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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to Commission file number 000-23887
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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, including Zip Code)
Registrant's telephone number, including area code: (248) 540-8000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON SHARES, PAR VALUE $0.01 PER SHARE
(Title of class)
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 |_|
Indicate by check mark if disclosure of delinquent filers pursuant to
item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|
As of March 11, 1999, the aggregate market value of the voting and
non-voting common equity, consisting of common shares, held by non-affiliates of
the registrant, computed by reference to the closing sales price of the common
shares on that date, was $174,573,375.
The number of the registrant's common shares outstanding as of March
11, 1999 was 13,965,870.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant's Proxy Statement for its 1999 Annual
Meeting of Shareholders, scheduled to be held May 25, 1999, are incorporated by
reference in Part III, if the Proxy Statement if filed no later than April 30,
1999.
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<TABLE>
<CAPTION>
ROCK FINANCIAL CORPORATION
Table of Contents
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Page
Number
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<S> <C>
PART I .......................................................................................3
ITEM 1. BUSINESS...............................................................................3
ITEM 2. PROPERTIES............................................................................22
ITEM 3. LEGAL PROCEEDINGS.....................................................................22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................................22
SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT..............................23
PART II ......................................................................................24
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.................24
ITEM 6. SELECTED FINANCIAL DATA...............................................................24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................................................................27
ITEM 7A. QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK............................49
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA............................................51
ITEM 9. CHANGES IN DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE............................................................................77
PART III ......................................................................................78
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT....................................78
ITEM 11. EXECUTIVE COMPENSATION................................................................78
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................78
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................78
PART IV ......................................................................................79
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.......................79
SIGNATURES ......................................................................................80
</TABLE>
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PART I
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ITEM 1. BUSINESS
OVERVIEW
Rock Financial Corporation ("Rock" or the "Company") is a company
marketing conventional, government insured and sub-prime debt consolidation and
home financing loans, secured primarily by first or second mortgages on one-to
four-family, owner-occupied residences. Rock originates loans through 18 stores
and branches, one call center, and an Internet site. Founded in 1985 by its
current Chief Executive Officer, President and Chairman of the Board, Daniel
Gilbert, the Company originates 100% of its loans through marketing directly to
consumers. The Company seeks to provide "world class" service to its customers,
thereby encouraging them to return for future loans and refer others to the
Company for loans. The Company also focuses on recruiting, developing and
motivating talented people, recruited from inside and outside the consumer
finance industry, to implement its business strategies. The Company believes it
is creating growing brand identities and a direct to customer franchise that
should sustain its loan origination efforts.
The Company originates loans to individuals with impaired credit
characteristics, high levels of debt service to income, unfavorable past credit
experience, limited credit history, limited employment history or unverifiable
income ("Sub-Prime Home Equity Loans") through its Fresh Start(R) division,
created in 1994. During 1998, the Company closed $374.2 million of Sub-Prime
Home Equity Loans (6,405 loans, representing 26.9% of the total loans closed).
The Company also originates loans that generally conform to Federal National
Mortgage Association ("FNMA") or Federal Home Loan Mortgage Corporation
("Freddie Mac") underwriting standards, or that generally meet such standards
except for maximum loan size guidelines ("Conventional Loans"), through its
Conventional Mortgage Lending division. During 1998, The Company closed $1.9
billion of Conventional Loans (15,093 loans). Although only 15.9% of the total
loan closings (by dollar volume) were Sub-Prime Home Equity Loans in 1998,
revenues from Sub-Prime Home Equity Loans equaled 42.4% of total revenues due to
higher profit margins and interest rates associated with Sub-Prime Home Equity
Loans. In addition, the Company increased its government insured lending
operations in 1998, primarily making mortgage loans that meet the underwriting
standards for Federal Housing Administration ("FHA") insurance.
Rock's business in each division is supported by an infrastructure of
sophisticated technology, highly-trained people and specialized marketing,
including multimedia advertising and direct marketing operations. To identify
potential customers, Rock uses internal and external databases of information
regarding past and potential customers and their needs. Rock then develops
customer profiles that it uses together with information from outside sources to
tailor and direct its marketing efforts for each of its divisions. Rock believes
that its focused marketing approach makes more efficient use of its marketing
resources and leads to a higher marketing success rate than broad indiscriminate
marketing aimed at a wide range of consumers.
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As a retail originator of loans, Rock earns a portion of its revenues
from origination points and processing fees charged to its customers. Rock
currently does not securitize its loans. Rather, it sells its loans in large
bulk and whole loan sales for cash premiums in the secondary market. During
1998, Rock had revenues of $89.8 million, pre-tax income of $18.8 million and
pro forma net income of $12.2 million. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations--Termination of S
Corporation Status and Income Taxes". During 1998, Rock closed $2.4 billion of
loans (23,853 loans). As of March 11, 1999, Rock had 754 employees, including
290 loan officers.
Rock was incorporated in the State of Michigan on June 21, 1985. For
information concerning revenues from external customers and a measure of profit
or loss by segment for each of 1997 and 1998, see "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Segment Analysis." Other than loans, the Company's assets are not
specifically allocated to its operating divisions and, therefore, such
allocation is not used for operating decisions with respect to the divisions. As
a result, total assets by division are not presented. The Company was not
managed according to segments during 1996; therefore, the Company is not
presenting segment information for 1996.
RECENT DEVELOPMENTS
Rock opened five Fresh Start stores in January 1998 and four
Conventional Mortgage Lending branches in the first three quarters of 1998. Rock
renamed its Michigan "Boulder Financial" stores "Fresh Start" in 1998. In 1999,
Rock plans to rename its Fresh Start Loan Centers, Rock Financial Loan Centers
in connection with its strategies to enhance consumer recognition of the Rock
Financial brand name and to expand the products offered through its existing
distribution channels (see "Business Strategy"). During 1998, Rock completed an
initial public offering (the "Offering") of its common shares (see "Item 7
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources"). Rock repurchased 244,000 of its
common shares during 1998 for an aggregate repurchase price of approximately
$1.3 million. Also during 1998, Rock decided to stop originating High LTV Loans
(see "Operating Divisions").
Rock had operated through three major divisions, but currently operates
through two major divisions. Rock decided, in the third quarter of 1998, to stop
originating home equity second mortgage loans to individuals with good credit
histories but little or no equity in their homes ("High LTV Loans") due to
concerns of liquidity that resulted from a diminishing base of purchasers of
these loans and to take advantage of the high demand for Conventional Loans.
Therefore, the sales force from this division was shifted to handle this high
demand for Conventional mortgage loans resulting from the lower interest rate
environment.
In December of 1998, the Company began to originate loans through its
Internet site which led to an announcement in January 1999, of Rock's new
Internet web site, RockLoans.com (see "Key Components of Rock's Retail Franchise
and Philosophies"), and the closing of eight Fresh Start stores and one
marketing center located outside of Michigan (see "Operating Divisions--Fresh
Start Division"). In February 1999, Rock announced that it had formed a
70%-owned limited liability company to provide residential mortgage products to
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Michigan National Bank's customers through Michigan National Bank's financial
centers, a call center and over the Internet. The joint venture is expected to
begin business in April 1999, subject to material closing terms and conditions
and governmental approvals.
BUSINESS STRATEGY
Rock's business strategy to build its consumer lending operations
includes: (i) enhancing consumer recognition of its "Rock Financial" brand name
in its current markets and establishing brand name recognition in new markets,
(ii) expanding its Internet and call center operations into additional states,
(iii) expanding the cross-selling of existing products and expanding the
products offered through existing distribution channels, (iv) exploring
establishing additional distribution channels, (v) providing "world class"
service, and thereby distinguishing itself from its competitors, (vi) continuing
to invest heavily in technology and marketing, (vii) maintaining consistent
underwriting standards, and thereby maintaining secondary market interest in
Rock's loans, and (viii) seeking potential acquisition opportunities.
Enhance Consumer Recognition of the "Rock Financial" Brand Name. Rock
uses advertising and marketing to enhance consumer recognition of its "Rock
Financial" brand name in each of the current markets it serves and to establish
brand name recognition in new markets it enters. Rock believes that it can
differentiate itself from its competitors through a strong brand name and
increase the likelihood that potential customers will use Rock to meet their
financial needs.
Expand Internet and Call Center Operations. Rock plans to expand its
Internet and call center operations into additional states and through
additional advertising, thereby potentially increasing loan production through
such distribution channels and diversifying its operations geographically. As of
March 11, 1999, Rock was soliciting mortgage loans in seven states through its
call center and in four states through its Internet site and was licensed to do
business or exempt from licensing in 36 other states. Rock is analyzing the
requirements to do business and originate loans in other states.
Expand the Cross-Selling of Existing Products and Expand the Products
Offered Through Existing Distribution Channels. Rock plans to place loan
officers from each of its divisions in each branch, thereby enabling Rock to
make available a greater variety of products to its customers at these branches
and to allow each of Rock's divisions to benefit from cross-selling
opportunities. Rock also plans to offer a greater variety of its products
through its Internet site and call center. Rock also plans to continue to
explore new products which it can cost-effectively originate through each of its
existing distribution channels. As part of this strategy, Rock continued to
increase its government-insured lending operations through its existing
distribution channels in 1998.
Explore Establishing Additional Distribution Channels. Rock has
developed a marketing and technology infrastructure that management believes
will allow Rock to establish new distribution channels to market financial
products directly to the consumer. Rock will explore creating new channels to
market such financial products.
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Provide "World Class" Service. Rock trains its employees in what it
calls its "world class" service philosophy, which is Rock's commitment to
provide superior customer service, to be responsive to customer needs and to
make applying for and closing each loan as quick, efficient and convenient for
the customer as possible. Rock believes that "world class" service is necessary
to distinguish Rock from its competitors. Rock also believes that referral and
repeat business are some of its most important sources of business, and that
satisfied customers who received "world class" service are more likely to refer
others to Rock for loans and to return to Rock for their future financing needs.
Continue to Invest Heavily in Technology and Marketing. Rock has
invested heavily in its technology and marketing to create an infrastructure of
sophisticated technology, highly-trained people and specialized marketing and to
create and enhance brand name recognition for the Rock Financial brand name.
Rock plans to continue to make significant investments in its technology and
marketing to maintain and enhance that infrastructure.
Maintain Consistent Underwriting Standards. Rock desires to maintain
consistent underwriting standards while it increases the volume of loans closed.
Rock believes that maintaining consistent underwriting standards is important to
develop and maintain its reputation and to maintain secondary market interest in
Rock's loans. Also, Rock seeks to maximize its premium on whole and bulk loan
sales by closely monitoring secondary market buyers' requirements.
Seek Potential Acquisition Opportunities. Rock seeks potential
acquisition opportunities. It intends to review selective new acquisition
opportunities, as they arise, as a means of expanding its retail operations. In
evaluating an acquisition candidate, Rock intends to analyze several strategic
characteristics, including the candidate's geographic locations, the types of
loans it originates, the presence and strength of local competition, the
regulations applicable in the candidate's geographic locations and the structure
of the transaction. The purchase consideration for any such acquisitions may be
cash, equity or debt securities or a combination of the foregoing. Rock
currently is not a party to a letter of intent or definitive agreement with any
acquisition candidates. There can be no assurance that Rock will enter into any
such agreements or acquire any acquisition candidates.
KEY COMPONENTS OF ROCK'S RETAIL FRANCHISE AND PHILOSOPHIES
Rock originates 100% of its loans through marketing directly to
consumers through stores and branches, a call center and an Internet site. Rock
seeks to provide "world class" service to its customers, thereby encouraging
them to return for future loans and refer others to Rock for loans. Rock also
focuses on recruiting, developing and motivating talented people, recruited from
inside and outside the consumer finance industry, to implement its business
strategies. Through the use of these key components, the Company believes it is
creating growing brand identities and a direct to customer franchise that should
sustain its loan origination efforts.
Marketing and Advertising. Rock makes extensive use of multimedia advertising
campaigns, including television, radio, yellow pages and print advertising, and
direct marketing efforts to support its loan officers' sales efforts. Rock uses
its customer profiles to focus its advertising and
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direct marketing efforts in order to reach its target customer cost-effectively
and generate loan inquiries. Rock also uses advertising to increase brand name
recognition for its Rock Financial brand name. In 1999, Rock plans to rename its
Fresh Start Loan Centers, Rock Financial Loan Centers in connection with its
strategies to enhance consumer recognition of the Rock Financial brand name and
to expand the products offered through its existing distribution channels (see
"Business Strategy"). By creating brand name recognition, Rock believes that it
is more likely that consumers will use the Company to meet their financial
needs.
Rock has an in-house marketing staff with a marketing product manager
dedicated to each division. Rock's marketing team, together with an outside
advertising agency, produces Rock's graphic art, places virtually all of Rock's
print, radio and television advertising, manages Rock's marketing data base and
acquires lists used for call center and direct marketing efforts. Rock uses
extensive direct-mail marketing and significant multimedia advertising campaigns
to generate inbound call volume into its call center, and expects to do the same
in 1999 to generate traffic on its new web site. At various times, outbound
telemarketing programs also are launched to targeted lists of consumers. Rock
uses a specially trained sales force and relies heavily on technology and
systems designed specifically for Rock. The infrastructure of the call center is
designed with the ability to change focus to, or add, various types of loan
products as appropriate, and the Company intends to expand the range of products
offered through its call center in 1999.
Using Technology and Information Systems for Marketing. Rock believes that its
focused marketing approach makes more efficient use of its marketing resources
and leads to a higher marketing success rate than broad indiscriminate marketing
aimed at a wide range of consumers. To identify potential customers, Rock uses
internal and external databases of information regarding past and potential
customers and their needs. Rock then develops customer profiles that it uses to
tailor and direct its marketing efforts for each of its divisions. Rock uses its
profiles to attempt to identify homeowners and potential homeowners believed by
management to be likely to have a need for a Rock product and who are likely to
satisfy its underwriting guidelines. Rock uses these profiles and demographic
information to determine where to locate its stores and branches and how to
target its multimedia advertising. Rock also monitors the effectiveness of its
marketing programs and adjusts them based on their performance.
Call center loan officers make outbound calls using Rock's predictive
dialer systems. Rock's telephone system also routes inbound calls to available
call center loan representatives. The telephone system can also track where
calls originate, who handles the call, the time a customer spends waiting on the
phone and other information about Rock's phone calls. Rock also uses a
customized loan origination system that allows Rock to process loans quickly and
efficiently. The system provides real-time access to the information used by
each team in operations as well as the secondary marketing and financial teams.
Rock also uses these systems to develop computer-generated forms for each of its
various loans in each jurisdiction to make the processing of approved loans
faster and more efficient.
In January 1999, the Company launched a new Internet web site,
www.RockLoans.com. The site is an easy, user friendly mortgage site that allows
the borrowers to apply for their mortgage, lock in an interest rate on selected
products, run a product and interest rate comparison
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for their specific situation and check the status of their loan application. The
site also provides product information about the loans offered by Rock.
As of March 11, 1999, Rock employed a staff of 47 in its technology
team to allow it to analyze better its information regarding past customers,
develop customer profiles, create and obtain lists of potential customers and
track loan applications, closings and sales. In addition, Rock's software
systems help call center and other loan officers make and keep track of calls
and assist them with their sales presentations and in gathering the information
necessary to determine if a potential customer qualifies for a Rock loan.
High Level of Service and Relationship Selling. Rock believes that "world class"
service is necessary to distinguish Rock from its competitors. The loan products
offered by Rock are generally standardized products offered by many competitors,
so potential customers generally can choose among competitors on the basis of
price, convenience and service. Rock seeks to provide "world class" service to
its customers, thereby encouraging them to return for future loans and to refer
others to Rock for loans. Rock strives to make applying for and closing each
loan as quick, efficient and convenient for the customer as possible. In
addition, Rock believes that referrals and repeat business from satisfied
customers are some of its largest sources of business and that satisfied
customers who received "world class" service are more likely to refer others to
Rock for loans and to return to Rock for their future financing needs. Rock
attempts to measure customers' satisfaction with its service through customer
service ratings and compensates its employees based, in part, on those ratings.
In addition, Rock attempts to establish third-party relationships with
persons from whom potential customers might seek advice about the types of loans
offered by Rock, such as real estate brokers, home builders and professionals in
order to generate referral business.
Training. Rock focuses on recruiting, developing and motivating talented people
from within and outside the consumer finance industry to implement its business
strategies. Rock is committed to its human resources team and its efforts to
train Rock's employees in Rock's marketing and "world class" service
philosophies. Through its training programs, Rock seeks to instill in all of its
employees Rock's commitment to provide superior customer service and to be
responsive to customer needs. All new employees are required to undergo a
training program. New sales persons are required to take a training class to
provide them with knowledge of Rock's products and to provide them with
extensive training in sales and marketing techniques, including telephone sales
techniques, and customer relations. Sales persons are also provided with
periodic ongoing training to keep their skills and product knowledge up to date.
Rock uses its technology and information systems to provide employees with more
standardized training, realistic practice of their skills and quick feedback.
Management also uses its technology and information systems to monitor employee
performance both in training classes and on the job, which in turn helps Rock
assess the ongoing training needs of its employees and develop more effective
training programs.
Ongoing telephone skill training is provided to all loan officers. The
training includes classroom as well as individual training sessions. Employees
are trained to return all calls promptly. Employees, especially call center
employees, are evaluated based on, among other
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things, the number of closed loans, the speed and accuracy of their loan
closings, the percentage of proposed loans submitted that receive underwriting
approval and the customer's evaluation of the service received.
Rock recruits employees who have the attitude and skills Rock considers
necessary to be successful. Rock has established a web site for its recruiting
efforts at http://www.rockcareers.com. It then strives to develop its loan
officers and to promote its most qualified loan officers. Rock monitors the
performance of its loan officers on a daily, weekly, monthly and yearly basis.
Rock also measures the customer service ratings of each of its loan officers and
of its internal staff based on customer feedback at loan closing.
OPERATING DIVISIONS
Rock had operated through three major divisions, but currently operates
through two major divisions. Rock decided, in the third quarter of 1998, to stop
originating High LTV Loans due to concerns of liquidity that resulted from a
diminishing base of purchasers of these loans and to take advantage of the high
demand for Conventional Loans. Therefore, the sales force from this division was
shifted to handle this high demand for Conventional mortgage loans resulting
from the lower interest rate environment. Rock originates Sub-Prime Home Equity
Loans to individuals with impaired credit characteristics, high levels of debt
service to income, unfavorable past credit experience, limited credit history,
limited employment history or unverifiable income through its Fresh Start
division. Rock also originates Conventional Loans that generally conform to FNMA
or Freddie Mac underwriting standards, or that generally meet such standards
except for maximum loan size guidelines, through its Conventional Mortgage
Lending division. In addition, the Company increased its government insured
lending operations in 1998, primarily making mortgage loans that meet the
underwriting standards for FHA insurance.
CONVENTIONAL MORTGAGE LENDING DIVISION
Since its inception in 1985, Rock has originated Conventional Loans
through its Conventional Mortgage Lending division. The Conventional Mortgage
Lending division originates loans primarily through nine branches, all located
in southeast Michigan, but also through its Fresh Start stores, Internet site
and call center. Over the past 14 years, Rock has used marketing and advertising
to create and enhance brand name recognition for the Rock Financial name. In
conjunction with its multimedia advertising, Rock coordinates extensive direct
marketing campaigns and call center operations. Rock has developed third-party
relationships with real estate brokers, home builders, attorneys, accountants,
and financial planners, which generate referral business. Conventional Loans
generally conform to the underwriting guidelines of FNMA or Freddie Mac, or
generally conform except for maximum loan size. The loans are generally made to
finance the purchase of a home or to refinance a home mortgage. Rock is also an
approved, unsupervised seller/servicer of FNMA and Freddie Mac Conventional
Loans and a HUD-approved lender. During 1998, Rock originated $1.9 billion of
Conventional Loans (15,093 loans) as compared to $867.5 million (6,513 loans) in
1997. Rock believes that it is the largest non-depositary-affiliated retail
lender of one- to four-family residential mortgage loans in southeast Michigan.
Management expects that loan closings will decline in the first quarter of
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1999 due, in part, to normal seasonality and, in part, to increases in mortgage
interest rates in January and February of 1999, which may cause revenues and/or
period-end inventory to be less than those of the fourth quarter of 1998.
Conventional Mortgage Lending Branches. As of March 11, 1999, the Conventional
Mortgage Lending division had eight southeastern Michigan branches. Four
branches are located in retail strip malls, two are in office buildings and two
are located near residential real estate brokers' offices. The branches, other
than the National Support Center, range in size from 485 to 6,360 square feet.
Each branch is headed by a branch manager, who is responsible for overseeing all
loans originated from that branch and is compensated, in part, based on loan
closing volume in his or her branch. The loan officers in the branch also earn
the majority of their compensation through commissions.
The Conventional Mortgage Lending division makes extensive use of
telephone call center marketing and direct mail campaigns. Over the past 14
years, Rock has used marketing and advertising to create and enhance brand name
recognition for the Rock Financial name. In conjunction with its multimedia
advertising, Rock coordinates extensive direct marketing campaigns and call
center operations and in 1999 expects to coordinate Internet operations. Rock
focuses its direct marketing efforts on its profiled customers and those
responding to its advertising, generally in the communities around its branch
offices. The customer profiles, combined with information from other sources,
are used to create mailing and call lists.
Conventional Loans. The following table shows, for 1996, 1997 and 1998, various
information concerning the aggregate of the Conventional Loans closed by Rock:
<TABLE>
<CAPTION>
1996 1997 1998
----------------- ----------------- -----------------
(Dollars in thousands)
<S> <C> <C> <C>
Principal amount of loans closed............................. $892,672 $867,520 $1,872,025
Number of loans closed....................................... 6,940 6,513 15,093
Average initial loan balance................................. $129 $133 $124
Fixed rate loans:
Percentage of loans closed (dollars)........ 37.2% 45.9% 84.4%
Weighted average interest rate.............. 7.9% 8.0% 7.2%
Weighted average initial LTV................ 72.0% 70.1% 69.1%
Adjustable rate loans:
Percentage of loans closed (dollars)........ 62.8% 54.1% 15.6%
Weighted average initial interest rate...... 6.5% 6.8% 6.8%
Weighted average initial LTV................ 72.9% 71.9% 71.6%
</TABLE>
Substantially all of the Conventional Mortgage Lending division's loans
are currently originated in the State of Michigan.
Underwriting. Loans originated through Rock's Conventional Mortgage Lending
division must generally meet the underwriting standards for sale to FNMA or
Freddie Mac or must generally meet such standards except for maximum loan size.
These standards include the customer's
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mortgage, installment loan and revolving debt payment history, employment
history, capacity to pay, outstanding judgments, charge-offs and repossessions,
involvement in bankruptcies and foreclosures.
Underwriting reviews and decisions are made by both automated
underwriting systems or if necessary by separate Rock underwriters located at
each branch. Although loans are secured by a mortgage lien, it is essential that
care and consideration be given to the appraisal of the property securing the
loan. Also, Rock generally evaluates the applicant's creditworthiness through
the use of a consumer credit report, verification of employment and a review of
the debt-to-income ratio of the customer. After completion of the documentation
necessary for underwriting review of a loan, Rock's goal is to make underwriting
decisions within 24 to 48 hours. On a case-by-case basis, Rock's underwriters
may determine that a prospective customer warrants an exception from Rock's
underwriting guidelines if compensating factors exist.
FRESH START DIVISION
Rock's Fresh Start division, which was created in 1994, originates
Sub-Prime Home Equity Loans secured primarily by first and second liens on one-
to four-family, owner-occupied residences. The Fresh Start division focuses on
customers whose borrowing needs are not served by traditional financial
institutions due to impaired credit profiles or other factors. The Fresh Start
division originates Sub-Prime Home Equity Loans primarily through its network of
retail loan origination stores, but also through Rock's branches, Internet site
and call center. Rock supports its Fresh Start store network with an array of
marketing, including multimedia advertising campaigns and direct marketing to
build local awareness of the Fresh Start brand name and to grow loan volume
within each market. Rock's Fresh Start division is using the "Fresh Start" name,
adopted in 1997, in its advertising outside of Michigan and converted its
Michigan "Boulder Financial" stores to Fresh Start stores in 1998. In 1999, Rock
plans to rename its Fresh Start Loan Centers, Rock Financial Loan Centers in
connection with its strategies to enhance consumer recognition of the Rock
Financial brand name and to expand the products offered through its existing
distribution channels (see "Business Strategy"). For the year ended December 31,
1998, this division closed $374.0 million of Sub-Prime Home Equity Loans (6,406
loans), compared to $269.3 million of Sub-Prime Home Equity Loans in 1997 (4,196
loans). Because of the seasonality of its business along with the store closings
in the first quarter of 1999, management expects both closings and revenue from
Sub-Prime Home Equity Loans to decline in the first quarter of 1999.
Sub-Prime Home Equity Loans. Sub-Prime Home Equity Loans do not generally meet
the underwriting standards for sale to FNMA or Freddie Mac for any of a variety
of reasons, such as impaired credit characteristics, high levels of debt service
to income, unfavorable past credit experience, limited credit history,
employment history or unverifiable income. These loans are used typically to
consolidate debt (such as credit card debt) and to finance home improvements,
home purchases and other consumer needs. By originating loans to individuals
with these characteristics, Rock is able to charge higher interest rates, in
order to compensate for these risks, on its Sub-Prime Home Equity Loans than for
its Conventional Loans.
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The following table shows, for 1996, 1997 and 1998, various information
concerning the aggregate of the Sub-Prime Home Equity Loans closed by Rock:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
(dollars in thousands)
<S> <C> <C> <C>
Principal amount of loans closed............................. $147,676 $269,275 $373,956
Number of loans closed....................................... 2,272 4,196 6,406
Average initial loan balance................................. $65 $64 $58
Fixed rate loans:
Percentage of loans closed (dollars)........ 22.7% 33.5% 94.6%
Weighted average interest rate.............. 12.6% 12.7% 11.8%
Weighted average initial combined LTV....... 81.4% 78.1% 77.7%
Adjustable rate loans:
Percentage of loans closed (dollars)........ 77.3% 66.5% 5.4%
Weighted average initial interest rate...... 10.3% 11.1% 11.2%
Weighted average initial combined LTV....... 77.2% 79.0% 79.9%
Lien position:
Percentage first mortgages.................. 95.2% 80.7% 73.0%
Percentage second mortgages................. 4.8% 19.3% 27.0%
</TABLE>
Fresh Start Stores. The majority of the Fresh Start stores are located
in retail strip malls or office buildings with substantial signage. These stores
range in size from approximately 1,400 to 5,400 square feet in size. Each store
is headed by a store manager, who is responsible for overseeing all loans
originated from that store and is compensated, in part, based on loan closing
volume in his or her store. The loan officers in the store also earn the
majority of their compensation through commissions. Fresh Start store managers
report to district managers who are responsible for overseeing loan originations
for the entire district and are compensated, in part, based on the volume of
loans closed in that district.
Prior to January 1, 1999, Rock had 19 Fresh Start stores and one pilot
marketing center. As of December 31, 1998 the Company committed to a plan to
close nine of its unprofitable stores in five states, leaving eight in Michigan
and one each in Ohio, Illinois and Nevada, and recognized a corresponding loss
on store closings of $2.0 million. The closing of these stores is in process and
it is anticipated that it will be completed by the end of the first quarter of
1999. Rock does not currently intend to open additional Fresh Start stores, but
has begun training its Fresh Start loan officers to be able to provide and
originate a greater variety of products to its customers. During 1996, 1997 and
1998, Rock closed 100.0%, 89.9%, and 68.6% respectively, of the dollar volume of
its Sub-Prime Home Equity Loans secured by property located in Michigan.
The Fresh Start division also makes extensive use of telephone call
center marketing and direct mail campaigns. Rock focuses its direct marketing
efforts on its profiled customers and those responding to its advertising,
generally in the communities around its stores. The customer profiles, combined
with information from other sources, are used to create mailing and call lists.
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Underwriting. Rock has developed its own underwriting guidelines for some of the
loans originated through its Fresh Start division and adjusts these guidelines
to the general standards required by secondary market buyers of such loans. Some
of the loans originated through the Fresh Start division are underwritten by
third parties that purchase such loans on a flow basis. During 1998,
approximately 26.2% of the Sub-Prime Home Equity Loans were underwritten by
third parties that purchase such loans on a flow basis. For the loans
underwritten by Rock's underwriters, Rock is dependent on such underwriters and
its quality control team to maintain the quality of its loans. See "Compliance
and Quality Control."
When underwriting its Sub-Prime Home Equity Loans, Rock relies
principally on the underlying collateral, and to a lesser extent on the
creditworthiness of the customer. Rock classifies such customers as "A" through
"D" credits for purposes of underwriting and pricing its Sub-Prime Home Equity
Loans. The criteria include the customer's mortgage, installment loan and
revolving debt payment history, employment history, capacity to pay, outstanding
judgments, charge-offs and repossessions, involvement in bankruptcies and
foreclosures. Lower credit-rated customers generally must meet higher
underwriting standards to obtain a loan, such as lower LTV and lower maximum
loan amounts, and generally must pay higher interest rates on their loans to
compensate the Company for this risk.
Underwriting reviews and decisions for loans underwritten by Rock are
made by separate Rock underwriters at the National Support Center. Rock has
guidelines to assist its underwriters in the credit decision process. Although
each loan is secured by a mortgage lien, it is essential that care and
consideration be given to the appraisal of the property securing the loan. Rock
also evaluates the applicant's creditworthiness through the use of a consumer
credit report, verification of employment and a review of the debt-to-income
ratio of the customer. After completion of the documentation necessary for
underwriting review of a loan, Rock's goal is to make underwriting decisions
within 24 to 48 hours. On a case-by-case basis, Rock's underwriters may
determine that a prospective customer warrants an exception from Rock's
underwriting guidelines due to compensating factors. Such decisions are usually
made by the underwriting management of this division.
SPECIALTY LENDING DIVISION
Rock's Specialty Lending division, which commenced High LTV Loan
operations in March 1997, originated High LTV Loans secured primarily by second
mortgages and with combined loan-to-value ratios (including the first mortgage
balance) of up to 125% of the estimated value of the underlying property. The
Specialty Lending division marketed High LTV Loans to consumers through its call
center located at Rock's National Support Center in Bingham Farms, Michigan. The
Company, during the third quarter of 1998, stopped originating these loans due
to concerns of liquidity that was the result of a diminishing base of purchasers
of High LTV Loans, and opted to take advantage of the potential business
available in Conventional Loans, due to low interest rates, by switching the
remaining sales force from High LTV Loans to Conventional Loans. Management will
continue to evaluate the High LTV marketplace and does not currently have plans
to renew originations until and unless the market for the loans changes.
Therefore, the only revenues to be recognized for High LTV Loans in the first
quarter of 1999, will be those earned on closing out the existing pipeline of
applications (comprised of three loans
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as of December 31, 1998). Management believes this demonstrates the flexibility
of the Call Center platform to shift to the products that are in the most
demand. During 1998, Rock closed $55.8 million of High LTV Loans (1,743 loans)
as compared to $66.0 million of High LTV Loans (2,036 loans) in 1997. During
1998, Rock closed 72.6% and 13.4% of the dollar volume of its High LTV Loans
secured by property located in Michigan and Illinois, respectively.
GOVERNMENT INSURED LENDING
Rock continued to increase its government-insured lending operations in
1998, primarily making mortgage loans that meet the underwriting standards for
FHA insurance. Rock's FHA loans are generally made to finance or refinance home
purchases. Rock currently originates these loans primarily from its Conventional
Mortgage Lending branches in Michigan, but also through its Fresh Start Loan
stores, its call center and its Internet site. For the year ended December 31,
1998, Rock closed $52.1 million of FHA loans (611 loans), representing
approximately 2.6% of Rock's total loans as compared to $16.6 million (205
loans) in 1997. The 1998 loans had an average principal amount of $85,303 and a
weighted average interest rate of 7.6%.
COMPLIANCE AND QUALITY CONTROL
Rock's legal/compliance team is responsible for compliance and quality
control. This centralized compliance function allows Rock to control and
supervise regulatory compliance and offer consistency to its customers. The
legal/compliance team also assists in developing underwriting and asset quality
requirements for its loans and in applying those standards in making
underwriting decisions. The legal/compliance team also helps the servicing team
handle delinquencies and foreclosures that occur before a loan is sold.
The quality control personnel review loans that have already been made
(i) to monitor, evaluate and improve the overall quality of loan production,
(ii) to identify and communicate to the legal/compliance team and management
existing and potential underwriting and loan file problems or areas of concern,
and (iii) meet the requirements of the secondary markets. After loans close, the
quality control personnel select a percentage of the closed loans to check them
for documentation, accuracy, compliance with law and potential fraud. The sample
is selected so that each loan officer, branch, store and production employee is
checked periodically. The quality control team also does statistical analyses of
closed loans to determine if there are any patterns or problems. The results of
their procedures are communicated to management through monthly reports.
LOAN SERVICING
Rock currently services the loans it closes between the date of making
the loan and the date it sells the loan and the related servicing. Rock employs
Alltel Information Services, Inc. for providing its loan servicing computing
services. During 1998, Rock sold all of its loans servicing released (i.e.,
without retaining the right to service the loan) or it sold the servicing rights
separately. Rock's technology and personnel, however, are capable of servicing a
substantially larger portfolio of loans without significantly increasing costs.
Rock would consider selling its loans with the servicing rights retained if it
believes that the value of the
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<PAGE> 15
servicing rights is or may become significantly greater than secondary market
buyers are then willing to pay for them. If Rock sold loans with servicing
retained, Rock would recognize a gain on the sale equal to the difference
between the carrying value of the loan sold on Rock's balance sheet and the sum
of (i) the cash received in such sale, and (ii) the amount of an asset recorded
on its balance sheet in an initial amount equal to the net present value of the
servicing fees it would expect to collect over the life of the loan (the
"Servicing Asset"). If Rock began to sell its loans with servicing retained, it
would be subject to the risks that its taxable income might not match its cash
flows and that its servicing assets might become overstated because of factors
beyond Rock's control.
Loan servicing includes collecting payments from customers, accounting
for loan principal and interest, holding custodial funds for payment of
mortgage-related expenses, such as taxes and insurance, inspecting the mortgaged
premises as required, contacting delinquent customers, supervising foreclosures
and property disposition in the event of unremedied defaults, and otherwise
administering the loan.
SALE OF LOANS
Rock closes all of its loans with the intent of selling such loans in
the secondary market. Rock attempts to originate loans with characteristics
which will be sought by unaffiliated purchasers of loans, including banks and
parties seeking loans for securitization pools, at attractive premiums. Sales of
Sub-Prime Home Equity Loans and High LTV Loans (together, "Sub-Prime Loans") and
Conventional Loans are conducted by Rock's secondary marketing team.
When Rock sells the loans it closes, Rock also reduces its exposure to
default risk (other than some first-payment defaults by customers) and most of
the prepayment risk normally inherent in the consumer lending business. Rock may
be required to repurchase or substitute loans in the event of a breach of
representations and warranties, including representations regarding compliance
with laws, regulations and program standards, accuracy of information, and lack
of fraud or any misrepresentation made during the loan origination process. In
addition, in connection with some Sub-Prime Loan sales, Rock may be required to
return a portion of the premium received upon the sale of the loan if the loan
is prepaid by the customer within the first year after sale. Otherwise, Rock's
loan sales are generally on a non-recourse basis. For the year ended December
31, 1998, Rock accrued approximately $815,000 with respect to future premium
recapture, and during the year made approximately $627,000 of recapture
payments. The amount remaining as a reserve with respect to future premium
recapture at December 31, 1998 was approximately $882,000. In addition, Rock
recorded a provision for credit losses of $568,000 in 1998 for potential
repurchase obligations and the credit risk associated with holding loans longer
before sale, as well as for loans classified as Held for Investment. During
1998, three loans were foreclosed and transferred to real estate owned, and
approximately $203,000 in charge-offs were recorded against the allowance.
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<PAGE> 16
SUB-PRIME LOANS
Rock sells its Sub-Prime Loans either through "bulk" sales or "flow"
sales. "Bulk" sales are sales of loans underwritten to Rock's underwriting
standards that are pooled and then sold to third parties for cash by Rock.
"Flow" sales are sales of loans underwritten by a third party who commits to
purchase each individual loan its underwriters approve.
Rock currently does not securitize its loans. If the prices offered in
the secondary market for Rock's loans decrease significantly relative to the
value Rock believes that it could receive by securitizing such loans, Rock's
management would consider securitizing its loans. If Rock began to securitize
its loans, it would be subject to the risks of the securitization market, and
liquidity risks.
Two loan buyers purchased an aggregate of approximately 64% of the
Sub-Prime Home Equity Loans sold by Rock in 1998, of which the largest of such
buyers purchased approximately 37% of such Sub-Prime Home Equity Loans. The loss
of either of these buyers or any significant reduction in the prices these
buyers are willing to pay for Rock's loans could have an adverse effect on
Rock's business, financial condition and results of operations. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations-Segment Analysis". Two loan buyers purchased approximately 94% of
the High LTV Loans sold by Rock in 1998.
CONVENTIONAL LOANS AND GOVERNMENT INSURED LOANS ("PRIME LOANS")
Rock sells its Prime Loans either through assignments of trade or whole
loan sales. Currently, Rock's fixed-rate Conventional Loans meeting FNMA or
Freddie Mac guidelines and Government Insured Loans are sold through assignments
of trade. Assignment of trade sales are sales of both mortgage backed securities
("MBS") and Prime Loans to a third party who settles the trade with FNMA or
Freddie Mac, but pays cash to Rock. Loans not meeting FNMA, Freddie Mac or
Government Insured guidelines are sold in whole loan sales. In a whole loan
sale, individual loans are underwritten and sold to a specific buyer on a
committed basis.
INTEREST RATE RISK MANAGEMENT
Rock closes loans and subsequently sells them for cash to unaffiliated
wholesale purchasers. If prevailing interest rates rise between the time Rock
closes loans or fixes the interest rates on such loans and the time such loans
are priced for sale, the spread between the amount loaned and the amount the
wholesale purchaser is willing to pay for the loan narrows, resulting in a loss
in value of the loan. To protect against such losses in respect of its Prime
Loans (where the interest spread is lower), Rock currently enters into forward
sales commitments to fix the sales price of the Prime Loans expected to be
closed or hedges the value of those loans through periodic purchases of
short-duration treasury-based options. Before entering into forward commitments
or hedging, Rock performs an analysis of its Prime Loans and Prime Loan
applications with committed interest rates taking into account such factors as
the estimated portion of such loan applications that will ultimately be funded,
interest rates, inventories of loans and applications and other factors to
determine the type and amount of forward commitment and hedging transactions.
Rock attempts to make forward commitments for or
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<PAGE> 17
hedge substantially all of its estimated interest rate risk on its Prime Loans.
Rock does not believe that hedging its interest rate risk with respect to its
Sub-Prime Loans is cost effective as a result of their generally higher interest
spreads combined with their relative lack of sensitivity to changes in market
interest rates and considering the period during which Rock intends to
accumulate such loans for sale. See Item 7A "Quantitative and Qualitative
Disclosures about Market Risk."
COMPETITION
The consumer lending industry is highly competitive and fragmented.
Rock faces intense competition, primarily from numerous commercial banks,
savings and loan associations, credit unions, insurance companies, mortgage
brokers, mortgage bankers and other consumer finance companies. If Rock expands
into additional geographic markets, it will face competition from consumer
lenders with established positions in such markets. There can be no assurance
that Rock will be able to compete successfully with these consumer lenders.
Competition can take place on various levels, including convenience in
obtaining a loan, service, marketing, pricing (including the interest rates,
closing costs and processing fees offered) and range of products. Rock believes
that pricing, service and convenience are the most important competitive factors
affecting its business. Many of Rock's competitors in the consumer lending
industry are better established, substantially larger and have significantly
more capital and other resources than Rock. In addition, FNMA and Freddie Mac
are currently developing technologies and business practices that will expand
the scope of mortgage loans eligible to be purchased by them, including
Sub-Prime Home Equity Loans. The effect of these events on the consumer lending
industry and profit margins is not presently determinable, but such expanded
scope could attract additional competitors into the market and significantly
erode profit margins. Barriers to entry into the consumer lending industry are
low, and the current level of gains realized by Rock and its existing
competitors on the sale of loans could attract additional competitors into the
market. Consequently, there are many recent market entrants seeking these
relatively attractive profit margins. Increases in the number of competitors
seeking to originate consumer loans could lower the rates of interest or reduce
the amount of origination points and fees Rock can charge customers, thereby
reducing the potential profitability of such loans. Competition might also
reduce Rock's loan closing volume. In addition, during periods of declining
interest rates, competitors which have "locked in" low borrowing costs may have
a competitive advantage. There can be no assurance that Rock will be able to
compete successfully in this market environment and any failure in this regard
could have a material adverse effect on Rock's business, financial condition and
results of operations.
SYSTEMS
Rock is committed to maintaining and enhancing its technology and
systems. As of March 11, 1999 Rock employed a staff of 47 in its technology team
to allow it better to analyze its information regarding past customers, develop
customer profiles, create and obtain lists of potential customers and track loan
applications, closings and sales. Rock's offering of a broad range of loan
products requires the timely delivery of such loan products and careful
monitoring and tracking of loans from their origination through their ultimate
sale. Rock uses a loan
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<PAGE> 18
origination and administration system that allows Rock to process loans quickly
and efficiently. The system provides real-time access to the information used by
each team in operations as well as the secondary marketing and financial teams.
The system provides loan officers with information concerning the status of each
loan application and reminds them of the documents and steps needed to close the
loan. Rock also uses these systems to develop computer-generated forms for each
of its various loans in each jurisdiction to make the processing of approved
loans faster and more efficient. Also, in January 1998, Rock introduced FNMA's
automated underwriting systems to its Conventional Mortgage Lending division.
Because a loan officer's compensation is based, in part, on the number of loans
closed each month, this information also provides employees with information
about the status of their compensation for the month and gives them an incentive
to be more productive.
Call center loan officers handle both inbound and outbound calls. Most
inbound calls are from homeowners responding to Rock's advertising and direct
mail campaigns. Outbound calls use Rock's computerized predictive dialers with
scripted, interactive sales presentations to solicit homeowners and current
customers. A predictive dialing system is a telecommunications device which
initiates phone calls to pre-selected and randomly-selected numbers, predicts
when sales agents are available to receive calls and automatically forwards
calls to an available sales agent. It also routes inbound calls to available
call center loan representatives. The telephone system can track where calls
originate, who handles the call, the time a customer spends waiting on the phone
and other information about Rock's phone calls.
SEASONALITY
Rock is affected by consumer demand for home loans, which is partially
influenced by regional trends, economic conditions and personal preferences.
Rock's business is generally subject to seasonal trends with loan activity
generally decreasing during the winter months, especially loans relating to home
purchases. Rock's lowest revenue and net income levels during the year have
historically been in the first quarter. In addition, Rock believes that new
stores typically require twelve to eighteen months of operations before their
revenues and expenses are at levels comparable to older stores, and that during
their first two to three quarters of operations their expenses might exceed
their contribution to income. Rock expects stores opened less than eighteen
months to contribute significantly less to its revenues and net income and more
to its expenses than stores and branches that have been in operation for at
least eighteen months.
GOVERNMENT REGULATION
Rock's business is subject to extensive regulation, supervision and
licensing by federal, state and local governmental authorities and will be
subject to various laws and judicial and administrative decisions imposing
requirements and restrictions on part or all of its operations. Regulated
matters include, without limitation, loan origination, marketing efforts, credit
application and underwriting activities, maximum finance and other charges,
disclosure to customers, certain rights of rescission, closing and servicing
loans, collection and foreclosure procedures, qualification and licensing
requirements for doing business in various jurisdictions and other trade
practices.
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Loan origination activities are subject to the laws and regulations in
each of the states in which those activities are conducted. Activities as a
lender are also subject to various federal laws. The Truth-in-Lending Act
("TILA") and Regulation Z promulgated thereunder, as both are amended from time
to time, contain disclosure requirements designed to provide consumers with
uniform, understandable information with respect to the terms and conditions of
loans and credit transactions in order to give them the ability to compare
credit terms. "TILA" also guarantees consumers a three-day right to cancel
certain credit transactions. If Rock is found not to be in compliance with
"TILA", aggrieved customers could have the right to rescind their loan
transactions with Rock and to demand the return of finance charges paid to Rock.
In September 1994, the Riegle Community Development and Regulatory
Improvement Act of 1994 (the "Riegle Act") was enacted. Among other things, the
Riegle Act makes certain amendments to "TILA". The "TILA" amendments, which
became effective in October 1995, generally apply to mortgage loans (other than
mortgage loans to finance the acquisition or initial construction of a dwelling)
("covered loans") with (i) total points and fees upon origination in excess of
the greater of eight percent of the loan amount or $400, or (ii) an annual
percentage rate of more than 10 percentage points higher than comparably
maturing United States Treasury securities.
The "TILA" amendments impose additional disclosure requirements on
lenders originating "covered loans" and prohibit lenders from originating
"covered loans" that are underwritten solely on the basis of the customer's home
equity without regard to the customer's ability to repay the loan. Rock applies
to all covered loans underwriting criteria that take into consideration the
customer's ability to repay. The "TILA" amendments also prohibit lenders from
including prepayment fee clauses in "covered loans" to customers with a
debt-to-income ratio in excess of 50% or in "covered loans" used to refinance
existing loans originated by the same lender. Rock did not report any material
prepayment fee revenue in the years ended December 31, 1996, 1997, and 1998. The
"TILA" amendments impose other restrictions on "covered loans", including
restrictions on balloon payments and negative amortization features, which Rock
does not believe will have a material effect on its operations.
Rock is also required to comply with the Equal Credit Opportunity Act
of 1974, as amended ("ECOA"), which prohibits lenders from discriminating
against applicants on the basis of race, color, sex, age or marital status.
Regulation B promulgated under ECOA restricts lenders from obtaining certain
types of information from loan applicants. It also requires certain disclosures
by the lender regarding consumer rights and requires lenders to advise
applicants of the reasons for any credit denial. In instances where the
applicant is denied credit or the rate or charge for a loan increases as a
result of information obtained from a consumer credit agency, the Fair Credit
Reporting Act of 1970, as amended ("FCRA"), requires the lender to supply the
applicant with a name and address of the reporting agency. Rock is also subject
to the Real Estate Settlement Procedures Act ("RESPA") and the Fair Debt
Collection Practices Act and is required to file an annual report with HUD
pursuant to the Home Mortgage Disclosure Act ("HMDA"). Rock is also subject to
the rules and regulations of, and examinations by, HUD, FNMA, Freddie Mac and
state regulatory authorities with respect to originating, processing,
underwriting, selling and servicing mortgage loans and to various other federal
and state laws, rules and regulations governing among other things, the
licensing of, and procedures that must be
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<PAGE> 20
followed by, consumer lenders and servicers, and disclosures that must be made
to consumer customers. Rock's joint venture with Michigan National Bank will
also be subject to supervision and examination by the Office of the Comptroller
of the Currency for compliance with banking laws.
Texas has newly-enacted laws affecting Sub-Prime Loans. As a result of
these new laws there are increased risks associated with Rock's loans secured by
property located in Texas, including (i) risks that Rock's Sub-Prime Loans will
not comply with the provisions permitting mortgage liens on Texas real estate,
making Rock's liens invalid, (ii) risks of litigation, including class action
lawsuits, if Rock's loans, including the origination points and processing fees
charged on such loans, are determined to violate Texas law, and (iii) risks that
secondary market loan buyers will not be willing to purchase loans secured by
Texas real estate or will pay lower prices for such loans. Rock currently sells
Sub-Prime Loans originated in Texas on a flow basis and intends to increase its
concentration on originating Conventional Loans in Texas until the new laws are
clarified. The volume of loans in Texas which are originated by the Company is
expected to be significantly less than in 1998 as all of the stores in Texas are
part of the store closings in the first quarter of 1999; however Rock may
originate loans in Texas through its call center and/or Internet site.
Failure to comply with these requirements can lead to civil or criminal
liability, loss of approved status, termination or suspension of servicing
contracts without compensation to the servicer, demands for indemnification or
loan repurchases, certain rights of rescission for mortgage loans, class action
lawsuits and administrative and enforcement actions. There can be no assurance
that Rock will maintain compliance with these requirements in the future without
additional expenses, or that more restrictive local, state or federal laws,
rules and regulations will not be adopted or that existing laws and regulations
will not be interpreted in a more restrictive manner, which would make
compliance more difficult and more expensive for Rock.
In addition, industry participants are frequently named as defendants
in litigation involving alleged violations of federal and state consumer-lending
laws and regulations, or other similar laws and regulations, as a result of the
consumer-oriented nature of the industry in which Rock operates and
uncertainties with respect to the application of various laws and regulations in
certain circumstances. Some sectors of, and participants in, the
consumer-finance industry have been adversely affected by regulatory enforcement
actions and private class-action lawsuits regarding various consumer-lending
practices. These actions and lawsuits allege violations of the Real Estate
Settlement Procedures Act, the Truth-in-Lending Act, the Equal Credit
Opportunity Act and various other federal and state lending and
consumer-protection laws. Some of the practices which have been the subject of
lawsuits against other companies include, but are not limited to, miscellaneous
"add-on" fees; truth-in-lending calculations and disclosures; escrow and
adjustable-rate mortgage calculations and collections; private mortgage
insurance calculations, disclosures and cancellation; forced-placed hazard,
flood and optional insurance; payoff statement, release and reconveyance fees;
and unfair lending practices. If a significant judgment were rendered against
Rock in connection with any litigation, it could have a material adverse effect
on Rock's business, financial condition and results of operations.
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Further, during the course of its business, Rock may acquire properties
securing loans that are in default. There is a risk that hazardous or toxic
waste could be found on properties acquired by Rock. As a result, the value of
such properties may be diminished. In the event that Rock is forced to foreclose
on a defaulted loan secured by a contaminated property, Rock may be subject to
environmental liabilities regardless of whether Rock was responsible for the
contamination; Rock could be held responsible for the cost of remediating or
removing such waste, and such cost could exceed the value of the underlying
properties. While Rock intends to exercise due diligence to discover potential
environmental liabilities before acquiring any property through foreclosure,
hazardous substances or wastes, contaminants, pollutants or sources thereof (as
defined by state and federal laws and regulations) may be discovered on
properties during Rock's ownership or after a sale thereof to a third party.
If such hazardous substances are discovered, Rock may be required to
remove those substances or sources and clean up the property at substantial
expense. Rock may also be liable to tenants and users of neighboring properties.
In addition, Rock may find it difficult or impossible to sell the property
before or following any such cleanup. Rock does not conduct or require any
environmental testing on the properties securing its loans. To date, Rock has
not been required to perform any material environmental investigation or
remediation activities, nor has it been subject to any material environmental
claims. Rock, however, might be required to perform such investigations or
activities, or become subject to environmental claims, in the future.
The laws and regulations described above are subject to legislative,
administrative and judicial interpretation, and certain of these laws and
regulations have been infrequently interpreted or only recently enacted.
Infrequent interpretations of these laws and regulations or an insignificant
number of interpretations of recently enacted laws and regulations can result in
ambiguity with respect to permitted conduct under these laws and regulations.
Any ambiguity under the laws and regulations to which Rock is subject may lead
to regulatory investigations or enforcement actions and private causes of
action, such as class action lawsuits, with respect to Rock's compliance with
applicable laws and regulations. Rock may also be subject to regulatory
enforcement actions and private causes of action from time to time with respect
to its compliance with applicable laws and regulations.
In addition, because Rock's business is highly regulated, the laws,
rules and regulations applicable to Rock are subject to modification and change.
Any changes in such laws, rules and regulations could make compliance much more
difficult or expensive, restrict Rock's ability to originate or sell loans,
limit or restrict the amount of interest and other charges earned on loans
closed or sold by Rock, or otherwise adversely affect the business or prospects
of Rock.
SERVICE MARKS
Rock has registered the names "Fresh Start Financial Services(R),"
"Mortgage in a Box(R)," "Mortgage First(R)", "Mortgage by Mail(R)", "Fresh
Start(R)," "Fresh Start Loan Center(R)," "Lender for Life(R)" and "PMI
Buster(R)" as service marks with the United States Patent and Trademark Office.
The registrations of these service marks are renewable indefinitely. Rock is not
aware of any adverse claims concerning its marks.
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EMPLOYEES
As of March 11, 1999 Rock employed 754 full-time individuals, including
290 in its sales force. Rock believes that its future success is dependent, in
large part, on its ability to attract and retain highly-qualified sales,
management, marketing, technical and administrative personnel. Rock's employees
are not represented by a union or subject to a collective bargaining agreement.
Rock believes that its relations with its current employees are good.
ITEM 2. PROPERTIES
Rock's executive and administrative offices are located in leased
premises at 30600 Telegraph Road, Fourth Floor, Bingham Farms, Michigan 48025
and consist of approximately 63,900 square feet. Rock has amended its lease to
add additional space to its call center and additional office space. Rock has
options to lease these premises through December 31, 2000, and the current base
monthly rent is approximately $75,272.
As of March 11, 1999 Rock had 11 Fresh Start stores and one call center
(eight in Michigan and one each in Illinois, Ohio, and Nevada) and nine
Conventional Lending branches (all in southeast Michigan). The Fresh Start
division's stores are generally located in retail strip malls or office
buildings. Four Conventional Lending branches are located in retail strip malls,
three are in office buildings and two are located near residential real estate
brokers' offices. Rock leases all of its Fresh Start stores and Conventional
Lending branch locations pursuant to leases that expire at varying times from
one month after notice from the landlord to November 2002. In January 1999, Rock
closed eight of its unprofitable stores and its marketing center in five states.
See "Recent Developments;" "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations--Segment Analysis --Fresh Start;"
and "Operating Divisions--Conventional Mortgage Lending Division."
Rock believes that its facilities are adequate for its current needs
and that additional space is available for future expansion.
ITEM 3. LEGAL PROCEEDINGS
Rock is involved from time to time in routine litigation incidental to
its business. Although the amount of any liability that could arise with respect
to these actions cannot accurately be predicted, in the opinion of Rock, any
such liability will not have a material adverse effect on Rock's financial
position.
ITEM 4. SUBMISSION OF MATERS TO A VOTE OF SECURITY HOLDERS
None.
Page 22 of 80
<PAGE> 23
SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT
The current executive officers of the Company and the positions held by
them are as follows:
<TABLE>
<CAPTION>
EXECUTIVE
NAME OFFICER SINCE AGE POSITION
---- ------------- --- --------
<S> <C> <C> <C>
Daniel Gilbert................ 6/85 37 Chairman of the Board of Directors, President and
Chief Executive Officer
David Carroll................. 4/92 36 Chief Operations Officer
Lindsay Gross................. 3/87 36 Executive Vice President
Frank E. Plenskofski.......... 4/96 40 Treasurer and Chief Financial Officer
</TABLE>
All officers are appointed by, and serve at the discretion of, the
Board of Directors.
Daniel Gilbert. Mr. Gilbert founded Rock in June 1985 and has served as
its Chief Executive Officer since its inception in June 1985, as its Chairman of
the Board since December 1992 and as its President since November 1998. He also
served as Rock's President from February 1986 until February 1998. Mr. Gilbert
has been a director of Rock since its inception in June 1985. Gary L. Gilbert, a
director of Rock, and Daniel Gilbert are brothers. David Katzman, a director of
Rock, and Daniel Gilbert are first cousins.
David Carroll. Mr. Carroll has served as Chief Operations Officer of
Rock since September 1994. From July 1992 until September 1994 he served as
Rock's Operation's Manager. Mr. Carroll was a director of Rock from September
1994 until February 1998.
Lindsay Gross. Mr. Gross has served as Executive Vice President of Rock
since May 1998. He also served as Executive Vice President, Conventional Lending
of Rock from December 1992 until May 1998 and as Rock's Secretary from March
1987 until September 1994. Mr. Gross was a director of Rock from March 1987
until February 1998.
Frank E. Plenskofski. Mr. Plenskofski is a certified public accountant
and a member of both the American Institute of Certified Public Accountants and
of the Pennsylvania Institute of Certified Public Accountants. He has served as
Rock's Treasurer and Chief Financial Officer since December 1996. From April
1996 until December 1996 he served as Rock's Chief Financial Officer. From
October 1992 until April 1996 he served as Senior Vice President of Secondary
Marketing of Com Net Mortgage Services, Inc., a mortgage banking company and a
subsidiary of Common Wealth Savings Bank.
Page 23 of 80
<PAGE> 24
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET PRICES
Rock's common shares have been traded under the symbol "RCCK" on The
Nasdaq National MarketSM since Rock's initial public offering effective May 1,
1998. The following table sets forth, for the periods indicated, the range of
high and low closing sales prices per share of Rock's common shares as reported
by Nasdaq:
<TABLE>
<CAPTION>
SALES PRICE
HIGH LOW
---- ---
<S> <C> <C>
Year Ended December 31, 1998
Second Quarter.......................... $12 1/2 $9 3/8
Third Quarter........................... $11 3/8 $5 1/2
Fourth Quarter.......................... $15 15/32 $3 3/4
</TABLE>
HOLDERS
As of March 11, 1999, Rock had approximately 2,000 shareholders of
record.
DIVIDEND POLICY
Rock has declared and paid cash dividends of $0.02 per share on its
common shares quarterly since becoming a publicly traded company in the second
quarter of 1998. Even though Rock has paid such a dividend, it may discontinue
it at any time or it may change the amount of the dividend at any time. Any
determination to pay dividends at all or to change the amount of any dividend
will depend on Rock's financial condition, capital requirements, results of
operations, contractual limitations and any other factors deemed relevant by the
Board of Directors. Under Rock's warehouse line of credit, Rock's ability to pay
cash dividends is limited by requirements that it maintain a minimum tangible
effective net worth, a maximum leverage ratio, a minimum ratio of current assets
to current liabilities, and minimum working capital.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial information of Rock
as of December 31, 1994, 1995, 1996, 1997 and 1998, and for each of the five
years in the period ended December 31, 1998. The historical income statement and
balance sheet data are derived from the audited financial statements of Rock,
certain of which appear in Item 8 of this Report together with the report of
KPMG LLP, independent auditors, covering the years 1996, 1997 and 1998. The
historical income statement and balance sheet data for 1994 were audited by
Rock's former auditors. The selected financial data should be read in
conjunction with the financial statements and notes thereto and with
"Management's Discussion and Analysis of Financial Condition and
Page 24 of 80
<PAGE> 25
Results of Operations" included elsewhere in this document.
<TABLE>
<CAPTION>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, (1)
---------------------------------------------------------
1994 1995 1996 1997 1998
-------- ---------- ---------- ---------- --------
STATEMENT OF INCOME DATA:
Revenue:
<S> <C> <C> <C> <C> <C>
Interest income............................ $ 2,310 $ 3,003 $ 4,267 $ 8,083 $ 13,170
Interest expense........................... 1,746 3,012 3,669 5,150 7,221
------- ------- ------- --------- --------------
Net interest margin...................... 564 (9) 598 2,933 5,949
Provision for credit losses................ -- -- -- (300) (568)
------- ------- ------- --------- --------------
Net interest margin after provision for
credit losses.......................... 564 (9) 598 2,633 5,381
Loan fees and gains and losses on sale of
mortgages................................ 10,348 17,788 27,960 47,084 84,401
Net gain on sale of mortgage servicing(2).. 2,465 5,728 -- -- --
Net gain (loss) on sale of marketable
securities(3)............................ (202) 346 991 2,222 --
Other income / expense..................... 1,348 399 6 171 (20)
------- ------- ------- --------- --------------
14,523 24,252 29,555 52,110 89,762
------- ------- ------- --------- --------------
Expenses:
Salaries, commissions and employee benefits 9,656 11,818 18,722 26,403 40,151
General and administrative expenses........ 3,159 3,726 4,646 7,630 13,424
Marketing expenses......................... 1,465 1,339 2,393 5,370 13,152
Depreciation and amortization.............. 510 506 663 1,292 2,197
Loss on store closings(5).................. -- -- -- -- 2,000
------- ------- ------- --------- --------------
14,790 17,389 26,424 40,695 70,924
------- ------- ------- --------- --------------
Income (loss) before income taxes............ (267) 6,863 3,131 11,415 18,838
Income taxes -- -- -- -- (2,584)
------- ------- ------- --------- --------------
Net income (267) 6,863 3,131 11,415 16,254
Pro forma income tax expense (benefit)(4).... (96) 2,471 1,127 4,109 6,593
------- ------- ------- --------- --------------
Pro forma net income (loss).............. $ (171) $ 4,392 $ 2,004 $ 7,306 $ 12,245
======= ======= ======= ======== ==============
PER SHARE INFORMATION:
Pro forma net income per share:
Basic.................................... $ 0.55 $ 0.89
======== ==============
Diluted.................................. $ 0.51 $ 0.85
======== ==============
Weighted average number of shares outstanding:
Basic.................................... 13,330,000 13,776,507
========== ==========
Diluted.................................. 14,282,914 14,355,195
========== ==========
Dividends.................................. $0.00 $0.00 $0.00 $0.00 $0.06
===== ===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,(1)
------------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
SELECTED BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents.................... $ -- $ 686 $ 3,289 $ 11,947 $ 30,082
Mortgage loans held for sale................. 26,717 73,996 85,009 121,344 155,631
Other assets................................. 8,173 19,613 12,062 11,138 18,725
Total assets................................. 34,890 94,295 100,360 144,429 204,437
Warehouse financing facilities............... 15,732 64,107 67,621 97,455 109,529
Drafts payable and other liabilities......... 12,885 13,661 20,393 31,866 56,873
Shareholders' equity......................... 6,273 16,527 12,346 15,108 38,035
(footnotes on next page)
</TABLE>
- -------------------
Page 25 of 80
<PAGE> 26
(1) Rock commenced operations in its Fresh Start division in 1994,
commenced High LTV Loan operations in its Specialty Lending division in
March 1997, and discontinued originating High LTV Loans in the fourth
quarter of 1998. Of the 19 Fresh Start stores open at December 31,
1998, nine were opened during 1997 (eight of which were opened since
July 1, 1997) and five were opened in January 1998.
(2) During 1994, Rock elected to retain, rather than sell, the servicing
rights to its loans and received lower sales prices as a result. In
1994 Rock sold some of its servicing rights, and in 1995 Rock sold all
of its remaining servicing rights and recognized a net gain on the sale
of servicing rights. In 1996 ,1997, and 1998 Rock sold its loans
servicing released.
(3) Prior to 1998, Rock invested some of its excess cash in marketable
securities. During 1995, 1996 and 1997, Rock sold a portion of its
portfolio of marketable securities and recognized net gains of
$346,000, $991,000 and $2,222,000, respectively.
(4) Pro forma income taxes reflect adjustments for federal and state income
taxes as if Rock had been taxed as a C corporation rather than an S
corporation. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations--Termination of S
Corporation Status and Income Taxes."
(5) After an evaluation of the performance of certain retail stores,
management concluded during the fourth quarter of 1998 that their
continuing viability was questionable. The stores' performance was
creating both operating losses and a "cash drain" on the resources of
the Company. As of December 31, 1998 management committed to a plan to
close eight Fresh Start stores and one marketing center. In 1998, the
combined net operating loss for the stores closed was $2.5 million.
Management evaluated the impact of the store closings in determining
the loss to be accrued. The accrual for such costs, in the amount of
$2.0 million, is included in accrued expenses and other liabilities in
Rock's December 31, 1998 balance sheet.
Page 26 of 80
<PAGE> 27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following analysis of the financial condition and results of
operations of Rock should be read in conjunction with "Item 6. Selected
Financial Data." Additionally, Rock's financial statements and notes thereto, as
well as other data included in this Report, should be read and analyzed in
combination with the analysis below. With the exception of historical
information, certain of the matters discussed in this Report are forward-looking
statements that involve risks and uncertainties and actual results could differ
materially from those discussed. The words and phrases "should be," "will be,"
"predicted," "believe," "expect," "anticipate" and similar expressions identify
forward-looking statements. These forward-looking statements reflect the
Company's current views with respect to future events in financial performance,
but are subject to many risks, uncertainties and factors relating to the
Company's operations and business environment which may cause its actual results
to differ materially from historical results or any future results expressed or
implied by such forward-looking statements. Such risks and uncertainties include
the factors described under the caption "Risk Factors" and elsewhere in the
Company's Registration Statement on Form S-1 (file no. 333-46885) effective May
1, 1998 and elsewhere in this Report.
GENERAL
Rock is a company marketing conventional, government insured and
sub-prime debt consolidation and home financing loans, secured primarily by
first or second mortgages on one-to four-family, owner-occupied residences. The
Company originates loans through 18 stores and branches, one call center and an
Internet site. Founded in 1985 by its current Chief Executive Officer and
Chairman of the Board, Daniel Gilbert, the Company originates 100% of its loans
through marketing its loans directly to consumers.
The Company had operated through three major divisions, but currently
operates through two major divisions. The Company decided, in the third quarter
of 1998, to stop originating High LTV Loans to individuals with good credit
histories but little or no equity in their homes due to concerns of liquidity
that resulted from a diminishing base of purchasers of these loans and to take
advantage of the high demand for Conventional Loans. Therefore, the sales force
from this division was shifted to handle the high demand for Conventional
mortgage loans resulting from the lower interest rate environment. The Company
originates Sub-Prime Home Equity Loans to individuals with impaired credit
characteristics, high levels of debt service to income, unfavorable past credit
experience, limited credit history, limited employment history or unverifiable
income through its Fresh Start division, created in 1994. Since its inception in
1985, the Company has originated Conventional Loans that generally conform to
FNMA or Freddie Mac underwriting standards, or that generally meet such
standards except for maximum loan size guidelines, through its Conventional
Mortgage Lending division. In addition, the Company further increased its
government insured lending operations in 1998, primarily making mortgage loans
that meet the underwriting standards for FHA insurance, but currently the
Company does not view government insured lending as a major business segment. In
February 1999, Rock announced that it had formed a 70%-owned limited liability
company to
Page 27 of 80
<PAGE> 28
provide residential mortgage products to Michigan National Bank's customers
through Michigan National Bank's financial centers, a call center and over the
Internet. The joint venture is expected to begin business in April 1999, subject
to material closing terms and conditions and governmental approvals.
TERMINATION OF S CORPORATION STATUS AND INCOME TAXES
Simultaneously with the closing of the Company's initial public
offering on May 6, 1998 (the "Offering"), the Company ceased to be taxed as an S
corporation under the Internal Revenue Code of 1986, as amended (the "Code"). In
connection with the termination of its S corporation status, the Company paid
the estimated Shareholder Distribution Amount out of the net proceeds of the
Offering to the Company's shareholders existing immediately before the closing
of the Offering (the "Existing Shareholders"). The estimated Shareholder
Distribution Amount (including the approximately $5.4 million tax distribution
to existing shareholders on April 10, 1998) was approximately $25.0 million.
Based upon the final results of 1998, the shareholders are required to pay to
the Company approximately $800,000, representing the excess of amounts disbursed
in May 1998 over the year-end estimate of the taxable income allocable to the S
corporation shareholders. The amount due the Company is included in
Shareholders' Advances (See Notes to Financial Statements), and is expected to
be paid by the end of the first quarter of 1999.
As an S corporation, the Company's income, whether or not distributed,
was taxed at the shareholder level for federal and state tax purposes. As a
result of the termination of its S corporation status, the Company is subject to
federal and state income taxation and recorded a $1.9 million deferred tax asset
on its balance sheet along with a current income tax liability of $0.9 million.
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 the Company had been subject to federal and
state taxation at the tax rates effective for the periods presented.
Page 28 of 80
<PAGE> 29
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
VERSUS YEAR ENDED DECEMBER 31, 1997
SUMMARY
The following table sets forth the revenues and expenses and net income
for the Company for the years ended December 31, 1997 and 1998:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1997 1998
-------------- --------------
(In thousands)
<S> <C> <C>
Total revenue before gains and losses
on sale of marketable securities.......... $ 49,888 $ 89,762
Net gain on sale of marketable securities... 2,222 --
------------- -------------
Total revenue............................... 52,110 89,762
Total expenses.............................. (40,695) (70,924)
------------- -------------
Income before income taxes.................. 11,415 18,838
Provision for pro forma income taxes........ 4,109 6,593
------------- -------------
Pro forma net income........................ $ 7,306 $ 12,245
============= =============
</TABLE>
The Company's total revenues increased to $89.8 million in 1998 from
$52.1 million in 1997, an increase of $37.7 million, or 72.3%, which included a
net decrease of $2.2 million in gains on sales of marketable securities over
1997. Excluding gains on sales of marketable securities, the Company's total
revenues increased to $89.8 million in 1998 from $50.0 million in 1997, an
increase of $39.8 million. The increase in revenues is primarily due to (i) an
increase of $924.6 million, or 107.7%, in the volume of Conventional Loans sold
by the Company in 1998 compared to 1997, (ii) an increase of $138.9 million, or
58.7%, in the volume of Sub-Prime Home Equity Loans sold by the Company in 1998
compared to 1997, (iii) an increase of $32.8 million, or 214.3%, in the volume
of government insured loans sold by the Company in 1998 compared to 1997, (iv)
an increase of $5.9 million, or 10.3%, in the volume of High LTV Loans sold by
Rock in 1998 compared to 1997, despite a 15.4% decrease in High LTV Loan
closings in 1998 compared to 1997, (v) a 27.8% increase in margins earned on
loan fees and gains on sale of Conventional Loans, and (vi) an 11.5% increase in
margins earned on loan fees and gains on sale of government insured loans,
partially offset by a 18.9% decrease in margins earned on loan fees and gains on
sale of High LTV Loans and a 9.4% decrease in margins earned on loan fees and
gain on sale of Sub-Prime Home Equity Loans in 1998 compared to 1997. In 1998,
the Fresh Start division's revenues as a percentage of total revenue decreased
to 42.4%, compared to 49.8% in 1997.
During 1998, the Company closed $2.4 billion of loans (23,853 loans),
an increase of $1.1 billion, or 93.1%, from the $1.2 billion of loans (12,950
loans) closed in 1997. The Company's loans held for sale, not considering the
change in deferred fees (costs), increased by $33.8 million in 1998, compared to
$36.8 million in 1997. The increase in 1998 was due to the Company selling
$2.270 billion in loans while closing $2.304 billion in loans in 1998. The
Page 29 of 80
<PAGE> 30
increase in loans held for sale in 1998 included increases of $50.1 million in
Conventional Loans, partially offset by (i) a decrease of $7.8 million in
Sub-Prime Home Equity Loans and (ii) a decrease of $8.5 million in High LTV
Loans. The increase in loans held for sale in 1997 included increases of $5.1
million in Conventional Loans, increases of $22.9 million in Sub-Prime Home
Equity Loans and increases of $8.8 million in High LTV Loans. Management expects
that loan closings will decline in the first quarter of 1999 due, in part, to
normal seasonality, in part, to increases in mortgage interest rates in January
and February of 1999, and, in part, to store closings in the first quarter of
1999, which may cause revenues and/or period-end inventory to be less than those
of the fourth quarter of 1998.
Total expenses increased from $40.7 million in 1997 to $70.9 million in
1998, an increase of $30.2 million, or 74.3%, primarily due to increased
commissions, increased occupancy costs for new stores and branches, increases in
marketing and advertising expenses associated with these new store openings, and
increases in general and administrative expenses that fluctuate with increases
in volumes of loans closed and numbers of employees. Also contributing to the
overall increase, is $2.0 million relating to the nine stores expected to be
closed in the first quarter of 1999 due to their unprofitable operations.
The 18 branches and stores along with the marketing center that have
opened since July 1, 1997 contributed significantly less to the Company's
revenues and net income in 1998 than stores that have been in operation for at
least eighteen months. Eleven of the eighteen stores and branches operated at a
net loss aggregating approximately $3.8 million in 1998. Of the 11 stores that
operated at a net loss in 1998, eight of those stores are expected to be closed
in the first quarter of 1999, and the Company recognized a $2 million store
closing expense in the fourth quarter of 1998. The Company believes that its new
stores generally mature over a twelve-to eighteen-month time period. Management
believes that in part because of the seasonality of its business, the trend in
its quarterly revenue and income growth during the four quarters of 1998 will
not continue at the same level in the first quarter of 1999. See "Item 1.
Business--Seasonality."
Page 30 of 80
<PAGE> 31
REVENUES
The following table sets forth information regarding the components of
the Company's revenues for the years ended December 31, 1997 and 1998:
<TABLE>
<CAPTION>
Years Ended
December 31,
----------------------------
1997 1998
------- --------
(in thousands)
<S> <C> <C>
Interest income........................................................ $8,083 $13,170
Interest expense....................................................... (5,150) (7,221)
------ ------
Net interest margin............................................... 2,933 5,949
Provision for credit losses............................................ (300) (568)
------ ------
Net interest margin after provision for credit losses............. 2,633 5,381
Loan fees and gains on sale of mortgages............................... 47,084 84,382
Net gain on sale of marketable securities.............................. 2,222 --
Other income (expense)................................................. 171 (1)
------- -------
Total revenue..................................................... $52,110 $89,762
======= =======
</TABLE>
Net interest margin after provision for credit losses increased to $5.4
million for the year ended December 31, 1998 from $2.6 million for the year
ended December 31, 1997, an increase of $2.8 million, or 104.4%. The increase
was primarily due to (i) the increase in the dollar volume of loans closed by
the Company, (ii) an increase in the portion of loans sold on a "bulk" or
assignment of trade basis, rather than on a "flow" basis, resulting in an
increase in the length of time loans were held before sale, which allowed the
Company to take advantage of the positive net interest margin, (iii) a decrease
in the weighted average interest rates charged on the Company's borrowing
facilities (from 7.03% in 1997 to 6.72% in 1998), and (iv) the Company's
increased use of internally-generated cash to fund its loans. "Flow" sales are
sales of loans underwritten by a third party who commits to purchase each
individual loan its underwriters approve. "Bulk" sales are sales of loans
underwritten to Rock's underwriting standards that are pooled and then sold to
third parties for cash by Rock. Assignment of trade sales are sales of
Conventional Loans to a third party who exchanges them with FNMA or Freddie Mac
for their securities. Rock has employed, and expects to continue to employ,
strategies to attempt to increase its net interest margin, including holding its
loans longer before it sells them, closing a higher volume of loans and using
available cash to fund loans without borrowing additional money. Although this
strategy enhances Rock's net interest margin, it exposes Rock to a greater risk
of delinquencies. Loans that become delinquent generally cannot be sold to third
parties, increasing the likelihood of foreclosures and charge-offs. The Company
may be required to repurchase or substitute loans in the event of a breach of
representations and warranties, including any fraud or any misrepresentation
made during the loan origination process. The Company recorded a provision for
credit losses of approximately $300,000 in 1997, and recorded a provision for
credit losses of approximately $568,000 in 1998 for future repurchase or
substitution requirements relating to loans sold before December 31, 1997 and
1998, respectively, and credit risk for loans held for sale and investment.
There were charge-offs of approximately $30,000 against the reserve in 1997, and
charge-offs of approximately $203,000 in 1998.
Page 31 of 80
<PAGE> 32
Loan fees and gains on sale of mortgages increased to $84.4 million in
1998 from $47.1 million in 1997, an increase of $37.3 million, or 79.3%. This
increase is primarily due to the increase in loan sales along with the increases
and decreases in the margins earned on loan fees and gains on sale of loans
described above. See "Summary" and "Segment Analysis" for a description of
changes in sales volume. During 1998, the Company recognized a 27.8% increase in
margins earned on loan fees and gains on sale of Conventional Loans, and an
11.5% increase in margins earned on loan fees and gains on sale of government
insured loans, partially offset by an 18.9% decrease in margins earned on loan
fees and gains on sale of High LTV Loans and a 9.4% decrease in margins earned
on loan fees and gains on sale of Sub-Prime Home Equity Loans, compared to 1997.
The increase in margins earned on loan fees and gains on sale of Conventional
Loans and government insured loans was primarily the result of a favorable
interest rate environment along with changes in sales methodologies which
reduced the need for rate competitiveness, as previously described. The decrease
in margins earned on loan fees and gains on sale on High LTV Loans was due to
the Company liquidating its pipeline. The decrease in margins earned on loan
fees and gains on sale of Sub-Prime Home Equity Loans was due to the erosion of
margins due to turmoil in the industry. Due to the store closings in the first
quarter of 1999, management anticipates both closings and revenue to decline
from Sub-Prime Home Equity Loans.
The increase in loan fees and gains on sale of mortgages was partially
offset by an increase in the Company's recapture reserve in 1998. Some Sub-Prime
Loans sales require the Company to return a portion of the premium received by
the Company on the sale of the loan if the loan is prepaid by the consumer
within the first year after sale. The Company records a provision for this risk
based on its evaluation of the terms of the sale contracts and its assumptions
concerning prepayments. The Company increased its reserve, and decreased its
loan fees and gains on sale of mortgages, through a provision of approximately
$816,000 for this risk in 1998, compared to approximately $603,000 in 1997. In
addition, by increasing net interest margin by holding loans for longer periods
of time, the Company is subject to a higher risk of delinquencies and resulting
foreclosure losses.
Net gain on sale of marketable securities was approximately $2.2
million in 1997. Before the end of 1997, the Company had invested some of its
excess cash in marketable securities. During 1997, the Company sold its
remaining portfolio of marketable securities held for sale. No such marketable
securities were held by the Company at December 31, 1997 or were acquired during
1998, and, therefore, there were no gains or losses on the sale of marketable
securities in 1998.
Page 32 of 80
<PAGE> 33
EXPENSES
The following table sets forth information regarding the components of
the Company's expenses for the years ended December 31, 1997 and 1998:
<TABLE>
<CAPTION>
Year
Ended December 31,
----------------------------
1997 1998
------- -------
(in thousands)
<S> <C> <C>
Salaries, commissions and employee benefits............................ $26,403 $40,151
General and administrative expenses.................................... 7,630 13,424
Marketing expenses..................................................... 5,370 13,153
Depreciation and amortization.......................................... 1,292 2,196
Loss on store closings................................................. -- 2,000
------- -------
Total expenses.................................................... $40,695 $70,924
======= =======
</TABLE>
Salaries, commissions and employee benefits increased from $26.4
million in 1997 to $40.2 million in 1998, an increase of $13.8 million, or
52.1%. The increase was primarily attributable to higher commissions due to
increased closings, the Company hiring additional personnel and increased
compensation for new management team members. The Company employed 667 persons
as of December 31, 1997, compared to 801 persons as of December 31, 1998, a
20.1% increase. These expenses are expected to continue to increase in 1999 in
connection with the expansion of existing operations, along with continuation of
development of Rock's Internet presence and strategic alliances. For 1997, these
expenses included $1.6 million of stock and option holders' bonuses. During
1997, Rock paid bonuses to option holders in accordance with their employment
agreements. The agreements do not require these bonuses after December 31, 1997.
In addition, Rock paid bonuses to one of its shareholders in 1997, partially in
recognition of cumulative past services.
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 $7.6 million in 1997 to $13.4 million
in 1998, an increase of $5.8 million, or 75.9%. The increase was primarily
attributable to an increase in occupancy costs, office expenses, and automobile
and delivery expenses as a result of opening eight new Fresh Start stores and
one marketing center in the last six months of 1997, five new Fresh Start stores
in January 1998, one new Conventional Mortgage Lending branch in 1997, three new
Conventional Mortgage Lending branches in the second quarter of 1998 and one new
Conventional Mortgage Lending branch in the third quarter of 1998. These
expenses are expected to continue to increase in 1999 as a result of expansion
of existing operations, along with continuation of development of Rock's
Internet presence and strategic alliances.
Marketing expenses increased from $5.4 million in 1997 to $13.2 million
in 1998, an increase of $7.8 million, or 145.0%. The increase is primarily due
to (i) the Company's focus on Sub-Prime Loans in early 1998, which typically
require higher levels of marketing than Conventional Loans and (ii) the
marketing associated with the new markets entered into in late 1997 and early
1998. Also contributing to the increase is the Company's continued commitment
Page 33 of 80
<PAGE> 34
to marketing for the conventional business. These expenses are expected to
continue to increase in 1999 in connection with expansion of existing
operations, along with continuation of development of Rock's Internet presence
and strategic alliances.
Depreciation and amortization expenses increased from $1.3 million in
1997 to $2.2 million in 1998, an increase of $0.9 million, or 69.9%. The
increase was primarily attributable to the Company's purchase of a front-end
origination computer system in 1997 and purchases of additional equipment and
leasehold improvements during 1997 and 1998 for new stores. These expenses are
expected to continue to increase in 1999 as a result of expansion of existing
operations and the web center.
As of December 31, 1998 the Company committed to a plan to close nine
of its unprofitable Fresh Start stores in five states (Missouri, Texas,
Illinois, Indiana and Ohio). As a result of this decision, the Company
established a $2.0 million accrual at December 31, 1998, for the estimated costs
associated with the closing of these stores to be incurred subsequent to the
expected closing date. The costs include the remaining estimated net lease
commitments or lease termination fees for the stores and related equipment
leases, severance packages for the employees, and leasehold improvements. All
costs associated with the closings are anticipated to be incurred when the plan
is executed, which is anticipated to be by the end of the second quarter of
1999. See Note 17 to the Financial Statements included in Item 8 of this Report.
Effective May 6, 1998, the Company's tax status changed from that of an
S corporation to that of a C corporation. As a C corporation, the Company became
subject to federal and state income taxation in the second quarter of 1998. As
an S corporation, the Company's taxable income is included in the individual
returns of its shareholders. As a result, the Company's income taxes due to C
corporation earnings for 1998 represents income taxes provided based on the
Company's 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 the Company's tax status,
the Company recognized a nonrecurring net income tax benefit due to conversion
of the S corporation of approximately $1.0 million during 1998. Upon conversion
to a C corporation, the Company recorded a net deferred tax asset of
approximately $1.9 million, and recognized a corresponding deferred income tax
benefit, which was somewhat offset by the Company's recognition of a current
income tax liability of approximately $0.9 million associated with the
allocation of the Company's taxable income between the S corporation and the C
corporation prior to conversion to a C corporation in 1998. Additionally, the
Company recognized the $3.5 million of current tax expense relating to the
earnings subject to tax attributable to operating as a C corporation. The
"effective" tax rate is lower than the tax rate that Rock would have incurred
had this allocation between the S corporation and C corporation not occurred.
The pro forma provision for income taxes in the selected consolidated financial
data shows results as if Rock had been subject to federal and state taxation at
the tax rates effective for the entire periods presented.
Page 34 of 80
<PAGE> 35
FISCAL YEAR ENDED DECEMBER 31, 1997
VERSUS FISCAL YEAR ENDED DECEMBER 31, 1996
Summary
The following table sets forth the revenues and expenses and pre-tax
income for Rock for the years ended December 31, 1996 and 1997:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1996 1997
------------- -------------
(In thousands)
<S> <C> <C>
Total revenue before gains on sale of
marketable securities..................... $ 28,564 $ 49,888
Net gain on sale of marketable securities... 991 2,222
------------- -------------
Total revenue............................... 29,555 52,110
Total expenses.............................. (26,424) (40,695)
------------- -------------
Pre-tax income.............................. 3,131 11,415
============= =============
</TABLE>
Rock's total revenues increased to $52.1 million in 1997 from $29.6
million in 1996, an increase of $22.5 million, or 76.3%, which included a net
increase of $1.2 million in gains on sales of marketable securities over 1996.
Excluding gains on sales of marketable securities, Rock's total revenues
increased to $49.9 million in 1997 from $28.6 million in 1996, an increase of
$21.3 million, or 74.7%. The increase in revenues is primarily due to (i) an
increased portion of the loans closed by Rock consisting of Sub-Prime Loans
(27.5% of the total dollar volume of loans closed in 1997, compared to 13.7% in
1996), which have higher origination fees and with respect to which Rock
receives a higher premium on sale than Rock's Conventional Loans, (ii) an
increase of $121.6 million, or 82.3%, in the volume of Sub-Prime Home Equity
Loans closed by Rock in 1997, and (iii) an increase in bulk sales of loans
(which generally resulted in higher premiums than sales of individual loans). In
1997, the Fresh Start division's revenues as a percentage of total revenue
increased to 49.8%, compared to 40% in 1996.
Total expenses increased from $26.4 million in 1996 to $40.7 million in
1997, an increase of $14.3 million, or 54.0%, primarily due to increased
commissions, increased occupancy costs for store openings and increases in
general and administrative expenses that fluctuate with increases in volumes of
loans closed. As a result of the increased revenues, proportionally lower
expenses and lower bonuses, pre-tax income increased 264.6%, from $3.1 million
in 1996 to $11.4 million in 1997.
Page 35 of 80
<PAGE> 36
Revenues
The following table sets forth information regarding the components of
Rock's revenues for the years ended December 31, 1996 and 1997:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1996 1997
------- -------
(in thousands)
<S> <C> <C>
Interest income........................................................ $4,267 $8,083
Interest expense....................................................... (3,669) (5,150)
------ ------
Net interest margin............................................... 598 2,933
Provision for credit losses............................................ -- (300)
------ -------
Net interest margin after provision for credit losses............. 598 2,633
Loan fees and gains and losses on sale of mortgages.................... 27,960 47,084
Net gain on sale of marketable securities.............................. 991 2,222
Other income........................................................... 6 171
------- -------
Total revenue..................................................... $29,555 $52,110
======= =======
</TABLE>
Net interest margin increased to $2.9 million in 1997 from $0.6 million
in 1996, an increase of $2.3 million, or 390.0%. The increase was primarily due
to (i) the increase in the dollar volume of loans closed by Rock, and (ii) a
change in the manner of selling loans from "flow" sales to "bulk" sales and
assignment of trade sales, resulting in an increase in the length of time loans
were held before sale, which allowed Rock to take advantage of the positive net
interest margin. The increase in net interest margin is also due to (i) higher
weighted average interest rates charged on the loans as a result of the
increased proportion of Sub-Prime Loans, which generally have higher interest
rates, (ii) a decrease in the weighted average interest rates charged on Rock's
borrowing facilities (from 7.26% in 1996 to 7.03% in 1997), and (iii) Rock's
increased use of internally-generated cash to fund its loans.
Rock may be required to repurchase or substitute loans in the event of
a breach of representations and warranties, including any fraud or any
misrepresentation made during the loan origination process. Rock recorded a
provision for credit losses of $300,000 in 1997 for future repurchase or
substitution requirements relating to loans sold before December 31, 1997 and
credit risk for loans held for sale and investment. During 1997, two loans were
reclassified as real estate owned, resulting in a $30,000 charge against the
reserve.
Loan fees and gains and losses on sale of mortgages increased to $47.1
million in 1997 from $28.0 million in 1996, an increase of $19.1 million, or
68.4%. This increase is primarily due to an increased portion of the loans
closed by Rock consisting of Sub-Prime Loans, with respect to which Rock
receives higher loan fees and a higher premium on sale, and the introduction of
Specialty Lending in 1997, resulting in $66.0 million of High LTV Loans closed
in 1997 for which Rock also receives relatively higher loan fees and premiums on
sale, and the higher volume of loans closed in 1997. The dollar volume of
Sub-Prime Loans increased in 1997 compared to 1996 primarily as a result of an
increase in Fresh Start stores, loan officers, and marketing and the beginning
of Rock's Specialty Lending division in 1997. The average premium received by
Rock on all loans sold during 1997 also increased, primarily due to changes in
the way Rock sold its loans in 1997 and favorable market conditions. Rock sold a
Page 36 of 80
<PAGE> 37
majority of its Sub-Prime Loans through bulk sales, rather than on a flow basis.
In addition, Rock began selling its Conventional Loans pursuant to an assignment
of trade, rather than on a flow basis.
The increase in loan fees and gains and losses on sale of mortgages was
partially offset by an increase in Rock's recapture reserve in 1997. Some
Sub-Prime Loan sales require Rock to return a portion of the premium received by
Rock on the sale of the loan if the loan is prepaid by the customer within the
first year after sale. Rock records a provision for this risk based on its
evaluation of the terms of its sale contracts and its assumptions concerning
prepayments. Rock increased its reserve, and decreased its loan fees and gains
and losses on sale of mortgages, by $603,000 for this risk in 1997, compared to
an increase of $317,000 in 1996. In addition, by increasing net interest margin
by holding loans for longer periods of time, Rock is subject to a higher risk of
delinquencies and resulting foreclosure losses.
Net gain on sale of marketable securities increased to $2.2 million in
1997 from $1.0 million in 1996, an increase of $1.2 million, or 124.2%. Before
the end of 1997, Rock had invested some of its excess cash in marketable
securities. During 1996 and 1997, Rock sold a portion of its portfolio of
marketable securities held for sale. No such marketable securities were held by
Rock at December 31, 1997.
Expenses
The following table sets forth information regarding the components of
Rock's expenses for the years ended December 31, 1996 and 1997:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1996 1997
------- -------
(in thousands)
<S> <C> <C>
Salaries, commissions and employee benefits............................ $18,722 $26,403
General and administrative expenses.................................... 4,646 7,630
Marketing expenses..................................................... 2,393 5,370
Depreciation and amortization.......................................... 663 1,292
------- -------
Total expenses.................................................... $26,424 $40,695
======= =======
</TABLE>
Salaries, commissions and employee benefits increased from $18.7
million in 1996 to $26.4 million in 1997, an increase of $7.7 million, or 41.0%.
The increase was primarily attributable to Rock hiring additional personnel in
order to generate increased levels of loan closings, increased compensation for
new management team members hired during 1997, and increased commissions due to
increased closings. Rock employed 399 persons as of December 31, 1996, compared
to 667 persons as of December 31, 1997, a 72.5% increase. Stock and option
holders' bonuses decreased from $2.3 million in 1996 to $1.6 million in 1997, a
decrease of $0.7 million, or 30.7%. During 1996 and 1997, Rock paid bonuses to
option holders in accordance with their employment agreements. The agreements do
not require these bonuses after December 31, 1997. In addition, Rock paid
bonuses to all three of its shareholders in 1996 and one of its shareholders in
1997, partially in recognition of cumulative past services.
Page 37 of 80
<PAGE> 38
General and administrative expenses consist primarily of occupancy
costs, professional services, office expenses, automobile and delivery expenses
and other expenses, many of which vary with the volume of loan closings. General
and administrative expenses increased from $4.6 million in 1996 to $7.6 million
in 1997, an increase of $3.0 million, or 64.2%. The increase was primarily
attributable to an increase in occupancy expenses as a result of opening nine
new Fresh Start stores and one marketing center in 1997 and one new Conventional
Mortgage Lending branch during 1997 and to significantly expanded Specialty
Lending activities in 1997. In addition, recruiting expenses increased in 1997
primarily due to the opening of the new Fresh Start stores and the hiring of new
management team members. Also, legal expenses increased in 1997 as a result of a
reorganization of some of Rock's employment and share ownership relationships in
1997.
Marketing expenses increased from $2.4 million in 1996 to $5.4 million
in 1997, an increase of $3.0 million, or 124.4%. Marketing expenses for the
Fresh Start and Specialty Lending divisions in 1997 increased $1.7 million, or
120.0%, and $1.2 million, or 100.0%, respectively, over 1996. The increase was
primarily attributable to Rock's greater marketing, both in existing markets and
in new markets to generate higher levels of loan closings, as well as the
marketing costs associated with the introduction of Rock's High LTV Loans. This
increase is primarily the result of Rock's increased focus on its Sub-Prime Loan
business, which required greater marketing related to new store openings, and
ongoing marketing.
Depreciation and amortization expenses increased from $0.7 million in
1996 to $1.3 million in 1997, an increase of $0.6 million, or 94.9%. The
increase was primarily attributable to Rock's purchase of a front-end
origination computer system in early 1997 and purchases of additional equipment
and leasehold improvements during 1997 for new stores.
SEGMENT ANALYSIS
The Company's recent growth may have a distortive impact on some of the
Company's ratios and financial statistics and may make period-to-period
comparisons difficult. In light of the Company's growth, historical 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 will
impact period to period comparisons.
Management expects segment contributions to vary from period to period.
In order to demonstrate the effect that varying factors have on loan production,
revenue and profits, management has elected to show the results of its
divisions. The Company was not managed according to segments during 1996,
therefore, the Company is not presenting segment information for 1996. The
following table shows the contribution to revenues and expenses and the loan
closings of each of the Company's divisions for the years ended December 31,
1997 and 1998:
Page 38 of 80
<PAGE> 39
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1997 1998
-------------- --------------
(In thousands)
<S> <C> <C>
CONVENTIONAL MORTGAGE LENDING:
Revenue.......................................... 16,333.6 43,166.8
Expenses......................................... (10,358.1) (22,252.1)
-------------- --------------
Division contribution.......................... 5,975.5 20,914.7
-------------- --------------
FRESH START:
Revenue.......................................... $ 25,938.1 $ 38,097.6
Expenses......................................... (15,898.7) (26,976.5)
-------------- --------------
Division contribution.......................... 10,039.4 11,121.1
-------------- --------------
SPECIALTY LENDING:
Revenue.......................................... 7,045.8 6,692.3
Expenses......................................... (3,754.7) (4,960.5)
-------------- --------------
Division contribution.......................... 3,291.1 1,731.8
-------------- --------------
OTHER REVENUE...................................... 2,792.7 1,805.5
OTHER EXPENSES..................................... (10,683.1) (16,734.7)
-------------- --------------
Pre-tax income................................... 11,415.6 18,838.4
PROVISION FOR PRO FORMA INCOME TAX................. 4,109.6 6,593.4
-------------- --------------
PRO FORMA NET INCOME............................... $ 7,306.0 $ 12,245.0
============== ==============
LOAN CLOSINGS:
Conventional Mortgage Lending.................... $ 867,520 $ 1,872,025
Fresh Start...................................... 269,274 373,955
Specialty Lending................................ 66,044 55,841
Other............................................ 16,598 52,120
------------ ------------
Total Loan Closings............................ $1,219,436 $ 2,353,941
============ ============
</TABLE>
YEAR ENDED DECEMBER 31, 1998
VERSUS YEAR ENDED DECEMBER 31, 1997
Although revenues increased in 1998 compared to 1997, the contribution
by segment differed from year to year. In 1998, the Conventional Mortgage
Lending division contributed $43.2 million, or 48.1%, of revenues, compared to
$16.3 million, or 31.3%, in 1997. The Fresh Start division contributed $38.1
million, or 42.4%, of revenues in 1998, compared to $25.9 million, or 49.8%, in
1997. The Specialty Lending division contributed $6.7 million, or 7.5%, of
revenues in 1998 compared to $7.0 million, or 13.5%, of revenues in 1997. The
Company's pro forma net income increased from $7.3 million in 1997 to $12.2
million in 1998, an increase of $4.9 million, or 67.6%.
Page 39 of 80
<PAGE> 40
CONVENTIONAL MORTGAGE LENDING: The Conventional Mortgage Lending
division generated $43.2 million in revenue in 1998 versus $16.3 million of
revenue in 1997. The 164.3% increase in revenue is mainly attributable to (i) a
107.7% increase in sales of Conventional Loans in 1998 compared to 1997, and
(ii) a 27.8% increase in the margins earned on loan fees and gains on sale of
Conventional Loans in 1998 compared to 1997. The greater loan sales are
primarily attributable to an increase in Conventional Loan closings as a result
of a more favorable interest rate environment, which caused a significant
increase in loan refinancings, and, to some extent, the significant efficiencies
gained through the implementation of automated underwriting systems and other
proprietary technology, partially offset by the sale of $50.1 million fewer
Conventional Loans in 1998 than were disbursed, compared to $1.3 million fewer
in 1997. Management believes that a significant increase in interest rates or a
prolonged period of consistently low interest rates could reduce the volume of
Conventional Loans closed by the division as a result of a decrease in
refinancing of existing mortgages by consumers. See "Results of Operations" for
a description of changes in margins. Management expects that loan closings will
decline in the first quarter of 1999 due, in part, to normal seasonality and, in
part, to increases in mortgage interest rates in January and February of 1999,
which may cause revenues and/or period-end inventory to be less than those of
the fourth quarter of 1998.
Direct expenses of the Conventional Mortgage Lending division were
$22.3 million on closings of $1.9 billion (1.2%) in 1998 compared to $10.4
million on closings of $867.5 million (1.2%) in 1997. The 114.4% increase in
expenses is primarily attributable to the 115.8% increase in the volume of
closed Conventional Loans. The Company believes its consistent expense ratio
resulted from increased incentive compensation that was more than offset by
economies of scale resulting from greater loan volume and, to some extent,
efficiencies resulting from the implementation of automated underwriting systems
and other proprietary technology. Management believes that a significant
increase in interest rates or a prolonged period of consistently low interest
rates could reduce the volume of Conventional Loans closed by the division and,
therefore, increase its per loan cost to originate Conventional Loans, reducing
its profitability.
FRESH START: The Fresh Start division generated $38.1 million in
revenue in 1998 versus $25.9 million of revenue in 1997. The 46.9% increase in
revenue is mainly attributable to a 58.7% increase in sales of Sub-Prime Home
Equity Loans in 1998 compared to 1997, and to the division beginning to sell
loans by bulk sales in the second quarter of 1997, which generate higher
premiums than selling the loans on an individual basis. The greater loan sales
are primarily attributable to a 38.9% increase in Sub-Prime Home Equity Loan
closings as a result of more stores open in 1998 than in 1997, partially offset
by a decrease in comparable store loan closings, and the sale of $2.5 million
more Sub-Prime Home Equity Loans in 1998 than were disbursed (compared to $42.3
million fewer in 1997), somewhat offset by a 9.4% decrease in margins earned on
loan fees and gains on sale of Sub-Prime Home Equity Loans. Stores that were
open before January 1, 1997 closed an average of $193.2 million of Sub-Prime
Home Equity Loans during 1998 compared to $217.2 million in 1997. Because of the
seasonality of the business along with the store closings in the first quarter
of 1999, management expects both closings and revenues from Sub-Prime Home
Equity Loans to decline in the first quarter of 1999. See "Results of
Operations" for changes in margins.
Page 40 of 80
<PAGE> 41
Direct expenses of the Fresh Start division were $27.0 million on
closings of $374.0 million (7.2%) in 1998 compared to $15.9 million on closings
of $269.3 million (5.9%) in 1997. Management believes that the increase in
expenses as a percentage of closings is primarily due to (i) the continuing
absorption of the start-up expenses of the four new stores opened in the fourth
quarter of 1997 and the five new stores opened in January 1998, and (ii) an
approximately $4.6 million increase (to 2.1% of closings in 1998 from 1.2% of
closings in 1997) in advertising spent to support the branch expansion into new
markets in order to "brand" the Fresh Start product in these new territories. A
new store opening requires the Company to incur monthly expenses in excess of
revenues generated by the new store until enough loans are closed for the store
to break even. The new store expenses, net of revenue, were approximately $1.9
million in 1998. As previously discussed, nine stores are expected to be closed
in the first quarter of 1999 due to their unprofitable operations, and in 1998
the Company recognized a charge of $2.0 million in connection with the costs of
such closings.
SPECIALTY LENDING: The Specialty Lending division generated $6.7
million in revenue in 1998 versus $7.0 million of revenue in 1997. The 5.0%
decrease in revenue is mainly attributable to an 18.9% decrease in margins
earned on loan fees and gains on sales of High LTV Loans, partially offset by
the sale of $5.9 million, or 10.3%, more High LTV Loans in 1998 than in 1997,
despite a 15.4% decrease in High LTV Loan closings in 1998 compared to 1997. The
decrease in margins earned on loan fees and gains on sale on High LTV Loans was
due to the Company liquidating its pipeline. High LTV Loan sales in 1998 were
$63.3 million compared to $57.4 in 1997. The higher loan sales are primarily
attributable to the liquidation of the Company's remaining pipeline following
the conscious decision, in the third quarter of 1998, to shift all of the
Company's Specialty Lending division's sales force to handle the high demand for
Conventional Loans. The Company sold $8.5 million more High LTV Loans than it
disbursed in 1998, compared to $9.7 million fewer in 1997.
Direct expenses of the Specialty Lending division were $5.0 million on
closings of $55.8 million (8.9%) in 1998 compared to $3.8 million on closings of
$66.0 million (5.7%) in 1997. The 56.3% increase in expenses as a percentage of
closings is primarily attributable to a 15.4% decrease in the volume of High LTV
Loans closed in 1998 versus 1997 and higher marketing expenses, attributable to
expansion into new markets in an attempt to generate more originations.
OTHER: Other revenue includes the net contribution from sales of
marketable securities and government insured lending. Approximately $2.2 million
of the other revenue in 1997 consisted of non-recurring gains on the sale of
marketable securities held for sale, all of which were sold by December 31,
1997. The remaining other revenue consists primarily of loan fees and gains on
sale relating to government insured lending.
Other expenses include expenses not directly allocable to a particular
division, such as the costs associated with Rock's legal, marketing, facilities,
information services, executive, human resources, secondary marketing and
general and administrative support teams. Included in other expenses was
approximately $1.6 million of bonuses to Rock's shareholders and option holders
in 1997. Other expenses in 1998 increased primarily due to the increased costs
of technology support for the front-end origination system and branch network.
Page 41 of 80
<PAGE> 42
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth information concerning the Company's
financial condition as of December 31, 1997 and December 31, 1998:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1998
-------------- --------------
(In thousands)
<S> <C> <C>
Cash and cash equivalents............................................... $ 11,947 $ 30,081
Mortgage loans held for sale............................................ 121,344 155,631
Loans held for investment............................................... 810 3,766
Property and equipment, net............................................. 7,011 10,776
Other assets............................................................ 3,317 4,183
-------------- --------------
Total assets........................................................ $ 144,429 $ 204,437
============== ==============
Warehouse borrowings.................................................... $ 97,455 $ 109,529
Drafts payable.......................................................... 21,875 44,021
Other liabilities....................................................... 9,991 12,852
Shareholders' equity.................................................... 15,108 38,035
-------------- --------------
Total liabilities and shareholders' equity.......................... $ 144,429 $ 204,437
============== =============
</TABLE>
On May 6, 1998, the Company completed its Offering of 3,829,500 common
shares, including 330,000 common shares sold by selling shareholders and
3,499,500 newly-issued common shares sold by the Company, at a price of $10.00
per share, for gross proceeds to the Company of $34,995,000, not including the
$1,544,400 received by the Company upon exercise by the selling shareholders of
options to purchase 330,000 common shares at $4.68 per share. These options were
exercised by the selling shareholders to acquire the common shares they sold in
the Offering. The net proceeds to the Company from the sale of shares offered by
it in the Offering, after deducting the underwriting discount and the expenses
of the Offering, were approximately $31,045,350.
The Company's December 31, 1998 balance sheet reflects the following in
connection with the Offering: (1) the distribution from retained earnings of a
$24.1 million dividend (including the $5.4 million tax distribution to existing
shareholders on April 10, 1998) to the Company's then existing shareholders,
effective immediately before the closing of the Offering and payable out of the
proceeds of the Offering, equal to the entire amount of Rock's income taxed or
taxable to the existing shareholders while Rock was an S corporation, but not
yet distributed to them (the "Shareholder Distribution Amount"), (2) the
establishment of a deferred tax asset of $1.9 million along with the creation of
a current income tax liability of approximately $0.9 million in connection with
the termination of the Company's S corporation status as of May 6, 1998, (3) the
repayment by one of the Company's shareholders of the entire outstanding balance
of shareholder advances (approximately $1.6 million) with his share of the
Shareholder Distribution Amount, and the Company's use of that cash to repay a
portion of the amounts outstanding under its warehouse line of credit, (4) the
receipt by the Company of approximately $1.5 million upon exercise by certain of
the Company's option holders of 330,000 options at $4.68 a share to acquire the
common shares they sold in the Offering and the
Page 42 of 80
<PAGE> 43
Company's application of the net proceeds therefrom to repay a portion of the
amounts outstanding under its warehouse line of credit, and (5) the sale of the
common shares offered by the Company in the Offering and the application of the
net proceeds therefrom to fund the Shareholder Distribution Amount and repay a
portion of the amounts outstanding under its warehouse line of credit. Due to
the payment of the estimated accumulated Subchapter S corporate earnings paid to
the shareholders in the Shareholder Distribution Amount of $24.1 million, the
Company does not expect to have any undistributed "S" corporation earnings. The
principal component of Rock's deferred tax asset is related to the temporary
differences between tax and book accounting for recognition of gains on sales of
mortgage loans. The amount of the deferred tax asset initially recorded was
based on the amount of such temporary differences at May 6, 1998, the date of
revocation of Rock's S corporation status.
Cash and cash equivalents increased in 1998 primarily due to the
proceeds of the Company's Offering, additional warehouse borrowings and cash
generated from operations, partially offset by cash used to pay the Shareholder
Distribution Amount. This cash is normally used to pay down the warehouse
borrowings. In order to demonstrate the availability of this liquidity, the
Company borrowed additional cash under its warehouse line of credit at December
31, 1998 for four days. Mortgage loans held for sale increased due to more loans
being closed than were sold in 1998. See "Results of Operations." The $3.0
million increase loans held for investment is the result of Sub-Prime Home
Equity Loan secondary market turmoil and a more selective process by the
purchasers of this product. Loans that had previously met the guidelines of
these purchasers were no longer meeting the investment criteria, which caused
the loans to be less liquid and necessitated reclassification from loans held
for sale. Property and equipment increased due to new Fresh Start store and
Conventional Mortgage Lending branch openings. Other assets at December 31, 1998
include approximately $1.9 million of deferred income taxes, approximately $1.2
million of miscellaneous assets, approximately $1.0 million of shareholders'
advances and approximately $50,000 of real estate owned as a result of
foreclosures.
The combination of warehouse borrowings and drafts payable increased
due to borrowings to finance the increase in volumes of originations and holding
loans for longer periods of time. See "Results of Operations." The increase in
other liabilities is due to increased accrued expenses and other liabilities,
primarily as a result of the $2.0 million accrual for closing nine Fresh Start
stores and increases in accrued payroll and accrued income taxes reflecting the
change to a C corporation, and increased trade payables relating to increases in
the volume of loans closed and financing for equipment acquisitions.
Shareholders' equity reflects the increase due to the receipt of approximately
$31.0 million in net proceeds from the Company's Offering that closed on May 6,
1998 and approximately $1.5 million in proceeds from the exercise of stock
options by selling shareholders in the Offering, and net income, less
distributions to shareholders of the Shareholder Distribution Amount, other
distributions to pay tax liabilities incurred by the shareholders as a result of
the Company's status as an S corporation until May 6, 1998, approximately $1.3
million paid to redeem 244,000 common shares and cash dividends paid to C
corporation shareholders.
Net cash provided by operating activities in 1998 was approximately
$10.5 million, compared to approximately $16.6 million used in operating
activities in 1997. Cash was provided primarily by (i) the Company's net income
in 1998 (approximately $17.1 million before
Page 43 of 80
<PAGE> 44
depreciation and amortization, provision for credit losses, deferred income
taxes and net gain on sales of marketable securities in 1998, compared to
approximately $10.8 million in 1997), (ii) an increase in drafts payable, which
represent funds advanced for loan closings that have not yet been drawn against
the warehouse line of credit (approximately $22.1 million in 1998, compared to
approximately $7.0 million in 1997), (iii) an increase in accounts payable and
accrued expenses and other liabilities, primarily as a result of the $2.0
million accrual for closing nine Fresh Start stores, the increase in loan
closings and the number of stores and branches opened during 1998 (approximately
$5.2 million in 1998, compared to approximately $2.6 million in 1997) and (iv) a
decrease in other assets (approximately $0.3 million in 1998, compared to an
approximately $0.6 million increase in 1997). These sources of cash were
partially offset primarily by cash used during 1998 to increase mortgage loans
held for sale (approximately $34.3 million in 1998, compared to approximately
$36.3 million in 1997).
Net cash used in investing activities during 1998 was approximately
$8.8 million, compared to approximately $0.7 million provided by investing
activities during 1997. Cash was used primarily to purchase equipment for new
stores, acquisition of computer equipment, and costs incurred from the
development of the Internet site (approximately $6.0 million in 1998, compared
to approximately $5.6 million in 1997), and for real estate owned and loans held
for investment (approximately $3.6 million in 1998, compared to $1.3 million in
1997). These uses of cash were partially offset primarily by cash provided by
repayment of shareholder advances (approximately $0.6 million in 1998, compared
to approximately $0.9 million in 1997). During 1997, these uses of cash were
more than offset by cash provided by the proceeds of the net sales of marketable
securities (approximately $6.7 million).
Net cash provided by financing activities during 1998 was approximately
$16.8 million, compared to approximately $24.6 million during 1997. Cash was
provided by (i) the proceeds of the Offering and the exercises of stock options,
including those exercised by the selling shareholders in the Offering
(approximately $32.6 million in 1998), and (ii) additional borrowings under the
warehouse line of credit in 1998 primarily to demonstrate the availability of
Rock's liquidity at year end, partially offset by the repayment of a portion of
the warehouse line of credit with a portion of the net proceeds of the Offering
(approximately $18.7 million in 1998, compared to approximately $11.7 million in
1997). These sources of cash were partially offset by (i) the payment of the
Shareholder Distribution Amount (approximately $19.6 million in 1998) and a tax
distribution to existing shareholders in April 1998 (approximately $5.4 million
in 1998, compared to approximately $7.2 million of shareholder distributions in
1997), (ii) net payments under Rock's reverse repurchase agreement
(approximately $6.6 million in 1998, compared to net borrowings of approximately
$18.2 million in 1997), (iii) the repayment of all notes payable (approximately
$1.9 million in 1998, compared to borrowings of approximately $1.9 million in
1997), (iv) approximately $1.3 million used in 1998 to repurchase 244,000 common
shares, and (v) approximately $0.8 million used in 1998 to pay dividends to
shareholders.
The Company's operations require continued access to financing sources.
The Company's primary operating cash requirements include the funding of (i)
loan closings, (ii) capital expenditures in connection with the expansion of its
operations, (iii) income tax payments due to the Company's net income, (iv)
expenses of closing eight Fresh Start stores and one
Page 44 of 80
<PAGE> 45
marketing center, (v) ongoing administrative and other operating expenses,
including compensation of additional employees expected to be hired in 1999,
(vi) repayments of borrowings and related interest, and (vii) payments of
dividends.
Adequate credit facilities and other sources of funding, which permit
the Company to fund the loans it closes, are essential to the continuation of
the Company's ability to close loans. After using available working capital, the
Company borrows money to fund its loan closings and, except at the end of a
quarter, repays those borrowings as the loans are sold. Loan origination fees
are sometimes included in the principal balance of the loan closed, although the
Company may receive these fees either at the closing of the loan or at the time
of a warehouse line of credit borrowing or reverse repurchase sale of the loan.
Upon the sale of loans and the subsequent repayment of the borrowings, the
Company's working capital and credit facilities then become available to fund
additional loan closings.
The Company has $400 million of warehouse financing facilities, an
increase from $190 million of warehouse financing facilities as of December 31,
1997. The Company's warehouse line of credit currently provides for up to $200
million principal amount of demand loans secured by loans held for sale and
other assets of the Company. Loans under the warehouse line of credit bear
interest at rates that vary depending on the type of underlying loan, and the
loans are subject to sublimits, advance rates and warehouse terms that vary
depending on the type of underlying loan. Interest rates vary from the bank's
prime rate to 1.5% to 2.5% over the federal funds rate. The effective weighted
average interest rate for this arrangement in 1998 was 6.83%. The warehouse line
of credit requires the Company to maintain a minimum tangible effective net
worth, a maximum leverage ratio, a minimum current ratio and minimum working
capital. The warehouse line of credit expires, with respect to loans committed
to be made by any particular lender, 75 days after that lender demands payment,
unless that lender is replaced. As of March 11, 1999, the Company had borrowed
$53.5 million under this facility and had a maximum of $32 million available for
additional borrowings and was in compliance with all associated financial
covenants. There would be $146.5 of borrowing capacity available if the
collateral existed.
In addition to the $200 million warehouse line of credit, the Company's
reverse repurchase arrangement provides that the lender, an affiliate of one of
the representatives of the underwriters in the Company's Offering, will purchase
from the Company at par, subject to the Company's agreement to repurchase on a
daily basis, up to $200 million of fully-amortizing, first or junior lien
residential mortgage loans and home equity loans that comply with the Company's
origination guidelines and conform to whole and bulk loan sale requirements.
This agreement is not a committed facility and the lender may elect to
discontinue the repurchase agreement at any time. The term of any financing
under the repurchase agreement matures and may be renewed on a daily basis. In
any event, the arrangement terminates in March 2000. Management intends to renew
this facility. The effective weighted average interest rate to the Company of
this arrangement in 1998 was 6.61%. The Company uses this facility as a
supplemental borrowing facility to fund loans closed by the Company until they
are sold. As of March 11, 1999, the Company had financed $7.7 million of loans
under this facility and had no additional available to draw against. There would
be an additional $192.3 million of borrowing capacity if the collateral existed.
Page 45 of 80
<PAGE> 46
The net proceeds of the Offering, together with cash flows from
operations, are expected to be sufficient to fund the Company's liquidity
requirements for the next 12 months, if the Company's future operations are
consistent with management's expectations. The Company, however, expects that
eventually it will need to arrange for additional sources of capital through the
issuance of debt, equity or additional bank borrowings. The Company has no
commitments for any such additional financing, and there can be no assurance
that the Company will be able to obtain any such additional financing at the
times required and on terms and conditions acceptable to the Company. In such
event, the Company's growth and operations could be curtailed. If the Company
begins to securitize its assets or significantly increases its retained mortgage
servicing rights, the Company's liquidity could be materially adversely
affected.
HEDGING
Rock closes loans and subsequently sells them for cash to unaffiliated
wholesale purchasers. If prevailing interest rates rise between the time Rock
closes loans or fixes the interest rates on such loans and the time such loans
are priced for sale, the spread between the amount loaned and the amount the
wholesale purchaser is willing to pay for the loan narrows, resulting in a loss
in value of the loan. To protect against such losses in respect of its
Conventional Loans (where the interest spread is lower), Rock currently enters
into forward sales commitments for future delivery of FNMA and Freddie Mac
securities to fix the sales price of the conventional loans expected to be
closed or hedges the value of those loans through periodic purchases of
short-duration treasury-based options. Rock had $222.1 million of such forward
sales commitments as of December 31, 1998 with various investment bankers. Rock
generally assigns these commitments to third parties along with Conventional
Loans necessary to obtain the FNMA and Freddie Mac securities deliverable
pursuant to those commitments. Before entering into forward commitments or
hedging, Rock performs an analysis of its Conventional Loans and Conventional
Loan applications with committed interest rates taking into account such factors
as the estimated portion of loan applications that will ultimately be funded,
interest rates, inventories of loans and applications and other factors to
determine the type and amount of forward commitment and hedging transactions.
Rock attempts to make forward commitments for or hedge substantially all of its
estimated interest rate risk on its Conventional Loans. Rock does not believe
that hedging its interest rate risk with respect to its Sub-Prime Loans is cost
effective as a result of their generally higher interest spreads combined with
their relative lack of sensitivity to changes in market interest rates and
considering the period during which Rock currently intends to accumulate such
loans for sale.
IMPACT OF INFLATION
Inflation has not had a material effect on Rock's results of
operations. Increases in the inflation rate generally result in increased
interest rates. Because Rock borrows money at variable rates, increased interest
rates will increase the borrowing costs of Rock. Inflation will also increase
the operating costs of Rock. Rock may not be able to pass on the effects of
inflation and the accompanying higher interest rates to its customers due to
usury or other regulatory restrictions or competitive pressures. Profitability
may also be affected by the level of and fluctuation in interest rates, which
affect Rock's ability to earn a spread between interest
Page 46 of 80
<PAGE> 47
received on its loans and the costs of its borrowings. The profitability of Rock
is likely to be adversely affected during any period of unexpected or rapid
changes in interest rates. A substantial and sustained increase in interest
rates could adversely affect the ability of Rock to close loans. Fluctuating
interest rates also may affect the net interest income earned by Rock resulting
from the difference between the yield to Rock on loans held pending sales and
the interest paid by Rock for funds borrowed under Rock's warehouse financing
facilities.
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. Statement 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. Upon initial
application, hedging relationships must be designated anew and documented
pursuant to the provisions of Statement 133. Statement 133 may not be applied
retroactively to financial statements for prior periods. Management has not yet
evaluated the impact of the implementation of this statement at this time.
YEAR 2000 -DISCLOSURE
STATE OF READINESS
Rock Financial has developed a Year 2000 project plan that addresses
both technological and non-technological systems, including embedded systems for
all business units. The Company has designated a Year 2000 project team to lead
the efforts using a phased approach. Both internal and external resources are
employed to identify, correct and test systems to achieve Year 2000 compliance.
The Company is also reviewing the Year 2000 readiness of third parties that
provide services essential to the Company's operations.
The plan consists of nine phases. The initial phases of planning,
awareness, inventory, triage and detailed assessment are complete. The
resolution phase, which defines the strategy for remediation is underway and is
expected to be completed by May 15, 1999. Test planning and testing have begun
and are projected to be completed by March 31, 1999. The deployment phase
includes the installation of compliant hardware and software into the production
environment. This phase has begun and many of the mission critical systems have
been upgraded or replaced with compliant systems. This phase is expected to be
completed by May 15, 1999. With regard to third parties, the Company is
communicating with key suppliers and other business partners to establish and
monitor their levels of Year 2000 readiness. Our Year 2000 project is subject to
modification and may be revised periodically as further information is
developed. The Company believes that its project will be completed without any
material adverse effects on the Company.
Page 47 of 80
<PAGE> 48
ESTIMATED COST
Cost estimates are in the range of $200,000 to $500,000. As of December
31, 1998, approximately $160,000 of costs have been incurred. Cost estimates are
continually being reviewed and adjusted, if appropriate. The Company's Year 2000
project cost is not expected to have a material impact on its liquidity or
capital resources.
RISKS OF THE COMPANY'S YEAR 2000 ISSUES
Based on current information, the Company believes the Year 2000
problem will not have a material adverse effect on the Company, its business or
its financial condition. The Company cannot predict the actual effect to it of
the Year 2000 problem. Many uncertainties exist as to whether broad-based or
systemic economic failures may occur.
YEAR 2000 CONTINGENCY PLANS
The Company is reviewing existing contingency plans for potential
modifications to address specific Year 2000 issues. The Company's key
operational systems are being reviewed and strengthened to address business
continuity requirements. Business continuity plans will 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 modifications
are made and as the status of third party readiness becomes better known.
Page 48 of 80
<PAGE> 49
ITEM 7A. QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK
Interest rate risk is the largest market risk affecting Rock Financial.
Interest rate risk is the possibility that changes in interest rates will cause
unfavorable changes in net income and in the value of interest rate sensitive
assets, liabilities and commitments. As part of its risk management programs,
the Company purchases financial instruments and enters into financial agreements
with off-balance sheet risk in the normal course of business to manage its
exposure to interest rate risk with respect to its Prime Loans, but not with
respect to its Sub-Prime Loans. See "Item 1. Business--Sale of Loans--Interest
Rate Risk Management" for a description of how Rock manages its interest rate
risk exposure, including a discussion of Rock's objectives, general strategies
and instruments used to manage those exposures. Rock uses these financial
instruments for the explicit purpose of managing interest rate risks to protect
the value of its Prime Loans held for sale and the Prime Loan commitment
pipeline. The Company uses 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 the Company's 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 (the loans, pipeline, commitments
and derivatives together, the "hedge position") are valued daily. 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. Rock does not enter into instruments for trading
purposes.
The Company evaluates 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 the Company's
historical experience. The Company's exposure is analyzed daily and reviewed at
least monthly by the Secondary Marketing Executive Committee, which includes in
its membership the Director of Secondary Marketing, the Chief Financial Officer
and the Chairman of the Board, President, and Chief Executive Officer.
Both modeling techniques described above were applied to the hedge
position, held by the Company on December 31, 1998, 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
Page 49 of 80
<PAGE> 50
basis point increase in interest rates (determined by management to reflect a
reasonably possible near-term change) would have reduced the fair value of the
hedge position 14 basis points from 2.51% to 2.37% but would have increased
revenue by approximately $27,000 based on an assumption that more loans would
have closed due to an increase in interest rates. A 50 basis point decrease in
interest rates (determined by management to reflect a reasonably possible
near-term change) would have reduced the fair value of the hedge position 9
basis points from 2.51% to 2.42% and would have decreased revenue by
approximately $450,000 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. See Note 12 "Fair Value of Financial Instruments" in "Notes
to Financial Statements" located elsewhere in this Report. The Company does not
believe that its spread income would be materially affected by interest rate
changes as the interest it charges on its mortgage loans can change faster than
the interest on its indebtedness.
The table below provides information about the Company's other
financial instruments that are sensitive to changes in interest rates, including
debt obligations and Sub-Prime loans. 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 December 31, 1998. The instruments' actual cash
flows are all denominated in U.S. dollars.
<TABLE>
<CAPTION>
December 31, 1998
Expected Maturity Date
(amounts in thousands) 1999 2000-2003 Thereafter Total Fair Value
-------------- ----------------- --------------- --------------------- ------------------
ASSETS:
<S> <C> <C> <C> <C> <C>
Sub-Prime Loans $30,542 $0 $0 $30,542 $30,542
Weighted Average Interest Rate:
11.83% NA NA 11.83%
LIABILITIES:
Warehouse Line of Credit $98,008 $0 $0 $98,008 $98,008
Weighted Average Interest Rate:
6.20% NA NA 6.20%
Reverse Repurchase Arrangement $11,521 $0 $0 $11,521 $11,521
Weighted Average Interest Rate:
5.97% NA NA 5.97%
</TABLE>
Page 50 of 80
<PAGE> 51
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
<TABLE>
<CAPTION>
ROCK FINANCIAL CORPORATION
INDEX TO FINANCIAL STATEMENTS
<S> <C>
INDEPENDENT AUDITORS' REPORT...................................52
BALANCE SHEETS.................................................53
STATEMENTS OF INCOME...........................................54
STATEMENTS OF SHAREHOLDERS' EQUITY.............................55
STATEMENTS OF CASH FLOWS.......................................56
NOTES TO FINANCIAL STATEMENTS..................................57
</TABLE>
Page 51 of 80
<PAGE> 52
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Directors of
Rock Financial Corporation:
We have audited the accompanying balance sheets of Rock Financial Corporation
(the "Company") as of December 31, 1997 and 1998, and the related statements of
income, shareholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
1997 and 1998, and the results of its operations and its cash flows for each of
the years in the three-year period ended December 31, 1998, in conformity with
generally accepted accounting principles.
As discussed in note 1 to the financial statements, the Company changed its
method of accounting for software developed for internal use to adopt the
provisions of the American Institute of Certified Public Accountants' Statement
of Position No. 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use" in 1998.
/s/ KPMG LLP
Detroit, Michigan
January 28, 1999
Page 52 of 80
<PAGE> 53
<TABLE>
<CAPTION>
ROCK FINANCIAL CORPORATION
BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
1997 1998
------------------ ------------------
ASSETS
<S> <C> <C>
Cash and cash equivalents............................................... $11,946,992 $30,081,524
Mortgage loans held for sale............................................ 121,343,814 155,631,112
Mortgage loans held for investment (net of allowance for losses of
$270,000 and $634,851 at December 31, 1997 and 1998, respectively). 810,293 3,766,171
Real estate owned....................................................... 158,271 49,989
Shareholders' advances.................................................. 1,626,519 994,372
Property and equipment, net............................................. 7,010,537 10,775,733
Deferred income taxes................................................... -- 1,945,000
Other assets............................................................ 1,532,471 1,193,552
------------ -------------
Total assets............................................................ $144,428,897 $204,437,453
============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Warehouse line of credit........................................... $79,293,856 $98,008,105
Reverse repurchase agreement....................................... 18,161,423 11,521,065
Notes payable...................................................... 1,944,445 --
Drafts payable..................................................... 21,875,184 44,021,087
Accounts payable................................................... 3,255,503 4,680,275
Accrued expenses and other liabilities............................. 4,790,350 8,171,773
------------ -------------
Total liabilities.............................................. 129,320,761 166,402,305
------------ -------------
Shareholders' equity:
Common shares, $.01 par value. Authorized 50,000,000
shares; issued and outstanding 10,000,000 shares and 13,590,500 shares
at December 31, 1997 and December 31, 1998, respectively....... 100,000 135,905
Additional paid-in capital......................................... 1,423,750 26,297,782
Retained earnings.................................................. 13,584,386 11,601,461
------------ -------------
Total shareholders' equity..................................... 15,108,136 38,035,148
------------ -------------
Total liabilities and shareholders' equity.............................. $144,428,897 $ 204,437,453
============ =============
The accompanying notes are an integral part of the financial statements.
</TABLE>
Page 53 of 80
<PAGE> 54
<TABLE>
<CAPTION>
ROCK FINANCIAL CORPORATION
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
1996 1997 1998
------------------ ----------------- -----------------
<S> <C> <C> <C>
Revenue:
Interest income................................. $4,267,824 $8,082,448 $13,169,754
Interest expense................................ 3,669,393 5,149,881 7,220,969
---------- ----------- ----------
Net interest margin......................... 598,431 2,932,567 5,948,785
Provision for credit losses..................... --- 300,000 567,738
---------- ----------- ----------
Net interest margin after provision for
credit losses........................... 598,431 2,632,567 5,381,047
Loan fees and gains on sale of mortgages............... 27,959,437 47,084,309 84,401,123
Loan fees and gains and losses on sale of
mortgages............................... 27,959,437 47,084,309 84,401,123
Net gain on sale of marketable securities....... 991,219 2,221,905 --
Other income (loss)............................. 6,489 171,085 (20,017)
---------- ----------- ------------
29,555,576 52,109,866 89,762,153
---------- ----------- ----------
Expenses:
Salaries, commissions and employee benefits..... 18,722,596 26,402,627 40,150,541
General and administrative expenses............. 4,645,820 7,629,889 13,424,027
Marketing expenses.............................. 2,392,994 5,369,515 13,152,793
Depreciation and amortization................... 663,428 1,292,479 2,196,520
Loss on store closings.......................... -- -- 2,000,000
---------- ----------- ------------
26,424,838 40,694,510 70,923,881
---------- ----------- ----------
Income before income taxes............................. 3,130,738 11,415,356 18,838,272
Income tax on "C" corporation earnings................. -- -- 3,535,281
Income tax benefit due to conversion of "S" corp -- -- (950,939)
------------ ----------- ------------
Net income $3,130,738 $11,415,356 $16,253,930
========== =========== ===========
Unaudited pro forma information (note 18):
Income before income taxes 11,415,356 18,838,272
Provision for pro forma income taxes............ 4,109,528 6,593,395
---------- ---------
Pro forma net income............................ $7,305,828 $12,244,877
========== ===========
Pro forma earnings per share:
Basic ........................................ $0.55 $0.89
===== =====
Diluted ........................................ $0.51 $0.85
===== =====
Dividends declared per share........................... $ -- $.06
===== =====
Pro forma weighted average number of shares outstanding:
Basic ........................................ 13,330,000 13,776,507
========== ==========
Diluted ........................................ 14,282,914 14,355,195
========== ==========
The accompanying notes are an integral part of the financial statements.
</TABLE>
Page 54 of 80
<PAGE> 55
<TABLE>
<CAPTION>
ROCK FINANCIAL CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE SHAREHOLDERS'
SHARES CAPITAL EARNINGS INCOME EQUITY
------ ---------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance December 31, 1995..................... $ 100,000 $ 1,423,750 $ 9,753,849 $ 5,249,385 $16,526,984
Year ended December 31, 1996:
Net Income.................................... 3,130,738 3,130,738
Other comprehensive loss:
Unrealized holding losses on securities
arising during the year................ ( 2,821,797) (2,821,797)
Less: reclassification adjustment for
gains included in net income........... (991,219) (991,219)
--------- ---------
Other comprehensive loss................. (3,813,016) (3,813,016)
-----------
Comprehensive loss............................ (682,278)
Shareholder distributions..................... (3,498,567) (3,498,567)
--------- ------------ ------------- -------------- -------------
Balance December 31, 1996..................... 100,000 1,423,750 9,386,020 1,436,369 12,346,139
Year ended December 31, 1997:
Net Income.................................... 11,415,356 11,415,356
Other comprehensive loss:
Unrealized holding gains on securities
arising during the year................ 785,536 785,536
Less: reclassification adjustment for
gains included in net income........... (2,221,905) (2,221,905)
----------- -----------
Other comprehensive loss................. (1,436,369) (1,436,369)
-----------
Comprehensive income ......................... 9,978,987
Shareholder distributions..................... (7,216,990) (7,216,990)
--------- ------------ ------------- -------------- -------------
Balance December 31, 1997..................... 100,000 1,423,750 13,584,386 -- 15,108,136
Year ended December 31, 1998:
Net Income.................................... 16,253,930 16,253,930
Shareholder distributions..................... (5,380,500) (5,380,500)
Distribution to S corporation shareholders in
connection with conversion to a C
corporation................................. (6,754,718) (12,029,585) (18,784,303)
Proceeds from initial public offering......... 34,995 31,010,355 31,045,350
Cash dividends to C corporation shareholders
($.06 per share)........................... (826,770) (826,770)
Tax benefit from the exercise of non-qualified
stock options............................... 360,000 360,000
Stock options exercised....................... 3,350 1,564,450 1,567,800
Repurchase of 244,000 common shares........... (2,440) (1,306,055) (1,308,495)
---------------------- ------------ ----------- -------------
Balance December 31, 1998..................... $ 135,905 $26,297,782 $ 11,601,461 $ -- $38,035,148
========= =========== ============ =========== ============
The accompanying notes are an integral part of the financial statements.
</TABLE>
Page 55 of 80
<PAGE> 56
<TABLE>
<CAPTION>
ROCK FINANCIAL CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
1996 1997 1998
-------------- --------------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................ $ 3,130,738 $ 11,415,356 $ 16,253,930
------------- --------------- ---------------
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization................................ 663,428 1,292,479 2,196,520
Provision for credit losses.................................. -- 300,000 567,738
Net loss on sale of fixed assets and real estate owned....... 38,322
Net gain on sales of marketable securities................... (991,219) (2,221,905) ---
Mortgage loans held for sale - originations.................. (1,080,765,776) (1,203,722,723) (2,303,958,352)
Mortgage loans held for sale - sales......................... 1,069,751,958 1,167,388,304 2,269,671,053
Change in assets and liabilities:
Deferred income taxes...................................... -- -- (1,945,000)
Other assets............................................... (314,122) (625,625) 338,920
Drafts payable............................................. 7,513,046 6,978,509 22,145,903
Accounts payable........................................... 1,215,113 1,256,564 1,424,772
Accrued expenses and other liabilities..................... (1,996,968) 1,293,858 3,741,424
-------------- --------------- ---------------
Total adjustments....................................... (4,924,540) (28,060,539) (5,778,700)
------------- --------------- ----------------
Net cash provided by (used in) operating activities..... (1,793,802) (16,645,183) 10,475,230
------------- --------------- ---------------
Cash flows provided by (used in) investing activities:
Proceeds from sale of marketable securities.................... 26,056,131 10,846,241 --
Purchase of marketable securities............................... (17,613,113) (4,106,842) __
Proceeds from sale of fixed assets and real estate owned........ 144,730
Net increase in real estate owned and loans held for investment -- (1,268,564) (3,569,108)
Purchase of equipment........................................... (2,084,296) (5,621,702) (5,990,995)
Shareholder (advances) repayments............................... (1,978,492) 892,823 632,147
------------- --------------- ---------------
Net cash provided by (used in) investing activities........ 4,380,230 741,956 (8,783,226)
------------- --------------- ----------------
Cash flows provided by financing activities:
Net borrowings under warehouse line of credit................... 3,514,047 11,672,590 18,714,249
Net borrowings (payments) under reverse repurchase agreement.... -- 18,161,423 (6,640,358)
Net (payments) borrowing under notes payable.................... 1,944,445 (1,944,445)
Proceeds from initial public offering........................... 31,045,350
Proceeds from exercised options................................. 1,567,800
Cash dividends to "C" corporation shareholders.................. (826,770)
Purchase of common
shares........................................................ (1,308,495)
Shareholder distributions....................................... (3,498,567) (7,216,990) (24,164,803)
------------- --------------- ----------------
Net cash provided by financing activities.................. 15,480 24,561,468 16,442,528
------------- --------------- ---------------
Net increase in cash and cash equivalents......................... 2,601,908 8,658,241 18,134,532
Cash and cash equivalents, beginning of
year............................................................ 686,843 3,288,751 11,946,992
------------- --------------- ---------------
Cash and cash equivalents, end of year............................ $ 3,288,751 $ 11,946,992 $ 30,081,524
============= =============== ===============
Supplemental disclosure of cash flow
information:
Cash paid during the year for interest.......................... $ 3,915,704 $ 4,994,752 $ 7,019,991
============= =============== ===============
Transfers of loans from held for sale to
held for investment........................................... $ -- $ 1,095,293 $ 3,320,729
============= =============== ===============
Transfers of loans from held for investment
to real estate owned.......................................... $ -- $ 173,271 $ 103,649
============= =============== ===============
The accompanying notes are an integral part of the financial statements.
</TABLE>
Page 56 of 80
<PAGE> 57
ROCK FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(1) NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Rock Financial Corporation ("Rock" or the "Company") is a company
marketing conventional, government insured and sub-prime debt
consolidation and home financing loans, secured primarily by first or
second mortgages on one-to four-family, owner-occupied residences. Rock
originates loans through 18 stores and branches, one call center, and
an Internet site. The Company originates 100% of its loans through
marketing directly to consumers.
The Company's 1997 and 1998 business (until the third quarter of 1998)
was comprised of three major operating divisions: (1) the Fresh Start
division, primarily originating sub-prime home equity loans to
individuals with impaired credit characteristics, high levels of debt
service to income, unfavorable past credit experience, limited credit
history, limited employment history or unverifiable income, (2) the
Specialty Lending division, primarily originating home equity second
mortgage loans to individuals with good credit histories but little or
no equity in their homes, and (3) the Conventional Mortgage Lending
division, originating conforming and non-conforming prime mortgages. At
the end of September 1998, the Company decided to stop originating high
LTV loans due to concerns of liquidity that resulted from a diminishing
base of purchasers of these loans and to take advantage of the high
demand for conventional loans. In 1998, the Company originated its
production from 28 stores and branches, one marketing center and one
call center operating in Michigan, Illinois, Ohio, Texas, Missouri,
Nevada and Indiana (see note 17).
On May 6, 1998, the Company completed its initial public offering (the
"Offering") of 3,829,500 common shares, including 330,000 common shares
sold by selling shareholders and 3,499,500 newly-issued common shares
sold by the Company, at a price of $10.00 per share, for gross proceeds
to the Company of $34,995,000, not including the $1,544,400 received by
the Company upon exercise by the selling shareholders of options to
purchase 330,000 common shares at $4.68 per share. These options were
exercised by the selling shareholders to acquire the common shares they
sold in the Offering. The net proceeds to the Company from the sale of
shares offered by it in the Offering, after deducting the underwriting
discount and the expenses of the Offering, were approximately
$31,045,350.
Simultaneously with the closing of the Company's Offering, the Company
ceased to be taxed as an S corporation under the Internal Revenue Code
of 1986, as amended. In connection with the termination of its S
corporation status, the Company paid a shareholder distribution amount
out of the net proceeds of the Offering to the Company's shareholders
existing immediately before the closing of the Offering. The
shareholder distribution amount was approximately $24.2 million, and is
subject to adjustment upon final determination of the amount of taxable
income through May 5, 1998 (see note 7).
Page 57 of 80
<PAGE> 58
ROCK FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(A) CASH EQUIVALENTS
The Company considers all highly liquid investments purchased
with a maturity of three months or less to be cash
equivalents. Included in cash was $257,730 and $806,839 of
restricted cash for mortgagor escrows at December 31, 1997 and
1998, respectively.
(B) MARKETABLE SECURITIES
The Company accounts for marketable securities in accordance
with Statement of Financial Accounting Standards No. 115,
Accounting for Certain Debt and Equity Securities ("SFAS
115"). All marketable securities are classified as available
for sale and are carried at fair value. Unrealized gains and
losses are included as a separate component of shareholders'
equity. Dividends on equity securities are recognized on the
ex-dividend date.
The Company continuously evaluates its marketable investment
securities for other-than-temporary or permanent impairment,
which is defined as being greater than 20% impaired for
greater than six consecutive months. When an investment
security is determined to have other-than-temporary or
permanent impairment, the loss is recognized through a charge
against income.
(C) MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale are valued at the lower of cost
or market, determined on an aggregate basis, based upon
commitments from investors to purchase such loans or upon
prevailing market rates.
(D) MORTGAGE LOANS HELD FOR INVESTMENT
Mortgage loans held for investment are stated at their
principal amount outstanding, net of an allowance for loan
losses. Interest on loans is accrued daily based on the
outstanding principal balance. Loans are generally placed on a
nonaccrual basis when principal or interest is past due 90
days or more and when, in the opinion of management, full
collection of principal and interest is unlikely. At the time
a loan is placed on nonaccrual status, interest previously
accrued but not yet collected is charged against current
income. Income on such loans is then recognized only to the
extent that cash is received and where future collection of
principal is probable. Loan origination fees and certain
direct loan origination costs are deferred and recognized over
the lives of the related loans as an adjustment of the yield.
(E) ALLOWANCE FOR LOSSES
The allowance for losses is based on management's periodic
evaluation of the potential loss exposure associated with the
portfolio of mortgage loans held for investment and costs to
be incurred due to the repurchase of mortgage loans or
indemnification of losses based on alleged violations of
representations and warranties customary to the mortgage
banking industry, and reflects an amount that, in management's
opinion, is adequate to absorb such estimated losses. In
Page 58 of 80
<PAGE> 59
ROCK FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
evaluating the potential exposure, management takes into
consideration numerous factors, including current economic
conditions, prior loss experience, the provisions of loan sale
agreements, the composition of the portfolio of mortgage loans
held for investment, and management's evaluation of the
collectibility of specific mortgage loans held for investment.
(F) REAL ESTATE OWNED
Real estate owned is recorded at the lower of the cost of
acquisition or the asset's fair value, net of disposal cost at
the time of foreclosure, which becomes the new basis for the
property. Any write-downs at date of acquisition are charged
to the allowance for losses. Expenses incurred in maintaining
assets and subsequent write-downs to reflect declines in value
are charged to general and administrative expenses.
(G) INVESTOR RESERVES
Investor reserves represent reserves for the estimated
repayment, where applicable, of a portion of the premium
received from investors on sales of certain sub-prime loans if
such loans are repaid in their entirety within a specified
time period after the sale of the loans (generally one year).
Provisions for premium recapture are determined based on
management's estimates of potential repayments, considering
factors such as historical premium recapture experience,
projected prepayments on loan sales, existence of prepayment
penalties to be paid by the borrower, and general economic
conditions. Actual premium recapture experience may vary from
management's estimates.
(H) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated
depreciation. Depreciation of property and equipment is
generally computed on a straight-line basis over the estimated
useful lives of the assets. Upon retirement or sale, the cost
of assets disposed of and the related accumulated depreciation
are removed from the accounts; any resulting gain or loss is
credited or charged to operations. Costs of maintenance and
repairs are charged to expense when incurred.
(I) REVENUE RECOGNITION
Loan origination revenue and associated incremental direct
costs on loans held for sale are deferred until the related
loan is sold. Gains and losses on loans are recognized at the
time of sale and are based upon the difference between the
selling price and the carrying value of the related loans
sold. Loan servicing revenue is earned as the related
principal is collected. Interest on mortgage loans held for
sale and mortgage loans held for investment is credited to
income as earned, and interest expense on related borrowings
is expensed as incurred.
The Company adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 125, Accounting for
Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, as of January 1, 1997. The
Page 59 of 80
<PAGE> 60
ROCK FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
impact of the adoption of this standard was not material to
the Company's financial position or results of operations.
(J) DERIVATIVE FINANCIAL INSTRUMENTS
The Company utilizes derivative financial instruments as part
of an overall interest rate risk and mortgage pipeline
management strategy. Derivative financial instruments utilized
by the Company include treasury-based options. The Company is
an end-user of derivative financial instruments and does not
conduct trading activities for derivatives. These derivative
financial instruments involve, to varying degrees, elements of
credit and market risk that are not recognized on the balance
sheet.
Credit risk is defined as the possibility that a loss may
occur from the failure of another party to perform in
accordance with the terms of the contract that exceeds the
value of existing collateral, if any. Market risk is the
possibility that future changes in market conditions may make
the derivative financial instrument less valuable. The Company
evaluates the risks associated with derivatives in much the
same way as the risks with on-balance-sheet financial
instruments. The derivative's risk of credit loss is generally
a small fraction of the notional value of the instrument and
is represented by the fair value of the derivative instrument.
The Company attempts to limit its credit risk by dealing with
creditworthy counterparties and obtaining collateral where
appropriate.
The Company uses treasury-based options in hedging its
interest rate risk exposure. Utilization of treasury-based
options involves some degree of basis risk. Basis risk is
defined as the risk that the hedge instrument's price does not
move as expected relative to the increase or decrease in the
market price of the hedged financial instrument. The Company
calculates an expected hedge ratio to attempt to mitigate a
portion of this risk.
The Company accounts for its options utilizing "split
accounting." The option's value is categorized into
"intrinsic" and "time value" components. The intrinsic value
is the amount that the option is "in the money." The time
value is the amount by which its price exceeds its intrinsic
value. Split accounting results in accounting for time value
and intrinsic value separately. The time value is amortized
over the option's exercise period. The intrinsic value is
recognized as a component of the gain or loss on settlement of
the option.
(K) INCOME TAXES
For the period between March 1, 1992 and May 5, 1998, the
Company had elected to have its income taxed directly to its
shareholders, pursuant to the S corporation provisions of the
Internal Revenue Code. Accordingly, no provision for income
taxes has been reflected in the accompanying financial
statements for the years ended December 31, 1996 and 1997.
Effective May 6, 1998, the Company's S corporation election
terminated. Accordingly, its income in 1998 has been allocated
pro rata (based on the number of days in the period) to the
Page 60 of 80
<PAGE> 61
ROCK FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
period from January 1, 1998 through May 5, 1998 (S corporation
period) and the period from May 6, 1998 through December 31,
1998 (C corporation period) on a preliminary basis at December
31, 1998, subject to the preparation and filing of the income
tax returns for 1998. Income for the C corporation period is
subject to tax at the corporate level. Therefore, a provision
for income taxes has been reflected in the accompanying
financial statements for the year ended December 31, 1998.
The Company uses the asset and liability method of accounting
for income taxes. Under the asset and liability method,
deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or
settled. The effect on different tax assets and liabilities of
a change in tax rates is recognized in income in the period
that includes the enactment date.
(L) ADVERTISING COSTS
Advertising costs are incurred for non-direct response
advertising. Accordingly, the costs of producing the
advertising are expensed as incurred, while the costs of
communicating the advertising are expensed when the
advertising space or airtime is first used.
(M) MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
(N) RECLASSIFICATIONS
Certain amounts from the prior year have been reclassified to
conform with current year presentation.
(O) COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted SFAS No. 130,
Reporting Comprehensive Income. SFAS No. 130 establishes
standards for reporting and presentation of comprehensive
income and its components (revenues, expenses, gains and
losses) in a full set of general-purpose financial statements.
Comprehensive income for the Company consists of net income
and the net unrealized gains (losses) on marketable securities
and is presented in the accompanying statement of
shareholders' equity. The Statement requires additional
disclosures in the financial statements; it does not affect
the Company's
Page 61 of 80
<PAGE> 62
ROCK FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
financial position or results of operations. Prior year
financial statements have been reclassified to conform to the
requirements of SFAS No. 130.
(P) SEGMENT REPORTING
On January 1, 1998, the Company adopted SFAS No. 131,
Disclosures About the Segments of an Enterprise and Related
Information. SFAS No. 131 establishes standards for the way
public business enterprises report information about their
operating segments and requires them to report selected
information about operating segments, products and services,
activities in different geographic areas, and its reliance on
major customers. SFAS No. 131 requires a "management approach"
for identifying reportable segments based on the way that
management organizes the segments within the enterprise for
making operating decisions and assessing performance. The
Company's reportable segments include its Fresh Start
division, its Conventional Mortgage Lending division, and its
Specialty Lending division. The Statement requires additional
disclosures in the financial statements; it does not affect
the Company's financial position or results of operations.
(Q) COMPUTER SOFTWARE COSTS
During 1998, the Company adopted the American Institute of
Certified Public Accountants' Statement of Position No. 98-1,
Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use. This Statement of Position (SOP)
provides guidance on accounting for the costs of computer
software developed or obtained for internal use. As a result
of adoption of SOP 98-1, the Company has capitalized
approximately $450,000 of costs associated with the
development of software to be used in its Internet web site.
Such costs will be depreciated over a three-year useful life
beginning January 1999 as this software was placed in service
at year-end 1998.
(R) EARNINGS PER SHARE
Basic earnings per share are computed based on the weighted
average number of common shares outstanding during the year.
Diluted earnings per share are computed based on the weighted
average number of common shares and common share equivalents
during the year.
(2) MARKETABLE SECURITIES
Realized gains and losses on marketable securities are computed based
on the specific identification method. Realized gains of $4,511,466 and
$3,156,783, and realized losses of $3,520,247 and $646,895 on the sale
of marketable securities for the years ended December 31, 1996 and
1997, respectively, are included in the determination of net income.
Page 62 of 80
<PAGE> 63
ROCK FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(3) MORTGAGE LOANS HELD FOR SALE AND HELD FOR INVESTMENT
<TABLE>
<CAPTION>
The following summarizes mortgage loans held for sale by type at December 31, 1997 and 1998:
1997 1998
------------------------- ----------------------
<S> <C> <C>
Conventional prime loans held for sale $ 74,049,209 $ 124,182,099
Sub-prime loans held for sale 38,372,558 30,542,410
High-LTV loans held for sale 9,194,343 671,748
------------------------- ----------------------
121,616,110 155,396,257
Net deferred loan origination costs (fees) (272,296) 234,855
------------------------- ----------------------
Mortgage loans held for sale $ 121,343,814 $ 155,631,112
========================= ======================
</TABLE>
Included in mortgage loans held for investment at December 31, 1997 and
1998 is an allowance for credit losses of $270,000 and $634,851,
respectively, which were established through a provision of $300,000
and $567,738 offset by charge-offs of $30,000 and $202,888 in 1997 and
1998, respectively.
As of December 31, 1997 and 1998, there were no loans held for sale
that were greater than 90 days past due. As of December 31, 1997 and
1998, there were approximately $72,000 and $753,000, respectively, of
loans held for investment that were greater than 90 days past due, the
vast majority of which is sub-prime loans.
(4) PROPERTY AND EQUIPMENT
Property and equipment are depreciated over lives ranging from three to
seven years for office furniture, equipment, computer software, and
leasehold improvements. Property and equipment consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
-------------------- --------------------
<S> <C> <C>
Office furniture and equipment $ 9,779,846 13,479,925
Leasehold improvements 600,958 2,238,348
Computer software - Web Site - 457,940
Projects in process 59,595 -
-------------------- --------------------
Total cost 10,440,399 16,176,213
Accumulated depreciation (3,429,862) (5,400,480)
-------------------- --------------------
Net $ 7,010,537 10,775,733
==================== ====================
</TABLE>
Page 63 of 80
<PAGE> 64
ROCK FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(5) BORROWINGS
Advances under the Company's warehouse line of credit are based on a
formula computation, with interest due monthly; are due on demand; and
are collateralized by residential first and second mortgages. Advances
may be drawn for working capital and sub-prime, high-LTV, and
conventional prime mortgage loans. Interest rates are variable and are
based on the federal funds rate and prime rate, depending on the type
of advance. Interest rates ranged from 6.69% to 7.69% at December 31,
1997, and 6.20% to7.21% at December 31, 1998, with weighted average
interest rates of 6.94% and 6.83% at December 31, 1997 and 1998,
respectively.
The maximum outstanding balance permitted under the line was
$90,000,000 and $200,000,000 (with certain sublimits for
working-capital, non-conforming, and second-mortgage loans) at December
31, 1997 and 1998. The Company is required to maintain a minimum
tangible net worth and other financial covenants, as defined in the
agreement. The Company was in compliance with the requirements as of
December 31, 1997 and 1998.
The Company's reverse repurchase agreement entered into in 1997
provides that the lender will purchase from the Company, subject to the
Company's agreement to repurchase on a daily basis, up to $100,000,000
and $200,000,000 at December 31, 1997 and 1998, respectively, of
conventional prime and sub-prime mortgage loans at par. Loans subject
to purchase are fixed- and adjustable-rate, fully-amortizing first or
junior lien residential mortgage loans and home equity loans that
comply with the Company's origination guidelines and conform to
whole-loan sale requirements.
This agreement is not a committed facility and the lender may elect to
discontinue the repurchase agreement at any time. The term of any
financing under the repurchase agreement matures and may be renewed on
a daily basis. In any event, the arrangement terminates in March 1999.
Interest rates are variable and are based on the London Interbank
Offered Rate, depending on the type of advance. The interest rates in
effect at December 31, 1997 and 1998 were 8.25 % and 6.50%,
respectively, while the weighted average interest rates during 1997 and
1998 were 6.88% and 6.61%, respectively.
In February 1997, the Company borrowed $2,000,000 for the purchase of
computer equipment and software. The note was paid in full in May 1998.
Drafts payable represent funds advanced for mortgages closed which have
not yet been drawn against the warehouse line of credit.
Page 64 of 80
<PAGE> 65
ROCK FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(6) INVESTOR RESERVES
The following presents the activity in the investor reserves, which are
included in accrued expenses and other liabilities, for the periods
indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
1996 1997 1998
------------------ ------------------- ------------------
<S> <C> <C> <C>
Beginning balance $ 226,809 389,162 693,840
Provision for premium recapture 317,262 602,632 815,198
Premium recapture paid (154,909) (297,954) (627,141)
------------------ ------------------- ------------------
Ending balance $ 389,162 693,840 881,897
================== =================== ==================
</TABLE>
(7) RELATED PARTY TRANSACTIONS
During the years ended December 31, 1997 and 1998, the Company made
short-term advances to certain shareholders that bear interest at 3%,
except for those loans outstanding at December 31, 1998, which do not
bear interest. The highest amounts outstanding during the period to
shareholders totaled approximately $6,100,000 and $1,627,000 in 1997
and 1998, respectively. Interest income relating to such advances
totaled approximately $98,000, $148,000 and $17,000, for the years
ended December 31, 1996, 1997 and 1998, respectively. The balance of
shareholders' advances at December 31, 1998 represents amounts owed to
the Company in connection with adjustments to the tax and other
distributions made to S corporation shareholders in 1998 based on the
preliminary estimated allocation of taxable income between the S
corporation period and C corporation period, as well as amounts owed to
the Company for the purchase by two of the S corporation shareholders
of certain officers' life insurance policies owned by the Company.
These advances are expected to be repaid by the end of the first
quarter of 1999.
In addition, the Company made short-term loans to certain affiliates
during 1997. The maximum amounts outstanding during 1997 was $400,000.
No balance was remaining outstanding at either December 31, 1997 or
1998. Interest income relating to such loans totaled approximately $300
and $10,000 for the years ended December 31, 1996 and 1997,
respectively.
Page 65 of 80
<PAGE> 66
ROCK FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(8) OPERATING LEASES
The following is a schedule of future minimum lease payments (with
initial or remaining terms in excess of one year) as of December 31,
1998:
<TABLE>
<S> <C>
1999 $ 3,100,000
2000 1,400,000
2001 900,000
2002 500,000
2003 and thereafter 10,000
---------------
Total 5,910,000
Less sublease payments to be received 50,000
---------------
Net future minimum lease payments $ 5,860,000
===============
</TABLE>
Total rental expense incurred during the years ended December 31, 1996,
1997, and 1998 was $990,000, $1,580,000, and $3,450,000, respectively.
See note 18 for a description of certain planned store closings and the
accrual by the Company of associated minimum future lease obligations
for such stores.
(9) EMPLOYEE BENEFIT PLAN
The Company maintains a defined contribution 401(k) plan covering
substantially all full-time employees. Employees can make elective
contributions to the plan. The plan requires the Company to contribute
20% of employee contributions to the plan up to a maximum of 1% of the
employee's gross pay. The Company's contributions to the plan for the
years ended December 31, 1996, 1997, and 1998 amounted to $43,000,
$83,000, and $145,000, respectively.
(10) STOCK OPTION PLAN AND EMPLOYMENT AGREEMENTS
On December 27, 1996, the Company approved a stock option plan in which
3,578,617 common shares were reserved for issuance. On February 18,
1998, the Company's board of directors and shareholders amended and
restated the Company's 1996 Stock Option Plan to increase the number of
shares reserved for issuance under the plan from 3,578,617 common
shares to 4,500,000 common shares. Under the plan, the exercise price
of any incentive stock option will not be less than the fair market
value of the common shares on the date of grant. The exercise price of
any non-qualified option and the dates on which the options are first
exercisable are determined by a committee of the board of directors or
the board of directors. The term of any options may not exceed ten
years from the date of grant. Option activity for the periods indicated
are:
Page 66 of 80
<PAGE> 67
ROCK FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER EXERCISE PRICE
OF SHARES
---------------- -----------------------
<S> <C> <C>
Options outstanding at December 31, 1996 (all granted on December
27, 1996 and all exercisable) 1,540,684 $ 4.68
Activity during 1997:
Granted 1,059,000 5.11
Expired --
Forfeited (110,000) 4.68
---------------- -----------------------
Options outstanding at December 31, 1997 (including exercisable
options for 1,692,684 shares) 2,489,684 4.86
Activity during 1998:
Granted 957,000 9.87
Exercised (335,000) 4.68
Forfeited (130,500) 6.08
---------------- -----------------------
Options outstanding at December 31, 1998 (including exercisable
options for 1,974,884 shares) 2,981,184 6.41
================ =======================
</TABLE>
At December 31, 1998, 1,183,816 common shares remained reserved for
issuance under the plan.
In accordance with SFAS No. 123, Accounting for Stock-based
Compensation, the Company applied the intrinsic-value method of
accounting, as described in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, to its stock-based
compensation. Accordingly, no compensation expense has been charged
against income for stock option grants. Had compensation expense been
determined based on the fair value at the respective grant dates,
consistent with the fair-value methodology of SFAS No. 123, the
Company's historical net income (loss) would have been ($369,300),
$10,885,000 and $15,000,000 in 1996, 1997 and 1998, respectively. The
corresponding pro forma net income for the Company, assuming a pro
forma provision for income taxes in 1997 and 1998, would have been
$6,960,000 and $9,600,000, respectively.
The weighted average fair value of options granted in 1996, 1997 and
1998 totaled $2.30, $2.50, and $7.90 per share, respectively. The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model. The weighted average assumptions
used in valuing the option grants for the years ended December 31,
1996, 1997 and 1998, respectively, were expected life, 5 years for each
year; interest rate 5.40%, 5.30% and 4.65%; and volatility (the measure
by which the stock price has fluctuated or will be expected to
fluctuate during the period), 66% for 1996 and 1997 and 80% for 1998.
Page 67 of 80
<PAGE> 68
ROCK FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
At December 31, 1998, the outstanding options have exercise prices that
range between $4.68 and $11.50, with a weighted average exercise price
of $6.41. Of these options, 1,517,884 options are exercisable, with a
weighted average exercise price of $4.73 and a weighted average
contractual maturity of 8 years.
Certain option holders who were officers of the Company entered into
employment agreements that stipulated a "distribution bonus" was
entitled to be paid upon certain conditions. No distribution bonuses
were required in 1996, 1997, or 1998 and none was expected to be paid
for the foreseeable future. In addition, in February 1998, the option
holders who were entitled to these distribution bonuses entered into
agreements whereby their rights to the distribution bonuses were
eliminated when the Offering was consummated. These rights were
replaced with the rights to exercise existing options representing
approximately 330,000 of the Company's common shares and simultaneously
sell the shares as part of the Offering. In addition, the option
holders were granted additional options for 450,000 common shares at an
exercise price of $10.00 a share, the initial public offering price.
Therefore, the distribution bonuses, which would have been
approximately $600,000 in 1996 and $1,100,000 in 1997, have not been
accrued for, nor recognized as compensation expense in, the
accompanying financial statements. In addition, as the existing options
exercised in connection with the Offering and the options to purchase
450,000 common shares granted in connection with the Offering were
granted at the fair value of the shares at the date of grant, the
Company has recognized no compensation expense associated with such
options.
(11) INCOME TAX EXPENSE
Total income tax expense (benefit) for the year ended December 31, 1998
was allocated as follows:
<TABLE>
<S> <C>
Income from operations $2,584,342
Shareholders' equity, for tax benefit
resulting from exercise of employee stock options (360,000)
-------------
$2,224,342
=============
</TABLE>
<TABLE>
<CAPTION>
Income tax expense (benefit) from operations for the year ended
December 31, 1998 consists of the following:
CURRENT DEFERRED TOTAL
------------------ ------------------ -----------------
<S> <C> <C> <C>
U.S. federal $ 4,379,342 (1,945,000) 2,434,342
State and local 150,000 - 150,000
------------------ ------------------ -----------------
Total $ 4,529,342 (1,945,000) 2,584,342
================== ================== =================
</TABLE>
Page 68 of 80
<PAGE> 69
ROCK FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
Income tax expense differs from the amount computed by applying the
U.S. federal statutory tax rate of 35% to income before income taxes as
a result of the following:
<TABLE>
<CAPTION>
<S> <C>
Computed "expected" tax expense $ 6,593,395
State and local income taxes, net of federal income tax benefit
97,500
S corporation income, taxable to shareholders (2,197,798)
Non-deductible expenses, net 64,058
Establishment of deferred tax asset at conversion (1,800,000)
Other, net (172,813)
-----------------
Total $ 2,584,342
=================
</TABLE>
The reconciliation of "expected" to actual pro forma provision for
income taxes would have the same adjustments as above, excluding the
adjustment for S corporation income taxable to shareholders and the
adjustment for the change in tax status.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1998 are presented below.
Deferred tax assets:
<TABLE>
<S> <C>
Mortgage loans held for sale, principally due to adjustment to market
value for tax purposes $ 1,260,000
Accrued liabilities, principally due to estimated branch closing costs
and investor reserves 1,026,000
Mortgages held for investment, principally due to the allowance for
loan losses 225,000
---------------
Total deferred tax assets $ 2,511,000
Deferred tax liabilities:
Property and equipment, principally due to difference in depreciation
$ 566,000
---------------
Total deferred tax liabilities (566,000)
---------------
Net deferred tax asset $ 1,945,000
===============
</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
Page 69 of 80
<PAGE> 70
ROCK FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning
strategies in making this assessment. Based upon the projections for
future taxable income over the periods in which the deferred tax assets
are deductible, management believes it is more likely than not the
Company will realize the benefits of these deductible differences.
As discussed in Note 1, the Company was an S corporation for federal
income tax purposes from March 1, 1992 through May 5, 1998, and
accordingly, no federal income tax expense has been provided for that
period.
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures About Fair Value of Financial Statements,
requires disclosures of the fair value of certain financial instruments
for which it is practical to estimate the value. In cases where quoted
market prices are not available, fair values are based on estimates
using present value or other valuation techniques.
The following tables present the carrying amounts and fair value of
financial instruments at December 31, 1997 and 1998:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1998
----------------------------------- --------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------------- --------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 11,949,992 11,950,000 30,081,524 30,100,000
Mortgage loans held for sale:
Conventional prime 74,475,694 75,500,000 124,958,218 126,700,000
Sub-prime home equity 37,896,640 39,900,000 30,030,473 31,100,000
High-LTV second mortgages
8,971,480 9,700,000 642,421 650,000
Mortgage loans held for
investment 810,293 900,000 3,766,171 3,800,000
Warehouse line of credit 79,293,856 79,300,000 98,008,105 98,100,000
Reverse repurchase agreement 18,161,423 18,200,000 11,521,065 11,500,000
Drafts payable 21,875,184 21,900,000 44,021,087 44,000,000
Notes payable 1,944,445 1,900,000 0 0
Calls on U.S. Treasury
securities 17,000 14,000 63,000 45,000
=============== =============== ================= =================
</TABLE>
Fair-value methods and assumptions for the Company's financial
instruments are as follows:
CASH AND CASH EQUIVALENTS
The carrying amounts reported in the balance sheet for cash and cash
equivalents reasonably approximate those assets' fair values.
Page 70 of 80
<PAGE> 71
ROCK FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
LOANS HELD FOR SALE AND LOANS HELD FOR INVESTMENT
For mortgage loans held for sale and investment, fair value is
estimated using quoted market prices for similar loans, adjusted for
differences in loan characteristics, including credit quality. The
carrying amount of accrued interest receivable of approximately
$234,000 approximates the asset's fair value.
BORROWINGS
For borrowings, fair value is estimated based on the discounted value
of contractual cash flows using interest rates currently in effect for
similar maturities and collateral requirements. As all of the
borrowings have variable interest rates that approximate current market
interest rates for similar types of lines of credit and are due upon
demand, the carrying amount of these borrowings approximates their
estimated fair values.
OFF-BALANCE-SHEET INSTRUMENTS
The fair value of the calls on U.S. Treasury securities are based on
quoted market prices for similar instruments.
The fair value of commitments to extend credit is estimated using the
fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the present
creditworthiness of the customers. For fixed-rate loan commitments,
fair value also considers the difference between current levels of
interest rates and the committed rates. The fair value of commitments
to extend credit approximated the book values at both December 31, 1997
and 1998.
The Company had mandatory forward sales commitments for future delivery
of FNMA and Freddie Mac securities of $82,535,000 and $222,135,600 as
of December 31, 1997 and 1998, respectively. The Company's exposure to
credit loss in the event of nonperformance by other parties to the
mandatory sales commitments represents the difference between the
contractual amount and the fair value of those agreements based on
quoted market prices. The fair value of those agreements approximated
the contractual amount as of December 31, 1998.
(13) STOCK SPLIT
On January 8, 1997, the Company effected a stock split of the Company's
common shares on the basis of 1,118.31805 common shares for each common
share formerly issued and outstanding. The financial statements and
related disclosures have been retroactively adjusted to reflect this
split.
Page 71 of 80
<PAGE> 72
ROCK FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(14) LOAN FEES AND GAINS AND LOSSES ON THE SALE OF MORTGAGES
Loans fees and gains and losses on the sale of mortgages for the years
ended December 31, 1996, 1997, and 1998 were comprised of the following
components:
<TABLE>
<CAPTION>
1996 1997 1998
---------------- ---------------- ----------------
<S> <C> <C> <C>
Gain on loan sales $ 25,613,600 37,728,135 69,390,155
Net loan origination fees 2,663,099 9,958,806 15,826,166
Provision for premium recapture (317,262) (602,632) (815,198)
---------------- ---------------- ----------------
$ 27,959,437 47,084,309 84,401,123
================ ================ ================
</TABLE>
(15) COMMITMENTS AND CONTINGENCIES
The Company is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of
its customers. These financial instruments are loan commitments to
extend credit and puts and calls on U.S. Treasury securities. These
instruments involve, to varying degrees, elements of credit risk in
excess of the amounts recognized in the balance sheets.
The Company's exposure to credit loss in the event of the
nonperformance by the other party to the financial instruments for loan
commitments to extend credit is represented by the contractual amounts
of these instruments, while the risk of credit loss associated with the
Company's puts and calls on U.S. Treasury securities is a small
fraction of the notional amount of the instrument and is represented by
the fair value of such instruments. The Company uses the same credit
policies in making credit commitments as it does for on-balance-sheet
loans.
Financial instruments for loan commitments to extend credit whose
contract amounts represent credit risk at December 31, 1997 and 1998
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1998
------------------------------------ -------------------------------------
FIXED- VARIABLE- FIXED- VARIABLE-
RATE RATE RATE RATE
--------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Conventional prime loans $ 58,500,000 17,600,000 299,000,000 49,000,000
Sub-prime loans 4,600,000 3,600,000 8,000,000 31,000
High-LTV loans 12,300,000 -- 500,000 --
--------------- --------------- ---------------- ----------------
$ 75,400,000 21,200,000 307,500,000 49,031,000
=============== =============== ================ ================
</TABLE>
Loan commitments to extend credit are agreements to lend to a customer
as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee.
Page 72 of 80
<PAGE> 73
ROCK FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
The Company evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained is based on
management's credit evaluation of the customer. Market risk may arise
if interest rates move adversely subsequent to the extension of loan
commitments.
The Company held calls on U.S. Treasury securities in the notional
amount of $9,000,000 as of December 31, 1998, to mitigate its interest
rate risk on its conventional mortgage loan pipeline.
The Company is subject to various claims and legal proceedings arising
out of the normal course of business, none of which, in the opinion of
management, is expected to have a material effect on the Company's
financial position.
(16) SEGMENT REPORTING
As discussed in Note 1, the Company adopted SFAS No. 131 in 1998. Also,
as discussed in Note 1, the Company was comprised of three major
operating divisions. The following table shows the contribution to
revenues and expenses and the loan closings of each of the Company's
divisions for the years ended December 31, 1997 and 1998. Other than
loans, the Company's assets are not specifically allocated to its three
operating divisions and therefore, not used by management for operating
decisions with respect to the divisions. As a result, total assets by
division are not presented.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
-----------------------------------------------------------------------------------------------
FRESH SPECIALTY
START CONVENTIONAL LENDING OTHER TOTAL
-------------- ------------------- --------------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
Revenues $ 25,938.1 16,333.6 7,045.8 2,792.7 52,109.9
Expenses 15,898.7 10,358.1 3,754.7 10,683.1 40,694.5
-------------- ------------------- --------------- ------------- -----------------
Net contribution $ 10,039.4 5,975.5 3,291.1 (7,890.4) 11,415.4
============== =================== =============== ============= =================
Loan closings $ 269,274 867,520 66,044 16,598 1,219,436
============== =================== =============== ============= =================
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)
-----------------------------------------------------------------------------------------------
FRESH SPECIALTY
START CONVENTIONAL LENDING OTHER TOTAL
-------------- ------------------- --------------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
Revenues $ 38,097.6 43,166.8 6,692.3 1,805.5 89,762.2
Expenses 26,976.5 22,252.1 4,960.5 16,734.7 70,923.8
-------------- ------------------- --------------- ------------- -----------------
Net contribution $ 11,121.1 20,914.7 1,731.8 (14,929.2) 18,838.4
============== =================== =============== ============= =================
Loan closings $ 373,955 1,872,025 55,841 52,120 2,353,941
============== =================== =============== ============= =================
-----------------------------------------------------------------------------------------------
</TABLE>
Page 73 of 80
<PAGE> 74
ROCK FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
The Company was not managed according to segments during 1996;
therefore, the Company is not presenting segment information for 1996.
Included in other revenue and expenses is the government division and
corporate overhead. During 1998, 64% of the non-conforming loan sales
were to two investors. Also, 94% of the high LTV loan sales were to two
investors.
(17) 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 resources of the Company. 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.
Management evaluated the impact of the store closings in determining
the loss to be accrued. The accrual for such costs is included in
accrued expenses and other liabilities in the accompanying December 31,
1998 balance sheet.
The following is the schedule detailing the loss recognized and the
costs accrued at December 31, 1998:
<TABLE>
<S> <C>
Write-off of fixed assets to be disposed of or abandoned $ 900,000
Lease commitments 1,000,000
Severance pay 100,000
----------
Total $2,000,000
==========
</TABLE>
Approximately 80 loan officers, processors, closers and administrative
employees are being terminated due to the store closings. The severance
pay included in the loss recognized is for approximately 30 loan
processors, closers and administrative employees that are employed at
the stores that are being closed.
(18) UNAUDITED PRO FORMA FINANCIAL INFORMATION
The pro forma 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 have been computed by dividing pro
forma net income by the average shares assumed to be outstanding
including the 3,499,500 shares sold by the Company in the Offering and
the 330,000 shares sold by certain shareholders
Page 74 of 80
<PAGE> 75
ROCK FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
in the Offering (after exercising options to purchase those shares from
the Company). Pro forma diluted earnings per share for the periods
ending December 31, 1997 and 1998, have been computed by dividing pro
forma net income by the 14,282,914 and 14,355,195, respectively,
average shares assumed to be outstanding, including the 3,499,500
shares sold by the Company in the Offering and the 330,000 shares to be
sold by certain existing shareholders in the Offering (after exercising
options to purchase those shares from the Company) as well as the
number of common stock equivalent shares assumed to be outstanding upon
exercise of the Company's stock options existing as of December 31,
1998, using the treasury stock method and the $8.49 per share weighted
average market price of the Company's common shares for the period
ended December 31, 1998, as reported by The Nasdaq Stock Market.
(19) QUARTERLY FINANCIAL INFORMATION - UNAUDITED
<TABLE>
<CAPTION>
QUARTER ENDED IN 1997
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
----------------------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------- -------------- ----------------- ------------------
<S> <C> <C> <C> <C>
Selected operations data:
Net interest margin $ 405 453 829 946
Other revenues 7,908 10,928 13,785 16,856
Net revenues 8,313 11,381 14,614 17,802
Expenses 7,193 8,161 11,449 13,892
Income before income taxes 1,120 3,220 3,165 3,910
Net income 1,120 3,220 3,165 3,910
Pro forma net income 717 2,061 2,026 2,501
Pro forma basic net income per share
.05 .15 .15 .19
Pro forma EPS - diluted .05 .14 .14 .18
Cash dividends - - - -
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED IN 1998
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
----------------------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------- -------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Selected operations data: $
Net interest margin 1,247 1,111 1,342 1,680
Other revenues 17,673 20,984 21,762 23,963
Net revenues 18,920 22,095 23,104 25,643
Expenses, excluding loss on store
closings 14,819 16,988 17,476 19,642
Loss on store closings - - - 2,000
Income before income taxes 4,101 5,107 5,628 4,001
Net income 4,101 4,934 4,127 3,091
Pro forma net income 2,625 3,371 3,658 2,601
Pro forma basic net income per share
.19 .24 .26 .19
Pro forma EPS - diluted .18 .23 .25 .18
Cash dividends - .02 .02 .02
</TABLE>
Page 75 of 80
<PAGE> 76
ROCK FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
Based on the Company's favorable historical experience of actual
prepayment recapture amounts paid as compared to amounts provided for
such risks, the Company decreased its reserve, and increased its loan
fees and gains on sale of mortgages, by approximately $200,000 in the
fourth quarter of 1998. In addition, the Company reassessed the amount
of direct origination costs being incurred on its conventional loan
production, and increased the amount of costs being deferred on
conventional loans held for sale at December 31, 1998 by approximately
$100,000.
Refer to Note 17 for details regarding the $2.0 million loss on store
closings in the fourth quarter of 1998.
Page 76 of 80
<PAGE> 77
ITEM 9. CHANGES IN DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
PREVIOUSLY REPORTED.
Page 77 of 80
<PAGE> 78
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 regarding executive officers
of the Company is included in the Supplemental Item in Part I of this Report,
and is incorporated in this Item 10 by reference. The information required by
this Item 10 regarding directors of the Company will be set forth under the
caption "Election of Directors" in the Company's Proxy Statement in connection
with the 1999 Annual Meeting of Shareholders scheduled to be held May 25, 1999,
and is incorporated in this Item 10 by reference. The information by this Item
10 concerning compliance with Section 16(a) of the Securities Exchange Act of
1934 will be set forth under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's Proxy Statement in connection with the
1999 Annual Meeting of Shareholders scheduled to be held May 25, 1999, and is
incorporated in this Item 10 by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 concerning executive
compensation will be set forth under the caption "Executive Compensation" in the
Company's Proxy Statement in connection with the 1999 Annual Meeting of
Shareholders scheduled to be held May 25, 1999, and is incorporated in this Item
11 by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 concerning security ownership
of certain beneficial owners and management will be set forth under the captions
"Voting Securities and Principal Holders" and "Election of Directors" in the
Company's Proxy Statement in connection with the 1999 Annual Meeting of
Shareholders scheduled to be held May 25, 1999, and is incorporated in this Item
12 by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 concerning certain
relationships and related transactions will be set forth under the caption
"Certain Transactions" or "Compensation Committee Interlocks and Insider
Participation" in the Company's Proxy Statement in connection with the 1999
Annual Meeting of Shareholders scheduled to be held May 25, 1999, and is
incorporated in this Item 13 by reference.
Page 78 of 80
<PAGE> 79
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
<TABLE>
<S> <C> <C>
(a) (1) Financial Statements
The following financial statements of the Company are
included in response to Item 8 of this Report:
Independent Auditors' Report
Balance Sheets - December 31, 1997 and 1998
Statements of Income - Years Ended December 31, 1996, 1997
and 1998
Statements of Shareholders' Equity - Years Ended December 31,
1996, 1997 and 1998
Statements of Cash Flows - Years Ended December 31, 1996,
1997 and 1998
Notes to Financial Statements
(2) Financial Statement Schedules
The schedules have been omitted because the
information required to be submitted has been
included in the consolidated financial statements or
notes thereto or has been omitted as not applicable
or not required.
(3) Exhibits
The Exhibits to this Report are as set forth in the
"Index to Exhibits" immediately following the
signature page of this report. Each management
contract or compensatory plan or arrangement filed as
an exhibit to this Report is identified in the "Index
to Exhibits" with an asterisk before the exhibit
number.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the
fourth quarter of the year ended December 31, 1998.
</TABLE>
Page 79 of 80
<PAGE> 80
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
<TABLE>
<S><C>
ROCK FINANCIAL CORPORATION
(Registrant)
Date: March 22, 1999 By: /s/ DANIEL GILBERT
-----------------------------------------------------------
Daniel Gilbert
Its: Chairman of the Board, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ DANIEL GILBERT Chairman of the Board, President, March 22, 1999
- ------------------------------------
Daniel Gilbert Chief Executive Officer and Director
(Principal Executive Officer)
/s/ FRANK E. PLENSKOFSKI Chief Financial Officer March 22, 1999
- ------------------------------------ (Principal Financial Officer and
Frank E. Plenskofski Principal Accounting Officer)
/s/ GARY L. GILBERT
- ------------------------------------ Director March 22, 1999
Gary L. Gilbert
/s/ DAVID A. BRANDON
- ------------------------------------ Director March 26, 1999
David A. Brandon
/s/ DAVID KATZMAN
- ------------------------------------ Director March 26, 1999
David Katzman
/s/ ROBERT V. SCHECHTER
- ------------------------------------ Director March 22, 1999
Robert V. Schechter
</TABLE>
Page 80 of 80
<PAGE> 81
EXHIBIT INDEX
Exhibit Description
- ------- -----------
3(i) Form of Restated Articles of Incorporation of Rock Financial
Corporation, incorporated by reference to Exhibit 3(i) to Rock
Financial Corporation's Registration Statement on Form S-1
(file no. 333-46885) filed February 25, 1998.
3(ii) Amended and Restated Bylaws of Rock Financial Corporation,
incorporated by reference to Exhibit 3(ii) to Rock Financial
Corporation's Registration Statement on Form S-1 (file no.
333-46885) filed February 25, 1998.
4.1 Specimen Common Share Certificate, incorporated by reference
to Exhibit 4.1 to Amendment No. 1 to Rock Financial
Corporation's Registration Statement on Form S-1 (file no.
333-46885) filed April 14, 1998.
*10.1 Amended and Restated Rock Financial Corporation 1996 Stock
Option Plan, incorporated by reference to Exhibit 10.1 to Rock
Financial Corporation's Registration Statement on Form S-1
(file no. 333-46885) filed February 25, 1998.
*10.2 Form of Stock Option Agreement granted under the 1996 Stock
Option Plan, incorporated by reference to Exhibit 10.1 to Rock
Financial Corporation's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998.
*10.3 Letter Agreement, dated as of April 10, 1998, between Rock
Financial Corporation and Daniel Gilbert, incorporated by
reference to Exhibit 10.3 to Amendment No. 1 to Rock Financial
Corporation's Registration Statement on Form S-1 (file no.
333-46885) filed April 14, 1998.
*10.4 Letter Agreement, dated as of December 9, 1998, between Rock
Financial Corporation and Frank Plenskofski.
*10.5 Employment Agreement, dated as of June 27, 1994, as amended as
of December 28, 1996 and as of February 18, 1998, between Rock
Financial Corporation and Steven M. Stone, incorporated by
reference to Exhibit 10.6 to Rock Financial Corporation's
Registration Statement on Form S-1 (file no. 333-46885) filed
February 25, 1998.
*10.6 Severance Agreement and Release, dated as of November 20,
1998, between Rock Financial Corporation and Steven Stone.
10.7 Second Amended and Restated Mortgage Warehousing Agreement,
dated as of November 13, 1997, as amended January 30, 1998,
among Rock Financial Corporation, the lenders named therein,
and Comerica Bank, as agent, incorporated by reference to
Exhibit 10.6 to Rock Financial Corporation's Registration
Statement on Form S-1 (file no. 333-46885) filed February 25,
1998.
10.8 Amendment No. 2 to Second Amended and Restated Mortgage
Warehousing Agreement, dated April 2, 1998, among Rock
Financial Corporation, the lenders named therein, and Comerica
Bank, as agent, incorporated by reference to Exhibit 10.7 to
Amendment No. 1 to Rock Financial Corporation's Registration
Statement on Form S-1 (file no. 333-46885) filed April 14,
1998.
<PAGE> 82
Exhibit Description
- ------- -----------
10.9 Amendment No. 3 to Second Amended and Restated Mortgage
Warehousing Agreement, dated July 13, 1998, among Rock
Financial Corporation, the lenders named therein, and Comerica
Bank, as agent, incorporated by reference to Exhibit 10.1 to
Rock Financial Corporation's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1998.
10.10 Amendment No. 4 to Second Amended and Restated Mortgage
Warehousing Agreement, dated November 1998, among Rock
Financial Corporation, the lenders named therein, and Comerica
Bank, as agent, incorporated by reference to Exhibit 10.2 to
Rock Financial Corporation's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1998.
10.11 Amendment No. 5 to Second Amended and Restated Mortgage
Warehousing Agreement, dated as of January 25, 1999, among
Rock Financial Corporation, the lenders named therein, and
Comerica Bank, as agent.
10.12 Master Repurchase Agreement and Custody Agreement, dated as of
March 26, 1997, between Rock Financial Corporation and Bear
Stearns Home Equity Trust, incorporated by reference to
Exhibit 10.8 to Rock Financial Corporation's Registration
Statement on Form S-1 (file no. 333-46885) filed February 25,
1998.
10.13 Amendment No. 1 to Master Repurchase Agreement, dated as of
March 26, 1998, and Letter Agreement, dated as of April 7,
1998, between Rock Financial Corporation and Bear Stearns Home
Equity Trust, incorporated by reference to Exhibit 10.9 to
Amendment No. 1 to Rock Financial Corporation's Registration
Statement on Form S-1 (file no. 333-46885) filed April 14,
1998.
10.14 Letter Agreement, dated as of May 1, 1998, between Rock
Financial Corporation and Bear Stearns Home Equity Trust,
incorporated by reference to Exhibit 10.2 to Rock Financial
Corporation's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1998.
10.15 Letter Agreement, dated as of March 12, 1999, between Rock
Financial Corporation and Bear Stearns Home Equity Trust.
10.16 Form of Tax Indemnification Agreement among Rock Financial
Corporation and the Existing Shareholders, incorporated by
reference to Exhibit 10.10 to Rock Financial Corporation's
Registration Statement on Form S-1 (file no. 333-46885) filed
February 25, 1998.
10.17 Form of Shareholders Agreement among Rock Financial
Corporation and its shareholders before this Offering,
incorporated by reference to Exhibit 10.11 to Rock Financial
Corporation's Registration Statement on Form S-1 (file no.
333-46885) filed February 25, 1998.
10.18 Joint Venture Agreement, dated as of February 19, 1999,
between Rock Financial Corporation and Michigan National Bank.
10.19 Operating Agreement of Rock Home Loans at Michigan National,
dated as of February 19, 1999, between Rock Financial
Corporation and Michigan National Bank.
21.1 Subsidiaries of the registrant
23.1 Consent of KPMG LLP.
27.1 Financial data schedule.
<PAGE> 1
Exhibit 10.4
CONFIDENTIAL
December 9, 1998
Mr. Frank Plenskofski
Dear Frank:
I am delighted that we have been able to work out together the details
of your continued employment with the Company through December 31, 2000. As we
discussed, this letter sets forth the terms of the agreements we have reached,
as follows:
1. Your salary for 1999 will be not less than $200,000, and for
2000, not less than $220,000, and you will continue to receive the fringe
benefits provided to other executives of the Company, including health, life and
disability insurance.
2. You will receive a bonus for 1998 of $75,000, payable on the
Company's next regular payroll date after the date of this agreement.
3. So long as the Company's pro forma, fully-diluted, net income
per share continues to grow (after excluding any substantial effects of
acquisitions of other businesses), your bonuses for 1999 and 2000 will be at
least as much as your bonus for the previous year, if you are employed by the
Company on the last day of such year.
4. On the date you accept this agreement, you will be granted an
option to purchase 40,000 of the Company's common shares pursuant to the terms
of the Company's 1996 stock option plan. The exercise price will be the price on
the date of your acceptance. The option will vest annually over a three-year
period beginning one year from the date of grant, and will otherwise be subject
to the terms of the stock option plan. The vested portion of this option and the
options granted to you in January 1997, April 1997 and May 1998 will continue to
be exercisable for up to 18 months after the Company terminates your employment
without cause.
5. If your employment with the Company terminates prior to
January 1, 2001, you will receive additional amounts from the Company only if
the Company terminates your employment other than for cause or your death or
disability. In that event, the salary payments described above will continue
through December 31, 2000 (unless you die or become disabled prior to that
date), subject to an obligation on your part to seek other employment, with the
Company to receive credit for amounts earned in such other employment.
Notwithstanding anything in this agreement to the contrary, if the Company's
President is not Daniel Gilbert at any time after the date of this agreement and
before December 31, 2000, you may resign within 10 days after you first know
there is another President of the Company, and if you so resign, (i) Paragraph 8
of this agreement will not apply after such resignation, except with respect to
competition through a Michigan-based mortgage lender, and (ii) you will receive
25% of your then current annual salary as your exclusive severance benefits.
6. Your employment after December 31, 2000 will be at will.
<PAGE> 2
Mr. Plenskofski CONFIDENTIAL
December 9, 1998
Re: Empolyment Letter
7. Both during your employment with the Company and thereafter,
all confidential information of the Company will be retained by you in strictest
confidence and will not be disclosed or used by you other than for the benefit
of the Company.
8. Through December 31, 2000, whether employed by the Company or
not, you will not, in any way, directly or indirectly, compete with the business
of the Company, whether as an owner, employee, investor or otherwise.
9. For a period ending 18 months after the date on which your
employment with the Company terminates, you will not, directly or indirectly,
solicit or hire any person employed by the Company within one year prior to your
termination of employment with the Company.
10. Because of the special and unique character of a violation of
any of the provisions of paragraphs 7, 8 and 9 above, and because the amount of
injury suffered by the Company as a result of any such violation will be
difficult, if not impossible, to determine and to compensate adequately by
monetary damages, you agree that the Company will be entitled, in addition to
all other remedies available to it, to an injunction or similar equitable
relief, restraining any such violation; and you waive any requirement that the
Company post any bond in connection with obtaining such relief.
11. Any provision of this agreement which is deemed invalid shall
be modified to the extent necessary to become enforceable, and no invalid
provision shall affect the validity of any other provision of this agreement.
Please review this letter carefully and have your attorney do so as
well. If the letter accurately sets forth our entire understanding, please sign
the enclosed copy and return it to me.
If you have any questions, please let me know.
I look forward to our continued close and mutually-beneficial
association.
Very truly yours,
ROCK FINANCIAL CORPORATION
By /s/ DANIEL GILBERT
------------------------------------
Daniel Gilbert, Chairman
The foregoing is accepted
and agreed to:
/s/ FRANK PLENSKOFSKI
- ------------------------------------
Frank Plenskofski
<PAGE> 1
Exhibit 10.6
SEVERANCE AGREEMENT AND RELEASE
-------------------------------
THIS SEVERANCE AGREEMENT AND RELEASE ("Agreement") is made as of
November 20, 1998 between Rock Financial Corporation, a Michigan corporation
(the "Company"), and Steven Stone ("Mr. Stone"). The Company and Mr. Stone are
sometimes referred to together as the "Parties" and individually as a "Party".
R E C I T A L S
---------------
A. Mr. Stone is the President and a director of the Company.
B. Mr. Stone wishes to resign from all of his positions with the
Company and to settle and resolve all actual and potential claims against the
Company and its affiliates in accordance with this Agreement.
C. The Company wishes to accept Mr. Stone's resignation and to
settle and resolve all actual and potential claims against Mr. Stone in
accordance with this Agreement.
THEREFORE, the Parties agree as follows:
1. Termination of Mr. Stone's Employment. Effective as of the
date of this Agreement (the "Effective Date"), Mr. Stone resigns from all of his
positions with the Company, the Rock Financial Corporation 401(k) Savings Plan
(the "401(k) Plan"), subject to Section 5(b), and all of its other employee
benefit plans, including the following: President and a director of the Company.
From the Effective Date through six months after the Effective Date, Mr. Stone
will answer reasonable inquiries from the Company during business hours
regarding aspects of the Company's business affairs of which he has knowledge
and which occurred during his employment.
2. Additional Compensation.
(a) Cash Payments. On the Company's next regular payroll
date following the Effective Date, but in any event within five business days
after the Effective Date, the Company will pay Mr. Stone by check, $112,500,
less normal withholding for federal, state, city and other taxes to the extent
such taxes are required to be withheld under applicable law.
(b) Stock Compensation Matters. As of the Effective Date
and solely for purposes of the Stock Option Agreement, granted December 28,
1996, between the Company and Mr. Stone (the "1996 Option"), and the Stock
Option Agreement, granted May 6, 1998, between the Company and Mr. Stone (the
"1998 Option"), Mr. Stone shall be deemed to cease to be an employee of the
Company because of termination by the Company without "cause" (as defined in the
1996 Option and the 1998 Option), and, therefore, subject to Section 2(d) of the
1996 Option and the 1998 Option, the Option (as defined in the 1996 Option and
the 1998 Option) shall expire three years after the Effective Date.
<PAGE> 2
(c) Medical and Dental Benefits. The Company will provide Mr.
Stone with his current Company health insurance coverage (including medical and
dental coverage) for one year after the Effective Date, and the Company shall
bear the costs of such coverage, which shall be paid directly to the carrier or
provider. Thereafter, the Company will provide Mr. Stone with the opportunity to
continue his current Company health insurance coverage (including medical and
dental coverage) pursuant to the Consolidated Omnibus Budget Reconciliation Act
("COBRA") for an additional 18 months. If he elects to continue such insurance,
he will pay the cost of any such insurance, including any premiums relating to
such insurance.
(d) Termination of Employment Agreement. As of the Effective Date,
the Employment Agreement, between Mr. Stone and the Company, dated as of
June 27, 1994, as amended, including by the Amendment to Employment Agreement,
dated as of December 28, 1996, and the Second Amendment to Employment Agreement,
dated as of February 18, 1998 (the ""Employment Agreement"), is terminated and
cancelled and shall be of no further force or effect, except for Sections 4A,
4B, 4C and 4D of the Employment Agreement, as amended, which shall continue in
full force and effect for three years after the Effective Date. The definition
of "Covenant Period" in Section 4B of the Employment Agreement shall be amended
to mean "during the Term and continuing for a period of three years thereafter."
Notwithstanding the foregoing, beginning one year after the Effective Date, Mr.
Stone shall be permitted to operate a mortgage company (the "Entity") subject to
the following restrictions:
(i) He must own at least 25% of the equity interests in the
Entity.
(ii) None of the other investors in the Entity shall have any
connection with any other company engaged in the business of originating,
buying or selling mortgage loans, including as owners, operators, employees
or lenders, except that an investor in the Entity may own, for investment
purposes only, less than 5% of the stock of any publicly-traded entity whose
stock is either listed on a national stock exchange or is quoted on The
Nasdaq National Market if such investor is not otherwise affiliated with
such entity.
(iii) The Entity shall employ no persons (in any capacity, including
as consultants) who were employed by the Company within one year prior to
the date of their employment by the Entity, except as otherwise agreed in
advance, in writing by the Company's Chief Executive Officer. If Mr. Stone
makes a written request for such an exception, the Company shall respond
within seven business days after it receives the request.
(e) No Other Payments or Benefits. Except as to Mr. Stone's salary
through the Effective Date and reimbursements for any expenses of Mr. Stone
incurred through the Effective Date based upon the Company's standard expense
reimbursement program, both of which (to the extent the reimbursement requests
have been submitted by the Effective Date) shall be paid by Company to Mr. Stone
on the Company's next applicable payroll date after the Effective Date, Mr.
Stone will not be entitled to any other payments or benefits whatsoever,
including participation after the Effective Date in the 401(k) Plan, subject to
Section 5(b). For no purpose (including 401(k) Plan contributions, vacation
benefits, or other benefits) shall the
2
<PAGE> 3
payments and benefits described in this Section 2 be considered salary to Mr.
Stone or be deemed to continue his employment beyond the Effective Date.
(f) Taxes. The Company will withhold from the cash payments
described in Section 2(a) normal withholding for federal, state, city and other
taxes to the extent such taxes are required to be withheld under applicable law.
3. Confidentiality.
(a) Return of Materials. Mr. Stone represents and warrants that to
the best of his knowledge he has returned to the Company all confidential
materials of the Company and files of the Company over which he exercises any
control.
(b) Enforceability. Sections 2(d) and 3(a) are intended, among
other things, to protect the confidential information of the Company and its
employees. If for any reason a court determines that any part of Section 2(d) or
this Section 3 is unreasonable in scope or otherwise unenforceable, such
provisions will be modified and fully enforceable, as so modified, to the
maximum extent the court determines lawful and enforceable under the
circumstances.
4. Termination of Prior Agreements; Unemployment Compensation. Except as
set forth in Section 2(d), this Agreement supersedes all prior understandings
and agreements between the Parties (written or otherwise). Mr. Stone
acknowledges that he is not entitled to any severance or termination payments
whatsoever in connection with the termination of his employment with the
Company, except as otherwise provided in Section 2. Mr. Stone agrees that his
resignation is voluntary, that he is not entitled to unemployment compensation
and that he will not seek or obtain unemployment compensation based upon his
termination of employment with the Company.
5. Release.
(a) Release. In consideration of, and in reliance on, the Company
entering into this Agreement and agreeing to the terms and conditions of this
Agreement, including the additional compensation provided in Section 2, which
Mr. Stone acknowledges as being adequate, Mr. Stone hereby unconditionally
releases and forever discharges the Company and its divisions, components,
employees, officers, directors, shareholders, affiliates, agents, trusts,
partnerships, attorneys and successors and assigns from, and hereby waives, any
and all causes of action, suits, damages, claims, demands and liability
whatsoever which Mr. Stone ever had or now has against the Company, directly or
indirectly, which is now existing or which may hereafter arise between them,
directly or indirectly, by reason of any facts existing on or prior to the
Effective Date, whether known or unknown, except for the Company's violation of
this Agreement or as to any claims arising from Section 10, and specifically
including, but not limited to, any and all claims relating to Mr. Stone's
employment with the Company or any of its affiliates and the termination of such
employment (including severance pay, vacation pay, and all other forms of pay
and benefits), and specifically including any and all claims for defamation,
wrongful discharge, breach of contract, negligence and other tort actions,
and/or discrimination,
3
<PAGE> 4
harassment and/or retaliation on account of sex, sexual orientation, race,
color, religion, marital status, handicap, height, weight, national origin, or
any other classification recognized under the common law of the State of
Michigan, local law and/or ordinances, and the civil rights statutes, and
specifically including any and all claims arising under or in connection with
Title VII of the Civil Rights Act of l964; the Rehabilitation Act of 1973; the
Older Workers Benefit Protection Act; the Americans With Disabilities Act; the
Family and Medical Leave Act of 1993; the Elliott-Larsen Civil Rights Act; the
Michigan Handicappers' Civil Rights Act; the Michigan Whistleblower's Protection
Act; the Fair Labor Standards Act; 42 USC 1981, l985, l986, l988; 29 USC 62l;
any amendments to such statutes, all other federal, state or local laws, the
common law of the State of Michigan, and any actions based upon injuries on the
job. Mr. Stone understands and agrees that this is a total and complete release
and waiver by Mr. Stone of all claims which Mr. Stone has or may have against
the Company or any of its affiliates by reason of any facts existing on or prior
to the Effective Date, both known and unknown, even though there may be facts
and consequences of facts which are unknown to Mr. Stone and/or the Company. Mr.
Stone further agrees that he has suffered no work related injury or illness, and
that he has been properly paid all his past wages and benefits, including
overtime earnings and vacation pay as of this date. Mr. Stone shall not bring
suit or make a claim or charge in any manner with respect to any claim released
under this Agreement.
(b) Benefit Plans. Mr. Stone is not releasing any rights he may
have to benefits arising under the 401(k) Plan; provided, that Mr. Stone
acknowledges that he will no longer be an employee of the Company as of the
Effective Date and, therefore, is not entitled to future contributions to the
401(k) Plan on his behalf on or after the Effective Date, except to the extent
the 401(k) Plan provides for employer contributions to the 401(k) Plan allocable
to Mr. Stone and related to his employment with the Company before the Effective
Date.
6. Remedies. Mr. Stone's undertakings and provisions under this Agreement
are related to matters which are of a special and unique character, and a
violation of any of the terms of this Agreement will cause irreparable injury,
the amount of which will be difficult, if not impossible, to determine and
cannot be adequately compensated by monetary damages alone. Therefore, if Mr.
Stone breaches or threatens to breach any of the terms of this Agreement, in
addition to any other remedies that may be available under this Agreement,
applicable law or equity, the Company will be entitled, as a matter of course,
to specific performance, an injunction, a restraining order, or any other
equitable relief from any court of competent jurisdiction, requiring compliance
with this Agreement or restraining any violation or threatened violation of any
such terms by Mr. Stone or by such other persons as the court may order;
provided Mr. Stone has at least seven days prior notice from Company in writing
of such alleged violation and the Company posts a bond in the amount determined
by the applicable court with respect to any injunctions or restraining orders.
7. Miscellaneous.
(a) Successors. This Agreement will be binding upon the Parties
and their respective successors, assigns, heirs, executors and administrators.
4
<PAGE> 5
(b) Governing Law and Forum. The laws of the State of Michigan
shall govern this Agreement, its construction, and the determination of any
rights, duties or remedies of the Parties arising out of, or relating to, this
Agreement (regardless of the laws that might otherwise govern under applicable
Michigan principles of conflicts of law). The parties acknowledge that the
United States District Court for the Eastern District of Michigan or the
Michigan Circuit Court for the County of Oakland shall have exclusive
jurisdiction over any case or controversy arising out of, or relating to, this
Agreement and that all litigation arising out of, or relating to, this Agreement
shall be commenced in the United States District Court for the Eastern District
of Michigan or in the Oakland County (Michigan) Circuit Court. Each of the
Parties consents to be subject to personal jurisdiction of the courts of
Michigan, including the federal courts in Michigan.
(c) Counterparts. This Agreement may be signed in counterparts,
both of which together will be deemed an original of this Agreement.
(d) Entire Agreement; Amendment. This Agreement constitutes the
entire agreement of the Parties with respect to the subject matter of this
Agreement; this Agreement may be amended only by a written instrument executed
by both Parties.
(e) Legal Fees; Damages for Breach. The prevailing Party in any
action under this Agreement will be entitled to recover from the other Party, in
addition to any other relief provided by law, such costs and expenses as may be
incurred by the prevailing Party (including court costs and reasonable
attorneys' fees) in connection with enforcing, defending or establishing the
applicability or validity of this Agreement (including investigating and
responding to any demand or claim) and in prosecuting any counterclaim or
cross-claim based thereon. Each Party shall be liable to the other Party for any
damages (including costs and reasonable attorneys' fees) resulting from any
breach of this Agreement by such Party. The rights and remedies set forth in
this Section 7(e) are in addition to rights and remedies otherwise available to
the Parties under any applicable agreement between the Parties or applicable law
(including injunctive or other equitable relief).
(f) Severability. The provisions of this Agreement will be deemed
severable, and if any part of any provision is held illegal, void or
unenforceable under applicable law, such provision may be changed to the extent
necessary to make the provision, as so changed, legal, valid, binding and
enforceable. If any provision of this Agreement is held illegal, void, invalid
or unenforceable in its entirety, the remaining provisions of this Agreement
will not in any way be affected or impaired but will remain valid, binding and
enforceable in accordance with their terms.
(g) No Duress or Coercion. This Agreement (including the release
contained in Section 5) is freely and voluntarily entered into by each Party
without duress or coercion and after consultation with, or an opportunity to
consult with, counsel; and each Party has carefully and completely read all of
the terms and provisions of this Agreement.
5
<PAGE> 6
8. Personal Property. Mr. Stone shall have the right to remove all
personal property of Mr. Stone's from his offices at the Company at any time
after the Effective Date.
9. Release by Company. In consideration of, and in reliance on, Mr. Stone
entering into this Agreement and agreeing to the terms and conditions of this
Agreement, Company unconditionally releases and forever discharges Mr. Stone
from any and all causes of action, suits, damages, claims, demands and liability
related to Mr. Stone's employment and/or service as an officer, director,
employee or agent of Company occurring prior to and up to the Effective Date,
including, without limitation, any and all causes of action, suits, damages,
claims and demands whatsoever which Company ever had or now has against Mr.
Stone, directly or indirectly, which is now existing or which may hereafter
arise between them, directly or indirectly, by reason or any facts existing on
or prior to the Effective Date, whether known or unknown, except for Mr. Stone's
violation of this Agreement or acts which may hereafter arise between them.
10. Indemnity. The Company shall, to the fullest extent authorized or
permitted by the Michigan Business Corporation Act and federal law, (a)
indemnify Mr. Stone, and his heirs, personal representatives, executors,
administrators and legal representatives, to the extent he 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 he is or was a director, officer, employee or agent of
the Company or is or was serving at the request of the Company as a director,
officer, employee, member or agent of another corporation, partnership, limited
liability company, joint venture, trust or other enterprise (collectively,
"Covered Matters"); and (b) pay or reimburse the reasonable expenses incurred by
Mr. Stone 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 as the same shall become due.
11. Disparagement. The parties will not make, participate in the making of,
or encourage any other person to make, any statements, written or oral, which
criticize, disparage or defame the goodwill or reputation of, or which are
intended to embarrass or adversely affect the morale of the other party and in
the case of Company, any of its respective present, former or future directors,
officers, executives, employees and/or shareholders. The parties agree not to
make any negative statements, written or oral, relating to their association,
the termination of their association, or any aspect of the business of the
Company. Notwithstanding the foregoing, nothing in this Section 11 shall
prohibit any person from making truthful statements when required by order of a
court or other body having jurisdiction or in a discussion with recruiters and
prospective employers, including to explain Mr. Stone's separation from Company.
6
<PAGE> 7
IN WITNESS WHEREOF, the parties have signed this Agreement on the date
set forth in the introductory paragraph above.
THIS IS AN AGREEMENT FOR RELEASE AND WAIVER OF CLAIMS
ROCK FINANCIAL CORPORATION
By: /s/ DANIEL GILBERT
-----------------------------------
Its: President
-------------------------
/s/ STEVEN STONE
----------------------------------------
Steven Stone
7
<PAGE> 1
Exhibit 10.11
AMENDMENT NO. 5 TO
SECOND AMENDED AND RESTATED
MORTGAGE WAREHOUSING AGREEMENT AND WAIVER
-----------------------------------------
THIS AMENDMENT AND WAIVER ("Amendment") is dated as of January 25,
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");
R E C I T A L S :
A. Borrower, Agent and Lenders entered into a certain Second
Amended and Restated Mortgage Warehousing Agreement dated
November 13, 1997, as amended by Amendment No. 1 dated January
30, 1998, Amendment No. 2 dated April 2, 1998, Amendment No. 3
dated July 13, 1998 and Amendment No. 4 dated November 16,
1998 (as amended, the "Agreement").
B. Borrower, Agent and Lenders desire to further amend the
Agreement and waive certain provisions thereof as hereinafter
set forth.
NOW THEREFORE, the parties hereto agree as follows:
1. Steve Stone has ceased to be the President of Borrower and
Borrower has requested that Agent and Lenders waive Borrower's noncompliance
with Section 7.09(iii) of the Agreement (and any resulting Event of Default)
arising therefrom. Agent and Lenders are willing to do so as hereinafter set
forth. For purposes of this Agreement only, Agent and the Lenders hereby waive
Borrower's noncompliance, prior to the effective date of this Amendment, with
Section 7.09(iii) of the Agreement and any Event of Default resulting therefrom.
The foregoing waiver shall not act as a waiver of any other transaction, act or
omission, whether related or unrelated to Steve Stone's ceasing to be the
President of Borrower. The foregoing waiver will not extend to or affect any
obligation, covenant or Event of Default not expressly waived hereby or
otherwise impair any of Agent's and/or any Lender's rights consequent therefrom.
2. Section 7.09 of the Agreement is amended and restated to read
in its entirety as follows:
"7.09 No Change in Management, Ownership or Control. Change in
any material respect its executive management, ownership or control of
its business operations. For purposes of this Section 7.09, if (i) Dan
Gilbert shall cease to own 35% or more of all issued and outstanding
classes of stock of Borrower, or (ii) Dan Gilbert shall cease to be the
Chairman of the Board of Directors and Chief Executive Officer of
Borrower, then Borrower shall be in default of this Section 7.09."
<PAGE> 2
3. 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 accordance with their terms;
(b) the continuing representations and warranties of Borrower set forth in
Section 5 of the Agreement (Sections 5.01-5.16) are true and correct on and as
of the date herewith, with the same force and effect as if made on and as of the
date herewith; and (c) no Event of Default, or condition or event which, with
the giving of notice or the running of time, or both, would constitute an Event
of Default under the Agreement, has occurred and is continuing on or as of the
date hereof.
4. Except as expressly modified by this Amendment, all of the
terms and conditions of the Agreement shall remain in full force and effect.
5. This Amendment shall not become effective unless and until the
Agent shall have received a counterpart of this Amendment executed by Borrower,
Agent and each Lender.
6. Capitalized terms not defined herein shall have the meanings
ascribed to them in the Agreement.
7. 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}
<PAGE> 3
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: /s/ Von Ringger By: /s/ Daniel Gilbert
------------------------------ --------------------------------
Its: Vice President Its: President and CEO
------------------------------ -------------------------------
FIRST UNION NATIONAL BANK,
SUCCESSOR BY MERGER TO
CORESTATES BANK, N.A., AS A LENDER
By: /s/ Edmund Furphy
-------------------------------
Its: Vice President
------------------------------
RESIDENTIAL FUNDING CORPORATION,
AS A LENDER
By: /s/ Barbara Rapetti
-------------------------------
Its: Director, Warehouse Lending
------------------------------
NATIONAL CITY BANK OF
KENTUCKY, AS A LENDER
By /s/ Gary Sievetink
--------------------------------
Its: Vice President
------------------------------
3
<PAGE> 1
EXHIBIT 10.15
BEAR STEARNS HOME EQUITY TRUST
245 PARK AVENUE
NEW YORK, NEW YORK 10167
March 12, 1999
Rock Financial Corporation
30600 Telegraph Road, 4th Floor
Bingham Farms, MI 48025
Attention: Mr. Frank Plenskofski
Re: Master Repurchase Agreement between Bear Stearns
Home Equity Trust and Rock Financial Corporation
Dated as of March 26, 1997 (the "Agreement")
Dear Mr. Plenskofski
This letter will confirm the mutual agreement between Bear Stearns Home Equity
Trust and Rock Financial Corporation to extend the term of the Agreement as
described in paragraph 22, "Non-assignability; Termination" for an additional
three hundred sixty-four (364) days commencing March 24, 1999. The extension
shall be subject to the same terms and conditions as set forth in the Agreement.
Very truly yours,
BEAR STEARNS HOME EQUITY TRUST
By: BEAR STEARNS MORTGAGE CAPITAL
CORPORATION, as agent
By: /s/ John M. Garzone
---------------------------------------
John M. Garzone
Senior Vice President
AGREED AND ACCEPTED:
ROCK FINANCIAL CORPORATION
BY: /s/ Frank Plenskofski
--------------------------------
Name: Frank Plenskofski
--------------------------------
Title: Chief Financial Officer
--------------------------------
<PAGE> 1
EXHIBIT 10.18
JOINT VENTURE AGREEMENT
BY AND BETWEEN
ROCK FINANCIAL CORPORATION
AND
MICHIGAN NATIONAL BANK
FEBRUARY 19, 1999
<PAGE> 2
TABLE OF CONTENTS
-----------------
SECTION PAGE
- ------- ----
ARTICLE I DEFINITIONS........................................................2
1.1 Affiliate..........................................................2
1.2 Ancillary Agreements...............................................3
1.3 Applicant..........................................................3
1.4 Article............................................................3
1.5 Business Day.......................................................4
1.6 Business Plan......................................................4
1.7 Closing............................................................4
1.8 Closing Date.......................................................4
1.9 Company............................................................4
1.10 Company Mortgage Loan Customers....................................4
1.11 Company Products...................................................5
1.12 [RESERVED].........................................................5
1.13 Control or Controlling.............................................5
1.14 CRA Products.......................................................5
1.15 Dissolution Event..................................................6
1.16 Employee Transfer Date.............................................6
1.17 FHA................................................................6
1.18 Financial Products or Services.....................................6
1.19 Financial Services Provider........................................7
1.20 Financial Statements...............................................7
1.21 [RESERVED].........................................................8
1.22 Include or Including...............................................8
1.23 Joint Venture Business.............................................8
1.24 Joint Venture Territory............................................8
1.25 Legally Protected Technology.......................................8
1.26 License Agreement(s)...............................................9
1.27 Manager............................................................9
1.28 Members............................................................9
1.29 MNB Correspondent Agreement........................................9
1.30 MNB Customer.......................................................9
1.31 Mortgage Loan.....................................................10
1.32 Mortgage Warehousing Line of Credit and Security Agreement........12
1.33 MSHDA.............................................................13
1.34 Non-Competing Home Equity Products................................13
1.35 Operating Agreement...............................................13
1.36 Person............................................................13
1.37 RFC Correspondent Agreement.......................................14
1.38 RFC Customer......................................................14
1.39 RFC Sub-Servicing Agreement.......................................14
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SECTION PAGE
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1.40 Section...........................................................14
1.41 Services Agreement(s).............................................14
1.42 Tailored Home Loan Product........................................15
1.43 Termination Event.................................................15
1.44 Trademark and Registered Mark License Agreement(s)................15
1.45 VA................................................................15
ARTICLE II PURPOSE AND SCOPE................................................16
2.1 General Purpose of the Company....................................16
2.2 Further Assurances and Joinder....................................16
ARTICLE III FORMATION OF THE COMPANY........................................16
3.1 Formation.........................................................16
3.2 Expenses of Formation and Other Expenses..........................16
3.3 MNB Pipeline......................................................17
3.4 Inventory of Closed and Unclosed Construction Loans At Closing - Two-
Time Closing Construction-Only and One-Time Closing Construction-
Permanent Product Types...........................................18
ARTICLE IV NON-SOLICITATION AND OTHER COMPETITIVE CONSIDERATIONS............19
4.1 General Competition Considerations................................19
4.2 Non-Solicitation of Financial Products or Services................23
4.3 Maintenance and Segregation of Databases and Sharing of Customer
Information.......................................................26
4.4 Reasonableness of Restrictions....................................27
4.5 Enforceability of Restrictions....................................27
4.6 Integration of Company Mortgage Loan Products with MNB Financial
Products or Services..............................................28
4.7 Competitive Pricing on Company Products...........................29
4.8 Mortgage Warehousing Line of Credit and Security Agreement -
Competitiveness of Pricing Arrangements and Service Standards.....29
4.9 Tailored Home Loan Mortgage Loan Products and Program.............30
4.10 Certification.....................................................31
4.11 HomeSide Correspondent Relationship...............................31
ARTICLE V TECHNOLOGY AND TRADEMARKS.........................................32
5.1 Technology License................................................32
5.2 General Restrictions on Technology Licensing......................32
5.3 Trademark and Registered Mark License Agreement(s)................32
5.4 Other Provisions..................................................33
5.5 MNB Link to Company's Call Center.................................33
5.6 Web Sites.........................................................34
ARTICLE VI AUDIT, COMPLIANCE WITH LAWS AND POLICIES, TRAINING AND MARKETING
MATERIALS....................................................................36
6.1 Audit and Access to Records.......................................36
6.2 Compliance with Laws and Policies.................................37
6.3 [RESERVED]........................................................38
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SECTION PAGE
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6.4 [RESERVED]........................................................38
6.5 Employee Contracts................................................38
6.6 Training..........................................................39
6.7 OCC and Other Regulatory Oversight................................39
6.8 Quality Control...................................................39
6.9 Marketing Media Material Approval Process.........................40
ARTICLE VII SERVICES AGREEMENTS.............................................41
7.1 Support of the Company............................................41
ARTICLE VIII FINANCIAL REPORTING AND OTHER REPORTS AND RECORDS..............42
8.1 Financial Reporting...............................................42
8.2 Auditors..........................................................43
8.3 Other Reports.....................................................43
8.4 Company Minute Books..............................................44
8.5 Confidentiality of Information Furnished Between the Company and
Any Member........................................................44
ARTICLE IX FACILITIES AND PERSONNEL.........................................46
9.1 Initial Personnel.................................................46
9.2 [RESERVED]........................................................47
9.3 No Poaching.......................................................47
9.4 Sharing of Space at MNB Financial Center Offices..................48
9.5 Sale of Furniture, Fixtures and Equipment to Company by MNB.......49
9.6 Company Employees Conducting Business on MNB Financial Center
Premises..........................................................49
ARTICLE X CLOSING AND CONDITIONS PRECEDENT TO CLOSING.......................50
10.1 Closing...........................................................50
10.2 Conditions Precedent to Closing...................................50
10.3 Failure to Close..................................................54
ARTICLE XI DEFAULT..........................................................55
11.1 Definition........................................................55
11.2 Notice and Cure...................................................56
11.3 Rights Upon the Happening of a Material Default Event or Other
Default...........................................................56
11.4 Force Majeure.....................................................58
ARTICLE XII TERM AND TERMINATION............................................59
12.1 Term..............................................................59
12.2 Termination.......................................................59
12.3 Effect of Termination on Ancillary Agreements and the Operating
Agreement.........................................................60
12.4 [RESERVED]........................................................60
12.5 Technology Rights and Trademark and Registered Mark Rights on
Termination.......................................................60
12.6 Termination of Non-Solicitation Restrictions; Use of Lists........61
12.7 Pending Mortgage Loan Applications at Company.....................62
12.8 Existing Pipeline of Mortgage Loan Applications and Inventory of
Closed Mortgage Loans.............................................63
12.9 Confidentiality...................................................64
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SECTION PAGE
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ARTICLE XIII INDEMNIFICATION................................................64
13.1 Misrepresentations; Breaches of Covenants; Other Indemnities......64
13.2 Survival of Representations, Warranties and Covenants.............65
13.3 Claims Procedures.................................................65
13.4 Defense...........................................................66
13.5 Company Errors and Omissions Insurance Policy, Fidelity Bond and
Other Insurance-Related Policies..................................66
ARTICLE XIV MISCELLANEOUS...................................................68
14.1 Entire Agreement..................................................68
14.2 Amendment.........................................................68
14.3 Notices...........................................................68
14.4 Waiver............................................................70
14.5 Assignment........................................................71
14.6 Further Assurances................................................71
14.7 Construction......................................................71
14.8 Counterparts......................................................72
14.9 Public Announcement...............................................72
14.10 No Brokers........................................................72
14.11 Governing Law.....................................................73
14.12 No Third Party Beneficiaries......................................73
14.13 Independence......................................................73
14.14 Internal Dispute Resolution.......................................73
14.15 Conflict..........................................................74
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LIST OF EXHIBITS
EXHIBIT A NON-COMPETING HOME EQUITY PRODUCTS
EXHIBIT B CRA PRODUCTS
EXHIBIT C ARTICLES OF ORGANIZATION
EXHIBIT D [RESERVED]
EXHIBIT E REPRESENTATIONS, WARRANTIES AND COVENANTS
EXHIBIT F MNB PIPELINE OF UNCLOSED LOANS
EXHIBIT G CONSTRUCTION LOANS
EXHIBIT H MNB AND RFC CANDIDATES FOR EMPLOYMENT AT THE COMPANY
EXHIBIT I FURNITURE, FIXTURES AND EQUIPMENT TO BE SOLD BY MNB TO THE COMPANY
EXHIBIT J LICENSE AGREEMENT(S)
EXHIBIT K MNB CORRESPONDENT AGREEMENT
EXHIBIT L MORTGAGE WAREHOUSING LINE OF CREDIT AND SECURITY AGREEMENT
EXHIBIT M OPERATING AGREEMENT
EXHIBIT N RFC CORRESPONDENT AGREEMENT
EXHIBIT O RFC SUB-SERVICING AGREEMENT
EXHIBIT P SERVICES AGREEMENT(S)
EXHIBIT Q TRADEMARK AND REGISTERED MARK LICENSE AGREEMENT(S)
EXHIBIT R FICO SCORE
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JOINT VENTURE AGREEMENT
THIS JOINT VENTURE AGREEMENT ("AGREEMENT") is made and entered into as
of the 19th day of February, 1999, by and between ROCK FINANCIAL CORPORATION
("RFC"), with its principal place of business located at 30600 Telegraph Road,
Fourth Floor, Bingham Farms, MI 48025 and MICHIGAN NATIONAL BANK ("MNB"), with
its principal place of business located at 27777 Inkster Road, Farmington Hills,
MI 48334.
RECITALS
A. RFC is engaged in the residential mortgage loan origination business
primarily in the State of Michigan, and makes, services, and sells conventional
and sub-prime debt consolidation and home financing loans and "FHA" (as defined
below) and "VA" (as defined below) loans, secured primarily by a first or second
mortgage on a one-to-four family residence;
B. MNB, through its Residential Mortgage Loan Department, is engaged in
the residential mortgage loan origination business primarily in the State of
Michigan, and makes, services on an interim basis, and sells conventional and
sub-prime debt consolidation and home financing loans, and FHA and VA loans,
secured by a first mortgage on a one-to-four family residence;
C. MNB desires to restructure its residential mortgage loan origination
business so as to offer this business in the future through a strategic alliance
between MNB and RFC;
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D. RFC desires to enter into this strategic alliance to strengthen its
position as a residential mortgage loan originator in its marketplace and to
increase its overall market share; and
E. The parties to this Agreement each desire to combine their relative
strengths to form a strategic alliance for the purpose of offering residential
mortgage lending origination services to MNB's customers and prospective
customers, through the establishment of a Michigan limited liability company, to
operate or operating under that certain "Operating Agreement" (as defined
below).
NOW, THEREFORE, in consideration of the above Recitals and the mutual
agreements set forth below, and referenced herein, the parties agree as follows:
ARTICLE I DEFINITIONS
For purposes of this Agreement, where written with an initial capital
letter, the following terms, words and phrases shall have the following
meanings:
1.1 Affiliate. Affiliate means a Person that directly or indirectly,
through one or more intermediaries, controls, is controlled by or is under
common control with, the first person,
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whether now or hereafter created or in existence; provided that as used in this
Agreement for definitional purposes only (i) the Company shall not be deemed an
Affiliate of RFC or MNB, (ii) Affiliate of RFC shall include only direct or
indirect parents of RFC and subsidiaries of RFC or such parents, (iii) HomeSide
Lending, Inc. shall not be deemed an Affiliate of MNB, and (iv) Affiliate of MNB
shall only include the direct parent of MNB and subsidiaries of MNB or such
direct parent.
1.2 Ancillary Agreements. Ancillary Agreements shall mean the (i)
Mortgage Warehousing Line of Credit and Security Agreement, (ii) the
Confidentiality and Non-Disclosure Agreement, dated September 17, 1998, between
MNB and RFC, (iii) RFC Correspondent Agreement, (iv) RFC Sub-Servicing
Agreement, (v) Trademark and Registered Mark Licensing Agreement(s), (vi)
Services Agreement(s), (vii) MNB Correspondent Agreement, and (viii) any other
agreements signed between one or more of the "Members" (as defined below) and
the "Company" (as defined below); together with their respective exhibits,
schedules and appendices, as such agreements may be amended from time to time.
1.3 Applicant. Applicant shall mean a natural person who has made
application to the Company for a Mortgage Loan.
1.4 Article. Article shall mean an Article of this Agreement, unless
the context otherwise requires.
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1.5 Business Day. Business Day shall mean any day other than a
Saturday, Sunday or other legal holiday on which a national banking institution
is required by law or by executive order to be closed.
1.6 Business Plan. Business Plan shall mean the annual business plan
under which the Company is operating in accordance with the terms of the
Operating Agreement.
1.7 Closing. Closing shall mean the actions taken to effect the
transactions contemplated herein, all as more specifically described in Article
X below.
1.8 Closing Date. Closing Date shall mean the date on which the Closing
is held pursuant to the terms of Article X below.
1.9 Company. The Michigan limited liability company organized and
structured by the Members pursuant to the terms of the Articles of Organization
(as amended from time to time) and the Operating Agreement which shall transact
business under the name of Rock Home Loans @ Michigan National, LLC, and any
other assumed names the Members may elect at the time of organization or in the
future.
1.10 Company Mortgage Loan Customers. Company Mortgage Loan Customers
shall mean those customers who have obtained a Mortgage Loan with the Company.
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1.11 Company Products. Company Products shall mean conventional,
sub-prime, FHA, MSHDA, VA and other Mortgage Loans (Including CRA Products and
Non-Competing Home Equity Products), whether now or hereafter offered or
developed by the Company.
1.12 [RESERVED]
1.13 Control or Controlling. Control (including the terms
"controlling", "controlled by" and "under common control with") means (i)
directly or indirectly, or acting through one or more persons, owning,
controlling or having the power to vote more than 50% of any class of voting
securities of a "Person" (as defined below), (ii) controlling in any manner, or
having the ability to control, either (a) the election of a majority of the
board of directors (or comparable body) of a Person, or (b) the referral of
Joint Venture Business or Financial Products or Services of or to a Person,
(iii) contributing more than 50% of the capital of a Person, or (iv) the
possession, direct or indirect, of the power to direct or cause the direction of
the management and policies of a Person, whether through the ownership of voting
securities, by contract, or otherwise.
1.14 CRA Products. CRA Products shall mean those certain products
listed on EXHIBIT B to this Agreement, as such EXHIBIT B is amended from time to
time by MNB by at least 30 days prior written notice from MNB to RFC and the
Company; provided, that any such amendment shall be for the purpose of meeting
MNB's then existing Community Reinvestment Act obligations; and provided
further, that a product shall be a CRA Product only if either (i) the
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product is readily saleable in the secondary mortgage market at a price that is
at least equal to the cost (including allocated overhead) to the Company of
originating, servicing and selling such product, or (ii) MNB commits to purchase
such product from the Company pursuant to the MNB Correspondent Agreement at a
price that is at least equal to the cost (including allocated overhead) to the
Company of originating, servicing and selling such product.
1.15 Dissolution Event. Dissolution Event shall have the meaning given
that term in Section 9.01 of the Operating Agreement.
1.16 Employee Transfer Date. Employee Transfer Date shall mean April 5,
1999, if Closing has occurred prior to such date, or five (5) Business Days
after Closing, if Closing occurs later than April 5, 1999.
1.17 FHA. FHA shall mean the Federal Housing Administration of the
Department of Housing and Urban Development of the United States or any
successor thereto.
1.18 Financial Products or Services. Financial Products or Services
shall mean all financial services or products that are or may in the future be
offered by a bank, financial institution or a financial services organization or
financial services entity, "Including" (as defined below), consumer credit and
charge cards, debit cards, ATM access devices, point of sale products, smart
cards, PC banking and electronic commerce banking services, depository account
products (Including without limitation, certificates of deposit, individual
retirement
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accounts, money market accounts and demand deposit accounts and savings
accounts), line of credit products and other loan accounts (whether secured or
unsecured), securities, brokerage, and insurance products (Including, mortgage
or credit life, disability or unemployment, homeowners, life and automobile
insurance) and other similar financial services or products; provided, that
Financial Products or Services shall not include Mortgage Loans
1.19 Financial Services Provider. Financial Services Provider means a
foreign bank or foreign savings and loan association, or a state or nationally
chartered bank (state bank shall Include without limitation any bank, banking
association, trust company, savings bank, mutual savings bank, industrial bank
or similar depository financial institution which is engaged in the business of
receiving deposits), or a state or federally chartered savings and loan
association, savings association or savings bank (state savings association
shall Include any building and loan association or homestead association or
cooperative savings bank or a qualified savings bank or similar depository
financial institution which is engaged in the business of receiving deposits),
or a state or federally chartered credit union, or an entity of the federally
chartered farm credit system, or any other entity engaged in the business of
providing Financial Products or Services.
1.20 Financial Statements. Financial Statements shall mean an income
statement, a balance sheet and, only for annual audited financial statements, a
statement of cash flows, all conforming to U.S. generally accepted accounting
principles consistently applied, except for interim and unaudited statements,
which are not required to include footnotes and are subject to periodic
adjustments, Including year-end adjustments.
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1.21 [RESERVED].
1.22 Include or Including. Include or Including shall indicate examples
of a foregoing general statement and not a limitation on that general statement.
1.23 Joint Venture Business. Joint Venture Business means originating,
servicing and/or selling conventional, sub-prime, FHA, VA, MSHDA and other
Mortgage Loans (Including CRA Products and Non-Competing Home Equity Products)
secured by real estate located in the Joint Venture Territory, all of which
close in the name of, and are funded by, the Company. For purposes of this
definition, originating does not include brokered transactions or purchasing or
obtaining assignments of Mortgage Loans from mortgage brokers or correspondent
lenders.
1.24 Joint Venture Territory. Joint Venture Territory shall mean the
State of Michigan (Including MNB's assessment areas under the Community
Reinvestment Act ("CRA"), as provided in MNB's CRA Statement, as such assessment
areas may be amended from time to time), unless and until hereafter expanded,
restricted or otherwise modified by the Members in writing pursuant to the terms
of the Operating Agreement.
1.25 Legally Protected Technology. Legally Protected Technology shall
mean technology belonging to MNB or RFC which is (i) patented, (ii) subject to
copyright, registered
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design or mark (Including graphics) or utility model protection, or (iii) a
legally protected trade secret.
1.26 License Agreement(s). License Agreement(s) shall mean those
certain agreement(s) in the form to be attached to this Agreement as EXHIBIT J
on or before the Closing Date, to be executed between (i) MNB and the Company
and/or (ii) RFC and the Company to make available to the Company certain
information and non-information technology.
1.27 Manager. Manager shall have the meaning given such term in the
Operating Agreement.
1.28 Members. Members shall mean RFC and MNB, respectively, as Members
of the Company pursuant to the terms of the Operating Agreement.
1.29 MNB Correspondent Agreement. MNB Correspondent Agreement shall
mean that certain agreement between the Company and MNB for the sale of certain
"servicing released" Mortgage Loans originated by Company to MNB, as an
investor, for placement in MNB's loan portfolio, in the form to be attached to
this Agreement as EXHIBIT K on or before the Closing Date.
1.30 MNB Customer. MNB Customer shall mean a Person who has a
relationship with MNB for any one or more Financial Products or Services.
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1.31 Mortgage Loan. Mortgage Loan shall mean each of the following:
(i) First Lien and Complimentary Mortgages. (a) an installment
loan evidenced by a residential mortgage note secured by a first lien
mortgage, deed of trust, deed to secure debt or similar instrument, on
a one-to-four family residence (Including manufactured, vacation and
second homes and co-ops), whether owner-occupied or otherwise,
Including a CRA Product and the Tailored Home Loan Product, and (b)
mortgage loans that enhance the ability of an Applicant to finance or
refinance a residence and that are expected to be executed at
approximately the same time (and in connection with the same financing)
as a loan described in Section 1.31(i)(a), together with associated
servicing rights, for home financing (Including refinancing) purposes,
debt consolidation purposes or otherwise; provided, however, the
following loans shall NOT be considered a "Mortgage Loan" as defined in
this Section 1.31(i):
(A) Revolving Lines of Credit. any home equity
revolving line of credit product secured by a first lien
mortgage, deed of trust, deed to secure debt or similar
instrument, on a one-to-four family residence (Including
manufactured, vacation and second homes and co-ops), whether
owner-occupied or otherwise; and
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(B) Daily Simple Interest Loans. any installment,
demand or other repayment plan loan product with a daily
simple interest feature if the loan is not a conventional loan
(excluding any conditions regarding the loan amount) that is
readily saleable into the secondary mortgage market.
(ii) Junior Lien Mortgages. (a) an installment loan evidenced
by a residential mortgage note, secured by a junior lien mortgage, deed
of trust, deed to secure debt or similar instrument, on a one-to-four
family residence (Including manufactured, vacation and second homes and
co-ops), whether owner-occupied or otherwise; provided the consumer
makes initial application or inquiry to the Company for a refinance of
a first lien mortgage loan, or (b) the loan is a Non-Competing Home
Equity Product; together with associated servicing rights, for home
financing (Including refinancing) purposes, debt consolidation purposes
or otherwise; provided, however, the following loans shall NOT be
considered a "Mortgage Loan" as defined in this Section 1.31(ii):
(A) Revolving Lines of Credit. any home equity
revolving line of credit product secured by a junior lien
mortgage, deed of trust, deed to secure debt or similar
instrument, on a one-to-four family residence (Including
manufactured, vacation and second homes and co-ops), whether
owner-occupied or otherwise, unless any such product is
offered by the Company through the MNB Correspondent
Agreement, as MNB and the Company mutually agree to so offer
such product(s);
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(B) Daily Simple Interest Loans. any installment,
demand or other repayment plan loan product with a daily
simple interest feature unless (i) (A) the loan is readily
saleable into the secondary mortgage market, and (B) the loan
is a Non-Competing Home Equity Product, or (ii) the loan is
originated for MNB's portfolio and such product is offered by
the Company through the MNB Correspondent Agreement as MNB and
the Company mutually agree to so offer such product(s); and
(C) Prime Loans. any request for an installment loan
product described in Section 1.31(ii)(a) where the Company
Applicant or inquiring consumer has a FICO score or similar
credit scoring mechanism score equal to or greater than the
score provided in EXHIBIT R, as such EXHIBIT R is amended from
time to time by MNB, with at least 30 days prior written
notice from MNB to RFC and the Company if the score disclosed
in EXHIBIT R is decreased.
1.32 Mortgage Warehousing Line of Credit and Security Agreement.
Mortgage Warehousing Line of Credit and Security Agreement means that certain
agreement between the Company and MNB, in the form to be attached to this
Agreement as EXHIBIT L on or before the Closing Date, under which the Company
desires to warehouse certain Mortgage Loans with MNB pending the sale of such
Mortgage Loans to the Company's investors and under which
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MNB has agreed to establish a line of credit in favor of the Company to be
secured by such Mortgage Loans and related collateral.
1.33 MSHDA. MSHDA shall mean the Michigan State Housing Development
Authority.
1.34 Non-Competing Home Equity Products. Non-Competing Home Equity
Products shall mean those certain products listed on EXHIBIT A to this
Agreement, as such EXHIBIT A is amended from time to time (i) by MNB by at least
30 days prior written notice from MNB to RFC and the Company if any products are
removed from EXHIBIT A, or (ii) by mutual agreement of the Members if any
products are added to EXHIBIT A.
1.35 Operating Agreement. Operating Agreement shall mean that certain
Operating Agreement of Rock Home Loans @ Michigan National, LLC, dated the same
date as this Agreement, between the Members attached to this Agreement as
EXHIBIT M, as such agreement may be amended from time to time.
1.36 Person. Person means a natural person, corporation, limited
liability company, partnership, joint venture, business trust, association,
unincorporated organization or similar legal organization or entity.
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1.37 RFC Correspondent Agreement. RFC Correspondent Agreement shall
mean that certain agreement between the Company and RFC for the sale of certain
Mortgage Loans originated by the Company to RFC, as an investor, in the form to
be attached to this Agreement as EXHIBIT N on or before the Closing Date.
1.38 RFC Customer. RFC Customer shall mean a Person who has a
relationship with RFC for any one or more Financial Products or Services or
Mortgage Loans, Including any Person who has obtained a mortgage loan from RFC.
1.39 RFC Sub-Servicing Agreement. RFC Sub-Servicing Agreement shall
mean that certain agreement between the Company and RFC for the servicing of
Mortgage Loans originated by the Company pending sale of such Mortgage Loans to
an investor, in the form to be attached to this Agreement as EXHIBIT O on or
before the Closing Date.
1.40 Section. Section shall mean a section of this Agreement, unless
the context otherwise requires.
1.41 Services Agreement(s). Services Agreement(s) shall mean those
certain agreements (i) between MNB and the Company and (ii) between RFC and the
Company, for certain administrative services to be provided to the Company from
time to time, Including the sharing of space in MNB's financial center offices
to accommodate the Company's mortgage
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loan officers' sales efforts, in the form to be attached to this Agreement as
EXHIBIT P on or before the Closing Date.
1.42 Tailored Home Loan Product. The Tailored Home Loan Product shall
mean that certain proprietary daily simple interest loan product which contains
features Including an acceleration factor and redraws, along with the Legally
Protected Technology rights which attach to and are part of such loan product,
that MNB agrees may be offered by the Company, subject to Section 4.9.
1.43 Termination Event. Termination Event shall have the meaning given
that term in Section 9.02 of the Operating Agreement.
1.44 Trademark and Registered Mark License Agreement(s). Trademark and
Registered Mark License Agreement(s) shall mean those certain agreement(s) to be
executed (i) between the Company and MNB and (ii) between the Company and RFC,
which by its terms govern the use of the trademarks or registered marks, in the
form to be attached to this Agreement as EXHIBIT Q on or before the Closing
Date.
1.45 VA. VA shall mean the United States Department of Veteran Affairs
or any successor thereto.
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ARTICLE II PURPOSE AND SCOPE
2.1 General Purpose of the Company. The purpose of the Company is as
described in Section 1.04 of the Operating Agreement.
2.2 Further Assurances and Joinder. In order to give effect to the
mutual agreements of the parties hereunder, RFC hereby agrees to use its
reasonable efforts to cause its Affiliates (whether now or hereafter created or
in existence) and MNB agrees to use its reasonable efforts to cause its
Affiliates (whether now or hereafter created or in existence) to enter into and
perform all other agreements required of them by the terms of this Agreement, as
and when applicable.
ARTICLE III FORMATION OF THE COMPANY
3.1 Formation. Prior to Closing, RFC and MNB shall take all necessary
steps required to cause the formation of a Michigan limited liability company to
be named Rock Home Loans @ Michigan National, LLC, or such other name as may be
agreed by the Members, having Articles of Organization (as may be amended by the
Members) in the form attached hereto as EXHIBIT C. The Company shall be governed
pursuant to the Operating Agreement and the Articles of Organization.
3.2 Expenses of Formation and Other Expenses. Each party will pay its
respective costs and expenses of negotiating and consummating the transactions
contemplated herein,
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Including, expenses of counsel, accountants, and other advisers and consultants.
Any expenses or services shall be reimbursed by the Company only if incurred by
the Member explicitly on behalf of the Company, Including costs and fees
required to make any governmental or regulatory filings or obtain any
governmental or regulatory consents, however designated and whenever levied. The
Company shall bear all direct operating costs of the Company, Including
advertising, promotional costs, insurance, legal and audit fees and other
similar, usual and ordinary direct operating costs and expenses.
3.3 MNB Pipeline. Provided any necessary investor consents are obtained
by MNB, within one (1) Business Day after the Employee Transfer Date, MNB, RFC
and the Company will identify on EXHIBIT F MNB's pipeline of Mortgage Loans in
the Joint Venture Territory to be transferred to the Company (Including loans
which following closing and funding by the Company are to be sold to MNB
pursuant to that certain MNB Correspondent Agreement). MNB shall, without
recourse, assign all right, title and interest to such loans (and any related
forward commitments relating to such loans) to the Company effective as of the
Employee Transfer Date. This assignment or transfer shall be communicated to
each applicant prior to the loan closing, and at or prior to the loan closing,
the applicant shall sign documentation evidencing such assignment or transfer of
the loan to the Company. The Company shall make no payment to MNB for such
pipeline of Mortgage Loans in the Joint Venture Territory, other than any
distributions from MNB's capital account in the Company relating to profits and
losses of the Company relating to such Mortgage Loans.
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The Company will pay to the sales representatives (Including mortgage
loan officers, personal account executives, financial services representatives
and financial services managers) who are employees of the Company at the time
the applicable Mortgage Loan closes, the appropriate compensation for such loans
as provided on the applicable sales compensation schedule. MNB is responsible
for unwinding and satisfying its own hedges that the Company does not elect to
acquire.
3.4 Inventory of Closed and Unclosed Construction Loans At Closing-
Two-Time Closing Construction-Only and One-Time Closing Construction-Permanent
Product Types. At the time of Closing, the MNB inventory of construction loans
(whether closed or in process) shall be retained and maintained by MNB during
the construction phase. In the event a one time closing construction-permanent
loan becomes a permanent Mortgage Loan, following the satisfactory completion of
the construction-phase of the mortgage loan, which shall be determined in the
sole discretion of MNB, then in that event MNB may elect to either (i) sell such
permanent Mortgage Loan to the Company, without recourse, and assign all right,
title and interest in such loan to the Company effective as of the sale date, if
the Company desires to acquire such Mortgage Loan, (ii) retain such permanent
loan in MNB's loan portfolio as an asset of MNB, or (iii) sell such loan to an
investor of MNB. Completion of the construction phase of any two-time closing
construction-only loan of MNB shall be determined in the sole discretion of MNB.
Upon completion of the construction phase of a two-time closing
construction-only loan, MNB shall assign, without recourse, to the Company the
end-loan application for the end-loan to take out MNB as the construction lender
if the end-loan is either readily saleable in the
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secondary mortgage market or MNB is willing to purchase such end loan pursuant
to the MNB Correspondent Agreement.
Provided any necessary investor consents are obtained by MNB, within
ten (10) Business Days after the Employee Transfer Date, MNB and the Company
will identify on EXHIBIT G, those one-time closing construction-permanent loans
and those two-time closing construction-only loans (whether closed or in
process). MNB, RFC and the Company shall mutually agree upon the price for such
one time closing construction-permanent loans after such loans become permanent
Mortgage Loans, as MNB in its discretion makes such loans available for purchase
by the Company, and the Company in its discretion determines to buy such loans.
ARTICLE IV NON-SOLICITATION AND OTHER COMPETITIVE
CONSIDERATIONS
In order for the Company to succeed and accomplish its objectives, and
in order to avoid confusion among customers, prospective customers, and other
third parties, the parties agree as follows until the termination of this
Agreement:
4.1 General Competition Considerations. Except as otherwise provided in
this Agreement, the Operating Agreement or any one or more of the Ancillary
Agreements, MNB and RFC and their Affiliates shall be free to compete with each
other in all businesses and in all
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matters that are either outside the scope of the Joint Venture Business or
outside the Joint Venture Territory.
During the term of this Agreement, RFC and its Affiliates shall not
enter into any joint venture, or other similar business arrangement, that is
similar to the arrangement described in this Agreement with any Financial
Services Provider or "Depository Institution Holding Company" as defined in the
Federal Deposit Insurance Act, Section 3(w)(1) [12 USC Section 1813(w)(1)] that
is not an Affiliate of RFC (provided that for purposes of this sentence only,
the term Financial Services Provider shall not include the phrase "or any other
entity engaged in the business of providing Financial Products or Services"
contained at the end of the definition of such term) to originate residential
mortgage loans in the Joint Venture Territory that are substantially similar to
the Mortgage Loans offered by the Company for its Joint Venture Business,
without the prior written consent of MNB; provided that nothing in this sentence
shall prohibit RFC or any of its Affiliates from (i) being acquired,
consolidated with any Person, merged with any Person or otherwise combined with
any Person, if the acquiror owns or obtains a Controlling interest in the
acquired entity, or (ii) owning or obtaining a Controlling interest (through an
acquisition, consolidation, merger, other business combination or business
arrangement or de novo event) in any Person even if any of the involved Persons
is a Financial Services Provider or a Depository Institution Holding Company
that originates residential mortgage loans in the Joint Venture Territory that
are substantially similar to the Mortgage Loans offered by the Company for its
Joint Venture Business. This paragraph does not change the parties' rights under
Sections 9.01 and 9.02 of the Operating Agreement.
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MNB, its Affiliates (provided that for purposes of this Section 4.1
only, Affiliates shall not include Executive Relocation Corporation), or any
third party designee of such entity shall not directly or indirectly (i) conduct
Joint Venture Business or otherwise originate, service and/or sell Mortgage
Loans in the Joint Venture Territory, (ii) knowingly solicit on a targeted basis
a MNB Customer, a Company Mortgage Loan Customer or a Company Applicant for any
Mortgage Loans, except through the Company, or (iii) "knowingly solicit on a
targeted basis" (as defined in this Section below) a RFC Customer for any
products or services then offered by RFC; provided, however, "Mortgage Loan" as
defined in Section 1.31 of this Agreement for purposes of this Section 4.1 shall
not include the following loans:
(i) any installment loan secured by a first lien
mortgage, deed of trust, deed to secure debt or similar
instrument, on a one-to-four family residence (Including
manufactured, vacation and second homes and co-ops), whether
owner-occupied or otherwise if (i) the consumer makes initial
application to MNB for a first lien installment loan in the
principal amount of $50,000 or less, and (ii) the loan is (A)
not generally accepted in the secondary mortgage market as a
prime conventional loan (excluding any conditions regarding
the loan amount), or (B) not readily saleable into the
secondary mortgage market;
(ii) any installment loan secured by a first or
junior lien mortgage, deed of trust, deed to secure debt or
similar instrument, on a one-to-four family
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residence (Including manufactured, vacation and second homes
and co-ops), whether owner-occupied or otherwise if (i) the
consumer makes initial application to MNB for a junior lien
installment loan in any principal amount, and (ii) for any
first lien loan, the loan is (A) not generally accepted in the
secondary mortgage market as a prime conventional loan
(excluding any conditions regarding the loan amount), or (B)
not readily saleable into the secondary mortgage market; and
(iii) any residential construction-only loan that is
considered to be a temporary financing loan, but not the
related take-out loan.
It is understood and agreed by the parties that "knowingly solicit on a
targeted basis" for purposes of this Section 4.1 shall not include promotions
and solicitations by direct mail, facsimile transmission, telephonic, electronic
(Including Internet) or in-person contacts or by any other available means which
are based on (i) commercially acquired or available mailing lists or any
publicly available information, if MNB, any of its Affiliates or any third party
designee of such entity desiring to use such list or publicly available
information purges from such lists or compilation of publicly available
information the names of any RFC Customer where RFC is readily identifiable on
the list as a lender to such customer; provided that such name is not required
to be purged if such customer is also a MNB Customer or a customer of a MNB
Affiliate, (ii) newspaper, radio and television or other electronic mass media
advertisements, (iii) any MNB Customer database or MNB Affiliate customer
database, (iv) advertisements, banners or any other information on MNB's
Internet site, and (v) initiation of contact by a consumer to
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the retail offices, Internet site, call center or any other marketing channel of
MNB, any of its Affiliates or any third party designee of such entity; provided,
however, the consumer's initiation of contact with MNB is not in response to a
promotion or solicitation prohibited by the terms of this Section 4.1.
MNB, its Affiliates, their officers, employees and agents and any third
party designee of such entity shall direct each MNB Customer and any other
consumer who requests or indicates an interest in obtaining a Mortgage Loan that
would constitute Joint Venture Business in the Joint Venture Territory, to the
Company for such Mortgage Loans. MNB will provide to the Company on or before
the Closing Date a list of the names, addresses and phone numbers of each MNB
Customer, and will provide the Company with an update of such list quarterly
within fifteen (15) Business Days after the end of each calendar quarter. In
providing any customer information of the Company for purposes other than
soliciting Financial Products or Services or required filings with governmental
agencies, MNB, its Affiliates, or any third party designee of such entity shall
obtain assurances that its transferee will not use the information for any
purpose prohibited by this Section 4.1.
4.2 Non-Solicitation of Financial Products or Services. RFC, any of its
Affiliates or any third party designee of such entity (and the Company, except
for the origination of Mortgage Loans for its Joint Venture Business in the
Joint Venture Territory), shall not directly or indirectly "knowingly solicit on
a targeted basis" (as defined in this Section below) a MNB Customer or a Company
Mortgage Loan Customer or a Company Applicant for (i) any Financial
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Products or Services then being offered by MNB or any of its Affiliates, or (ii)
any Mortgage Loans then being offered by the Company.
It is understood and agreed by the parties that "knowingly solicit on a
targeted basis" for purposes of this Section 4.2 shall not include promotions
and solicitations by direct mail, facsimile transmission, telephonic, electronic
(Including Internet) or in-person contacts or by any other available means which
are based on (i) commercially acquired or available mailing lists or any
publicly available information, if RFC, any of its Affiliates or any third party
designee of such entity desiring to use such list or publicly available
information purges from such lists or compilation of publicly available
information the names of any MNB Customer and any Company Mortgage Loan Customer
where MNB or the Company is readily identifiable on the list as a lender or a
Financial Services Provider, as applicable, to such customer; provided that such
name is not required to be purged if such customer is also a RFC Customer or a
customer of a RFC Affiliate, (ii) newspaper, radio and television or other
electronic mass media advertisements, (iii) any RFC Customer database or RFC
Affiliate customer database (subject to the Section 4.3 database segregation
requirements of this Agreement), (iv) advertisements, banners or any other
information on RFC's Internet site, Including any portion of that site used by
Company Mortgage Loan Customers, Company Applicants or MNB Customers or
potential customers to apply for a Mortgage Loan, and (v) initiation of contact
by a consumer to the retail offices, Internet site, call center or any other
marketing channel of RFC, any of its Affiliates or any third party designee of
such entity; provided, however, the consumer's initiation of contact
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with RFC is not in response to a promotion or solicitation prohibited by the
terms of this Section 4.2.
RFC, any of its Affiliates, any third party designee of such entity and
the Company shall not be allowed (i) to use a list or partial list of known
Company Applicants, Company Mortgage Loan Customers or MNB Customer names (to
the extent they are known by RFC to be Company Applicants, Company Mortgage Loan
Customers, or MNB Customers either because the Company or MNB customer
relationship is readily identifiable from such list or because the list
intentionally targets the Company Applicants, Company Mortgage Loan Customers or
MNB Customers) for any marketing, cross-sell or other solicitation-related
purposes other than to generate Joint Venture Business in the Joint Venture
Territory, or (ii) to sell, rent, transfer or otherwise provide a list or
partial list of known Company Applicants, Company Mortgage Loan Customers or MNB
Customer names (to the extent they are known by RFC to be Company Applicants,
Company Mortgage Loan Customers, or MNB Customers either because the Company or
MNB customer relationship is readily identifiable from such list or because the
list intentionally targets the Company Applicants, Company Mortgage Loan
Customers or MNB Customers) for any purpose, unless in either event MNB approves
or consents.
In providing any customer information of the Company for purposes other
than required filings with governmental agencies or providing such information
to MNB, RFC, any of its Affiliates or any third party designee of such entity
shall obtain assurances that its transferee will not use the information for any
purpose prohibited by this Section 4.2
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The Company shall refer to MNB any request for either a junior lien
home equity installment loan or revolving line of credit if (i) the Company
Applicant or the inquiring consumer has a FICO score or similar credit scoring
mechanism score equal to or greater than the score provided in EXHIBIT R to this
Agreement, and (ii) the Company Applicant or the inquiring consumer made initial
application or inquiry to the Company for a refinance of a first lien mortgage
loan.
4.3 Maintenance and Segregation of Databases and Sharing of Customer
Information. The Company's database of Company Mortgage Loan Customer and
Company Applicant names, addresses and telephone numbers (and any other customer
information so maintained) and any names, addresses and telephones numbers
provided to the Company by MNB from its database or provided by MNB through its
third party designee (Including Internet obtained database information on such
Persons) shall be segregated and maintained separate and distinct from RFC's (or
any Affiliate of RFC) database of RFC Customers (and customers of any RFC
Affiliate). RFC agrees to develop and maintain a system to keep such names,
addresses and telephone numbers (and other customer information so maintained)
segregated and agrees to timely provide such segregated information and records
to MNB upon request.
Subject to any federal or state laws or regulations on sharing of
customer information which may apply, MNB and any of its Affiliates shall have
the unrestricted right to solicit Company Mortgage Loan Customers and Company
Applicants for the purpose of MNB offering
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to any MNB Customer or potential MNB Customer a Financial Product or Service,
and the Company shall work cooperatively with MNB or any Affiliate of MNB in any
such desired solicitation. The Company shall have the right to solicit MNB
Customers for the purpose of offering to any such MNB Customer a Mortgage Loan,
and MNB shall work cooperatively with the Company in any such desired
solicitation; provided, however, MNB shall not be obligated to provide to the
Company the names of, or any other information about, any customer of any
Affiliate of MNB.
4.4 Reasonableness of Restrictions. MNB, RFC and the Company each
acknowledge that the restrictions contained in this Article IV are reasonable
and necessary to protect the legitimate business interests of the respective
parties and that losses arising from a breach thereof cannot reasonably and
adequately be compensated by money damages and will cause the injured party to
suffer irreparable harm. Accordingly, upon the failure of any party to comply
with the applicable terms of Article IV, the injured party will be entitled to
injunctive or other extraordinary relief in case of such breach (without any
bond or other security being required), such relief to be cumulative to, but not
in limitation of, any other remedies to which the non-breaching party may be
entitled to under this Agreement or the Operating Agreement or at law or in
equity.
4.5 Enforceability of Restrictions. If any of the provisions of Article
IV are held to be unenforceable because of the scope, duration and/or area of
their applicability, it would be in furtherance of the intent of the parties for
the court to have the power to modify such scope,
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duration and/or area, and such provisions shall then be applicable in such
modified form so as not to nullify the covenants as a whole.
4.6 Integration of Company Mortgage Loan Products with MNB Financial
Products or Services. The Company agrees to meet with MNB or any Affiliate of
MNB, as MNB or any Affiliate of MNB may reasonably request from time to time, on
the development and implementation of MNB or MNB Affiliate cross-sell
opportunities (Including any business opportunity plans, policies or processes
for directing business to MNB, its Affiliates or the Company) for Financial
Products or Services (other than Mortgage Loans in the Joint Venture Territory)
to Company Mortgage Loan Customers and Company Applicants, which may Include ACH
payments from deposit accounts; a relationship rewards program, a card accessed
line of credit account (whether secured or unsecured) and home equity line of
credit products executed at or following the Mortgage Loan closing, subject to
applicable investor guidelines. RFC and any of its Affiliates agree to meet with
MNB and any of its Affiliates, as MNB may reasonably request from time to time,
on the development and implementation of MNB or MNB Affiliate cross-sell
opportunities (Including any business opportunity plans, policies or processes
for directing business to MNB and its Affiliates) for Financial Products or
Services (other than Mortgage Loans in the Joint Venture Territory) to RFC
Customers, to the extent RFC is not then offering similar Financial Products or
Services itself. MNB and RFC shall work cooperatively, diligently and in good
faith to discuss the feasibility of placing MNB employees on RFC or any
Affiliate of RFC premises for the purpose of MNB conducting its business
operations outside the scope of the Joint Venture Business, as the Members may
mutually agree upon. The parties
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understand and acknowledge that the manner and/or ability to offer MNB Financial
Products or Services (other than Mortgage Loans secured by real estate in the
Joint Venture Territory) to the names of Company Mortgage Loan Customers,
Company Applicants, or RFC Customers, inter alia, may be subject to any
requirements of and/or be limited by federal or state laws and regulations on
sharing of customer information. MNB, RFC and the Company shall also work
cooperatively, diligently and in good faith to discuss the feasibility of
placing an Automated Teller Machine at RFC's and/or the Company's headquarters.
4.7 Competitive Pricing on Company Products. RFC shall provide the
Company with copies of its rate sheets that it prepares for RFC Mortgage Loan
products that are offered to RFC mortgage loan applicants and to Company
Applicants (covering interest rate, points, and fees retained in whole or in
part by the lender) and shall respond to requests from the Company for
information regarding RFC's standard interest rates, points and fees for
Mortgage Loans that are offered to RFC mortgage loan applicants and to Company
Applicants and for which RFC does not provide rate sheets; provided however, the
parties understand and acknowledge that the Company shall ultimately be
responsible for its pricing model, strategies and policies. RFC shall offer to
the Company Mortgage Loan products at least as comprehensive as the Mortgage
Loan products offered by RFC to its mortgage loan applicants, at the Manager's
discretion.
4.8 Mortgage Warehousing Line of Credit and Security Agreement -
Competitiveness of Pricing Arrangements and Service Standards. The Company and
MNB agree that the terms of the Mortgage Warehousing Line of Credit and Security
Agreement when executed shall reflect
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the following understanding: If the Company determines in good faith that the
pricing and/or service under such agreement is no longer competitive for the
then current volume of its Joint Venture Business and the Company provides
written notice to MNB of such event and at least thirty (30) days to cure the
perceived deficiencies in service standards or pricing (which cure period shall
be extended, for perceived deficiencies in service standards only, for such
period of time as is reasonably necessary with the exercise of due diligence and
good faith to cure such perceived deficiencies in service upon reasonable
request of MNB, if MNB is cooperatively and diligently working in good faith
toward correction of any perceived deficiencies in service within the thirty
(30) day cure period) and MNB fails to cure such perceived deficiencies in
service standards or pricing within such period, then the Company shall have the
option to terminate the Mortgage Warehousing Line of Credit and Security
Agreement with MNB effective at the time stated in the written notice of such
termination given to MNB, provided the Company gives MNB notice of such
termination within ninety (90) days after the end of such cure period.
4.9 Tailored Home Loan Mortgage Loan Products and Program. In the event
MNB makes available to the Company the Tailored Home Loan Product as a Mortgage
Loan product of the Joint Venture Business, then the Company and RFC both agree
that any rights or interests in the Tailored Home Loan Product (however modified
following the execution of this Agreement) shall at all times remain and be
retained by MNB during the term of this Agreement and following termination of
this Agreement. The parties agree that the Tailored Home Loan Product is a
proprietary product of MNB and MNB's direct and indirect parent and shall be so
treated by the parties in the conduct of their businesses and the Joint Venture
Business. MNB
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reserves the right to withdraw the authority of the Company to offer the
Tailored Home Loan Product at any time upon prior written notice of at least
thirty (30) days to RFC and the Company; provided that MNB shall allow the
Company to offer Tailored Home Loan Product at any time MNB is willing to
purchased as an investor closed Tailored Home Loan Product Mortgage Loans, and
MNB shall not offer the Tailored Home Loan Product other than through the
Company during the term of this Agreement. Upon the request of MNB, the Company
and/or RFC shall execute a mutually acceptable License Agreement with MNB to
protect MNB's Legally Protected Technology in such product.
4.10 Certification. An authorized senior officer of RFC ,MNB, and the
Company, as applicable, shall, upon the request of MNB or RFC, provide an annual
certification, within thirty (30) days following the end of the Company's fiscal
year, that the terms and provisions of this Article IV have been complied with
by the party making the certification during the preceding fiscal year, with any
exceptions noted.
4.11 HomeSide Correspondent Relationship. RFC and the Company shall
discuss with HomeSide Lending Inc. a preferred correspondent relationship on
terms mutually acceptable to the parties and which would be structured as an
arm's length transaction.
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ARTICLE V TECHNOLOGY AND TRADEMARKS
5.1 Technology License. RFC and the MNB shall, as applicable, each
enter into a separate License Agreement(s) with the Company, whereby the Company
shall be granted a non-exclusive, non-transferable, royalty-free and
non-sublicensable right and license as it relates to certain existing technology
owned, controlled or otherwise licensable by RFC or MNB (as applicable) which is
necessary and convenient for conducting the Joint Venture Business.
5.2 General Restrictions on Technology Licensing. The Company shall be
subject to the following general restrictions on the licensing of technology
contributed or made available to it by RFC or MNB or developed by the Company.
The Company shall not grant any license or otherwise authorize any use of any
technology received by the Company from RFC or MNB or any technology owned,
controlled or developed by the Company during the term of this Agreement to any
third party absent prior written notice and consent of MNB and RFC.
5.3 Trademark and Registered Mark License Agreement(s). RFC and MNB
shall each enter into separate Trademark and Registered Mark License
Agreement(s) with the Company, whereby the Company grants to RFC and MNB the
non-exclusive, non-transferable, royalty-free and non-sublicensable right to use
the name of the Company in connection with advertising, promotions, marketing,
correspondence and sale of Company Products for the Joint Venture Business or
MNB Financial Products or Services, as applicable and in accordance with the
terms and provisions of said Trademark and Registered Mark License Agreement(s)
in the
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form to be mutually agreed upon by MNB and RFC and attached to this Agreement as
EXHIBIT Q. RFC and MNB each acknowledge and agree that the Company is and will
forever remain the sole, vested owner of the subject trademarks or registered
marks (as applicable). The parties also agree to execute the Trademark and
Registered Mark License Agreement(s) relating to certain trademarks or
registered marks of either RFC or MNB which the Company desires to use and which
are necessary and convenient for the conducting of Joint Venture Business. Any
grant to the Company by either RFC or MNB in any such trademarks or registered
marks shall be non-exclusive, non-transferable, non-sublicensable and
royalty-free.
5.4 Other Provisions. The License Agreement(s) and the Trademark and
Registered Mark License Agreement(s) shall contain further provisions governing
the transfer and licensing of technology, and governing the use of certain
trademarks or registered marks relating to products or services of the Company,
RFC or MNB, or the name of the Company, RFC or MNB.
5.5 MNB Link to Company's Call Center. In each MNB financial center
office, MNB and the Company shall provide for space for Company brochures and
signage and a telephone connection to the Company's call center, which at a
minimum shall consist of a shared ring down telephone with an option to link to
the Company's call center. The Company, RFC and MNB shall work cooperatively to
identify those MNB financial center offices that can accommodate a Company's
dedicated kiosk, a dedicated telephone and telephone line to the Company's call
center and/or a dedicated personal computer connected to the Company's web
center; provided, however, subject to the first sentence of this Section 5.5 and
Section 2.06(j) of
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the Operating Agreement, MNB may unilaterally (i) remove Company office space,
equipment and signage from its financial center offices, and (ii) change the
location within such financial center office of such loan officer, Company
office space, equipment and signage; provided further, however, that MNB shall
reimburse the Company for the reasonable costs it incurs in connection with any
such removal or change in location of any such office, equipment and signage. In
addition, inbound calls to MNB's Voice Response Unit ("VRU") for Mortgage Loans
offered by the Company shall be directed and linked, through technology mutually
agreed to by the parties from time to time, to the Company's call center. The
parties also desire to establish telephone lines or other available
technological links (Including "hot switches") from MNB's financial center
office locations to the Company's call center. The parties agree to use
reasonable efforts to obtain telephone lines or hot switches from MNB's
financial center office locations to the Company's call center. The Company will
establish its own toll free telephone number for its call center, and the
Company's call center telephones will be answered in the name of the Company.
The costs of such space, kiosks, telephone lines (whether dedicated or not), hot
switches and personal computers (Including usage charges after a call relating
to Joint Venture Business is transferred from a MNB telephone line to a Company
call center telephone line or to any Company employee telephone line at any
other location, to the extent MNB provides the Company with reasonable
documentation of such charges allocable to the Company) shall be allocated to
the Company.
5.6 Web Sites. The parties shall establish a Company web site which
will enable an Applicant, directly or indirectly through a link to RFC's site,
to make an electronic Mortgage
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Loan application to the Company and further allow the Company directly or
indirectly to provide an approval through this electronic delivery channel. To
this end, the Company may either (i) obtain authorization from RFC to use its
Internet application kit or (ii) create a mechanism on the Company's web site to
allow an Applicant to make application through an electronic Internet delivery
channel without a link to RFC's web site. In either event, the Company will have
a process to identify and track the application as a Company Applicant (and
segregate and maintain such data separate from RFC's database or the database of
any Affiliate of RFC and the Company's web site should be established so that
the Applicant understands that the Company is taking its Mortgage Loan
Application. If so requested by the Manager, the Members shall work
cooperatively, at the Company's expense, toward the Company's establishment of
the second alternative in a reasonable time frame. The parties shall work
cooperatively, diligently and in good faith to establish a link from the MNB web
site and from MNB's Internet Cafe to the Company web site and from the Company
web site to the MNB web site, all of which must be unanimously approved by RFC
and MNB under the Operating Agreement. The content and manner of presentation of
information on MNB Financial Products or Services which is located at the
Company web site shall be pre-approved in writing by MNB and the Company.
Likewise, the content and manner of presentation of information on Company
Mortgage Loan products or services which is located at the MNB web site shall be
pre-approved in writing by the Company and MNB. Any link between the Company web
site and the RFC or Affiliate of RFC web site shall require the unanimous
approval of both RFC and MNB under the Operating Agreement and shall be subject
to any trade secret and/or confidentiality agreements as RFC shall deem
appropriate.
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ARTICLE VI AUDIT, COMPLIANCE WITH LAWS AND POLICIES, TRAINING AND
MARKETING MATERIALS
6.1 Audit and Access to Records. Each party (as well as its respective
designated representatives, which may include an independent and disinterested
third party auditor), upon prior written notice to the other party and the
Manager, shall be afforded full and complete access, at its sole expense, during
normal business hours, to the facilities, properties (excluding proprietary
information of a party relating to such party's technology, access to which is
governed by a License Agreement), books, records, files, databases and contracts
of the Company; Including, audits of the Financial Statements and other
financial and tax records of the Company, and, upon prior written notice to the
other party and the Manager, to the Company's employees, agents, contractors and
customers, with full and complete authority independently to contact such
persons. The Company shall provide to any supervisory agents or examiners
representing a state or federal governmental agency having jurisdiction or
examination authority over the Company, access to any documentation or records
such agency deems necessary in the conduct of its examination or audit. Such
access shall be afforded without charge, upon reasonable request, during normal
business hours and at the offices of the Company, and in accordance with the
applicable federal or state governmental agency's regulations.
If during an audit or otherwise, a Member concludes that the Company
may be violating or has violated a federal or state law or regulation, and after
notifying the Company, its legal
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counsel and the other Member, the Company and its counsel are of a differing
opinion as to compliance with any such federal or state law or regulation, then,
if material penalties or damages could be imposed or a material reputation risk
exists to a Member for any such violation, an opinion of counsel shall be
obtained from a mutually agreeable law firm regarding the issue on which there
is a difference of opinion. The cost of any such outside legal opinion shall be
borne by the Company.
6.2 Compliance with Laws and Policies. The Company shall comply with
its policies and federal and state laws and regulations to which the Company
shall be subject in carrying out its Joint Venture Business. While they are at
MNB's financial center offices, the Company's employees, representatives,
consultants and agents shall be subject to, and shall comply with, MNB's
policies concerning codes of conduct, business ethics and service standards then
in effect and provided to the Manager. The Company's employees, representatives,
consultants and agents, while at its offices or locations other than MNB's
financial center offices, shall be subject to, and shall comply with, RFC's
policies concerning codes of conduct, business ethics and service standards then
in effect and provided to the Manager, to the extent such policies do not
materially interfere with the Company's conduct of the Joint Venture Business in
the Joint Venture Territory.
In addition, on or before the Closing Date, the Company shall adopt
reasonable and prudent policies, mutually approved by the Members pursuant to
Section 2.06(p) of the Operating Agreement, concerning (i) financial privacy and
accuracy of customer information,
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(ii) monitoring and supervising overages, (iii) the Company's cooperation with
MNB to help MNB meet its commitments under its special agreements with coalition
groups, (iv) brand standards and product positioning (Including graphic
standards), (v) hedging, (vi) security and loss prevention matters, and
liability and other insurance and indemnity protection (and other risk
management matters the Members deem should be developed by the Company), and
(vii) a Y2K action plan; provided that such policies are not required to be more
onerous to the Company than similar policies adopted by MNB. The Manager of the
Company shall execute such acknowledgments and certificates confirming the
Company's agreement to comply with such policies, laws and regulations and
certifying its continued compliance with such policies, laws and regulations
when RFC or MNB shall request the execution of any such written acknowledgments
or certifications.
6.3 [RESERVED]
6.4 [RESERVED]
6.5 Employee Contracts. If employment contracts are used by the Company
in conducting its routine business operations, then such contracts shall protect
the confidentiality of customer information and customer lists and shall protect
the Members' trade secrets, which provisions shall survive termination of such
employee's employment.
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6.6 Training. Pursuant to its Service Agreement, RFC shall train
employees transferred from either MNB or RFC to the Company or hired by the
Company from time to time.
6.7 OCC and Other Regulatory Oversight. The parties acknowledge that
the Office of the Comptroller of the Currency ("OCC") has informed MNB that the
Company will be subject to OCC supervision, regulation and examination
(Including the ability to conduct examinations). The Company agrees to provide
RFC and MNB with written notice of, and a copy of, any examination, supervisory
or audit findings, including any side letters or management letters (whether by
the OCC, Federal Trade Commission, HUD, Michigan Financial Institutions Bureau,
Fannie Mae, Freddie Mac, or VA or other governmental or quasi-governmental
agency), within five (5) Business Days of receipt of such findings by the
governmental or quasi-governmental agency. The Company shall also provide, upon
request of either RFC or MNB, the Company's management response to such
findings.
6.8 Quality Control. The Company shall develop and implement a quality
control system to monitor and track compliance with investor requirements and
federal and state laws and regulations that apply to the Company. The Company
shall prepare on at least a quarterly basis a quality control report. Any party
to this Agreement may request at any time a copy of the most recent quality
control report or any past report or findings in the last three (3) fiscal years
of the Company. Any such request shall be complied with by the Company within a
reasonable time period, but shall be provided to the requesting party no later
than ten (10) Business Days
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following the request. The Service Agreement between RFC and the Company may
address the quality control services provided by RFC to the Company (Including
the legal counsel services provided by RFC to the Company).
6.9 Marketing Media Material Approval Process. The parties agree that
any marketing materials contemplated to be distributed by the Company (whether
through a direct mail method or otherwise) to or at MNB financial center offices
or MNB's headquarter office or distributed to known MNB Customers (to the extent
they are known by the Company to be MNB Customers either because the MNB
customer relationship is readily identifiable from the applicable marketing list
or because the list intentionally targets MNB Customers) shall require prior
approval from MNB. The Company shall use its reasonable efforts to send written
notice so that it arrives not less than ten (10) days prior to the date for
which the approval is requested. MNB shall not unreasonably withhold its
approval and may inform the Company of (i) its approval; (ii) its approval with
conditions; or (iii) its disapproval within the ten (10) day period. If the
Company does not receive any written notice from MNB during the ten (10) day
approval period, then the matter shall be deemed approved. If circumstances
prevent the Company from seeking such approval from MNB (Including market
conditions which require a timely and expedited response) prior to taking any
action with respect to the item or document for which approval is sought, then
the Company agrees to so inform MNB of this event in a timely fashion but in no
event later than one (1) Business Day after taking any such action.
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For any other type of marketing materials (Including general
advertising and solicitations to the general public at large), the Company shall
use reasonable efforts to provide MNB and RFC with prior written notice of at
least five (5) days before running it along with a copy of such advertisements
or solicitations.
ARTICLE VII SERVICES AGREEMENTS
7.1 Support of the Company. The parties shall enter into the following
agreements with the Company:
(a) RFC Administrative Services. On or before the Closing Date, RFC
shall enter into a Services Agreement with the Company, pursuant to which RFC
will provide specified administrative services to the Company in exchange for a
per loan fee based on an allocation of RFC's direct costs and overhead, which
Services Agreement shall be negotiated in good faith by the parties and shall be
structured as an arm's length transaction. Administrative services provided to
the Company by RFC shall be transparent to Company Applicants and Company
Mortgage Loan Customers.
(b) MNB Administrative Services. On or before the Closing Date, MNB
shall enter into a Services Agreement with the Company, pursuant to which MNB
will provide specified administrative services in exchange for a fee, which
Services Agreement shall be negotiated in good faith by the parties and shall be
structured as an arm's length transaction.
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Administrative services provided to Company by MNB shall be transparent to
Company Applicants and Company Mortgage Loan Customers, except for specified
sharing of space arrangements between MNB and the Company.
(c) Other Services. Any other services requested by the Company
from any one party to this Agreement shall be evidenced by a written agreement
negotiated in good faith by the parties and shall at all times be structured as
an arm's length transaction.
(d) Standard and Quality of Administrative Services. The
administrative services are to be of the same standard and quality as
administrative services provided by MNB or RFC on its on own behalf or on behalf
of any of its Affiliates. The initial administrative services to be provide by
RFC and MNB to the Company under this Section 7.1 shall be as specified in the
Services Agreement(s).
ARTICLE VIII FINANCIAL REPORTING AND OTHER REPORTS AND RECORDS
8.1 Financial Reporting. Each of RFC and MNB will provide the other
with its unaudited quarterly Financial Statements (i) for RFC, at the time RFC
is required to file its financial statements with the Securities and Exchange
Commission ("SEC"), and (ii) for MNB, within 45 days following the previous
quarter end; its annual audited Financial Statements (i) for RFC, at the time
RFC is required to file its financial statements with the SEC, and (ii) for MNB,
within 90 days following MNB's fiscal year end; provided however, in the event a
party's
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Financial Statements are no longer published, that party shall provide, at the
other party's request, (i) any financial information already generated for its
operations in a reasonable period of time following the request, but in any
event not longer than fifteen (15) days after such request; and (ii) in
addition, any information related to a material change in such party's financial
condition, within ten (10) days of such request.
8.2 Auditors. Notwithstanding the appointment of the auditors of the
Company, either party shall have the right to designate an accounting firm to
provide secondary auditing support to the Company, at the sole expense of the
party desiring secondary audit support.
8.3 Other Reports. Except as otherwise specifically provided for
herein, the parties shall mutually agree from time to time on the form, content
and timing of reports which the parties believe to be necessary and convenient
to assess the growth, potential growth and general condition of the Company and
the Joint Venture Business. In particular, the Company shall provide to RFC and
MNB on disk or other mutually agreeable delivery vehicle, within seven (7) days
of each pervious month end, a document or file which includes all reportable
Home Mortgage Disclosure Act ("HMDA") data (except census tract information,
which may be omitted if not available), and Company Applicant names and
addresses. The Company shall also provide with each monthly loan application
register ("LAR") report or separately, within the same time period, information
detailing the pricing on the Mortgage Loan applications listed on the monthly
report (to include interest rate, term, discount points and any loan fee in
which a mortgage loan originator may retain in whole or part such fee). The
Company shall provide RFC
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and MNB its final HMDA LAR submission, in machine readable format, no later than
March 15 of each year for the prior year's loan performance. MNB reserves the
exclusive right to use all data reported on the Company's HMDA LAR report for
lending consideration under MNB's CRA evaluation.
8.4 Company Minute Books. A duplicate set of the Company minute books
(other than financial books and records) shall be provided to MNB and RFC and
updated as and when necessary, for the convenience of MNB and RFC.
8.5 Confidentiality of Information Furnished Between the Company and
Any Member. The parties to this Agreement have established a business
relationship and in furtherance of this relationship the Members will furnish to
the Company, from time to time, confidential information, proprietary
information, data, customer lists, documents and other materials relating to its
operations and its products. All such information, regardless of the form or
media in which it is stored or disclosed, shall be referred to as "Confidential
Information".
The receiving party shall (i) treat all Confidential Information
confidentially and shall not disclose such information to any other Person,
except as expressly permitted by this Agreement or as required by law and shall
use the Confidential Information only for the purposes specifically provided for
in this Agreement, (ii) protect all proprietary information with the same degree
of care as it applies to protect its own proprietary and confidential
information; and (iii)
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use the Confidential Information only for the purposes of the business
relationship contemplated under this Agreement.
Notwithstanding the provisions of this Section 8.5, the receiving party
shall have no obligations with respect to any information that: (i) is or
becomes within the public domain through no act of the receiving party in breach
of this Agreement; (ii) was in the possession of the receiving party prior to
its disclosure or transfer, and the receiving party can so prove; (iii) is
independently developed by the receiving party and the receiving party can so
prove; or (iv) is received from another source without any restriction on use or
disclosure.
In the event that the receiving party is requested or required (by oral
questions, interrogatories, requests for information or documents, subpoena,
civil investigative demand or similar process) to disclose any information
supplied to the receiving party or its Affiliates in the course of the parties'
dealings, the receiving party will provide the disclosing party with prompt
notice of such request so that the disclosing party may seek appropriate
protection order and/or waive compliance with the provisions of Section 8.5 of
this Agreement.
Confidential Information provided to the Company under this Section 8.5
shall not be duplicated, except to the extent necessary for the purposes of this
Agreement.
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ARTICLE IX FACILITIES AND PERSONNEL
9.1 Initial Personnel. All employees of MNB primarily employed as of
the execution date of this Agreement in the conduct of MNB's retail first lien
residential mortgage loan origination business are listed on EXHIBIT H. The
Company agrees that it will offer employment to a significant number of existing
processing employees and mortgage loan officers (to be retained either in the
current type of position or offered another assignment in the Joint Venture
Business) listed on EXHIBIT H. All employees of RFC who are candidates for
employment in the Company for the purposes of the initial staffing of the
Company shall be listed on EXHIBIT H.
As early as practical, but not later than fifteen (15) business days
following the execution date of this Agreement, the Company will notify MNB and
RFC of the names of the employees to whom the Company intends to offer
employment on the Employee Transfer Date provided said employees are employees
of MNB or RFC (as applicable) at the end of the Business Day immediately prior
to the Employee Transfer Date. MNB and RFC shall use their reasonable efforts to
assist the Company in obtaining employment of those employees to whom the
Company desires to offer employment.
Any severance pay, unemployment compensation, COBRA benefits or any
other expenses associated with any employees related to their employment at MNB
or RFC (as applicable) prior to the Employee Transfer Date shall be the sole
responsibility of MNB or RFC (as applicable). Any compensation due any employee
for loans closed prior to the Employee
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Transfer Date shall be the sole responsibility of MNB or RFC (as applicable).
Any employees accepting employment at the Company shall be employed on an
employment at will basis, and former MNB or RFC employees employed by the
Company shall receive credit for past service at MNB or RFC (as applicable) for
purposes of determining (i) determining the number of available and paid
vacation days, and (ii) if permitted by the applicable plan, enrollment
eligibility and vesting in any benefit plans provided by the Company. The
Company shall bear all direct costs related to the Company employees, including
the salaries, benefits and expenses of such Persons.
9.2 [RESERVED].
9.3 No Poaching. Except as otherwise provided in Section 9.06 of the
Operating Agreement, during the term of this Agreement, RFC and MNB shall, and
shall each use its reasonable efforts to cause their Affiliates to, refrain from
interfering on a targeted basis with employment and employment-related
relationships between the Company and its employees, representatives,
consultants or agents, Including soliciting on a targeted basis any such
individual for employment at either RFC or MNB, or any of their Affiliates
parents, without the approval of the other Member.
The Company shall not on a targeted basis solicit employees,
representatives, consultants or agents of MNB, RFC, their parents, their
subsidiaries or subsidiaries of their parents, without
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the approval of the entity who currently employs such employee, representative,
consultant or agent.
Except as otherwise provided in Section 9.06 of the Operating
Agreement, during the term of this Agreement, RFC and MNB shall, and shall use
their reasonable efforts to cause their Affiliates to, refrain from interfering
on a targeted basis with employment and employment-related relationships between
the other Member and its employees, representatives, consultants or agents,
without the approval of the then current employer of such Person.
9.4 Sharing of Space at MNB Financial Center Offices. The parties shall
cooperatively, diligently and in good faith discuss any recommendations of any
design consulting firm engaged by MNB or RFC on how to best use the space in
MNB's financial center offices for conducting the Joint Venture Business, to the
extent MNB or RFC wishes to pursue such recommendations further. The expenses
from the engagement of any such design firm(s) shall be borne by the engaging
party and shall not be a Company expense.
Subject to any landlord consents as and when necessary and applicable,
MNB shall (i) allow the Company's mortgage loan officers to share space at the
MNB financial center offices agreed upon by the Members pursuant to Section
2.06(j) of the Operating Agreement, and (ii) provide space for the equipment
agreed upon by the Members pursuant to Section 5.5. MNB shall charge to the
Company the space sharing cost under the Services Agreement between MNB and the
Company. MNB shall obtain the necessary landlord consents when necessary and
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applicable. To minimize customer confusion, to the extent practicable, the Joint
Venture Business shall be conducted in a physical location distinct from the
area where MNB carries out its banking business, and signs or other means will
be used to distinguish the Joint Venture Business area from the general banking
business area of the MNB financial center office. Subject to Section 5.5, any
sharing of space or leasehold improvements in any MNB financial center office
shall adhere to any MNB space layout requirements and signage and branding
considerations, Including any signage requirements of any regulatory agency. Any
exterior or outward facing signage related to the Joint Venture Business at a
MNB financial center office shall at all times adhere to local zoning laws and
regulations, and any interior or exterior signage shall be approved by MNB prior
to its use in a MNB financial center office.
9.5 Sale of Furniture, Fixtures and Equipment to Company by MNB. If the
Company desires to purchase and MNB agrees to sell any identified furniture,
fixtures or equipment owned by MNB and located at MNB's headquarters or at any
other location of MNB which was previously used in MNB's Residential Mortgage
Loan Group and if RFC approves pursuant to Section 2.06(c) of the Operating
Agreement, then the Company shall remit to MNB the negotiated value of such
items on the Closing Date and attach to this Agreement an EXHIBIT I, listing
such items.
9.6 Company Employees Conducting Business on MNB Financial Center
Premises. Subject to any federal or state laws or regulations which may apply to
such activities (Including OCC Regulation 12 C.F.R. 7.3001), MNB shall work
cooperatively, diligently and in good faith
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with the Company to develop, on or before the Closing Date, policies and
procedures for how the business operations of the Company will be conducted at
MNB financial center office premises, and how employees, representatives,
consultants or agents of the Company and MNB may interact, represent or identify
themselves in conducting their respective businesses. The parties shall
segregate and maintain as separate and distinct the databases of the Company and
MNB located at any MNB financial center office, and shall agree on other
security and privacy-related matters and other risk-related matters (Including
reputation risk).
ARTICLE X CLOSING AND CONDITIONS PRECEDENT TO CLOSING
10.1 Closing. The parties shall consummate and close the transactions
contemplated in the Operating Agreement and this Agreement at one or more
locations. The Closing Date shall take place on the day following the
satisfaction or waiver of all conditions precedent to the Closing Date set forth
in Section 10.2, or such other date to which the parties mutually agree upon, or
such other date required by the provisions of Section 10.3 of this Agreement.
RFC and MNB each agree to use its reasonable efforts to cause the Closing to be
completed as soon as practicable after receipt of final regulatory, licensing
and other necessary approvals of the transactions contemplated hereunder, the
negotiation of the remaining agreements between the parties and the expiration
of all applicable waiting periods.
10.2 Conditions Precedent to Closing. The obligation of the parties to
close the transactions contemplated by the Operating Agreement and this
Agreement will be subject to
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satisfaction of the following conditions, provided however, any condition may be
waived by the party for whose benefit it is intended or waived by mutual
agreement of RFC and MNB:
(a) Consents. All parties shall have obtained all material
consents and approvals or other action required of third parties necessary for
the consummation of the transactions contemplated hereby and the conduct of the
Joint Venture Business, Including all applicable governmental-related regulatory
approvals and licenses (or the expiration without objection of any notice
periods required by any governmental-related authority) shall have occurred.
(b) No Litigation. No litigation or governmental or
quasi-governmental proceeding shall have been commenced which, in the reasonable
judgment of RFC or MNB, is likely to (i) have a material adverse effect on the
business and affairs of the other party or the Joint Venture Business, (ii)
restrain, prohibit, delay or prevent the consummation of the transactions
contemplated hereby, or (iii) have a material adverse impact on the technology,
assets or services to be made available to the Company pursuant to this
Agreement or any of the Ancillary Agreements.
(c) Accuracy of Representations; Performance of Covenants. The
representations and warranties made in the Operating Agreement, this Agreement,
and in the Ancillary Agreements executed prior to or at the Closing shall remain
true, correct and complete as of the date of Closing in all material respects.
All material terms, covenants and conditions of
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this Agreement, the Operating Agreement, and the Ancillary Agreements required
to be complied with and performed by the parties prior to or at the Closing or
execution date of this Agreement (as applicable), shall have been duly complied
with and performed by the parties in all material respects.
(d) No Default. No party shall be in default of any of its
respective material obligations under the Operating Agreement, this Agreement or
under any of the Ancillary Agreements (executed prior to or at the Closing), and
no Termination Event or Dissolution Event shall have taken place or occurred
under the Operating Agreement, and no "Material Default Event" (as defined
below) shall have taken place or occurred under this Agreement.
(e) Other Agreements. All conditions to Closing set forth in any
of the Ancillary Agreements required to be executed prior to or at the Closing
shall have been satisfied or waived by the parties entitled to waive the same.
(f) Execution of Other Agreements. Except as may have been waived
by the mutual agreement of RFC and MNB or waived by the party for whose benefit
it was intended, all of the agreements and other documents to be concluded,
executed and/or delivered by the parties no later than the Closing shall have
been mutually agreed upon and shall have been executed prior to or at the
Closing, as follows:
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(i) RFC and MNB shall have executed the Operating
Agreement, as contemplated by the parties;
(ii) RFC and the Company shall have executed the
Services Agreement, and MNB and the Company shall have executed the Services
Agreement, as contemplated by the parties;
(iii) MNB and the Company shall have executed the
Mortgage Warehousing Line of Credit and Security Agreement and related loan
documents, as contemplated by the parties; provided, however, either Member
shall have the right to unilaterally waive this condition precedent to Closing
in the event an alternative funding source is obtained that is mutually
agreeable to both Members;
(iv) MNB and the Company shall have executed the MNB
Correspondent Agreement, as contemplated by the parties;
(v) RFC and the Company, and MNB and the Company
shall have executed the License Agreement(s), as applicable and as contemplated
by the parties;
(vi) RFC and the Company and MNB and the Company
shall have executed the Trademark and Registered Mark License Agreement(s), as
applicable and as contemplated by the parties;
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(vii) RFC and the Company shall have executed the RFC
Correspondent Agreement and the RFC Sub-Servicing Agreement, as contemplated by
the parties; and
(viii) any other agreement the parties mutually agree
should be executed prior to or at the Closing which is necessary and convenient
to the conducting of the Joint Venture Business shall have been executed, as
contemplated by the parties.
10.3 Failure to Close. In the event that any of the above conditions
precedent have not been fulfilled or waived in accordance with this Agreement,
as of the scheduled Closing Date, the Closing shall be postponed for a
reasonable period of time to allow fulfillment of such condition; provided
however, that if the Closing does not occur on or before May 1, 1999, by reason
of the failure of any one or more of such conditions precedent to have been
fulfilled, either RFC or MNB may, upon written notice to the other party,
terminate this Agreement in accordance with Article XII of this Agreement, and
neither party shall have the right to request specific performance of this
Agreement and neither party shall be liable for damages to the other party,
except to the extent that the failure to close is attributable to the breach of
a material covenant, representation or warranty by a party to this Agreement. If
the failure to close is caused by a material breach of this Agreement by the
party seeking to terminate this Agreement under this Section 10.3 and Section
12.2(a), then such party shall not have the ability to exercise its rights under
this Section 10.3. If damages are sought by any party to this Agreement,
punitive
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damages may not be recoverable from the party in breach, provided however, other
remedies shall be available at law or in equity and as otherwise provided for in
this Agreement.
ARTICLE XI DEFAULT
11.1 Definition. The term "Material Default Event" (subject to Section
11.2 below) shall mean:
(a) Any material breach by any party to this Agreement (except by
reason of Force Majeure) of any of such party's covenants, obligations, duties,
representations or warranties as set forth in this Agreement (Including EXHIBIT
E) which materially and adversely affects the operations, financial condition,
business or business prospects of the Company such that the Company is unable to
substantially carry on or perform in its usual course its Joint Venture
Business;
(b) Any material breach by any party to this Agreement (except by
reason of Force Majeure) of any of such party's covenants, obligations, duties,
representations or warranties as set forth in any of the Ancillary Agreements
which materially and adversely affects the operations, financial condition,
business or business prospects of the Company such that the Company is unable to
substantially carry on or perform in its usual course its Joint Venture
Business;
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(c) Any material breach by any party to the Operating Agreement
(except by reason of Force Majeure) of any of such party's covenants,
obligations, duties, representations or warranties as set forth therein, which
materially and adversely affects the operations, financial condition, business
or business prospects of the Company such that the Company is unable to
substantially carry on or perform in its usual course its Joint Venture
Business; or
(d) Any material breach of Section 4.1, 4.2, 4.3 or 4.7 of this
Agreement by any party to this Agreement (except by reason of Force Majeure).
11.2 Notice and Cure. No Material Default Event under Section 11.1
above shall be deemed to have occurred until (i) the non-defaulting party has
provided the defaulting party with written notice of such potential Material
Default Event (including, if applicable, the adverse effects on the Company) and
at least 30 days to cure the potential Material Default Event (which cure period
shall be extended for such period of time as is reasonably necessary with the
exercise of due diligence and good faith to correct the potential Material
Default Event upon reasonable request of the defaulting party, if the defaulting
party commences diligent and good faith correction of such potential Material
Default Event within the thirty (30) day cure period), and (ii) the party in
default has failed to cure such default within such period.
11.3 Rights Upon the Happening of a Material Default Event or Other
Default. If a Material Default Event takes place and is continuing following the
expiration of the cure period, the party not in default shall have the option
to:
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(a) terminate this Agreement in accordance with Section 12.2
below; and/or
(b) seek such relief and other remedy provided for under Sections
9.02(l) and 9.03 of the Operating Agreement, Including injunctive relief without
any bond or security being required; provided however, punitive damages shall
not be recoverable by the party seeking relief or remedy.
Subject to the limitations in Section 9.03 of the Operating Agreement,
if a material breach (except by reason of Force Majeure) of any of the
covenants, obligations, duties, representations or warranties shall occur by any
party to this Agreement, the Operating Agreement or any Ancillary Agreement (to
which a Member is a party) which does not rise to the level of a Material
Default Event and is not a Dissolution Event (Including a Termination Event)
under the Operating Agreement, then (i) the non-defaulting party shall give
written notice of such breach to the party in default and at least 30 days to
cure the breach (which cure period shall be extended for such period of time as
is reasonably necessary with the exercise of due diligence and good faith to
correct such breach upon reasonable request of the defaulting party, if the
defaulting party commences diligent and good faith correction of such breach
within the thirty (30) day cure period). If the party in default has failed to
cure such default within such period, the non-defaulting party shall be entitled
to seek such relief and other remedy provided for under Section 9.03 of the
Operating Agreement as the non-defaulting party may desire and be entitled to
receive (Including injunctive relief without any bond or security being
required);
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provided however, punitive damages shall not be recoverable by the party seeking
relief or remedy.
11.4 Force Majeure. For purposes of this Agreement, "Force Majeure"
shall mean any event or condition, not reasonably within the control of a party
to this Agreement, which prevents, in whole or in material part, the performance
by such party of its obligations hereunder. Without limiting the generality of
the foregoing, the following shall constitute events or conditions of Force
Majeure: acts of State or governmental action, riots, wars, acts of terrorism,
sabotage, strikes, lockouts, prolonged shortages of energy supplies, fires,
floods, hurricanes, earthquakes, lightning, explosions, civil commotions or any
other unforeseeable supervening events of any nature beyond the control of the
party. Any party affected by an event or condition of Force Majeure shall, upon
providing prompt notice to the other party, be excused, subject to the following
sentence, from performance to the extent and for so long as such event or
condition so prevents its performance, provided that the party so affected shall
use reasonable, diligent and good faith efforts to avoid or remove the cause of
non-performance and shall continue performance hereunder immediately upon the
removal of such causes. If the event or condition of Force Majeure causing
non-performance shall continue for more than one hundred twenty (120)
consecutive days and such event shall have a material adverse affect upon the
operations, financial condition, business or business prospects of the Company,
the party whose performance is not prevented by the event of Force Majeure, upon
the expiration of the above period may enforce whatever remedies it may have
with respect to such non-performance as if this
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Section 11.4 were not contained in this Agreement. Force Majeure shall not
include Year 2000 related events that are within the control of the parties.
ARTICLE XII TERM AND TERMINATION
12.1 Term. This Agreement shall take effect on the date first above
written, and shall continue in effect until a Dissolution Event (Including a
Termination Event) occurs under the Operating Agreement, or this Agreement is
terminated in accordance with Section 12.2 below.
12.2 Termination. Notwithstanding anything to the contrary contained in
this Agreement, this Agreement may be terminated as follows:
(a) By any party, upon written notice to the other party, and in
accordance with Section 10.3 of this Agreement; provided however, a party in
breach of this Agreement may not exercise the right to terminate under Section
10.3;
(b) By the mutual consent of RFC and MNB at any time prior to the
Closing Date; and if exercised shall immediately terminate and this Agreement
shall have no effect, without any liability on the part of any party;
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(c) By either party upon written notice to the other party
following the occurrence of a Material Default Event by such other party, after
the cure period has expired, and in accordance with Section 11.2 above; or
(d) A Dissolution Event or Termination Event under the Operating
Agreement, after any applicable cure period or notice period has expired.
12.3 Effect of Termination on Ancillary Agreements and the Operating
Agreement. In the event this Agreement is terminated, then the Ancillary
Agreements between the Company and either Member or Members, and the Operating
Agreement shall terminate, with no obligation of the parties for subsequent
action or transactions, except as otherwise provided for in this Agreement, the
Operating Agreement or the affected Ancillary Agreement, and the Joint Venture
Business shall unwind and the Company shall be dissolved in accordance with the
terms and provisions of the Operating Agreement.
12.4 [RESERVED]
12.5 Technology Rights and Trademark and Registered Mark Rights on
Termination. If one or more License Agreement(s) have been entered into,
disposition of technology and Legally Protected Technology rights on termination
of this Agreement shall be governed by such License Agreements. If a License
Agreement has not been entered into as of termination of this Agreement, all
technology and Legally Protected Technology rights shall revert to the party
that
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developed such rights, and all technology and Legally Protected Technology
rights that have been developed by the Company, for its exclusive benefit, shall
be transferred to MNB and RFC, to be shared royalty free in perpetuity.
If one or more Trademark and Registered Mark License Agreement(s) have
been entered into, disposition of any trademark or Legally Protected Technology
registered mark rights on termination of this Agreement shall be governed by
such agreements, provided however, notwithstanding anything in such agreements
to the contrary, the Company agrees not to use any trademark or registered mark
rights available at common law or registered with the United States Trademark
and Patent Office or in any other related state office in the name of or for the
benefit of the Company, and all parties to this Agreement further agree not to
initiate any action to use such trademark or registered mark name or graphic
design for three (3) years following termination of this Agreement, except
during the winding up of the Company to the extent necessary to process, service
and sell mortgages closed before, or in process or in the pipeline at the time
of, termination of this Agreement.
12.6 Termination of Non-Solicitation Restrictions; Use of Lists. The
provisions of Article IV of this Agreement shall terminate upon the termination
of this Agreement, with no obligations of either party for subsequent actions or
transactions. Following termination of this Agreement, both RFC and MNB shall
each have access to, and may copy for itself, the Company's list or database of
Company Mortgage Loan Customers and Company Applicants (excluding from the
Company's list or database any whole or partial list of names of MNB
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Customers (and any other customer information provided by MNB to the Company on
such customers) provided to the Company by MNB during the term of this Agreement
that are not Company Mortgage Loan Customers or Company Applicants) and each
party may use such list for whatever purpose it desires; except to solicit
Mortgage Loans in which another party to this Agreement retains a proprietary
interest (Including any CRA Product developed by MNB and the Tailored Home Loan
Product, whether developed prior to or following the execution date of this
Agreement and whether developed or further developed in whole or part by MNB
following the execution date of this Agreement), without the consent of the
other party.
Following termination of this Agreement, the Company, shall return to
MNB (without retaining a copy) and purge from its databases the names (and any
other customer information provided by MNB to the Company) of MNB Customers
provided to the Company during the term of this Agreement that are not Company
Mortgage Loan Customers or Company Applicants, in a mutually agreeable format
and within five (5) days following termination of this Agreement. This returned
file shall be the property of MNB and shall be deemed to be Confidential
Information. RFC and the Company agree to maintain the confidentiality of such
Confidential Information.
12.7 Pending Mortgage Loan Applications at Company. To the extent not
acquired by RFC or MNB pursuant to Section 12.8, following termination of this
Agreement, the parties shall jointly agree on how to fulfil any pending
applications from Applicants which have not yet resulted in a closed Mortgage
Loan. The parties shall be paid any outstanding respective fees,
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expenses or reimbursements to which they otherwise would be entitled under any
of the Ancillary Agreements for continuing to perform services under those
agreements in connection with such applications, Including processing, servicing
and/or selling such Mortgage Loan.
12.8 Existing Pipeline of Mortgage Loan Applications and Inventory of
Closed Mortgage Loans. Within one (1) Business Day after the termination date of
this Agreement, the Company will identify in writing all of the Company's (i)
unclosed pipeline of Mortgage Loans in the Joint Venture Territory (Including
loans which following closing and funding by the Company may be sold to MNB
"servicing released" pursuant to that certain MNB Correspondent Agreement), and
(ii) inventory of closed Mortgage Loans (collectively, the "Pipeline"). The
Members and the Company will use their reasonable efforts to cause the Company's
Pipeline to be processed, closed, serviced and sold through the Company. To the
extent this is not possible, the liquidator shall engage a third party (which
may be either Member) to process, close, service and sell any remaining Mortgage
Loans then in the Company's pipeline in exchange for compensation for such
services mutually agreed upon by the Company and such Person. The Company will
pay to the mortgage loan officer and any other eligible employee the appropriate
compensation for such closed loans as provided on the Company's incentive
compensation schedule. The Company is responsible for unwinding and satisfying
its own hedges that are not acquired by a third party.
Any one or more closed loans in, or resulting from, such Pipeline shall
be sold (i) to MNB, and MNB shall purchase such loan, if any such closed loan is
contemplated by the parties
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to be sold to MNB under that certain MNB Correspondent Agreement with the
Company (as if this Agreement had not terminated); (ii) to RFC, and RFC shall
purchase such loan, if any such closed loan is contemplated by the parties to be
sold to RFC under that certain RFC Correspondent Agreement with the Company (as
if this Agreement had not terminated); or (iii) to any other investor of the
Company or of any party purchasing the applicable portion of such Pipeline. The
price in any such sale to MNB or RFC shall be determined under the respective
correspondent agreement.
12.9 Confidentiality. Following termination of this Agreement, the
confidentiality of Confidential Information shall be maintained in accordance
with Section 8.5 of this Agreement and in accordance with that certain
Confidentiality and Non-Disclosure Agreement. The terms and provisions of
Section 8.5 of this Agreement and the Confidentiality and Non-Disclosure
Agreement shall survive any termination of this Agreement and the Operating
Agreement, or any other Ancillary Agreement.
ARTICLE XIII INDEMNIFICATION
13.1 Misrepresentations; Breaches of Covenants; Other Indemnities.
Subject to the provisions of this Article XIII, each of MNB and RFC agrees to
indemnify, defend, and hold the other (and all of its directors, officers,
partners, members, employees and agents) harmless from and against the
following:
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(a) Any and all liabilities, damages, losses and expenses
resulting from or arising out of the failure of such party's representations or
warranties (i) contained in EXHIBIT E of this Agreement, or (ii) contained in
any certificate or other document furnished by such party to the other party to
have been true when made or as of the Closing Date (as applicable);
(b) Any and all liabilities, damages, losses and expenses
resulting from or arising out of the failure of such party to comply with any of
such party's covenants, obligations, and duties contained in this Agreement
which is required to be performed by such party; and
(c) All actions, suits, proceedings, claims, deficiencies, costs,
penalties and expenses, including interest and reasonable attorneys' fees,
incident to the foregoing.
13.2 Survival of Representations, Warranties and Covenants. The
representations, warranties and covenants given to the other party in this
Agreement shall survive termination of this Agreement.
13.3 Claims Procedures. The party seeking indemnification under this
Article XIII must make a written demand which shall describe in reasonable
detail the facts with respect to its request, the reason or reasons why it
believes indemnification is required and the amount of indemnification requested
(or an estimated amount in the case of unliquidated matters such as pending or
threatened litigation and other contingent liabilities). Indemnification may be
sought from time to time and in one or more written demands.
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13.4 Defense. The fact that a party had knowledge of an actual or
possible misrepresentation or a breach of a warranty or covenant by the other
party prior to the Closing and did not disclose such knowledge shall preclude
such party from making a claim for breach of that particular representation,
warranty or covenant, but shall not be deemed a waiver of any other
indemnification right under this Article XIII or estop such party from making
any other indemnification claim hereunder.
13.5 Company Errors and Omissions Insurance Policy, Fidelity Bond and
Other Insurance-Related Policies. The Company shall carry and maintain, at its
own expense, a blanket fidelity bond and an errors and omissions insurance
policy, with broad coverage, with companies with a Best rating of at least "A",
on all officers or other persons acting in any capacity with regard to Mortgage
Loans and who handle funds, money, documents and papers relating to Mortgage
Loans. The fidelity bond and errors and omissions insurance policy shall be in
the form of the Mortgage Banker's Blanket Bond and shall protect and insure the
Company against losses, Including forgery, theft, embezzlement, fraud, errors
and omissions and negligent acts of such persons. No provision of this Section
13.5 requiring the fidelity bond and errors and omissions insurance shall
diminish or relieve the Company from its duties and obligations set forth in
this Agreement. The minimum coverage under any such fidelity bond and insurance
policy shall be at least equal to the corresponding amounts required by Fannie
Mae in the Fannie Mae Guide (as updated from time to time). The Company shall,
upon request of either RFC or MNB, deliver to the requesting party a certificate
from the surety and the insurer as to the
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existence of the fidelity bond and insurance policy and shall obtain a statement
from the surety and the insurer that such fidelity bond or insurance policy
shall in no event be terminated or materially modified without thirty (30) days
prior written notice to RFC and MNB. The Company will notify RFC and MNB within
five (5) Business Days of receipt of notice that such fidelity bond or insurance
policy will be, or has been, materially modified or terminated.
The Company shall also consider, and upon agreement by the Members on
whether to obtain such insurance and its terms, carry and maintain, at its own
expense, (i) casualty insurance polic(ies) (Including fire, wind and storm),
(ii) worker's compensation insurance polic(ies), (iii) general liability
insurance polic(ies), (iv) business interruption insurance polic(ies), (v)
employer's liability insurance polic(ies), and (vi) any other applicable
insurance policies that the Members mutually agree shall be carried and
maintained by the Company.
In determining the appropriate types and terms of such insurance
coverage to be carried and maintained by the Company, the Members may engage a
mutually agreeable outside party to assist in such determination, the expense,
if any, of such outside party to be borne by the Company. The Members shall not
be bound by any recommendations provided by such outside party.
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ARTICLE XIV MISCELLANEOUS
14.1 Entire Agreement. This Agreement, the Operating Agreement and any
and all Ancillary Agreements (which are incorporated by this reference into this
Agreement,) and Including any Exhibits thereto and their respective schedules
and appendices (as applicable), constitute the entire agreement among the
parties hereto and contain all of the agreements and understandings between the
parties with respect to the subject matter. The parties have no expectations,
other than those specifically expressed in this Agreement, the Operating
Agreement and any and all Ancillary Agreements which are enforceable at law or
in equity. This Agreement, the Operating Agreement and any and all Ancillary
Agreements supersede any and all other agreements or understandings, either oral
or written, between the parties with respect to this subject matter.
14.2 Amendment. This Agreement may be amended or modified, in writing,
executed by all the parties, and no oral agreement shall have the effect of
modifying or amending this Agreement.
14.3 Notices. All notices, demands and requests required or permitted
to be given under the provisions of this Agreement shall be in writing and shall
be deemed given (i) when personally delivered to the party to be given such
notice or other communication, (ii) on the Business Day that such notice or
other communication is sent by facsimile or similar electronic device, which
facsimile or similar electronic communication shall promptly be confirmed by
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written notice, (iii) on the third Business Day following the date of deposit in
the United States mail if such notice or other communication is sent by first
class mail with postage prepaid, or (iv) on the Business Day following the day
such notice or other communication is sent by a domestically recognized
overnight courier or receipted mail, to the address that the receiving party
designates in writing. The parties shall be entitled to consider the following
proper addresses of the other parties:
Rock Financial Corporation
30600 Telegraph Road, Fourth Floor
Bingham Farms, Michigan 48025
Daniel Gilbert, Chief Executive Officer
With Copy To:
Richard Chyette, Esquire
Rock Financial Corporation
30600 Telegraph Road, Fourth Floor
Bingham Farms, Michigan 48025
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Michigan National Corporation
27777 Inkster Road
Farmington Hills, Michigan 48333-9065
Douglas E. Ebert, Chief Executive Officer
With Copy To:
Laura Nieber, Esquire
Michigan National Corporation
27777 Inkster Road
Farmington Hills, Michigan 48333-9065
Rock Home Loans @ Michigan National, LLC
30600 Telegraph Road, Fourth Floor
Bingham Farms, Michigan 48025
William Emerson, Manager
14.4 Waiver. No failure on the part of any party to exercise and no
delay in exercising any right or remedy hereunder shall operate as a waiver or
shall in any way affect the full right to require such performance from the
other party at anytime thereafter; nor shall any single or partial exercise of
any right or remedy preclude any other or further exercise of such right or
remedy or the exercise of any other right or
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remedy granted under this Agreement, the Operating Agreement, or any Ancillary
Agreement, or by any related document or at law or in equity.
14.5 Assignment. This Agreement shall be binding upon and inure to the
benefit of the parties and their respective successors and permitted assigns;
provided however, that no party shall have the right to assign this Agreement in
whole or in part to anyone without the prior written consent of the other party,
which consent may be granted or withheld in the sole and absolute discretion of
such other party.
14.6 Further Assurances. The parties agree to execute such other
instruments, documents and agreements and will use their reasonable efforts to
cause their Affiliates to take such action as may be necessary to effect the
purposes of this Agreement. Each party shall undertake or cause to be undertaken
such further acts and shall execute and deliver or cause to be executed and
delivered such further documents as are necessary and convenient to further the
purposes of the Company.
14.7 Construction. Whenever possible, each provision in this Agreement,
the Operating Agreement, any related-documents, or any Ancillary Agreement shall
be interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement, the Operating Agreement, any
related-documents, or any Ancillary Agreement, shall be prohibited by or be
invalid under applicable law, such provision shall be ineffective only to the
extent of such prohibition or invalidity without invalidating the remainder of
such provision
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or the remaining provisions of this Agreement, the Operating Agreement, such
related-documents or such Ancillary Agreement; provided however, that in such a
case the parties oblige themselves to use their reasonable efforts to achieve
the purpose of the invalid provisions by a new, legally valid stipulation.
14.8 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, and all of which
shall constitute together one and the same agreement.
14.9 Public Announcement. Neither party shall disclose any of the
commercial or legal details of this Agreement in press releases or other
publicity (unrelated to any required filings with governmental agencies) or with
any other Person without the prior written approval of the other party;
provided, however, that either party may at any time make any announcement which
such party determines, based upon an opinion of counsel, is required by
applicable law or the rules of any applicable stock exchange or market so long
as the party so required to make an announcement promptly upon learning of such
requirement notifies the other party of such requirement and discusses with the
other party in good faith the wording of any such announcement.
14.10 No Brokers. Each party represents to the other party that it has
not dealt with any broker, finder or intermediary in connection with this
Agreement or the transactions contemplated under this Agreement.
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14.11 Governing Law. This Agreement, the Operating Agreement and the
Ancillary Agreements shall be construed according to the laws of the State of
Michigan. Any and all action concerning any dispute arising hereunder shall be
filed and maintained only in a state or federal court sitting in the State of
Michigan, and the parties hereto specifically consent and submit to the
jurisdiction of such state or federal court.
14.12 No Third Party Beneficiaries. Nothing herein expressed or implied
shall confer upon any person, other than the parties hereto or their respective
successors and assigns, any rights, remedies, obligations or liabilities under
or by reason of this Agreement.
14.13 Independence. MNB and RFC shall each carry out their respective
obligations under this Agreement independently and not as agents one for the
other.
14.14 Internal Dispute Resolution. The parties shall attempt to resolve
their disputes and differences arising out of or in connection with this
Agreement or as to the rights or obligations under this Agreement through
cooperative, diligent and good faith discussions and negotiations between the
Manager and the Member-designated officer(s) of MNB and the Member-designated
officer(s) of RFC. MNB and RFC shall each designate a primary officer or
officers to engage in dispute resolution matters and shall also designate an
alternate officer or officers in the event the primary officer(s) are not
available. If the Manager and the primary or alternate officer(s) at MNB and RFC
cannot resolve the matter in dispute amicably, through
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friendly negotiations, within sixty (60) days after one party gives written
notice of a desire to negotiate or discuss a solution to any such dispute, then
the dispute shall be elevated to the Chief Executive Officer ("CEO") of each
Member of the Company for final resolution, and if these CEOs are unable to
resolve the dispute or difference within one hundred twenty (120) days from the
date of its submission for final resolution, then the parties may pursue any
other rights or remedies they may have under this Agreement, at law or in
equity. If a dispute or difference is elevated to the CEOs of the Members, such
CEOs may, if any one so desires, consult with outside experts or counsel for
assistance in arriving at a resolution at the expense of the party engaging the
outside expert or counsel, unless the CEOs mutually agree to share the expense
of engaging such an expert. The Manager, the primary and alternate officer(s)
designated by each Member, and the CEO of each Member shall make a bona fide
attempt to settle any such dispute or difference when so called upon.
Throughout the pendency of any such dispute or difference, the Company
shall continue to conduct its business activities in accordance with the
Business Plan then in effect.
14.15 Conflict. In the event of a conflict in the terms or provisions
of the Operating Agreement and this Agreement, the Operating Agreement shall
control.
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IN WITNESS WHEREOF, the parties have executed this Agreement by their
respective duly authorized representatives as of the date set forth in the first
paragraph.
ROCK FINANCIAL CORPORATION
BY: DANIEL GILBERT
-----------------------------------------------
DANIEL GILBERT, CHIEF EXECUTIVE OFFICER
MICHIGAN NATIONAL BANK
BY: DOUGLAS E. EBERT
-----------------------------------------------
DOUGLAS E. EBERT, CHIEF EXECUTIVE OFFICER
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ROCK HOME LOANS @ MICHIGAN NATIONAL, LLC
ACCEPTANCE:
THE COMPANY, HAVING BEEN FORMED ACCEPTS AND AGREES TO PERFORM AND
DISCHARGE AND BE ENTITLED TO, AS OF THE DATE OF ITS FORMATION, ALL OF THE
RESPECTIVE RIGHTS, DUTIES AND OBLIGATIONS AS SET FORTH IN THIS AGREEMENT, AND
SHALL BE CONSIDERED A PARTY TO THIS AGREEMENT WHEN APPLICABLE UNDER THE TERMS OF
THIS AGREEMENT.
BY: WILLIAM EMERSON
- -------------------------------------
WILLIAM EMERSON, MANAGER
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EXHIBIT A
NON-COMPETING HOME EQUITY PRODUCTS
1. FIRST AND JUNIOR LIEN INSTALLMENT MORTGAGES WITH LOAN-TO-VALUE RATIOS OF 100%
TO 125%.
<PAGE> 84
EXHIBIT B
CRA PRODUCTS
1. FHA MORTGAGE LOANS.
2. VA MORTGAGE LOANS.
3. MSHDA MORTGAGE LOANS.
4. MNB'S PURCHASE OPPORTUNITY PROGRAM LOANS.
<PAGE> 85
EXHIBIT C
ARTICLES OF ORGANIZATION
<PAGE> 86
MICHIGAN DEPARTMENT OF CONSUMER AND INDUSTRY SERVICES
CORPORATION, SECURITIES AND LAND DEVELOPMENT BUREAU
(FOR BUREAU USE ONLY)
DATE RECEIVED
JAN 14 1999
517-663-2525 Ref # 90260 FILED
Attn: Cheryl J. Bixby JAN 14, 1999
MICHIGAN RUNNER SERVICE Administrator
P.O. Box 266 MI DEPARTMENT OF CONSUMER & INDUSTRY SERVICES
Eaton Rapids, MI 48827 CORPORATION, SECURITIES & LAND DEVELOPMENT BUREAU
EFFECTIVE DATE:
DOCUMENT WILL BE RETURNED TO THE NAME AND ADDRESS YOU ENTER ABOVE.
ARTICLES OF ORGANIZATION
FOR USE BY DOMESTIC LIMITED LIABILITY COMPANIES B 40-566
(Please read information and instructions on last page)
Pursuant to the provisions of Act 23, Public Acts of 1993, the undersigned
execute the following Articles:
ARTICLE I
- --------------------------------------------------------------------------------
The name of the limited liability company: RFCJVCO, LLC
--------------------------------------
- --------------------------------------------------------------------------------
ARTICLE II
- --------------------------------------------------------------------------------
The purpose or purposes for which the limited liability company is formed is to
engage in any activity within the purposes for which a limited liability company
may be formed under the Limited Liability Company Act of Michigan.
- --------------------------------------------------------------------------------
ARTICLE III
- --------------------------------------------------------------------------------
The duration of the limited liability company is: PERPETUAL
-------------------------------
- --------------------------------------------------------------------------------
ARTICLE IV
- --------------------------------------------------------------------------------
1. The address of the registered office is:
30600 TELEGRAPH RD., 4TH FLOOR BINGHAM FARMS , Michigan 48025
------------------------------------------------- ---------------
(Street Address) (City) (Zip Code)
2. The mailing address of the registered office if different than above:
, Michigan
------------------------------------------------- ---------------
(P.O. Box) (City) (Zip Code)
3. The name of the resident agent at the registered office is:
RICHARD CHYETTE, ESQ.
- --------------------------------------------------------------------------------
ARTICLE V (Insert any desired additional provision authorized by the Act; attach
additional pages if needed.)
- --------------------------------------------------------------------------------
THE LLC IS TO BE MANAGED BY MANAGERS.
- --------------------------------------------------------------------------------
Signed this 13th day of January, 1999
ROCK FINANCIAL CORPORATION
By Richard Chyette
------------------- ------------------ -----------------------
(Signature) (Signature) (Signature)
ITS SECRETARY AND CORPORATE COUNSEL
RICHARD CHYETTE
------------------ ------------------ -----------------------
(Type or Print Name) (Type or Print Name) (Type or Print Name)
<PAGE> 87
MICHIGAN DEPARTMENT OF CONSUMER AND INDUSTRY SERVICES
CORPORATION, SECURITIES AND LAND DEVELOPMENT BUREAU
(FOR BUREAU USE ONLY)
Date Received
Name
Richard Chyette
Address
30600 Telegraph Rd., 4th Floor
City State Zip Code
Bingham Farms MI 48025 EFFECTIVE DATE:
- ----------------------------------------------------- ----------------------
Document will be returned to the name and address you enter above
CERTIFICATE OF AMENDMENT TO THE ARTICLES OF ORGANIZATION
FOR USE BY LIMITED LIABILITY COMPANIES
(Please read information and instructions on reverse side)
Pursuant to the provisions of Act 23, Public Acts of 1993, the undersigned
limited liability company executes the following Certificate of Amendment:
- --------------------------------------------------------------------------------
1. The present name of the limited liability Company is:
RFCJVCO, LLC
--------------------------------------------------------------------------
2. The Identification number assigned by the Bureau is: B 40-566
3. The date of filing of its original articles of organization was:
January 14, 1999
--------------------------------------------------------------------------
4. The location of its registered office is:
30600 Telegraph Rd., 4th Floor, Bingham Farms , Michigan 48025
--------------------------------------------------- ----------
(Street Address) (City) (Zip Code)
- --------------------------------------------------------------------------------
5. ARTICLE I of the Articles of Organization is hereby amended to read as
follows: The name of the limited liability company is Rock Home Loans @
Michigan National, L.L.C.
ARTICLE II of the Articles of Organization is hereby amended to read as
follows: The purpose or purposes for which the limited liability company
is formed is to engage only in activities legally permissible for national
banks under the National Bank Act (12 U.S.C. 24(Seventh)) and any
regulations and interpretative rulings issued thereunder.
The foregoing amendment to the Articles of Organization was duly adopted on
the 19th day of February, 1999 as required by Section 502 of the Act by at
least a majority vote of the members or by such other vote as required by the
articles of organization or the operating agreement.
Signed this 19th day of February , 1999
By William C. Emerson
------------------------------------------------
(Signature)
William C. Emerson Member or Manager
----------------------------- -----------------
(Type or Print Name) (Circle One)
<PAGE> 88
EXHIBIT D
[RESERVED]
<PAGE> 89
EXHIBIT E
REPRESENTATIONS, WARRANTIES AND COVENANTS
Mutual Representations, Warranties and Covenants of RFC and MNB. RFC
and MNB each hereby represents, warrants and undertakes to each other, as of the
date hereof and as of the Closing Date (as applicable), that each of the
following statements is true and accurate with respect to its business:
1. Due Organization. It is duly organized and validly existing under
the laws of the jurisdiction of its organization, has all requisite authority to
carry on its business as now being conducted, and is qualified to do business in
each jurisdiction where the nature of its business would require such
qualification.
2. Authority. It will have taken prior to the Closing Date all action
necessary for the authorization, execution, delivery and performance of this
Agreement and the Ancillary Agreements (to which it is a party), and when
accepted, executed and delivered by the other party, this Agreement and the
Ancillary Agreements (to which it is a party) will constitute valid and binding
obligations of such party, enforceable against it in accordance with their
terms.
3. Litigation. No material litigation, arbitration, prosecution,
administrative or criminal or other proceeding against, or, so far as it is
aware, investigation with respect to, its business is pending, threatened or
expected and, so far as it is aware, there is no fact or
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circumstance likely to give rise to any litigation, arbitration, prosecution,
administrative or criminal or other proceeding or investigation or to any
proceeding against it, all to the extent that any of the foregoing would
materially adversely affect its ability to perform this Agreement or any of the
Ancillary Agreements to which it is a party.
4. Consents. All consents of any third party required for the transfer
of the assets it is contributing to the Company or for the execution, delivery
or performance of this Agreement, the Operating Agreement or any of the
Ancillary Agreements (to which it is a party) by it have been obtained prior to
or as of Closing Date.
5. No Conflict. Neither the execution nor delivery of this Agreement or
the Ancillary Agreements (to which it is a party), nor the consummation of the
transactions contemplated under this Agreement or the Ancillary Agreements (to
which it is a party), nor the fulfillment of or compliance by it with the terms
and conditions of this Agreement or the Ancillary Agreements (to which it is a
party) will violate the Company's Articles of Organization or its Operating
Agreement, or result in a breach of or constitute a default under any material
contract, agreement or instrument to which it is a party or by which it or its
properties are bound, which breach or default would materially adversely affect
its ability to perform this Agreement or any of the Ancillary Agreements to
which it is a party.
6. Compliance with Laws. It is operating its business in compliance
with all laws, rules, regulations and orders applicable to it or its business,
and it has all the permits, licenses, or
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other authorizations required by federal, state, or local governmental agencies
for the conduct of its business, all to the extent that failure to do so would
materially adversely affect its ability to perform this Agreement or any of the
Ancillary Agreements to which it is a party. All such permits, licenses and
other governmental authorizations are in full force and effect, and it is not in
violation of any terms or conditions of any such permits, licenses or
authorizations, all to the extent that any failure to be in full force and
effect or any violation would materially adversely affect its ability to perform
this Agreement or any of the Ancillary Agreements to which it is a party.
7. Ownership of Assets. It is the sole legal and beneficial owner of
all of the assets to be contributed by it to the Company hereunder, is entitled
to transfer the full legal and beneficial ownership of the same to the Company
and has good and marketable title to each of such assets.
8. Securities Laws. It understands that none of the interests in the
Company has been registered or qualified under the securities laws of any
jurisdiction. It is acquiring its interest in the Company solely for its own
account for investment and without any current intention to sell or otherwise
transfer such interest or any part thereof and without any view to distribute
such interest.
9. Year 2000 Readiness- Member Developed, Owned and Maintained
Applications, Software and Hardware Programs and Member Owned and Maintained
Equipment. Any
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applications, software, hardware, operating systems, programs and related
equipment ("Operating Systems") (either MNB or RFC developed, owned or
maintained as applicable) it may authorize for use by the Company, whether
through a formalized arrangement under any one or more License Agreement(s) or
otherwise, is "Compatible with the 21st Century".
"Compatible with the 21st Century" shall, for the purposes of this
Agreement and any Ancillary Agreement between a Member and the Company, mean
using reasonable and prudent efforts to cause Operating Systems to be able to
handle date information before, during and after January 1, 2000, Including
accepting date input, providing date output, and performing calculations on
dates or portion of dates, the ability to function accurately and without
interruption before, during and after January 1, 2000, without any changes in
operations associated with the advent of the new century, the ability to respond
to two digit year date input in a way that resolves the ambiguity as to century
in a disclosed, defined and pre-determined manner, the ability to process
correctly leap years before, during and after January 1, 2000, and the ability
to store and provide output of date information in ways that are unambiguous as
to century, and shall also mean Year 2000 compliant in accordance with the OCC's
guidelines.
Without limiting this Year 2000 representation and warranty provision,
in the event any such change or consequential change in dates requires any
adjustment, modification or addition to the said Operating Systems, the party
authorizing the Company's use of such Operating Systems shall undertake to
provide, free of charge, all such services (including on-site services) as the
Company may reasonably require for the purpose of such adjustment, modification
or
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<PAGE> 93
addition (which may Include software replacement, software upgrades or product
enhancements), and the Company shall be entitled to receive prior written notice
of any required adjustments, modifications or additions to the subject Operating
Systems.
10. Year 2000 Readiness - Third Party Vendor Maintained Applications,
Software and Hardware Programs and Member Leased Equipment. Any Operating
Systems or leased equipment (maintained by a third party vendor) it may
authorize for use by the Company, whether through a formalized arrangement under
any one or more License Agreement(s) or otherwise, is Compatible with the 21st
Century. Without limiting this Year 2000 warranty provision, in the event any
such change or consequential change requires any adjustment, modification or
addition to the said Operating Systems or leased equipment, the party
authorizing the Company's use of such Operating Systems or leased equipment
shall undertake to provide, free of charge, all such services (including on-site
services) as the Company may require for the purpose of such adjustment,
modification or addition and the Company shall be entitled to receive prior
written notice of any required adjustments, modifications or additions to the
subject Operating Systems or leased equipment.
5
<PAGE> 94
EXHIBIT F
MNB PIPELINE OF UNCLOSED LOANS
<PAGE> 95
EXHIBIT G
CONSTRUCTION LOANS
<PAGE> 96
EXHIBIT H
MNB AND RFC CANDIDATES FOR EMPLOYMENT AT COMPANY
<PAGE> 97
EXHIBIT H
MNB AND RFC CANDIDATES FOR EMPLOYMENT AT COMPANY
MNC candidates:
Mike Lyon
Paul Hicks
Kathy Toma
Marcie Freedman
Rhonda Bealore
Gail Kielty
Dori Garner
Audra Brown
Ty Sischo
Charlynn Dillon
Betty Merritt
Loreen Chamberlain
Sandra Hollins
Cathy Cavanaugh
Lisa Reinberger
Bev Krause
Sheryl Dailey
Brad Hein
Bernie Misko
Tofiq Ahmed
Daine Ruggeri
Steve Lankheet
George Bradley
Jennifer Dreyer
Pam King
Joe Wehner
Sue McDonald
Cindy Rase
Steve Gornick
Stephen Boles
Keya Coleman
Paul May Jr
Jennifer Huhn
John Layman
Eloise Brower
Paul Hartman
Patti Jo Champagne
Joanne Ellstein
Jim Wilcox
Brandy Ren
Paul Bremner
James Washington
Nicole Marinos
<PAGE> 98
Bruce Dulin
Sharon Wood
Angela Husky
Evelynn Mangum
Jeff Thompson
Jackie Thornton
Loraine Roper
Shenang Pride
Judy Lambert
Annette Stephens
Aleta McDaniel
Chyonna Lowry-Lee
Al Wilson
Brenda Price
Floreen McKey-Hill
Rock Candidates:
Tim Eagen
Eric King
Jesse Brady Davenport
Stephanie Kovach
Delanie Boon
Kurt Etzkorn
Richard Lebiedzinski
Jay Shienbaum
Christine Mitchell
Ken Weinbaum
Barry Roffman
David Lacido - Spelling unconfirmed on this one
<PAGE> 99
EXHIBIT I
FURNITURE, FIXTURES AND EQUIPMENT TO BE SOLD BY MNB TO THE
COMPANY
<PAGE> 100
EXHIBIT J
LICENSE AGREEMENT(S)
94
<PAGE> 101
EXHIBIT K
MNB CORRESPONDENT AGREEMENT
<PAGE> 102
EXHIBIT L
MORTGAGE WAREHOUSING LINE OF CREDIT AND SECURITY AGREEMENT
<PAGE> 103
EXHIBIT M
OPERATING AGREEMENT
<PAGE> 104
EXHIBIT N
RFC CORRESPONDENT AGREEMENT
<PAGE> 105
EXHIBIT O
RFC SUB-SERVICING AGREEMENT
<PAGE> 106
EXHIBIT P
SERVICES AGREEMENT(S)
<PAGE> 107
EXHIBIT Q
TRADEMARK AND REGISTERED MARK LICENSE AGREEMENT(S)
<PAGE> 108
EXHIBIT R
FICO SCORE
620
<PAGE> 1
Exhibit 10.19
OPERATING AGREEMENT
OF
ROCK HOME LOANS @ MICHIGAN NATIONAL, LLC
<PAGE> 2
ROCK HOME LOANS @ MICHIGAN NATIONAL, LLC
(a Michigan Limited Liability Company)
OPERATING AGREEMENT
Table of Contents
<TABLE>
<CAPTION>
<S> <C>
ARTICLE I - ORGANIZATION..........................................................................................1
Section 1.01 Organization......................................................................................1
Section 1.02 Name of Company...................................................................................2
Section 1.03 Duration and Effective Date of Agreement..........................................................2
Section 1.04 Purpose and Business..............................................................................2
Section 1.05 Status of Members.................................................................................3
Section 1.06 Registered Agent and Office.......................................................................3
Section 1.07 Principal Office..................................................................................4
Section 1.08 Conflicts of Interest.............................................................................4
Section 1.09 Definitions.......................................................................................4
ARTICLE II - MEMBERS..............................................................................................5
Section 2.01 Members...........................................................................................5
Section 2.02 Additional Members................................................................................5
Section 2.03 Representations and Warranties....................................................................5
Section 2.04 Information.......................................................................................6
Section 2.05 [RESERVED]........................................................................................7
Section 2.06 Voting Rights.....................................................................................7
Section 2.07 Meetings and Notice..............................................................................14
Section 2.08 Quorum...........................................................................................14
Section 2.09 Member to Vote in Person or by Proxy.............................................................14
Section 2.10 Action by Written Consent........................................................................15
Section 2.11 No Authority to Commence Civil Suit..............................................................15
Section 2.12 Independent Activities...........................................................................16
Section 2.13 Transactions Permitted With Members and Affiliates...............................................16
Section 2.14 Participation by Communications Equipment........................................................16
Section 2.15 Waiver of Notice.................................................................................17
ARTICLE III - MANAGEMENT BY MANAGER..............................................................................17
Section 3.01 General Powers...................................................................................17
Section 3.02 Number and Term of Office........................................................................17
Section 3.03 Limitation of Authority of Members...............................................................18
Section 3.04 Resignation and Removal of the Manager...........................................................18
Section 3.05 Discharge of Duties, Reliance on Reports.........................................................18
Section 3.06 Accountable as Trustee...........................................................................20
Section 3.07 Authority to Execute Documents...................................................................20
Section 3.08 Officers.........................................................................................20
Section 3.09 Removal, Resignation or Replacement of Officers..................................................21
Section 3.10 Conflict-of-Interest.............................................................................21
ARTICLE IV - CAPITAL CONTRIBUTIONS...............................................................................22
Section 4.01 Initial Contributions; Membership Interest.......................................................22
Section 4.02 Additional Contributions.........................................................................23
Section 4.03 Failure to Make Additional Contribution..........................................................23
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
Section 4.04 Contribution Returns.............................................................................24
Section 4.05 Loans by Members.................................................................................24
Section 4.06 [RESERVED].......................................................................................25
Section 4.07 Capital Accounts.................................................................................25
Section 4.08 Personal Property................................................................................25
ARTICLE V - ALLOCATIONS AND DISTRIBUTIONS........................................................................26
Section 5.01 Allocations......................................................................................26
Section 5.02 Distributions....................................................................................26
Section 5.03 Minimum Income Distributions.....................................................................27
ARTICLE VI - WITHDRAWAL; TRANSFER OF MEMBERSHIP INTEREST.........................................................29
Section 6.01 Withdrawal of Member.............................................................................29
Section 6.02 Bankrupt Members.................................................................................29
Section 6.03 Transferability of Membership Interest...........................................................31
Section 6.04 Expulsion of Member..............................................................................31
Section 6.05 Effectiveness of Transfer........................................................................32
ARTICLE VII - LIMITATION OF LIABILITY AND INDEMNIFICATION........................................................32
Section 7.01 Limitation of Personal Liability.................................................................32
Section 7.02 Indemnification..................................................................................33
Section 7.03 Liability Insurance..............................................................................34
ARTICLE VIII - TAXES, TAX ALLOCATIONS AND ACCOUNTING.............................................................35
Section 8.01 Tax Returns......................................................................................35
Section 8.02 Tax Elections....................................................................................35
Section 8.03 Tax Matters Member...............................................................................36
Section 8.04 Indemnification of Tax Matters Member............................................................37
Section 8.05 Allocations of Net Profits and Net Losses from Operations........................................37
Section 8.06 Accounting, Reports, Audit and Other Information.................................................37
Section 8.07 Banking and Accounts.............................................................................38
ARTICLE IX - DISSOLUTION, LIQUIDATION, AND TERMINATION...........................................................39
Section 9.01 Dissolution......................................................................................39
Section 9.02 Termination Events...............................................................................42
Section 9.03 Damages..........................................................................................56
Section 9.04 Certificate of Dissolution.......................................................................57
Section 9.05 Winding Up.......................................................................................57
Section 9.06 Liquidation and Buy-Out Option...................................................................57
Section 9.07 Deficit Capital Accounts.........................................................................64
ARTICLE X - GENERAL PROVISIONS...................................................................................65
Section 10.01 Books and Records...............................................................................65
Section 10.02 Invalidity......................................................................................66
Section 10.03 Waiver..........................................................................................66
Section 10.04 Choice of Law and Choice of Forum...............................................................66
Section 10.05 Counterparts....................................................................................67
Section 10.06 Further Assistance..............................................................................67
Section 10.07 Notices.........................................................................................67
Section 10.08 Conflict With MLLCA.............................................................................69
Section 10.09 Amendment.......................................................................................69
Section 10.10 Entire Agreement................................................................................69
</TABLE>
ii
<PAGE> 4
OPERATING AGREEMENT
OF
ROCK HOME LOANS @ MICHIGAN NATIONAL, LLC
(A MICHIGAN LIMITED LIABILITY COMPANY)
This OPERATING AGREEMENT ("Agreement") is made on February 19, 1999,
between the Rock Home Loans @ Michigan National, LLC, a Michigan Limited
Liability Company (the "Company") and the persons executing this Operating
Agreement as members of the Company (individually, a "Member" and collectively,
the "Members").
RECITALS
A. The Members desire to organize a Michigan Limited Liability
Company for the purpose of conducting the Joint Venture Business, and further
desire to effectuate this purpose through execution of this Operating Agreement.
Now, therefore, for good and valuable consideration, the parties agree
as follows:
ARTICLE I - ORGANIZATION
Section 1.01 Organization. The Company has been or shall be organized
as a Michigan limited liability company pursuant to the Michigan Limited
Liability Company Act, M.C.L.A. Section 450.4101 et. Seq. ("MLLCA") by filing of
Articles of Organization ("Articles"), as may be amended or restated from time
to time, with the Michigan Department of Consumer and Industry Services as
required by the MLLCA. If the Company has not been organized as of the date of
this Agreement, the Members shall cause it to be organized forthwith.
<PAGE> 5
Section 1.02 Name of Company. The name of the Company shall be Rock
Home Loans @ Michigan National, LLC. All business of the Company shall be
transacted in that name, provided however, the Company may also conduct its
business under one or more assumed names as permitted by the MLLCA and as may be
approved by the Members.
Section 1.03 Duration and Effective Date of Agreement. The Company
shall continue in existence in perpetuity or until the Company dissolves and
winds-up in accordance with the MLLCA or this Agreement. This Agreement shall be
effective as of the date of this Agreement. This Agreement shall be deemed
ratified and restated by the Company upon the filing of amended or restated
Articles.
Section 1.04 Purpose and Business. The purpose of the Company is to
engage in the Joint Venture Business and in any other activities, as may be
determined by the unanimous consent of the Members, for which limited liability
companies may be formed under the MLLCA, provided such activities are legally
permissible activities under the National Bank Act (12 U.S.C Section 24
(Seventh)) and any regulations and interpretative rulings issued thereunder.
Notwithstanding anything in this Agreement to the contrary, the Company may not
engage in any activity which is not a permissible activity for a national bank
or an operating subsidiary thereof and will cease to engage in any activity
which the Office of the Comptroller of the Currency ("OCC") determines to be an
impermissible activity and will obtain OCC approval, to the extent required,
prior to the formation of any subsidiary or the commencement of any activity
outside of the purpose permitted by this Section 1.04. The Company shall have
all the powers necessary or
2
<PAGE> 6
convenient to effect any purpose for which it is formed, including all powers
granted by the MLLCA. Regardless of any broad purposes permitted by the
Articles, the Company shall not engage in any activities not permitted by this
Agreement.
Section 1.05 Status of Members. The Members have formed or intend to
form the Company as a limited liability company under the MLLCA. The Members
specifically intend and agree that the Company shall not be a partnership, a
limited partnership, or any other type venture. The Company is a limited
liability company under and pursuant to the MLLCA, even though the Company may
be taxed or elect to be taxed as a partnership. No Member or Manager shall be
construed to be a partner in the Company or a partner of any other Member,
Manager or Person, and the Articles, this Agreement and the relationships
created thereby and arising therefrom shall not be construed to suggest
otherwise. If any Member, by word or action, represents to another person that
any other Member is a partner or that the Company is a partnership other than
for tax purposes, the Member making such wrongful representation shall be liable
to any Member who incurs personal liability by reason of such wrongful
representation, provided however, punitive damages shall not be recoverable from
the Member making such wrongful representation.
Section 1.06 Registered Agent and Office. The registered agent for the
service of process and the registered office shall be that person and location
reflected in the Articles. The Manager or Members may, from time to time, change
the registered agent or office and establish registered agents and offices in
other jurisdictions according to the MLLCA and other applicable law.
3
<PAGE> 7
Section 1.07 Principal Office. The principal office of the Company
shall be at 30600 Telegraph Road, Fourth Floor, Bingham Farms, Michigan 48025,
or such other location selected by the "Manager" (as defined in Section 3.01),
and unanimously approved by the Members, if so required under Section 2.06.
Section 1.08 Conflicts of Interest. A Member does not violate a duty or
obligation to the Company or the other Member merely because his or her conduct
furthers his or her own interest, provided however, in the event such conduct
gives rise to a "Dissolution Event" or a "Termination Event" as defined under
Sections 9.01 and 9.02, respectively, of this Agreement, the Members shall have
the rights and obligations provided for in Article IX of this Agreement, and as
otherwise provided for in this Agreement. A Member may lend money to the Company
and transact other business with the Company. Unless otherwise agreed in a
writing signed by the Company and the Member, the rights and obligations of a
Member who lends money to or transacts business with the Company are the same as
those of a Person who is not a Member, subject to applicable laws or
regulations. No transaction with the Company shall be voidable solely because a
Member has a direct or indirect interest in the transaction if the transaction
is within a reasonable range of fairness to the Company or the disinterested
Member knowing the material facts of the transaction and the Member's interest,
authorizes, approves or ratifies the transaction.
Section 1.09 Definitions. Except as the context requires otherwise, any
term, word, phrase written with an initial capital letter and not defined in
this Agreement shall
4
<PAGE> 8
have meaning attributed to such term, word, or phrase provided in that certain
Joint Venture Agreement executed the same date as this Agreement by and among
the Members and the Company ("Joint Venture Agreement").
ARTICLE II - MEMBERS
Section 2.01 Members. The Members of the Company are the persons
executing this Agreement effective upon such execution.
Section 2.02 Additional Members. Additional Members may not be admitted
without the unanimous agreement of the then current Members.
Section 2.03 Representations and Warranties. Each Member represents and
warrants to the other Member and to the Company that (a) if that Member is a
corporation, it is duly organized, validly existing and in good standing under
the laws of the state of its formation and qualified to do business (to the
extent required by applicable law) in the State of Michigan and in any other
jurisdiction where it conducts its business activities; (b) if that Member is a
national banking association, it is duly organized, validly existing and in good
standing under the laws of the United States and qualified to do business (to
the extent required by applicable law) in the State of Michigan and in any other
jurisdiction where it conducts its business activities; (c) that each Member has
full corporate, or other applicable power and authority to execute and deliver
the Articles and this Agreement, and to perform its obligations hereunder and
thereunder; (d) all actions necessary for the due authorization, execution,
delivery and
5
<PAGE> 9
performance of the Articles and this Agreement have been duly taken and if any
consent or approval of any Person or governmental authority is required such
approval or consent has been obtained, Including approval of the OCC; (e) that
Member's execution, delivery and performance of the Articles and this Agreement
shall not violate any other agreement or instrument to which that Member is a
party or by which its property is bound; (f) that Member is bound by this
Agreement which is enforceable in accordance with its terms, except as
enforceability may be limited by bankruptcy, insolvency or similar laws
affecting the enforcement of creditors rights generally, and general principles
of equity (regardless of whether such enforceability is considered in a
proceeding at law or in equity); (g) the Member is acquiring its interest in the
Company for the Member's own account as an investment and without an intent to
distribute the interest; (h) the Member understands that the interests have not
been registered under the Securities Act of 1933 or any state securities laws,
and may not be resold or transferred by the Member without appropriate
registration or the availability of an exemption from such requirements; and (i)
the Member's interest in the Company is not a security under federal or state
law, unless specifically prescribed under 12 C.F.R. 1 for a national banking
association.
Section 2.04 Information. In addition to the other rights specifically
set forth in this Agreement, each Member is entitled to all information on the
Company to which that Member is entitled to have access pursuant to Section 503
of the MLLCA under the circumstances and subject to the conditions therein
stated, Including the books, records of account, business records, the Articles
and this Agreement.
6
<PAGE> 10
Section 2.05 [RESERVED]
Section 2.06 Voting Rights. Each Member votes in proportion to its
Membership Interest (as defined in Section 4.01). Each Member shall be entitled
to vote on all matters submitted for a vote of the Members. Except as provided
in the next sentence, the approval of all such matters shall be by unanimous
vote of all Members in the Company. Notwithstanding any other provision of this
Agreement, the election, removal and compensation (including benefits) of the
Manager shall be approved by the Members, and shall be approved by the holders
of a majority of the Membership Interests in the Company, except that either
Member alone may remove the Manager if he or she commits a felony, fraud,
embezzlement, or other misappropriation of funds that has a material adverse
effect on the Member's capital account in the Company. Notwithstanding any other
provision of this Agreement, the following matters are the only matters that
must be submitted for a vote of the Members (except for the election, removal
and compensation (including benefits) of the Manager), and the approval of the
Members by the unanimous vote of all Members shall be required with respect to
the following:
(a) Business Combination or Dissolution. any acquisition,
consolidation, merger, voluntary dissolution or liquidation (Including
the winding up) of the Company, or any business combination
acquisitions, consolidations or merger transactions by the Company,
whether with Affiliated entities or not;
7
<PAGE> 11
(b) Conflict of Interest. any transaction between the Manager
and the Company in which the Manager has a conflict of interests,
other than transactions related to the Manager's compensation or
benefits;
(c) Related-Party Transactions. any transaction directly or
indirectly between either Member and the Company, except for (i)
loans from a Member to the Company aggregating not more than
$250,000 at any one time outstanding, (ii) the Manager's
termination of agreements or transactions directly or indirectly
between either Member and the Company, subject to the terms of
those agreements, and (iii) those transactions described in
Section 9.06(e) that do not require unanimous Member approval
pursuant to the terms of Section 9.06(e);
(d) Changes to Organizational Documents or Name. any amendment
or restatement to the Articles or this Agreement (Including,
expanding the purpose of the Company pursuant to Section 1.04) or
any use of one or more assumed names by the Company, pursuant to
Section 1.02;
(e) [RESERVED];
(f) Distributions. any distribution of profits and losses to
the Members, except for those distributions required by Section
5.03 of this Agreement;
(g) Sales and Acquisitions of Assets. the sale or transfer of
all or substantially all of the Company's assets, except in the
ordinary course of
8
<PAGE> 12
business (the sale of mortgage loan assets to third parties shall be
in the ordinary course of business), or any material purchase,
receipt, lease, exchange or other acquisition of any real or personal
property or business that (i) is not in the ordinary course of
business, and (ii) costs the Company more than $100,000 in any single
transaction;
(h) Annual Business Plan. the approval of a Business Plan
(Including at least a two (2) year rolling forecast) annually submitted
by the Manager, within sixty (60) days prior to the commencement of the
new fiscal year, which shall be in such form as the Members unanimously
agree and communicate to the Manager from time to time, and in the
absence of such agreement on the form of the Business Plan, in such
form most recently agreed upon; provided, that if the Members do not
approve the annual Business Plan, the Company shall be entitled to
operate within the annual Business Plan submitted by the Manager,
except for any portion of such annual Business Plan that requires
either Member to make any capital contributions or loans to the Company
(other than those already agreed upon) or any portion of such annual
Business Plan that can not be funded from operating cash flow of the
Company;
(i) Acquisition of, or Joint Venture with, Other Entities. any
acquisition of substantially all of the assets or equity capital of, or
joint venture with, any other entity, including the formation of any
new company, partnership or other business entity;
9
<PAGE> 13
(j) Branch Selection. any addition to, or removal from, the
list of Michigan National Bank ("MNB") financial center offices at
which a Company loan officer will have an office to conduct the
Company's Joint Venture Business; provided, however, MNB may
unilaterally remove a Company loan officer from such a site if MNB
decides to relocate or close such financial center office; and the
financial terms of any leasing or sharing of space arrangements for MNB
financial center office sites;
(k) Indebtedness. incurring or assuming general indebtedness
or warehouse line indebtedness or any guaranty of obligations of any
other person or entity, except for the endorsement of negotiable
instruments for deposit in the ordinary course of business and except
for any indebtedness or guaranty that is either (i) not in excess of
the approved amount stated in the annual Business Plan under which the
Company is then operating, or (ii) in the ordinary course of the
Company's business;
(l) Dispositions and Liens Not in the Ordinary Course. any
sale, conveyance, or mortgage of, grant of a security interest in, or
creation of a lien, pledge or encumbrance on, any real or personal
property or asset now owned or hereafter acquired by the Company or any
other disposition of any property or asset now owned or hereafter
acquired by the Company, except in the ordinary course of business;
10
<PAGE> 14
(m) Capital Expenditures. any capital expenditures which
exceed the amount stated in the annual Business Plan under which the
Company is operating by more than thirty percent (30%);
(n) Changing the Company's Purpose. changing the purpose of
the Company pursuant to Section 1.04, or changing (Including expanding
or restricting) the Joint Venture Territory of the Company;
(o) Bank Accounts. the establishment of bank account(s), other
than MNB accounts having no set-off rights in favor of MNB in its
capacity as a Member (but it may have set-off rights as a lender) ;
(p) Company Policies. any adoption, ratification or
modification of the following Company policies: (i) tax policies, (ii)
brand standards and product line positioning (Including graphic
standards), (iii) privacy standards for customer information, (iv) risk
management policies (Including, an overage policy, hedging, code of
ethics and conduct, indemnity protection, liability and other
insurance, security and loss prevention policies and a Y2K action
plan), and (v) policies concerning conduct of joint venture employees
on MNB premises;
(q) Claims. any commencement of any claim or suit by the
Company, any settlement of any claim or suit by or against the Company,
or any settlement of any claim or suit against the Manager or any
employee, officer or agent of the Company, all if the matter is in
excess of $100,000, or any reimbursement of
11
<PAGE> 15
expenses is in excess of $100,000 in connection with any such matter,
except for seeking injunctive relief on behalf of the Company for
employment related matters;
(r) Response to Examination Reports. the initiation of any
voluntary action resulting from a material examination report finding
prepared by any regulatory or governmental agency (Including, the OCC,
Federal Trade Commission, Fannie Mae, Freddie Mac, Federal Housing
Administration, Veterans Administration, Department of Housing and
Urban Development, and Michigan Financial Institutions Bureau) having
jurisdiction or other authority over the Company;
(s) Change in Membership Interest. any change in any Member's
Membership Interest relative to all other Members, except as otherwise
required by Section 4.02;
(t) Violations of Organizational Documents or Law. any matter
that would violate any provision of the Articles, this Agreement, the
MLLCA, or any other material federal or state law or regulation
(Including, the National Bank Act and its implementing regulations and
interpretative rulings);
(u) Additional Capital. making additional capital
contributions to the Company;
12
<PAGE> 16
(v) Authority to Execute Documents. any authorization to
execute deeds, documents, transfers, contracts, agreements, bonds,
debentures, notes, obligations, evidences of indebtedness, checks,
drafts, bills of exchange, orders for the payment of money and other
instruments requiring execution by the Company, with a value or dollar
amount in excess of $100,000 or a termination penalty or similar
provision in excess of $100,000, and not relating to mortgage notes
transferred in the ordinary course of business;
(w) New Members. any addition of new Members pursuant to
Section 2.02;
(x) Office Location. the location of the principal office of
the Company outside of MNB's Community Reinvestment Act assessment
areas;
(y) Appointment of Successor Accounting Firm. the appointment
of any successor accounting firm for the Company, in the event the then
current accounting firm resigns or is removed by the Company;
(z) Web site. Any link(s) between the Company's web site and
the web site of Rock Financial Corporation ("RFC"), its parent, any
subsidiary of RFC or its parent, MNB, its parent or any Affiliate of MNB
or its parent, including HomeSide Lending, Inc.; and
13
<PAGE> 17
(aa) Licenses. any license grants by the Company relating to
Company's technology, trademarks, registered marks or trade secrets and
approval of any acquisitions by license, purchase or registration (as
applicable) of any technology, trademarks, registered marks or trade
secrets by the Company.
Section 2.07 Meetings and Notice. The Members shall from time to time
agree on a meeting schedule, provided however, the Members will hold meetings
monthly for the first year of the Company. Any Member or the Manager may call a
special meeting of the Members for any proper purpose or purposes, for any
reasonable time, upon not less than ten (10) days and no more than sixty (60)
days notice to the other Member (unless the Members mutually agree on a shorter
time frame to meet). The notice shall state the date, time, place, and
purpose(s) of any meeting and the nature of the business to be transacted and
the matters, if any, upon which the Members will be requested to vote; provided
however, action may be taken on any matter to be brought before the meeting
regardless of whether set forth in the notice. Minutes will be taken at any such
meetings.
Section 2.08 Quorum. The presence of all Members (in person, by
authorized agent or by proxy) at a meeting shall constitute a quorum for the
transaction of business.
Section 2.09 Member to Vote in Person or by Proxy. A Member entitled to
vote at a meeting of Members, or to express consent or dissent without a
meeting, shall be entitled to vote in person or by proxy, appointed by an
instrument in writing authorizing
14
<PAGE> 18
other persons to act. A proxy shall be signed by the Member or authorized agent
or representative and shall not be valid after the expiration of 3 years from
its date unless otherwise provided. RFC represents that its chief executive
officer, and MNB represents that its chief executive officer, is entitled to
vote or designate a proxy to vote at a meeting of Members or by written consent.
Section 2.10 Action by Written Consent. Any action required or permitted
to be taken at a meeting of Members may be taken by consent or approval without
a meeting, without prior notice and without a vote, if consents in writing,
setting forth the action so taken, are signed by all Members of the Company, and
are delivered to the Company. All such consents shall be dated within a period
of 90 days from the first date thereof to the last date.
Section 2.11 No Authority to Commence Civil Suit. No Member shall have
the authority to commence and maintain a civil suit in the right of the Company,
and no such civil suit shall be commenced and maintained in the right of the
Company except upon the unanimous vote of the Members, to the extent required by
Section 2.06(q) or except as provided in this Agreement. The Manager shall have
the authority (i) to commence, maintain and settle any pending or threatened
arbitration, litigation or other proceeding in the right of the Company in which
the amount to be paid or received by the Company is not in excess of $100,000
(after giving effect to coverage provided by any insurance policy), and (ii) to
seek injunctive relief on behalf of the Company for employment-related matters.
15
<PAGE> 19
Section 2.12 Independent Activities. Absent a Dissolution Event or a
Termination Event under Sections 9.01 and 9.02, respectively, of this Agreement,
any Member may, notwithstanding the existence of this Agreement, engage in other
activities beyond the purpose of the Company (as stated in the Articles and
Section 1.04 of this Agreement) which such Member chooses, whether the same is
competitive with the Company or otherwise, without having or incurring any
obligation to offer any interest in such activities to the Company or to any
other party to this Agreement, except as otherwise provided in the Joint Venture
Agreement.
Section 2.13 Transactions Permitted With Members and Affiliates. The
validity of any transaction, agreement or payment involving the Company, the
Members or any Affiliate thereof, otherwise permitted by the terms of this
Agreement and the Joint Venture Agreement shall not be affected by reason of the
relationship between any Member and such Affiliate or by reason of the approval
of said transaction, agreement or payment by any Member.
Section 2.14 Participation by Communications Equipment. A Member may
participate in a meeting of the Members by a conference telephone or by other
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 parties in the
conference shall be divulged to all participants. Participation in a meeting
pursuant to this section constitutes presence in-person at the meeting.
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Section 2.15 Waiver of Notice. When any notice is required to be given
to any Member, a waiver of the notice in writing signed by the Member entitled
to the notice, whether before, at, or after the time stated therein, shall be
equivalent to the giving of the notice. A Member's attendance at or
participation in any Member meeting waives any required notice to such Member of
the meeting unless such Member, at the beginning of the meeting or upon its
arrival, objects to the meeting or the transaction of business at the meeting
and does not thereafter vote for or assent to any action taken at the meeting.
ARTICLE III - MANAGEMENT BY MANAGER
Section 3.01 General Powers. The property, affairs, and business of the
Company shall be managed by the "Manager" who shall be elected by the Members.
The initial Manager is William Emerson. Except as otherwise provided in this
Agreement, the ordinary and usual decisions concerning the business and affairs
of the Company shall be made by the Manager. The Manager may exercise all the
powers of the Company, whether derived from law, the Articles or otherwise,
which are not reserved to the Members under this Agreement. The Manager need not
be and is not a Member of the Company. The Members shall have no power to engage
in the management of the Company which is delegated to the Manager.
Section 3.02 Number and Term of Office. A Manager shall hold office for
the term elected and until a successor is elected and qualified or until death,
resignation or removal.
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Section 3.03 Limitation of Authority of Members. Except as provided in
this Agreement, no Member has the authority or power to act for or on behalf of
the Company, to do any act which would be binding on the Company or to incur any
expenditures on behalf of the Company.
Section 3.04 Resignation and Removal of the Manager. The Manager shall
serve at the will and pleasure of the Members, subject to the terms of any
written agreement executed by the Manager and the Company which is approved by
the holders of a majority of the Membership Interests. The Manager may resign by
delivering a written resignation to the Members upon not less than fourteen (14)
days notice, and such resignation shall be effective 14 days after receipt
thereby or at a subsequent time as set forth in the notice of resignation. The
Manager may be removed from office at any time with or without cause as provided
in Section 2.06, and the Members shall designate a successor Manager by a vote
of the Members in proportion to each Member's Membership Interest.
Section 3.05 Discharge of Duties, Reliance on Reports. The Manager shall
discharge his or her duties as a Manager in good faith, with the care an
ordinarily prudent person in a like position would exercise under similar
circumstances and in a manner the Manager reasonably believes to be in the best
interests of the Company and in accordance with the Articles, this Agreement and
the Joint Venture Agreement. In discharging his or her duties, a Manager may
rely on information, opinions, reports or
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statements, including financial statements and other financial data, if prepared
or presented by any of the following:
(a) One or more Members, or employees of the Company whom the Manager
reasonably believes to be reliable and competent in the matter presented; and
(b) Legal counsel, public accountants, information technology engineers,
or other Persons as to matters the Manager reasonably believes are within the
Person's professional or expert competence and who has been selected with
reasonable care by or on behalf of the Company, (including information,
opinions, reports or statements from such persons as to the value and amount of
the assets, liability, profits or losses of the Company or any other facts
pertinent to the existence and amount of assets from which distributions to
Members might properly be paid).
The Manager is not entitled to rely on the information set forth in this
Section 3.05 if the Manager has knowledge concerning the matter in question that
makes reliance otherwise permitted by this provision unwarranted. To the full
extent permitted by the MLLCA or any other applicable laws presently or
hereafter in effect, no Manager of the Company shall be liable for any monetary
damages to the Company or its Members for any breach of such duties. Any repeal
or modification of this Section 3.05 shall not adversely affect any right or
protection of a Manager of the Company existing immediately before, or for or
with respect to any acts or omissions occurring before, such repeal or
modification. The Manager is not otherwise liable for any action taken as
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a Manager or any failure to take any action if he or she performs the duties of
his or her office in compliance with this Section 3.05.
Section 3.06 Accountable as Trustee. The Manager shall account to the
Company and hold as trustee for it any profit or benefit derived, without the
informed consent of the Members, by the Manager from any transaction connected
with the conduct or winding up of the Company or from any personal use by him or
her of its property.
Section 3.07 Authority to Execute Documents. All deeds, documents,
transfers, contracts, agreements, bonds, debentures, notes, obligations,
evidences of indebtedness, checks, drafts, bills of exchange, orders for the
payment of money and other instruments requiring execution by the Company, with
a value or dollar amount not in excess of $100,000 or relating to mortgage notes
transferred in the ordinary course of business, shall be executed and delivered
by the Manager or any other person authorized by the Manager in accordance with
the provisions of the Articles and this Agreement. All funds of the Company not
otherwise employed shall be deposited from time to time to the credit of the
Company in such financial institutions and shall be endorsed, assigned and
delivered as designated by the Manager or any other person authorized by the
Manager in accordance with the terms of this Agreement.
Section 3.08 Officers. The Company may have one or more officers who may
have particular titles and who shall be elected or appointed by the Manager. Two
or more offices may be held by the same person and the assignment of such
offices shall confer upon those officers the same authority and duties as
authorized or directed by
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the Manager. An officer shall hold office for the term for which elected or
appointed and until a successor is elected or appointed and qualified, or until
death, resignation or removal by the Manager. The officers shall serve at the
will and pleasure of the Manager, subject to the terms of any written agreement
executed by the officer and the Company.
Section 3.09 Removal, Resignation or Replacement of Officers. An officer
elected or appointed by the Manager may be removed by the Manager with or
without cause. The removal of an officer shall be without prejudice to his or
her contract rights, if any. The election or appointment of an officer does not
of itself create contract rights. An officer may resign by written notice to the
Company, which resignation is effective upon its receipt by the Company or at a
subsequent time specified in the notice of resignation which the Manager deems
acceptable. Vacancies in any office may be filled by the Manager.
Section 3.10 Conflict-of-Interest. Any transaction between the Manager
and the Company in which the Manager has a conflict of interests, other than
transactions related to the Manager's compensation or benefits, shall be
authorized or ratified by an unanimous vote of all Members. The Manager shall
disclose all material facts regarding the transaction and the Manager's interest
in the transaction before the Members vote on that transaction.
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ARTICLE IV - CAPITAL CONTRIBUTIONS
Section 4.01 Initial Contributions; Membership Interest. The Members
shall make the capital contributions to the Company on or before the Closing
Date in the aggregate amount set forth on the execution page of this Agreement.
Such contributions shall be paid:
(i) within ten (10) days after receiving a notice from the
Manager, which may be given by the Manager at any time and from time to
time between the date of this Agreement and the Closing Date, stating
the aggregate amount of the required capital contribution; provided
that each Member shall only be required to contribute its portion of
such aggregate amount (based on its Membership Interest); and provided
further, that a Member's aggregate contributions under this clause
shall not exceed the amount of the initial capital contribution of such
Member set forth on the execution page of this Agreement; and
(ii) on or before the Closing Date, the difference between the
aggregate contributions made by such Member pursuant to the previous
clause and the amount of the initial capital contribution of such
Member set forth on the execution page of this Agreement.
The contributions will be in the form of cash. Each Member's percentage interest
in the Company (the Member's "Membership Interest", as may be adjusted from time
to time pursuant to the specific provisions of this Agreement, including Section
4.02) is set forth
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on the execution page of this Agreement. The Membership Interest of each Member
shall not change, except as specifically permitted in this Agreement. No
interest shall accrue on any capital contribution or balance in a capital
account, and no Member shall have any right to withdraw or to be repaid any
capital contribution or balance in a capital account, except as provided in this
Agreement.
Section 4.02 Additional Contributions. No Member shall be required or
allowed to advance or contribute any additional funds to the Company, except
upon an unanimous vote of the Members. In the event of an unanimous vote, all
Members shall be notified of the date on which the additional capital
contributions shall be made, which date shall be at least twenty (20) days after
the notice. Each Member shall contribute a percentage of the additional funds
which is equal to that Member's Membership Interest in the Company unless the
Members unanimously agree otherwise. If the Members unanimously agree to
contribute a percentage of the additional funds which is not equal to a Member's
Membership Interest in the Company, each Member's Membership Interest shall be
adjusted to equal the aggregate amount of such Member's capital account after
such contributions, divided by the aggregate amount of all Members' capital
accounts after such contributions. At no time will the Membership Interest of
the Member, who is a national banking association, exceed five percent (5%) of
its capital.
Section 4.03 Failure to Make Additional Contribution. Should any Member
decline to pay to the Company the amount of any additional capital contribution
unanimously agreed to by all Members, within the time so specified, the
remaining Member shall have the option of advancing the additional
contributions. Upon the failure by a Member
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to make the full amount of such additional capital contribution, the Membership
Interests of the Members shall be reallocated so that the noncontributing
Member's percentage interest in the Company shall be reduced as provided herein
to reflect the failure to make the required capital contribution, and the Member
making such contributions shall be allocated a percentage interest in the
Company to equitably reflect such contribution. No commitment or other
obligation to make an initial or additional contribution may be enforced by a
creditor of the Company, unless the Members expressly consent in writing to such
enforcement.
Section 4.04 Contribution Returns. A Member is not entitled to the
return of any part of the Member's capital contributions, except as otherwise
expressly required by this Agreement. An unrepaid capital contribution is not a
liability of the Company or of any Member. A Member is not required to
contribute or to lend any cash or property to the Company to enable it to return
any Member's capital contribution.
Section 4.05 Loans by Members. Should the Company lack sufficient cash
to pay its obligations, any Member that may agree to do so may advance (as in
all respects an arm's length transaction) all or part of the needed funds to or
on behalf of the Company, subject to unanimous approval of the Members for loans
from a Member to the Company aggregating more than $250,000 at any one time
outstanding. An advance described in this section constitutes a loan from the
Member to the Company, bears interest at the interest rate agreed to by the
Company and the lending Member from the date of the advance until the date of
repayment, is not a capital contribution, and does not change any Member's
Membership Interest in the Company. Any loan by RFC, as
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a Member, shall be subordinated in all respects to that certain Mortgage
Warehousing Line of Credit and Security Agreement for as long as such obligation
has indebtedness outstanding, and, if requested by MNB, RFC shall sign a
mutually acceptable subordination agreement to effect such purpose.
Section 4.06 [RESERVED].
Section 4.07 Capital Accounts. A capital account shall be maintained for
each Member in accordance with the Treasury Regulations under Section 704(b) of
the Internal Revenue Code of 1986, as amended (the "Code").
Section 4.08 Personal Property. A Member's interest in the Company shall
be personal property for all purposes. All property now or hereafter owned by
the Company shall be deemed owned by the Company as an entity, and no Member,
individually, shall have any ownership interest in such property.
Notwithstanding any other provision hereof or of any governing law, no Member
shall have the right of partition with respect to any property of the Company
during the term hereof, nor shall any Member make application to any court or
authority having jurisdiction in the matter, or otherwise commence or prosecute
any action or proceeding for partition or the sale thereof. Upon any breach of
the provisions of this Agreement, the Company and the other Member not seeking
partition or sale, in addition to any rights or remedies which they may have at
law or in equity, shall be entitled to a decree or order restraining and
enjoining any such application, action or proceeding.
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ARTICLE V - ALLOCATIONS AND DISTRIBUTIONS
Section 5.01 Allocations.
(a) Except as may be required by Section 704(c) of the Code
and Treasury Regulation Section 1.704-1(b)(2)(iv)(f)(4), the Company's
Profits, Losses, and other items of income, gain, loss, deduction, and
credit shall be allocated between the Members in accordance with their
Membership Interests.
(b) For the purpose of this Agreement, the term "Profits" and
"Losses" mean, respectively, for each taxable year of the Company or
other period, the Company's taxable income or loss for such taxable
year or other period, determined in accordance with Section 703(a) of
the Code (for this purpose, all items of income, gain, loss, or
deduction required to be stated separately pursuant to Section
703(a)(1) of the Code shall be included in taxable income or loss),
except that any income of the Company that is exempt from federal
income tax and not otherwise taken into account in computing Profits or
Losses shall be added to such taxable income or loss and such taxable
income or loss shall be decreased by expenditures that are neither
deductible nor otherwise result in a charge to a Member's capital
account.
Section 5.02 Distributions. Except as otherwise provided in this
Agreement, the Members shall determine quarterly by mutual agreement whether to
make distributions to the Members. The amount of such distributions shall be
determined by the
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unanimous vote of the Members. Distributions shall be in cash. All distributions
shall be in accordance with each Member's respective Membership Interest. No
distribution, Including any distribution pursuant to Section 5.03, shall be
declared or made if, after giving it effect: (a) the Company would not be able
to pay its debts as they become due in the usual course of business or (b) the
Company's total assets would be less than the sum of its total liabilities.
Section 5.03 Minimum Income Distributions.
(a) Year-End Distribution. The Company will distribute to the
Members, in proportion to their Membership Interests, within 90 days
after the end of each taxable year of the Company for which it is taxed
under the provisions of Subchapter K of chapter I of subtitle A of the
Code (the "Year End Distribution"), an amount equal to the Federal Tax
Amount (as defined in the next sentence) for the prior taxable year. As
used in this Agreement, the "Federal Tax Amount" will be equal to the
product of (a) the Company's Profits (excluding tax exempt income and
non-deductible expenditures) ("Taxable Income") for the taxable year,
multiplied by (b) the highest marginal federal corporate income tax
rate then in effect under the Code, minus (i) tax credits allocable to,
and usable by, the Members, and (ii) all quarterly distributions made
to the Members for the taxable year of the Company and other tax
distributions made to the Members with respect to the taxable year.
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(b) Quarterly Distributions. The Company will make
distributions to its Members in proportion to their Membership
Interests during each taxable year of the Company for which it is taxed
under the provisions of Subchapter K of chapter I of subtitle A of the
Code in such amounts and at such times so that each Member will be able
to make timely estimated federal income tax payments attributable to
the portion of the Company's Taxable Income allocated to such Member
pursuant to the Code; provided, however, that each periodic
distribution (i) will not exceed the Federal Tax Amount, calculated as
though the Taxable Income were equal to the Company's estimated Taxable
Income from the beginning of the Company's taxable year through the
date of such periodic distribution, less prior distributions for taxes
with respect to such taxable year of the Company, and (ii) will not
violate any applicable law of the State of Michigan governing the
payment of distributions to members.
(c) Distribution Adjustments. If after distribution (or
determination, in the event there is no distribution) of the Year End
Distribution amount, the Company determines (or accepts a determination
of the Internal Revenue Service) that the yearly Taxable Income for a
taxable year of the Company exceeds the amount upon which the Year End
Distribution was based, the Company will, within 30 days, distribute to
the Members in proportion to their Membership Interests, the amount by
which the Federal Tax Amount, determined with regard to such adjusted
yearly Taxable Income, exceeds the amount previously distributed as the
Federal Tax Amount for such taxable year (the "Redetermination
Amount"). The Members will not be required to return
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distributions under this Section 5.03 if, after distribution of the
Year End Distribution Amount, the Company determines that the yearly
Taxable Income of the Company is less than the amount upon which the
Year End Distribution was based.
ARTICLE VI - WITHDRAWAL; TRANSFER OF MEMBERSHIP INTEREST
Section 6.01 Withdrawal of Member. A Member does not have the right or
power to voluntarily withdraw from the Company as a Member. Any such voluntary
withdrawal shall be in violation of this Agreement and the withdrawing Member
shall not be entitled to receive any distribution pursuant to Section 305 of the
MLLCA. A "voluntary withdrawal" shall mean a Member's dissociation from the
Company by any means other than the expulsion, bankruptcy or dissolution of the
Member, a Dissolution Event under Section 9.01 (except for the portion of
Section 9.01(c) referring to this Section 6.01), or a Termination Event under
Section 9.02. The non-withdrawing Member shall be entitled to any remedies at
law or in equity and as provided for in this Agreement, provided however,
punitive damages shall not be recoverable, and provided further, however, that
if the non-withdrawing Member elects to dissolve the Company pursuant to Section
9.01(c)(i), its remedies shall be as provided in Section 9.01(c).
Section 6.02 Bankrupt Members. Subject to the other provisions of this
Agreement, if any Member becomes a Bankrupt Member (as defined below), the
Company shall have the option, exercisable by notice from the Company to the
Bankrupt Member at any time prior to the 180th day after receipt of notice of
the
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occurrence of the event causing it to become a Bankrupt Member, to buy and
on the exercise of this option the Bankrupt Member shall sell the Membership
Interest of the Bankrupt Member. The purchase price shall be an amount equal to
the fair market value of the Membership Interest determined by agreement of the
Bankrupt Member and the Company; however, if the Company and the Bankrupt Member
do not agree on the fair market value on or before the 30th day after the
exercise of the option, by notice to the other, this will require the
determination of fair market value to be made by an independent appraiser whose
determination shall be final and binding upon all parties. The Company shall pay
the fair market value of the Membership Interest as so determined as agreed by
the Members, or, in the absence of an agreement by the Members, in four (4)
equal cash installments, the first due on closing and the remainder due, with
interest on the unpaid balance, on each of the first three anniversaries
thereof, which payment shall be in complete liquidation and satisfaction of all
the rights and interests of the Bankrupt Member (and of all persons claiming by,
through or under the Bankrupt Member) and constitutes a compromise to which all
Members have agreed pursuant to the MLLCA. As used herein a "Bankrupt Member"
shall mean a Member who (i) has been declared bankrupt through the issuance of
an order of relief, (ii) has filed a petition in bankruptcy or for
reorganization, or to effect a plan or other arrangement with creditors; or
(iii) has any bankruptcy petition filed against such Member unless discharged
within ninety (90) days; or (iv) has filed an answer to a creditor's petition
(admitting the material allocations thereof) in bankruptcy or for reorganization
or to affect a plan or other arrangement of creditors; or (v) has applied to
have a receiver, trustee or custodian appointed with respect to any of the
Member's assets.
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Section 6.03 Transferability of Membership Interest. Except as
specifically permitted in this Agreement, no Member shall sell or otherwise
transfer any portion of the Member's Membership Interest in the Company in any
manner, voluntarily or involuntarily, including without limitation, by sale,
gift, granting an option to purchase, bequest, descent, device or operation of
law, or any other disposition. Any attempted voluntary or involuntary
disposition by a Member or a creditor of a Member, of an interest or right, or
any part thereof, in or in respect of the Company other than in accordance with
this Section 6.03 shall be null and void, and shall be considered a violation of
this Agreement and a Dissolution Event to the extent provided under Section 9.01
of this Agreement.
Section 6.04 Expulsion of Member. Any Member who is convicted of a
felony, found by a court of competent jurisdiction to have committed fraud,
embezzlement, or other misappropriation of funds, shall be in violation of this
Agreement and shall be expelled from the Company. In such event, all rights of
the Member, including without limitation, voting rights and the right to receive
reports and review Company books and records, shall immediately terminate and
the expelled Member shall become an economic interest owner (owner of the right
to receive allocations of the Company's profits, losses and distributions of the
Company's assets pursuant to this Agreement and the MLLCA but no other rights as
a Member) until the Company is liquidated following such Dissolution Event in
Section 9.01 of this Agreement.
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Section 6.05 Effectiveness of Transfer. No transfer of any Membership
Interest which is in violation of this Agreement shall be valid or effective and
the Company shall not recognize the same for the purposes of making
distributions or allocations with respect to the Membership Interest. The
Company may enforce the provisions of this Agreement, either directly or
indirectly, or through its agents by entering an appropriate stop-transfer order
on its books or otherwise refusing to register or transfer or permit the
registration or transfer on its books of any proposed assignment not in
accordance with this Agreement.
ARTICLE VII - LIMITATION OF LIABILITY AND INDEMNIFICATION
Section 7.01 Limitation of Personal Liability. Unless otherwise
provided by law or in this Agreement, or expressly assumed in a writing by a
Member or a Manager, a person who is a Member or Manager shall not be liable for
the acts, debts or liabilities of the Company. The doing of any act or the
failure to do any act by any or all of the Members which is not contrary to any
provision of this Agreement or the MLLCA, the effect of which may cause or
result in loss or damage to the Company, if done in good faith to promote the
best interests of the Company, shall not subject the Members or the Manager to
any liability. The failure of the Company, Member or the Manager to observe any
formalities or requirements relating to the exercise of powers or management of
the Company's business or affairs under this Agreement, the Articles, the MLLCA,
or otherwise, shall not be grounds for imposing personal liability on the
Members or the Manager for liabilities of the Company. Any repeal, amendment or
other modification of this Section 7.01 shall not adversely affect any right or
protection
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of a Member or the Manager of the Company existing at the time of such repeal,
amendment or other modification. If the MLLCA is amended, after this Agreement
becomes effective, to authorize action further eliminating or limiting personal
liability of a Member or the Manager, then the liability of a Member or the
Manager shall be eliminated or limited to the fullest extent permitted by the
MLLCA, as so amended and shall so amend this Section 7.01.
Section 7.02 Indemnification. The Company, to the extent authorized by
the MLLCA , shall indemnify a Member (Including the "Tax Matters Member", as
defined below), the Manager, or an officer, and may indemnify an employee or an
agent, who was or is a party or is threatened to be made a party to a
threatened, pending or a completed action, suit, or proceeding (whether civil,
criminal, administrative, or investigative and whether formal or informal),
including an action by or in the right of the Company, by reason of the fact
that he or she is or was a Member, the Manager, an officer, an employee or an
agent of the Company, or is or was serving at the request of the Company as a
director, member, manager, officer, partner, trustee, employee, or agent of
another foreign or domestic corporation, partnership, limited liability company,
joint venture, trust, or other enterprise, whether for profit or not, against
expenses, including attorneys' fees, judgments, penalties, fines, and amounts
paid in settlement actually, and reasonably incurred by him or her in connection
with the action, suit, or proceeding. The Company shall indemnify such Member,
Manager, or officer, and may indemnify such employee or an agent if the person
acted in good faith, with the care an ordinarily prudent person in a like
position would exercise under similar circumstances, and in a manner that the
Person reasonably believed to be in the best interests of the
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Company. With respect to a criminal proceeding or action, the Person must have
had no reasonable cause to believe such Person's conduct was unlawful.
The Company shall pay or reimburse the reasonable expenses incurred in
advance of final disposition of the proceeding, to the extent authorized by the
Manager to the extent of his authority, if he is not a party to or threatened to
be made a party to the action, suit or proceeding, otherwise by an unanimous
vote of the Members. However, no indemnification shall be provided under this
section to any Person of the Company for or in connection with the receipt of a
financial benefit to which the Person is not entitled or a knowing violation of
law or for liability under Section 308 of the MLLCA.
Section 7.03 Liability Insurance. The Company shall have the power to
purchase and maintain insurance on behalf of any Person who is or was a Member,
the Manager, an officer, an employee, independent contractor, or an agent of the
Company, or is or was serving at the request of the Company as a director,
member, manager, officer, partner, trustee, employee or an agent of another
corporation, partnership, joint venture, trust, or other enterprise, against any
liability or expense asserted against such Person or incurred by such Person in
any such capacity or arising out of such Person's status as such, whether or not
the Company would have the power to indemnify such Person against such liability
under the provisions of the MLLCA.
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ARTICLE VIII - TAXES, TAX ALLOCATIONS AND ACCOUNTING
Section 8.01 Tax Returns. The "Tax Matters Member" (as defined below)
shall cause to be prepared and filed all necessary federal and state income tax
returns for the Company, including making the elections described in Section
8.02. Each Member shall provide the Tax Matters Member with all pertinent
information in its possession relating to Company operations that is necessary
for the Company to prepare and file its income tax returns.
Section 8.02 Tax Elections. The Company shall make the following
elections on the appropriate tax returns:
(a) to adopt the calendar year as the Company's taxable
year, unless the Code provides otherwise;
(b) to adopt the accrual method of accounting for tax
purposes, and to keep the Company books and records
on the accrual method;
(c) if a distribution of Company property as described in
Section 734 of the Code occurs, to elect, pursuant to
Section 754 of the Code, to adjust the basis of
properties of the Company;
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(d) to amortize the organizational and start-up
expenditures of the Company under Section 195 of the
Code ratably over a period of sixty (60) months as
permitted by Section 709(b) of the Code; and
(e) any other election the Tax Matters Member may deem
appropriate and in the best interest of the Members,
which are allowed under the Code or the tax laws of
any state or other jurisdiction having taxing
jurisdiction over the Company.
Neither the Company nor the Manager or any Member may make an election
for the Company to be excluded from the application of the provisions of
Subchapter K of chapter I of subtitle A of the Code or any similar provisions of
applicable state law, and no provision of this Agreement shall be construed to
sanction or approve an election.
The provisions of this Agreement as they relate to the maintenance of
capital accounts are intended, and shall be construed, and, if necessary,
modified to comply with Treasury Regulations promulgated under Section 704(b) of
the Code. This Agreement shall not be construed as creating a deficit
restoration obligation or otherwise personally obligate any Member to make a
capital contribution in excess of the initial contribution.
Section 8.03 Tax Matters Member. RFC shall be designated as the "Tax
Matters Member" of the Company pursuant to Section 6231(a)(7) of the Code; and
shall take such action as may be necessary to cause each other Member to become
a "notice
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member" within the meaning of Section 6223 of the Code; and shall inform each
other Member of all significant matters that may come to its attention in its
capacity as a Tax Matters Member and shall forward to each other Member copies
of all significant written communications it may receive in that capacity.
Section 8.04 Indemnification of Tax Matters Member. The Company shall
defend, indemnify and hold harmless the Tax Matters Member for all expenses
Including legal and accounting fees, claims, liabilities, losses and damages
incurred in connection with the performance of such Member as Tax Matters
Member. Neither the Members or the Manager, nor any other Person or Affiliate of
the Company shall have any obligation to provide funds for such purpose.
Section 8.05 Allocations of Net Profits and Net Losses from Operations.
Except as may be required by Section 704 of the Code net profits, net losses,
and other items of income, gain, loss, deduction and credit shall be apportioned
among the Members in proportion to their Membership Interest.
Section 8.06 Accounting, Reports, Audit and Other Information.
Unaudited Financial Statements (which need not include cash flow statements) and
reports concerning the capital accounts of the Members shall be prepared at
least monthly in the form mutually agreed upon by the Members and delivered to
the Members by the Manager at the time delivered to RFC, but no later than five
(5) Business Days following the previous month end. Within ninety (90) days
after the close of the Company's fiscal year, and within forty-five (45) days
after the close of the Company's first three fiscal
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quarters each year, Financial Statements and a statement of each Member's share
of profits and other items of income, gain, loss, deduction and credit, relating
to the prior fiscal year or quarter, as the case may be, shall be prepared in
accordance with generally accepted accounting principles, consistently applied,
unless otherwise provided herein, and delivered to the Members by the Manager.
Annual audited Financial Statements are required, and the Company shall employ
an independent certified public accountant to prepare the annual audited
Financial Statements. Each Member shall have the right to interview the
accountant and obtain the accountant's work papers in connection with any audit.
The initial accountant for the Company shall be KPMG Peat Marwick LLP. The
initial accountant and subsequent accountants for the Company may be the
accountant for one or more Members without waiving any accountant-client
privilege and may continue to act as an accountant for one or more of the
Members. Each Member shall have the right at its own expense to conduct an audit
of the Company upon reasonable notice to the Manager.
Section 8.07 Banking and Accounts. All funds of the Company not
otherwise required in the ordinary operation of its business shall be deposited
in a separate bank account or accounts as shall be determined by the Manager.
All withdrawals therefrom shall be made upon checks signed by the Manager or by
any person authorized to do so by the Manager or by Member resolution. The
Company shall maintain its principal operating accounts at MNB if the accounts
have no set-off rights in favor of MNB as a Member (but it may have set-off
rights as a lender).
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ARTICLE IX - DISSOLUTION, LIQUIDATION, AND TERMINATION
Section 9.01 Dissolution. The Company is dissolved and its affairs
shall be wound up upon the first occurrence of any of the following each of
which shall be considered a "Dissolution Event":
(a) upon the happening of any events specified in this
Agreement that is a "Termination Event" (as defined
in Section 9.02 of this Agreement), following the
expiration of any designated cure period(s) or
waiting period (if applicable);
(b) upon the unanimous consent of the Members to
voluntarily dissolve the Company;
(c) the following, if an option to dissolve is exercised,
shall each be considered a Dissolution Event:
(i) after the attempted withdrawal of a Member
in violation of Section 6.01 of this
Agreement, but only if the non-withdrawing
Member so elects and makes, and gives notice
of, such election within 90 days after it
becomes aware of the attempted withdrawal in
violation of Section 6.01, such dissolution
to be effective at the time the
non-withdrawing Member gives notice to the
other Member of such election;
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(ii) after the expulsion or dissolution of a
Member, but only if the non-expelled or
non-dissolved Member so elects and makes,
and gives notice of, such election within 90
days after it becomes aware of such
expulsion in violation of Section 6.04 or
dissolution, such dissolution to be
effective at the time the non-expelled or
non-dissolved Member gives notice to the
other Member of such election;
(iii) after a Bankrupt Member event under Section
6.02, but only if the Company does not elect
to purchase the Bankrupt Member's Membership
Interest and the non-Bankrupt Member so
elects and makes, and gives notice of, such
election within 90 days after it becomes
aware of such Bankrupt Member event under
Section 6.02, such dissolution to be
effective at the time the non-Bankrupt
Member gives notice to the other Member of
such election; or
(iv) after any attempted transfer of a Member's
Membership Interest in violation of Section
6.03, but only if the non-transferring
Member so elects and makes, and gives notice
of, such election within 90 days after it
becomes aware of such attempted transfer in
violation of Section 6.03, such
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dissolution to be effective at the time the
non-transferring Member gives notice to the
other Member of such election.
If a Member exercises its option to dissolve the
Company pursuant to this Section 9.01(c) at any time
during the first five years after the date of this
Agreement, the other Member shall pay the greater of
(i) the "Break-Up Fee" (as defined in Section
9.02(a), except that it shall be calculated based on
the Membership Interest of the Member electing to
dissolve the Company), or (ii) the dissolving
Member's actual damages resulting from such
dissolution, to the dissolving Member on or before
the date such dissolution and winding up is complete,
provided however, punitive damages shall not be
recoverable;
(d) the following, if an option to dissolve is exercised,
shall be considered a Dissolution Event: after a
Member's failure to make the full amount of an
additional capital contribution which was unanimously
agreed to by the Members, but only if the
contributing Member does not elect to make the
non-contributing Member's additional capital
contribution and the contributing Member does elect
to dissolve the Company and wind up its affairs and
gives notice of such election within 90 days after
its becomes aware of the failure of the other Member
to make the required contribution, such dissolution
to be effective at the time the contributing Member
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gives notice to the other Member of such election. If
the contributing Member exercises its option to
dissolve the Company pursuant to this Section 9.01(d)
at any time during the first five years after the
date of this Agreement, the other Member shall pay
the greater of (i) the "Break-Up Fee" (as defined in
Section 9.02(a), except that it shall be calculated
based on the Membership Interest of the Member
electing to dissolve the Company), or (ii) the
dissolving Member's actual damages resulting from
such dissolution, to the dissolving Member on or
before the date such dissolution and winding up is
complete; provided however, punitive damages shall
not be recoverable; and
(e) upon the entry of a decree of judicial dissolution.
Section 9.02 Termination Events. The following, if any option to
terminate is exercised, shall each be considered a "Termination Event" under
this Agreement:
(a) If MNB or its parent-Michigan National Corporation
("MNC") (or any direct or indirect subsidiary of MNB
or its parent -MNC whether now or hereafter created
or in existence) owns or obtains a Controlling
interest (through an acquisition, consolidation,
merger, other business combination, business
arrangement or de novo event) in a business which
originates, services and/or sells residential
mortgage loans substantially similar to any of the
Mortgage Loans
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originated by the Company for its Joint Venture
Business, that, at such time or at any time
thereafter, competes or plans to compete in any of
the same or substantially the same market territory
as the Joint Venture Territory, then MNB and RFC
shall each have the option to terminate this
Agreement effective at the time stated in a prior
written notice of such termination given to the other
Member (but not less than 120 days after such notice
is given); provided, the Member exercising its
termination rights gives the other Member notice of
termination within ninety (90) days after it has
notice that such ownership, acquisition,
consolidation, merger, other business combination or
business arrangement or de novo event has become
effective; and further provided, that if MNB
exercises this option to terminate this Agreement by
providing the notice of termination, and such notice
is provided during the first five years after the
date of this Agreement, then MNB shall pay the
"Break-Up Fee" (as defined below) to RFC on or before
the date such termination becomes effective;
The "Break-Up Fee" means the Membership Interest of
the non-terminating party multiplied by the greater
of (i) $5,000,000, or (ii) two times the pre-tax
earnings of the Company for the 12 months ending at
the end of the calendar month immediately preceding
(i) the date of the event triggering the right to
terminate this Agreement or dissolve the Company, or
(ii) the date of entering into
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<PAGE> 47
the agreement, if any, relating to the event
triggering the right to terminate this Agreement or
dissolve the Company, if it produces a higher
12-months pre-tax earnings of the Company.
(b) If MNB or its parent- MNC (or any direct or indirect
subsidiary of MNB or its parent-MNC whether now or
hereafter created or in existence) is acquired,
consolidated with an unaffiliated company, merged
with an unaffiliated company or otherwise combined
with an unaffiliated company and the acquirer owns or
obtains a Controlling interest in the acquired entity
and the acquirer owns or is in the business of
originating, servicing and/or selling residential
mortgage loans substantially similar to any of the
Mortgage Loans originated by the Company for its
Joint Venture Business, that, at such time or at any
time thereafter, competes or plans to compete in any
of the same or substantially the same market
territory as the Joint Venture Territory, then MNB
and RFC shall each have the option to terminate this
Agreement effective at the time stated in a prior
written notice of such termination given to the other
Member (but not less than 120 days after such notice
is given); provided, the Member exercising its
termination rights gives the other Member notice of
termination within ninety (90) days after it has
notice that such acquisition, consolidation, merger
or other business combination has become effective;
and further provided, that if MNB exercises this
option to terminate this Agreement by providing
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the notice of termination, and such notice is
provided during the first five years after the date
of this Agreement, then MNB shall pay the "Break-Up
Fee" (as defined in Section 9.02(a)) to RFC on or
before the date such termination becomes effective;
(c) If National Australia Bank ("NAB") (its parent, or
any direct or indirect subsidiary of NAB or its
parent whether now or hereafter created or in
existence; provided HomeSide Lending, Inc. ("HSL")
shall be excluded for purposes of this Section
9.02(c); provided, however, HSL shall be included for
purposes of this Section 9.02(c) in the event HSL at
any time after the execution date of this Agreement
or at any time thereafter substantially competes, in
any of the same or substantially the same market
territory as the Joint Venture Territory, in the
retail origination (other than brokered transactions
or purchasing or obtaining assignments of mortgage
loans from mortgage brokers or correspondent lenders)
of residential mortgage loans substantially similar
to any of the Mortgage Loans originated by the
Company for its Joint Venture Business) owns or
obtains a Controlling interest (through an
acquisition, consolidation, merger, other business
combination, business arrangement or de novo event)
in a business which originates, services and/or sells
residential mortgage loans substantially similar to
any of the Mortgage Loans originated by the Company
for its Joint Venture Business, that, at such time or
at any
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<PAGE> 49
time thereafter, competes or plans to compete in any
of the same or substantially the same market
territory as the Joint Venture Territory, then MNB
and RFC shall each have the option to terminate this
Agreement effective at the time stated in a prior
written notice of such termination given to the other
Member (but not less than 120 days after such notice
is given); provided, the Member exercising its
termination rights gives the other Member notice of
termination within ninety (90) days after it has
notice that such ownership, acquisition,
consolidation, merger, other business combination or
business arrangement or de novo event has become
effective; and further provided, that if MNB
exercises this option to terminate this Agreement by
providing the notice of termination, and such notice
is provided during the first five years after the
date of this Agreement, then MNB shall pay the
"Break-Up Fee" (as defined in Section 9.02(a)) to RFC
on or before the date such termination becomes
effective;
(d) If NAB or its parent is acquired, consolidated with
an unaffiliated company, merged with an unaffiliated
company or otherwise combined with an unaffiliated
company and the acquirer owns or obtains a
Controlling interest in the acquired entity and the
acquirer owns or is in the business of originating,
servicing and/or selling residential mortgage loans
substantially similar to any of the Mortgage Loans
originated by the Company for its Joint Venture
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Business, that, at such time or at any time
thereafter, competes or plans to compete in any of
the same or substantially the same market territory
as the Joint Venture Territory, then MNB and RFC
shall each have the option to terminate this
Agreement effective at the time stated in a prior
written notice of such termination given to the other
Member (but not less than 120 days after such notice
is given); provided, the Member exercising its
termination rights gives the other Member notice of
termination within ninety (90) days after it has
notice that such acquisition, consolidation, merger
or other business combination has become effective;
and further provided, that if MNB exercises this
option to terminate this Agreement by providing the
notice of termination, and such notice is provided
during the first five years after the date of this
Agreement, then MNB shall pay the "Break-Up Fee" (as
defined in Section 9.02(a)) to RFC on or before the
date such termination becomes effective;
(e) If RFC or its parent (or any direct or indirect
subsidiary of RFC or its parent, whether now or
hereafter created or in existence) is acquired,
consolidated with an unaffiliated company, merged
with an unaffiliated company or otherwise combined
with an unaffiliated company and the acquirer owns or
obtains a Controlling interest in the acquired entity
and the acquirer is a Financial Services Provider
marketing any one or more Financial Products or
Services, that, at such time or at any time
thereafter, (i) competes or plans to
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<PAGE> 51
compete in any of the same or substantially the same
market territory as the Joint Venture Territory and
(ii) has assets in excess of 20% of MNB's assets
(whether through internal growth, branch
acquisitions, acquisitions of any Financial Services
Provider, strategic alliances or otherwise), then MNB
and RFC shall each have the option to terminate this
Agreement effective at the time stated in a prior
written notice of such termination given to the other
Member (but not less than 120 days after such notice
is given); provided, the Member exercising its
termination rights gives the other Member notice of
termination within ninety (90) days after it has
notice that such acquisition, consolidation, merger
or other business combination has become effective;
and further provided, that if RFC exercises this
option to terminate this Agreement by providing the
notice of termination, and such notice is provided
during the first five years after the date of this
Agreement, then RFC shall pay the "Break-Up Fee" (as
defined in Section 9.02(a)) to MNB on or before the
date such termination becomes effective;
(f) If RFC or its parent (or any direct or indirect
subsidiary of RFC or its parent whether now or
hereafter created or in existence) owns or obtains a
Controlling interest (through an acquisition,
consolidation, merger, other business combination or
business arrangement or de novo event) in a Financial
Services Provider marketing any one or more Financial
Products or Services, that, at such time or at any
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time thereafter, (i) competes or plans to compete in
any of the same or substantially the same market
territory as the Joint Venture Territory and (ii) has
assets in excess of 20% of MNB's assets (whether
through internal growth, branch acquisitions,
acquisitions of any Financial Services Provider,
strategic alliances or otherwise), then MNB and RFC
shall each have the option to terminate this
Agreement effective at the time stated in a prior
written notice of such termination given to the other
Member (but not less than 120 days after such notice
is given); provided, the Member exercising its
termination rights gives the other Member notice of
termination within ninety (90) days after it has
notice that such ownership, acquisition,
consolidation, merger, other business combination or
business arrangement or de novo event has become
effective; and further provided, that if RFC
exercises this option to terminate this Agreement by
providing the notice of termination, and such notice
is provided during the first five years after the
date of this Agreement, then RFC shall pay the
"Break-Up Fee" (as defined in Section 9.02(a)) to MNB
on or before the date such termination becomes
effective;
(g) If RFC or any parent of RFC or any direct or indirect
subsidiary of RFC or its parent sells, assigns,
transfers or otherwise disposes of key assets
essential to the operation of the Joint Venture
Business and this event (i) materially and adversely
affects RFC's
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performance under any one or more Ancillary
Agreements to which it is a party, and (ii)
materially and adversely affects the operations,
financial condition, property rights, business or
business prospects of the Company such that the
Company is unable to substantially carry on or
perform in its usual course the Joint Venture
Business, and if MNB provides RFC with notice of the
failure of RFC's performance under the applicable
Ancillary Agreement and the adverse effects on the
Company and at least 30 days to cure the failure
and/or effects (which cure period shall be extended
for such period of time as is reasonably necessary
with the exercise of due diligence and good faith to
correct such failure or effects upon reasonable
request of RFC, if the Company, RFC or any parent or
subsidiary of RFC or its parent commences diligent
and good faith correction of such failure or effects
within the thirty (30) day cure period) and RFC fails
to cure such failure or effects within such period,
then MNB shall have the option to terminate this
Agreement effective at the time stated in a written
notice of such termination given to RFC (but not less
than 120 days after such notice is given); provided,
MNB gives RFC notice of termination within ninety
(90) days after the end of such cure period; and
further provided, that if MNB exercises this option
to terminate this Agreement by providing the notice
of termination, and such notice is provided during
the first five years after the date of this
Agreement, then RFC shall pay the greater of (i) the
"Break-Up Fee" (as defined in
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Section 9.02(a), except that such fee shall be
calculated based on MNB's Membership Interest and the
event giving rise to the right to terminate this
Agreement shall be MNB's notice of the failure of
RFC's performance and the adverse effects on the
Company), or (ii) MNB's actual damages resulting from
such termination, provided however, punitive damages
shall not be recoverable, to MNB on or before the
date such termination becomes effective;
(h) If there is a material adverse change in the business
financial status of RFC or any parent of RFC or any
direct or indirect subsidiary of RFC or its parent
and this event (i) materially and adversely affects
RFC's performance under any one or more Ancillary
Agreements to which it is a party, and (ii)
materially and adversely affects the operations,
financial condition, property rights, business or
business prospects of the Company such that the
Company is unable to substantially carry on or
perform in its usual course the Joint Venture
Business, and if MNB provides RFC with notice of the
failure of RFC's performance under the applicable
Ancillary Agreement and the adverse effects on the
Company and at least 30 days to cure the failure
and/or effects (which cure period shall be extended
for such period of time as is reasonably necessary
with the exercise of due diligence and good faith to
correct such failure or effects upon reasonable
request of RFC, if the Company, RFC or any parent or
subsidiary of RFC or its parent
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commences diligent and good faith correction of such
failure or effects within the thirty (30) day cure
period) and RFC fails to cure such failure or effects
within such period, then MNB shall have the option to
terminate this Agreement, without the payment of any
"Break-Up Fee", effective at the time stated in a
written notice of such termination given to RFC (but
not less than 120 days after such notice is given);
provided, MNB gives RFC notice of termination within
ninety (90) days after the end of such cure period;
(i) Any one Member shall have the right to terminate this
Agreement, without cause, upon 120 days prior written
notice; provided however, that no Member shall have
the right to terminate this Agreement, without cause,
pursuant to this Section 9.02(i) only, during the
first two (2) years after the date of this Agreement;
and provided, further, that if a Member exercises
this Section 9.02(i) option to terminate this
Agreement at any time that is five years or less
after the date of this Agreement, the terminating
Member shall pay to the non-terminating Member, on or
before the date such termination becomes effective, a
fee equal to the Membership Interest of the
non-terminating party multiplied by the greater of
(i) $5,000,000, and (ii) the number of years (and
fractions of a year) between the date the termination
becomes effective and five years after the date of
this Agreement multiplied by the pre-tax earnings
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<PAGE> 56
of the Company for the 12 months ending at the end of
the calendar month immediately preceding the date of
notice of termination of this Agreement;
(j) Any one Member of the Company shall have the right to
terminate this Agreement, for cause, and without the
payment of any "Break-Up Fee", upon thirty (30) days
written notice, following prior written notice to
each Member of the violation and at least thirty (30)
days to cure it, (i) if (a) the terminating Member
has a reasonable basis to believe that the Company's
operations, policies, practices or procedures violate
a material federal or state law or regulation, and
(b) such a violation materially and adversely affects
the operations, financial condition, property rights,
business or business prospects of the Company such
that the Company is unable to substantially carry on
or perform in its usual course the Joint Venture
Business; (ii) if (a) a court of law, or a federal or
state regulatory or other governmental body or agency
who has jurisdiction or other authority over the
Company (through formal processes or otherwise),
communicates to the Company that there has been or
that there is a reasonable basis to believe that the
Company's operations, policies, practices or
procedures violate a material federal or state law or
regulation, and (b) such violation either (I)
materially and adversely affects the operations,
financial condition, property rights, business or
business prospects of the Company
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such that the Company is unable to substantially
carry on or perform in its usual course the Joint
Venture Business, or (II) impairs the ability of key
management of either the Company or any one Member to
continue to operate in such capacity. Absent an
objection from any informed regulatory authority who
has jurisdiction or other authority over the Company
or any court order, the thirty (30) day cure period
shall be extended for such period of time as is
reasonably necessary with the exercise of due
diligence and good faith to correct the violation
upon reasonable request of the non-terminating Member
or the Company if the Company commences diligent and
in good faith correction of the violation within the
thirty (30) day cure period;
(k) If the Company engages in activities which violate,
or result in a violation by the Company or either
Member (or any of their Affiliates) of, the National
Bank Act and its implementing regulations, to the
extent they are subject to the National Bank Act and
its implementing regulations, MNB and RFC shall each
have the right to terminate this Agreement
immediately, without the payment of any "Break-Up
Fee", upon written notice to the other Member,
following prior written notice to each Member of the
violation and at least ninety (90) days to cure such
violation provided such cure period is not objected
to by the informed regulatory authority who has
jurisdiction or other authority over the
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Company. The ninety (90) day cure period shall be
extended for such period of time as is reasonably
necessary with the exercise of due diligence and good
faith to correct the violation upon request of either
Member or the Company if the Company commences
diligent and good faith correction of the violation
within the ninety (90) day cure period;
(l) If the non-defaulting Member provided the defaulting
Member with notice of a potential Material Default
Event (as defined in the Joint Venture Agreement) and
at least 30 days to cure the potential Material
Default Event (which cure period shall be extended
for such period of time as is reasonably necessary
with the exercise of due diligence and good faith to
correct such potential Material Default Event upon
reasonable request of the defaulting Member, if the
defaulting Member commences diligent and good faith
correction of such potential Material Default Event
within the thirty (30) day cure period), all pursuant
to Section 11.2 of the Joint Venture Agreement, and
the defaulting member fails to cure such potential
Material Default Event within such period, and a
Material Default Event (as defined in the Joint
Venture Agreement) occurs, then the non-defaulting
Member shall have the option to terminate this
Agreement effective at the time stated in a written
notice of such termination given to the defaulting
Member; provided the non-defaulting Member gives
notice of termination to the other Member
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within 90 days after the end of such cure period. If
a Member exercises this option to terminate this
Agreement by providing the notice of termination, and
such notice is provided during the first five years
after the date of this Agreement, then the other
Member shall pay the greater of (i) the "Break-Up
Fee" (as defined in Section 9.02(a), except that such
fee shall be calculated based on the Membership
Interest of the Member electing to terminate this
Agreement), or (ii) the terminating Member's actual
damages resulting from such termination, provided
however, punitive damages shall not be recoverable,
to the terminating Member on or before the date such
termination becomes effective.
Section 9.03 Damages. If a Member breaches this Agreement, the Joint
Venture Agreement, any Ancillary Agreement to which it is a party, the Articles
or the MLLCA, the Company and the other Member, in addition to other applicable
remedies, may recover from the Member in breach its foreseeable compensatory
general and special and incidental damages caused by such breach, provided,
however, punitive damages shall not be recoverable from the Member in breach,
and provided further, however, that the sole remedies under this Agreement as a
result of the occurrence of a Dissolution Event or a Termination Event are as
provided in Section 9.01 or Section 9.02, except to the extent that such
Dissolution Event or Termination Event (or the events giving rise to it) breach
any other section of this Agreement, the Joint Venture Agreement or any
Ancillary Agreement, including any breaches after the first five years after the
date of this Agreement.
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Section 9.04 Certificate of Dissolution. Upon the dissolution and
commencement of winding up of the Company, a certificate of dissolution shall be
duly executed and filed with the Michigan Department of Consumer and Industry
Services as required by the MLLCA.
Section 9.05 Winding Up. On dissolution, the Company shall begin
winding up. Except as otherwise provided in the Articles, this Agreement, or
Section 805 of the MLLCA, the Manager or, if the Members unanimously agree, the
Members or any one Member who has not wrongfully dissolved the company may wind
up the Company's affairs. The Company shall complete the winding up as soon as
practicable. The Members or the Manager, who are winding up the Company's
affairs shall continue to function for the purpose of winding up, in accordance
with the procedures set by the MLLCA, the Articles, and this Agreement, and
shall be held to no greater standard of conduct than that described by Section
404 of the MLLCA and shall be subject to no greater liabilities than would apply
in the absence of dissolution. The Company may sue and be sued in its name and
process may issue by and against the Company in the same manner as if
dissolution had not occurred. An action brought by or against the Company before
its dissolution does not abate because of the dissolution.
Section 9.06 Liquidation and Buy-Out Option. On dissolution of the
Company, one or more Members or the Manager shall serve as liquidator. The
liquidator shall be the same person designated pursuant to Section 9.05 as the
person with the right to wind up the Company's affairs. The liquidator shall
proceed diligently to wind up the
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affairs of the Company and make final distributions as provided herein and
in the MLLCA. The costs of liquidation shall be borne as a Company expense.
Until final distribution, the liquidator shall continue to operate the Company
properties with all of the power and authority of a Manager. The steps to be
accomplished by the liquidator are as follows:
(a) As promptly as possible after dissolution and again
after final liquidation, the liquidator shall cause a
proper accounting to be made by a recognized
accounting firm of certified public accountants of
the Company's assets, liabilities, and operations
through the last day of the calendar month in which
the dissolution occurs or the final liquidation is
completed, as applicable.
(b) The liquidator shall cause the notice described in
Sections 806 and 807 of the MLLCA to be mailed to
each known creditor of and claimant against the
Company in the manner described in Sections 806 and
807.
(c) The assets of the Company shall be distributed in the
following order:
(i) to creditors, including Members who are
creditors, to the extent permitted by law,
in satisfaction of the debts, liabilities
and obligations of the Company other than
liabilities for
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distributions to Members under Section 304
of the MLLCA. Reasonable provisions shall be
made for debts, liabilities, and obligations
that are not liquidated but will not be
barred under Sections 806 or 807 of the
MLLCA.
(ii) except as provided in this Agreement, all
remaining assets to Members in accordance
with their capital account balances. For
this purpose, the determination of the
Members' capital account balances shall be
made after adjustment to reflect the
allocation of all Profits, Losses, and items
thereof under Section 5.01 and distributions
made to the Members pursuant to Sections
5.02 and 5.03, in each case through the
taxable year of liquidation of the Company.
The proceeds shall be paid to Members within
one hundred twenty (120) days after the date
of dissolution.
(d) Provided, however, before the assets of the Company
are distributed as set forth under (c) above, the
Company shall file tax returns and pay tax
obligations as required by law.
(e) The distribution of assets to the Members shall be as
follows:
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(i) The liquidator may sell any or all Company
property, including to Members (subject to
the unanimous approval of the Members of the
terms of such sale; provided, that sales
pursuant to the first refusal rights
described below in this Section 9.06(e)
shall not require unanimous approval of the
Members), and any resulting gain or loss
from each sale shall be computed and
allocated to the capital accounts of the
Members;
(ii) With respect to all Company property that
has not been sold, the fair market value of
that property shall be determined and the
capital accounts of the Members shall be
adjusted to reflect the manner in which the
unrealized income, gain, loss, and deduction
inherent in property that has not previously
been reflected in the capital accounts would
be allocated among the Members if there were
a taxable disposition of that property for
the fair market value of that property on
the date of distribution; and
(iii) Company property shall be distributed among
the Members in accordance with the positive
capital account balances of the Members.
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The distribution of cash and/or property to a Member in
accordance with the provisions of this Section 9.06
constitutes a complete return to the Member of its capital
contributions and a complete distribution to the Member of its
capital account and Membership Interest and all the Company's
property and constitutes a compromise to which all Members
have consented within the meaning of Section 808(l)(c) of the
MLLCA. To the extent that a Member returns funds to the
Company, it has no claim against any other Member for those
funds.
At the time of termination of this Agreement, any Ancillary
Agreements between the Company and either Member or Members,
and the Joint Venture Agreement shall terminate, with no
obligations of either party for subsequent actions or
transactions except as otherwise provided in the Joint Venture
Agreement or the affected Ancillary Agreement.
At the time of dissolution following a Termination Event or as
otherwise provided in Section 9.01 of this Agreement, (i) MNB
shall have the right, but not the obligation, to purchase for
"Fair Value" (as defined below) the Company's leasehold
improvements located at MNB's branches that it communicates to
RFC an interest to purchase within 30 days after the
dissolution, and (ii) RFC shall have the right, but not the
obligation, to purchase for Fair Value the Company's
equipment, and prepaid expenses; that it communicates to MNB
an interest to purchase within 30 days after the dissolution.
61
<PAGE> 65
"Fair Value" means (i) the value determined by mutual
agreement of the Members, or (ii) in the absence of such an
agreement, the value determined by a bona fide, good faith
offer to purchase the applicable assets by a third party that
is obtained by the liquidator, or (iii) if no such agreement
or offer is obtained, the value determined by averaging
appraisals from two appraisal firms qualified to value the
applicable assets, with one appraisal firm being selected by
each Member.
The closing on the purchase of such assets shall take place at
such time and place as may be mutually agreed upon by the
Members, but in any case within a reasonable time period
following the determination of the Fair Value of such assets.
At the closing, the Company shall deliver such assets to the
purchaser free and clear of all claims, liens, encumbrances
and security interests.
At the time of dissolution following a Termination Event or as
otherwise provided in Section 9.01 of this Agreement: (i) MNB
shall have the right, but not the obligation, to offer
employment to the Company's existing employees that are former
MNB employees, (ii) RFC shall have the right, but not the
obligation, to offer employment to the Company's existing
employees that are former RFC employees, and (iii) both MNB
and RFC shall have the right, but not the obligation, to offer
employment to the Company's other existing employees. As early
as practicable, but not
62
<PAGE> 66
later than thirty (30) days following the Dissolution Event,
(i) MNB will notify RFC of the names of the employees to whom
MNB intends to offer employment under clause (i) above, and
(ii) RFC will notify MNB of the names of the employees to whom
RFC intends to offer employment under clause (ii) above. After
receiving the notices described in the preceding sentence,
neither MNB, nor RFC may offer employment to the employees
properly set forth in the other Member's notice until such
time, if any, that the employee refuses such offer of
employment. An offer of employment must be made to any such
employee on the MNB list or RFC list no later than ten (10)
Business Days following the final liquidation of the Company
(or the other Member may solicit such employee), but such
employment may not begin before the final liquidation of the
Company without the Manager's consent.
Any compensation (including bonuses and other incentive pay)
due an employee of the Company for loans closed or originated
prior to the employee transfer date shall be the
responsibility of the Company. Any Company employee who
accepts employment at MNB or RFC may be employed as new hires
and on an employment at will basis. The employing Member is
not assuming, and it shall have no responsibility for the
continuation of, or any liabilities under or in connection
with, any of the following: (a) any employment contract,
collective bargaining agreement, or plan or arrangement
providing for insurance coverage, deferred compensation,
bonuses, stock options or other forms of incentive
63
<PAGE> 67
compensation or post-retirement benefits or compensation which
is entered into or maintained, as the case may be by the
Company; (b) any "employee benefit plan" as defined in Section
3(3) of the Employee Retirement Income Security Act ("ERISA")
which is subject to any provision of ERISA, and which is
maintained, administered or contributed to by the Company, or
(c) any notices required to be given to the Company's
employees pursuant to the "Plant Closing Act" or any other
applicable federal or state law.
MNB and RFC agree that, for a period of two (2) years after
the Dissolution Event under this Agreement that neither of
them nor their parents nor any direct or indirect subsidiaries
of them or their parents shall directly or indirectly
knowingly solicit on a targeted basis (as defined in Section
4.2 of the Joint Venture Agreement) employment of any employee
hired pursuant to this Agreement that were former employees of
such Member.
Section 9.07 Deficit Capital Accounts. Notwithstanding anything to the
contrary contained in this Agreement, and notwithstanding any custom or rule of
law to the contrary, to the extent that the deficit, if any, in the capital
account of any Member results from or is attributable to deductions and losses
of the Company (including non-cash items such as depreciation), or distributions
of money pursuant to this Agreement to all Members in proportion to their
respective Membership Interests, upon dissolution of the Company such deficit
shall not be an asset of the Company and such Members
64
<PAGE> 68
shall not be obligated to contribute such amount to the Company to bring the
balance of such Member's capital account to zero.
ARTICLE X - GENERAL PROVISIONS
Section 10.01 Books and Records. The Company shall maintain complete
and accurate books and records of the Company's business and affairs as required
by the MLLCA, tax law and other law. The following books and records shall be
kept at its registered office or principal place of business in Michigan:
(a) A current list of the full name and last known
address of each Member and the Manager;
(b) A copy of the Articles or Restated Articles of
Organization, together with any amendments to the
Articles;
(c) Copies of the Company's federal, state, and local tax
returns and reports for the three (3) most recent
years;
(d) Copies of any financial statements of the Company for
the three (3) most recent years;
(e) Copies of operating agreements, including this
Agreement, the Joint Venture Agreement and any
Ancillary Agreements; and
65
<PAGE> 69
(f) Copies of records that would enable a Member to
determine the Member's relative shares of the
Company's distributions.
Section 10.02 Invalidity. To the extent any provision of this Agreement
is prohibited or ineffective under the MLLCA, this Agreement shall be considered
amended to the smallest degree possible in order to make this Agreement
effective under the MLLCA. In the event the MLLCA is subsequently amended or
interpreted in such a way to make any provision of this Agreement that was
formally invalid valid, such provision shall be considered to be valid from the
effective date of such amendment or interpretation. The invalidity or
unenforceability of any particular provision of this Agreement shall not affect
the other provisions and this Agreement shall be construed in all respects as if
such invalid or unenforceable provisions were omitted.
Section 10.03 Waiver. The failure of any party at any time to require
performance by any other party of any provision of this Agreement shall not be
deemed a continuing waiver of that provision or a waiver of any other provision
of this Agreement and shall in no way affect the full right to require such
performance from the other party at any time thereafter.
Section 10.04 Choice of Law and Choice of Forum. This Agreement, and
the determination of any rights, duties or remedies of the parties arising out
of or relating to
66
<PAGE> 70
this Agreement, shall be governed by and construed according to the laws of the
State of Michigan. Any and all actions concerning any dispute arising hereunder
shall be filed and maintained only in a state or federal court sitting in the
State of Michigan, and the parties hereto specifically consent and submit to the
jurisdiction of such state or federal court.
Section 10.05 Counterparts. This Agreement may be signed in any number
of counterparts with the same effect as if the signature on each such
counterpart were upon the same instrument. Each executed copy shall be deemed an
executed original for all purposes.
Section 10.06 Further Assistance. Each party shall, at the request of
any other party, furnish, execute and deliver such other documents as the other
party may reasonably request and shall take such other actions as any other
party shall reasonably request, provided only that the furnishing of such
documents and taking of such action shall be necessary and convenient to
consummate or confirm the transactions contemplated herein.
Section 10.07 Notices. All notices, demands and requests required or
permitted to be given under the provisions of this Agreement shall be in writing
and shall be deemed given (a) when personally delivered to the party to be given
such notice or other communication, (b) on the business day that such notice or
other communication is sent by facsimile or similar electronic device, which
facsimile or similar electronic communication shall promptly be confirmed by
written notice, (c) on the third business
67
<PAGE> 71
day following the date of deposit in the United States mail if such notice or
other communication is sent by first class mail with postage thereon fully
prepaid, or (d) on the business day following the day such notice or other
communication is sent by a domestically recognized overnight courier, to the
following address, as such address may be modified by notice to the other
parties:
If to the Company: Rock Home Loans @ Michigan National, LLC
30600 Telegraph Road, 4th Floor
Bingham Farms, Michigan 48025
Attention: William Emerson
Fax Number: (248) 723-7238
If to MNB: Michigan National Bank
27777 Inkster Road
Farmington Hills, Michigan 48333-9065
Attention: Douglas E. Ebert (MC 10-00)
Fax Number: (248) 473-3086
with a copy to: Laura Nieber
Legal Department (MC 10-09)
27777 Inkster Road
Farmington Hills, Michigan 48333-9065
Fax Number: (248) 473-3235
68
<PAGE> 72
If to RFC: Rock Financial Corporation
30600 Telegraph Road, 4th Floor
Bingham Farms, Michigan 48025
Attention: Daniel Gilbert
Fax Number: (248) 723-7217
with a copy to: Richard Chyette
Rock Financial Corporation
30600 Telegraph Road, 4th Floor
Bingham Farms, Michigan 48025
Fax Number: (248) 723-7217
Section 10.08 Conflict With MLLCA. In the event any article or section
of this Operating Agreement shall conflict with the mandatory provisions of the
MLLCA, the MLLCA shall control.
Section 10.09 Amendment. This Agreement may be amended or modified only
in writing signed by all Members.
Section 10.10 Entire Agreement. This Agreement and the Joint Venture
Agreement (including the agreements referred to and incorporated into the Joint
Venture Agreement defined as "Ancillary Agreements") constitute the entire
agreement among the parties hereto and contain all of the agreements and
understandings between the parties with respect to the subject matter. The
parties have no
69
<PAGE> 73
expectations, other than those specifically expressed in this Agreement and the
Joint Venture Agreement, which are enforceable at law or in equity. This
Agreement and the Joint Venture Agreement supersede any and all other agreements
and understandings, either oral or written, between the parties with respect to
this subject matter.
IN WITNESS WHEREOF, the Members have made this Agreement effective as
of the date first set forth above.
MEMBERS:
ROCK FINANCIAL CORPORATION
SIGNATURE: /S/ DANIEL GILBERT
-----------------------------------------
DANIEL GILBERT, CHIEF EXECUTIVE OFFICER
30600 TELEGRAPH ROAD, FOURTH FLOOR
BINGHAM FARMS, MICHIGAN 48025
INITIAL CAPITAL CONTRIBUTION: $700,000
MEMBERSHIP INTEREST: 70%
70
<PAGE> 74
MICHIGAN NATIONAL BANK
SIGNATURE: /S/ DOUGLAS E. EBERT
-----------------------------------------
DOUGLAS E. EBERT, CHIEF EXECUTIVE OFFICER
27777 INKSTER ROAD
FARMINGTON HILLS, MICHIGAN 48334
INITIAL CAPITAL CONTRIBUTION: $300,000
MEMBERSHIP INTEREST: 30%
71
.
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
Name State of Organization
- ---- ---------------------
Rock Home Loans at Michigan National, LLC Michigan
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement
No. 333-53923 on Form S-8 of Rock Financial Corporation of our report dated
January 28, 1999 appearing in the Annual Report on Form 10-K of Rock Financial
Corporation for the year ended December 31, 1998.
/s/ KPMG LLP
Detroit, Michigan
March 29, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF ROCK FINANCIAL CORPORATION AS OF, AND FOR THE YEAR
ENDED, DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS AND ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 30,081,524
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 155,631,112
<CURRENT-ASSETS> 0
<PP&E> 16,176,213
<DEPRECIATION> 5,400,480
<TOTAL-ASSETS> 204,437,453
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 135,905
<OTHER-SE> 37,899,243
<TOTAL-LIABILITY-AND-EQUITY> 204,437,453
<SALES> 0
<TOTAL-REVENUES> 89,762,153
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 567,738
<INTEREST-EXPENSE> 7,220,969
<INCOME-PRETAX> 18,838,272
<INCOME-TAX> 2,584,342
<INCOME-CONTINUING> 16,253,930
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,253,930
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
