing, accounting, information systems, facilities management, servicing and
general and administrative support teams. The direct expenses of government
insured lending are also reflected within these expenses.
THREE MONTHS ENDED MARCH 31, 1998
VERSUS THREE MONTHS ENDED DECEMBER 31, 1997
FRESH START(TM): The Fresh Start(TM) division generated $9.3 million in
revenue in the first quarter of 1998 and in the fourth quarter of 1997.
The 0.5% decrease in revenue is mainly attributable to lower weighted average
loan fees and gains on sales of mortgages in the first quarter of 1998 and a
change in the mix of "bulk" sales as a percentage of overall sales,
substantially offset by a 14.3% increase in sales of Sub-Prime Home Equity
Loans in the first quarter of 1998 compared to the fourth quarter of 1997. The
weighted average loan fees along with gains on sales of mortgages earned by
the Company decreased by 6.7% in the first quarter of 1998 compared to the last
half of 1997.
Page 17 of 28 pages
<PAGE> 18
These decreases were offset by the sale of $9.6 million more Sub-Prime
Home Equity Loans in the first quarter of 1998 than were closed, compared to
$11.9 million fewer in the fourth quarter of 1997. Management believes that loan
closings were lower in the first quarter of 1998 versus the fourth quarter of
1997, partially due to the seasonality of the business and partially because the
Company moved some of its higher producing loan officers into new stores in the
first quarter. Stores that were opened before January 1, 1997 closed an average
of $9.9 million of Sub-Prime Home Equity Loans during the first quarter of 1998
compared to $11.4 million in the fourth quarter of 1997. Management expects that
the personnel relocations will result in short-term decreases in loan closings
at the mature stores from which these new store managers were moved, but
believes that these moves will enable the new stores to mature and reach full
productivity more quickly.
Direct expenses of the Fresh Start(TM) division were $5.9 million on
closings of $80.5 million (7.3%) in the first quarter of 1998 compared to $5.9
million on closings of $90.8 million (6.5%) in the fourth quarter of 1997.
Management believes that the increase in expenses as a percentage of closings is
primarily due to the continuing absorption of the start-up expenses of the four
new stores opened in the fourth quarter of 1997 and the five new stores opened
in January 1998. A new store opening requires the Company 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. The Company expects these stores to
contribute significantly less to its revenues and net income and more to its
expenses in the second and possible third quarters of 1998.
SPECIALTY LENDING: The Specialty Lending division generated $2.8
million in revenue in the first quarter of 1998 versus $3.4 million of revenue
in the fourth quarter of 1997. The 19.1% decrease in revenue is mainly
attributable to (i) a 11.0% decrease in sales of High LTV Loans in the first
quarter of 1998 compared to the fourth quarter of 1997, and (ii) a 13.2%
decrease in average loan fees and gains on sales of High LTV Loans in the first
quarter of 1998 compared to the fourth quarter of 1997. Management believes that
the lower loan sales are primarily attributable to an decrease in High LTV Loan
closings as a result of (i) the conscious decision to shift part of the
Company's Specialty Lending division's sales force to handle the
high demand for Conventional Loans during the first quarter of 1998, and (ii)
the seasonality of the business. The decrease in High LTV Loan closings was
partially offset by the sale of $1.5 million more High LTV Loans in the first
quarter of 1998 than were closed, compared to $1.3 million fewer in the fourth
quarter of 1997. The Company expects that it will continue to shift part of the
Specialty Lending division's sales force to handle Conventional Loans into the
second quarter of 1998 and management believes expects this practice will reduce
second quarter High LTV Loan closings from first quarter levels.
Direct expenses of the Specialty Lending division were $1.8 million on
closings of $23.2 million (7.9%) in the first quarter of 1998 compared to $1.8
million on closings of $29.1 million (6.0%) in the fourth quarter of 1997. The
31.6% increase in expenses as a percentage of closings is primarily attributable
to increased marketing expenses.
Page 18 of 28 pages
<PAGE> 19
CONVENTIONAL MORTGAGE LENDING: The Conventional Mortgage Lending
division generated $6.7 million in revenue in the first quarter of 1998 versus
$5.1 million of revenue in the fourth quarter of 1997. The 31.9% increase in
revenue is mainly attributable to a 41.9% increase in sales of Conventional
Loans in the first quarter of 1998 compared to the fourth quarter of 1997. The
greater loan sales are primarily attributable to an increase in Conventional
Loan closings as a result of a more favorable interest rate environment, which
caused a significant increase in loan refinancings, and, to some extent, the
significant efficiencies gained through the implementation of automated
underwriting systems and other proprietary technology, partially offset by the
seasonality of the business and the sale of $35.0 million fewer Conventional
Loans in the first quarter of 1998 than were closed, compared to $21.5 million
fewer in the fourth quarter of 1997. Management believes that a significant
increase in interest rates could reduce the volume of Conventional Loans closed
by the division as a result of a decrease in refinancing of existing mortgages
by consumers.
Direct expenses of the Conventional Mortgage Lending division were $3.8
million on closings of $368.2 million (1.03%) in the first quarter of 1998
compared to $3.1 million on closings of $257.7 million (1.20%) in the fourth
quarter of 1997. The 22.8% increase in expenses is primarily attributable to
the 42.9% increase in the volume of closed Conventional Loans. The Company
attributes the efficiency gain of 0.17% to economies of scale gained through
increased loan closings and, to some extent, the significant efficiencies of
the implementation of automated underwriting systems and other proprietary
technology. Management believes that a significant increase in interest rates
could reduce the volume of Conventional Loans closed by the division and,
therefore, increase its per loan cost to originate Conventional Loans, reducing
its profitability.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth information concerning the Company's
financial condition as of December 31, 1997 and March 31, 1998:
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
-------------- --------------
(In thousands)
<S> <C> <C>
Cash and cash equivalents.......................... $ 11,947 $ 2,995
Mortgage loans held for sale....................... 121,344 123,206
Property and equipment, net........................ 7,011 8,872
Other assets....................................... 4,127 4,883
-------------- --------------
Total assets................................... $ 144,429 $ 139,956
============== ==============
Warehouse borrowings............................... $ 97,455 $ 73,456
Drafts payable..................................... 21,875 35,390
Other liabilities.................................. 9,991 11,900
Shareholders' equity............................... 15,108 19,210
-------------- --------------
Total liabilities and shareholders' equity..... $ 144,429 $ 139,956
============== =============
</TABLE>
Page 19 of 28 pages
<PAGE> 20
Cash and cash equivalents decreased in the first quarter of 1998
primarily due to the use of cash to pay down warehouse borrowings, partially
offset by cash generated from operations. Mortgage loans held for sale
increased due to higher volume of originations than sales in the first quarter
of 1998 by the Conventional Mortgage Lending division, partially offset by the
sale of more Sub-Prime Loans by the Company than it originated in the first
quarter of 1998. See "Results of Operations." Property and equipment increased
due to new Fresh Start(TM) store openings. Other assets at March 31, 1998
include loans to a shareholder of approximately $1.6 million, which were repaid
out of the Shareholder Distribution Amount, approximately $1.2 million of loans
held for investment, net of approximately $384,000 of allowances for losses on
these loans, approximately $204,000 of real estate owned as a result of
foreclosures, and approximately $1.9 million of miscellaneous assets.
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 the Company's status as an S corporation until May 6, 1998.
Net cash provided by operating activities during the first three months
of 1998 before increases or decreases in loans held for sale was approximately
$19.9 million, compared to approximately $2.9 million in the first three months
of 1997. Cash was provided primarily by (i) the Company's pre-tax income for the
first three months of 1998 (approximately $4.8 million before depreciation and
amortization, provision for credit losses and net gain on sales of marketable
securities in 1998, compared to approximately $0.6 million in 1997), (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
$13.5 million in 1998, compared to approximately $1.9 million in 1997), 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 1998 (approximately $1.9 million in 1998,
compared to approximately $0.2 million in 1997). These increases were partially
offset by cash used to increase other assets, primarily related to prepaid
expenses of the Offering.
These sources of cash were partially offset primarily by cash used to
fund the increase in loans held for sale resulting from the increased volume of
closings in 1998 (approximately $1.9 million in 1998, compared to approximately
$19.6 million provided by the decrease in loans held for sale in 1997). Cash was
also used during the first three months of 1998 to purchase equipment for new
stores (approximately $2.4 million in 1998, compared to approximately $0.9
million in 1997), and (ii) for real estate owned and loans held for investment
(approximately $0.5 million in 1998, compared to zero in 1997). The Company also
used cash to decrease borrowings under the Company's warehouse financing
facilities (approximately $24.0 million in 1998, compared to approximately $20.9
million in the first three months of 1997). These uses of cash were financed
primarily by cash generated by operations. During the first three months of
1997, cash was also used to purchase marketable securities (approximately $1.2
Page 20 of 28 pages
<PAGE> 21
million and to fund advances to shareholders (approximately $0.9 million), and
approximately $2.0 million of cash was provided by borrowings under notes
payable.
The Company has $350 million of warehouse financing facilities, an
increase from $90 million of warehouse financing facilities as of March 31,
1997. The Company's warehouse line of credit currently provides for up to $150
million principal amount of demand loans secured by loans held for sale and
other assets of the Company. 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 6.97% during the first quarter of 1998). As of June
10, 1998, the Company had borrowed $85.4 million under this facility and had a
maximum of $64.6 million available for additional borrowings.
In addition to the $150 million warehouse line of credit, the Company's
reverse repurchase arrangement provides that the lender, an affiliate of one of
the representatives of the underwriters in the Company's Offering, will purchase
from the Company at par, subject to the Company's agreement to repurchase on a
daily basis, up to $200 million of fully-amortizing, first or junior lien
residential mortgage loans and home equity loans that comply with the Company'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 1999. The effective weighted
average interest rate to the Company of this arrangement in the first quarter of
1998 was 6.84%. The Company uses this facility as a supplemental borrowing
facility to fund loans closed by the Company until they are sold. As of June 10,
1998, the Company had financed $16.8 million of loans under this facility and an
additional $183.2 million was available for future financings.
On May 6, 1998, the Company completed its Offering of 3,829,500 Common
Shares, including 330,000 Common Shares sold by selling shareholders and
3,499,500 newly-issued Common Shares sold by the Company, at a price of $10.00
per share, for gross proceeds to the Company of $34,995,000, not including the
$1,544,400 received by the Company upon exercise by the selling shareholders of
options to purchase 330,000 common shares at $4.68 per share. These options were
exercised by the selling shareholders to acquire the common shares they sold in
the Offering. The estimated net proceeds to the Company from the sale of shares
offered by it in the Offering, after deducting the underwriting discount and the
estimated expenses of the Offering, were approximately $31,045,350. The Offering
was underwritten by a group of underwriters for which Bear, Stearns & Co. Inc.,
Prudential Securities Incorporated and Roney & Co. served as representatives.
The December 31, 1997 and March 31, 1998 balance sheets include approximately
$55,000 and $435,000 of capitalized costs directly associated with the Offering.
For a description of the pro forma effects of the offering on the Company's
balance sheet, see note 5 of the Notes to Financial Statements in Item 1 of this
Report.
Page 21 of 28 pages
<PAGE> 22
The net proceeds of the Offering, together with cash flows from
operations, are expected to be sufficient to fund the Company's liquidity
requirements for the next 12 months, if the Company's future operations are
consistent with management's expectations. The Company, 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. The Company has no commitments for any such additional
financings, and there can be no assurance that the Company will be able to
obtain any such additional financing at the times required and on terms and
conditions acceptable to the Company. In such event, the Company's growth and
operations could be curtailed. If the Company begins to securitize its assets or
significantly increases its retained mortgage servicing rights, the Company's
liquidity could be materially adversely affected.
Page 22 of 28 pages
<PAGE> 23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Not Applicable.
Page 23 of 28 pages
<PAGE> 24
PART II--OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Changes in Articles of Incorporation and Bylaws.
Effective February 18, 1998, the Company's Board of Directors and
shareholders approved an amendment and restatement of the Company's Articles of
Incorporation to (i) eliminate the provisions in the restated Articles of
Incorporation relating to a stock split effected January 8, 1997, (ii) increase
the number of authorized Common Shares, par value $0.01 per share, to
50,000,000, (iii) 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 Company and provide that directors may only be removed
for cause, and (iv) provide that no majority written shareholder consent is
effective unless the proposed action is approved by the Board of Directors
before the consent of shareholders is executed. Effective February 18, 1998, the
Board of Directors and Shareholders also approved amended and restated bylaws of
the Company. The new bylaws require that nominations of persons for election to
the Company's Board of Directors may be made at a meeting of shareholders by or
at the direction of the board of Directors or by any shareholder of the Company
entitled to vote for the election of directors at the meeting who complies with
the notice and information procedures described in the bylaws.
As a result of the increase in the number of authorized Common Shares,
the additional shares are available for issuance by the Board of Directors of
the Company for raising additional capital, stock options, acquisitions, stock
splits, stock dividends or other corporate purposes. The other amendments to the
Articles of Incorporation and the bylaws could delay, deter or prevent the
removal of incumbent officers and directors of the Company, and, therefore, 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 the Company's shareholders.
(c) Unregistered Securities Offerings.
Effective May 6, 1998, the Company granted options under the Amended
and Restated Rock Financial Corporation 1996 Stock Option Plan to purchase an
aggregate of 888,500 Common Shares, par value $0.01 per share, at an exercise
price equal of $10.00 to 141 key employees and directors of the Company. Three
of the options, exercisable to purchase an aggregate of 450,000 Common Shares,
granted to key employees who were selling shareholders in the Company's initial
public offering, are 100% vested. Three of the options, exercisable to purchase
an aggregate of 45,000 Common Shares, granted to directors who are not officers
or employees of the Company, vest one third immediately, and the balance in 20%
cumulative annual installments beginning May 6, 1999. The remaining options vest
in 20% cumulative annual installments beginning May 6, 1999. Such options and
the underlying Common Shares were not registered, but were issued in reliance
upon the exemption from registration contained in Section 4(2) under the
Securities Act of 1933. The Company has filed a Registration
Page 24 of 28 pages
<PAGE> 25
Statement on Form S-8 with respect to the sale of Common Shares upon exercise of
these options effective May 29, 1998.
(d) Use of Proceeds.
On May 6, 1998, the Company completed its initial public offering (the
"Offering") of 3,829,500 Common Shares, par value $0.01 per share, including
330,000 Common Shares sold by selling shareholders and 3,499,500 newly-issued
Common Shares sold by the Company, at a price of $10.00 per share, for gross
proceeds to the Company of $34,995,000, not including the $1,544,400 received by
the Company upon exercise by the selling shareholders of options to purchase
330,000 common shares at $4.68 per share. These options were exercised by the
selling shareholders to acquire the common shares they sold in the Offering. The
Offering was underwritten by a group of underwriters for which Bear, Stearns &
Co. Inc., Prudential Securities Incorporated and Roney & Co. served as
representatives. The effective date of the Company's Registration Statement on
Form S-1 (file no. 333-46885) in connection with the Offering was May 1, 1998.
The Offering commenced on May 1, 1998 and closed on May 6, 1998 after the sale
of all securities registered, including the 499,500 shares offered by the
Company pursuant to an option granted to the Underwriters to cover
over-allotments. The following table provides information regarding the
Offering.
The Company The Selling Shareholders
----------- ------------------------
Amount Registered 3,499,500 shares 330,000 shares
Aggregate Offering Price
of Amount Registered $34,995,000 $3,300,000
Amount Sold 3,499,500 shares 330,000 shares
Aggregate Offering Price
of Amount Sold $34,995,000 $3,300,000
The following table provides information concerning the estimated
amount of expenses incurred for the Company's account in connection with the
Offering through May 31, 1998:
<TABLE>
<CAPTION>
Payments to "Affiliates"* Payments to Others
------------------------- ------------------
<S> <C> <C>
Underwriting discounts and commissions $ 0 $2,449,650
Finder's fees $ 0 $ 0
Expenses paid to or for underwriters $ 0 $ 7,522
Other expenses $1,347 $1,491,131**
------ ------------
Total expenses $1,347 $3,948,303**
====== ============
</TABLE>
________________
*Includes direct or indirect payments to directors and officers of the Company
and their associates, to persons owning ten percent or more of any class of
equity securities of the issuer, and to affiliates of the issuer. The amounts
shown represent the portion of the filing fees paid by the Company relating to
the Common Shares sold by the Selling Shareholders.
**Estimated.
Page 25 of 28 pages
<PAGE> 26
The estimated net Offering proceeds to the Company after deducting the
total estimated expenses described above is $31,045,350. The following table
provides information concerning the amount of the net Offering proceeds to the
Company used for the following purposes through May 31, 1998:
<TABLE>
<CAPTION>
Payments to "Affiliates"* Payments to Others
------------------------- ------------------
<S> <C> <C>
Construction of plant, building and facilities $ 0 $ 0
Purchase and installation of machinery
and equipment $ 0 $ 0
Purchases of real estate $ 0 $ 0
Acquisition of other business(es) $ 0 $ 0
Repayment of indebtedness $ 0 $11,445,350
Working capital $ 0 $ 0
Temporary investment $ 0 $ 0
Other purposes (payment of the estimated
Shareholder Distribution Amount) $19,600,000 $ 0
----------- -----------
Total uses $19,600,000 $11,445,350
=========== ===========
</TABLE>
____________________
*Includes direct or indirect payments to directors and officers of the Company
and their associates, to persons owning ten percent or more of any class of
equity securities of the issuer, and to affiliates of the issuer. The amounts
shown represent the payment out of the proceeds of the Offering of a dividend to
the Company's pre-Offering shareholders equal to the estimated entire amount of
the Company's income taxed or taxable to such shareholders while the Company was
an S corporation, but not yet distributed to them (the "Shareholder Distribution
Amount").
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
By unanimous written consent dated February 18, 1998, the Company's
shareholders approved the Offering (see Item 2(d)), the Company's Amended and
Restated Articles of Incorporation and Bylaws (see Item 2(a)), amendments to
Employment Agreements with the Selling Shareholders in the Offering, the
dividend of the Shareholder Distribution Amount (see Item 2(d)), an increase in
the number of shares subject to the 1996 Stock Option Plan to 4,500,000 Common
Shares, a Tax Indemnification Agreement between the Company and its pre-
Offering shareholders, an Amended and Restated Shareholders Agreement, among the
Company, the pre-Offering shareholders and the Selling Shareholders in the
Offering, the election of officers of the Company, and the election (in lieu of
the 1998 Annual Meeting of Shareholders) of Daniel Gilbert, Steven Stone and
Gary Gilbert as Class III, Class II and Class I directors, respectively, to
serve until the 2001, 2000 and 1999 Annual Meetings of Shareholders,
respectively.
By unanimous written consent dated April 10, 1998, the Company's
shareholders approved the election of David A. Brandon, David Katzman and Robert
V. Schechter as
Page 26 of 28 pages
<PAGE> 27
Class III, Class II and Class I directors, respectively, to serve until the
2001, 2000 and 1999 Annual Meetings of Shareholders, respectively, created a
Compensation Committee and an Audit Committee of the Board of Directors of the
Company and appointed Messrs. Brandon and Katzman as the members of each of such
committees, approved the Company's new form of common share certificate and
approved the manner of exercise of stock options by the Selling Shareholders in
connection with the Offering.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10.1 Form of Stock Option Agreement granted under the
1996 Stock Option Plan.
10.2 Letter Agreement, dated as of May 1, 1998, between
Rock Financial Corporation and Bear Stearns Home
Equity Trust.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Registrant
during the quarter for which this report is filed.
Page 27 of 28 pages
<PAGE> 28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ROCK FINANCIAL CORPORATION
(Registrant)
Date: June 15, 1998 By: /s/ DANIEL GILBERT
--------------------------------
DANIEL GILBERT
Its: Chairman of the Board and
Chief Executive Officer
(Duly Authorized Officer)
Date: June 15, 1998 By: /s/ FRANK E. PLENSKOFSKI
------------------------
FRANK E. PLENSKOFSKI
Its: Chief Financial Officer
(Principal Accounting
Officer)
Page 28 of 28 pages
<PAGE> 29
EXHIBIT INDEX
Exhibit Description
10.1 Form of Stock Option Agreement granted under the 1996 Stock Option Plan.
10.2 Letter Agreement, dated as of May 1, 1998, between Rock Financial
Corporation and Bear Stearns Home Equity Trust.
27.1 Financial data schedule.
<PAGE> 1
EXHIBIT 10.1
STOCK OPTION AGREEMENT
Dated as of: __________
To:_______________
Pursuant to the Rock Financial Corporation 1996 Stock Option Plan
("1996 Plan"), Rock Financial Corporation (the "Company") hereby grants you an
option (the "Option") to purchase __________ (_______) Common Shares, par value
$0.01 per share, of the Company (the "Shares") at $__.__ per Share, upon the
terms and conditions contained in this Stock Option Agreement and in the 1996
Plan, as amended from time to time, a copy of which is attached to, and, as
amended from time to time, is made a part of, this Stock Option Agreement.
1. Nonqualified Option. The Option is intended to be a Nonqualified
Option, as defined in the 1996 Plan.
2. Transferability. The Option may not be transferred by you otherwise
than by will or by the laws of descent and distribution and, during your
lifetime, the Option is exercisable only by you.
3. Vesting. Subject to the other terms contained in this Stock Option
Agreement and in the 1996 Plan, you may exercise the Option in accordance with
the following schedule:
(a) Before _________ [one year after grant], you may not purchase
any of the Shares.
(b) Beginning on _________ [one year after grant], you may purchase
up to 20% of the Shares.
(c) Beginning on _________ [two years after grant], you may purchase
up to 40% of the Shares, including Shares previously purchased.
(d) Beginning on _________ [three years after grant], you may
purchase up to 60% of the Shares, including Shares previously purchased.
(e) Beginning on _________ [four years after grant], you may
purchase up to 80% of the Shares, including Shares previously purchased.
(f) Beginning on _________ [five years after grant], you may
purchase up to 100% of the Shares, including Shares previously purchased.
<PAGE> 2
4. Term.
(a) General Term. Subject to earlier termination of the
Option upon your death, permanent disability or termination of employment with
the Company (voluntarily or involuntarily and with or without cause), which are
governed by Paragraph 13 of the 1996 Plan, the Option will expire (to the extent
not previously exercised) on the earlier of (i) the tenth anniversary of the
date of this Stock Option Agreement, and (ii) the date of any reduction in your
title or position with the Company.
[(b) 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 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 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,
<PAGE> 3
(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 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,
-3-
<PAGE> 4
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 and 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 , and 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.
(c) Cause. For purposes of this Option, "cause" has
the same meaning as in your employment agreement with the Company, if any, or
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,
-4-
<PAGE> 5
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.]
5. 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 and such exercise price, 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.
6. No Employment Rights. 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, and your employment is and
will remain employment at will, unless otherwise provided pursuant to a written
employment agreement between you and the Company.
7. Income Tax Withholding Requirements. If upon or as a result of your
exercise of the 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.
8. 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.
9. 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
-5-
<PAGE> 6
with all actions and proceedings arising out of, or in any way related to this
Stock Option Agreement.
10. 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 to your address appearing on the stock records of the
Company or such other address as may be designated by you by notice to the
Company.
11. Committee and Board of Directors Determinations Conclusive. Each
determination, interpretation, or other action made or taken pursuant to the
provisions of the 1996 Plan or this Stock Option Agreement 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.
12. Reimbursement of Certain Costs and Fees. Notwithstanding any term
to the contrary, you agree to reimburse the Company (including its officers and
directors) for any and all costs and expenses, including, without limitation,
court costs, legal expenses and reasonable attorney fees (whether inside or
outside counsel is used), whether or not a lawsuit or other form of legal action
is instituted, and if a lawsuit or other legal action is instituted, whether at
the trial or appellate court level, in the event you do not fully prevail with
respect to all claims and demands brought by you (or your representatives) in
connection with or in any way related to any determination, interpretation, or
action taken pursuant to this Stock Option Agreement or the 1996 Plan, or in any
way related to the enforcement of this Stock Option Agreement.
-6-
<PAGE> 7
Very truly yours,
ROCK FINANCIAL CORPORATION,
a Michigan corporation
By:
--------------------------------
Its:
-----------------------------
The above is agreed to and accepted.
- -----------------------------------
Dated:
----------
-7-
<PAGE> 1
EXHIBIT 10.2
[BEAR STEARNS LETTERHEAD]
May 1, 1998
Mr. Frank Plenskofski
Chief Financial Officer
Rock Financial Corporation
30600 Telegraph Road - 4th Fl.
Bingham Farms, MI 48025
Dear Frank:
Congratulations on the success of Rock's IPO!
As we have previously indicated, the dollar limit of the non-committed credit
facility that you have established with Bear Stearns is now $200 million. This
facility is subject to the terms and provisions set forth in the Master
Repurchase Agreement between you and Bear Stearns Home Equity Trust which
provides, among other things, that any financing transaction is subject to the
approval of Bear Stearns.
Also, effective Monday, May 4, 1998, the interest rate of the facility will be
lowered to Libor + 1.00%.
Please call me if you have any questions.
Sincerely,
John
JMG:ds
<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 THREE
MONTHS ENDED, MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS AND ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 2,994,955
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 123,206,026
<CURRENT-ASSETS> 0
<PP&E> 12,884,275
<DEPRECIATION> 3,972,517
<TOTAL-ASSETS> 139,955,701
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 100,000
<OTHER-SE> 19,110,424
<TOTAL-LIABILITY-AND-EQUITY> 139,955,701
<SALES> 0
<TOTAL-REVENUES> 18,920,911
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 114,470
<INTEREST-EXPENSE> 1,737,637
<INCOME-PRETAX> 4,102,288
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,102,288
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,102,288
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
