<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 September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
----------------------- ------------------------
Commission file number 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 [X] No [ ]
Number of common shares outstanding as of November 11, 1999: 14,858,554
================================================================================
<PAGE> 2
ROCK FINANCIAL CORPORATION
Table of Contents
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I--FINANCIAL INFORMATION............................................................................ 3
ITEM 1. FINANCIAL STATEMENTS........................................................................ 3
CONSOLIDATED BALANCE SHEETS.................................................................... 3
CONSOLIDATED STATEMENTS OF INCOME.............................................................. 4
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY................................................. 5
CONSOLIDATED STATEMENTS OF CASH FLOWS.......................................................... 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS..................................................... 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................................................. 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.................................................................................... 40
PART II--OTHER INFORMATION............................................................................... 42
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.................................................. 42
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................................................... 42
SIGNATURES............................................................................................... 45
</TABLE>
<PAGE> 3
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ROCK FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
-------------- -------------
ASSETS (Unaudited)
<S> <C> <C>
Cash and cash equivalents............................................... $ 30,081,524 $ 37,091,876
Mortgage loans held for sale............................................ 155,631,112 41,277,617
Mortgage loans held for investment (net of allowance for
losses of $634,851 and $362,191 at December 31,
1998 and September 30, 1999, respectively)........................... 3,766,171 361,009
Real estate owned....................................................... 49,989
Shareholders' advances.................................................. 994,372
Property and equipment (net of accumulated depreciation of
$5,400,480 and $5,405,026 at December 31, 1998 and
September 30, 1999, respectively).................................... 10,775,733 8,640,297
Deferred income taxes................................................... 1,945,000 4,931,699
Prepaid and federal income tax receivable............................... 5,808,751
Other assets............................................................ 1,193,552 1,140,692
-------------- -------------
Total assets............................................................ $ 204,437,453 $ 99,251,941
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Warehouse line of credit............................................. $ 98,008,105 $ 21,235,911
Reverse repurchase agreement......................................... 11,521,065
Drafts payable....................................................... 44,021,087 19,252,599
Accounts payable..................................................... 4,680,275 3,244,237
Accrued expenses and other liabilities............................... 8,171,773 6,111,441
-------------- -------------
Total liabilities................................................. 166,402,305 49,844,188
-------------- -------------
Minority interest in subsidiary......................................... 155,939
Shareholders' equity:
Common shares, $.01 par value. Authorized 50,000,000
shares; issued and outstanding 13,590,500 shares
and 14,853,454 shares at December 31, 1998 and
September 30, 1999, respectively................................... 135,905 148,535
Additional paid-in capital........................................... 26,297,782 40,226,050
Retained earnings.................................................... 11,601,461 8,877,229
-------------- -------------
Total shareholders' equity......................................... 38,035,148 49,251,814
-------------- -------------
Total liabilities and shareholders' equity.............................. $ 204,437,453 $ 99,251,941
============== =============
</TABLE>
Page 3 of 45
<PAGE> 4
ROCK FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
(Unaudited)
<TABLE>
<CAPTION>
For the Three-Month For the Nine-Month
Periods Ended September 30, Periods Ended September 30,
---------------------------------- -------------------------------
1998 1999 1998 1999
------------- ----------------- -------------- -------------
<S> <C> <C> <C> <C>
Revenue:
Interest income..................................... $ 2,964,168 $ 1,608,076 $ 9,191,880 $ 6,520,908
Interest expense.................................... 1,481,819 369,112 5,101,646 2,401,370
------------ ---------------- ------------- ------------
Net interest margin............................ 1,482,349 1,238,964 4,090,234 4,119,538
Provision for credit losses......................... 139,863 399,527 389,573 1,083,086
------------ ---------------- ------------- ------------
Net interest margin after provision for credit
losses..................................... 1,342,486 839,437 3,700,661 3,036,452
Loan fees and gains on sale of mortgages............ 21,761,051 11,420,439 60,400,881 45,955,456
Other income........................................ 614 1,699 18,349 4,324
------------- ---------------- ------------- ------------
23,104,151 12,261,575 64,119,891 48,996,232
------------ ---------------- ------------- ------------
Expenses:
Salaries, commissions and employee benefits........ 10,085,776 8,357,223 28,282,016 28,945,819
General and administrative expenses................. 3,452,014 2,996,673 9,549,769 10,014,187
Marketing expenses.................................. 3,396,356 2,837,290 9,856,834 7,432,882
Depreciation and amortization....................... 541,654 513,810 1,593,704 1,773,871
Loss on branch closings............................. 3,500,000 3,500,000
Costs incurred or accrued in connection with the
relocation of corporate headquarters.............. 835,919 835,919
------------ ---------------- ------------- ------------
17,475,800 19,040,915 49,282,323 52,502,678
------------ ---------------- ------------- ------------
Income (loss) before income taxes and minority
interest.......................................... 5,628,351 (6,779,340) 14,837,568 (3,506,446)
Minority interest in loss of subsidiary............. 59,163 144,061
Income tax (expense) benefit........................ (1,501,016) 2,419,264 (2,624,540) 1,210,264
Income tax benefit due to conversion of "S"
Corp.............................................. 950,939
------------ ---------------- ------------- ------------
Net income (loss)................................ $ 4,127,335 $ (4,300,913) $13,163,967 $(2,152,121)
============ ================ ============= ============
Pro forma information (note 5):
Income before income taxes.......................... $ 5,628,351 $14,837,568
Provision for pro forma income taxes................ 1,969,923 5,193,149
------------ -------------
Pro forma net income................................ $ 3,658,428 $ 9,644,419
============ =============
Pro forma earnings (loss) per share/earnings (loss) per
share (1999):
Basic............................................... $ 0.26 $ (0.29) $ 0.70 $ (0.15)
============ ================ ============= ============
Diluted............................................. $ 0.25 $ (0.29) $ 0.66 $ (0.15)
============ ================ ============= ============
Dividends declared per share............................ $ 0.02 -- $ 0.04 $ 0.04
============ ================ ============= ============
Pro forma weighted average number of
shares outstanding/Weighted average number of shares
outstanding (1999):
Basic............................................... 13,829,500 14,829,436 13,829,500 14,441,750
============ ================ ============= ============
Diluted............................................. 14,516,904 14,829,436 14,520,594 14,441,750
============ ================ ============= ============
</TABLE>
Page 4 for 45
<PAGE> 5
ROCK FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED SHAREHOLDERS'
SHARES CAPITAL EARNINGS EQUITY
------ ------- -------- ------
<S> <C> <C> <C> <C>
Balance January 1, 1999 ...................... $ 135,905 $ 26,297,782 $11,601,461 $38,035,148
Net income (loss) ............................ (2,152,121) (2,152,121)
Cash dividends ($.04 per share) .............. (572,111) (572,111)
Stock options exercised ...................... 12,630 7,594,867 7,607,497
Tax benefit from the exercise of non-qualified
stock options ......................... 6,333,401 6,333,401
----------- ------------ ----------- -----------
Balance September 30, 1999 ................... $ 148,535 $ 40,226,050 $ 8,877,229 $49,251,814
=========== ============ =========== ===========
</TABLE>
Page 5 of 45
<PAGE> 6
ROCK FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
For the Nine-Month
Periods Ended September 30,
---------------------------
1998 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ....................................... $ 13,163,967 $ (2,152,121)
--------------- ---------------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Minority interest in loss of subsidiary ............. (144,061)
Depreciation and amortization ....................... 1,593,704 1,773,871
Provision for credit losses ......................... 389,573 1,083,086
Deferred income taxes ............................... (1,684,088) 1,512,501
Mortgage loans held for sale - originations ......... (1,541,037,088) (1,515,807,934)
Mortgage loans held for sale - sales ................ 1,558,158,378 1,630,161,429
Change in assets and liabilities:
Prepaid and federal income tax receivable ...... (3,974,550)
Other assets ................................... (128,069) 52,861
Drafts payable ................................. 23,395,698 (24,768,488)
Accounts payable ............................... 1,448,278 (1,436,038)
Accrued expenses and other liabilities ......... 7,044,646 (1,187,005)
--------------- ---------------
Total adjustments .......................... 49,181,032 87,265,672
--------------- ---------------
Net cash provided by operating activities .. 62,344,999 85,113,551
--------------- ---------------
Cash flows from investing activities:
Net (increase) decrease in real estate owned and loans
held for investment ................................. (1,281,614) 2,372,065
Purchase of property and equipment ...................... (4,570,127) (511,763)
Repayments of shareholders' advances .................... 1,626,519 994,372
--------------- ---------------
Net cash provided by (used in) investing activities.. (4,225,222) 2,854,674
--------------- ---------------
Cash flows from financing activities:
Net payments under warehouse line of credit ............. (25,743,423) (76,772,194)
Net payments under reverse repurchase agreement ......... (15,410,507) (11,521,065)
Net payments under notes payable ........................ (1,944,445)
Investment in subsidiary by minority interest ........... 300,000
Net proceeds from initial public offering ............... 31,045,350
Proceeds from exercised options ......................... 1,904,400 7,607,497
Cash dividends .......................................... (553,280) (572,111)
S Corporation distribution .............................. (24,980,500)
--------------- ---------------
Net cash used in financing activities ........................ (35,682,405) (80,957,873)
--------------- ---------------
Net increase in cash and cash equivalents .................... 22,437,372 7,010,352
Cash and cash equivalents, beginning of period ............... 11,946,992 30,081,524
--------------- ---------------
Cash and cash equivalents, end of period ..................... $ 34,384,364 $ 37,091,876
=============== ===============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest ................ $ 5,059,170 $ 3,049,277
=============== ===============
Cash paid during the period for federal income tax ...... $ 0 $ 1,156,000
=============== ===============
Transfers of loans from held for sale to held
for investment ...................................... $ 989,338 $ 1,420,641
=============== ===============
Transfers of loans from held for investment to
real estate owned ................................... $ 45,880 $ 447,124
=============== ===============
</TABLE>
Page 6 of 45
<PAGE> 7
ROCK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. FINANCIAL STATEMENT PRESENTATION:
The accompanying unaudited interim financial statements of Rock
Financial Corporation (the "Company") and its subsidiary 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 present a
fair statement of the results of operations 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. All significant intercompany accounts and transactions have
been eliminated in consolidation. Operating results for the three- and
nine-month periods ended September 30, 1999 are not necessarily indicative
of the results that may be expected for the year ending December 31, 1999.
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, 1998 included in the Company's
Annual Report on Form 10-K (file no. 000-23887) for the year ended December
31, 1998.
2. MORTGAGE LOANS HELD FOR SALE AND HELD FOR INVESTMENT:
The following summarizes mortgage loans held for sale by type at
December 31, 1998 and September 30, 1999:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
---------------- --------------
<S> <C> <C>
Conventional loans held for sale.............................. $ 123,240,133 $ 31,634,797
Sub-prime loans held for sale................................. 30,542,410 4,607,080
Government-insured loans held for sale........................ 941,966 4,890,885
High LTV loans held for sale.................................. 671,748
---------------- -------------
155,396,257 41,132,762
Net deferred loan origination costs........................... 234,855 144,855
---------------- -------------
Mortgage loans held for sale.............................. $ 155,631,112 $ 41,277,617
================ =============
</TABLE>
Netted against mortgage loans held for investment at December 31, 1998
and September 30, 1999 is an allowance for credit losses of $634,851 and
$362,191 respectively. The activity for the nine months ended September 30,
1999 includes a provision of $1,083,086 offset by charge-offs of
$1,355,746. The activity for the year ended December 31, 1998 includes a
provision of $567,738 offset by charge-offs of $202,888.
Page 7 of 45
<PAGE> 8
As of December 31, 1998 and September 30, 1999, there were no loans
held for sale that were greater than 90 days past due. As of December 31,
1998 and September 30, 1999, there were approximately $753,000 and
$361,000, respectively, of loans held for investment that were greater than
90 days past due, the vast majority of which were sub-prime loans.
3. RELATED PARTY TRANSACTIONS:
The Company's short-term advances to certain shareholders were repaid
in full on March 31, 1999.
4. EARNINGS PER SHARE:
Basic earnings per share are computed based on the weighted average
number of common shares outstanding during the period. Diluted earnings per
share are computed based on the weighted average number of common shares
and common share equivalents during the period. Basic and diluted loss per
share have been calculated by dividing the net loss by the weighted average
number of common shares outstanding during each period presented. Stock
options have been excluded from the calculation of diluted loss per share
for the earnings per share calculation for the periods ended September 30,
1999, as their effect would have been antidilutive.
5. UNAUDITED PRO FORMA FINANCIAL INFORMATION:
The pro forma financial information has been presented 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. 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 35.0%.
Pro forma basic earnings per share for the period ended September 30,
1998 were 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 its initial public offering and the 330,000 shares
sold by certain existing shareholders in its initial public offering (after
exercising options to purchase those shares from the Company). Pro forma
diluted earnings per share for the period ended September 30, 1998 were
computed by dividing pro forma net income by the 14,520,594 (for the
nine-month period) and 14,516,904 (for the three-month period) average
shares assumed to be outstanding, including the 3,499,500 shares sold by
the Company in its initial public offering and the 330,000 shares sold by
certain existing shareholders in its initial public 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 September 30, 1998,
using the treasury stock method and the $9.86 per share closing market
price of the Company's common shares as of September 30, 1998, as reported
by The Nasdaq Stock Market.
Page 8 of 45
<PAGE> 9
6. SEGMENT REPORTING:
When the Company adopted SFAS No. 131 in 1998 it was comprised of
three major operating divisions based on the major products it offered in
1998 and in the first quarter of 1999. As of April 1, 1999, the Company
changed the way it manages its business from divisions based on products to
divisions based on the method of distribution of its loan products: the
Web/Call Center division, the Branch network and the Strategic Alliance
Program. The following table shows the contribution to revenues and
expenses and the loan closings of each of the Company's distribution
channels for the three- and nine-month periods ended September 30, 1998 and
September 30, 1999 (the comparative prior year information has been
restated to conform to the current segmentation of the Company's business).
Corporate overhead is included in Other. Also, reflected in Other are the
costs associated with the branch closings and relocation of the corporate
headquarters of $3.5 million and $0.8 million, respectively. Other than
loans, the Company's assets are not specifically allocated to its three
distribution channels and therefore, not used by management for operating
decisions with respect to the distribution channels. As a result, total
assets by distribution channel are not presented.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS)
-----------------------------------------------------------------------------------------------------
WEB/CALL STRATEGIC
CENTER BRANCH ALLIANCE
DIVISION NETWORK PROGRAM OTHER TOTAL
-------------- -------------------- --------------- ----------------- ------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 2,612.4 $ 20,609.0 $ -- $ (117.2) $ 23,104.2
Expenses 2,072.4 12,089.0 -- 3,314.4 17,475.8
-------------- -------------------- --------------- ----------------- ------------------
Net contribution before
tax and minority
interest $ 540.0 $ 8,520.0 $ -- $ (3,431.6) $ 5,628.4
============== ==================== =============== ================= ==================
Loan closings $ 57,892.7 $ 526,151.9 $ -- $ -- $ 584,044.6
============== ==================== =============== ================= ==================
<CAPTION>
-----------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30, 1999
(IN THOUSANDS)
-----------------------------------------------------------------------------------------------------
WEB/CALL STRATEGIC
CENTER BRANCH ALLIANCE
DIVISION NETWORK PROGRAM OTHER TOTAL
-------------- -------------------- --------------- ----------------- ------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 3,668.0 $ 7,481.9 $ 1,479.9 $ (368.2) $ 12,261.6
Expenses 4,541.7 4,760.9 1,677.2 8,061.1 19,040.9
-------------- -------------------- --------------- ----------------- ------------------
Net contribution before
tax and minority
interest $ (873.7) $ 2,721.0 $ (197.3) $ (8,429.3) $ (6,779.3)
============== ==================== =============== ================= ==================
Loan closings $ 113,980.0 $ 209,459.1 $ 56,084.7 $ -- $ 379,523.8
============== ==================== =============== ================= ==================
</TABLE>
Page 9 of 45
<PAGE> 10
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS)
-------------------------------------------------------------------------------------------------------
WEB/CALL STRATEGIC
CENTER BRANCH ALLIANCE
DIVISION NETWORK PROGRAM OTHER TOTAL
-------------- ------------------ ----------------- ---------------- ------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 8,629.2 $ 55,823.7 $ -- $ (332.9) $ 64,120.0
Expenses 6,164.5 34,306.5 -- 8,811.4 49,282.4
-------------- ------------------ ----------------- ---------------- ------------------
Net contribution before
tax and minority
interest $ 2,464.7 $ 21,517.2 $ -- $ (9,144.3) $ 14,837.6
============== ================== ================= ================ ==================
Loan closings $ 126,044.9 $ 1,451,211.4 $ -- $ -- $ 1,577,256.3
============== ================== ================= ================ ==================
<CAPTION>
-------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 1999
(IN THOUSANDS)
-------------------------------------------------------------------------------------------------------
WEB/CALL STRATEGIC
CENTER BRANCH ALLIANCE
DIVISION NETWORK PROGRAM OTHER TOTAL
-------------- ------------------- ----------------- --------------- ------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 10,640.6 $ 36,850.9 $ 2,537.2 $ (1,032.4) $ 48,996.3
Expenses 10,264.0 23,117.5 3,017.6 16,103.2 52,502.3
-------------- ------------------- ----------------- --------------- ------------------
Net contribution before
tax and minority
interest $ 376.6 $ 13,733.4 $ (480.4) $ (17,135.6) $ (3,506.0)
============== =================== ================= =============== ==================
Loan closings $ 348,552.5 $ 1,016,771.0 $ 112,982.3 $ -- $ 1,478,305.8
============== =================== ================= =============== ==================
</TABLE>
7. BRANCH CLOSINGS
Management's evaluation of the performance of certain retail branches
during the fourth quarter of 1998 concluded that their continuing viability
was questionable. The branches' performance was creating both operating
losses and a "cash drain" on the Company's resources. As of December 31,
1998, management committed to a plan to close nine Fresh Start stores. In
1998, the combined loss for the stores closed was $2.5 million, excluding
the loss recognized for the closing of such stores. A $2.0 million accrual
was established for this loss at December 31, 1998. As of September 30,
1999, the Company had incurred approximately $1.4 million relating to the
store closings, which consisted of fixed asset write-offs, ongoing lease
commitments, and severance pay for terminated employees. The remaining
balance in the reserve of approximately $0.6 million is expected to be
utilized over the remaining life of the lease obligations and/or lease
termination payments.
In the beginning of the third quarter of 1999, management committed to
a plan to close and consolidate twelve of its remaining fifteen branches.
This plan was part of the Company's strategic initiative to base its growth
on a Web/Call Center-based origination platform. The branches that remained
opened were the more profitable branches, consistent with the Company's
attempt to maintain its branded retail brick and mortar platform in the
Page 10 of 45
<PAGE> 11
metropolitan Detroit area. As of September 30, 1999, the Company had
accrued or incurred expenses of $3.5 million related to these branch
closings.
8. INCOME TAX BENEFIT
Total income tax benefit for the period ended September 30, 1999 was
allocated as follows (amounts in thousands):
<TABLE>
<S> <C>
Loss from operations $ (1,210.3)
Stockholders' equity, for tax benefit
resulting from exercise of employee stock options (6,333.4)
-------------
Total tax benefit $ (7,543.7)
=============
</TABLE>
Income tax expense (benefit) from operations for the nine-month period
ended September 30, 1999 consists of the following:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------------------ ------------------ ------------------
<S> <C> <C> <C>
U.S. Federal $ (2,646.7) $ 1,470.0 $ (1,176.7)
State and local (75.6) 42.0 (33.6)
------------------ ------------------ ------------------
Total $ (2,722.3) $ 1,512.0 $ (1,210.3)
================== ================== ==================
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
September 30, 1999 are presented below.
Deferred tax assets:
<TABLE>
<S> <C>
Tax loss carryforward related to Non-Qualified stock
options exercised $ 4,499.2
Mortgage loans held for sale, principally due to
adjustment to market value for tax 359.4
Accrued liabilities, principally due to estimated branch
closing costs, investor reserves, and reserve for
relocation of corporate headquarters 984.7
Mortgages held for investment, principally due to
allowance for loan losses 125.3
Investment in subsidiary, principally due to adjustments
to subsidiary mortgage loans held for sale to market
value 43.1
---------
Total deferred tax assets $ 6,011.7
</TABLE>
Page 11 of 45
<PAGE> 12
Deferred tax liabilities:
<TABLE>
<S> <C>
Property and equipment, principally due to difference in
depreciation $ (1,080.0)
----------
Total deferred tax liabilities (1,080.0)
----------
Net deferred tax asset $ 4,931.7
==========
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected
future taxable income, and tax planning strategies in making this
assessment. Based upon principally the projections for future taxable
income over the periods which the deferred tax assets are deductible,
management believes it is more likely than not the Corporation will realize
the benefits of these deductible differences. Management believes that the
transition from a brick and mortar operation platform to one based more on
the Web/Call Center platform will produce operating losses in the near
term. Business models of the transition show a return to profitability and
a level of profitability within the period of realization and sufficient
enough to utilize the benefits of the deferred tax asset. Therefore,
management believes in the weight of available evidence, it is more likely
than not to realize the benefit of the deferred tax asset and has not
recognized a valuation allowance.
9. COMMITMENTS AND CONTINGENCIES
The Company signed a lease in April 1999 for a 110,000 square foot
facility that will afford us the room to potentially create a new 400-seat
Web/Call Center, including room for approximately 200 loan officers, and
its National Support Center. The new facility will more than triple the
size of the Company's current Web/Call Center, which is nearing capacity.
The move is scheduled to take place in December of 1999. The Company
estimates that the move will cost it approximately $5.5 million for
equipment, new technology, leasehold improvements, moving costs and
accelerated depreciation in the third and fourth quarters of 1999, $3.5
million of which the Company expects to capitalize. The Company also
expects the new larger facility will increase its operating expenses by
approximately $125,000 to $150,000 per month. As of September 30, 1999, the
Company has incurred or accrued approximately $836,000 of expenses related
to the relocation, the majority of which is the recognition of the impaired
value of long-lived assets.
10. SUBSEQUENT EVENTS
On October 6, 1999, the Company entered into an Agreement and Plan of
Merger, with Intuit Inc., (NASDAQ: INTU). Under the Merger Agreement,
Intuit will acquire the Company, the Company will become a wholly-owned
subsidiary of Intuit and each of the
Page 12 of 45
<PAGE> 13
Company's outstanding common shares will be converted into the right to
receive a fraction of a share of Intuit common stock. This fraction is
calculated by dividing $23.00 by the average of the closing prices of
Intuit common stock on the Nasdaq Stock Market over the 20 trading days
ending on the third trading day before the date of the special meeting of
the Company's shareholders called to approve the merger, currently
scheduled to be held December 8, 1999. The fraction may not be less than
0.579832 and may not be more than 0.841463.
Also, in this merger, Intuit will assume the outstanding options to
purchase the Company's common shares. As a result, these options will be
exercisable for Intuit common stock pursuant to their existing terms,
except that the number of shares will be multiplied by the exchange ratio,
described above, and the exercise price will be divided by that exchange
ratio. Under specified conditions, if the Agreement and Plan of Merger is
terminated or the mergers are not completed, Intuit may be entitled to a
fee as liquidated damages. Under related voting agreements, the beneficial
owners of a majority of the outstanding Company common shares have agreed
to vote their shares in favor of the approval and adoption of the Agreement
and Plan of Merger. The Company also granted Intuit an option to buy up to
19.9% of the outstanding Company common shares at $23.00 a share,
exercisable if specified conditions are triggered. In light of the merger,
the Company determined to slow down its previously announced national
advertising campaign during the fourth quarter.
The Company determined to not pay a dividend in the third and fourth
quarters of 1999.
Page 13 of 45
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
With the exception of historical information, some 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 "may," "will," "should," "believe," "expect,"
"anticipate," "estimate," "continue," "predict," and similar expressions
identify forward-looking statements. These forward-looking statements reflect
our current views with respect to future events in financial performance, but
are subject to many risks, uncertainties and factors relating to our operations
and business environment which may cause our 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 Intuit Inc.'s
Registration Statement on Form S-4 (file no. 333-90393) filed November 5, 1999
and elsewhere in this Report.
GENERAL
We are a technology- and service-driven retail mortgage banking company
that markets conventional, government-insured, and sub-prime mortgage loans and
home equity lines of credit directly to consumers through the Internet
(www.RockLoans.com), our call center, three retail branches and our strategic
alliance program. We believe we are developing a growing brand identity, built
upon our technology, service, people and marketing. We believe we are unlike
most mortgage companies and loan middlemen that have Web sites on the Internet.
We process, underwrite and close the loan ourselves without referring the
customer to another company to perform these services and without charging
additional brokerage fees to our customers. We seek to provide "world class"
service to our customers, thereby encouraging them to return for future loans
and refer others to us for loans. As of November 11, 1999, we had 428 employees,
including 143 loan officers.
As of April 1, 1999, we changed the way we manage our business, from
managing divisions based on products to divisions based on the method of
distribution of our loan products: the Web/Call Center division, the Branch
network and the Strategic Alliance Program. Our Web/Call Center division markets
loans on-line through our Internet Web site, RockLoans.com, which began
originating loans in January 1999. Our Web/Call Center division also markets
loans through our call center located in our National Support Center in Bingham
Farms, Michigan. Our Branch network markets loans through our network of three
retail loan origination branches. Our Strategic Alliance Program currently
consists of one joint venture, a 70%-owned limited liability company that
originates residential mortgage products to Michigan National Bank's customers
through Michigan National Bank's 192 financial centers, a call center and over
the Internet. Michigan National Bank has approximately 450,000 customers and
owns the other 30% of the joint venture. The joint venture commenced operations
in April 1999.
Page 14 of 45
<PAGE> 15
1999 has been a transition year for us, as we continue to move from a brick
and mortar branch operation to one more based on Internet, Call Center and
Strategic Alliance mortgage lending channels. This transition has adversely
affected our short-term earnings to date and we expect this to continue through
the fourth quarter of 1999. We believe that technology is changing the way
mortgages are originated. Consequently, management committed to a plan to close
and consolidate twelve of our remaining fifteen branches. As of September 30,
1999, we had accrued or incurred expenses of $3.5 million related to these
branch closings.
On October 6, 1999, we entered into an Agreement and Plan of Merger, with
Intuit Inc., (NASDAQ: INTU). Under the Merger Agreement, Intuit will acquire us,
we will become a wholly-owned subsidiary of Intuit and each of our outstanding
common shares will be converted into the right to receive a fraction of a share
of Intuit common stock. This fraction is calculated by dividing $23.00 by the
average of the closing prices of Intuit common stock on the Nasdaq Stock Market
over the 20 trading days ending on the third trading day before the date of the
special meeting of our shareholders called to approve the merger, currently
scheduled to be held December 8, 1999. The fraction may not be less than
0.579832 and may not be more than 0.841463.
Also, in this merger, Intuit will assume the outstanding options to
purchase our common shares. As a result, these options will be exercisable for
Intuit common stock pursuant to their existing terms, except that the number of
shares will be multiplied by the exchange ratio, described above, and the
exercise price will be divided by that exchange ratio. Under specified
conditions, if the Agreement and Plan of Merger is terminated or the mergers are
not completed, Intuit may be entitled to fees as liquidated damages. Under
related voting agreements, the beneficial owners of a majority of our
outstanding common shares have agreed to vote their shares in favor of the
approval and adoption of the Agreement and Plan of Merger. We also granted
Intuit an option to buy up to 19.9% of our outstanding common shares at $23.00 a
share, exercisable if specified conditions are triggered. In light of the
merger, we determined to slow down our previously announced national advertising
campaign during the fourth quarter.
In the third quarter of 1999, margins on all of our products, and volumes
of our Conventional Loans as well as our Sub-Prime Loans continued to decline
from fourth quarter 1998 levels. Volumes of our Conventional Loan and Sub-Prime
Loan originations have also continued to decline so far in the fourth quarter of
1999 from the third quarter 1999 levels. The declines are primarily due to
higher interest rates, lower refinancing loan volumes and our closing of 25
branches and one marketing center in 1999. We expect these trends to continue in
the fourth quarter of 1999 and our fourth quarter 1999 operating results to be
below our third quarter 1999 operating results.
We also plan to make other moves that are intended to further our long-term
business and our transition from a brick and mortar branch operation to one more
based on Internet, Call Center and Strategic Alliance mortgage lending channels.
We expect that this continued transition will adversely affect our short-term
earnings. We have signed a lease for an 110,000 square foot facility that will
afford us the room to potentially create a new 400-seat Web/Call Center,
including room for approximately 200 loan officers, and our National Support
Center. The move is scheduled to take place in December of 1999. We estimate
that the move will cost
Page 15 of 45
<PAGE> 16
us approximately $5.5 million for equipment, new technology, leasehold
improvements, moving costs and accelerated depreciation in the third and fourth
quarters of 1999, $3.5 million of which we expect to capitalize. We also expect
the new larger facility will increase our operating expenses by approximately
$125,000 to $150,000 a month. As of September 30, 1999, we have accrued or
incurred approximately $836,000 of expenses related to the relocation, the
majority of which is the recognition of the impaired value of long-lived assets.
TERMINATION OF S CORPORATION STATUS AND INCOME TAXES
Simultaneously with the closing of our initial public offering on May 6,
1998 (the "Offering"), we ceased to be taxed as an S corporation under the
Internal Revenue Code. In connection with the termination of our S corporation
status, we paid an estimate of our income taxed or taxable to our shareholders
while we were an S Corporation, but not yet distributed to them ("Shareholder
Distribution Amount") out of the net proceeds of the Offering to our
shareholders existing immediately before the closing of the Offering (the
"Existing Shareholders"). The estimated Shareholder Distribution Amount,
including the approximately $5.4 million tax distribution to the Existing
Shareholders on April 10, 1998, was approximately $25.0 million. Based upon the
final results of 1998, the Existing Shareholders were required to pay us
approximately $800,000, representing the excess of amounts disbursed in May 1998
over the year-end estimate of the taxable income allocable to the Existing
Shareholders. The amount due to us was paid in full as of March 31, 1999.
As an S corporation, our income, whether or not distributed, was taxed at
the shareholder level for federal and state tax purposes. When we terminated our
S corporation status, we became subject to federal and state income taxation and
we recorded a $1.8 million deferred tax asset on our balance sheet along with a
current income tax liability of $0.9 million as of May 6, 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 statements of income are intended to
show results as if we had been subject to federal and state taxation at the tax
rates effective for the periods presented.
Page 16 of 45
<PAGE> 17
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999
VERSUS THREE MONTHS ENDED SEPTEMBER 30, 1998
The following table sets forth our revenues, expenses and pre-tax
income (loss) for the three months ended September 30, 1998 and 1999:
<TABLE>
<CAPTION>
Three-Months Ended
September 30,
---------------------------------------
1998 1999
---------------- -----------------
(In thousands)
<S> <C> <C>
Total revenue.......................................... $ 23,104 $ 12,262
Total expenses......................................... (17,476) (19,041)
-------- ---------
Income (loss) before taxes and minority
interest.......................................... $ 5,628 $ (6,779)
======== ========
</TABLE>
Our total revenues decreased from $23.1 million in the third quarter of
1998 to $12.3 million in the third quarter of 1999, a decrease of $10.8 million,
or 46.9%. The decrease in revenues is primarily due to the following:
- a decrease of $100.8 million, or 23.5%, in the volume of Conventional
Loans we sold in the third quarter of 1999 compared to the third
quarter of 1998;
- a decrease of $65.3 million, or 61.6%, in the volume of Sub-Prime Loans
we sold in the third quarter of 1999 compared to the third quarter of
1998;
- a decrease of $12.1 million, or 100%, in the volume of High LTV Loans
we sold in the third quarter of 1999 compared to the third quarter of
1998;
- a 21.7% decrease in margins earned on loan fees and gains on sale of
Conventional Loans in the third quarter of 1999 compared to the third
quarter of 1998;
- an 18.0% decrease in margins earned on loan fees and gains on sale of
Sub-Prime Loans in the third quarter of 1999 compared to the third
quarter of 1998; and
- a 9.1% decrease in margins earned on loan fees and gains on sale of
government-insured Loans in the third quarter of 1999 compared to the
third quarter of 1998;
partially offset by an increase of $35.5 million, or 300.7%, in the volume of
government-insured loans we sold in the third quarter of 1999 compared to the
third quarter of 1998.
In the third quarter of 1999, margins on all of our products, and
volumes of our Conventional Loan and Sub-Prime Loan originations, continued to
decline from fourth quarter 1998 levels. Volumes of our Conventional Loan and
Sub-Prime Loan originations have also continued to decline so far in the fourth
quarter of 1999 from the third quarter 1999 levels. The declines are primarily
due to higher interest rates, lower refinancing loan volumes and our
Page 17 of 45
<PAGE> 18
closing of 25 branches and one marketing center in 1999. We expect these trends
to continue into the fourth quarter, as we continue our transition to an
Internet and call center-based loan origination system. We also expect our
fourth quarter 1999 operating results to be below third quarter 1999 operating
results.
During the third quarter of 1999, we disbursed $376.0 million of loans, a
decrease of $195.9 million, or 34.2%, from the $571.9 million of loans disbursed
in the third quarter of 1998. The $195.9 million decrease included a $154.9
million decrease in Conventional Loans, a $65.0 million decrease in Sub-Prime
Loans, and a $12.2 million decrease in High LTV Loans, partially offset by a
$33.4 million increase in government-insured loans and a $2.8 million increase
in Home Equity Line of Credit loans. Our loans held for sale decreased by $40.7
million in the third quarter of 1999, compared to an increase of $12.6 million
in the third quarter of 1998. The decrease was due to our disbursing $376.0
million in loans while selling $416.7 million in loans in the third quarter of
1999. The decrease in loans held for sale in the third quarter of 1999 included
decreases of $34.0 million in Conventional Loans, $3.9 million in
government-insured loans and $2.8 million in Sub-Prime Loans. The increase in
loans held for sale in the third quarter of 1998 included increases of $14.3
million in Conventional Loans, $1.3 million in government-insured loans and $0.1
million in High LTV Loans, partially offset by a decrease of $3.1 million in
Sub-Prime Loans.
Total expenses increased from $17.5 million in the third quarter of 1998 to
$19.0 million in the third quarter of 1999, an increase of $1.5 million, or
9.0%, primarily due to one-time charges of $3.5 million related to the closing
and consolidation of branches in the third quarter of 1999, and $0.8 million
related to the relocation of our corporate headquarters, the majority of which
is the recognition of the impaired value of long-lived assets. These increases
were partially offset by reduced commissions as a result of lower origination
volumes and an increase in the portion of Conventional Loans originated, which
have lower commission rates, and reduced marketing expenses, partly as a result
of the closing of 25 branches and one marketing center in 1999 and reduced
postage and delivery expenses as a result of reduced origination volumes.
Page 18 of 45
<PAGE> 19
The following table sets forth information regarding the components of our
revenues for the three months ended September 30, 1998 and 1999:
<TABLE>
<CAPTION>
Three-Months
Ended September 30,
-------------------------------
1998 1999
---------- ---------
(In thousands)
<S> <C> <C>
Interest income........................................................ $ 2,964 $ 1,608
Interest expense....................................................... (1,482) (369)
---------- ----------
Net interest margin............................................... 1,482 1,239
Provision for credit losses............................................ (140) (400)
---------- ----------
Net interest margin after provision for credit losses............. 1,342 839
Loan fees and gains on sale of mortgages............................... 21,761 11,420
Other income........................................................... 1 2
---------- ----------
Total revenue..................................................... $ 23,104 $ 12,261
========== ==========
</TABLE>
Net interest margin before provision for credit losses decreased from
$1.5 million in the third quarter of 1998 to $1.2 million in the third quarter
of 1999, a decrease of $0.3 million, or 16.4%. The decrease was primarily due to
the following:
- a decrease in the average balance of mortgages held for sale in the
third quarter of 1999 as compared to the same period in 1998;
- a 64.9% decrease in Sub-Prime Loan closings in the third quarter of
1999 as compared to the third quarter of 1998, which typically have
higher interest rates than our other loan products;
partially offset by a decrease in the weighted average interest rates paid on
our borrowing facilities, from 6.78% in the third quarter of 1998 to 6.59% in
the third quarter of 1999;
We intend to continue holding our loans for a shorter period of time before
selling them and anticipate additional reductions in the average balance of
mortgages held for sale in the fourth quarter of 1999, which we expect will
significantly decrease our net interest margin from that experienced in the
fourth quarter of 1998.
Buyers of our loans may require us 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, during
the period we hold our loans we face the risk of delinquencies and resulting
foreclosure losses. As a result of these risks we recorded a provision for
credit losses of approximately $140,000 in the third quarter of 1998 and
recorded a provision for credit losses of approximately $400,000 in the third
quarter of 1999, partly for future repurchase or substitution requirements
relating to loans sold in those periods, and credit risk for loans held for
sale and investment. The increase in the provision in the third quarter of 1999
as compared to the third quarter of 1998 was primarily due to the increased
portion of High LTV Loans (second mortgages with combined
Page 19 of 45
<PAGE> 20
loan-to-value ratios greater than 100%) and past due loans in loans held for
investment during 1999 along with increased indemnification payments with
respect to these High LTV Loans. These loans required a greater than normal
reserve because they are delinquent, creating a likelihood of a greater loss. As
a result, the provision for credit losses and the reserve for representations
and warranties during the third quarter of 1999 was greater than in the third
quarter of 1998. During the third quarter of 1998 and 1999 no loans were
reclassified as real estate owned.
Loan fees and gains on sale of mortgages decreased from $21.8 million in
the third quarter of 1998 to $11.4 million in the third quarter of 1999, a
decrease of $10.4 million, or 47.5%. The decrease in revenue is primarily due to
the changes in sale of loans described above, as well as changes in the margins
earned on loan fees and gains on sale of loans described above. The decrease in
the volume of High LTV Loans we sold is a result of our decision to stop
originating High LTV Loans in the third quarter of 1998. The decrease in the
volume of Sub-Prime Loans we sold is primarily due to a 64.9% decrease in
Sub-Prime Loan closings as a result of our branch closings in 1999 and our sale
of $1.3 million more Sub-Prime Loans in the third quarter of 1999 than we
disbursed, compared to $2.7 million more in the third quarter of 1998. The
decrease in the volume of Conventional Loans we sold is primarily due to a 34.4%
decrease in Conventional Loan closings as a result of a rising interest rate
environment in the third quarter of 1999 compared to the third quarter of 1998
and our branch closings in 1999, partially offset by our sale of $33.1 million
more Conventional Loans in the third quarter of 1999 than we disbursed, compared
to $14.0 million fewer in the third quarter of 1998. The increase in the volume
of government-insured loans we sold is primarily due to a 234.4% increase in
government-insured loan closings as a result of a higher volume of home purchase
loans along with our increased emphasis on government-insured lending in the
third quarter of 1999 compared to the third quarter of 1998 and our sale of $3.3
million more government-insured loans in the third quarter of 1999 than we
disbursed, compared to $1.3 million fewer in the third quarter of 1998.
The decrease in margins earned on loan fees and gains on sale of
Conventional Loans and government-insured loans, when comparing the third
quarter of 1999 to the third quarter of 1998, was primarily the result of a
higher interest rate environment, which increased the need for rate
competitiveness. We expect this trend to continue into the fourth quarter of
1999. We also expect that Conventional Loan closings will further decline in the
fourth quarter of 1999, as compared to the third quarter of 1999 due, in part,
to increases in mortgage interest rates, which should reduce consumer demand for
refinancing existing mortgages, along with the closing of 25 branches (includes
the 13 closed in the first six months of 1999 and the 12 additional closed in
the third quarter) and one marketing center to further the transition to a
Web/Call Center environment and a slowing of new housing starts in the third
quarter of 1999. The decrease in margins earned on loan fees and gains on sale
of Sub-Prime Loans was due to the turmoil in the industry, which created a
surplus of Sub-Prime Loans available for sale thereby driving down the prices of
these loans. We expect both loan closings and revenue to decline from Sub-Prime
Loans in fourth quarter of 1999, principally due to the branch closings in 1999.
Page 20 of 45
<PAGE> 21
The decrease in loan fees and gains on sale of mortgages was partially
offset by a decrease in our recapture reserve in the third quarter of 1999. Some
Sub-Prime Loan sales require us to return a portion of the premium we received
on the sale of the loan if the loan is prepaid by the customer within the first
year after sale. We record a provision for this risk separate from the provision
for credit losses based on our evaluation of the terms of our sale contracts and
our assumptions concerning prepayments. We increased our reserve, and decreased
our loan fees and gains on sale of mortgages, by approximately $0.3 million, in
the third quarter of 1998. Virtually all of the loans we originated in the third
quarter of 1999 contained a prepayment penalty in excess of the reserve
requirement. Therefore, based on our analysis, the reserve for this premium
recapture was adequate at September 30, 1999 and no further provision was
required.
The following table sets forth information regarding the components of our
expenses for the three months ended September 30, 1998 and 1999:
<TABLE>
<CAPTION>
Three-Months
Ended September 30,
------------------------------
1998 1999
-------- -------
(In thousands)
<S> <C> <C>
Salaries, commissions and employee benefits............................ $10,086 $ 8,357
General and administrative expenses.................................... 3,452 2,997
Marketing expenses..................................................... 3,396 2,837
Depreciation and amortization.......................................... 542 514
Loss on branch closings................................................ 3,500
Costs incurred or accrued in connection with the relocation
of corporate headquarters........................................... 836
------- -------
Total expenses.................................................... $17,476 $19,041
======= =======
</TABLE>
Salaries, commissions and employee benefits decreased from $10.1
million in the third quarter of 1998 to $8.4 million in the third quarter of
1999, a decrease of $1.7 million, or 17.1%. The decrease was primarily
attributable to a decrease in commissions as a result of lower origination
volumes and a change in the mix of products originated. More Conventional Loans
were closed which have a lower commission structure than Sub-Prime Loans. These
expenses are expected to continue to fluctuate in the fourth quarter of 1999 in
connection with our planned expansion of existing operations, which includes our
continued development of our Internet presence and strategic alliance.
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 decreased from $3.5 million in the third quarter of
1998 to $3.0 million in the third quarter of 1999, a decrease of $0.5 million,
or 13.2%. The decrease was primarily attributable to a decrease in occupancy
expenses as a result of closing 25 branches in 1999 and a decrease in postage
and delivery expenses as a result of lower origination volumes. These decreases
were partially offset by increased professional fees during the third quarter of
1999, primarily legal and
Page 21 of 45
<PAGE> 22
accounting fees associated with various projects that we were working on during
the quarter. Certain of these expenses are expected to vary according to the
volume of loan closings in the fourth quarter of 1999, except for occupancy
expenses, which are expected to decrease for the branches closed in the third
quarter of 1999, partially offset by an increase of $125,000 to $150,000 per
month in connection with our move to a new Web/Call Center and National Support
Center, which is scheduled to occur in December of 1999.
Marketing expenses decreased from $3.4 million in the third quarter of
1998 to $2.8 million in the third quarter of 1999, a decrease of $0.6 million,
or 16.5%. The decrease was primarily attributable to our closing 25 branches and
one marketing center in 1999.
Depreciation and amortization expenses remained consistent at $0.5
million in the third quarters of 1998 and 1999. These expenses are expected to
increase in 1999 as a result of the expansion of our Web center and the
relocation of our Web/Call Center and National Support Center, partially offset
by a decrease in depreciation attributable to the branches closed in 1999.
In the beginning of the third quarter of 1999, we committed to a plan
to close and consolidate twelve of our remaining fifteen branches. As of
September 30, 1999, we have accrued or incurred expenses of $3.5 million
relating to these branches, which consisted of fixed asset write-offs, ongoing
lease commitments, and severance pay for terminated employees related to these
branch closings.
During the third quarter of 1999, we accrued or incurred approximately
$836,000 of expenses related to the relocation of our corporate headquarters
(National Support Center) and Web/Call center (the majority of which is the
recognition of the impaired value of long-lived assets). We have signed a lease
for an 110,000 square foot facility that will afford us the room to potentially
create a new 400-seat Web/Call Center, including room for approximately 200 loan
officers, and our National Support Center. The move is scheduled to take place
in December of 1999. We estimate that the move will cost us approximately $5.5
million for equipment, new technology, leasehold improvements, moving costs and
accelerated depreciation in the third and fourth quarters of 1999, $3.5 million
of which we expect to capitalize. We also expect the new larger facility will
increase our operating expenses by approximately $125,000 to $150,000 a month.
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 we became subject
to federal and state income taxation in the second quarter of 1998. As an S
corporation, our taxable income was included in the individual returns of the
shareholders. As a result, our income taxes due to quarterly earnings for the
second quarter of 1998 represents income taxes provided based on our estimated
allocation of income before income taxes between the S corporation and the C
corporation as required under IRS regulations.
In addition, in connection with the change in our tax status, we
recognized a net income tax benefit due to conversion of the S corporation of
approximately $0.9 million during the second quarter of 1998. Upon conversion to
a C corporation, we recorded a net deferred tax
Page 22 of 45
<PAGE> 23
asset of approximately $1.8 million, and recognized a corresponding deferred
income tax benefit. The deferred income tax benefit was somewhat offset by our
recognition of a current income tax liability of approximately $0.9 million
associated with the allocation of our taxable income between the S corporation
and the C corporation. For the quarter ended September 30, 1999, we recognized
an income tax benefit of approximately $2.4 million.
NINE MONTHS ENDED SEPTEMBER 30, 1999
VERSUS NINE MONTHS ENDED SEPTEMBER 30, 1998
The following table sets forth our revenues, expenses and pre-tax
income for the nine months ended September 30, 1998 and 1999:
<TABLE>
<CAPTION>
Nine-Months Ended
September 30,
-----------------------------------------
1998 1999
----------------- -----------------
(In thousands)
<S> <C> <C>
Total revenue.......................................... $ 64,120 $ 48,996
Total expenses......................................... (49,282) (52,502)
================= =================
Income (loss) before taxes and minority
interest $ 14,838 $ (3,506)
================= =================
</TABLE>
Our total revenues decreased from $64.1 million in the first nine
months of 1998 to $49.0 million in the first nine months of 1999, a decrease of
$15.1 million, or 23.6%. The decrease in revenues is primarily due to the
following:
- -- a decrease of $135.3 million, or 45.3%, in the volume of Sub-Prime
Loans we sold in the first nine months of 1999 compared to the first
nine months of 1998;
- -- a decrease of $56.3 million, or 98.6%, in the volume of High LTV Loans
we sold in the first nine months of 1999 compared to the first nine
months of 1998;
- -- a 68.5% decrease in margins earned on loan fees and gains on sale of
High LTV Loans in the first nine months of 1999 compared to the first
nine months of 1998;
- -- a 24.6% decrease in margins earned on loan fees and gain on sale of
Sub-Prime Loans in the first nine months of 1999 compared to the first
nine months of 1998;
- -- a 1.6% decrease in margins earned on loan fees and gain on sale of
government-insured loans in the first nine months of 1999 compared to
the first nine months of 1998; and
- -- an 0.8% decrease in margins earned on loan fees and gain on sale of
Conventional Loans in the first nine months of 1999 compared to the
first nine months of 1998
partially offset by the following:
- -- an increase of $172.0 million, or 14.7%, in the volume of Conventional
Loans we sold in the first nine months of 1999 compared to the first
nine months of 1998; and
Page 23 of 45
<PAGE> 24
- -- an increase of $91.6 million, or 295.7%, in the volume of
government-insured loans we sold in the first nine months of 1999
compared to the first nine months of 1998.
In the first nine months of 1999, margins on all of our products, and
volumes of our Conventional Loan and Sub-Prime Loan originations, declined from
fourth quarter 1998 levels. The declines are primarily due to higher interest
rates, lower refinancing loan volumes and our closing of 25 branches and one
marketing center in 1999. We expect these trends to continue in the fourth
quarter of 1999, as we continue our transition to an Internet and call
center-based loan origination system. We also expect our operating results for
the remainder of 1999 to be below our third quarter 1999 operating results.
During the first nine months of 1999, we disbursed $1,515.8 million of
loans, a decrease of $25.2 million, or 1.6%, from the $1,541.0 million of loans
disbursed in the first nine months of 1998. The $25.2 million decrease included
a $141.8 million decrease in Sub-Prime Loans and a $52.0 million decrease in
High LTV Loans, partially offset by a $94.1 million increase in government-
insured loans, a $70.5 million increase in Conventional Loans, and a $4.0
million increase in Home Equity Line of Credit Loans. Our loans held for sale
decreased by $114.4 million in the first nine months of 1999, compared to a
decrease of $17.2 million in the first nine months of 1998. The decrease, which
had a significant positive effect on our 1999 profitability, was due to our
selling $1,630.2 million in loans while disbursing $1,515.8 million in loans in
the first nine months of 1999. The decrease in loans held for sale in the first
nine months of 1999 included decreases of $91.6 million in Conventional Loans,
$26.0 million in Sub-Prime Loans and $0.7 million in High LTV Loans, partially
offset by a $3.9 million increase in government-insured loans. The decrease in
loans held for sale in the first nine months of 1998 included decreases of $19.6
million in Sub-Prime Loans and $5.0 million in High LTV Loans, partially offset
by increases of $4.5 million in Conventional Loans and $2.9 million in
government-insured loans.
Total expenses increased from $49.3 million in the first nine months
of 1998 to $52.5 million in the first nine months of 1999, an increase of $3.2
million, or 6.5%. The increase was primarily due to one time charges of $3.5
million related to the closing and consolidation of branches in the third
quarter of 1999, $0.8 million related to the relocation of the corporate
headquarters (the majority of which is the recognition of the impaired value of
long-lived assets), increased salaries attributable to compensation for new
management team members and additional hiring of staff to the marketing,
technology and other support areas to facilitate the transition to the Web/Call
Center based platform and increases in professional services. These increases
were partially offset by reduced commissions as a result of an increase in the
portion of Conventional Loans originated, reduced marketing expenses, partly as
a result of closing 25 branches and one marketing center in 1999 and reduced
automobile and delivery expenses as a result of reduced origination volumes.
Page 24 of 45
<PAGE> 25
The following table sets forth information regarding the components of
our revenues for the nine months ended September 30, 1998 and 1999:
<TABLE>
<CAPTION>
Nine months
Ended September 30,
-----------------------------
1998 1999
------- --------
(In thousands)
<S> <C> <C>
Interest income........................................................ $ 9,192 $ 6,521
Interest expense....................................................... (5,102) (2,401)
-------- -------
Net interest margin............................................... 4,090 4,120
Provision for credit losses............................................ (389) (1,083)
-------- -------
Net interest margin after provision for credit losses............. 3,701 3,037
Loan fees and gains on sale of mortgages............................... 60,401 45,955
Other income........................................................... 18 4
-------- -------
Total revenue..................................................... $ 64,120 $48,996
======== =======
</TABLE>
Net interest margin before provision for credit losses remained
consistent at $4.1 million for the first nine months of 1998 and 1999. Interest
income was $6.5 million in the first nine months of 1999, a $2.7 million, or
29.1% decrease, as compared to $9.2 million in the first nine months of 1998.
Interest expense decreased from $5.1 million in the first nine months of 1998 to
$2.4 million in the first nine months of 1999, a decrease of $2.7 million, or
52.9%. The decreases were primarily due to the following:
-- a decrease in the average balance of mortgages held for sale in
first nine months of 1999;
-- a 52.6% decrease in Sub-Prime Loan closings during the first nine
months of 1999 compared to the first nine months of 1998, which
typically have a higher interest rate than our other loans
products;
-- a decrease in the weighted average interest rates paid on our
borrowing facilities, from 6.84% in the first nine months of 1998
to 6.14% in the first nine months of 1999; and
-- our increased use of cash generated from operations and our
initial public offering to fund our loans in 1999.
Buyers of our loans may require us 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,
during the period we hold our loans, we face the risk of delinquencies and
resulting foreclosure losses. As a result of these risks we recorded a provision
for credit losses of approximately $389,000 in the first nine months of 1998 and
recorded a provision for credit losses of approximately $1,083,000 in the first
nine months of 1999, partly for future repurchase or substitution requirements
relating to loans sold in these periods, and credit risk for loans held for sale
and investment. The increase was primarily due to the significant increase in
the volume of loans held for investment that were past due along with increased
indemnification payments in connection with these of High LTV Loans. During the
fourth quarter of 1998 and the first quarter of 1999, the secondary
Page 25 of 45
<PAGE> 26
market Sub-Prime Loan buyers changed their underwriting standards, making it
more difficult for us to sell some of our loans. As a result, we held these
loans for a longer period of time than normal or could not sell some of them,
which resulted in us being exposed to more delinquencies than normal. In the
beginning of the third quarter of 1999, we found a buyer for these loans, which
resulted in a charge to the allowance for losses of $1,100,000. During the first
nine months of 1998, two loans were reclassified as real estate owned, resulting
in charges of approximately $192,000 against the allowance for credit losses. In
the first nine months of 1999, four loans were reclassified as real estate
owned, resulting in charges of approximately $48,000 against the reserve.
Loan fees and gains on sale of mortgages decreased from $60.4 million
in the first nine months of 1998 to $46.0 million in the first nine months of
1999, a decrease of $14.4 million, or 23.9%. This decrease is primarily due to
the changes in sales of loans described above, as well as changes in the margins
earned on loan fees and gains on sale of loans described above. The decrease in
the volume of High LTV Loans we sold is a result of our decision to stop
originating High LTV Loans in the third quarter of 1998. The decrease in the
volume of Sub-Prime Loans we sold is primarily due to a 52.6% decrease in
Sub-Prime Loan closings as a result of our branch closings in 1999, partially
offset by our sale of $24.1 million more Sub-Prime Loans in the first nine
months of 1999 than we disbursed, compared to $18.1 million more in the first
nine months of 1998. The increase in the volume of Conventional Loans we sold is
primarily due to our sale of $92.5 million more Conventional Loans in the first
nine months of 1999 than we disbursed, compared to $8.6 million fewer in the
first nine months of 1998. The increase in the volume of government-insured
loans we sold is primarily due to a 286.2% increase in government-insured loan
closings as a result of a higher volume of home purchase loans as well as our
increased emphasis on government-insured lending in the first nine months of
1999 compared to the first nine months of 1998, partially offset by our sale of
$1.4 million fewer government-insured loans in the first nine months of 1999
than we disbursed, compared to $0.6 million fewer in the first nine months of
1998. We also expect that Conventional and Sub-Prime Loan closings will further
decline in the fourth quarter of 1999 compared to the third quarter of 1999 due,
in part, to increases in mortgage interest rates in 1999, which should reduce
consumer demand for refinancing existing mortgages, along with the closing of 25
branches (includes the 13 closed in the first six months of 1999 and the 12
additional closed in the third quarter) and one marketing center and the
transition to a Web/Call Center environment and a slowing of new housing starts
in the third quarter of 1999.
The decrease in margins earned on loan fees and gains on sale of
Sub-Prime Loans was due to the turmoil in the industry, which created a surplus
of Sub-Prime Loans available for sale thereby driving down the prices of these
loans. We expect both loan closings and revenue to continue to decline from
Sub-Prime Loans in the remainder of 1999, principally due to the branch closings
in 1999. The decrease in margins earned on loan fees and gains on sale of
Conventional Loans and government-insured loans, when comparing the first nine
months of 1999 to the first nine months of 1998, was primarily the result of
increased interest rates, which increased the need for rate competitiveness. We
expect this trend to continue in the fourth quarter of 1999.
Page 26 of 45
<PAGE> 27
The decrease in loan fees and gains on sale of mortgages was partially
offset by a decrease in our recapture reserve in the first nine months of 1999.
Some Sub-Prime Loan sales require us to return a portion of the premium we
received on the sale of the loan if the loan is prepaid by the customer within
the first year after sale. We record a provision for this risk separate from the
provision for credit losses based on our evaluation of the terms of our sale
contracts and our assumptions concerning prepayments. We increased our reserve,
and decreased our loan fees and gains on sale of mortgages, by approximately
$12,800 for this risk in the first nine months of 1999, compared to an increase
of approximately $971,900, in the first nine months of 1998. The decrease was
due to a provision not being recorded in the second and third quarters of 1999
as virtually all of the loans we originated in the second and third quarters of
1999 contained a prepayment penalty in excess of the reserve requirement.
Therefore, based on our analysis, the reserve for this premium recapture was
adequate at September 30, 1999 and no further provision was required.
The following table sets forth information regarding the components of
our expenses for the nine-months ended September 30, 1998 and 1999:
<TABLE>
<CAPTION>
Nine-Months
Ended September 30,
------------------------------
1998 1999
---------- ----------
(In thousands)
<S> <C> <C>
Salaries, commissions and employee benefits............................ $28,282 $28,946
General and administrative expenses.................................... 9,550 10,014
Marketing expenses..................................................... 9,857 7,433
Depreciation and amortization.......................................... 1,593 1,774
Loss on branch closings................................................ 3,500
Costs incurred or accrued in connection with the relocation
of corporate headquarters.......................................... 836
------- -------
Total expenses.................................................... $49,282 $52,503
======= =======
</TABLE>
Salaries, commissions and employee benefits increased from $28.3
million in the first nine months of 1998 to $28.9 million in the first nine
months of 1999, an increase of $0.6 million, or 2.3%. The increase was primarily
attributable to salaries for new management, marketing, technology and other
support, partially offset by a decrease in commissions as a result of lower
origination volumes in the first nine months of 1999 as compared to the first
nine months of 1998 and an increase in the portion of Conventional Loans
originated, which have lower commission rates than our other products. These
expenses are expected to continue to fluctuate in the remainder of 1999 in
connection with our expansion of existing operations, along with our continued
development of our Internet presence and strategic alliance.
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 $9.5 million in the first nine months
of 1998 to $10.0 million in the first nine months of 1999, an increase of $0.5
million, or 4.9%. The increase was primarily attributable to an
Page 27 of 45
<PAGE> 28
increase in occupancy expenses, professional services, and expenses related to
technology, support and other personnel hired in connection with our new Web
site, partially offset by a decrease in automobile and delivery expenses that
fluctuate with the volume of originations. Certain of these expenses are
expected to vary according to the volume of loan closings in 1999, except for
occupancy expenses, which are expected to decrease for branches closed in 1999,
partially offset by an increase in connection with our move to a new Web/Call
Center and National Support Center, which is scheduled to occur in December of
1999.
Marketing expenses decreased from $9.9 million in the first nine months
of 1998 to $7.4 million in the first nine months of 1999, a decrease of $2.5
million, or 24.6%. The decrease was primarily attributable to our closing 25
branches and one marketing center in the first nine months of 1999 and our
discontinued origination of High LTV Loans in the third quarter of 1998.
Depreciation and amortization expenses increased from $1.6 million in
the first nine months of 1998 to $1.8 million in the first nine months of 1999,
an increase of $0.2 million, or 11.3%. The increase was primarily attributable
to our purchases of additional equipment and leasehold improvements during the
latter part of 1998 and during 1999 for our new Web center and existing
branches. The expenses are expected to continue to increase in 1999 as a result
of the relocation of our Web/Call Center and National Support Center, partially
offset by the decrease attributable to the branches closed in 1999.
In the beginning of the third quarter of 1999, we committed to a plan
to close and consolidate twelve of our remaining fifteen branches. As of
September 30, 1999, we have accrued or incurred expenses of $3.5 million
relating to these branches which consisted of fixed asset write-offs,
ongoing lease commitments, and severance pay for terminated employees related to
these branch closings.
During the third quarter of 1999, we accrued or incurred approximately
$836,000 of expenses related to the relocation of our corporate headquarters
(National Support Center) and Web/Call center (the majority of which is the
recognition of the impaired value of long-lived assets). We have signed a lease
for an 110,000 square foot facility that will afford us the room to potentially
create a new 400-seat Web/Call Center, including room for approximately 200 loan
officers, and our National Support Center. The move is scheduled to take place
in December of 1999. We estimate that the move will cost us approximately $5.5
million for equipment, new technology, leasehold improvements, moving costs and
accelerated depreciation in the third and fourth quarters of 1999 and the first
quarter of 2000, $3.5 million of which we expect to capitalize. We also expect
the new larger facility will increase our operating expenses by approximately
$125,000 to $150,000 a month.
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 we became subject
to federal and state income taxation in the second quarter of 1998. As an S
corporation, our taxable income was included in the individual returns of the
shareholders. As a result, our income taxes due to quarterly earnings for the
first nine months of 1998 represents income taxes provided based on our
Page 28 of 45
<PAGE> 29
estimated allocation of income before income taxes between the S corporation and
the C corporation as required under IRS regulations.
In addition, in connection with the change in our tax status, we
recognized a net income tax benefit due to conversion of the S corporation of
approximately $0.9 million during the second quarter of 1998. Upon conversion to
a C corporation, we recorded a net deferred tax asset of approximately $1.8
million, and recognized a corresponding deferred income tax benefit. The
deferred income tax benefit was somewhat offset by our recognition of a current
income tax liability of approximately $0.9 million associated with the
allocation of our taxable income between the S corporation and the C
corporation. For the nine months ended September 30, 1999, we recognized income
tax benefit of approximately $1.2 million. This benefit is comprised of a
current tax benefit of $2.7 million offset by a deferred tax asset of $1.5
million.
SEGMENT ANALYSIS
Our growth and our transition from a brick and mortar branch operation
to one more based on Internet, Call Center and Strategic Alliance mortgage
lending channels may distort some of our ratios and financial statistics and may
make period-to-period comparisons difficult. In light of our growth and our
transition, historical earnings and other financial statistics may be of little
relevance in predicting future performance. Additionally, the sensitivity of
Conventional Loans to interest rates and the effect of interest rates on the
volume of loan production and margins will affect period to period comparisons.
We expect segment contributions to vary from period to period. In order
to demonstrate the effect that varying factors have on loan production, revenue
and profits, we have elected to show the results of our current business
segments. As described above, effective April 1, 1999, we changed the way we
manage our business from a product line basis to a distribution channel basis.
The following table shows the contribution to revenues and expenses and the loan
closings of each of our distribution channels for the three and nine months
ended September 30, 1998 and 1999:
Page 29 of 45
<PAGE> 30
<TABLE>
<CAPTION>
For the Three-Month For The Nine-Month
Periods Ended September 30, Periods Ended September 30,
------------------------------------ -----------------------------------
1998 1999 1998 1999
--------------- --------------- --------------- --------------
(In thousands)
<S> <C> <C> <C> <C>
REVENUES:
Web/Call Center ......................... $ 2,612.4 $ 3,668.0 $ 8,629.2 $ 10,640.6
Branch Network .......................... 20,609.0 7,481.9 55,823.7 36,850.9
Strategic Alliance
Program ............................. 1,479.9 2,537.2
Other ................................... (117.2) (68.6) (332.9) (477.6)
Eliminations............................. (299.6) (554.8)
--------- --------- --------- ----------
23,104.2 12,261.6 64,120.0 48,996.3
EXPENSES:
Web/Call Center ......................... 2,072.4 4,541.7 6,164.5 10,264.0
Branch Network........................... 12,089.0 4,760.9 34,306.5 23,117.5
Strategic Alliance
Program ............................. 1,677.2 3,017.6
Other ................................... 3,314.4 8,360.7 8,811.4 16,658.0
Eliminations............................. (299.6) (554.8)
--------- --------- --------- ----------
17,475.8 19,040.9 49,282.4 52,502.3
Income (loss) before taxes and
minority interest ....................... 5,628.4 (6,779.3) 14,837.6 (3,506.0)
Minority interest ............................ 59.2 144.1
Income tax (expense) benefit
due to quarterly earnings (loss) ............. (1,501.0) 2,419.2 (2,624.5) 1,210.0
Income tax benefit due to
Conversion of S. Corp. ....................... 950.9
--------- --------- --------- ----------
Net income (loss) before taxes and
minority interest ............................ $ 4,127.4 $(4,300.9) $13,164.0 $ (2,151.9)
========= ========= ========= ==========
Provision for pro forma
income tax .............................. 1,969.9 5,193.1
--------- ---------
Pro forma net income ......................... $ 3,658.5 $ 9,644.5
========= =========
LOAN CLOSINGS:
Web/Call Center .......................... $ 57,893 $ 113,980 $ 126,045 $ 348,553
Branch Network ........................... 526,152 209,459 1,451,211 1,016,771
Strategic Alliance Program ............... 56,085 112,982
--------- --------- ----------- ----------
Total Loan Closings .................... $ 584,045 $ 379,524 $ 1,577,256 $1,478,306
========= ========= =========== ==========
</TABLE>
Page 30 of 45
<PAGE> 31
THREE MONTHS ENDED SEPTEMBER 30, 1999
VERSUS THREE MONTHS ENDED SEPTEMBER 30, 1998
Revenues decreased in the third quarter of 1999 compared to the third
quarter of 1998 and the contribution by distribution channel differed from
quarter to quarter. In the third quarter of 1999, the Branch Network division
contributed $7.5 million, or 61.0%, of revenues, compared to $20.6 million, or
89.2%, in the third quarter of 1998. The Web/Call Center division contributed
$3.7 million, or 29.9%, of revenues, compared to $2.6 million, or 11.3%, in the
third quarter of 1998. The Strategic Alliance Program, which commenced
operations in April of 1999, contributed $1.5 million, or 12.1%, of revenues in
the third quarter of 1999.
BRANCH NETWORK: The Branch Network division generated $7.5 million in
revenue in the third quarter of 1999 versus $20.6 million of revenue in the
third quarter of 1998. The 63.7% decrease in revenue is mainly attributable to a
decrease in margins earned on loan fees and gains on sale of Sub-Prime Loans and
Conventional Loans originated by the Branch Network in the third quarter of 1999
(see "Results of Operations" for a description of changes in margins), and a
52.7% decrease in sales of Branch Network loans in the third quarter of 1999
compared to the third quarter of 1998. The lower loan sales are primarily
attributable to the following:
-- a 60.2% decrease in Branch Network loan closings, as a result of
an increase in interest rates and a corresponding decrease in the
volume of refinance activity, along with the shift of some Branch
Network loan officers to the Web/Call Center; and
-- the closing of 25 branches and one marketing center in 1999;
partially offset by the sale of $32.4 million more Branch Network loans in the
third quarter of 1999 than were disbursed, compared to $9.3 million fewer in the
third quarter of 1998.
Due to the branch closings and the continuing increase in interest rates further
dampening the amount of refinance business, we expect both closings and revenues
from our Branch Network to decline in the fourth quarter of 1999 from third
quarter of 1999.
Direct expenses of the Branch Network division were $4.8 million in the
third quarter of 1999 compared to $12.1 million in the third quarter of 1998.
The $7.3 million decrease in direct expenses is primarily attributable to:
-- a $4.7 million decrease in salaries, commissions and employee
benefits, as a result of decreased origination volumes, the closing of
25 branches and one marketing center in 1999, as well as a shift in
product mix to more Conventional Loans, which have lower commissions;
-- a decrease in marketing and advertising from $2.3 million in the third
quarter of 1998 to $0.5 million in the third quarter of 1999. The
decrease is primarily
Page 31 of 45
<PAGE> 32
attributable to discontinuing advertising for branches closed in 1999,
compared to advertising for new branches in 1998;
-- a $0.7 million decrease in occupancy costs from $1.2 million in the
third quarter of 1998 to $0.5 million in the third quarter of 1999, as
a result of branches closed during 1999; and
-- a decrease in variable expenses directly associated with closed loans.
WEB/CALL CENTER DIVISION: The Web/Call Center division generated $3.7
million in revenue in the third quarter of 1999 versus $2.6 million of revenue
in the third quarter of 1998. The 40.4% increase in revenue is mainly
attributable to a 119.6% increase in the volume of loans sold ($116.4 million in
the third quarter of 1999 compared to $53.0 million in the third quarter of
1998) as a result of a 96.9% increase in Web/Call Center originations ($114.0
million in the third quarter of 1999, compared to $57.9 million in the third
quarter of 1998) and the sale of $1.6 million more loans than were disbursed in
the third quarter of 1999, compared to $3.3 million fewer in the third quarter
of 1998, partially offset by reduced margins resulting from a change in products
originated, from High LTV Loans in 1998 to primarily Conventional Loans in 1999.
(see "Results of Operations" for a description of volumes and margins).
We anticipate the increasing interest rates that started to occur in
the second quarter of 1999 will decrease the demand for loans that refinance the
existing mortgages of consumers. The decrease in production is expected to
reduce the profitability of the division in the fourth quarter of 1999.
Direct expenses of the Web/Call Center division were $4.5 million in
the third quarter of 1999 compared to $2.1 million in the third quarter of 1998.
The 119.2% increase in expenses is primarily attributable to the following:
-- a $0.6 million increase in commissions associated with a 96.9%
increase in the volume of closed Web/Call Center loans;
-- $0.9 million of increased marketing expenses in an attempt to brand
RockLoans.com for the transition to the Web/Call Center origination
platform; and
-- increased expenses for personnel costs and occupancy for the
anticipated growth in our Internet production; and
-- increased variable expenses that fluctuate with the volume of loans
closed.
STRATEGIC ALLIANCE PROGRAM: Our Strategic Alliance Program currently
consists of one joint venture, a 70%-owned limited liability company that
originates residential mortgage products to Michigan National Bank's customers
through Michigan National Bank's 192 financial centers, a call center and over
the Internet. Michigan National Bank has approximately 450,000 customers and
owns the other 30% of the joint venture. The Strategic Alliance Program, which
commenced operations April 4, 1999, generated $1.5 million in revenue on loan
sales of $60.8 million in the third quarter of 1999.
Direct expenses of the Strategic Alliance Program were $1.7 million
in the third quarter of 1999 before intercompany eliminations.
Page 32 of 45
<PAGE> 33
OTHER: The majority of the Other revenue in the third quarter of 1999
is the fee charged to the joint venture for services rendered by Rock Financial
in accordance with the services agreement, which is eliminated in consolidation.
Other expenses include expenses not directly allocable to a particular
division, such as the costs associated with our legal, marketing, accounting,
information services, facilities management, servicing, executive, human
resources, secondary marketing and general and administrative support teams. The
majority of the $5.1 million increase in expenses, from $3.3 million in the
third quarter of 1998 to $8.4 million for the third quarter of 1999, is
primarily due to one time charges of $3.5 million for branch closings in the
third quarter and $0.8 million in corporate relocation expenses (the majority of
which is the recognition of the impaired value of long-lived assets) and
increased costs of technology, marketing and other support personnel for our
Web/Call Center.
NINE MONTHS ENDED SEPTEMBER 30, 1999
VERSUS NINE MONTHS ENDED SEPTEMBER 30, 1998
Revenues decreased in the first nine months of 1999 compared to first
nine months of 1998 and the contribution by distribution channel differed from
quarter to quarter. In the first nine months of 1999, the Branch Network
division contributed $36.9 million, or 75.2%, of revenues, compared to $55.8
million, or 87.1%, in the first nine months of 1998. The Web/Call Center
division contributed $10.6 million, or 21.7%, of revenues, compared to $8.6
million, or 13.5%, in the first nine months of 1998. The Strategic Alliance
Program, which commenced operations in April of 1999, contributed $2.5 million,
or 5.2%, of revenues in the first nine months of 1999.
BRANCH NETWORK: The Branch Network division generated $36.9 million in
revenue in the first nine months of 1999 versus $55.8 million of revenue in the
first nine months of 1998. The 34.0% decrease in revenue is mainly attributable
to a decrease in margins earned on loan fees and gains on sale of Sub-Prime
Loans originated in the Branch Network in the first nine months of 1999 (see
"Results of Operations" for a description of changes in margins). The decrease
was partially offset by our sale of $118.4 million more Branch Network loans in
the first nine months of 1999 than were disbursed, compared to $15.7 million
more in the first nine months of 1998. This increase was substantially offset by
a 29.9% decrease in Branch Network loan closings in the first nine months of
1999 as compared to the first nine months of 1998. The lower loan closings are a
result of an increase in interest rates and corresponding decrease in the volume
of refinance activity, along with the shift of some loan officers to the
Web/Call Center and the closing of 25 branches and one marketing center in 1999.
Due to the branch closings and the continuing increase in interest rates further
dampening the amount of refinance business in the third quarter of 1999, we
expect both closings and revenues from our Branch Network to continue to decline
in the fourth quarter of 1999 from the third quarter of 1999 level.
Page 33 of 45
<PAGE> 34
Direct expenses of the Branch Network division were $23.1 million in
the first nine months of 1999 compared to $34.3 million in the first nine months
of 1998. The $11.2 million decrease in expenses is primarily attributable to:
-- a $ 4.7 million decrease in salaries, commissions and employee
benefits, as a result of decreased origination volumes, the
closing of 25 branches and one marketing center in 1999, as well
as a shift in product mix to more Conventional Loans, which have
lower commissions;
-- a $2.3 million decrease in marketing expense, primarily
attributable to discontinuing advertising for branches closed in
1999, compared to advertising for new branches in 1998;
-- a $0.9 million decrease in occupancy costs from $3.4 million in
the third quarter of 1998 to $2.5 million in the third quarter of
1999, as a result of branches closed during 1999; and
-- a decrease in variable expenses directly associated with closed
loans.
WEB/CALL CENTER DIVISION: The Web/Call Center division generated $10.6
million in revenue in the first nine months of 1999 versus $8.6 million of
revenue in the first nine months of 1998. The 23.3% increase in revenue is
mainly attributable to a 189.3% increase in loan sales (see "Results of
Operations" for a description of volumes and margins) as a result of a $222.5
million increase, or 176.5%, in Web/Call Center originations and the sale of
$3.7 million more loans than were disbursed in the first nine months of 1999,
compared to $2.2 million fewer in the first nine months of 1998, partially
offset by reduced margins resulting from a change in products originated, from
High LTV Loans in 1998 to primarily Conventional Loans in 1999. We anticipate
the increasing interest rates that started to occur in the third quarter of 1999
will decrease the refinancing of existing mortgages by consumers. The decrease
in production is expected to reduce the profitability of the division in the
fourth quarter of 1999.
Direct expenses of the Web/Call Center division were $10.3 million in
the first nine months of 1999 compared to $6.2 million in the first nine months
of 1998. The 66.5% increase is primarily attributable to the following:
-- a $1.5 million increase in commissions associated with a 176.5%
increase in the volume of closed Web/Call Center loans;
-- $0.9 million of increased marketing expenses in an attempt to
brand RockLoans.com for the transition to the Web/Call Center
origination platform; and
-- increased expenses for personnel costs and occupancy for the
anticipated growth in our Internet production; and
-- increased variable expenses that fluctuate with the volume of
loans closed.
STRATEGIC ALLIANCE PROGRAM: Our Strategic Alliance Program currently
consists of one joint venture, a 70%-owned limited liability company that
originates residential mortgage products to Michigan National Bank's customers
through Michigan National Bank's 192 financial centers, a call center and over
the Internet. Michigan National Bank has approximately 450,000 customers and
owns the other 30% of the joint venture. The Strategic
Page 34 of 45
<PAGE> 35
Alliance Program, which commenced operations April 4, 1999, generated $2.5
million in revenue on loan sales of $105.5 million in the first nine months of
1999.
Direct expenses of the Strategic Alliance Program were $3.0 million in
the first nine months of 1999 before intercompany eliminations.
OTHER: The majority of the Other revenue in the first nine months of
1999 is the fee charged to the joint venture for services rendered by Rock
Financial in accordance with the services agreement, which is eliminated in
consolidation.
Other expenses include expenses not directly allocable to a particular
division, such as the costs associated with our legal, marketing, accounting,
information services, facilities management, servicing, executive, human
resources, secondary marketing and general and administrative support teams. The
majority of the $7.9 million increase in expenses, from $8.8 million in the
first nine months of 1998 to $16.7 million for the first nine months of 1999, is
primarily due to one time charges of $3.5 million for branch closings in the
third quarter and $0.8 million in corporate relocation expenses (the majority of
which is the recognition of the impaired value of long-lived assets) and
increased costs of technology, marketing and other support personnel for our
Web/Call Center.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities in the first nine months of
1999 was approximately $85.1 million, compared to approximately $62.3 million in
the first nine months of 1998. Cash was provided primarily by:
-- a decrease in mortgage loans held for sale of approximately $114.4
million in the first nine months of 1999, compared to an approximately
$17.1 million decrease in the first nine months of 1998; and
-- our results of operation in the first nine months of 1999,
approximately $2.2 million before depreciation and amortization,
provision for credit losses, and deferred income taxes in the first
nine months of 1999, compared to net income of approximately $13.5
million in the first nine months of 1998.
These sources of cash were partially offset by the following:
-- a decrease in drafts payable, which represent funds advanced for loan
closings that have not yet been drawn against the warehouse line of
credit of approximately $24.8 million in the first nine months of
1999, compared to an increase of approximately $23.4 million in the
first nine months of 1998;
-- an increase in prepaid and federal income tax receivable of $4.0
million in the first nine months of 1999, as a result of stock options
exercised;
-- a decrease in accounts payable and accrued expenses and other
liabilities of approximately $2.6 million in the first nine months of
1999, compared to an increase of approximately
Page 35 of 45
<PAGE> 36
$8.5 million in the first nine months of 1998, primarily as a result
of the decrease in loan closings from the fourth quarter of 1998 to
the third quarter of 1999.
Net cash provided by investing activities during the first nine months
of 1999 was approximately $2.9 million, compared to approximately $4.2 million
used in investing activities during the first nine months of 1998. Cash was
primarily provided by a decrease in real estate owned and loans held for
investment of approximately $2.4 million in the first nine months of 1999 as a
result of the sale and repayment of loans in the third quarter of 1999, compared
to an increase of $1.3 million in the first nine months of 1998 and the
repayment of shareholders' advances of approximately $1.0 million in the first
nine months of 1999, compared to $1.6 million in the first nine months of 1998.
These uses of cash were partially offset by the purchase property and equipment
of approximately $0.5 million in the first nine months of 1999, compared to $4.6
million in the first nine months of 1998.
Net cash used in financing activities during the first nine months of
1999 was approximately $81.0 million, compared to approximately $35.7 million
during the first nine months of 1998. Cash was used for the following:
-- repayments of borrowings under our warehouse line of credit of
approximately $76.8 million in the first nine months of 1999, compared
to approximately $25.7 million in the first nine months of 1998;
-- repayments of borrowings under our reverse repurchase agreement of
approximately $11.5 million in the first nine months of 1999, compared
to approximately $15.4 million in the first nine months of 1998; and
-- payment of dividends to shareholders of approximately $0.6 million in
the first nine months of 1999, compared to approximately $0.6 million
in the first nine months of 1998. We determined not to pay a dividend
in the third or fourth quarters of 1999.
These uses of cash were partially offset by the proceeds from the exercise of
stock options of approximately $7.6 million in the first nine months of 1999,
compared to $1.9 million in the first nine months of 1998, and $0.3 million
minority interest investment received from Michigan National Bank for our joint
venture in the first nine months of 1999. We normally use our cash to pay down
our warehouse borrowings. In order to demonstrate the availability of this
liquidity, we borrowed additional cash under our warehouse line of credit at
September 30, 1999 for three days.
We have $450 million of warehouse financing facilities, which includes
a $50 million warehouse financing facility of our subsidiary, Rock Home Loans at
Michigan National. Our warehouse line of credit currently provides for up to
$200 million principal amount of demand loans secured by loans held for sale and
other of our assets. 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. The effective weighted average interest rate for
this arrangement in the first nine months of 1999 was 6.31%. As of November 11,
1999, we had financed $10.3 million of loans under this facility and had a
maximum of $26.3 million available for additional
Page 36 of 45
<PAGE> 37
borrowings and were in compliance with all associated financial covenants. We
would have an additional $189.7 million of borrowing capacity available if we
had sufficient collateral.
In addition to the $200 million warehouse line of credit, our reverse
repurchase arrangement provides that the lender, an affiliate of one of the
representatives of the underwriters in our initial public offering and our
financial advisor in connection with our merger with Intuit Inc., will purchase
from us at par up to $200 million of fully-amortizing, first or junior lien
residential mortgage loans and home equity loans that comply with our
origination guidelines and conform to whole and bulk loan sale requirements. The
lender's obligations are subject to our agreement to repurchase loans on a daily
basis. 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 2000. The effective weighted
average interest rate to us of this arrangement in the first nine months of 1999
was 5.92%. We use this facility as a supplemental borrowing facility to fund
loans we close until they are sold. As of November 3, 1999, we had not financed
any loans under this facility and had no additional borrowings available to draw
against. We would have an additional $200 million of borrowing capacity if we
had sufficient collateral.
Our subsidiary, Rock Home Loans at Michigan National, has $50 million
of warehouse financing facilities. Its warehouse line of credit currently
provides for up to $50 million principal amount of demand loans secured by loans
held for sale and other of its assets. 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. The effective weighted average
interest rate for this arrangement for the six months ended September 30, 1999
was 6.20%. As of November 11, 1999, $8.6 million had been borrowed under this
facility and our subsidiary had no additional borrowings available to draw
against and was in compliance with all associated financial covenants. It would
have $41.4 million of borrowing capacity available if it had sufficient
collateral.
Our warehouse financing facilities, together with cash flows from
operations, are expected to be sufficient to fund our liquidity requirements for
the next 12 months, if our future operations are consistent with our
expectations. We, however, expect that eventually we will need to arrange for
additional sources of capital through the issuance of debt, equity or additional
bank borrowings. We have no commitments for any such additional financing, and
we cannot assure you that we will be able to obtain any such additional
financing at the times required and on terms and conditions acceptable to us. In
such event, our growth and operations could be curtailed. If we begin to
securitize our assets or significantly increase our retained mortgage servicing
rights, our liquidity could be materially adversely affected, although we have
no current intention to do either in the immediate future.
Page 37 of 45
<PAGE> 38
NEW ACCOUNTING STANDARDS NET YET ADOPTED
In September 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("Statement 133"). Statement 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. Statement 133 requires companies to
record derivatives on the balance sheet as assets or liabilities, measured at
fair value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. Upon initial application, hedging
relationships must be designated anew and documented pursuant to the provisions
of Statement 133.
In June 1999, the Financial Accounting Standards Board issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of
the Effective Date of FASB Statement No. 133" ("Statement 137"). Statement 137
amends the effective date of Statement 133. Statement 133 will now be effective
for all fiscal quarters of all fiscal years beginning after June 15, 2000.
Management has not yet evaluated the impact of the implementation of Statement
133.
YEAR 2000 DISCLOSURE
STATE OF READINESS
We have developed a Year 2000 project plan that addresses both
technological and non-technological systems, including embedded systems for all
business units. We have designated a Year 2000 project team to lead the efforts
using a phased approach. We employ both internal and external resources to
identify, correct and test systems to achieve Year 2000 compliance. We are also
reviewing the Year 2000 readiness of third parties that provide services
essential to our operations.
The plan consists of nine phases. As of September 30, 1999, we have
completed all the phases which are planning, awareness, inventory, triage,
detailed assessment, resolution, test planning, testing and deployment. As a
result of the completion of these phases, we believe that we are Year 2000
compliant, however, there can be no guarantee until the event actually happens.
We also are continuing to communicate with key third party suppliers and other
business partners to establish and monitor their levels of Year 2000 readiness.
Our Year 2000 project is subject to modification, and we may revise it
periodically as we further develop information.
ESTIMATED COST
As of September 30, 1999, we have incurred approximately $290,000 of
costs. As we are completed with all nine phases of our project, we do not expect
any further significant costs to be incurred in relation with this project. We
do not expect our Year 2000 project cost to have a material impact on our
liquidity or capital resources.
Page 38 of 45
<PAGE> 39
RISKS OF OUR YEAR 2000 ISSUES
Based on current information, we believe the Year 2000 problem will not
have a material adverse effect on us, our business or our financial condition.
We cannot predict the actual effect of the Year 2000 problem on us. Many
uncertainties exist as to whether broad-based or systemic economic failures may
occur.
YEAR 2000 CONTINGENCY PLANS
We are reviewing existing contingency plans for potential modifications
to address specific Year 2000 issues. Our key operational systems are being
reviewed and strengthened to address business continuity requirements. Business
continuity plans include the development of back-up processes that would be
implemented in the event of system failures, for example, the ability to provide
government reporting manually versus electronically. The contingency planning
process will continue as the status of third party readiness becomes better
known.
Page 39 of 45
<PAGE> 40
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate risk is the largest market risk affecting us. Interest
rate risk is the possibility that changes in interest rates will cause
unfavorable changes in our net income and in the value of our interest rate
sensitive assets, liabilities and commitments. As part of our risk management
programs, we purchase financial instruments and enter into financial agreements
with off-balance sheet risk in the normal course of business to manage our
exposure to interest rate risk with respect to our Conventional Loans and our
government-insured loans (together, "Prime Loans"), but not with respect to our
Sub-Prime Loans or Home Equity Lines of Credit. We use these financial
instruments for the explicit purpose of managing interest rate risks to protect
the value of our Prime Loans held for sale and the Prime Loan commitment
pipeline. We use financial instruments that tend to decrease in value as
interest rates decline and increase in value as interest rates rise, which acts
as an offset to the behavior of the underlying Prime Loans held for sale and
Prime Loan pipeline.
Management actively monitors and manages our exposure to interest rate
risk on Prime Loans, which is incurred in the normal course of business. The
committed and closed pipelines of Prime Loans, as well as the related forward
commitments and derivatives, are valued daily. We refer to the loans, pipeline,
commitments and derivatives together as the "hedge position". The hedge position
is "shocked" against a spectrum of interest rate scenarios to evaluate expected
net changes of the fair values of the hedge position in relation to the changes
in interest rates. We do not enter into instruments for trading purposes.
We evaluate interest rate risk exposure using both static shock and
option adjusted spread models to estimate changes to the fair value of the hedge
position. Both modeling techniques measure net changes in the fair value to the
underlying assets and commitments by determining the present value of the cash
flow of the underlying mortgage or debt instrument discounted at the interest
rate assumed to be required by an investor to yield a market rate of return.
Both modeling techniques measure changes in the fair value of derivatives
through Option Adjusted Spread calculations to determine the present value using
implied volatility, discount rates and expected life of the derivative. Both
models use assumptions regarding the amount of commitments that close, given an
incremental shift of +/- 100 basis points, in 12.5 basis point increments, to
the yield curve. The assumptions are based on our historical experience. Our
exposure is analyzed daily and reviewed at least monthly by the Secondary
Marketing Executive Committee, which includes in its membership our Director of
Secondary Marketing, our Chief Financial Officer, our President, and our
Chairman of the Board and Chief Executive Officer.
Both modeling techniques described above were applied to the hedge
position as of September 30, 1999 over a spectrum of interest rate changes to
evaluate the change in the hedge position's fair value ("sensitivity analysis").
Using the results of the model producing the largest loss in fair value, the
sensitivity analysis reflected that an instantaneous 50 basis point increase in
interest rates at September 30, 1999, determined by management to reflect a
reasonably possible near-term change, would have reduced the fair value of the
hedge position 17 basis points from 2.33% to 2.16% and would have decreased
revenue by approximately $140,000 even though the model assumes that more loans
would have closed due to an increase in interest rates. A 50 basis
Page 40 of 45
<PAGE> 41
point decrease in interest rates at September 30, 1999, determined by management
to reflect a reasonably possible near-term change, would have decreased the fair
value of the hedge position 10 basis points from 2.33% to 2.23% and would have
decreased revenue by approximately $46,000 assuming that fewer loans would have
closed due to the decline in interest rates. Both 50 basis point moves are
assumed shifts in the entire yield curve. We do not believe that our spread
income would be materially affected by interest rate changes as the interest we
charge on our mortgage loans can change faster than the interest on our
indebtedness.
The table below provides information about our other financial
instruments that are sensitive to changes in interest rates, including debt
obligations and Sub-Prime Loans, as of September 30, 1999. For both debt
obligations and Sub-Prime Loans, the table presents principal cash flows and
related weighted average interest rates by expected maturity dates. Weighted
average variable rates are based on current rates as of September 30, 1999. The
instruments' actual cash flows are all denominated in U.S. dollars.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
EXPECTED MATURITY DATE
(AMOUNTS IN THOUSANDS) 1999 2000-2003 THEREAFTER TOTAL FAIR VALUE
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Sub-Prime Loans $ 4,953 $ 0 $ 0 $ 4,953 $ 4,953
Weighted Average Interest Rate: 12.17% NA NA 12.17%
LIABILITIES:
Warehouse Line of Credit $ 21,236 $ 0 $ 0 $21,236 $21,236
Weighted Average Interest Rate: 6.26% NA NA 6.26%
Reverse Repurchase Arrangement $ 0 $ 0 $ 0 $ 0 $ 0
Weighted Average Interest Rate: NA NA NA NA NA
</TABLE>
Page 41 of 45
<PAGE> 42
PART II--OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In general, under Chapter 7B of the Michigan Business Corporation Act,
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 our officers, our employee-directors, 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 us. In
connection with the proposed merger with Intuit Inc., on October 5, 1999, the
Board of Directors amended our bylaws to provide that Chapter 7B does not apply
to Rock or its common shares, par value $0.01 per share.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
2.1 Agreement and Plan of Merger, dated October 6, 1999, among
Intuit Inc., Rock Financial Corporation, Title Source, Inc.,
Merger Sub 1, Inc. and Merger Sub 2, Inc., incorporated by
reference to Exhibit 2.1 to Rock Financial Corporation's
Current Report on Form 8-K filed with the Securities and
Exchange Commission on October 22, 1999.
3(ii) Amended and restated bylaws of Rock Financial Corporation as
amended October 5, 1999.
10.1 Form of Indemnification Agreement for Directors and Officers.
10.2 Stock Option Agreement, dated October 6, 1999, between Intuit,
Inc. and Rock Financial Corporation, incorporated by reference
to Exhibit 99.1 to Rock Financial Corporation's Current Report
on Form 8-K filed with the Securities and Exchange Commission
on October 22, 1999.
10.3 Form of Rock Voting Agreement, dated October 6, 1999, between
specified shareholders of Rock Financial Corporation and
Intuit Inc., incorporated by reference to Exhibit 99.2 to Rock
Financial Corporation's Current Report on Form 8-K filed with
the Securities and Exchange Commission on October 22, 1999.
10.4 Form of Title Voting Agreement, dated October 6, 1999, between
specified shareholders of Title Source, Inc. and Intuit Inc.,
incorporated by reference to Exhibit 99.3 to Rock Financial
Corporation's Current Report on Form 8-K filed with the
Securities and Exchange Commission on October 22, 1999.
10.5 Form of Rock Affiliate Agreement, dated October 6, 1999, among
deemed
Page 42 of 45
<PAGE> 43
affiliates of Rock Financial Corporation, Intuit Inc. and Rock
Financial Corporation, incorporated by reference to Exhibit
99.4 to Rock Financial Corporation's Current Report on Form
8-K filed with the Securities and Exchange Commission on
October 22, 1999.
10.6 Form of Title Affiliate Agreement, dated October 6, 1999,
among deemed affiliates of Title Source, Inc., Intuit Inc. and
Title Source, Inc, incorporated by reference to Exhibit 99.5
to Rock Financial Corporation's Current Report on Form 8-K
filed with the Securities and Exchange Commission on October
22, 1999.
10.7 Form of Intuit Affiliate Agreement, dated October 6, 1999,
between deemed affiliates of Intuit Inc. and Intuit Inc,
incorporated by reference to Exhibit 99.6 to Rock Financial
Corporation's Current Report on Form 8-K filed with the
Securities and Exchange Commission on October 22, 1999.
10.8 Non-Competition Agreement, dated October 6, 1999, among Intuit
Inc., Rock Financial Corporation and Daniel Gilbert,
incorporated by reference to Exhibit 99.7 to Rock Financial
Corporation's Current Report on Form 8-K filed with the
Securities and Exchange Commission on October 22, 1999.
10.9 Amendment No. 6 to Second Amended and Restated Mortgage
Warehousing Agreement dated August 27, 1999, among Rock
Financial Corporation, the lenders named therein, and
Comerica Bank, as agent.
27.1 Financial Data Schedule.
Page 43 of 45
<PAGE> 44
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K on October 22,
1999, reporting in Item 5 that it had entered into the Agreement
and Plan of Merger on October 6, 1999 with Intuit, Inc. See Note
9 of the Notes to Consolidated Financial Statements in Part I of
this report for a description of the agreement and the merger. No
financial statements were filed with the Form 8-K.
Page 44 of 45
<PAGE> 45
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: November 15, 1999 By:/s/ MICHAEL D. HOLLERBACH
---------------------------------
MICHAEL D. HOLLERBACH
Its: President
(Duly Authorized Officer)
Date: November 15, 1999 By:/s/ FRANK E. PLENSKOFSKI
---------------------------------
FRANK E. PLENSKOFSKI
Its: Chief Financial Officer
(Principal Financial and
Chief Accounting Officer)
Page 45 of 45
<PAGE> 46
EXHIBIT INDEX
Exhibit Description
2.1 Agreement and Plan of Merger, dated October 6, 1999, among
Intuit Inc., Rock Financial Corporation, Title Source, Inc.,
Merger Sub 1, Inc. and Merger Sub 2, Inc., incorporated by
reference to Exhibit 2.1 to Rock Financial Corporation's
Current Report on Form 8-K filed with the Securities and
Exchange Commission on October 22, 1999.
3(ii) Amended and restated bylaws of Rock Financial Corporation as
amended October 5, 1999.
10.1 Form of Indemnification Agreement for Directors and Officers.
10.2 Stock Option Agreement, dated October 6, 1999, between Intuit,
Inc. and Rock Financial Corporation, incorporated by reference
to Exhibit 99.1 to Rock Financial Corporation's Current Report
on Form 8-K filed with the Securities and Exchange Commission
on October 22, 1999.
10.3 Form of Rock Voting Agreement, dated October 6, 1999, between
specified shareholders of Rock Financial Corporation and
Intuit Inc., incorporated by reference to Exhibit 99.2 to Rock
Financial Corporation's Current Report on Form 8-K filed with
the Securities and Exchange Commission on October 22, 1999.
10.4 Form of Title Voting Agreement, dated October 6, 1999, between
specified shareholders of Title Source, Inc. and Intuit Inc.,
incorporated by reference to Exhibit 99.3 to Rock Financial
Corporation's Current Report on Form 8-K filed with the
Securities and Exchange Commission on October 22, 1999.
10.5 Form of Rock Affiliate Agreement, dated October 6, 1999, among
deemed affiliates of Rock Financial Corporation, Intuit Inc.
and Rock Financial Corporation, incorporated by reference
to Exhibit 99.4 to Rock Financial Corporation's Current Report
on Form 8-K filed with the Securities and Exchange Commission
on October 22, 1999.
10.6 Form of Title Affiliate Agreement, dated October 6, 1999,
among deemed affiliates of Title Source, Inc., Intuit Inc. and
Title Source, Inc, incorporated by reference to Exhibit 99.5
to Rock Financial Corporation's Current Report on Form 8-K
filed with the Securities and Exchange Commission on October
22, 1999.
10.7 Form of Intuit Affiliate Agreement, dated October 6, 1999,
between deemed affiliates of Intuit Inc. and Intuit Inc,
incorporated by reference to Exhibit 99.6 to Rock Financial
Corporation's Current Report on Form 8-K filed with the
Securities and Exchange Commission on October 22, 1999.
10.8 Non-Competition Agreement, dated October 6, 1999, among Intuit
Inc., Rock Financial Corporation and Daniel Gilbert,
incorporated by reference to Exhibit 99.7 to Rock Financial
Corporation's Current Report on Form 8-K filed with the
Securities and Exchange Commission on October 22, 1999.
10.9 Amendment No. 6 to Second Amended and Restated Mortgage
Warehousing Agreement dated August 27, 1999, among Rock
Financial Corporation, the lenders named therein, and Comerica
Bank, as agent.
27.1 Financial Data Schedule.
<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
Page
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............................... 2
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......................................... 4
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.............................................. 5
3.16 Compensation............................................ 6
i
<PAGE> 3
ARTICLE 4 - OFFICERS................................................. 6
4.1 Officers and Agents..................................... 6
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............................................... 7
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... 8
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 ....................................... 9
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...................................... 10
6.4 Record Date............................................. 10
6.5 Registered Shareholders................................. 11
ARTICLE 7 - INDEMNIFICATION.......................................... 11
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....................................... 12
8.5 Financial Statements.................................... 12
ARTICLE 9 - AMENDMENTS............................................... 12
ARTICLE 10 -CONTROL SHARE ACQUISITIONS............................... 13
ARTICLE 11 -SCOPE OF BYLAWS.......................................... 13
ii
<PAGE> 4
ROCK FINANCIAL CORPORATION,
a Michigan corporation
ARTICLE I - 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 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.
1
<PAGE> 5
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.
2.11 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'
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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 then 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 1, Class II and Class 111. 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
11 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 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
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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.
3.8 Annual Meeting. 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.
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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 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
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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.
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, may
be officers of the Corporation or may be Directors
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who are not officers of the Corporation, as designated by the Board of
Directors. In the absence of such 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 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
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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 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,
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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 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:
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(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 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
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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.
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
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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.
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.
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ARTICLE 10 - CONTROL SHARE ACQUISITIONS
Pursuant to Section 794 of the Michigan Business Corporation Act, Chapter
7B of the Michigan Business Corporation Act (being Sections 790 through 799 of
the Michigan Business Corporation Act or any successor provisions) does not
apply to control share acquisitions of shares of the Corporation.
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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<PAGE> 1
EXHIBIT 10.1
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is made on October __, 1999,
between Rock Financial Corporation, a Michigan corporation ("Corporation"), and
__________ ("[Director/Officer]").
RECITALS
A. [Director/Officer] is [a member of Corporation's Board of Directors] [an
officer of Corporation], and Corporation desires [Director/Officer] to continue
in such capacity. [Director/Officer] is willing to continue to serve [on
Corporation's Board of Directors] [as an officer of Corporation] if
[Director/Officer] receives the protections provided by this Agreement.
B. Corporation's Bylaws obligate it to indemnify its current and former
directors and officers.
C. Corporation has furnished, at its expense, directors and officers
liability insurance ("D&O Insurance") protecting its directors and officers in
connection with their performance of services for the Corporation.
D. The Corporation believes that (1) litigation against corporate directors
and officers, regardless of whether meritorious, is expensive and time-consuming
for the director, officer or both to defend; (2) there is a substantial risk of
a large judgment or settlement in litigation in which a corporate director or
officer was neither culpable nor profited personally to the detriment of the
corporation; (3) it is increasingly difficult to attract and keep qualified
directors and officers because of such potential liabilities; (4) it is
important for both current and former directors and officers to have assurance
that indemnification will be available if the current or former director or
officer acts in accordance with reasonable business standards; and (5) because
available D&O Insurance and the indemnification available from the Corporation
are not adequate to fully protect Corporation's directors and officers against
the problems discussed above, it is in the best interests of Corporation and its
shareholders for Corporation to contractually obligate itself to indemnify its
directors and officers and to set forth the details of the indemnification
process.
E. Based upon the conclusions stated in Recital D, to induce
[Director/Officer] to continue to serve [on Corporation's Board of Directors]
[as an officer of Corporation] and in consideration of [Director/Officer]'s
continued service as a director, officer or both, Corporation wishes to enter
into this Agreement with [Director/Officer].
Therefore, Corporation and [Director/Officer] agree as follows:
1. AGREEMENT TO SERVE. [Director/Officer] will serve as [a member of the
Board of Directors] [an officer] of Corporation as long as [Director/Officer] is
duly elected and qualified to so serve or until [Director/Officer] resigns or is
removed [from Corporation's Board of Directors] [as an officer of Corporation].
<PAGE> 2
2. INDEMNIFICATION.
(a) Corporation will indemnify [Director/Officer] to the fullest extent
permitted under applicable law if [Director/Officer] was or is a party or
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding of any kind, whether civil, criminal, administrative or
investigative and whether formal or informal (including actions by or in the
right of Corporation and any preliminary inquiry or claim by any person or
authority), by reason of the fact that [Director/Officer] is or was a
[Director/Officer], officer, employee or agent of Corporation or is or was
serving at Corporation's request as a director, officer, partner, trustee,
employee or agent of another corporation (including a subsidiary), limited
liability company, partnership, joint venture, trust, employee benefit plan or
other enterprise, whether or not for profit, or by reason of anything done or
not done by [Director/Officer] in any such capacity (collectively, "Covered
Matters"). Such indemnification will cover all Expenses (as defined in paragraph
5(a)), liabilities, judgments (including punitive and exemplary damages),
penalties, fines (including excise taxes relating to employee benefit plans and
civil penalties) and amounts paid in settlement which are incurred or imposed
upon [Director/Officer] in connection with a Covered Matter (collectively,
"Indemnified Amounts").
(b) [Director/Officer] will be indemnified for all Indemnified Amounts and
Corporation will defend [Director/Officer] against claims (including threatened
claims and investigations) in any way related to [Director/Officer]'s service as
an officer, a director or both, including claims brought by or on behalf of
Corporation or any subsidiary, except if it is finally determined by the court
of last resort (or by a lower court if not timely appealed) that (1) the payment
is prohibited by applicable law or (2) [Director/Officer] engaged in intentional
misconduct for the primary purpose of significant personal financial benefit
through actions adverse to a Corporation's and its shareholders' best interests.
As used in this Agreement, (1) "intentional misconduct" will not include
violations of disclosure or reporting requirements of federal securities laws or
a breach of fiduciary duties (including duties of loyalty or care) if
[Director/Officer] relied on advice of counsel to Corporation, or otherwise
reasonably believed that there was no violation of such requirements or breach
of fiduciary duty; and (2) "significant personal financial benefit" will not
include compensation or employee benefits for past or prospective services to
Corporation or Corporation's successor or in connection with an agreement not
to compete or similar agreement, or any benefit received by directors, officers
or shareholders of Corporation generally.
(c) If [Director/Officer] is entitled under this Agreement to
indemnification for less than all of the amounts incurred by [Director/Officer]
in connection with a Covered Matter, Corporation will indemnify
[Director/Officer] for the indemnifiable amount.
3. CLAIMS FOR INDEMNIFICATION. [Director/Officer] will give Corporation
written notice of any claim for indemnification under this Agreement. Payment
requests will include a schedule setting forth in reasonable detail the amount
requested and will be accompanied (or, If necessary, followed) by copies of the
relevant invoices or other documentation. Upon Corporation's request,
[Director/Officer] will provide Corporation with a copy of the document or
pleading, if any, notifying [Director/Officer] of the Covered Matter. To the
extent practicable, Corporation will pay Indemnified Amounts directly without
requiring [Director/Officer] to make any prior payment.
2
<PAGE> 3
4. DETERMINATION OF RIGHT TO INDEMNIFICATION.
(a) [Director/Officer] will be presumed to be entitled to indemnification
under this Agreement and will receive such indemnification, subject to paragraph
4(b), irrespective of whether the Covered Matter involves allegations of
intentional misconduct, alleged violations of Section 16(b) of the Securities
Exchange Act of 1934, alleged violations of Section 10(b) of the Securities
Exchange Act of 1934 (including Rule lOb-5 thereunder), breach of
[Director/Officer]'s fiduciary duties (including duties of loyalty or care) or
any other claim.
(b) If, in the opinion of counsel to Corporation, applicable law permits
indemnification in a Covered Matter only as authorized in the specific case upon
a determination that indemnification is proper in the circumstances because
[Director/Officer] has met a standard of conduct established by applicable law,
and upon an evaluation of Indemnified Amounts to be paid in connection with such
Covered Matter, the following will apply:
(1) Corporation will give [Director/Officer] notice that a
determination and evaluation will be made under this paragraph 4(b); such
notice will be given immediately after receipt of counsel's opinion that
such a determination and evaluation is necessary and will include a copy of
such opinion.
(2) Such determination and evaluation will be made in good faith, as
follows:
(A) by a majority vote of a quorum of Corporation's Board of
Directors consisting of directors who are not parties or threatened to
be made parties to the Covered Matter in question ("Disinterested
Directors") or, if such a quorum is not obtainable, by a majority vote
of a committee of Disinterested Directors who are selected by the
Board; or
(B) by an attorney or firm of attorneys, having no previous
relationship with Corporation or [Director/Officer], which is selected
by Corporation and [Director/Officer]; or
(C) by all independent directors of Corporation (as defined in
the Michigan Business Corporation Act) who are not parties or
threatened to be made parties to the Covered Matter.
(3) [Director/Officer] will be entitled to a hearing before the entire
Board of Directors of Corporation and any other person or persons making
the determination and evaluation under clause (2) above. [Director/Officer]
will be entitled to be represented by counsel at such hearing.
(4) The cost of a determination and evaluation under this paragraph
4(b) (including attorneys' fees and other expenses incurred by
[Director/Officer] in preparing for and attending the hearing contemplated
by clause (3)
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<PAGE> 4
above and otherwise in connection with the determination and evaluation
under this paragraph 4(b)) will be borne by Corporation.
(5) The determination will be made as promptly as possible after final
adjudication of the Covered Matter.
(6) [Director/Officer] will be presumed to have met the required
standard of conduct under this paragraph 4(b) unless it is clearly
demonstrated to the determining body that [Director/Officer] has not met
the required standard of conduct.
5. ADVANCE OF EXPENSES.
(a) Before final adjudication of a Covered Matter, upon
[Director/Officer]'s request pursuant to paragraph 3 above, Corporation will
promptly either advance Expenses directly or reimburse [Director/Officer] for
all Expenses. As used in this Agreement, "Expenses" means all costs and expenses
(including attorneys' fees, expert fees, other professional fees and court
costs) incurred by [Director/Officer] in connection with a Covered Matter other
than judgments, penalties, fines and settlement amounts.
(b) If, in the opinion of counsel to Corporation, applicable law permits
advancement of Expenses only as authorized in the specific case upon a
determination that [Director/Officer] has met a standard of conduct established
by applicable law, the determination will be made at Corporation's cost, in good
faith and as promptly as possible after [Director/Officer]'s request, in
accordance with clauses (1) through (4) and (6) of paragraph 4(b). Because of
the difficulties inherent in making any such determination before final
disposition of the Covered Matter, to the extent permitted by law such advance
will be made if (1) the facts then known to those persons making the
determination, without conducting a formal independent investigation, would
not preclude advancement of Expenses under applicable law and (2)
[Director/Officer] submits to Corporation a written affirmation of
[Director/Officer]'s belief that [Director/Officer] has met the standard of
conduct necessary for advancement of Expenses under the circumstances.
(c) [Director/Officer] will repay any Expenses that are advanced under
this paragraph 5 if it is ultimately determined, in a final, non-appealable
judgment rendered by the court of last resort (or by a lower court if not timely
appealed), that [Director/Officer] is not entitled to be indemnified against
such Expenses. This undertaking by [Director/Officer] is an unlimited general
undertaking but no security for such undertaking will be required.
6. DEFENSE OF CLAIM.
(a) Except as provided in paragraph 6(c) below, Corporation, jointly
with any other indemnifying party, will be entitled to assume the defense of any
Covered Matter as to which [Director/Officer] requests indemnification.
(b) Counsel selected by Corporation to defend any Covered Matter will be
subject to [Director/Officer]'s advance written approval, which will not be
unreasonably withheld.
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<PAGE> 5
(c) [Director/Officer] may employ [Director/Officer]'s own counsel in a
Covered Matter and be fully reimbursed therefor if (1) Corporation approves, in
writing, the employment of such counsel or (2) either (A) [Director/Officer] has
reasonably concluded that there may be a conflict of interest between
Corporation and [Director/Officer] or between (Director/Officer] and other
parties represented by counsel employed by Corporation to represent
[Director/Officer] in such action or (B) Corporation has not employed counsel
reasonably satisfactory to [Director/Officer] to assume the defense of such
Covered Matter promptly after [Director/Officer]'s request.
(d) Neither Corporation nor [Director/Officer] will settle any Covered
Matter without the other's written consent, which will not be unreasonably
withheld.
7. DISPUTES; ENFORCEMENT.
(a) If there is a dispute relating to the validity or enforceability of
this Agreement or a denial of indemnification, advance of Expenses or payment of
any other amounts due under this Agreement or Corporation's Articles of
Incorporation or Bylaws, Corporation will provide such indemnification, advance
of Expenses or other payment until a final, non-appealable judgment that
[Director/Officer] is not entitled to such indemnification, advance of Expenses
or other payment has been rendered by the court of last resort (or by a lower
court if not timely appealed). (Director/Officer] will repay such amounts if
such final, non-appealable judgment so requires.
(b) Corporation will reimburse all of [Director/Officer]'s reasonable
expenses (including attorneys' fees) in pursuing an action to enforce
[Director/Officer]'s rights under this Agreement unless a final, non-appealable
judgment against [Director/Officer] has been rendered in such action by the
court of last resort (or by a lower court if not timely appealed). At
[Director/Officer]'s request, such expenses will be advanced by the Corporation
to [Director/Officer] as incurred before final resolution of such action by the
court of last resort; such expenses will be repaid by [Director/Officer] if a
final, non-appealable judgment in the Corporation's favor is rendered in such
action by the court of last resort (or by a lower court if not timely appealed).
8. D&O INSURANCE.
(a) Corporation represents that it currently has in full force and
effect the D&O Insurance listed on the schedule which is attached to this
Agreement.
(b) Except as provided in paragraph 8(c), Corporation will purchase and
maintain D&O Insurance with a policy limit of at least $10,000,000 without
deductible or co-insurance in excess of the amounts set forth on the schedule
which is attached to this Agreement, insuring [Director/Officer] against any
liability arising out of [Director/Officer]'s status as a director or officer of
Corporation, regardless of whether Corporation has the power to indemnify
[Director/Officer] against such liability under applicable law.
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<PAGE> 6
(c) Corporation will not be required to purchase and maintain D&O
Insurance if the Board of Directors of Corporation determines, after diligent
inquiry, that (1) such insurance is not available; or (2) the premiums for
available insurance are disproportionate to the amount of coverage and to the
premiums paid by other corporations similarly situated. The Board of Directors
of Corporation will, at least twice annually, in good faith review its decision
not to maintain D&O Insurance and will purchase such insurance at any time that
the conditions of this paragraph 8(c) cease to apply.
(d) The parties will cooperate to obtain advances of Expenses,
indemnification payments and consents from D&O Insurance carriers in any Covered
Matter to the full extent of applicable D&O Insurance. The existence of D&O
Insurance coverage will not diminish or limit Corporation's obligation to make
indemnification payments to [Director/Officer]. Amounts paid directly to
[Director/Officer] with respect to a Covered Matter by Corporation's D&O
Insurance carriers will be credited to the amounts payable by Corporation to
[Director/Officer] under this Agreement.
9. LIMITATIONS OF ACTIONS. No action will be brought by or on behalf of
Corporation against [Director/Officer] or [Director/Officer]'s heirs or personal
representatives relating to [Director/Officer]'s service as an officer, a
director or both, after the expiration of one year from the date
[Director/Officer] ceases (for any reason or for no reason) to serve as a
director or officer of Corporation, and any claim or cause of action of
Corporation will be extinguished and deemed released unless asserted by the
filing of a legal action before the expiration of such period.
10. RIGHTS NOT EXCLUSIVE. The indemnification provided to
[Director/Officer] under this Agreement will be in addition to any
indemnification provided to [Director/Officer] by any law, agreement, Board
resolution, provision of the Articles of Incorporation or Bylaws of Corporation
or otherwise.
11. SUBROGATION. Upon payment of any Indemnified Amount under this
Agreement, Corporation will be subrogated to the extent of such payment to all
of [Director/Officer]'s rights of recovery therefor and [Director/Officer] will
take all reasonable actions requested by Corporation (at no cost or penalty to
[Director/Officer]) to secure Corporation's rights under this paragraph 11
including executing documents.
12. CONTINUATION OF INDEMNITY. All of Corporation's obligations under
this Agreement will continue as long as [Director/Officer] is subject to any
actual or possible Covered Matter, notwithstanding [Director/Officer]'s
termination of service as an officer, a director or both.
13. AMENDMENTS. Neither Corporation's Articles of Incorporation nor its
Bylaws will be changed to increase liability of officers or directors or to
limit (Director/Officer]'s indemnification. Any repeal or modification of
Corporation's Articles of Incorporation or Bylaws or any repeal or modification
of the relevant provisions of any applicable law will not in any way diminish
any of [Director/Officer]'s rights or Corporation's obligations under this
Agreement. This Agreement cannot be amended except with the written consent of
Corporation and [Director/Officer].
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<PAGE> 7
14. GOVERNING LAW. This Agreement will be governed by Michigan law.
15. SUCCESSORS.
(a) This Agreement will be binding upon and inure to the benefit of the
parties and their respective heirs, legal representatives and assigns.
(b) Corporation will require any successor (whether direct or indirect,
by purchase, merger, consolidation or otherwise) to all or substantially all of
the business or assets of Corporation to assume all of Corporation's obligations
under this Agreement. Such assumption will not release Corporation from its
obligations under this Agreement.
16. SEVERABILITY. The provisions of this Agreement will be deemed
severable, and if any part of any provision is held illegal, void or invalid
under applicable law, such provision may be changed to the extent reasonably
necessary to make the provision, as so changed, legal, valid and binding. If any
provision of this Agreement is held illegal, void or invalid in its entirety,
the remaining provisions of this Agreement will not in any way be affected or
impaired but will remain binding in accordance with their terms.
17. NOTICES. All notices given under this Agreement will be in writing and
delivered either personally, by registered or certified mail (return receipt
requested, postage prepaid), by courier or by telecopy (if promptly followed by
a copy delivered personally, by registered or certified mail or overnight
courier), as follows:
If to [Director/Officer]:
__________________________
__________________________
__________________________
If to Corporation: Rock Financial Corporation
30600 Telegraph Road, 4th Floor
Bingham Farms, MI 49025
Attention: Secretary
or to such other address as any party furnishes to the others in writing.
18. COUNTERPARTS. This Agreement may be signed in counterparts.
19. SUBSIDIARIES. As used in this Agreement, the term "subsidiary" means
any corporation in which Corporation owns a majority interest.
In witness whereof, the parties have executed this Agreement on the date
set forth in the introductory paragraph of this Agreement.
ROCK FINANCIAL CORPORATION,
a Michigan corporation
By: ________________________________
Its: __________________________
_______________________________
________________________________
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<PAGE> 1
EXHIBIT 10.9
AMENDMENT NO. 6 TO
SECOND AMENDED AND RESTATED MORTGAGE WAREHOUSING AGREEMENT
THIS AMENDMENT ("Amendment") is dated as of August 27, 1999, by and
among Comerica Bank, a Michigan banking corporation ("Comerica"), First Union
National Bank, successor by merger to Corestates Bank, N.A. ("FUNB"),
Residential Funding Corporation, a Delaware corporation ("RFC") and National
City Bank of Kentucky, a national banking association ("NCBank") (collectively,
Comerica, FUNB, RFC and NCBank are referred to as "Lenders"), Comerica Bank, as
Agent for Lenders (in such capacity, "Agent"), and Rock Financial Corporation, a
Michigan corporation ("Borrower");
RECITALS:
WHEREAS, BORROWER, Agent and Lenders entered into a certain Second
Amended and Restated Mortgage Warehousing Agreement dated November 13,1997, as
amended by Amendment No. 1 dated January 30, 1998, Amendment No. 2 dated April
2, 1998, Amendment No. 3 dated July 13, 1998, Amendment No. 4 dated November 16,
1998 and Amendment No. 5 and Waiver dated January 25, 1999 (as amended, the
"Agreement"); and
WHEREAS, Borrower, Agent and Lenders desire to further amend the
Agreement as hereinafter set forth.
NOW, THEREFORE, the parties hereto agree as follows:
1. Borrower and Michigan National Bank, a national banking association
("Michigan National") have formed Rock Home Loans at Michigan National, L.L.C.,
a Michigan limited liability company ("Rock Home Loans"), the sole members of
which are Borrower and Michigan National, for the purpose of engaging in the
origination, purchase and sale of mortgage loans. Pursuant to a Mortgage
Warehousing Agreement between Rock Home Loans and Michigan National dated April
14, 1999, Michigan National made available to Rock Home Loans a mortgage
warehousing line of credit (the "Rock Home Loans Warehousing Agreement"). In
connection with the Rock Home Loans Warehousing Agreement, Rock Home Loans,
Michigan National and Comerica entered into a Custodial Agreement dated April
14, 1999, as amended by Amendment No. 1 dated of even date herewith (as amended,
the "Custodial Agreement"), a copy of which is attached hereto as Exhibit A,
under which Comerica agreed to act as collateral custodian for the benefit of
Michigan National. The Lenders hereby consent to (a) the formation of Rock Home
Loans, (b) the extensions of credit to Rock Home Loans under the Rock Home Loans
Warehousing Agreement, and (c) the Custodial Agreement and Comerica's
obligations thereunder.
2. The definition of "Loan Documents" in Section 1.02 of the Agreement
is amended and restated to read in its entirety as follows:
<PAGE> 2
"Loan Documents means this Agreement, the Security Agreement, the
Notes, the Michigan National Intercreditor Agreement and all other
documents, instruments or agreements executed in connection with or securing
or "supporting the foregoing or the Loan."
3. The following definitions are added to Section 1.02 of the Agreement:
"Business Day shall mean any day on which commercial banks are open for
business in Detroit, Michigan.
Countrywide Remittances shall have the meaning given the term in the
Michigan National Intercreditor Agreement.
Michigan National shall mean Michigan National Bank, a national banking
association.
Michigan National Collateral shall have the meaning given the term in
the Michigan National Intercreditor Agreement.
Michigan National Intercreditor Agreement shall mean the Intercreditor
Agreement by and among Comerica, as Agent and as Collateral Custodian under
the Rock Home Loans Custodial Agreement, and Michigan National in the form
of Exhibit J hereto, as it may be amended from time to time.
Rock Home Loans shall mean Rock Home Loans at Michigan National,
L.L.C., a Michigan limited liability company.
Rock Home Loans Account shall have the meaning given the term in the
Michigan National Intercreditor Agreement.
Rock Home Loans Collateral Custodian shall mean Comerica, as collateral
custodian for Michigan National under the Rock Home Loans Custodial
Agreement.
Rock Home Loans Custodial Agreement shall mean that certain Custodial
Agreement by and among Comerica, Rock Home Loans and Michigan National dated
April 14, 1999, as amended by Amendment No. 1 dated August 27, 1999, as it
may be further amended from time to time.
Rock Home Loans Warehousing Agreement shall mean the Mortgage
Warehousing Agreement between Rock Home Loans and Michigan National dated
April 14, 1999, as it may be amended from time to time.
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<PAGE> 3
Sweep Account shall have the meaning given the term in the Michigan
National Intercreditor Agreement.
Sweep Account Reconciliation shall have the meaning given the term in
the Michigan National Intercreditor Agreement."
4. The last sentence of Section 2.05 of the Agreement is amended and restated
to read in its entirety as follows:
"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, except that the proceeds from the sale of Mortgage
Loans securing the Loan which constitute Countrywide Remittances shall be
paid directly to the Sweep Account and transferred to the Restricted Account
in accordance with Section 2.07 hereof and once transferred to the
Restricted Account applied against the Loan in accordance with the
foregoing."
5. Section 2.07 of the Agreement is amended and restated to read in its
entirety as follows:
"2.07 Countrywide Remittances; Sweep Account; Disbursements from Sweep
Account, Michigan National Intercreditor Agreement.
(a) Borrower and Rock Home Loans shall open with Comerica and maintain
in effect the Sweep Account, which Sweep Account shall be maintained as a
"no access" account to Borrower, Rock Home Loans or any other person other
than Rock Home Loans Collateral Custodian and Agent. The Sweep Account shall
be used in the manner set forth in this Agreement and the Michigan National
Intercreditor Agreement.
(b) To obtain certain cost savings for Rock Home Loans, in which
Borrower is a member, except as otherwise provided herein, all Countrywide
Remittances shall be paid directly to the Sweep Account (and Countrywide
shall be so instructed by Borrower and, pursuant to the Rock Home Loans
Custodial Agreement, by Rock Home Loans).
(c) Agent shall retain an exclusive security interest in and lien on
the Collateral for the benefit of the Lenders, whether in the Sweep Account
or otherwise, pursuant to this Agreement, the Security Agreement and all
other documents, instruments and agreements made in connection therewith;
and, except for Rock Home Loans Collateral Custodian's rights under the Rock
Home Loans Custodial Agreement, Michigan National shall retain an exclusive
security interest in and lien on the Michigan National Collateral, whether
in the Sweep Account or otherwise,
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<PAGE> 4
pursuant to the Rock Home Loans Warehousing Agreement and all other
documents, instruments and agreements made in connection therewith.
(d) Agent, Rock Home Loans Collateral Custodian, Michigan National,
Borrower and Rock Home Loans have entered into the Michigan National
Intercreditor Agreement, a copy of which is attached hereto as Exhibit J,
describing in greater detail the rights and responsibilities of Agent and
Michigan National with respect to the Sweep Account. The Lenders agree to be
bound by all of the terms and conditions thereof.
(e) Comerica may, and at the direction of Majority Lenders shall, at
any time and for any reason, immediately on notice to Borrower, Rock Home
Loans and Michigan National, whether or not an Event of Default or a
Custodial Agreement Default (as defined in the Rock Home Loans Custodial
Agreement) has occurred and is continuing or exists, prohibit the further
use of the Sweep Account in the manner set forth in Paragraph 4(f) of the
Rock Home Loans Custodial Agreement, whereupon Borrower shall immediately
notify Countrywide thereof (with a copy thereof to be sent to Agent) and
Borrower shall direct and cause Countrywide to make all amounts payable by
Countrywide on account of the purchase of any Collateral or Michigan
National Collateral shipped by Agent or Rock Home Loans Collateral Custodian
after the date of such prohibition, directly to the Restricted Account or
Rock Home Loans Account respectively.
(f) Comerica shall transfer funds in the Sweep Account in accordance
with and subject to the terms of the Michigan National Intercreditor
Agreement."
6. The reference to "and" at the end of subsection 8 of Section 3.01.01 on
page 20 of the Agreement is deleted, the period at the end of subsection 9 of
Section 3.01.01 on page 20 of the Agreement is replaced with "; and", and the
following subsection 10 is added to Section 3.01.01:
"10. The Sweep Account and all Collateral and other amounts therein,
except for the Michigan National Collateral."
7. The Intercreditor Agreement attached as Exhibit J hereto is added to the
Agreement as Exhibit J thereto.
8. Borrower hereby represents and warrants that, after giving effect to the
amendments 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
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<PAGE> 5
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 effects
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.
9. Except as expressly modified by this Amendment, all of the terms and
conditions of the Agreement shall remain in full force and effect.
10. This Amendment shall not become effective unless and until each of the
following conditions precedent has been satisfied:
(a) The Agent shall have received a counterpart of this Amendment
executed by Borrower, Agent and each Lender.
(b) Due execution and acknowledgment by all parties to the Intercreditor
Agreement in the form of Exhibit J attached hereto.
(c) The Agent and the Borrower shall have entered into an Amendment No.
2 to Amended and Restated Security Agreement in form and substance satisfactory
to Agent.
11. Capitalized terms not defined herein shall have the meanings ascribed to
them in the Agreement.
12. 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.
REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
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IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date set forth above.
COMERICA BANK, AS AGENT AND ROCK FINANCIAL CORPORATION
A LENDER
By: Robert W. Marr By: Daniel Gilbert
------------------------------ -------------------------------
Its: Account Officer Its: CEO
----------------------------- ------------------------------
FIRST UNION NATIONAL BANK,
SUCCESSOR BY MERGER TO
CORESTATES BANK, N.A., AS A LEADER
By: Edmund J. Furphy
------------------------------
Its: Vice President
-----------------------------
RESIDENTIAL FUNDING CORPORATION,
AS A LENDER
By: Barbara Rapetti
------------------------------
Its: Director
-----------------------------
NATIONAL CITY BANK OF
KENTUCKY, AS A LENDER
By: Kelly Moyer
------------------------------
Its: Asst. Vice President
-----------------------------
6
<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 NINE
MONTHS ENDED, SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS AND ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 37,091,876
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 41,277,617
<CURRENT-ASSETS> 0
<PP&E> 14,045,323
<DEPRECIATION> 5,405,026
<TOTAL-ASSETS> 99,251,941
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 148,535
<OTHER-SE> 49,103,279
<TOTAL-LIABILITY-AND-EQUITY> 99,251,941
<SALES> 0
<TOTAL-REVENUES> 48,996,232
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,083,086
<INTEREST-EXPENSE> 2,401,370
<INCOME-PRETAX> (3,506,446)
<INCOME-TAX> (1,210,264)
<INCOME-CONTINUING> (2,152,121)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,152,121)
<EPS-BASIC> (0.15)
<EPS-DILUTED> (0.15)
</TABLE>
