<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1999
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
----------------------- ------------------------
Commission file number 000-23887
ROCK FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2603955
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
30600 TELEGRAPH ROAD, FOURTH FLOOR
BINGHAM FARMS, MICHIGAN
48025
(Address of principal executive offices)
(Zip Code)
(248) 540-8000
(Registrant's telephone number, including area code)
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No | |
Number of common shares outstanding as of July 30, 1999: 14,843,654
<PAGE> 2
ROCK FINANCIAL CORPORATION
Table of Contents
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I--FINANCIAL INFORMATION.....................................................................................3
ITEM 1. FINANCIAL STATEMENTS............................................................................3
CONSOLIDATED BALANCE SHEETS.....................................................................3
CONSOLIDATED STATEMENTS OF INCOME...............................................................4
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY..................................................5
CONSOLIDATED STATEMENTS OF CASH FLOWS...........................................................6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS......................................................7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..........12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....................................36
PART II--OTHER INFORMATION.......................................................................................38
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................38
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...............................................................38
SIGNATURES.......................................................................................................39
</TABLE>
<PAGE> 3
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ROCK FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND JUNE 30, 1999
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
------------ -----------
ASSETS (Unaudited)
<S> <C> <C>
Cash and cash equivalents ...................................................... $ 30,081,524 $ 35,405,660
Mortgage loans held for sale ................................................... 155,631,112 81,916,736
Mortgage loans held for investment (net of allowance for
losses of $634,851 and $1,272,085 at December 31,
1998 and June 30, 1999, respectively) ..................................... 3,766,171 2,977,711
Real estate owned .............................................................. 49,989 497,113
Shareholders' advances ......................................................... 994,372
Property and equipment (net of accumulated depreciation of
$5,400,480 and $6,192,468 at December 31, 1998 and
June 30, 1999, respectively) .............................................. 10,775,733 9,828,493
Deferred income taxes .......................................................... 1,945,000 900,000
Prepaid federal income tax ..................................................... 3,792,272
Other assets ................................................................... 1,193,552 2,027,221
------------ ------------
Total assets ................................................................... $204,437,453 $137,345,206
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Warehouse line of credit .................................................. $ 98,008,105 $ 29,896,091
Reverse repurchase agreement .............................................. 11,521,065
Drafts payable ............................................................ 44,021,087 49,168,873
Accounts payable .......................................................... 4,680,275 3,134,851
Accrued expenses and other liabilities .................................... 8,171,773 5,479,788
------------ ------------
Total liabilities ..................................................... 166,402,305 87,679,603
------------ ------------
Minority interest in subsidiary ................................................ 215,102
Shareholders' equity:
Common shares, $.01 par value. Authorized 50,000,000
shares; issued and outstanding 13,590,500 shares
and 14,784,900 shares at December 31, 1998 and
June 30, 1999, respectively ........................................... 135,905 147,849
Additional paid-in capital ................................................ 26,297,782 36,124,511
Retained earnings ......................................................... 11,601,461 13,178,141
------------ ------------
Total shareholders' equity ............................................ 38,035,148 49,450,501
------------ ------------
Total liabilities and shareholders' equity ..................................... $204,437,453 $137,345,206
============ ============
</TABLE>
Page 3 of 39 pages
<PAGE> 4
ROCK FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 AND 1999
(Unaudited)
<TABLE>
<CAPTION>
For the Three-Month For the Six-Month
Periods Ended June 30, Periods Ended June 30,
------------------------ ------------------------
1998 1999 1998 1999
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Revenue:
Interest income ................................................... $ 3,128,445 $ 1,886,709 $ 6,227,712 $ 4,912,832
Interest expense .................................................. 1,882,191 613,321 3,619,827 2,032,259
----------- ----------- ----------- -----------
Net interest margin ........................................... 1,246,254 1,273,388 2,607,885 2,880,573
Provision for credit losses ....................................... 135,240 113,012 249,710 683,559
----------- ----------- ----------- -----------
Net interest margin after provision for
credit losses ............................................. 1,111,014 1,160,376 2,358,175 2,197,014
Loan fees and gains on sale of mortgages .......................... 20,976,499 15,518,744 38,639,830 34,535,018
Other income (expense) ............................................ 7,315 (12,195) 17,734 2,625
----------- ----------- ----------- -----------
22,094,828 16,666,925 41,015,739 36,734,657
----------- ----------- ----------- -----------
Expenses:
Salaries, commissions and employee benefits ...................... 9,650,074 11,112,349 18,196,241 20,588,596
General and administrative expenses ............................... 3,267,659 3,594,154 6,097,754 7,017,514
Marketing expenses ................................................ 3,560,772 2,221,316 6,460,478 4,595,593
Depreciation and amortization ..................................... 509,395 622,877 1,052,050 1,260,060
----------- ----------- ----------- -----------
16,987,900 $17,550,696 31,806,523 33,461,763
----------- ----------- ----------- -----------
Income (loss) before income taxes and minority
interest ....................................................... 5,106,928 (883,771) 9,209,216 3,272,894
Minority interest in loss of subsidiary ........................... 84,898 84,898
Income tax (expense) benefit ...................................... (1,123,524) 288,000 (1,123,524) (1,209,000)
Income tax benefit due to conversion of
"S" Corp. ...................................................... 950,939 950,939
----------- ----------- ----------- -----------
Net income (loss) ............................................. $ 4,934,343 $ (510,873) $ 9,036,631 $ 2,148,792
=========== =========== =========== ===========
Pro forma information (note 5):
Income before income taxes ........................................ $ 5,106,928 $ 9,209,216
Provision for pro forma income taxes .............................. 1,736,356 3,131,133
----------- -----------
Pro forma net income .............................................. $ 3,370,572 $ 6,078,083
=========== ===========
Pro forma earnings (loss) per share /earnings (loss) per share (1999):
Basic ............................................................. $ 0.24 $ (0.03) $ 0.44 $ 0.15
=========== =========== =========== ===========
Diluted ........................................................... $ 0.23 $ (0.03) $ 0.41 $ 0.14
=========== =========== =========== ===========
Dividends declared per share ........................................... $ 0.02 $ 0.02 $ 0.02 $ 0.04
=========== =========== =========== ===========
Pro forma weighted average number of shares outstanding/Weighted average
number of shares outstanding (1999):
Basic ............................................................. 13,829,500 14,693,862 13,829,500 14,244,695
=========== =========== =========== ===========
Diluted ........................................................... 14,945,181 15,537,343 14,945,181 15,175,691
=========== =========== =========== ===========
</TABLE>
Page 4 or 39 pages
<PAGE> 5
ROCK FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED SHAREHOLDERS'
SHARES CAPITAL EARNINGS EQUITY
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
Balance January 1, 1999 ...................... $ 135,905 $ 26,297,782 $ 11,601,461 $ 38,035,148
Net income ................................... 2,148,792 2,148,792
Cash dividends ($.04 per share) .............. (572,112) (572,112)
Stock options exercised ...................... 11,944 7,226,729 7,238,673
Tax benefit from the exercise of non-qualified
stock options ......................... 2,600,000 2,600,000
------------ ------------ ------------ ------------
Balance June 30, 1999 ........................ $ 147,849 $ 36,124,511 $ 13,178,141 $ 49,450,501
============ ============ ============ ============
</TABLE>
Page 5 or 39 pages
<PAGE> 6
ROCK FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
For the Six-Month
Periods Ended June 30,
-----------------------------------------
1998 1999
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................................ $ 9,036,631 $ 2,148,792
--------------- ---------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interest in loss of subsidiary ............................... (84,898)
Depreciation and amortization ......................................... 1,052,050 1,260,060
Provision for credit losses ........................................... 249,710 683,559
Deferred income taxes ................................................. (1,564,850) 1,045,000
Mortgage loans held for sale - originations ........................... (969,163,180) (1,139,790,248)
Mortgage loans held for sale - sales .................................. 998,838,753 1,213,504,624
Change in assets and liabilities:
Prepaid federal income tax ....................................... (3,792,272)
Other assets ..................................................... 62,617 (833,669)
Drafts payable ................................................... 12,334,129 5,147,786
Accounts payable ................................................. 1,570,138 (1,545,424)
Accrued expenses and other liabilities ........................... 2,949,044 (1,818,657)
--------------- ---------------
Total adjustments ............................................ 46,328,411 73,775,861
--------------- ---------------
Net cash provided by operating activities .................... 55,365,042 75,924,653
--------------- ---------------
Cash flows from investing activities:
Net increase in real estate owned and loans
held for investment ................................................... (779,013) (342,223)
Purchase of property and equipment ........................................ (3,519,186) (1,186,148)
Repayments of shareholders' advances ...................................... 1,626,519 994,372
--------------- ---------------
Net cash used in investing activities ............................ (2,671,680) (533,999)
--------------- ---------------
Cash flows from financing activities:
Net payments under warehouse line of credit ............................... (52,172,830) (68,112,014)
Net payments under reverse repurchase agreement ........................... (15,775,649) (11,521,065)
Net payments under notes payable .......................................... (1,944,445)
Investment in subsidiary by minority interest ............................. 300,000
Net proceeds from intial public offering .................................. 31,045,350
Proceeds from exercised options ........................................... 1,544,400 9,838,673
Cash dividends ............................................................ (276,589) (572,112)
S Corporation distribution ................................................ (24,980,500)
--------------- ---------------
Net cash used in financing activities ..................................... (62,560,263) (70,066,518)
--------------- ---------------
Net (decrease) increase in cash and cash equivalents ........................... (9,866,901) 5,324,136
Cash and cash equivalents, beginning of period ................................. 11,946,992 30,081,524
--------------- ---------------
Cash and cash equivalents, end of period ....................................... $ 2,080,091 $ 35,405,660
=============== ===============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest .................................. $ 3,686,167 $ 2,509,948
=============== ===============
Cash paid during the period for federal income tax ........................ $ $ 1,156,000
=============== ===============
Transfers of loans from held for sale to held
for investment ........................................................ $ 551,804 $ 1,420,641
=============== ===============
Transfers of loans from held for investment to
real estate owned ..................................................... $ 45,880 $ 447,124
=============== ===============
</TABLE>
Page 6 of 39 pages
<PAGE> 7
ROCK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. FINANCIAL STATEMENT PRESENTATION:
The accompanying unaudited interim financial statements of Rock
Financial Corporation (the "Company") and its subsidiary have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Accordingly, such financial statements do not include all of the information and
footnotes normally included in the Company's annual financial statements
prepared in accordance with generally accepted accounting principles, although
the Company believes that the disclosures are adequate to make the information
presented not misleading.
The accompanying unaudited interim financial statements reflect all
adjustments which are, in the opinion of management, necessary to present a fair
statement of the results of operations for the interim periods presented. All
such adjustments are of a normal recurring nature, except those not material to
the Company's financial condition or results of operations. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Operating results for the three- and six-month periods ended June 30, 1999 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1999. The unaudited interim financial statements should be
read in conjunction with the audited financial statements and footnotes to such
financial statements for the year ended December 31, 1998 included in the
Company's Annual Report on Form 10-K (file no. 000-23887) for the year ended
December 31, 1998.
2. MORTGAGE LOANS HELD FOR SALE AND HELD FOR INVESTMENT:
The following summarizes mortgage loans held for sale by type at
December 31, 1998 and June 30, 1999:
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
--------------- ----------------
<S> <C> <C>
Conventional loans held for sale.............................. $ 123,240,133 $ 65,624,051
Sub-prime loans held for sale................................. 30,542,410 7,532,466
Government loans held for sale................................ 941,966 8,676,446
High LTV loans held for sale.................................. 671,748 --
---------------- ----------------
155,396,257 81,832,963
Net deferred loan origination costs........................... 234,855 83,773
--------------- ----------------
Mortgage loans held for sale.............................. $ 155,631,112 $ 81,916,736
================ ================
</TABLE>
Included in mortgage loans held for investment at December 31, 1998 and
June 30, 1999 is an allowance for credit losses of $634,851 and $1,272,085,
respectively. The activity for the six months ended June 30, 1999 includes a
provision of $683,559 offset by charge-offs of $46,325. The activity for the
year ended December 31, 1998 includes a provision of $567,738 offset by
charge-offs of $202,888.
As of December 31, 1998 and June 30, 1999, there were no loans held for
sale that were greater than 90 days past due. As of December 31, 1998 and
June 30, 1999, there were
Page 7 of 39 pages
<PAGE> 8
approximately $753,000 and $1,753,000, respectively, of loans held for
investment that were greater than 90 days past due, the vast majority of
which is sub-prime loans.
3. RELATED PARTY TRANSACTIONS:
The Company's short-term advances to certain shareholders were repaid
in full on March 31, 1999.
4. EARNINGS PER SHARE:
Basic earnings per share are computed based on the weighted average
number of common shares outstanding during the period. Diluted earnings per
share are computed based on the weighted average number of common shares
and common share equivalents during the period.
5. UNAUDITED PRO FORMA FINANCIAL INFORMATION:
The pro forma financial information has been presented to show what the
significant effects on the historical results of operations might have been
had the Company not been treated as an S corporation for income tax
purposes as of the beginning of the earliest period presented. The
presentation of pro forma net income represents the historical results of
operations adjusted to recognize federal and state income taxes as if the
Company had been taxed as a C corporation rather than an S corporation for
all of the periods presented, using a pro forma combined federal and state
income tax rate of approximately 34.0%.
Pro forma basic earnings per share for the period ended June 30, 1998
have been computed by dividing pro forma net income by the 13,829,500
average shares assumed to be outstanding, including the 3,499,500 shares
sold by the Company in its initial public offering and the 330,000 shares
sold by certain existing shareholders in its initial public offering (after
exercising options to purchase those shares from the Company). Pro forma
diluted earnings per share for the period ended June 30, 1998 have been
computed by dividing pro forma net income by the 14,945,181 average shares
assumed to be outstanding, including the 3,499,500 shares sold by the
Company in its initial public offering and the 330,000 shares sold by
certain existing shareholders in its initial public offering (after
exercising options to purchase those shares from the Company) as well as
the number of common stock equivalent shares assumed to be outstanding upon
exercise of the Company's stock options existing as of June 30, 1998, using
the treasury stock method and the $10.25 per share closing market price of
the Company's common shares as of June 30, 1998, as reported by The Nasdaq
Stock Market.
Page 8 of 39 pages
<PAGE> 9
6. SEGMENT REPORTING:
The Company adopted SFAS No. 131 in 1998 and was comprised of three
major operating divisions based on the major products it offered in 1998
and in the first quarter of 1999. As of April 1, 1999, the Company changed
the way it manages its business from divisions based on products to
divisions based on the distribution channels for its loan products: the
Web/Call Center division, the Branch network and the Strategic Alliance
Program. The following table shows the contribution to revenues and
expenses and the loan closings of each of the Company's distribution
channels for the three- and six-month periods ended June 30, 1998 and June
30, 1999 (the comparative prior year information has been restated to
conform to the current segmentation of the Company's business). Corporate
overhead is included in other revenues and expenses. Other than loans, the
Company's assets are not specifically allocated to its three distribution
channels and therefore, not used by management for operating decisions with
respect to the distribution channels. As a result, total assets by
distribution channel are not presented.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS)
-------------------------------------------------------------------------------
WEB/CALL STRATEGIC
CENTER BRANCH ALLIANCE
DIVISION NETWORK PROGRAM OTHER TOTAL
-------------- ----------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Revenues $ 3,126.3 $ 19,096.4 $ -- $ (127.9) $ 22,094.8
Expenses 2,145.8 12,110.5 -- 2,731.6 16,987.9
---------- ----------- ---------- --------- -----------
Net contribution
before tax and $ 980.5 $ 6,985.9 $ -- $(2,859.5) $ 5,106.9
minority interest ========== =========== ========== ========= ===========
Loan closings $ 44,948.8 $ 467,103.4 $ -- $ -- $ 512,052.2
========== =========== ========== ========= ============
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, 1999
(IN THOUSANDS)
------------------------------------------------------------------------------------
WEB/CALL STRATEGIC
CENTER BRANCH ALLIANCE
DIVISION NETWORK PROGRAM OTHER TOTAL
----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues $ 3,332.4 $ 12,402.4 $ 1,057.3 $ (125.2) $ 16,666.9
Expenses 3,430.4 8,402.5 1,340.3 4,377.5 17,550.7
----------- ----------- ---------- ---------- -----------
Net contribution
before tax and
minority interest $ (98.0) $ 3,999.9 $ (283.0) $ (4,502.7) $ (883.8)
=========== =========== ========== ========== ===========
Loan closings $ 112,195.2 $ 355,516.2 $ 56,897.6 $ -- $ 524,610.0
=========== =========== ========== ========== ===========
</TABLE>
Page 9 of 39 pages
<PAGE> 10
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS)
-------------------------------------------------------------------------------------
WEB/CALL STRATEGIC
CENTER BRANCH ALLIANCE
DIVISION NETWORK PROGRAM OTHER TOTAL
----------- ------------ ------------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Revenues $ 6,035.8 $ 35,211.9 $ -- $ (232.0) $ 41,015.7
Expenses 4,165.7 22,143.0 -- 5,497.8 31,806.5
----------- ------------ ------------- ---------- ------------
Net contribution
before tax and
minority interest $ 1,870.1 $ 13,068.9 $ -- $ (5,729.8) $ 9,209.2
=========== ============ ============= ========== ============
Loan closings $ 68,152.2 $ 925,059.5 $ -- $ -- $ 993,211.7
=========== ============ ============= ========== ============
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 1999
(IN THOUSANDS)
------------------------------------------------------------------------------------
WEB/CALL STRATEGIC
CENTER BRANCH ALLIANCE
DIVISION NETWORK PROGRAM OTHER TOTAL
-------------- ------------ ----------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Revenues $ 6,915.5 $ 29,442.7 $ 1,057.3 $ (680.8) $ 36,734.7
Expenses 5,842.0 18,203.1 1,340.3 8,076.4 33,461.8
------------ ------------ ----------- ---------- --------------
Net contribution
before tax and
minority interest $ 1,073.5 $ 11,239.6 $ (283.0) $ (8,757.2) $ 3,272.9
============ ============ =========== ========== ==============
Loan closings $ 234,572.6 $ 807,311.8 $ 56,897.6 $ -- $ 1,098,782.0
============ ============ =========== ========== ==============
</TABLE>
7. BRANCH CLOSINGS
Management's evaluation of the performance of certain retail branches
during the fourth quarter of 1998 concluded that their continuing viability
was questionable. The branches' performance was creating both operating
losses and a "cash drain" on the 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. A $2.0
million accrual was established for this loss at December 31, 1998. As of
June 30, 1999, the Company had incurred approximately $1.4 million relating
to the store closings, which consisted of fixed asset write-offs, ongoing
lease commitments, and severance pay for terminated employees. The
remaining balance in the reserve of approximately $0.6 million is expected
to be utilized over the remaining life of the lease obligations and/or
lease termination payments.
Page 10 of 39 pages
<PAGE> 11
8. COMMITMENTS AND CONTINGENCIES
The Company signed a lease in April 1999 for a 110,000 square foot
facility that will afford us the room to potentially create a new 400-seat
Web/Call Center, including room for approximately 200 loan officers, and
its National Support Center. The new facility will more than triple the
size of the Company's current Web/Call Center, which is nearing capacity.
The move is expected to take place in the fourth quarter of 1999. The
Company estimates that the move will cost it approximately $5.5 million
between equipment, new technology, leasehold improvements and moving costs
and accelerated depreciation in the third and fourth quarters of 1999, $3.5
million of which the Company expects to capitalize, and that the new larger
facility will increase operating expenses by approximately $125,000 to
$150,000 a month. As of June 30, 1999, the Company has incurred
approximately $260,000 of expenses related to the relocation.
9. SUBSEQUENT EVENTS
In the beginning of the third quarter of 1999, management approved and
announced a strategic move to close and consolidate twelve of its remaining
fifteen branches. As of June 30, 1999, no accrual has been established for
this plan; however, the Company expects to take a one-time charge of
$3.5-4.5 million in the third quarter of 1999 related to these branch
closings. The Company also launched a national advertising campaign in the
third quarter of 1999 to increase recognition its "Rock Financial" and
"RockLoans.com" brand names. The campaign is expected to cost up to $20
million dollars over twelve months.
In July 1999, the Board of Directors of the Company determined to not
pay a dividend in the third quarter of 1999.
Page 11 of 39 pages
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
With the exception of historical information, some of the matters
discussed in this Management's Discussion and Analysis of Financial Condition
and Results of Operations are forward-looking statements that involve risks and
uncertainties and actual results could differ materially from those discussed.
The words and phrases "may," "will," "should," "believe," "expect,"
"anticipate," "estimate," "continue," "predict," and similar expressions
identify forward-looking statements. These forward-looking statements reflect
our current views with respect to future events in financial performance, but
are subject to many risks, uncertainties and factors relating to our operations
and business environment which may cause our actual results to differ materially
from historical results or any future results expressed or implied by such
forward-looking statements. Such risks and uncertainties include the factors
described under the caption "Risk Factors" and elsewhere in the Company's
Registration Statement on Form S-1 (file no. 333-46885) filed April 30, 1998 and
elsewhere in this Report.
GENERAL
We are a technology and service driven retail mortgage banking company
that markets conventional, government-insured, and sub-prime mortgage loans and
home equity lines of credit directly to consumers through the Internet
(www.RockLoans.com), our call center, three retail branches and our strategic
alliance program. We believe we are developing a growing brand identity, built
upon our technology, service, people and marketing. We believe we are unlike
most mortgage companies and loan middlemen that have Web sites on the Internet.
We process, underwrite and close the loan ourselves without referring the
customer to another company to perform these services and without charging
additional brokerage fees to our customers. We seek to provide "world class"
service to our customers, thereby encouraging them to return for future loans
and refer others to us for loans. As of August 11, 1999, we had 561 employees,
including 218 loan officers.
As of April 1, 1999, we changed the way we manage our business, from
managing divisions based on product to divisions based on the method of
distribution of our loan products: the Web/Call Center division, the Branch
network and the Strategic Alliance Program. Our Web/Call Center division markets
loans on-line through our Internet Web site, RockLoans.com, which began
originating loans in January 1999. Our Web/Call Center division also markets
loans through our call center located in our National Support Center in Bingham
Farms, Michigan. Our Branch network markets loans through our network of three
retail loan origination branches. Our Strategic Alliance Program currently
consists of one joint venture, a 70%-owned limited liability company that
originates residential mortgage products to Michigan National Bank's customers
through Michigan National Bank's 192 financial centers, a call center and over
the Internet. Michigan National Bank has approximately 450,000 customers and
owns the other 30% of the joint venture. The joint venture began business in
April 1999.
Page 12 of 39 pages
<PAGE> 13
We expect 1999 to be a transition year for us, as we move from a brick
and mortar branch operation to one more based on Internet, Call Center and
Strategic Alliance mortgage lending channels. We expect that this transition
will adversely affect our short-term earnings. We believe that technology is
changing the way mortgages are originated. Consequently, we announced in July
that we will be closing and consolidating twelve of our fifteen remaining
branches as we began to concentrate more of our resources and marketing efforts
on originating mortgages through our two new distribution channels, the Internet
and our Strategic Alliance Program. We expect to take a one-time charge of
$3.5-4.5 million in the third quarter of 1999 related to the branch closings.
In the second quarter of 1999, margins on all of our products, and
volumes of our Conventional Loans as well as our Sub-Prime Loans continued to
decline from fourth quarter 1998 levels. Margins on our Conventional Loans as
well as the volumes of our Conventional Loan and Sub-Prime Loan originations
have also continued to decline so far in the third quarter of 1999 from the
second quarter 1999 levels. The declines are primarily due to higher interest
rates, lower refinancing loan volumes and our closing of 25 branches and one
marketing center in 1999. We expect these trends to continue in the third and
fourth quarters of 1999 and our third and fourth quarter 1999 earnings to be
substantially below our first and second quarter 1999 earnings.
We also plan to make several other moves that are intended to further
our long-term business and our transition from a brick and mortar branch
operation to one more based on Internet, Call Center and Strategic Alliance
mortgage lending channels. We expect that this transition will adversely affect
our short-term earnings. We have signed a lease for an 110,000 square foot
facility that will afford us the room to potentially create a new 400-seat
Web/Call Center, including room for approximately 200 loan officers, and our
National Support Center. The move is expected to take place in the fourth
quarter of 1999. We estimate that the move will cost us approximately $5.5
million between equipment, new technology, leasehold improvements and moving
costs and accelerated depreciation in the third and fourth quarters of 1999,
$3.5 million of which we expect to capitalize, and that the new larger facility
will increase our operating expenses by approximately $125,000 to $150,000 a
month.
We also launched a multi-million dollar national advertising campaign
in the third quarter of 1999 to increase recognition for our "Rock Financial"
and "RockLoans.com" brand names. We plan to spend up to $20 million dollars over
twelve months for national promotion of our Web site, RockLoans.com. We recently
began airing advertisements on national television stations and expect to also
sponsor radio advertising, national print publications and other traditional
media. We expect this advertising campaign to increase incrementally as our
processing and closing infrastructure capable of handling the expected loan
volume increase from this campaign is developed, including the new Web/Call
Center. In addition, we have recently signed agreements with iClick and
broadcast.com in an effort to aggressively align us with other leading Internet
companies to harness strategic marketing opportunities on the Web. Each of the
events described above, however, is expected to have an adverse effect on our
earnings, in the short-term.
Page 13 of 39 pages
<PAGE> 14
TERMINATION OF S CORPORATION STATUS AND INCOME TAXES
Simultaneously with the closing of our initial public offering on May
6, 1998 (the "Offering"), we ceased to be taxed as an S corporation under the
Internal Revenue Code. In connection with the termination of our S corporation
status, we paid an estimate of our income taxed or taxable to our shareholders
while we were an S Corporation, but not yet distributed to them ("Shareholder
Distribution Amount") out of the net proceeds of the Offering to our
shareholders existing immediately before the closing of the Offering (the
"Existing Shareholders"). The estimated Shareholder Distribution Amount,
including the approximately $5.4 million tax distribution to the Existing
Shareholders on April 10, 1998, was approximately $25.0 million. Based upon the
final results of 1998, the Existing Shareholders were required to pay us
approximately $800,000, representing the excess of amounts disbursed in May 1998
over the year-end estimate of the taxable income allocable to the Existing
Shareholders. The amount due to us was paid in full as of March 31, 1999.
As an S corporation, our income, whether or not distributed, was taxed
at the shareholder level for federal and state tax purposes. When we terminated
our S corporation status, we became subject to federal and state income taxation
and we recorded a $1.8 million deferred tax asset on our balance sheet along
with a current income tax liability of $0.9 million as of May 6, 1998. The
amount of the deferred tax asset is based on timing differences between tax and
book accounting relating principally to marking loans to market for tax
purposes. The pro forma provision for income taxes in the statements of income
are intended to show results as if we had been subject to federal and state
taxation at the tax rates effective for the periods presented.
Page 14 of 39 pages
<PAGE> 15
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999
VERSUS THREE MONTHS ENDED JUNE 30, 1998
The following table sets forth our revenues, expenses and pre-tax
income for the three months ended June 30, 1998 and 1999:
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
1998 1999
--------- ----------
(In thousands)
<S> <C> <C>
Total revenue ..................................................... $ 22,095 $ 16,667
Total expenses .................................................... (16,988) (17,551)
-------- --------
Income (loss) before taxes and minority
interest .......................................................... $ 5,107 $ (884)
======== ========
</TABLE>
Our total revenues decreased from $22.1 million in the second quarter
of 1998 to $16.7 million in the second quarter of 1999, a decrease of $5.4
million, or 24.6%. The decrease in revenues is primarily due to the following:
- a decrease of $52.5 million, or 51.1%, in the volume of Sub-Prime Loans
we sold in the second quarter of 1999 compared to the second quarter of
1998;
- a decrease of $20.1 million, or 98.5%, in the volume of High LTV Loans
we sold in the second quarter of 1999 compared to the second quarter of
1998; and
- a 28.3% decrease in margins earned on loan fees and gains on sale of
Sub-Prime Loans in the second quarter of 1999 compared to the second
quarter of 1998;
partially offset by the following:
- an increase of $41.1 million, or 364.2%, in the volume of
government-insured loans we sold in the second quarter of 1999 compared
to the second quarter of 1998;
- an increase of $20.9 million, or 5.2%, in the volume of Conventional
Loans we sold in the second quarter of 1999 compared to the second
quarter of 1998; and
- a 7.1% increase in margins earned on loan fees and gains on sale of
Conventional Loans in the second quarter of 1999 compared to the second
quarter of 1998.
In the second quarter of 1999, margins on all of our products, and
volumes of our Conventional Loan and Sub-Prime Loan originations, continued to
decline from fourth quarter 1998 levels. Margins on our Conventional Loans as
well as the volumes of our Conventional Loan and Sub-Prime Loan originations
have also continued to decline so far in the third quarter of 1999 from the
second quarter 1999 levels. The declines are primarily due to higher interest
rates, lower refinancing loan volumes and our closing of 25 branches and one
marketing center in 1999. We expect these trends to continue in the third and
fourth quarters as we continue our transition from a brick and mortar based loan
origination system to an Internet and call center-based
Page 15 of 39 pages
<PAGE> 16
platform. We also expect our third and fourth quarter earnings to be
substantially below our first and second quarter 1999 earnings.
During the second quarter of 1999, we disbursed $534.2 million of loans, an
increase of $24.8 million, or 4.9%, from the $509.4 million of loans disbursed
in the second quarter of 1998. The $24.8 million increase included a $52.1
million increase in Conventional Loans, a $44.9 million increase in
government-insured loans, and a $1.2 million increase in Home Equity Line of
Credit Loans, partially offset by a $57.0 million decrease in Sub-Prime Loans
and a $16.4 million decrease in High LTV Loans. Our loans held for sale
increased by $2.9 million in the second quarter of 1999, compared to a decrease
of $31.5 million in the second quarter of 1998. The increase was due to our
disbursing $534.2 million in loans while selling $531.3 million in loans in the
second quarter of 1999. The increase in loans held for sale in the second
quarter of 1999 included increases of $6.2 million in Conventional Loans, $2.7
million in government-insured loans and $0.3 million in Home Equity Line of
Credit Loans partially offset by a $6.3 million decrease in Sub-Prime Loans. The
decrease in loans held for sale in the second quarter of 1998 included decreases
of $24.9 million in Conventional Loans, $1.8 million in Sub-Prime Loans, $3.7
million in High LTV Loans and $1.1 million in Home Equity Line of Credit Loans.
Total expenses increased from $17.0 million in the second quarter of
1998 to $17.6 million in the second quarter of 1999, an increase of $0.6
million, or 3.3%, primarily due to compensation for new management, marketing,
technology and other support employees, partially offset by lower commissions as
a result of an increase in the portion of Conventional Loans originated, which
have lower commission rates than our other products, and reduced marketing
expenses, partly as a result of closing branches in the first two quarters of
1999.
The following table sets forth information regarding the components of
our revenues for the three months ended June 30, 1998 and 1999:
<TABLE>
<CAPTION>
Three Months
Ended June 30,
----------------------------
1998 1999
-------- ---------
(In thousands)
<S> <C> <C>
Interest income ................................................................ $ 3,128 $ 1,886
Interest expense ............................................................... (1,882) (613)
-------- --------
Net interest margin ....................................................... 1,246 1,273
Provision for credit losses .................................................... (135) (113)
-------- --------
Net interest margin after provision for credit losses ..................... 1,111 1,160
Loan fees and gains on sale of mortgages ....................................... 20,977 15,519
Other income ................................................................... 7 (12)
-------- --------
Total revenue ............................................................. $ 22,095 $ 16,667
======== ========
</TABLE>
Net interest margin before provision for credit losses increased from
$1.2 million in the second quarter of 1998 to $1.3 million in the second quarter
of 1999, an increase of $0.1 million, or 2.2%. The increase was primarily due to
the following:
- a decrease in the weighted average interest rates paid on our
borrowing facilities, from 6.95% in the second quarter of 1998 to
6.05% in the second quarter of 1999; and
Page 16 of 39 pages
<PAGE> 17
- our increased use of cash generated from operations and our initial
public offering to fund our loans;
partially offset by:
- an increase in the portion of loans sold on a "flow" basis,
resulting in a decrease in the length of time loans were held
before sale; and
- a decrease in mortgages held for sale in the second quarter of
1999.
In the remainder of 1999, we intend to continue holding our loans for a
shorter period of time before selling them, which we expect will significantly
decrease our net interest margin from that experienced in the comparative
quarters of 1998.
Buyers of our loans may require us to repurchase or substitute loans in
the event of a breach of representations and warranties, including any fraud or
any misrepresentation made during the loan origination process. In addition,
during the period we hold our loans we face the risk of delinquencies and
resulting foreclosure losses. As a result of these risks we recorded a provision
for credit losses of approximately $135,000 in the second quarter of 1998 and
recorded a provision for credit losses of approximately $113,000 in the second
quarter of 1999, partly for future repurchase or substitution requirements
relating to loans sold before June 30, 1998 and 1999, respectively, and credit
risk for loans held for sale and investment. The decrease was primarily due to
the decrease in the volume of Sub-Prime Loans held for sale coupled with the low
amount of charge-offs and losses incurred on loans held for investment to date.
During the second quarter of 1998 no loans were reclassified as real estate
owned. In the second quarter of 1999, three loans were reclassified as real
estate owned, resulting in charges of approximately $36,000 against the reserve.
Loan fees and gains on sale of mortgages decreased from $21.0 million
in the second quarter of 1998 to $15.5 million in the second quarter of 1999, a
decrease of $5.5 million, or 26.0%. The decrease in revenue is primarily due to
the decrease in sale of loans described above, as well as changes in the margins
earned on loan fees and gains on sale of loans described above. The decrease in
the volume of High LTV Loans we sold is a result of our decision to stop
originating High LTV Loans in the third quarter of 1998. The decrease in the
volume of Sub-Prime Loans we sold is primarily due to a 57.3% decrease in
Sub-Prime Loan closings as a result of our decision to shift some of our
resources to handle the higher demand for Conventional Loans and
government-insured loans and our branch closings in the first and second
quarters of 1999, partially offset by our sale of $6.3 million more Sub-Prime
Loans in the second quarter of 1999 than we disbursed, compared to $1.8 million
more in the second quarter of 1998. The increase in the volume of Conventional
Loans we sold is primarily due to a 10.2% increase in Conventional Loan closings
as a result of a higher volume of home purchase loans in the second quarter of
1999 compared to the second quarter of 1998, partially offset by our sale of
$6.4 million fewer Conventional Loans in the second quarter of 1999 than we
disbursed, compared to $26.0 million more in the second quarter of 1998. The
increase in the volume of government-insured loans we sold is primarily due to a
475.9% increase in government-insured loan closings as a result of a higher
volume of home purchase loans in the second quarter of 1999 compared to the
second quarter of 1998, partially offset by our sale of $2.7 million fewer
government-insured loans in the
Page 17 of 39 pages
<PAGE> 18
second quarter of 1999 than we disbursed, compared to $0.1 million fewer in
the second quarter of 1998.
The increase in margins earned on loan fees and gains on sale of
Conventional Loans, when comparing the second quarter of 1999 to the second
quarter of 1998, was primarily the result of more favorable execution of our
loan sales, partially offset by increased interest rates, which increased the
need for rate competitiveness. In the third quarter of 1999, margins earned on
loan fees and gains on sale of Conventional Loans have declined from those of
the second quarter so far because of an increase in interest rates that has
increased the need for rate competitiveness. We also expect that Conventional
Loan closings will further decline in the third and fourth quarters of 1999
compared to the second quarter of 1999 due, in part, to increases in mortgage
interest rates in 1999, which should reduce consumer demand for refinancing
existing mortgages, along with the closing of 25 branches (includes the 13
closed in the first six months of 1999 and the 12 additional closed in the third
quarter) and one marketing center and the transition to a Web/Call Center
environment. The decrease in margins earned on loan fees and gains on sale of
Sub-Prime Loans was due to the turmoil in the industry, which created a surplus
of Sub-Prime Loans available for sale thereby driving down the prices of these
loans. We expect both loan closings and revenue to decline from Sub-Prime Loans
in the third and fourth quarters of 1999, principally due to the branch
closings in the first and second quarters of 1999 and the additional closures to
occur in the third quarter of 1999.
The decrease in loan fees and gains on sale of mortgages was partially
offset by a decrease in our recapture reserve in the second quarter of 1999.
Some Sub-Prime Loan sales require us to return a portion of the premium we
received on the sale of the loan if the loan is prepaid by the customer within
the first year after sale. We record a provision for this risk separate from the
provision for credit losses based on our evaluation of the terms of our sale
contracts and our assumptions concerning prepayments. We increased our reserve,
and decreased our loan fees and gains on sale of mortgages, by approximately
$414,000, in the second quarter of 1998. Virtually all of the loans we
originated in the second quarter of 1999 contained a prepayment penalty in
excess of the reserve requirement. Therefore, based on our analysis, the reserve
for this premium recapture was adequate at June 30, 1999 and no further
provision was required.
Page 18 of 39 pages
<PAGE> 19
The following table sets forth information regarding the components of
our expenses for the three months ended June 30, 1998 and 1999:
<TABLE>
<CAPTION>
Three Months
Ended June 30,
--------------------------
1998 1999
------- --------
(In thousands)
<S> <C> <C>
Salaries, commissions and employee benefits .................................... $ 9,650 $11,113
General and administrative expenses ............................................ 3,268 3,594
Marketing expenses ............................................................. 3,561 2,221
Depreciation and amortization .................................................. 509 623
------- -------
Total expenses ............................................................ $16,988 $17,551
======= =======
</TABLE>
Salaries, commissions and employee benefits increased from $9.7 million
in the second quarter of 1998 to $11.1 million in the second quarter of 1999, an
increase of $1.4 million, or 15.2%. The increase was primarily attributable to
compensation for new management team members and additional hiring of staff to
the marketing, technology and other support areas to facilitate the transition
to a Web/Call Center based platform, partially offset by reduced commissions
which were due to the change to the mix of products originated, more
conventional loans were closed, which have a lower commission structure than the
Sub-Prime and High LTV Loans and reduced marketing expenses as a result of
closing branches in the first two quarters of 1999. These expenses are expected
to continue to fluctuate in 1999 in connection with our expansion of existing
operations, which includes our continued development of our Internet presence
and strategic alliance.
General and administrative expenses consist primarily of occupancy
costs, professional services, office expenses, automobile and delivery expenses
and other expenses, many of which vary with the volume of loan closings. General
and administrative expenses increased from $3.3 million in the second quarter of
1998 to $3.6 million in the second quarter of 1999, an increase of $0.3 million,
or 10.0%. The increase was primarily attributable to an increase in professional
services and expenses related to technology, support and other personnel hired
in connection with our new Web site. Certain of these expenses are expected to
vary according to the volume of loan closings in 1999, except for occupancy
expenses, which are expected to increase in connection with our move to a new
Web/Call Center and National Support Center, which management expects to occur
in the fourth quarter of 1999, and the reduction of those ongoing expenses
attributable to the branch closings in the third quarter of 1999.
Marketing expenses decreased from $3.6 million in the second quarter of
1998 to $2.2 million in the second quarter of 1999, a decrease of $1.4 million,
or 37.6%. The decrease was primarily attributable to our closing 13 branches and
one marketing center in the first two quarters of 1999 and our discontinued
origination of High LTV Loans in the third quarter of 1998. We expect these
expenses to increase for the remainder of 1999 in connection with our announced
national advertising program and the expansion of existing operations which
includes the continuation of development of our Internet presence and strategic
alliances.
Depreciation and amortization expenses increased from $0.5 million in
the second quarter of 1998 to $0.6 million in the second quarter of 1999, an
increase of $0.1 million, or 22.3%. The
Page 19 of 39 pages
<PAGE> 20
increase was primarily attributable to our purchases of additional equipment
and leasehold improvements during 1998 and 1999 for our new Web center and
existing branches. The expenses are expected to continue to increase in 1999
as a result of the expansion of our Web center and the relocation of our
Web/Call Center and National Support Center, which will require accelerated
depreciation of the leasehold improvements at our current location in the third
and fourth quarters of 1999.
Effective May 6, 1998, the Company's tax status changed from that of an
S corporation to that of a C corporation. As a C corporation we became subject
to federal and state income taxation in the second quarter of 1998. As an S
corporation, our taxable income was included in the individual returns of the
shareholders. As a result, our income taxes due to quarterly earnings for the
second quarter of 1998 represents income taxes provided based on our estimated
allocation of income before income taxes between the S corporation and the C
corporation as required under IRS regulations.
In addition, in connection with the change in our tax status, we
recognized a net income tax benefit due to conversion of the S corporation of
approximately $0.9 million during the second quarter of 1998. Upon conversion to
a C corporation, we recorded a net deferred tax asset of approximately $1.8
million, and recognized a corresponding deferred income tax benefit. The
deferred income tax benefit was somewhat offset by our recognition of a current
income tax liability of approximately $0.9 million associated with the
allocation of our taxable income between the S corporation and the C
corporation. For the quarter ended June 30, 1999, we recognized an income tax
benefit of approximately $0.3 million.
SIX MONTHS ENDED JUNE 30, 1999
VERSUS SIX MONTHS ENDED JUNE 30, 1998
The following table sets forth our revenues, expenses and pre-tax
income for the six months ended June 30, 1998 and 1999:
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------
1998 1999
---------- ----------
(In thousands)
<S> <C> <C>
Total revenue.......................................... $ 41,016 $ 36,735
Total expenses.... (31,807) (33,462)
========== ==========
Income before taxes and minority interest............... $ 9,209 $ 3,273
========== ==========
</TABLE>
Our total revenues decreased from $41.0 million in the first six months
of 1998 to $36.7 million in the first six months of 1999, a decrease of $4.3
million, or 10.4%. The decrease in revenues is primarily due to the following:
- an decrease of $70.0 million, or 36.3%, in the volume of Sub-Prime
Loans we sold in the first six months of 1999 compared to the first six
months of 1998;
Page 20 of 39 pages
<PAGE> 21
- a decrease of $44.2 million, or 98.2%, in the volume of High LTV Loans
we sold in the first six months of 1999 compared to the first six
months of 1998;
- a 68.8% decrease in margins earned on loan fees and gains on sale of
High LTV Loans in the first six months of 1999 compared to the first
six months of 1998; and
- an 27.2% decrease in margins earned on loan fees and gain on sale of
Sub-Prime Loans in the first six months of 1999 compared to the first
six months of 1998;
partially offset by the following:
- an increase of $272.0 million, or 36.7%, in the volume of Conventional
Loans we sold in the first six months of 1999 compared to the first six
months of 1998;
- an increase of $56.0 million, or 292.5%, in the volume of
government-insured loans we sold in the first six months of 1999
compared to the first six months of 1998;
- a 10.4% increase in margins earned on loan fees and gains on sale of
Conventional Loans in the first six months of 1999 compared to the
first six months of 1998; and
- an 3.6% increase in margins earned on loan fees and gain on sale of
government-insured loans in the first six months of 1999 compared to
the first six months of 1998.
In the first six months of 1999, margins on all of our products
declined from fourth quarter 1998 levels. The volumes of our Conventional Loan
products and Sub-Prime Loan originations have also declined in the first six
months of 1999 from fourth quarter 1998 levels. The declines are primarily due
to higher interest rates, lower refinancing loan volumes, our decision to stop
originating High LTV Loans in the third quarter of 1998, and our closing of 13
branches and one marketing center in the first six months of 1999. We expect
these trends to continue in the second half of 1999 and our earnings in the
second half of 1999 to be substantially below our first and second quarter 1999
earnings.
During the first six months of 1999, we disbursed $1,139.8 million of
loans, an increase of $170.6 million, or 17.6%, from the $969.2 million of loans
disbursed in the first six months of 1998. The $170.6 million increase included
a $225.2 million increase in Conventional Loans, a $60.7 million increase in
government-insured loans, and a $1.1 million increase in Home Equity Line of
Credit Loans, partially offset by a $76.5 million decrease in Sub-Prime Loans
and a $39.9 million decrease in High LTV Loans. Our loans held for sale
decreased by $73.7 million in the first six months of 1999, compared to a
decrease of $29.7 million in the first six months of 1998. The decrease, which
had a significant positive effect on our profitability, was due to our selling
$1,213.5 million in loans while disbursing $1,139.8 million in loans in the
first six months of 1999. The decrease in loans held for sale in the first six
months of 1999 included decreases of $54.3 million in Conventional Loans, $23.0
million in Sub-Prime Loans and $0.7 million in High LTV Loans, partially offset
by an $4.0 million increase in government-insured loans and a $0.3 million
increase in Home Equity Line of Credit Loans. The decrease in loans held for
sale in the first six months of 1998 included decreases of $16.4 million in
Sub-Prime Loans, $7.5 million in Conventional Loans, $5.1 million in High LTV
Loans and $0.7 million in government-insured loans.
Total expenses increased from $31.8 million in the first six months of
1998 to $33.5 million in the first six months of 1999, an increase of $1.7
million, or 5.2%. The increase was primarily due to compensation for new
management, marketing, technology and other support employees, partially offset
by reduced commissions as a result of an increase in the portion of
Page 21 of 39 pages
<PAGE> 22
Conventional Loans originated, which have lower commission rates than our other
products, and reduced marketing expenses, partly as a result of closing
branches in the first two quarters of 1999.
The following table sets forth information regarding the components of
our revenues for the six months ended June 30, 1998 and 1999:
<TABLE>
<CAPTION>
Six Months
Ended June 30,
-------------------------------
1998 1999
-------- --------
(In thousands)
<S> <C> <C>
Interest income ................................................................ $ 6,228 $ 4,913
Interest expense ............................................................... (3,620) (2,032)
-------- --------
Net interest margin ....................................................... 2,608 2,881
Provision for credit losses .................................................... (250) (684)
-------- --------
Net interest margin after provision for credit losses ..................... 2,358 2,197
Loan fees and gains on sale of mortgages ....................................... 38,640 34,535
Other income ................................................................... 18 3
-------- --------
Total revenue ............................................................. $ 41,016 $ 36,735
======== ========
</TABLE>
Net interest margin before provision for credit losses increased from
$2.6 million in the first six months of 1998 to $2.9 million in the first six
months of 1999, an increase of $0.3 million, or 10.5%. The increase was
primarily due to the following:
- a decrease in the weighted average interest rates paid on our
borrowing facilities, from 6.94% in the first six months of 1998 to
6.05% in the first six months of 1999; and
- our increased use of cash generated from operations and our initial
public offering to fund our loans;
partially offset by:
- an increase in the portion of loans sold on a "flow" basis,
resulting in a decrease in the length of time loans were held before
sale; and
- a decrease in mortgages held for sale in first six months of 1999.
Buyers of our loans may require us to repurchase or substitute loans in
the event of a breach of representations and warranties, including any fraud or
any misrepresentation made during the loan origination process. In addition,
during the period we hold our loans, we face the risk of delinquencies and
resulting foreclosure losses. As a result of these risks we recorded a provision
for credit losses of approximately $250,000 in the first six months of 1998 and
recorded a provision for credit losses of approximately $684,000 in the first
six months of 1999, partly for future repurchase or substitution requirements
relating to loans sold before June 30, 1998 and 1999, respectively, and credit
risk for loans held for sale and investment. The increase was primarily due to
the significant increase in the volume of loans held for investment that were
past due. During the fourth quarter of 1998 and the first quarter of 1999, the
secondary market Sub-Prime Loan buyers changed their underwriting standards,
making it more difficult for us to sell our loans. As a result, we held these
loans for a longer period of time than normal, which resulted
Page 22 of 39 pages
<PAGE> 23
in more delinquencies. In the second quarter of 1999, we entered into an
agreement with a loan buyer for our Sub-Prime Loans and we are now underwriting
to that buyer's standards. During the first six months of 1998, two loans were
reclassified as real estate owned, resulting in charges of approximately
$159,000 against the reserve. In the first six months of 1999, four loans were
reclassified as real estate owned, resulting in charges of approximately $48,000
against the reserve.
Loan fees and gains on sale of mortgages decreased from $38.6 million
in the first six months of 1998 to $34.5 million in the first six months of
1999, a decrease of $4.1 million, or 10.6%. This decrease is primarily due to
the change in sales of loans described above, as well as changes in the margins
earned on loan fees and gains on sale of loans described above. The decrease in
the volume of High LTV Loans we sold is a result of our decision to stop
originating High LTV Loans in the third quarter of 1998. The decrease in the
volume of Sub-Prime Loans we sold is primarily due to a 45.8% decrease in
Sub-Prime Loan closings as a result of our decision to shift some of our
resources to handle the higher demand for Conventional Loans and
government-insured loans and our branch closings in the first and second
quarters of 1999, partially offset by our sale of $23.0 million more Sub-Prime
Loans in the first six months of 1999 than we disbursed, compared to $16.5
million more in the first six months of 1998. The increase in the volume of
Conventional Loans we sold is primarily due to a 22.1% increase in Conventional
Loan closings as a result of a higher volume of home purchase loans in the first
six months of 1999 compared to the first six months of 1998, and our sale of
$57.6 million more Conventional Loans in the first six months of 1999 than we
disbursed, compared to $8.2 million more in the first six months of 1998. The
increase in the volume of government-insured loans we sold is primarily due to a
322.2% increase in government-insured loan closings as a result of a higher
volume of home purchase loans in the first six months of 1999 compared to the
first six months of 1998, partially offset by our sale of $7.7 million fewer
government-insured loans in the first six months of 1999 than we disbursed,
compared to $0.1 million fewer in the first six months of 1998. We also expect
that Conventional Loan closings will further decline in the third and fourth
quarters of 1999 compared to the first six months of 1999 due, in part, to
increases in mortgage interest rates in 1999, which should reduce consumer
demand for refinancing existing mortgages, along with the closing of 25 branches
(includes the 13 closed in the first six months of 1999 and the 12 additional
closed in the third quarter) and one marketing center and the transition to a
Web/Call Center environment.
The decrease in margins earned on loan fees and gains on sale of
Sub-Prime Loans was due to the turmoil in the industry, which created a surplus
of Sub-Prime Loans available for sale thereby driving down the prices of these
loans. We expect both loan closings and revenue to continue to decline from
Sub-Prime Loans in the third and fourth quarters of 1999, principally due to the
branch closings in 1999. The increase in margins earned on loan fees and gains
on sale of Conventional Loans and government-insured loans, when comparing the
first six months of 1999 to the first six months of 1998, was primarily the
result of more favorable arrangements with loan buyers, partially offset by
increased interest rates which increased the need for rate competitiveness. In
the third quarter of 1999, margins earned on loan fees and gains on sale of
Conventional Loans have declined from those of the second quarter so far
because of an increase in interest rates and an increase in Web/Call Center
originations that have increased the need for rate competitiveness.
Page 23 of 39 pages
<PAGE> 24
The decrease in loan fees and gains on sale of mortgages was partially
offset by a decrease in our recapture reserve in the first six months of 1999.
Some Sub-Prime Loan sales require us to return a portion of the premium we
received on the sale of the loan if the loan is prepaid by the customer within
the first year after sale. We record a provision for this risk separate from the
provision for credit losses based on our evaluation of the terms of our sale
contracts and our assumptions concerning prepayments. We increased our reserve,
and decreased our loan fees and gains on sale of mortgages, by approximately
$12,800 for this risk in the first six months of 1999, compared to an increase
of approximately $638,000, in the first six months of 1998. The decrease was due
to a provision not being recorded in the second quarter of 1999. Virtually all
of the loans we originated in the second quarter of 1999 contained a prepayment
penalty in excess of the reserve requirement. Therefore, based on our analysis,
the reserve for this premium recapture was adequate at June 30, 1999 and no
further provision was required.
The following table sets forth information regarding the components of
our expenses for the six months ended June 30, 1998 and 1999:
<TABLE>
<CAPTION>
Six Months
Ended June 30,
-------------------------
1998 1999
------- -------
(In thousands)
<S> <C> <C>
Salaries, commissions and employee benefits .................................... $18,196 $20,589
General and administrative expenses ............................................ 6,098 7,017
Marketing expenses ............................................................. 6,461 4,596
Depreciation and amortization .................................................. 1,052 1,260
------- -------
Total expenses ............................................................ $31,807 $33,462
======= =======
</TABLE>
Salaries, commissions and employee benefits increased from $18.2
million in the first six months of 1998 to $20.6 million in the first six months
of 1999, an increase of $2.4 million, or 13.1%. The increase was primarily
attributable to salaries for new management, marketing, technology and other
support, partially offset by an increase in the portion of Conventional Loans
originated, which have lower commission rates than our other products and
reduced marketing expenses as a result of closing branches in the first two
quarters of 1999. These expenses are expected to continue to fluctuate in 1999
in connection with our expansion of existing operations, along with our
continued development of our Internet presence and strategic alliance.
General and administrative expenses consist primarily of occupancy
costs, professional services, office expenses, automobile and delivery expenses
and other expenses, many of which vary with the volume of loan closings. General
and administrative expenses increased from $6.1 million in the first six months
of 1998 to $7.0 million in the first six months of 1999, an increase of $0.9
million, or 15.1%. The increase was primarily attributable to an increase in
occupancy expenses, professional services, and expenses related to technology,
support and other personnel hired in connection with our new Web site. Certain
of these expenses are expected to vary according to the volume of loan closings
in 1999, except for occupancy expenses, which are expected to increase in
connection with our move to a new Web/Call Center and National Support Center,
which management expects to occur in the fourth quarter of 1999 and the
reduction of those expenses attributable to the branch closings in the third
quarter.
Page 24 of 39 pages
<PAGE> 25
Marketing expenses decreased from $6.5 million in the first six months
of 1998 to $4.6 million in the first six months of 1999, a decrease of $1.9
million, or 28.9%. The decrease was primarily attributable to our closing 13
branches and one marketing center in the first six months of 1999 and our
discontinued origination of High LTV Loans in the third quarter of 1998. We
expect these expenses to increase for the remainder of 1999 in connection with
our announced national advertising program and the expansion of existing
operations, along with the continuation of development of our Internet presence
and strategic alliances.
Depreciation and amortization expenses increased from $1.1 million in
the first six months of 1998 to $1.3 million in the first six months of 1999, an
increase of $0.2 million, or 19.8%. The increase was primarily attributable to
our purchases of additional equipment and leasehold improvements during 1998 and
1999 for our new Web center and existing branches. The expenses are expected to
continue to increase in 1999 as a result of the expansion of existing
operations, expansion of our Web center, and the relocation of our Web/Call
Center and National Support Center.
Effective May 6, 1998, the Company's tax status changed from that of an
S corporation to that of a C corporation. As a C corporation we became subject
to federal and state income taxation in the first six months of 1998. As an S
corporation, our taxable income was included in the individual returns of the
shareholders. As a result, our income taxes due to quarterly earnings for the
first six months of 1998 represents income taxes provided based on our estimated
allocation of income before income taxes between the S corporation and the C
corporation as required under IRS regulations.
In addition, in connection with the change in our tax status, we
recognized a net income tax benefit due to conversion of the S corporation of
approximately $0.9 million during the first six months of 1998. Upon conversion
to a C corporation, we recorded a net deferred tax asset of approximately $1.8
million, and recognized a corresponding deferred income tax benefit. The
deferred income tax benefit was somewhat offset by our recognition of a current
income tax liability of approximately $0.9 million associated with the
allocation of our taxable income between the S corporation and the C
corporation. For the six months ended June 30, 1999, we recognized income tax
expense of approximately $1.2 million as a result of our conversion to a C
corporation in 1998.
SEGMENT ANALYSIS
Our growth and our transition from a brick and mortar branch operation
to one more based on Internet, Call Center and Strategic Alliance mortgage
lending channels may distort some of our ratios and financial statistics and may
make period-to-period comparisons difficult. In light of our growth and our
transition, historical earnings and other financial statistics may be of little
relevance in predicting future performance. Additionally, the sensitivity of
Conventional Loans to interest rates and the effect of interest rates on the
volume of loan production and margins will affect period to period comparisons.
We expect segment contributions to vary from period to period. In order
to demonstrate the effect that varying factors have on loan production, revenue
and profits, we have elected to show the results of our current business
segments. As described above, effective April 1, 1999,
Page 25 of 39 pages
<PAGE> 26
we changed the way we manage our business from a product line basis to a
distribution channel basis. The following table shows the contribution to
revenues and expenses and the loan closings of each of our distribution channels
for the three and six months ended June 30, 1998 and 1999:
Page 26 of 39 pages
<PAGE> 27
<TABLE>
<CAPTION>
For the Three-Month For The Six-Month
Periods Ended June 30, Periods Ended June 30,
------------------------------ -------------------------------
1998 1999 1998 1999
------------ ------------ ----------- ------------
(In thousands)
<S> <C> <C> <C> <C>
REVENUES:
Web/Call Center ............................. $ 3,126.3 $ 3,332.4 $ 6,035.8 $ 6,915.5
Branch Network .............................. 19,096.4 12,402.4 35,211.9 29,442.7
Strategic Alliance
Program ................................. 1,057.3 1,057.3
Other ....................................... (127.9) 130.0 (232.0) (936.0)
Eliminations ................................ (255.2) 255.2
------------- ------------ ----------- --------------
22,094.8 16,666.9 41,015.7 36,734.7
EXPENSES:
Web/Call Center ............................. 2,145.8 3,430.4 4,165.7 5,842.0
Branch Network .............................. 12,110.5 8,402.5 22,143.0 18,203.1
Strategic Alliance
Program ................................. 1,340.3 1,085.1
Other ....................................... 2,731.6 4,377.5 5,497.8 8,076.4
Eliminations ................................ (255.2) 255.2
------------- ----------- ----------- --------------
16,987.9 17,550.7 31,806.5 33,461.8
INCOME (LOSS) BEFORE TAXES AND
MINORITY INTEREST ........................... 5,106.9 (883.8) 9,209.2 3,272.9
MINORITY INTEREST ................................ 84.9 84.9
INCOME TAX (EXPENSE) BENEFIT
DUE TO QUARTERLY EARNINGS (LOSS) ................. (1,123.5) 288.0 (1,123.5) (1,209.0)
INCOME TAX BENEFIT DUE TO
CONVERSION OF S. CORP ............................ 950.9 950.9
------------- ----------- ----------- --------------
NET INCOME (LOSS) BEFORE TAXES AND
MINORITY INTEREST ................................ $ 4,934.3 $ (510.9) $ 9,036.6 $ 2,148.8
============= =========== =========== ==============
PROVISION FOR PRO FORMA
INCOME TAX .................................. 1,736.4 3,131.1
----------- -----------
PRO FORMA NET INCOME ............................. $ 3,370.6 $ 6,078.1
=========== ===========
LOAN CLOSINGS:
Web/Call Center .............................. $ 44,949 $ 112,195 $ 68,152 $ 234,573
Branch Network ............................... 467,103 355,516 925,060 807,312
Strategic Alliance Program ................... 56,898 56,898
------------ ----------- ----------- --------------
Total Loan Closings ........................ $ 512,052 $ 524,609 $ 993,212 $1,098,783
============ =========== =========== ==============
</TABLE>
Page 27 of 39 pages
<PAGE> 28
THREE MONTHS ENDED JUNE 30, 1999
VERSUS THREE MONTHS ENDED JUNE 30, 1998
Revenues decreased in the second quarter of 1999 compared to the second
quarter of 1998 and the contribution by distribution channel differed from
quarter to quarter. In the second quarter of 1999, the Branch Network division
contributed $12.4 million, or 74.4%, of revenues, compared to $19.1 million, or
86.4%, in the second quarter of 1998. The Web/Call Center division contributed
$3.3 million, or 20.0%, of revenues, compared to $3.1 million, or 14.1%, in the
second quarter of 1998. The Strategic Alliance Program, which commenced
operations in April of 1999, contributed $1.1 million, or 6.3%, of revenues in
the second quarter of 1999.
BRANCH NETWORK: The Branch Network division generated $12.4 million in
revenue in the second quarter of 1999 versus $19.1 million of revenue in the
second quarter of 1998. The 35.1% decrease in revenue is mainly attributable to
a decrease in margins earned on loan fees and gains on sale of Sub-Prime Loans
originated by the Branch Network in the second quarter of 1999 (see "Results of
Operations" for a description of changes in margins), and a 28.2% decrease in
sales of Branch Network loans in the second quarter of 1999 compared to the
second quarter of 1998. The lower loan sales are primarily attributable to a
24.6% decrease in Branch Network loan closings, as a result of an increase in
interest rates and a corresponding decrease in the volume of refinance activity,
along with the shift of some Branch Network loan officers to the Web/Call
Center, and our sale of $7.4 million more Branch Network loans in the second
quarter of 1999 than were disbursed, compared to $31.4 million in the second
quarter of 1998. Due to the branch closings and the continuing increase in
interest rates further dampening the amount of refinance business, we expect
both closings and revenues from our Branch Network to decline in the third and
fourth quarters of 1999 from the first and second quarters of 1999.
Direct expenses of the Branch Network division were $8.4 million in the
second quarter of 1999 compared to $12.1 million in the second quarter of 1998.
The $3.7 million decrease in direct expenses is primarily attributable to:
- reduced commissions, as the mix of products shifted to more
Conventional Mortgage Loans, which have lower commissions;
- a decrease in marketing and advertising from $2.6 million in the
second quarter of 1998 to $0.5 million in the second quarter of
1999. The decrease is primarily attributable to discontinuing
advertising to enhance consumer recognition of the Fresh Start brand
name and to discontinuing advertising for branches closed in 1999,
compared to advertising for new branches in 1998; and
- a decrease in variable expenses directly associated with closed
loans.
WEB/CALL CENTER DIVISION: The Web/Call Center division generated $3.3
million in revenue in the second quarter of 1999 versus $3.1 million of revenue
in the second quarter of 1998. The 6.6% increase in revenue is mainly
attributable to a change in the mix of products originated (see "Results of
Operations" for a description of volumes and margins). In 1998, the primary
product originated was High LTV, compared to 1999 where Conventional Mortgage
Loans were the primary product originated and source of revenue.
Page 28 of 39 pages
<PAGE> 29
We anticipate the increasing interest rates that started to occur in
the second quarter of 1999 and continued in the third quarter will decrease the
refinancing of existing mortgages by consumers. The decrease in production is
expected to reduce the profitability of the division.
Direct expenses of the Web/Call Center division were $3.4 million in
the second quarter of 1999 compared to $2.1 million in the second quarter of
1998. The 59.9% increase in expenses is primarily attributable to the following:
- a $0.4 million increase in commissions associated with a 149.6%
increase in the volume of closed Web/Call Center loans;
- $0.3 million of increased marketing expenses in an attempt to brand
RockLoans.com for the transition to the Web/Call Center origination
platform; and
- increased expenses for personnel costs and occupancy for the
anticipated growth in our Internet production from the new
multimillion marketing campaign which was initiated in the third
quarter of 1999.
STRATEGIC ALLIANCE PROGRAM: Our Strategic Alliance Program currently
consists of one joint venture, a 70%-owned limited liability company that
originates residential mortgage products to Michigan National Bank's customers
through Michigan National Bank's 192 financial centers, a call center and over
the Internet. Michigan National Bank has approximately 450,000 customers and
owns the other 30% of the joint venture. The Strategic Alliance Program, which
commenced operations April 4, 1999, generated $1.1 million in revenue on loan
sales of $44.7 million in the second quarter of 1999.
Direct expenses of the Strategic Alliance Program were $1.3 million in
the second quarter of 1999 before intercompany eliminations.
OTHER: The majority of the Other revenue in the second quarter of 1999
is the fee charged to the joint venture for services rendered by Rock Financial
in accordance with the services agreement, which is eliminated in consolidation.
Other expenses include expenses not directly allocable to a particular
division, such as the costs associated with our legal, marketing, accounting,
information services, facilities management, servicing, executive, human
resources, secondary marketing and general and administrative support teams. The
majority of the $1.7 million increase in expenses, from $2.7 million in the
second quarter of 1998 to $4.4 million for the second quarter of 1999, is
primarily due to increased costs of technology, marketing and other support
personnel for our Web/Call Center.
Page 29 of 39 pages
<PAGE> 30
SIX MONTHS ENDED JUNE 30, 1999
VERSUS SIX MONTHS ENDED JUNE 30, 1998
Revenues decreased in the first six months of 1999 compared to first
six months of 1998 and the contribution by distribution channel differed from
quarter to quarter. In the first six months of 1999, the Branch Network division
contributed $29.4 million, or 80.1%, of revenues, compared to $35.2 million, or
85.8%, in the first six months of 1998. The Web/Call Center division contributed
$6.9 million, or 18.8%, of revenues, compared to $6.0 million, or 14.7%, in the
first six months of 1998. The Strategic Alliance Program, which commenced
operations in April of 1999, contributed $1.1 million, or 2.9%, of revenues in
the first six months of 1999.
BRANCH NETWORK: The Branch Network division generated $29.4 million in
revenue in the first six months of 1999 versus $35.2 million of revenue in the
first six months of 1998. The 16.4% decrease in revenue is mainly attributable
to a decrease in margins earned on loan fees and gains on sale of Sub-Prime
Loans originated in the Branch Network in the first six months of 1999 (see
"Results of Operations" for a description of changes in margins). We sold $85.9
million more Branch Network loans in the first six months of 1999 than were
disbursed, compared to $21.0 million in the first six months of 1998. This
increase was substantially offset by a 12.7% decrease in Branch Network loan
closings in the first six months of 1999 as compared to the first six months of
1998. The lower loan closings are a result of an increase in interest rates and
corresponding decrease in the volume of refinance activity, along with the shift
of some loan officers to the Web/Call Center. Due to the branch closings and the
continuing increase in interest rates further dampening the amount of refinance
business in the first and second quarters of 1999, we expect both closings and
revenues from our Branch Network to decline in the third and fourth quarters of
1999 from the first and second quarters of 1999.
Direct expenses of the Branch Network division were $18.2 million in
the first six months of 1999 compared to $22.1 million in the first six months
of 1998. The $3.9 million decrease in expenses is primarily attributable to:
- a $2.3 million decrease in marketing expense, primarily attributable
to discontinuing advertising to enhance consumer recognition of the
Fresh Start brand name and to discontinuing advertising for branches
closed in 1999, compared to advertising for new branches in 1998;
and
- a $1.5 million decrease in commissions due to more Conventional
Mortgage loan closings and less Sub-Prime loan closings in 1999
compared to 1998. Conventional Mortgage loans have lower commissions
than those paid on Sub-Prime Loans.
WEB/CALL CENTER DIVISION: The Web/Call Center division generated $6.9
million in revenue in the first six months of 1999 versus $6.0 million of
revenue in the first six months of 1998. The 14.6% increase in revenue is mainly
attributable to a change in the mix of products originated (see "Results of
Operations" for a description of volumes and margins). In 1998, the primary
product originated was High LTV, compared to 1999 where Conventional Mortgage
Loans were the primary product originated and source of revenue.
Page 30 of 39 pages
<PAGE> 31
We anticipate the increasing interest rates that started to occur in
the second quarter of 1999 and continued in the third quarter will decrease the
refinancing of existing mortgages by consumers. The decrease in production is
expected to reduce the profitability of the division.
Direct expenses of the Web/Call Center division were $5.8 million in
the first six months of 1999 compared to $4.2 million in the first six months of
1998. The 40.2% increase is primarily attributable to the following:
- a 244.2% increase in the volume of closed Web/Call Center Loans
which increased commissions by $0.9 million despite to the
previously discussed change in the mix of products originated.
- an increase of $0.7 million in operating expenses mainly attributed
to the increase in volumes of loans closed and increases in expenses
for personnel in connection with the anticipated growth in our
Internet production from the new multi-million dollar marketing
campaign initiated in the third quarter of 1999; and
- increased marketing expenses in an attempt to brand RockLoans.com in
connection with the transition to an operation more based on
Web/Call Center and Strategic Alliance distribution channels.
STRATEGIC ALLIANCE PROGRAM: Our Strategic Alliance Program currently
consists of one joint venture, a 70%-owned limited liability company that
originates residential mortgage products to Michigan National Bank's customers
through Michigan National Bank's 192 financial centers, a call center and over
the Internet. Michigan National Bank has approximately 450,000 customers and
owns the other 30% of the joint venture. The Strategic Alliance Program, which
commenced operations April 4, 1999, generated $1.1 million in revenue on loan
sales of $44.7 million in the second quarter of 1999.
Direct expenses of the Strategic Alliance Program were $1.3 million in
the second quarter of 1999 before intercompany eliminations.
OTHER: The majority of the Other revenue in the first six months of
1999 is the fee charged to the joint venture for services rendered by Rock
Financial in accordance with the services agreement, which is eliminated in
consolidation.
Other expenses include expenses not directly allocable to a particular
division, such as the costs associated with our legal, marketing, accounting,
information services, facilities management, servicing, executive, human
resources, secondary marketing and general and administrative support teams. The
majority of the $2.6 million increase in expenses, from $5.5 million in the
first six months of 1998 to $8.1 million for the first six months of 1999, is
primarily due to increased costs of technology, marketing and other support
personnel for our Web/Call Center.
Page 31 of 39 pages
<PAGE> 32
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities in the first six months of
1999 was approximately $75.9 million, compared to approximately $55.4 million in
the first six months of 1998. Cash was provided primarily by the following:
- - our net income in the first six months of 1999, approximately $5.1 million
before depreciation and amortization, provision for credit losses, and
deferred income taxes in the first six months of 1999, compared to
approximately $8.8 million in the first six months of 1998;
- - a decrease in mortgage loans held for sale of approximately $73.7 million in
the first six months of 1999, compared to an approximately $29.7 million
decrease in the first six months of 1998; and
- - an increase in drafts payable, which represent funds advanced for loan
closings that have not yet been drawn against the warehouse line of credit of
approximately $5.1 million in the first six months of 1999, compared to an
increase of approximately $12.3 million in the first six months of 1998.
These sources of cash were partially offset by the following:
- - an increase in prepaid federal income tax of $3.8 million in the first six
months of 1999, as a result of stock options exercised;
- - an increase in other assets of approximately $0.8 million in the first six
months of 1999, compared to a decrease of approximately $0.1 million, as a
result of increases in deposits and other prepaid items; and
- - a decrease in accounts payable and accrued expenses and other liabilities of
approximately $3.4 million in the first six months of 1999, compared to an
increase of approximately $4.5 million in the first six months of 1998,
primarily as a result of the decrease in loan closings from the fourth quarter
of 1998 to the second quarter of 1999.
Net cash used in investing activities during the first six months of
1999 was approximately $0.5 million, compared to approximately $2.7 million used
in investing activities during the first six months of 1998. Cash was primarily
used to purchase property and equipment of approximately $1.2 million in the
first six months of 1999, compared to $3.5 million in the first six months of
1998 and for the increase in real estate owned and loans held for investment of
approximately $0.3 million in the first six months of 1999, compared to $0.8
million in the first six months of 1998. These uses of cash were partially
offset by the repayment of approximately $1.0 million of shareholder advances in
the first six months of 1999, compared to $1.6 million in the first six months
of 1998.
Net cash used in financing activities during the first six months of
1999 was approximately $70.1 million, compared to approximately $62.6 million
during the first six months of 1998. Cash was used for the following:
- - repayments of borrowings under our warehouse line of credit of approximately
$68.1 million in the first six months of 1999, compared to approximately $52.2
million in the first six months of 1998;
Page 32 of 39 pages
<PAGE> 33
- - repayments of borrowings under our reverse repurchase agreement of
approximately $11.5 million in the first six months of 1999, compared to
approximately $15.8 million in the first six months of 1998; and
- - payment of dividends to shareholders of approximately $0.6 million in the
first six months of 1999, compared to approximately $0.3 million in the first
six months of 1998. In July 1999, the Board of Directors determined not to pay
a dividend in the third quarter of 1999.
These uses of cash were partially offset by the proceeds from the exercise of
stock options of approximately $9.8 million in the first six months of 1999,
compared to $1.5 million in the first six months of 1998, and $0.3 million
minority interest investment received from Michigan National Bank for our joint
venture in the first six months of 1999. We normally use our cash to pay down
our warehouse borrowings. In order to demonstrate the availability of this
liquidity, we borrowed additional cash under our warehouse line of credit at
June 30, 1999 for three days.
We have $450 million of warehouse financing facilities, which includes
a $50 million warehouse financing facility of our subsidiary, Rock Home Loans at
Michigan National. Our warehouse line of credit currently provides for up to
$200 million principal amount of demand loans secured by loans held for sale and
other of our assets. Loans under the warehouse line of credit bear interest at
rates that vary depending on the type of underlying loan, and the loans are
subject to sublimits, advance rates and warehouse terms that vary depending on
the type of underlying loan. The effective weighted average interest rate for
this arrangement in the first six months of 1999 was 6.31%. As of July 30, 1999,
we had borrowed $11.3 million under this facility and had a maximum of $29.5
million available for additional borrowings and were in compliance with all
associated financial covenants. We would have $188.7 million of borrowing
capacity available if we had sufficient collateral.
In addition to the $200 million warehouse line of credit, our reverse
repurchase arrangement provides that the lender, an affiliate of one of the
representatives of the underwriters in our initial public offering, will
purchase from us at par up to $200 million of fully-amortizing, first or junior
lien residential mortgage loans and home equity loans that comply with our
origination guidelines and conform to whole and bulk loan sale requirements. The
lender's obligations are subject to our agreement to repurchase loans on a daily
basis. This agreement is not a committed facility and the lender may elect to
discontinue the repurchase agreement at any time. The term of any financing
under the repurchase agreement matures and may be renewed on a daily basis. In
any event, the arrangement terminates in March 2000. The effective weighted
average interest rate to us of this arrangement in the first six months of 1999
was 5.92%. We use this facility as a supplemental borrowing facility to fund
loans we close until they are sold. As of July 30, 1999, we had not financed any
loans under this facility and had no additional borrowings available to draw
against. We would have an additional $200 million of borrowing capacity if we
had sufficient collateral.
Our subsidiary, Rock Home Loans at Michigan National, has $50 million
of warehouse financing facilities. Its warehouse line of credit currently
provides for up to $50 million principal amount of demand loans secured by loans
held for sale and other of its assets. Loans under the warehouse line of credit
bear interest at rates that vary depending on the type of underlying loan, and
the loans are subject to sublimits, advance rates and warehouse terms that vary
depending on the type of underlying loan. The effective weighted average
interest rate for this arrangement in
Page 33 of 39 pages
<PAGE> 34
the second quarter of 1999 was 5.92%. As of July 30, 1999, $5.2 million had
been borrowed under this facility and had no additional borrowings were
available to draw against and were in compliance with all associated financial
covenants. It would have $44.8 million of borrowing capacity available if it had
sufficient collateral.
Our warehouse financing facilities, together with cash flows from
operations, are expected to be sufficient to fund our liquidity requirements for
the next 12 months, if our future operations are consistent with our
expectations. We, however, expect that eventually we will need to arrange for
additional sources of capital through the issuance of debt, equity or additional
bank borrowings. We have no commitments for any such additional financing, and
we cannot assure you that we will be able to obtain any such additional
financing at the times required and on terms and conditions acceptable to us. In
such event, our growth and operations could be curtailed. If we begin to
securitize our assets or significantly increase our retained mortgage servicing
rights, our liquidity could be materially adversely affected, although we have
no current intention to do either in the immediate future.
NEW ACCOUNTING STANDARDS NET YET ADOPTED
In September 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("Statement 133"). Statement 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. Statement 133 requires companies to
record derivatives on the balance sheet as assets or liabilities, measured at
fair value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. Upon initial application, hedging
relationships must be designated anew and documented pursuant to the provisions
of Statement 133.
In June 1999, the Financial Accounting Standards Board issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of
the Effective Date of FASB Statement No. 133" ("Statement 137"). Statement 137
amends the effective date of Statement 133. Statement 133 will now be effective
for all fiscal quarters of all fiscal years beginning after June 15, 2000.
Management has not yet evaluated the impact of the implementation of Statement
133.
Page 34 of 39 pages
<PAGE> 35
YEAR 2000 DISCLOSURE
STATE OF READINESS
We have developed a Year 2000 project plan that addresses both
technological and non-technological systems, including embedded systems for all
business units. We have designated a Year 2000 project team to lead the efforts
using a phased approach. We employ both internal and external resources to
identify, correct and test systems to achieve Year 2000 compliance. We are also
reviewing the Year 2000 readiness of third parties that provide services
essential to our operations.
The plan consists of nine phases. The initial phases of planning,
awareness, inventory, triage, detailed assessment, resolution, test planning and
testing are complete. 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. We expect to compete this phase by September 1, 1999. We
are communicating with key third party suppliers and other business partners to
establish and monitor their levels of Year 2000 readiness. Our Year 2000 project
is subject to modification, and we may revise it periodically as we further
develop information. We believe we will complete our project without any
material adverse effects.
ESTIMATED COST
Our cost estimates are in the range of $300,000 to $500,000. As of June
30, 1999, we have incurred approximately $290,000 of costs. We continually
review our cost estimates and adjust them, if appropriate. We do not expect our
Year 2000 project cost to have a material impact on our liquidity or capital
resources.
RISKS OF OUR YEAR 2000 ISSUES
Based on current information, we believe the Year 2000 problem will not
have a material adverse effect on us, our business or our financial condition.
We cannot predict the actual effect of the Year 2000 problem on us. Many
uncertainties exist as to whether broad-based or systemic economic failures may
occur.
YEAR 2000 CONTINGENCY PLANS
We are reviewing existing contingency plans for potential modifications
to address specific Year 2000 issues. Our key operational systems are being
reviewed and strengthened to address business continuity requirements. Business
continuity plans 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 35 of 39 pages
<PAGE> 36
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate risk is the largest market risk affecting us. Interest
rate risk is the possibility that changes in interest rates will cause
unfavorable changes in our net income and in the value of our interest rate
sensitive assets, liabilities and commitments. As part of our risk management
programs, we purchase financial instruments and enter into financial agreements
with off-balance sheet risk in the normal course of business to manage our
exposure to interest rate risk with respect to our Conventional Loans and our
government-insured loans (together, "Prime Loans"), but not with respect to our
Sub-Prime Loans or Home Equity Lines of Credit. We use these financial
instruments for the explicit purpose of managing interest rate risks to protect
the value of our Prime Loans held for sale and the Prime Loan commitment
pipeline. We use financial instruments that tend to decrease in value as
interest rates decline and increase in value as interest rates rise, which acts
as an offset to the behavior of the underlying Prime Loans held for sale and
Prime Loan pipeline.
Management actively monitors and manages our exposure to interest rate
risk on Prime Loans, which is incurred in the normal course of business. The
committed and closed pipelines of Prime Loans, as well as the related forward
commitments and derivatives, are valued daily. We refer to the loans, pipeline,
commitments and derivatives together as the "hedge position". The hedge position
is "shocked" against a spectrum of interest rate scenarios to evaluate expected
net changes of the fair values of the hedge position in relation to the changes
in interest rates. We do not enter into instruments for trading purposes.
We evaluate interest rate risk exposure using both static shock and
option adjusted spread models to estimate changes to the fair value of the hedge
position. Both modeling techniques measure net changes in the fair value to the
underlying assets and commitments by determining the present value of the cash
flow of the underlying mortgage or debt instrument discounted at the interest
rate assumed to be required by an investor to yield a market rate of return.
Both modeling techniques measure changes in the fair value of derivatives
through Option Adjusted Spread calculations to determine the present value using
implied volatility, discount rates and expected life of the derivative. Both
models use assumptions regarding the amount of commitments that close, given an
incremental shift of +/- 100 basis points, in 12.5 basis point increments, to
the yield curve. The assumptions are based on our historical experience. Our
exposure is analyzed daily and reviewed at least monthly by the Secondary
Marketing Executive Committee, which includes in its membership our Director of
Secondary Marketing, our Chief Financial Officer, our President, and our
Chairman of the Board and Chief Executive Officer.
Both modeling techniques described above were applied to the hedge
position as of June 30, 1999 over a spectrum of interest rate changes to
evaluate the change in the hedge position's fair value ("sensitivity analysis").
Using the results of the model producing the largest loss in fair value, the
sensitivity analysis reflected that an instantaneous 50 basis point increase in
interest rates at June 30, 1999, 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 2.15% to 2.06% and would have decreased
revenue by approximately $82,000 even though the model assumes that more loans
would have closed due to an increase in interest rates. A 50 basis point
decrease in interest rates at June 30, 1999, determined by management to reflect
a reasonably
Page 36 of 39 pages
<PAGE> 37
possible near-term change, would have decreased the fair value of the hedge
position 2 basis points from 2.15% to 2.13% and would have decreased revenue
by approximately $6,000 assuming that fewer loans would have closed due
to the decline in interest rates. Both 50 basis point moves are assumed shifts
in the entire yield curve. We do not believe that our spread income would be
materially affected by interest rate changes as the interest we charge on our
mortgage loans can change faster than the interest on our indebtedness.
The table below provides information about our other financial
instruments that are sensitive to changes in interest rates, including debt
obligations and Sub-Prime Loans, as of June 30, 1999. For both debt obligations
and Sub-Prime Loans, the table presents principal cash flows and related
weighted average interest rates by expected maturity dates. Weighted average
variable rates are based on current rates as of June 30, 1999. The instruments'
actual cash flows are all denominated in U.S. dollars.
<TABLE>
<CAPTION>
JUNE 30, 1999
EXPECTED MATURITY DATE
(AMOUNTS IN THOUSANDS) 1999 2000-2003 THEREAFTER TOTAL FAIR VALUE
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS:
SUB-PRIME LOANS $ 7,532 $ 0 $ 0 $ 7,532 $ 8,097
WEIGHTED AVERAGE INTEREST
RATE: 11.79% NA NA 11.79%
LIABILITIES:
WAREHOUSE LINE OF CREDIT $29,896 $ 0 $ 0 $29,896 $29,896
WEIGHTED AVERAGE INTEREST
RATE: 6.12% NA NA 6.12%
REVERSE REPURCHASE ARRANGEMENT $ 0 $ 0 $ 0 $ 0 $ 0
WEIGHTED AVERAGE INTEREST
RATE: NA NA NA NA
</TABLE>
Page 37 of 39 pages
<PAGE> 38
PART II--OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our Annual Meeting of Shareholders was held on May 25, 1999. At the
Annual Meeting, Gary L. Gilbert and Robert V. Schechter were elected as
Directors of the Company for a three-year term. The terms of office of David
Katzman, Daniel Gilbert, and David A. Brandon as Directors of the Company
continued after the meeting. 11,649,812 votes were cast for Gary L. Gilbert's
election and 2,087,614 votes were withheld. 13,729,610 votes were cast for
Robert V. Schechter's election and 7,816 votes were withheld. There were no
abstentions or broker non-votes in connection with the election of the Directors
at the Annual Meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10.1 Employment Agreement, dated as of June 14, 1999 between Rock
Financial Corporation and Michael D. Hollerbach.
10.2 Mortgage Warehousing Agreement, dated as of April 4, 1999,
between Rock Home Loans at Michigan National, LLC and Michigan
National Bank.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Registrant during the
quarter for which this report is filed.
Page 38 of 39 pages
<PAGE> 39
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ROCK FINANCIAL CORPORATION
(Registrant)
Date: August 16, 1999 By:/s/ MICHAEL D. HOLLERBACH
--------------------------------------
Michael D. Hollerbach
Its: President
(Duly Authorized Officer)
Date: August 16, 1999 By:/s/ FRANK E. PLENSKOFSKI
--------------------------------------
FRANK E. PLENSKOFSKI
Its: Chief Financial Officer
(Principal Financial and Chief
Accounting Officer)
Page 39 of 39 pages
<PAGE> 40
EXHIBIT INDEX
Exhibit Description
- ------- -----------
10.1 Employment Agreement, dated as of June 14, 1999 between Rock
Financial Corporation and Michael D. Hollerbach
10.2 Mortgage Warehousing Agreement, dated as of April 4, 1999,
between Rock Home Loans at Michigan National, LLC and Michigan
National Bank.
27.1 Financial data schedule.
<PAGE> 1
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made as of June 14, 1999, by and
between Rock Financial Corporation, a Michigan corporation (the "Company"), and
Michael D. Hollerbach, a resident of the State of Michigan ("Employee").
The parties agree as follows:
1. EMPLOYMENT AND DUTIES. During the Term of Employee's employment under this
Agreement (as defined in Sections 2 and 4.1), Employee shall be employed as
President of the Company. During the Term, Employee shall have such authority
and responsibilities and perform such duties for the Company as are customary
and appropriate for such position and as may from time to time be established by
the Chief Executive Officer or the Board of Directors of the Company. During the
Term, Employee shall devote substantially all of his working time and best
efforts exclusively to the performance of his duties under this Agreement;
provided, however, Employee will continue to wind down his activities in MDH
Financial, Inc. ("MDH") and thereafter perform only minimal activities for MDH
as long as such activities are not in competition with the Company. In addition,
the Company will cause its Board of Directors to increase its size by one member
and appoint Employee to fill the newly-created vacancy effective as of July 1,
1999.
2. TERM OF EMPLOYMENT. Employee's employment under this Agreement shall begin
on June 14, 1999 and shall continue until terminated in accordance with Section
4.1 (the "Term").
3. COMPENSATION.
3.1 Salary. During the Term, the Company shall pay to Employee an annual
salary, pro rated for partial years of employment, of $275,000, which amount may
be increased from time to time by the Board of Directors or its Compensation
Committee. The salary shall be payable bi-weekly in arrears (or at such other
intervals not less frequently than monthly as the Company shall designate).
3.2 Bonus. In the sole discretion of the Board of Directors of the Company
or its Compensation Committee, each year during the Term, the Company may pay to
Employee a discretionary bonus determined by the Board of Directors or its
Compensation Committee. Employee shall be eligible to participate in the
Company's executive bonus plan, if any, applicable to its other executive
officers, and if the formula for determining bonuses varies among participants
in the plan, Employee shall be included in the most highly compensated group.
3.3 Stock Options. If Employee is then employed by the Company, on each of
June 14, 1999, September 14, 1999, December 14, 1999, March 14, 2000, June 14,
2000, September 14, 2000 and December 14, 2000, the Company will grant to
Employee, under the Amended and Restated Rock Financial Corporation 1996 Stock
Option Plan, or any successor plan (the "Plan"), a Nonqualified Option (as
defined in the Plan) to purchase 50,000 of the Company's Common Shares at an
exercise price equal to the fair market value of the Company's Common Shares on
the date of grant. The options will vest in one-fifth cumulative annual
<PAGE> 2
installments beginning on the first anniversary of the grant date, if Employee
is employed by the Company on these dates and will be in substantially the form
of the attached Exhibit 3.3, except that the dates in the grants after June 14,
1999 will be appropriately adjusted to reflect the later grant date. The Common
Shares issuable upon exercise of options granted under the Plan are currently
registered on a Registration Statement on Form S-8 that became effective May 29,
1998.
3.4 Other. Employee shall be entitled to the fringe benefits generally
provided to other employees of the Company, subject to the eligibility and other
requirements of such benefits. Any expenses which the Company is obligated to
pay or reimburse Employee pursuant to Article 7 of the Company's bylaws shall be
paid or reimbursed by the Company as such expenses are incurred.
4. TERMINATION.
4.1 Termination of Employment. Employee's employment under this Agreement
and the Term shall terminate and neither party shall have any rights or
obligations under this Agreement (except for the rights and obligations under
those Sections of this Agreement which are continuing and shall survive such
termination, as specified in Section 11.9) on the earliest to occur of the
following events:
4.1.1 Death. Employee's employment shall terminate upon the death of
Employee, effective as of the date of Employee's death.
4.1.2 Disability. Employee's employment shall terminate, at the
Company's option, upon written notice to Employee by the Company, effective
as of the date of such notice, if Employee shall suffer from a
"Disability". For purposes of this Agreement, "Disability" means (1)
Employee's physical or mental condition that would entitle Employee to
disability benefits under any long-term disability insurance policy or
other long-term disability plan provided by the Company to Employee, or (2)
if the Company does not provide any such plan to Employee, Employee is
absent from his job for a period of three consecutive months due to illness
or other physical or mental condition or Employee shall have become
permanently disabled. If the Company does not provide any disability
insurance or plan to Employee and if there is any disagreement as to the
nature, extent, duration or cause of Employee's absence or disability, such
matter shall be determined by a licensed physician selected by the Company
and approved by Employee, which approval shall not be unreasonably
withheld; provided, however, Employee shall be regarded as permanently
disabled as specified in this Section 4.1.2 if Employee shall fail or
refuse to submit to a physical examination by such physician.
4.1.3 Cause. Upon the occurrence of one or more of the events within
the definition of "cause", Employee's employment shall terminate
immediately upon written notice of such cause by the Company to Employee or
at such other date as shall be specified in such notice. For purposes of
this Agreement, "cause" shall mean (i) any willful refusal on the part of
Employee to perform the services reasonably required of Employee under this
Agreement (including the intentional withholding of services reasonably
required under this Agreement), (ii) any willful failure on the part of
Employee to make a good faith effort to perform his employment duties under
this
2
<PAGE> 3
Agreement, (iii) Employee's willful act or omission that Employee knew
or had reason to know would materially injure the Company, (iv) gross
neglect or gross abuse of office amounting to breach of trust, (v)
Employee's commission of, or participation in, any act of fraud, false
pretense, forgery, embezzlement, theft or dishonesty, (vi) any conviction
of a felony or any crime involving moral turpitude, (vii) any material
breach by Employee of any term or provision of Section 5, 6, 7 or 8 of this
Agreement, or (viii) Employee's substantial dependence on any mind altering
or other harmful substance, including, without limitation, alcohol,
marijuana, amphetamines, barbiturates, LSD, cocaine, narcotic drugs, or any
natural or synthetic substance having the same or similar effects as any of
the foregoing, to the extent that such use would constitute reasonable
cause for termination under applicable law; provided that the matters
described in clauses (i), (ii) and (iii) shall constitute "cause" only if
(1) the Company's Compensation Committee determines that an event otherwise
meeting the definition of "cause" described in clause (i), (ii) or (iii)
has occurred, (2) the Company notifies Employee in writing of the actions
or omissions potentially constituting "cause" and the portion of the
definition of "cause" being relied upon, and (3) Employee fails to (i) (A)
act, where the potential "cause" is an omission, or (B) terminate the act,
where the potential "cause" is an action, and (ii) remedy any harm or
damage resulting from such actions or inactions potentially constituting
"cause", all within 30 days after such notice is deemed given pursuant to
Section 11.5.
4.1.4 Resignation. Upon 30 days written notice by Employee to the
Company, Employee's employment shall terminate 30 days after such notice or
at such other date within such 30-day period as shall be specified by the
Company.
4.1.5 Maximum Agreement Term. If not sooner terminated, Employee's
employment under this Agreement shall terminate on June 14, 2004.
4.1.6 Termination Without Cause. Employee's employment shall
terminate upon written notice by the Company to Employee.
There is not, nor will there be, unless in writing signed by the Company and
Employee, any express or implied agreement as to Employee's continued employment
by the Company after the end of the Term. Any subsequent employment by the
Company, if any, will be employment "at will".
4.2 Termination. From and after the date of termination of Employee's
employment under this Agreement and the Term in accordance with Section 4.1,
Employee shall not be entitled to receive from the Company, nor shall the
Company be obligated to make, any payments or distributions to employee under
this Agreement, any Company policy or applicable law (including unemployment
compensation benefits, but not including any COBRA benefits), including, without
limitation, any salary or bonus payments, except as provided in Section 4.3 and,
if applicable, Section 4.4. The termination benefits described in Section 4.3
and, if applicable, Section 4.4 will be in lieu of any other termination or
severance benefits and will constitute Employee's sole and exclusive rights and
remedies with respect to the termination of Employee's employment. The Company
may withhold from any such payments all federal, state, city or other taxes to
the extent such taxes are required to be withheld by applicable law.
3
<PAGE> 4
4.3 Payments on or after Termination. On the termination of Employee's
employment under this Agreement, the Company shall pay to employee (or his
estate if termination is due to his death) the following:
4.3.1 Accrued Salary. unpaid salary due pursuant to Section 3.1 for
the period up to the date of termination and not yet paid;
4.3.2 Accrued Bonus. any bonus payments pursuant to Section 3.2,
earned and not yet paid as of the date of termination;
4.3.3 Accrued Benefits. any benefits actually due pursuant to
Section 3.4 and not yet paid; and
4.3.4 Severance Payment. if such termination is pursuant to Section
4.1.6,
4.3.4.1 a continuation of the salary in effect as of the date
of termination pursuant to Section 3.1 for the "Period" (as defined
below), as and when such salary would otherwise have been payable as
provided in this Agreement, or in an appropriately discounted lump sum,
if the Company, in its sole discretion, elects to make such payment in
a lump sum (the "Salary Severance"). For purposes of this Agreement,
the "Period" means (i) 15 months if such termination occurs before the
date a "Change in Control" (as defined in Section 4.4.1) occurs or more
than six months after a Change in Control occurs, and (ii) six months
if such termination occurs on, or within six months after, the date a
Change in Control occurs, plus
4.3.4.2 a continuation of the life and health coverage
pursuant to the Consolidated Omnibus Budget Reconciliation Act
("COBRA") for 18 months after such termination, with the Company paying
the cost of such benefits, including any premiums for the related
insurance; provided that this obligation shall be reduced by the amount
of any other life and health coverage provided to Employee by any other
person or entity with respect to such 18-month period.
4.4 Change in Control Severance Payment. If, (1) a Change in Control occurs
after June 14, 1999 and on or before June 13, 2004, and (2) (i) at any time from
the date that is nine months before the date of the Change in Control through
the day before the date of the Change in Control, Employee's employment with the
Company is terminated by the Company without "cause", or (ii) at any time from
the date that is 90 days before the date of the Change in Control through the
day before the date of the Change in Control, Employee's employment with the
Company is terminated as a result of Employee's death or Disability, or (iii) at
any time on or after the date that is six months after the date of the Change in
Control, Employee's employment with the Company is terminated as a result of
Employee's resignation, or, (iv) except as provided in clause (iii), at any time
on or after the date of the Change in Control, Employee's employment with the
Company is terminated for any reason, then the Company shall pay Employee, in
cash, within 14 days after the later of such Change in Control or such
termination, the sum of (x) $830,000, plus (y) $40,000 for each full month (not
exceeding 40 months) that has elapsed between the date of this Agreement and the
date (A) a Change in Control Agreement is entered into if (I) the Change in
Control Agreement is entered into before June 14, 2000, and (II) the
4
<PAGE> 5
Change in Control occurs on or before the date that is six months after the
Change in Control Agreement is entered into, or (B) the Change in Control
occurs, in all other events, plus (z) if the Change in Control occurs after June
14, 2000 and is not pursuant to an agreement entered into before June 14, 2000
that closes within six months after it is entered into, $15,000 for each full
month (not exceeding 28 months) that has elapsed between June 14, 2000 and the
date the Change in Control occurs.
4.4.1 "Change in Control". For purposes of this Agreement, a "Change
in Control" occurs on the first day any one or more of the following
occurs:
4.4.1.1 the consummation of any merger, consolidation,
reorganization or share exchange involving the Company, unless the
holders of the Company's capital stock outstanding immediately before
such transaction own more than 50% of the combined outstanding shares
of capital stock and have more than 50% of the combined voting power in
the surviving entity after such transaction;
4.4.1.2 the consummation of any sale or other disposition (in
one transaction or a series of related transactions) of all, or
substantially all, of the Company's assets to any person (as such term
is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act")) or persons, other than the
"Excluded Persons" (as defined in Section 4.4.2);
4.4.1.3 Daniel Gilbert and Gary Gilbert sell more than half of
the excess of the Company's Common Shares registered in their names as
of the date of this Agreement, over the actual number of Common Shares
they sell in a public offering of Common Shares in 1999, excluding,
however, from the calculation of sales, all sales to any person (as
such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act)
or persons, who are (i) "Excluded Persons" (as defined in Section
4.4.2), (ii) Daniel Gilbert, Gary Gilbert, or either of their spouses,
children, grandchildren or siblings ("Immediate Family Members"), (iii)
any trust for the exclusive benefit of such Immediate Family Members,
(iv) any partnership in which such Immediate Family Members are the
majority partners, and (v) any other entity in which the Immediate
Family Members own a majority of the equity interests.
4.4.1.4 Daniel Gilbert, Gary Gilbert, their Immediate Family
Members, any trust for the exclusive benefit of such Immediate Family
Members, any partnership in which such Immediate Family Members are the
majority partners, and any other entity in which the Immediate Family
Members own a majority of the equity interests collectively have
registered in their names less than 25% of the Company's Common Shares.
4.4.2 "Excluded Persons". For purposes of this Agreement, the
"Excluded Persons" are (i) Employee, (ii) any "group" (as that term is used
in Section 13(d) of the Exchange Act and the rules under that section) that
includes Employee or in which Employee is, or has agreed to become, an
equity participant, (iii) any entity in which Employee is, or has agreed to
become, an equity participant, (iv) the Company, (v) any subsidiary of the
Company, (vi) any employee benefit plan of the Company or any subsidiary of
the Company or the related trust, (vii) any entity to the extent it is
holding
5
<PAGE> 6
capital stock of the Company for or pursuant to the terms of any employee
benefit plan of the Company or any subsidiary of the Company, and (viii)
any director or officer of the Company as of the date of this Agreement.
5. CONFIDENTIALITY. Except as required in Employee's duties to the Company or
its successors (whether by sale or other transfer of stock, sale or other
transfer of assets or merger) (references in this Agreement to the "Company"
include the Company and all of its predecessors or successors), or as authorized
in writing by the Company, or as required by legal process, Employee shall not
at any time, either during or after employment, consultation or other
association with the Company, disseminate, distribute, disclose, reveal, copy,
use, communicate or otherwise appropriate, either directly or indirectly,
through any individual, person or entity, any Confidential Information (as
defined in Section 10.1), and Employee shall retain all such information in
trust in a fiduciary capacity for the sole use and benefit of the Company.
Employee acknowledges that the Confidential Information is valuable, special and
unique to the Company's business and on which such business depends, and is
proprietary to the Company, and that the Company wishes to protect such
Confidential Information by keeping it secret and for the sole use and benefit
of the Company. Employee shall take all steps reasonably necessary and all steps
reasonably requested by the Company to insure that all such Confidential
Information is kept secret and confidential for the sole use and benefit of the
Company. All records and other materials pertaining to the Confidential
Information, whether or not developed by Employee shall be and remain the
exclusive property of the Company. Upon termination of this Agreement, upon
termination of any employment or consultation with the Company or at any other
time that the Company in writing so requests, Employee shall promptly deliver to
the Company all materials concerning any Confidential Information, Company's
Business (as defined in Section 10.3), copies of such materials and any other
materials of the Company which are in Employee's possession or under Employee's
control, including, without limitation, any documents, records, files, lists and
the like, and Employee shall not make or retain any copies or extracts of such
materials.
6. SOLICITATION. While Employee is employed by the Company and for a period
ending 12 months after such termination (the "Agreement Term"), Employee shall
not, either directly or indirectly, himself or through or for any individual,
person or entity wherever located:
6.1 Solicit, recruit, attempt to hire or hire any person who is then
employed by, is a consultant to, or is an agent of, the Company or who was
employed by, a consultant to, or an agent of, the Company at any time beginning
12 months before the date in question or, if earlier, 12 months before the date
Employee's employment under this Agreement terminated.
6.2 Encourage, induce or attempt to induce, or aid, assist or abet any
other party or person in encouraging, inducing or attempting to induce, any such
employee, consultant or agent to alter or terminate his or her employment,
consultation or agency with the Company.
7. COVENANT NOT TO COMPETE. While Employee is employed by the Company,
Employee shall not, either directly or indirectly, himself or through or for any
individual, person or entity wherever located:
7.1 Engage in any activities, perform any services or conduct, maintain or
operate any businesses which are competitive with, or in the same or similar
line of business or activity as,
6
<PAGE> 7
Company's Business, or any Company Customer, or engage in activities or services
performed by, or sell products sold by, the Company during Employee's
employment, consultation or other association with the Company ("Competing
Business"). For purposes of this Section 7.1, the term "Company Customer" means
any person or entity to, for, or with respect to, whom the Company or any of its
affiliates: (i) obtained a credit report, took an application for a loan,
pre-qualified a loan, pre-approved a loan, made a loan, provided a settlement
service, or submitted a bid for, or otherwise negotiated for, the providing of
products or the performance of services; (ii) provided products or performed
services; or (iii) entered into an agreement for the providing of products or
performance of services; provided, that the bid was submitted, the negotiations
done, the products provided or the services performed, or the agreement entered
into at any time during the period beginning 12 months before the date such
determination is made, and ending on the date such determination is made;
7.2 Be engaged by, employed by, consult with, serve in any other capacity
to, own any capital stock of, or have any financial or equity interest of any
kind in, any individual, person, firm, agency, partnership, limited liability
company, unincorporated association, corporation, pre-incorporated association
or other entity ("Person or Entity") wherever located, which conducts a business
which is competitive with Company's Business or any part of Company's Business
or is acting against the interests of the Company. Notwithstanding the
foregoing, Employee may own, for investment purposes only, up to 5% of the stock
of any publicly-traded entity whose stock is either listed on a national stock
exchange or is quoted in The Nasdaq National Market (if Employee is not
otherwise affiliated with such entity); or
7.3 Undertake any efforts or activities toward pre-incorporating,
incorporating, financing or commencing any Competing Business, or advise, serve
or consult with any Person or Entity which is or will be undertaking efforts
towards incorporating, financing or commencing any Competing Business or
activity which engages in a Competing Business.
During the period beginning on the date Employee's employment by the Company
terminates and ending one year thereafter, Employee shall not, directly or
indirectly, himself or through or for any individual, person or entity wherever
located, be engaged by, employed by, consult with, serve in any other capacity
to, own any capital stock of, or have any financial or equity interest of any
kind in, any of the ten Persons or Entities designated by the Company's Chief
Executive Officer to Employee in writing within 30 days after the date
Employee's employment by the Company terminates.
8. CONFLICTS OF INTEREST. While Employee is employed by the Company, Employee
shall not, unless approved in writing by the Board of Directors or the Chief
Executive Officer of the Company:
8.1 Participate in any way in the benefits of transactions between the
Company and its investors, suppliers or customers, or have personal financial
transactions with any of the Company's investors, suppliers or customers,
including, without limitation, having a financial interest in the Company's
investors, suppliers or customers, or making loans to, or receiving loans from,
the Company's investors, suppliers or customers; provided, that Employee may
own, for investment purposes only, up to 5% of the stock of any publicly-traded
entity whose stock is either listed on a national stock exchange or is quoted in
The Nasdaq National Market (if Employee is not otherwise affiliated with such
entity);
7
<PAGE> 8
8.2 Realize a personal gain or advantage from a transaction in which the
Company has an interest, or use information obtained in connection with
Employee's employment with the Company for Employee's personal advantage or
gain;
8.3 Accept any offer to serve as an officer, director, partner, consultant,
or manager with, or be employed in a technical capacity by, a person or entity
which is a competitor of the Company; or
8.4 Participate in a hostile takeover attempt of the Company.
9. REMEDIES.
9.1 Injunction. Employee acknowledges and agrees that the covenants and
undertakings contained in Sections 5, 6, 7, and 8 of this Agreement relate to
matters which are of a special, unique and extraordinary character and that a
violation of any of those terms of this Agreement will cause irreparable injury
to the Company and Company's Business, and that the amount of such injury will
be difficult, if not impossible, to estimate or determine and cannot adequately
be compensated by monetary damages. Therefore, Employee acknowledges that the
Company shall be entitled, in addition to all other rights and remedies
available under this Agreement and applicable law, as a matter of course, to an
injunction, restraining order or other equitable relief from any court of
competent jurisdiction, restraining any violation or threatened violation of any
of such terms by Employee and by such other persons as the court shall order.
Employee waives any requirement that the Company post any bond in connection
with obtaining such relief or in connection with any proceeding or appeal with
respect to any such relief obtained.
9.2 Indemnification by Employee. Notwithstanding the execution of this
Agreement and regardless of any investigation made at any time by or on behalf
of the Company or any information the Company may have, Employee shall indemnify
the Company and save the Company harmless from and against any demand, claim,
action, cause of action, damage, liability, loss, cost, debt, expense,
obligation, tax, assessment, public charge, lawsuit, contract, agreement,
undertaking or deficiency of any kind or nature, whether known or unknown,
fixed, actual, accrued, or contingent, liquidated or unliquidated (including,
but not limited to, interest, penalties, additional taxes, reasonable attorneys'
fees and other costs and expenses incident to proceedings or investigations or
the defense of any claim whether or not litigation is commenced), including any
consequential or incidental damages (which for purposes of this Agreement shall
include any loss of profits, business or goodwill damages or any other damages
to the Business) ("Damages"), arising out of, resulting from, or relating to,
and to pay the Company on demand the full amount of any sum which the Company
becomes legally obligated to pay on account of, any material breach of any
provision of Sections 5, 6, 7, and 8 of this Agreement. Notwithstanding anything
in this Agreement to the contrary, Employee shall not be liable to indemnify the
Company with respect to the Company's aggregate Damages in excess of the total
value of all benefits received by Employee under this Agreement, including,
without limitation, salary, bonus, fringe benefits, Option Value, payments on or
after termination and Change in Control payments.
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<PAGE> 9
9.3 Indemnification by Company. Notwithstanding the execution of this
Agreement and regardless of any investigation made at any time by or on behalf
of Employee or any information Employee may have, the Company shall indemnify
Employee and save Employee harmless from and against any Damages arising out of,
resulting from, or relating to, and to pay Employee on demand the full amount of
any sum which Employee becomes legally obligated to pay on account of, the
breach of any provision of Employee's agreement with Pulte Home Corporation,
dated December 5, 1997, as a result of any acquisition of the Company by, any
business combination by the Company with, or any other activity of the Company
with, another business, all to the extent any of the foregoing causes the
Company to become owned or controlled by a home builder on or before December
31, 1999.
10. DEFINITIONS.
10.1 Confidential Information means and includes all information known or
used by the Company or its Affiliates in the Company's Business or otherwise
and/or developed by or for the Company or its Affiliates by any person,
including Employee, which is maintained as confidential by the Company and is
not otherwise explicitly, consciously, properly, legally and generally known
(unless it is generally known as a result of a breach of this Agreement or any
similar agreement) in any industry in which the Company or its Affiliates is or
may become engaged. Confidential Information does not include general skills and
general knowledge obtained by reason of Employee's employment with the Company.
Confidential Information specifically includes, but is not limited to, such
information, whether now possessed or later obtained, concerning plans,
marketing, sales and inventory methods, materials, processes, methods,
procedures, devices used by the Company or its predecessors or successors,
business forms, prices, investors, suppliers, organizations or other entities
with which the Company or its predecessors or successors deals, contractors,
representatives and customers of the Company or its predecessors or successors,
plans for the development of new products and services and expansion into new
areas or markets, internal operations, financial data, financial plans,
salaries, commissions, purchasing policies, bidding practices or procedures,
pricing policies, advertising practices, scripting techniques, customer
identities and lists, formulas, patterns, source codes, trade secrets, and other
proprietary or confidential information of any type, together with all written,
graphic and other materials relating to all or any part of the same.
10.2 Affiliates means and includes every person or entity who is on the
date of this Agreement or becomes during the Term, directly or indirectly, a
shareholder, director, officer, partially- or wholly-owned subsidiary, sister
corporation, parent corporation, successor, successor in interest or permitted
assignee of the Company.
10.3 Company's Business means and includes the business of marketing,
originating, selling and servicing loans, secured primarily by first or junior
mortgages on one- to four-family, owner occupied residences in any county of any
state in which (1) the Company or any Subsidiary is operating a prime or
sub-prime mortgage loan origination office, or (2) the Company is licensed, or
exempt from licensing, to originate prime or sub-prime mortgages.
11. MISCELLANEOUS.
11.1 Representation. Employee represents and warrants that Employee is not
now a party to or bound in any way by any agreement, commitment, obligation or
company policy
9
<PAGE> 10
(written or otherwise), including any with any former employer, which in any way
restricts Employee's ability to enter into, or perform Employee's obligations
under, this Agreement or under which a breach or default occurs, or with notice,
lapse of time or both will occur, as a result of Employee's entry into, or
performance of Employee's obligations under, this Agreement.
11.2 Press Releases. Before it is released to the public, the Company shall
provide Employee with a copy of any press release with a subject matter relating
to Employee or the position of President of the Company that is proposed to be
released during the Term, and, except as required by law, the Company shall not
release such press release to the public without Employee's approval, which
approval shall not be unreasonably withheld.
11.3 Cooperation Regarding Life Insurance. Employee shall cooperate with
the Company in connection with its obtaining any life insurance policy on
Employee's life, including having a physical examination.
11.4 Exclusive Remedy. Employee's exclusive remedy against the Company for
breach of this Agreement is the collection of any compensation due Employee
provided in Sections 3, 4.3 and 4.4.
11.5 Notices. Any notice or other communication required or which may be
given under this Agreement shall be in writing and either delivered personally
to the addressee, telegraphed, telecopied or telexed to the addressee, sent by
overnight courier to the addressee or mailed, certified or registered mail,
postage prepaid, and shall be deemed given when so delivered personally,
telegraphed, telecopied or telexed to the addressee, or, if sent by overnight
courier, on the day delivery is guaranteed by such courier, or if mailed, three
business days after the date of mailing, to his last known residence, in the
case of Employee, or to its principal office, in the case of the Company.
Employee or the Company may change its address for notices by notice to the
other party.
11.6 Assignment. Employee may not assign, transfer or delegate his rights
or obligations under this Agreement and any attempt to do so shall be void. This
Agreement shall be binding upon and shall inure to the benefit of the Company
and its successors and assigns.
11.7 Entire Agreement; Amendment; Waiver; Headings; Counterparts. This
Agreement embodies the entire agreement and understanding of the parties with
respect to the subject matter of this Agreement. This Agreement may be amended,
modified, superseded, cancelled, renewed or extended only by a writing signed by
the parties. No waiver of any provision of this Agreement shall be valid unless
in writing and signed by the party against whom enforcement of the waiver is
sought. The waiver by either party of any provision of this Agreement shall not
operate or be construed as a waiver of any subsequent breach. The headings
contained in this Agreement are solely for the purpose of reference, are not
part of the agreement of the parties and shall not in any way affect the meaning
or interpretation of this Agreement. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. This Agreement may be
executed by facsimile signatures.
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<PAGE> 11
11.8 Severability. The provisions of this Agreement shall be deemed
severable, and if any part of any provision is determined to be illegal, invalid
or unenforceable, such illegality, invalidity or unenforceability shall have no
effect on the other provisions of this Agreement, which shall remain valid,
operative and enforceable. In addition, in lieu of such illegal, invalid or
unenforceable provision, there shall be added automatically as part of this
Agreement a provision as similar in terms to such illegal, invalid or
unenforceable provision as may be possible and be legal, valid and enforceable.
11.9 Continuing Obligations. The following provisions of this Agreement
shall continue and shall survive the termination of Employee's employment under
this Agreement and the Term: Sections 4.3, 4.4, 5, 6, 7, 9, 10 and 11.
11.10 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.
11.11 Attorneys' Fees. If any party commences an action against any other
party to enforce any of the terms, covenants, conditions or provisions of this
Agreement or because of a breach by a party under this Agreement, the prevailing
party in any such action shall be entitled to recover its reasonable attorneys'
fees, costs and expenses incurred in connection with the prosecution or defense
of such action from the losing party.
11.12 Prior Agreement. This Agreement supersedes all previous employment
agreements between the parties, including the Employment Agreement, dated as of
June 14, 1999, between the Company and Employee, which original agreement shall
have no further force or effect.
IN WITNESS WHEREOF, the parties have executed this Agreement with effect as
of the date first above written.
ROCK FINANCIAL CORPORATION
By:__________________________________________________
Its:________________________________________
EMPLOYEE: _____________________________________________________
MICHAEL D. HOLLERBACH
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<PAGE> 12
STOCK OPTION AGREEMENT
Dated as of: June 14, 1999
To: Michael D. Hollerbach
Pursuant to the Amended and Restated Rock Financial Corporation 1996
Stock Option Plan ("1996 Plan"), Rock Financial Corporation (the "Company")
hereby grants you an option (the "Option") to purchase Fifty Thousand (50,000)
Common Shares, par value $0.01 per share, of the Company (the "Shares") at
$ . per Share, upon the terms and conditions contained in this Stock Option
Agreement and in the 1996 Plan, as amended from time to time, a copy of which is
attached to, and, as that 1996 Plan may be amended from time to time, is made a
part of, this Stock Option Agreement.
1. Nonqualified Option. The Option is intended to be a Nonqualified
Option, as defined in the 1996 Plan.
2. Transferability. The Option may not be transferred by you otherwise
than by will or by the laws of descent and distribution and, during your
lifetime, the Option is exercisable only by you.
3. Vesting. Subject to the other terms contained in this Stock Option
Agreement and in the 1996 Plan, you may exercise the Option in accordance with
the following schedule:
(a) Before June 14, 2000, you may not purchase any of the
Shares.
(b) Beginning on June 14, 2000, you may purchase up to 20% of
the Shares.
(c) Beginning on June 14, 2001, you may purchase up to
40% of the Shares, including Shares previously
purchased.
(d) Beginning on June 14, 2002, you may purchase up to
60% of the Shares, including Shares previously
purchased.
(e) Beginning on June 14, 2003, you may purchase up to
80% of the Shares, including Shares previously
purchased.
(f) Beginning on June 14, 2004, you may purchase up to
100% of the Shares, including Shares previously
purchased.
<PAGE> 13
4. Term.
(a) General Term. Subject to earlier termination of the Option
upon your death, permanent disability or termination of employment with the
Company (voluntarily or involuntarily and with or without cause), which are
governed by Paragraph 13 of the 1996 Plan, the Option will expire (to the extent
not previously exercised) on the tenth anniversary of the date of this Stock
Option Agreement.
(b) Special Termination Provisions. The purpose of the 1996
Plan is to provide key employees with an increased incentive to make significant
and extraordinary contributions to the long-term performance and growth of the
Company and its Subsidiaries, to join the interests of key employees with the
interests of the shareholders of the Company, and to facilitate attracting and
retaining key employees of exceptional ability. You acknowledge that the Company
expends considerable time, money and resources in recruiting, training and
developing the skills and abilities of its employees, developing business
relationships with referral sources and customers so as to improve the good will
of the Company, establishing and maintaining close business relationships
between employees and the Company's customers and obtaining, compiling and
developing confidential customer lists, various internal computer reports and
other proprietary business information not readily available to the public or
through other sources. You agree that the provisions in this Section 4 are
necessary to preserve and protect the legitimate business interests of the
Company. In return for granting this Option to you, notwithstanding any other
term of this Option to the contrary, you agree to the following:
(1) Forfeiture of Option Gain if You Leave the Company Within
One Year After Exercise. If you exercise any portion of this Option and
your employment with the Company terminates within one year after such
exercise for any reason except death, disability, normal retirement or
termination by the Company without "cause", then the gain represented
by the fair market value of a Share, determined pursuant to Paragraph 8
of the 1996 Plan, on the date of such exercise over the exercise price,
multiplied by the number of Shares you purchased ("option gain"),
without regard to any subsequent increase or decrease in fair market
value, shall be paid by you to the Company.
(2) Forfeiture of Option Gain and Unexercised Options if You
Engage In Certain Activities. If, at any time within (i) one year after
termination of your employment with the Company, or (ii) one year after
you exercise any portion of this Option, whichever is later, you engage
in any activity in competition with any activity of the Company or
inimical, contrary or harmful to the interests of the Company,
including, but not limited to,
(A) conduct related to your employment for which either
criminal or civil penalties against you may be sought,
(B) violation of published Company policies, including,
without limitation, the Company's insider trading policy,
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<PAGE> 14
(C) owning, maintaining, operating or engaging in
the same or similar line of business or activity
as the Company or any Subsidiary or in any business or
activity that competes with the Company or any Subsidiary
("Competing Business") in any county of any state in which (1)
the Company or any Subsidiary is operating a prime or
sub-prime mortgage loan origination office, or (2) the Company
is licensed, or exempt from licensing, to originate prime or
sub-prime mortgages,
(D) accepting employment with or serving as a
consultant, advisor or in any other capacity to an employer
(including, without limitation, any individual, firm, agency,
partnership, limited liability company, unincorporated
association, corporation or pre-incorporated association
("Person or Entity")) that is a Competing Business or is
acting against the interests of the Company or any Subsidiary,
(E) undertaking any efforts or activities toward
pre-incorporating, incorporating, financing or commencing any
Competing Business,
(F) advising, serving, or consulting with any
Person or Entity which is or will be undertaking efforts
towards incorporating, financing or commencing any Competing
Business or activity which engages in a Competing Business,
(G) employing, offering employment to, soliciting
for the purpose of employing or recruiting any present, former
or future employee of the Company or any Subsidiary for or on
behalf of any Person or Entity,
(H) calling upon, soliciting, diverting or
referring to any Person or Entity customers or referral
sources of the Company or any Subsidiary who have conducted
business with the Company or any Subsidiary within the two
years before the time in question,
(I) disclosing, copying, communicating,
distributing, revealing, or using any confidential
information, material, trade secrets, proprietary information,
or confidential business information concerning the Company,
any Subsidiary or any of their customers ("Confidential
Information"), except as your employment duties with the
Company or a Subsidiary may require during your employment
with the Company or a Subsidiary,
(J) failing to return any Confidential
Information or any documents, records, files, lists and the
like (including originals and copies) containing Confidential
Information immediately upon your termination or separation of
employment with the Company or any Subsidiary, or
(K) participating in a hostile takeover attempt
of the Company or any Subsidiary,
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<PAGE> 15
then (y) this Option shall terminate effective on the date on which you
enter into such activity, unless terminated sooner by operation of
another term or condition of this Stock Option Agreement or the 1996
Plan, and (z) any option gain realized by you from exercising all or a
portion of this Option shall be paid by you to the Company.
(3) Right of Set-off. By accepting this Option, you
consent to a deduction from any amounts the Company or any Subsidiary
owes to you from time to time (including amounts owed to you as wages
or other compensation, fringe benefits, or vacation pay, as well as any
other amounts owed to you by the Company or any Subsidiary), to the
extent of the amounts you owe the Company under Sections 4(b)(1) and
4(b)(2) above. Whether or not the Company elects to make any set-off in
whole or in part, if the Company does not recover by means of set-off
the full amount you owe it, calculated as set forth above, you agree to
pay immediately the unpaid balance to the Company.
(4) Committee Discretion. You may be released from
all or any portion of your obligations under Sections 4(b)(1), 4(b)(2)
and 4(b)(3) above only if the Committee (or its duly appointed agent)
determines in its Discretion that such action is in the best interests
of the Company.
(c) Cause. For purposes of this Option, "cause" has the same
meaning as in your employment agreement with the Company, if any, or if you do
not have an employment agreement with the Company, "cause" means the occurrence
of any of the following:
(1) A material breach of any term or provision of
your employment agreement, if any, with the Company or a Subsidiary,
the Company's Employee Handbook, or this Stock Option Agreement.
(2) Your failure to perform your duties of employment
in a reasonable and business-like manner.
(3) Your conviction of a felony or any crime
involving moral turpitude, including, without limitation, crimes
involving drugs or liquor, regardless of whether appealed.
(4) Your commission of, or participation in, any act
of fraud, false pretense, forgery, embezzlement or dishonesty against
the Company or any Subsidiary.
(5) Your commission of, or participation in, any
other act or omission, wantonly, willfully, or recklessly, or in a
manner that is negligent against, and having an adverse effect upon,
the affairs of the Company or any Subsidiary.
(6) Your substantial dependence on any mind altering
or other harmful substance, including, without limitation, alcohol,
marijuana, amphetamines, barbiturates, LSD, cocaine, narcotic drugs, or
any natural or synthetic substance having the same or
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<PAGE> 16
similar effects as any of the foregoing, to the extent that such use
would constitute reasonable cause for termination under applicable law.
5. Exercise of the Option. The Option shall be exercised by giving a
written notice of exercise to the Treasurer of the Company. Such notice shall
specify the number of Shares to be purchased and shall be accompanied by payment
in full in cash (or in such other manner as is approved by the Committee
pursuant to the 1996 Plan) of the aggregate option price for the number of
Shares purchased and by the representation required by Paragraph 14 of the 1996
Plan if the Shares to be issued under the 1996 Plan have not been registered
under the Securities Act of 1933. Such exercise shall be effective only upon the
actual receipt of such written notice and such exercise price, and no rights or
privileges of a shareholder of the Company in respect of any of the Shares
issuable upon the exercise of any part of the Option shall inure to you, or any
other person entitled to exercise the Option, unless and until certificates
representing such Shares shall have been issued.
6. No Employment Rights. Nothing contained in the 1996 Plan or in this
Stock Option Agreement, nor any action taken by the Committee, shall confer upon
you any right with respect to the continuation of your employment by the Company
or any Subsidiary, nor interfere in any way with the right of the Company or a
Subsidiary to terminate your employment at any time, and your employment is and
will remain employment at will, unless otherwise provided pursuant to a written
employment agreement between you and the Company.
7. Income Tax Withholding Requirements. If upon or as a result of your
exercise of the Option there shall be payable by the Company or any Subsidiary
any amount for income tax withholding, you will pay such amount to the Company
to reimburse it for such income tax withholding.
8. Entire Agreement. This Stock Option Agreement, including the 1996
Plan, are the entire agreement between you and the Company with respect to the
subject matter of this Stock Option Agreement, and any prior or contemporaneous
understandings, arrangements or agreements are superseded by this Stock Option
Agreement and the 1996 Plan and are merged into this Stock Option Agreement.
9. Governing Law and Choice of Forum. The laws of the State of Michigan
shall govern this Stock Option Agreement, its construction, and the
determination of any rights, duties or remedies of the parties arising out of or
relating to this Stock Option Agreement. The parties acknowledge that the United
States District Court for the Eastern District of Michigan or the Michigan
Circuit Court for the County of Oakland shall have exclusive jurisdiction over
any case or controversy arising out of or relating to this Stock Option
Agreement and that all litigation arising out of or relating to this Stock
Option Agreement shall be commenced in the United States District Court for the
Eastern District of Michigan or the Oakland County (Michigan) Circuit Court. You
irrevocably consent to the jurisdiction of the United States District Court for
the Eastern District of Michigan and the Oakland County (Michigan) Circuit Court
in connection with all actions and proceedings arising out of, or in any way
related to, this Stock Option Agreement.
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<PAGE> 17
10. Committee and Board of Directors Determinations Conclusive. Each
determination, interpretation, or other action made or taken pursuant to, or
related to, the provisions of the 1996 Plan or this Stock Option Agreement by
the Committee or the Company's Board of Directors shall be final and shall be
binding and conclusive for all purposes on you and the Company and our
respective successors in interest.
11. Reimbursement of Certain Costs & Fees. Notwithstanding any term to
the contrary, you agree to reimburse the Company (including its officers and
directors) for all costs and fees incurred by the Company (or its officers and
directors) in response to or defense of any claim, demand or legal action
made/undertaken by you (or your representatives on your behalf) with respect to
which you do not prevail in full that is in any way related to: (i) any
determination, interpretation, or action undertaken by the Board of Directors or
Committee operating thereunder with respect to the Stock Option Agreement or the
1996 Plan, or (ii) enforcement of or any claim of breach or default under the
Stock Option Agreement. For purposes of this Stock Option Agreement, the term
"costs and fees" includes, without limitation, all court costs, legal expenses
and reasonable attorney fees (whether inside or outside counsel is used) whether
or not a lawsuit or other form of legal action is instituted, and if a lawsuit
or other legal action is instituted, whether at the trial or appellate court
level.
12. Notices. Any and all notices, designations, consents, offers,
acceptances or other communications provided for in this Stock Option Agreement
shall be given in writing and shall be delivered in person, sent by certified or
registered mail, sent by facsimile or similar method of transmission or sent by
overnight courier, addressed in the case of the Company to its principal office
and in the case of you to your address appearing on the stock records of the
Company or such other address as may be designated by you by notice to the
Company.
13. Prior Agreement. This Stock Option Agreement supersedes all
previous stock option agreements between the parties, including the Stock Option
Agreement, dated as of June 14, 1999, between the Company and Employee, which
original agreement shall have no further force or effect.
Very truly yours,
ROCK FINANCIAL CORPORATION,
a Michigan corporation
By:____________________________________________
Daniel Gilbert
Its: Chief Executive Officer
The above is agreed to and
accepted.
By:___________________________
Michael D. Hollerbach
Dated:________________________
6
<PAGE> 1
EXHIBIT 10.2
MORTGAGE WAREHOUSING AGREEMENT
MICHIGAN NATIONAL BANK
AND
ROCK HOME LOANS AT MICHIGAN NATIONAL
APRIL 8, 1999
<PAGE> 2
THIS MORTGAGE WAREHOUSING AGREEMENT is made and entered into as of this
8th day of April, 1999, by and between Michigan National Bank, a national
banking association ("Bank"), and Rock Home Loans at Michigan National, L.L.C.,
a Michigan limited liability company ("Borrower").
WITNESSETH
WHEREAS, Bank and Borrower desire to enter into an agreement under
which Bank will extend credit to Borrower to finance the origination and sale of
Mortgage Warehousing Loans (as defined below); and
WHEREAS, Bank and Borrower desire to establish the terms and conditions
for such financing by Bank of Mortgage Warehousing Loans.
NOW, THEREFORE, in consideration of the premises and mutual promises
herein contained, Bank and Borrower agree as follows:
1. DEFINITIONS.
1.01 For all purposes of this Agreement, except as otherwise expressly
provided or unless the context otherwise requires, the terms defined in this
Paragraph shall have the meanings assigned to them in this Paragraph and include
the plural as well as the singular.
1.02 The terms which follow have the meanings herein ascribed to them:
Accumulated Funding Deficiency means a funding deficiency described in
Section 302 of ERISA.
Advance means each separate advance of the Loan made hereunder from
time to time.
Affiliate means, as to any Person, any other person directly or
indirectly controlling, controlled by or under direct or indirect common control
with, such Person, whether through the
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<PAGE> 3
ownership of voting securities, by contract or otherwise. "Control" as used
herein means the power to direct the management and policies of such Person.
Aged Mortgage Loan means a Mortgage Loan (i) which would be an Eligible
Mortgage Loan except for noncompliance with subsections (d) and/or (q) of the
definition of Eligible Mortgage Loan, or (ii) which would be a Second Mortgage
Loan except for noncompliance with subsection (c) of the definition of Second
Mortgage Loan, and (iii) has not been included in the Borrowing Base for more
than two hundred seventy (270) days, and (iv) upon which no payment is more than
one hundred twenty (120) days past the payment due date set forth in the
underlying promissory note and deed of trust or mortgage, and no foreclosure
proceedings have been instituted.
Aged Mortgage Loan Advance means an Advance against the Borrowing Base
value of Aged Mortgage Loans.
Agreement means this Agreement as executed as of the date first above
written or, if amended or supplemented as herein provided, as so amended or
supplemented.
Bailee Letter means a letter in the form of Exhibit 9 attached to the
Custodial Agreement.
Borrower's Property in Possession of Collateral Custodian or Bank means
goods, securities, stocks, bonds, notes, instruments, documents, policies and
certificates of insurance, deposits, money or other property now owned or later
acquired by Borrower or in which Borrower now has or later acquires an interest
and which are now or later in the possession of Collateral Custodian or Bank, or
as to which Collateral Custodian or Bank now or later control possession by
documents or otherwise. Borrowing Base means:
(a) For Conforming Mortgage Loan Advances which are Committed Mortgage
Loans, ninety-nine percent (99%) of the lesser of (i) the principal amount of,
or (ii) the Committed Purchase
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<PAGE> 4
Price (if applicable) for, (A) all Committed Mortgage Loans in Collateral
Custodian's possession, and (B) all Committed Pre-warehouse Loans, plus
(b) For Conforming Mortgage Loan Advances which are Uncommitted
Mortgage Loan Advances, the lesser of (i) ninety-five percent (95%) of the
principal amount or Cost (if applicable), whichever is less, of (A) all
Uncommitted Mortgage Loans in Collateral Custodian's possession, and (B) all
Uncommitted Pre-warehouse Loans, or (ii) Five Hundred Thousand Dollars
($500,000.00), plus
(c) For Non-Conforming Mortgage Loan Advances which are Committed
Mortgage Loans, the lesser of (i) ninety-eight percent (98%) of the lesser of
(A) the principal amount of each Non-Conforming Mortgage Loan, or (B) the
Committed Purchase Price based on a commitment from Rock financial Corporation
or other Investor, or (ii) Five Million Dollars ($5,000,000), plus
(d) For Second Mortgage Loan Advances which are Committed Mortgage
Loans, the lesser of:
(i) all Second Mortgage Loans, ninety-five per cent (95%) of
the lesser of (1) the principal amount of each Second Mortgage
Loan, or (2) the Committed Purchase Price based on a
commitment from Rock Financial Corporation or other Investor
for each such Second Mortgage Loan, or
(ii) Five Hundred Thousand Dollars ($500,000), plus
(e) For Aged Mortgage Loan Advances, the lesser of
(i)(a) with respect to all Aged Mortgage Loans upon which any
payment is sixty (60) days or more past due the
payment due date set forth in the underlying
promissory note and deed of trust (or mortgage),
eighty percent (80%) of the lesser of (1) the
principal amount of such Aged
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<PAGE> 5
Mortgage Loan, or (2) if said Aged Mortgage Loan
meets all FNMA, FHLMC, FHA, VA or MSHDA conditions
for purchase at the time made, the Market Value for,
each such Aged Mortgage Loan, plus
(b) with respect to all Aged Mortgage Loans upon which
any payment thereunder is less than sixty (60) days
past due the payment due date set forth in the
underlying promissory note and deed of trust (or
mortgage), ninety percent (90%) of the lesser of (1)
the principal amount of such Aged Mortgage Loan, or
(2) if said Aged Mortgage Loan meets all FNMA, FHLMC,
FHA, VA or MSHDA conditions for purchase at the time
made, the Market Value for, each such Aged Mortgage
Loan, or
(ii) Five Hundred Thousand Dollars ($500,000), provided,
however, that the principal amount of all Pre-warehouse
Loans included in the Borrowing Base shall not exceed
$1,000,000, and provided that no Unfunded Drafts may be
used to calculate the Borrowing Base.
Borrowing Base Certificate means a certificate in form satisfactory to
Bank showing a calculation of the Borrowing Base as of a certain date.
Borrowing Base Report means a report prepared by Collateral Custodian
which summarizes the contents of the Borrowing Base, in form satisfactory to
Bank.
Collateral means Mortgage Loans, Mortgage Notes, Mortgages and all
other documents, property rights, proceeds and payments relating to (a) Mortgage
Loans which secure the Loan; and (b) all other collateral of Borrower
hereinafter described in Section 3.01.01 of this Agreement, and/or from time to
time deposited with, delivered or to be delivered to or held by Collateral
Custodian
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pursuant to this Agreement and under the terms of the Custodial Agreement, and
the proceeds thereof in each case, whether now or hereafter arising.
Collateral Custodian means Comerica Bank, a Michigan banking
corporation, pursuant to the terms of the Custodial Agreement.
Committed Mortgage Loan means an Eligible Mortgage Loan as to which
Collateral Custodian has received a Take-Out Commitment.
Committed Mortgage Loan Advance means an Advance against the Borrowing
Base value of Committed Mortgage Loans.
Committed Pre-warehouse Loan means a Pre-warehouse Loan as to which
Collateral Custodian has received a Take-Out Commitment.
Committed Purchase Price means, with respect to a Mortgage Loan, the
price at which the Investor under the applicable Take-Out Commitment has agreed
to purchase said Mortgage Loan (less any fees or other compensation due
Investor).
Conforming Mortgage Loan shall be an Eligible Mortgage Loan or
Pre-warehouse Loan which: (1) meets all FNMA or FHLMC conditions for purchase at
the time made, except for conditions regarding the loan amount in the case of
Jumbo Loans and Super Jumbo Loans; or, (2) which meets all agency guidelines for
a FHA, VA or MSHDA Mortgage Loan (as applicable); or,(3) is a Mortgage Loan for
which Bank has issued a Take-Out Commitment.
Conforming Mortgage Loan Advance means an Advance against the Borrowing
Base value of Conforming Mortgage Loans.
Cost means the acquisition price of a Mortgage Loan, net of discount
points and fees associated with yield.
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Current Assets means, as of any applicable date of determination, all
assets of a person that should be classified as current in accordance with GAAP,
including without limitation cash, non-affiliated customer receivables, United
States government securities, claims against the United States government, and
inventories, but excluding:
(a) Investments or securities in any corporation not listed on the New
York Stock Exchange, NASDAQ National Market or the American Stock Exchange;
(b) Investments or securities in any limited liability company,
partnership, limited partnership, joint venture or other business venture or
legal entity;
(c) Investments or securities in any options or derivatives;
(d) Investments or securities in any corporation to the extent to which
the cost basis of Borrower's securities exceeds twenty-five percent (25%) of the
Tangible Net Worth of Borrower as calculated without the inclusion of such
investments or securities; and
(e) Investments or securities in any corporation in which Borrower owns
in excess of a four percent (4%) ownership interest.
Current Liabilities means, as of any applicable date of determination,
all liabilities of a person that should be classified as current in accordance
with GAAP, including without limitation any portion of the principal of the Note
classified as current.
Current Ratio means Current Assets divided by Current Liabilities.
Custodial Agreement means the Custodial Agreement by and among
Borrower, Bank, and Collateral Custodian dated April 8, 1999, as the same may be
amended from time to time.
DDA Account means Borrower's demand deposit account with Bank.
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<PAGE> 8
Draft means a draft on Borrower's Restricted Account which is signed by
the Borrower and presented to a title company or other closing agent for purpose
of closing a Mortgage Loan.
Eligible Mortgage Loan means a Mortgage Loan with respect to which each
of the following statements shall be accurate and complete (and Borrower by
including such Mortgage Loan in any computation of the Borrowing Base shall be
deemed to so represent and warrant to the Collateral Custodian and the Bank as
of the date of such computation):
(a) Said Mortgage Loan is a binding and valid obligation of the obligor
thereon, in full force and effect and enforceable in accordance with its terms.
(b) Said Mortgage Loan is genuine in all respects as appearing on its
face and as represented in the books and records of Borrower and all information
set forth therein is true and correct.
(c) Said Mortgage Loan is free of any default of any party thereto
(including Borrower), other than as expressly permitted pursuant to subparagraph
(d) below, counterclaims, offsets and defenses and from any rescission,
cancellation or avoidance, and all right thereof, whether by operation of law or
otherwise.
(d) No payment under said Mortgage Loan is more than fifty-nine (59)
days past the payment due date set forth in the underlying promissory note and
deed of trust (or mortgage).
(e) Said Mortgage Loan contains the entire agreement of the parties
thereto with respect to the subject matter thereof, has not been modified or
amended in any respect and is free of concessions or understandings with the
obligor thereon of any kind not expressed in writing therein.
(f) Said Mortgage Loan is in all respects in compliance with all
applicable laws and regulations governing the same, including, without
limitation, the federal Consumer Credit Protection Act and the regulations
promulgated thereunder and all applicable usury laws and restrictions, and
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<PAGE> 9
all notices, disclosures and other statements or information required by law
or regulation to be given, and any other act required by law or regulation to be
performed, in connection with said Mortgage Loan have been given and performed
as required.
(g) All advance payments and other deposits required to be paid on said
Mortgage Loan have been paid in cash, and no part of said sums has been loaned,
directly or indirectly, by Borrower to the obligor and there have been no
prepayments on account of said Mortgage Loan.
(h) At all times, said Mortgage Loan will be free and clear of all
liens, except in favor of Borrower and assigned to Bank.
(i) The property covered by said Mortgage Loan is insured against loss
or damage by fire, flood (when required by the Investor) and all other hazards
normally included within standard extended coverage in accordance with the
provisions of said Mortgage Loan with Borrower named as a loss payee thereon.
(j) The property covered by said Mortgage Loan is free and clear of all
liens, except (i) Borrower's first mortgage loan, (ii) liens for real estate
taxes, special assessments and the like which are not delinquent, and (iii)
liens which are subordinate to the lien of the Mortgage Loan.
(k) As to those Mortgage Loans represented by Borrower to be covered by
a Take-Out Commitment, the Take-Out Commitment is in full force and effect, and
Borrower and the Mortgage Loan are in full compliance therewith.
(l) The date of the underlying promissory note is no earlier than
thirty (30) days prior to the date said Mortgage Loan is first included in the
Borrowing Base and Collateral Custodian has received an advice from Borrower
directing it to pay a Draft on said Mortgage Loan.
(m) If said Mortgage Loan is FHA insured or VA guaranteed, such
insurance or guaranty (or a binding commitment to issue such insurance or
guaranty) is in full force and effect.
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<PAGE> 10
(n) The improvements on the property consist of a completed one-to-four
unit single family residence, including but not limited to a condominium,
planned unit development or townhouse but excluding in any event a co-op.
(o) There has been delivered to the Collateral Custodian the Required
Documents or the Pre-warehouse Required Documents.
(p) Said Mortgage Loan is not subject to any servicing arrangement with
any person other than Borrower or Borrower's sub-servicer, nor are any servicing
rights relating to said Mortgage Loan subject to any lien, claim, interest or
negative pledge in favor of any person other than Collateral Custodian for and
on behalf of Bank.
(q) Said Mortgage Loan has not been included in the Borrowing Base for
more than ninety (90) days.
(r) Said Mortgage Loan has not previously been included in the
Borrowing Base.
(s) The Borrower has obtained an appraisal in connection with the
origination of said Mortgage Loan which would satisfy all appraisal requirements
for said Mortgage Loan if such had been originated by a federally insured
depository institution; provided, however, that no such appraisal shall be
required for a Second Mortgage Loan (i) where the Investor for such Second
Mortgage Loan has issued a Take-Out Commitment therefor and has not required an
appraisal for such Second Mortgage Loan, or (ii) with an original principal
amount of less than $40,000.
(t) If the Mortgage Loan has been sent to an Investor, not more than
forty-five (45) days have elapsed from the date of delivery, unless the Mortgage
Loan has been returned to the Collateral Custodian.
(u) If the Mortgage Note or other Required Document has been released
to Borrower, not more than ten (10) days shall have elapsed from the date of
delivery to Borrower.
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(v) Super Jumbo Loans shall be Eligible Mortgage Loans only if a
Take-Out Commitment exists for such loans.
(w) Jumbo Loans shall be Eligible Mortgage Loans.
ERISA means the Employee Retirement Income Security Act of 1974, as the
same may from time to time be supplemented or amended, and the rules and
regulations issued thereunder, as in effect from time to time.
ERISA Affiliate means each trade or business, including Borrower,
whether or not incorporated, that, together with Borrower would be treated as a
single employer under Section 4001 of ERISA.
Event of Default means an event or condition listed under Section 9.01
of this Agreement.
FHA means the Federal Housing Administration and any successor thereto
or to the functions thereof.
FHA Mortgage Loans means Mortgage Loans within acceptable limits to and
insured, or committed to be insured, by the FHA, and evidenced by instruments
and documents which comply, and arising from a transaction which complies, in
all respects, with the requirements of the FHA.
FHLMC means the Federal Home Loan Mortgage Corporation and any
successor thereto or to the functions thereof.
FNMA means the Federal National Mortgage Association and any successor
thereto or to the functions thereof.
GAAP means generally accepted accounting principles consistently
applied.
GNMA means the Government National Mortgage Association and any
successor thereto or to the functions thereof.
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<PAGE> 12
Governmental Authority means any nation or government, any state or
other political subdivision thereof, and any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government.
Indebtedness means any and all sums, indebtedness and liabilities of
any and every kind now owing or later to become due from Borrower to Bank under
this Agreement or to Bank or Collateral Custodian under the terms of the
Custodial Agreement, whether joint or several, contingent or absolute, now
existing or later arising, and however created incurred, evidenced, acquired or
arising, and any and all modifications, renewals or extensions of it.
Investor means a bank, trust company, savings and loan association,
pension fund, governmental authority, insurance company, institutional investor,
investment brokerage firm, mortgage banker, or other entity, determined by Bank,
in its sole discretion, to be acceptable. A list of approved Investors for
Conforming Mortgage Loans, Non-Conforming Mortgage Loans and Second Mortgage
Loans is attached hereto as Exhibit E, which list may be changed from time to
time by Bank.
Jumbo Loan means a Mortgage Loan which exceeds the maximum loan amount
permitted by then current FNMA or FHLMC purchase guidelines but otherwise meets
FHLMC or FNMA purchase criteria and does not exceed $750,000.
Leverage Ratio means a fraction, determined as of the pertinent
financial statement date, the numerator of which is the sum total of Borrower's
outstanding Liabilities plus the unadvanced amount of the Loan and the
denominator of which is Tangible Net Worth, all determined in accordance with
GAAP.
Liabilities means all indebtedness that, in accordance with generally
accepted accounting principles consistently applied, should be classified as
liabilities on a balance sheet of Borrower.
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<PAGE> 13
Loan means a $50,000,000 mortgage warehouse facility which MNB shall
advance subject to the terms and conditions of this Agreement.
Loan Documents means this Agreement and all documents evidencing or
securing the Loan.
Market Value means an amount determined by Bank from time to time, in
its sole discretion, to be the amount an Investor would pay to purchase a
particular Mortgage Loan.
Maximum Loan Amount means $50,000,000, subject to Section 12 hereof.
Members' Equity means the following, as set forth in Borrower's balance
sheet prepared in accordance with GAAP: (a) the par or stated value of all
outstanding Member's interests; plus (b) capital surplus; plus (c) retained
earnings; less (d) declared dividends not yet paid.
Mortgage means a mortgage or a deed of trust on real estate, and
securing a Mortgage Loan and also creating a valid first lien on the fee simple
title to real estate referred therein subject only to
(a) liens for taxes, not yet due and payable, special assessments or
similar governmental charges not yet due and payable or still subject to payment
without interest or penalty;
(b) zoning restrictions, utility easements, covenants, or conditions
and restrictions of record, which shall neither defeat nor render invalid such
lien or the priority thereof, nor materially impair the marketability or value
of such real estate, nor be violated by the existing improvements or the
intended use thereof;
(c) subordinate liens.
In the case of Second Mortgage Loans, subject only to a first mortgage and
such other prior liens as may have been approved in writing by Bank.
Mortgage Loan means a loan evidenced by a Mortgage Note and secured by
a Mortgage covering a fee simple interest in residential (1- 4 unit single
family) real property and all improvements located thereon located in the United
States.
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<PAGE> 14
Mortgage Note means a valid and binding note, bond or other evidence of
indebtedness evidencing a Mortgage Loan and secured by a Mortgage, which
(a) was executed by a bona fide third person who has capacity to
contract;
(b) matures in thirty (30) years or less; and
(c) complies with any other terms as may be required in writing in
advance of the closing date by Bank, from time to time.
Mortgage Warehousing Advance means a Conforming Mortgage Loan Advance,
a Non-Conforming Mortgage Loan Advance, a Committed Mortgage Loan Advance, an
Uncommitted Mortgage Loan Advance, a Second Mortgage Loan Advance or an Aged
Mortgage Loan Advance made in accordance with the terms of this Agreement.
Mortgage Warehousing Loan means a Conforming Mortgage Loan, a
NonConforming Mortgage Loan, a Committed Mortgage Loan, an Uncommitted Mortgage
Loan, a Pre-warehouse Loan, a Second Mortgage Loan or an Aged Mortgage Loan.
MSHDA means the Michigan State Housing Development Authority.
Multiemployer Plan means a plan described in Section 4001(a)(3) of
ERISA to which Borrower or any ERISA Affiliate is required to contribute on
behalf of any of its employees.
Non-Conforming Mortgage Loan shall be a Mortgage Loan which (i) is a
Committed Mortgage Loan or an Uncommitted Mortgage Loan, but which does not meet
all FNMA or FHLMC conditions for purchase at the time made, (ii) at the time of
origination had a principal balance that (A) did not exceed eighty percent (80%)
of the appraised value of the real estate and improvements securing such
Mortgage Loan unless private mortgage insurance was obtained covering such
Mortgage Loan or the Investor did not require such insurance, or if such
Mortgage Loan is an Uncommitted Mortgage Loan, an ordinary and prudent Investor
would not require such insurance
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<PAGE> 15
as determined by Bank, and (B) did not exceed ninety-five percent (95%) of such
appraised value in any event, (iii) has a term of not more than thirty (30)
years, (iv) if Collateral Custodian has received a Take-Out Commitment with
respect to the Mortgage Loan identifying the Investor and the Committed Purchase
Price, the Mortgage Loan meets all of the then current requirements for sale to
an Investor purchasing such type of Mortgage Loan from Borrower, (v) has an
outstanding principal balance of less than $600,000 on the date the Required
Documents are delivered to Collateral Custodian (however, this limitation will
not apply if Bank has issued a Take-Out Commitment for the Mortgage Loan), and
(vi) has not been included in the Borrowing Base for more than one hundred
twenty (120) days.
Non-Conforming Mortgage Loan Advance means an Advance against the
Borrowing Base value of Non-Conforming Mortgage Loans.
Note means the instrument described in Section 2.07 hereof, as it may
be amended, restated, extended, replaced or renewed from time to time.
Overnight-based Rate means a per annum interest rate equal to (i) in
the case of Conforming Mortgage Loan Advances, 1.25% above the Overnight Rate,
(ii) in the case of Non-Conforming Mortgage Loan Advances, 1.625% above the
Overnight Rate, (iii) in the case of Second Mortgage Loan Advances, 1.625% above
the Overnight Rate, and (iv) in the case of Aged Mortgage Loan Advances, 3.5%
above the Overnight Rate..
Overnight Rate means, for any day, a per annum rate of interest
determined by Bank, in its sole discretion, to be the prevailing overnight
federal funds rate on such date. Changes in the overnight federal funds rate
during any day after Bank has determined the prevailing overnight federal funds
rate for that day shall not change the interest rate for that day.
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<PAGE> 16
PBGC means the Pension Benefit Guaranty Corporation established
pursuant to Subtitle A of Title IV of ERISA and any successor thereto.
Person means any corporation, natural person, firm, joint venture,
partnership, trust, unincorporated organization or any governmental entity or
body.
Plan means any plan (other than a Multiemployer Plan) subject to Title
IV of ERISA maintained for employees of Borrower or any ERISA Affiliate and any
such plan no longer maintained by Borrower or any of its ERISA Affiliates to
which Borrower or any of its ERISA Affiliates has made or was required to make
any contributions during the five (5) years preceding the date on which such
plan ceased to be maintained.
Potential Default means the occurrence of any event or condition which
with the giving of notice or passage of time or both would constitute an Event
of Default.
Pre-warehouse Loan means a loan which (i) would be an Eligible Mortgage
Loan or a Second Mortgage Loan, except that the Required Documents have not been
delivered to Collateral Custodian, and (ii) has not been included in the
Borrowing Base for more than five (5) business days.
Pre-warehouse Required Documents means the documents referenced in
Section 2(a)(2) of the Custodial Agreement.
Prohibited Transaction means any transaction described in Section 406
of ERISA that is not exempt by reason of Section 408 of ERISA or the
transitional rules set forth in Section 414(c) of ERISA and any transaction
described in Section 4975(c)(1) of the Code that is not exempt by reason of
Section 4975(c)(2) or Section 4975(d) of the Code, or the transitional rules of
Section 2003(c) of ERISA.
Reportable Event means any of the events set forth in Section 4043(b)
of ERISA or the regulations thereunder, a withdrawal from a Plan described in
Section 4063 of ERISA, a cessation
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<PAGE> 17
of operations described in Section 4068(f) of ERISA, an amendment to a Plan
necessitating the posting of security under Section 401(a)(29) of the Code, or a
failure to make a payment required by Section 412(m) of the Code and Section
302(e) of ERISA when due.
Request for Advance means the form attached hereto as Exhibit D, or
such other form as Collateral Custodian may require from time to time, filled in
and executed by Borrower to the satisfaction of Collateral Custodian.
Request for Pre-warehouse Advance and Security Agreement means the form
attached as Exhibit 4 of the Custodial Agreement and referenced in Section
2(a)(2).
Required Documents means all of the following:
(a) An original mortgage note endorsed by the Borrower in blank showing
a complete chain of endorsement from the original holder through the Borrower.
(b) An original mortgage or deed of trust securing the above mortgage
note. In lieu of a recorded document, the Collateral Custodian will accept a
certified copy, including a copy certified by the Borrower to be a true and
correct copy of the mortgage or deed of trust that has been duly delivered to
the appropriate recording office, with a conformed recorded copy to follow as
soon as the same is received by the Borrower.
(c) An original assignment of the mortgage or deed of trust by the
Borrower to the Bank in blank in recordable form and a certified copy of all
intervening assignments of the related mortgage or deed of trust from the
original holder, through any subsequent transferees to the Borrower, certified
in each case by the records office or escrow or title company or the Borrower.
(d) A copy of a commitment for issuance of a policy of title insurance
insuring the mortgage or deed of trust as a first lien on the mortgaged premises
for first lien Mortgage Loans or as a subordinate lien on the mortgaged premises
for Second Mortgage Loans , written by a title
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<PAGE> 18
company and in an amount not less than the amount of the related mortgage note
and containing exceptions reasonably satisfactory to the Bank and an order to
issue such policy. In lieu of a policy, the Bank and Collateral Custodian will
accept a copy of a signed first lien letter for first lien Mortgage Loans or a
copy of a subordinate lien letter for Second Mortgage Loans or a copy of a
signed title commitment conforming to the foregoing requirements.
(e) If applicable, a current, unused and unexpired whole loan
commitment issued in favor of and held by the Borrower made by an approved
investor, under which said approved investor agrees, prior to the expiration
thereof, upon the satisfaction of certain terms and conditions therein, to
purchase the subject Mortgage Loan at a specified price, which commitment is not
subject to any term or condition which is not customary in commitments of like
nature or which, in the reasonably anticipated course of events, cannot be fully
complied with prior to the expiration thereof.
(f) Any other loan documents required by Bank.
Restricted Account means a demand deposit account to be maintained with
Collateral Custodian on Borrower's behalf, as to which Borrower shall not have
the ability to write Drafts or withdraw funds, except for: Drafts to title
companies; then to remit repayment of Loan principal to Bank, and then to
disburse funds to the DDA account.
Second Mortgage Loan means a Mortgage Loan which would be an Eligible
Mortgage Loan except for noncompliance with the requirements of paragraphs (h)
and (j) of the definition of Eligible Mortgage Loan, and with respect to which
each of the following statements shall be accurate and complete (and Borrower by
including such Mortgage Loan in any computation of the Borrowing Base shall be
deemed to so represent and warrant to the Collateral Custodian and the Bank as
of the date of such computation):
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<PAGE> 19
(a) The property covered by said Mortgage Loan is free and clear of all
liens except (i) a first mortgage loan, (ii) liens for real estate taxes,
special assessments and the like which are not delinquent, (iii) liens which are
subordinate to the lien of the Mortgage Loan, and (iv) liens which are superior
to the lien of the Mortgage Loan, if all of the other conditions set forth
herein are satisfied.
(b) The principal amount of the Mortgage Loan does not exceed One
Hundred Thousand Dollars ($100,000).
(c) The Mortgage Loan has not been included in the Borrowing Base for
more than sixty (60) days.
(d) The Mortgage Loan is an allowable mortgage loan under the terms of
the Joint Venture Agreement between Bank and Rock Financial Corporation dated
February 19, 1999.
Second Mortgage Loan Advance means an Advance against the Borrowing
Base value of Second Mortgage Loans.
Security Agreement means that certain Security Agreement by and between
Borrower and Bank, dated as of the date hereof.
Servicing Portfolio means, as of any date, the portfolio of Mortgage
Loans with respect to which the Borrower has direct servicing rights.
Subsidiary means a corporation of which fifty percent (50%) or more of
the outstanding voting stock (except for directors' qualifying shares, if and to
the extent required by law) is owned, at the time of determination, directly or
indirectly, by Borrower.
Super Jumbo Loan means a Mortgage Loan which would be a Jumbo Loan
except that the amount thereof exceeds $750,000, but is less than $1,000,000,
except as otherwise approved in writing by Bank or where Bank has issued a
Take-Out Commitment.
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<PAGE> 20
Take-Out Commitment means (i) an existing written commitment to
Borrower in form and substance satisfactory to Bank from an Investor
satisfactory to Bank, under the terms of which the such Investor agrees to
purchase Mortgage Notes or a specific Mortgage Note, or (ii) a forward
commitment to sell mortgage backed securities at a committed sales price will
exist in amounts equal to or greater than the closed Mortgage Loans included in
the Borrowing Base.
Tangible Net Worth means, at any time, Stockholders' Equity determined
in accordance with GAAP, less the sum of:
(a) Any surplus resulting from any write-up of assets, except any such
surplus which constitutes Members' Equity in accordance with GAAP;
(b) Goodwill including any amounts, however designated on a balance
sheet of the Borrower, representing the excess of the purchase price paid for
assets or ownership acquired over the value assigned thereto on the books of the
Borrower;
(c) Patents, trademarks, trade names and copyrights;
(d) Any amount at which ownership interest of the Members of Borrower
appear as an asset on the Borrower's balance sheet;
(e) Loans and advances to members, managers, employees or affiliated
companies;
(f) Deferred expenses; (g) Assets, the marketability, and/or liquidity
value of which are not readily ascertainable, in Bank's sole discretion;
(h) Investments or securities in any corporation not listed on the New
York Stock Exchange, NASDAQ National Market or American Stock Exchange;
(i) Investments or securities in any limited liability company,
partnership, limited partnership, joint venture or other business venture or
legal entity;
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<PAGE> 21
(j) Investments or securities in any options or derivatives;
(k) Investments or securities in any corporation to the extent to which
the cost basis of Borrower's securities exceeds twenty-five percent (25%) of the
Tangible Net Worth of Borrower as calculated without the inclusion of such
investments or securities; and
(1) Investments or securities in any corporation in which Borrower owns
in excess of a four percent (4%) ownership interest.
Trust Receipt means a receipt in the form of Exhibit 7 in the Custodial
Agreement.
Uncommitted Mortgage Loan means an Eligible Mortgage Loan as to which a
Take-Out Commitment does not exist.
Uncommitted Mortgage Loan Advance means an Advance against the
Borrowing Base value of Uncommitted Mortgage Loans.
Uncommitted Pre-warehouse Loan means a Pre-warehouse Loan as to which a
Take-Out Commitment does not exist.
Unfunded Draft means a Draft which has not been honored by Collateral
Custodian.
VA means the Veterans Administration and any successor thereto or to
the functions thereof.
VA Mortgage Loans means Mortgage Loans within acceptable limits to and
guaranteed by the VA, and evidenced by instruments and documents which comply,
and arising from a transaction which complies, in all respects, with the
requirements of the VA.
Working Capital means, as of any applicable date of determination,
Current Assets less Current Liabilities.
2. THE LOAN.
2.01 The Loan. Subject to the terms and conditions of this Agreement,
Bank agrees to make Advances to Borrower such that the total Advances by Bank
for then outstanding (taking into
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<PAGE> 22
account any current request for an Advance), shall not exceed the lesser of the:
(1) Borrowing Base at such date, less the aggregate Advances then outstanding,
or (2) $50,000,000.00.
2.02 Request for Advance. Borrower shall deliver to Collateral
Custodian and Bank a Request for Advance no later than 1:00 p.m. on the proposed
funding date.
2.03 Advances.
(a) Subject to all of the terms and conditions of this Agreement,
including but not limited to Sections 2.01 and 2.02, above, Bank will make
requested Advances on the same business day that a Request for Advance is
submitted to the Collateral Custodian. Bank's obligation to make Advances shall
terminate immediately upon:
(i) the occurrence of an Event of Default,
(ii) a Request for Advance, which if made, would result in
Collateral Custodian exceeding the lesser of the Loan
amount or the amount eligible under the Borrowing
Base for Advance.
(b) If a Draft is presented to Collateral Custodian for closing a
Mortgage Warehouse Loan, Collateral Custodian shall be obligated to honor such
Draft only if, (i) Borrower instructs Collateral Custodian to pay the Draft, and
(ii) by 2:00 p.m., Detroit, Michigan time, Collateral Custodian shall have
received the Required Documents or the Pre-warehouse Required Documents for the
Mortgage Loan to which such Draft relates, (iii) there are available funds in
the Restricted Account to pay the Draft or funds will be available based upon a
commitment by Bank to transfer funds, and (iv) the Collateral Custodian has not
been advised of the occurrence of an Event of Default.
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2.04 Borrowing Base Conformity.
(a) In support of its obligation to repay the Loan hereunder,
Borrower shall cause to be maintained with Bank a Borrowing Base such that (i)
the Borrowing Base is not less than, at any date, the sum of the aggregate
outstanding principal amount of the Loan, and (ii) the Borrowing Base for
Committed Mortgage Loan Advances, Uncommitted Mortgage Loan Advances, Conforming
Mortgage Loan Advances, Non-Conforming Mortgage Loan Advances, Pre-Warehouse
Loans, Second Mortgage Loan Advances and Aged Mortgage Loan Advances which are
each not less than, at any date, the sum of the aggregate outstanding principal
amounts of Committed Mortgage Loan Advances, Uncommitted Mortgage Loan Advances,
Conforming Mortgage Loan Advances, Non-Conforming Mortgage Loan Advances,
Pre-Warehouse Loans and Second Mortgage Loan Advances respectively.
(b) Borrower shall make a principal payment on the Loan to Bank,
on any day (i) in the amount by which the aggregate outstanding principal amount
of the Loan exceeds the Borrowing Base, or (ii) in the amount by which the
aggregate outstanding principal amount of Committed Mortgage Loan Advances,
Uncommitted Mortgage Loan Advances, Conforming Mortgage Loan Advances,
Non-Conforming Mortgage Loan Advances, Pre-Warehouse Loans, Second Mortgage Loan
Advances, and Aged Mortgage Loan Advances exceeds the Borrowing Base for
Committed Mortgage Loan Advances, Uncommitted Mortgage Loan Advances, Conforming
Mortgage Loan Advances, Non-Conforming Mortgage Loan Advances, Pre-Warehouse
Loans, Second Mortgage Loan Advances and Aged Mortgage Loan Advances
respectively.
(c) Provided Borrower is not then in default hereunder, in lieu of
prepaying the Loan as required above, Borrower may deliver to the Collateral
Custodian on such date additional Eligible Mortgage Loans such that the
Borrowing Base, after giving effect to the inclusion of such Eligible
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Mortgage Loans in the Borrowing Base, shall be in compliance with the
requirements of (a) and (b) above.
2.05 Payments. All payments made on account of the Loan shall be made
without setoff or counterclaim in lawful money of the United States of America
in immediately available same day funds, free and clear of and without deduction
for any taxes, fees or other charges of any nature whatsoever and must be
received by Bank by 3:00 p.m. on the day of payment, it being expressly agreed
and understood that if a payment is received after 3:00 p.m. by the Collateral
Custodian, such payment will be considered to have been made on the next
succeeding business day and interest thereon shall be payable at the then
applicable rate until such date. The proceeds from the sale of Mortgage Loans
securing the Loan shall be paid directly to the Restricted Account and applied
against the Loan on a daily basis.
2.06 Allocation of Payments Received. All amounts received by the
Collateral Custodian on account of the Loan shall be disbursed by the Collateral
Custodian to the Bank for application on the indebtedness due on the Loan.
2.07 The Note. The Loan, which shall be in the form of a revolving
credit, shall be evidenced by Borrower's promissory note to Bank in the maximum
committed amount of the Loan (hereinafter called the "Note"), and shall be in
form and content satisfactory to Bank. All terms of the Note are incorporated
herein. The Note shall be dated the date of this Agreement, shall bear interest
payable at the rate and in the manner provided for in Section 2.09 hereof, and
shall evidence Advances of the Loan. Borrower agrees that the date and amount of
each Advance on the Loan shall be as set forth in the books and records of Bank
relating to such matters which shall be presumed accurate, but subject to
verification and correction by Borrower within 30 days of Borrower's receipt of
a statement.
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2.08 Use of Proceeds. The proceeds of the Loan shall be used by
Borrower solely to finance its making of Mortgage Warehousing Loans pending sale
thereof to Investors. Use of Loan proceeds for any other purpose, including but
not limited to, the repurchase of loans purchased by an Investor and
subsequently returned to Borrower, shall be an Event of Default under this
Agreement.
2.09 Rate of Interest. Borrower shall pay to Bank interest on the daily
outstanding principal balance of the Loan at a per annum rate equal to the
following:
(a) For Conforming Mortgage Loan Advances, a variable rate of one and
one quarter percent (1.25%) in excess of the Overnight-based Rate;
(b) For Committed Nonconforming Mortgage Loan Advances, a variable rate
of one and five eighths percent (1.625%) in excess of the Overnight-based rate;
(c) For Second Mortgage Loan Advances, a variable rate of one and five
eighths percent (1.625%) in excess of the Overnight-based Rate;
(d) For Aged Mortgage Loan Advances, a variable rate of three and
one-half percent (3.5%) in excess of the Overnight-based Rate.
In order to calculate the interest owed on the Loan, Collateral Custodian shall
determine the daily outstandings for Conforming Mortgage Loan Advances,
Non-Conforming Mortgage Loan Advances, Second Mortgage Loan Advances and Aged
Mortgage Loan Advances using Collateral Custodian's and Bank's records. Which
records shall be conclusive evidence thereof, absent manifest error. After
demand or an Event of Default, and during the continuation thereof, the Advances
shall bear interest, payable on demand, at a rate per annum equal to two percent
(2%) above the otherwise applicable rate of interest. A late payment charge of
five percent (5%) of each late payment may be charged on any payment not
received by Bank within ten (10) calendar days after payment is due. Interest
shall
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continue to accrue on the unpaid principal balance even if all sums due
hereunder are accelerated and reduced to judgment.
2.10 Automatic Charges to Borrower's Account. Interest shall be due and
payable on the first day of each month at which date Bank may at its option
direct charge Borrower's DDA Account for interest calculated as aforesaid on the
daily outstanding principal balances for the preceding month.
2.11 Banker's Year. All interest and fee calculations shall be based on
a 360 day year for the actual days elapsed.
3. COLLATERAL.
3.01 The Indebtedness and Borrower's obligations hereunder and under
the other Loan Documents shall be secured and supported by the following, all of
which shall be in form and substance satisfactory to Bank:
3.01.01 Security Agreements and financing statements in favor of
the Bank creating (subject in the case of Mortgage Loans to delivery of the
Note to Collateral Custodian following the 21-day period of automatic
perfection) a first priority lien on the following:
1. All Mortgage Loans, now owned or hereafter acquired or
originated by Borrower, including, without limitation, the promissory notes or
other instruments or agreements evidencing the indebtedness of obligors thereon,
all mortgages, deeds to secure debt, trust deeds and security agreements related
thereto, all rights to payment thereunder, all rights in the properties securing
payment of the indebtedness of the obligors thereon, all rights under documents
related thereto, such as guaranties and insurance policies (issued by
governmental agencies or otherwise), including, without limitation, mortgage and
title insurance policies, fire and extended coverage insurance policies
(including the right to any return premiums) and FHA insurance and
VA guaranties,
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and all rights in cash deposits consisting of impounds, insurance premiums or
other funds held on account thereof;
2. All rights of Borrower (but not its obligations) under
all Take-Out Commitments, now existing or hereafter arising, covering any part
of the Collateral, all rights to deliver Mortgage Loans to Investors and other
purchasers pursuant thereto and all proceeds resulting from the disposition of
such Collateral pursuant thereto;
3. All now existing and hereafter arising accounts,
instruments, chattel paper, inventory, investment property and general
intangibles constituting or arising in connection with any of the Collateral;
4. All now existing and hereafter acquired files,
documents, instruments, surveys, certificates, correspondence, appraisals,
computer programs, tapes, discs, cards, accounting records and other books,
records, information and data of the Borrower relating to the Collateral;
5. All insurance policies and guarantees relating to any
of the Collateral;
6. All amounts in the DDA Account and Restricted Account
and in any of Borrower's other operating accounts with Collateral Custodian or
Bank;
7. Borrower's Property in Possession of Collateral
Custodian or Bank;
8. All property substituted for any of the Collateral or
for any part thereof; and
9. All proceeds of all of the aforementioned.
4. CONDITIONS OF LENDING.
4.01 Documentation Required Prior to First Advance Only. Delivery by
Borrower of each of the following to Bank shall be conditions precedent to the
making of the first Advance:
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4.01.01 A duly executed copy of this Agreement, the Security
Agreement and the Note.
4.01.02 Duly executed copies of all financing statements and
other documents, instruments and agreements, properly executed, deemed necessary
or appropriate by Bank and the Collateral Custodian, in their reasonable
discretion, to obtain for the Bank a perfected, first priority security interest
in and lien upon the Collateral.
4.01.03 Such credit applications, financial statements,
authorizations and such information concerning the (financial and otherwise)
condition of Borrower as any bank may reasonably request.
4.01.04 Certified copies of a resolution of the Members of
Borrower approving the execution and delivery of the Loan Documents to which
such person is a party, the performance of the obligations thereunder and the
consummation of the transactions contemplated thereby.
4.01.05 A duly completed Borrowing Base Certificate dated as
of the date of the first Advance hereunder.
4.01.06 (i) A true, complete and correct copy of Borrower's
Articles of Organization and all amendments thereto; (ii) a true, complete and
correct copy of Borrower's Operating Agreement and all amendments thereto; (iii)
a Certification by Borrower's authorized representative as to the incumbency and
specimen signatures of each party executing this Agreement and any endorsements
or assignments to be executed in the performance of this Agreement; (iv) a
certificate issued by the Secretary of the State of Borrower's state of
organization as to the good standing and continued existence of Borrower; (v)
certificates of the appropriate officials of each state in which Borrower
conducts business as to the qualification of the Borrower to transact business
and its good standing and as a foreign corporation in said jurisdiction.
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4.01.07 Evidence of Borrower's receipt of FNMA seller approval
certification.
4.02 Delivery of Documents to Investor. For each Mortgage Loan which
is the subject of an Advance, Borrower shall deliver the documents required by
the Investor to the Collateral Custodian sufficiently in advance to allow
delivery of those documents to the Investor within the time frame permitted by
the applicable Take Out Commitment. Collateral Custodian shall deliver Mortgage
Notes to Investors under a Transmittal Letter.
4.03 Continuing Warranties. At the time any Advance is requested by
Borrower, and as a precondition to the making of any Advance hereunder, no
default by Borrower shall have occurred and be continuing, and no event shall
have occurred which, with the lapse of time or notice or both, shall constitute
such default; and Borrower shall have paid all interest, fees, charges and other
amounts due and payable by Borrower hereunder.
4.04 Other Requested Documents. Borrower shall deliver directly to
Collateral Custodian any documents pertaining to each Mortgage Loan which
Collateral Custodian reasonably specifically requests.
4.05 Financing Statements. Borrower will execute one or more financing
statements covering the Collateral pursuant to the Uniform Commercial Code, in
form satisfactory to Bank, and will pay the cost of filing the same in all
public offices.
4.06 Limited Power of Attorney. Borrower hereby irrevocably makes,
constitutes and appoints Collateral Custodian and Bank as its attorney-in-fact
with full power of substitution for and on behalf and in the name of Borrower
(which neither Bank nor Collateral Custodian is under any obligation to use) if
an Event of Default has occurred hereunder to endorse any checks, instruments
or other papers in Bank's or Collateral Custodian's possession representing
payments on assigned Mortgage Notes and Mortgages or Take-Out Commitments to
purchase Mortgage Notes and
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Mortgages; to complete, execute, deliver and record any assignment or other
document, including financing statements covering the Collateral; to endorse any
Mortgage Note in the name of Borrower and do every other act or thing necessary
or desirable to effect transfer of a Mortgage Note, Mortgage or any related
Collateral and/or to protect the interest of Bank in the Collateral; to take all
necessary and appropriate action in Borrower's name with respect to any Advances
hereunder and servicing of Mortgage Notes and Mortgages or sale of Collateral
under any Commitment; to take any and all action which Bank or Collateral
Custodian deems appropriate to commence, prosecute, settle, discontinue, defend
or otherwise dispose of any claim relating to any Commitment, insurance or
guarantee, assigned Mortgage Note, Mortgage or other Collateral; and to sign
Borrower's name whenever and wherever appropriate to the performance of this
Agreement, including, but not limited to, whether or not Borrower is in default,
execution in Borrower's name of any document necessary to perfect or protect
Bank security interest granted hereunder. This appointment shall be deemed
coupled with an interest but shall only extend to dealings with regard to the
Collateral.
4.07 Perfecting Bank's Lien. Borrower hereby agrees, upon Bank's or
Collateral Custodian's request, to sign any additional documents which the
Collateral Custodian or Bank, or any of their counsel, deems necessary to
evidence or perfect the lien on any Collateral, or which may be required by
GNMA, FNMA, FHLMC or other Investor in order to secure the Investor's
acknowledgment and recognition of the lien on the Collateral.
5. CONTINUING REPRESENTATIONS AND WARRANTIES.
In order to induce Bank to enter into this Agreement and to make the
Loan, Borrower warrants and represents that as of the date hereof and, at the
time of the making of each Advance hereunder, that:
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5.01 Borrower's Organization. Borrower is a limited liability company
duly organized and existing and in good standing under the laws of the place of
its incorporation, and Borrower is qualified as a foreign limited liability
company and in good standing in every other jurisdiction where its business or
operations requires such qualification. The execution, delivery and performance
of this Agreement, the Note and other documents required of Borrower have been
duly authorized by all requisite action and will not violate the Articles of
Organization or Operating Agreement of Borrower or any applicable statutes or
regulations or any agreements or judgments to which Borrower is a party. This
Agreement and the Note are valid and binding obligations of Borrower,
enforceable in accordance with their terms except as may be limited by
bankruptcy, insolvency, moratorium, reorganization and other similar laws or
equitable principles affecting generally the enforcement of creditors, rights,
and the consent or approval of governmental authorities or of third parties is
not required for the validity of Borrower's obligations hereunder or thereunder
or, if required, has been obtained; nor does this Agreement or the Note violate
any applicable Federal, state or local law, rule or regulation relating to
usury.
5.02 Financial Statements. All financial statements and financial
information heretofore delivered to Bank are true and correct in all material
respects as of the date made. As of the date of this Agreement and as of the
date of any borrowing hereunder, there has not been, nor does Borrower
anticipate the occurrence of, any material change of an adverse nature
sufficient to impair Borrower's ability to repay the Loan or to continue to
conduct its business as it is being conducted on the date hereof. Borrower has
no material contingent liabilities or unusual forward or long-term
commitments which are not disclosed by or reserved against in said financial
statements furnished to Bank or have not been disclosed to Bank in writing. At
the date of this Agreement and at the date of each Advance requested by Borrower
hereunder, Borrower warrants and reaffirms there are no material unrealized
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or anticipated losses from any commitments of the Borrower except as previously
disclosed in writing to Bank.
5.03 Authority. All requisite action for the authorization, execution
and delivery by Borrower of this Agreement and the Note, and for the assigning
and endorsing by Borrower of the Collateral as provided for hereunder, has been
duly taken and has not been rescinded.
5.04 Title to Collateral. Borrower is or will be the legal and
beneficial owner (subject only to potential claims of an Investor arising solely
out of a Take-Out Commitment) of the Mortgage Loans and the Collateral at the
time pledged, free and clear of all adverse security interests, liens and
encumbrances, and has the right to assign the same to Collateral Custodian for
the benefit of the Bank as contemplated by the Agreement.
5.05 Compliance with Laws of Applicable Jurisdiction. Borrower is fully
familiar with the requirements of the laws of the applicable jurisdiction(s)
from which all Mortgage Loans assigned as Collateral hereunder originate and all
Mortgage Loans assigned as Collateral hereunder have been made in strict
compliance with the provisions of any act, law or regulation which governs
lending practices enacted by the applicable jurisdiction.
5.06 Borrower's Locations. The address of Borrower set forth above in
this Agreement is its chief executive office; and the addresses indicated on
Exhibit A, if any, attached hereto are all of the Borrower's offices or
locations.
5.07 No Subsidiaries. Borrower has no Subsidiaries other than those
designated and described in writing to Bank on or prior to the date hereof.
5.08 No Default. Borrower has no knowledge of any default under any
material term or provision of any agreement to which it is a party or by which
it is bound or to which any of its
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property is subject, which default would have a material adverse effect on
Borrower's creditworthiness.
5.09 Outstanding Judicial Proceedings. Except as disclosed on Exhibit F
hereto, there are no outstanding criminal proceedings pending or threatened, or
judgments, actions or proceedings pending or threatened before any court or
governmental authority, bureau or agency, with respect to or affecting the
Borrower wherein damages alleged or owed exceed $100,000.00, nor are there any
such actions or proceedings in which Borrower is a plaintiff or complainant
(excepting routine foreclosures) wherein damages alleged exceed the sum of
$100,000.00.
5.10 Accuracy of Submitted Information; No Material Omissions. No
financial statements, nor any certificate, opinion or any other statement made
or furnished to Collateral Custodian or Bank by or on behalf of the Borrower in
connection with this Agreement or the transaction contemplated herein, contains
any untrue statement of a material fact, or omits a material fact necessary in
order to make the statements contained therein or herein not misleading.
5.11 Loan Not Usurious. The Loan as contemplated herein is not
usurious.
5.12 Title to Assets. Borrower has good and marketable title to all
property and assets reflected in the financial statements referred to in Section
5.02 hereof, except property and assets sold or otherwise disposed of in the
ordinary course of business subsequent to the respective dates thereof and
property subject to a capital lease made in the ordinary course of business.
Borrower does not have outstanding liens on any of its property or assets, and
is not a party to any security agreements or title retention agreements whether
in the form of leases or otherwise, of any personal property, except as
permitted under Section 7.02 hereof.
5.13 Taxes. Borrower and each of its Subsidiaries, if any, have filed
or caused to be filed all tax returns that are required to be filed and have
paid all taxes shown to be due and payable on
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such returns, or on any assessments made against them or any of their
property, other than taxes and assessments that are being contested in good
faith by appropriate proceedings and as to which the Borrower or such
Subsidiary has established adequate reserves in conformance with GAAP.
5.14 Investment Company Act. Borrower is not an "investment company"
within the meaning of the Investment Company Act of 1940, as amended.
5.15 ERISA.
(a) No Prohibited Transactions, Accumulated Funding
Deficiencies, withdrawals from Multiemployer Plans, or Reportable Events have
occurred with respect to any Plans or Multiemployer Plans that, in the
aggregate, could subject Borrower to any material tax, penalty or other
liability where such tax, penalty, or liability is not covered in full, for the
benefit of Borrower or such Subsidiary, by insurance;
(b) no notice of intent to terminate a Plan has been filed,
nor has any Plan been terminated under Section 4041 of ERISA, nor has the PBGC
instituted proceedings to terminate, or appointed a trustee to administer, a
Plan and no event has occurred or condition exists that might constitute grounds
under Section 4042 of ERISA for the termination of, or the appointment of a
trustee to administer, any Plan;
(c) the present value of all benefits liabilities [as defined
in Section 4001(a)(16) of ERISA] under all Plans (based on the actuarial
assumptions used to fund the Plans) does not exceed the assets of the Plans; and
(d) the execution, delivery, and performance by Borrower of the
Loan Documents and the borrowing of the Loans hereunder and the use of the
proceeds thereof will not involve any Prohibited Transaction.
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6. AFFIRMATIVE COVENANTS. Borrower covenants and agrees:
6.01 Loan Payments. To pay the Loan (as provided in the Note and this
Agreement) when due including but not limited to interest upon the Loan on the
first day of each month.
6.02 Casualty Insurance. To place, or cause to be placed, and
maintained at all times, such fire and extended coverage insurance on all real
estate forming the basis of the Collateral as may be required by the Investor or
if there is no Investor, by the Bank but in no event less than the Mortgage Loan
amount, to the extent permitted by law.
6.03 Other Insurance. To maintain (a) errors and omissions insurance or
mortgage impairment insurance and blanket bond coverage, with such companies and
in such amounts as satisfy prevailing FNMA and FHLMC requirements applicable to
a qualified mortgage originating institution, even though Borrower may not be
approved by that agency; and (b) liability insurance and fire and other hazard
insurance on its properties, with responsible insurance companies approved by
the Bank or Collateral Custodian, in such amounts and against such risks as is
customarily carried by similar businesses operating in the same vicinity; and
(c) within thirty (30) days after notice from Bank or Collateral Custodian, will
obtain such additional insurance as Bank or Collateral Custodian shall
reasonably require, all at the sole expense of the Borrower. Copies of such
policies shall be furnished to Bank or Collateral Custodian without charge, upon
request of Bank or Collateral Custodian. Borrower shall notify Bank within five
(5) days of receipt of notice that such bond or insurance policy will be or has
been materially modified or terminated.
6.04 Enforcement of Mortgage Notes. To enforce payment and collection,
at Borrower's expense, of all Mortgage Notes assigned to Bank as Collateral.
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6.05 Costs of Collection. To pay the reasonable cost of collection
(including attorneys' fees) of any of the Collateral, the enforcement of
collection of which has been undertaken by Collateral Custodian or Bank.
6.06 Notation of Mortgage Assignments. To make appropriate notations on
its books of all assignments to Bank hereunder, and to give such notice hereof
as Bank or Collateral Custodian may from time to time reasonably require.
6.07 Execution of Additional Documents To execute such additional
instruments or assignments of the Collateral as Bank or Collateral Custodian may
from time to time reasonably require.
6.08 Submission of Financial Statements and Reports. To deliver the
following to the Bank, in form satisfactory to the Bank:
6.08.01 Quarterly Financial Statements. Within forty-five (45)
days after the close of each quarterly accounting period in each fiscal year:
(a) an income statement of the Borrower for such quarterly period; (b) a balance
sheet of the Borrower as of the end of such quarterly period; (c) a year-to-date
Mortgage Loan closing report; and (d) a servicing portfolio report; all in
detail, subject to year end audit adjustments and prepared by Borrower, and
certified true, correct and in compliance with the terms and conditions of the
Loan Documents during any such period and on the date thereof, by Borrower's
chief financial officer or Manager.
6.08.02 Year End Financial Statement. Within ninety (90) days
after the close of each fiscal year: (a) a statement of members' equity; (b) an
income statement of the Borrower for such fiscal year; (c) a cash flow statement
for such fiscal period; and (d) a balance sheet of the Borrower as of the end
of such fiscal year, all in reasonable detail, including all supporting
schedules and comments and the accountant's management letter on internal
procedures and controls; the
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statements and balance sheet to be audited by an independent certified
public accountant selected by the Borrower and acceptable to Bank; and
accompanied by such accountant's opinion letter satisfactory to Bank.
6.08.03 Quarterly Compliance Certificate. Within forty-five
(45) days after the close of each quarterly accounting period in each fiscal
year, a Compliance Certificate showing Borrower's (a) Tangible Net Worth; (b)
Leverage Ratio; and (c) Current Ratio, accompanied by calculations supporting
the reported results. The calculations and results shall be certified as true,
correct and in compliance with the terms and conditions of the Loan Documents
during any such period and on the date thereof, by Borrower's chief financial
officer or Manager.
6.08.04 Monthly Delinquency Reports. Within seven (7) days
after and as of the end of each calendar month, a Mortgage Loan delinquency
report in form satisfactory to Bank and Collateral Custodian.
6.9 Maintenance Books and Records. To maintain adequate books,
accounts and records in accordance with GAAP with appropriate notations thereon
of all assignments to Bank; and to permit Collateral Custodian or Bank or their
representatives at any reasonable time to inspect or examine or audit the books,
accounts and records of Borrower.
6.10 Compliance with Administrative Requests. To comply with such
reasonable administrative directions as Bank or Collateral Custodian may give in
order to provide proper servicing of the Advances hereunder.
6.11 Submission of Pipe Line Report. To provide when requested by Bank,
a copy of the Borrower's pipeline report in form and substance satisfactory to
Bank.
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6.12 Notification of Borrower's Default. To advise Bank in writing
within three (3) business days after the expiration of any applicable cure
period, of any uncured material default known to Borrower in connection with any
loan or line of credit to Borrower.
6.13 Maintenance of Take-Out Commitments. To keep all Take-Out
Commitments in full force and effect and subject to no lien, assignment or other
interest (other than that to Bank or Collateral Custodian for the benefit of the
Bank).
6.14 Financial Covenants. To maintain at all times:
(i) a ratio of Liabilities to Tangible Net Worth not to exceed
a ratio of 66 to 1;
(ii) a Current Ratio of not less than 1.0:1.0;
(iii) a minimum Tangible Net Worth equal to or in excess of
$500,000.00.
6.15 Tax Returns. To furnish Bank with copies of federal income tax
returns previously filed by the Borrower, within ten (10) days of Bank's
written request.
6.16 Payment of Taxes. To pay or cause to be paid when due, all taxes,
assessments and charges or levies imposed upon it or on any of its property or
which it is required to withhold and pay over, except where contested in good
faith by appropriate proceedings with adequate reserves therefor having been set
aside on its books; provided, however, that the Borrower shall pay or cause to
be paid all such taxes, assessments, charges or levies forthwith whenever
foreclosure on any lien that attaches (or security therefor) appears imminent.
6.17 Mortgage Banker's Financial Reporting Form. To provide Bank within
sixty (60) days of the end of each quarterly accounting period, with a copy of
the quarterly Mortgage Banker's Financial Reporting Form (either FNMA Form 1002
or FHLMC Form 1055, as applicable).
6.18 Additional Reports. To promptly furnish Collateral Custodian and
Bank with such reports and information as any of them deems reasonably necessary
from time to time.
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6.19 Demand Deposit Account. To maintain DDA Account with Bank and the
Restricted Account with Collateral Custodian.
6.20 FNMA, FHLMC, VA, MSHDA and HUD Audits. To provide to Bank within
thirty (30) days of receipt, copies of all FNMA, FHLMC, VA, MSHDA and HUD audit
reports.
6.21 Compliance With Laws. To comply with all present and future Laws
applicable to it in the operation of its business, and all material agreements
to which it is subject.
6.22 Notice of Litigation. To give immediate notice to the Bank of: (1)
any litigation in which it is a party if an adverse decision therein would
require it to pay over more than $100,000 or deliver assets the value of which
exceeds such sum (whether or not the claim is considered to be covered by
insurance); and (2) the institution of any other suit or any administrative
proceeding involving it that might materially and adversely affect its
operations, financial conditions, property or business.
6.23 Payment of Obligations When Due. To pay when due (or within
applicable grace periods) all indebtedness due third persons, except when the
amount thereof is being contested in good faith, by appropriate proceedings and
with adequate reserves therefor being set aside on the books of the Borrower.
6.24 Operational Reviews. Upon request, permit access to its premises,
records and employees (including internal staff accountants) by Collateral
Custodian, Bank or their representatives, for the purpose of conducting a review
of Borrower's general mortgage business methods, policies, and procedures,
auditing loan files, and reviewing financial and operational aspects of
Borrower's business.
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6.25 Exchange of Information. So long as any sums due Bank shall remain
outstanding, Collateral Custodian, Bank or their successors may exchange credit
and/or collateral information relating to Borrower, with any of Borrower's other
creditors.
6.26 Preservation of Legal Status. To preserve and maintain its
existence, rights, franchises and privileges in the jurisdiction of its
organization as a limited liability company, and qualify and remain qualified as
a foreign limited liability company in each jurisdiction in which such
qualification is necessary in view of its business operation or ownership of its
properties.
6.27 Subordinate Debt. Subordinate any and all debts to members,
managers, employees or Affiliates to Borrower's Indebtedness to Bank.
6.28 Maintenance of Approvals, Filings and Registrations. At all times
maintain in effect, renew and comply with, and cause each of its Subsidiaries,
if any, to effect, renew and comply with all the terms and conditions of all
consents, licenses, approvals and authorizations as may be necessary under any
applicable law or regulation for the execution, delivery and performance of this
Agreement, the Security Agreement and the Note and to make this Agreement and
such other documents legal, valid, binding and enforceable.
6.29 Licenses and Qualifications. The Borrower is authorized to
originate Mortgage Loans in each state in which a parcel of real property
securing a Mortgage Loan is located and holds all necessary licenses. The
Borrower is not subject to any disciplinary order or finding by any licensing
authority and is not, to its knowledge, the subject of any investigation of
alleged wrongdoing by any licensing authority.
To the extent required in order to sell a Mortgage Loan to its
intended Investor, the Borrower is approved and qualified and in good standing
as a lender or seller/servicer, as set forth below, and meets all requirements
applicable to its status as such:
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(i) with all of its Investors is an approved correspondent
eligible to originate and sell Mortgage Loans to each such Investor;
(ii) FNMA approved seller of Mortgage Loans eligible to sell
Mortgage Loans to FNMA;
(iii) Borrower has made application to the VA to become an
unsupervised lender in good standing under the VA loan guarantee program and
upon approval shall be eligible to originate and sell VA-guaranteed Mortgage
Loans;
(iv) Borrower has made application to the FHA to become an
approved mortgagee and upon approval shall be eligible to originate and sell
FHA-insured single family Mortgage Loans; and
(v) Borrower has made application to MSHDA to become an approved
mortgagee and upon approval shall be eligible to originate and sell MSHDA
guaranteed Mortgage Loans.
The Borrower is not, to its knowledge, the subject of any investigation
or review by any of the foregoing agencies other than periodic reviews which
take place in the ordinary course of the mortgage banking business, nor is it
the subject of any order by any such agency placing it on probation, suspension
or other condition adversely affecting its ability to originate, sell or
service Mortgage Loans.
7. NEGATIVE COVENANTS.
Without the prior written consent of Bank, Borrower will not:
7.01 No Compromise of Collateral. Make any compromise, adjustment or
settlement in respect of any of the Collateral or accept anything other than
cash in payment or liquidation of the Collateral.
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7.02 No Other Liens. Permit any lien or financing statement covering
all or any part of the Collateral to be on file or recorded in any public
office, or pledge, grant or permit to exist a security interest or lien upon any
of its assets of any kind, real or personal, tangible, intangible, now owned or
hereafter acquired, except:
(a) liens created in favor of Bank or Collateral Custodian on
behalf of Bank hereunder;
(b) liens or charges for current taxes, assessments or other
governmental charges that are not delinquent or that remain payable without
penalty;
(c) purchase money liens on specific equipment;
(d) liens shown on Exhibit C attached.
7.03 No Change in Borrower's Name or Organizational Status. Change its
name or liquidate, dissolve, consolidate, or merge, reorganize, recapitalize or
reclassify its members or membership interests, nor permit any Subsidiary to do
so, nor acquire, or permit any Subsidiary to acquire, substantially all the
assets of another entity, except as may be allowed under the terms of the
Borrower's Operating Agreement or the Joint Venture Agreement between Bank and
Rock Financial Corporation dated February 19, 1999.
7.04 No Sale of Assets or Membership Interests. Sell, transfer, lease
or otherwise dispose of or cancel all or (except in the ordinary course of
business) any material part of its assets or membership interests.
7.05 Improper Use of Proceeds. Use the proceeds of the Loan, or permit
them to be used, for any purpose other than as permitted by Section 2.08 hereof.
7.06 No Additional Loans. Incur, create, assume or permit to exist any
mortgage warehousing loans or gestation loans except (a) to Bank under the terms
of this Agreement, (b)
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gestation-type or sale-purchase loan facilities for the purpose of temporarily
bulking/accumulating Non-Conforming Mortgage Loans previously funded by Bank
under the terms of this Agreement, (c) loans secured by liens permitted under
Section 7.02 hereof, and (d) loans from Members which are subordinate to this
Loan.
7.07 No Misleading Information. Furnish to Collateral Custodian or Bank
any certificate or document that contains any untrue statement of material fact
or omits a material fact necessary to make it not misleading in light of the
circumstances under which it was furnished.
7.08 No Guarantees. Become liable directly or indirectly, as guarantor,
surety, indorser or otherwise for any obligation of any other entity or person
in excess of $20,000.
7.09 No Change in Ownership or Control. Change in any material respect
its ownership or control of its business operations.
7.10 Regulation U. Use the proceeds of any Advance, directly or
indirectly, for the purpose, whether immediate, incidental, or ultimate, of
buying or carrying any "margin stock" within the meaning of Regulation U of the
Board of Governors of the Federal Reserve System of the United States or any
successor thereto, as in effect from time to time.
7.11 No Pledge of Servicing. Pledge, assign or grant a security
interest or lien on all or any part of Borrower's Servicing Portfolio to anyone
other than Bank.
7.12 No Prepayment of Subordinated Debt. Prepay any debt subordinated
to Borrower's Indebtedness to Bank under the Loan Documents.
7.13 Transactions with Affiliates. Directly or indirectly enter into,
or permit any of its Subsidiaries directly or indirectly to enter into, any
transaction (including the purchase, sale, lease, or exchange of any property,
the making or borrowing of any loan or the rendering of any service)
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with any Affiliate on terms that are less favorable to Borrower or such
Subsidiary than those that might be obtained at the time from Persons who are
not Affiliates.
7.14 ERISA Compliance. Take any of the following actions:
(a) Terminate or withdraw from any Plan, so as to result in any
material liability to the PBGC;
(b) Engage in or permit any person to engage in any Prohibited
Transaction involving any Plan that would subject Borrower or any of its
Subsidiaries to any material tax, penalty, or other liability;
(c) Incur or suffer to exist any material Accumulated Funding
Deficiency involving any Plan;
(d) Amend any Plan, so as to require the posting of security
under Section 401(a)(29) of the Code; or
(e) Fail to make payments required under Section 412(m) of the
Code and Section 302(e) of ERISA that would subject Borrower or any of its
Subsidiaries to any material tax, penalty or other liability.
7.15 Repurchase of Mortgage Loans. Fail to repurchase a Mortgage Loan
when requested by the Investor or otherwise required to do so pursuant to any
agreement between Borrower and the Investor, except, in the case of a repurchase
requested by an Investor, for so long as Borrower shall in good faith contest
its obligation to comply with such request under the terms of the agreement with
the Investor.
8. COLLATERAL CUSTODIAN.
8.01 Appointment of Collateral Custodian. Bank appoints and authorizes
the Collateral Custodian to act on behalf of Bank under this Agreement, the
Custodial Agreement and the Loan
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Documents and to exercise such powers hereunder and thereunder as are
specifically delegated to Collateral Custodian by the terms of the Custodial
Agreement, together with such powers as may be reasonably incidental thereto,
including without limitation the power to execute or authorize the execution of
financing or similar statements or notices, and other documents. In performing
its functions and duties under this Agreement, the Collateral Custodian shall
act solely as agent of the Bank and does not assume and shall not be deemed to
have assumed any obligation towards or relationship of agency or trust with or
for Borrower. With respect to Mortgage Notes for Mortgage Loans in Collateral
Custodian's possession from time to time, Collateral Custodian shall be deemed
to hold them as bailee for the Bank for the purpose of perfection under the
Uniform Commercial Code, provided, however, that Collateral Custodian shall have
only those duties and responsibilities expressly stated in the Custodial
Agreement and shall retain all rights, protections and indemnities provided
therein.
8.02 Deposit Accounts. Borrower hereby authorizes Bank, in Bank's sole
discretion, to charge its general deposit account(s), DDA Account and the
Restricted Account, maintained with Bank or Collateral Custodian for the amount
of any principal, interest, or other amounts or costs due under this Agreement
or Custodial Agreement when the same becomes due and payable under the terms of
said agreements and to pay said amounts to Bank.
8.03 Scope of Collateral Custodian's Duties. The Collateral Custodian
shall have no duties or responsibilities except those expressly set forth in the
Custodial Agreement.
8.04 Successor Collateral Custodian. If Collateral Custodian at any
time shall resign or if the position of Collateral Custodian shall become vacant
for any other reason, Bank shall, by written instrument, appoint a successor
Collateral Custodian, and which shall thereupon become the
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Collateral Custodian. Such successor Collateral Custodian shall succeed to all
of the rights and obligations of the resigning Collateral Custodian as if
originally named.
8.05 Authority of Collateral Custodian to Enforce Notes and This
Agreement. Bank, subject to the terms and conditions of this Agreement, may
authorize Collateral Custodian to act as its attorney-in-fact to institute and
maintain actions, suits or proceedings for the collection and enforcement of the
Note and to file such proofs of debt or other documents as may be necessary to
have the claims of the Bank allowed in any proceeding relative to Borrower or
its creditors or affecting its properties.
9. DEFAULT
9.01 Events of Default. Borrower shall be in default under this
Agreement upon the happening of any of the following events or conditions (each
an "Event of Default"):
9.01.01 Default in the payment of the Note or payment or
performance of any other obligation, covenant or liability of Borrower contained
or referred to herein, or in any other obligation owed by Borrower to Bank or
Collateral Custodian under this Agreement, the Loan Documents or the Custodial
Agreement, within ten (10) days of the date such payment is due;
9.01.02 Any warranty, representation or statement furnished to
Bank by or on behalf of Borrower in connection with this Agreement proves to
have been false in any material respect when made or furnished;
9.01.03 Loss, theft, substantial damage, destruction, abandonment,
sale (except as permitted by this Agreement) or encumbrances to or of the
Collateral or any substantial part thereof, or the making of any levy, seizure
or attachment thereof, or thereon;
9.01.04 Dissolution, termination of existence, insolvency,
business failure, appointment of a receiver for benefit of creditors by, or the
commencement of any case or proceeding
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under any bankruptcy or insolvency law by or against Borrower unless said
proceeding, if commenced against Borrower, is dismissed within thirty (30) days
from the date it is filed;
9.01.05 Occurrence of any material adverse change in the financial
or operating condition of Borrower;
9.01.06 If presently held or later obtained, subsequent loss for
cause of FNMA and/or FHLMC certification, or VA, FHA or MSHDA certification;
9.01.07 Failure of Borrower to observe the terms of or perform any
agreement with Bank;
9.01.08 Borrower's default under the terms and conditions of any
loan or credit agreement with any third party for over $20,000; or
9.01.09 If any one of the following shall occur (a) any Reportable
Event or a Prohibited Transaction shall occur with respect to any Plan; (b) a
notice of intent to terminate a Plan under Section 4041 of ERISA shall be filed;
(c) a notice shall be received by the plan administrator of a Plan that the PBGC
has instituted proceedings to terminate a Plan or appoint a trustee to
administer a Plan; (d) any other event or condition shall exist that might, in
the opinion of the Bank, constitute grounds under Section 4042 of ERISA for the
termination of, or the appointment of a trustee to administer, any Plan; (e)
Borrower or any ERISA Affiliate shall withdraw from a Multiemployer Plan under
circumstances that Bank determines could have a material adverse effect on the
financial condition of Borrower; and in case of the occurrence of any event or
condition described in clauses (a) through (e) above, such event or condition
together with all other such events or conditions, if any, could subject
Borrower to any tax, penalty, or other liabilities in the aggregate business,
operations, property, or financial or other condition of Borrower and its
Subsidiaries, taken as a whole.
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9.01.10. Upon the occurrence of any Event of Default listed in
sections 9.01.03, 9.01.05, 9.01.07 and 9.01.08 hereinabove, Borrower shall have
thirty (30) days from the date when Bank sends written notice of such Event of
Default, to effect a cure of such Event of Default to the satisfaction of Bank.
Except as provided above, Bank is not required to provide written notice of any
Event of Default or an opportunity to cure. Borrower shall give Bank written
notice to Bank of the occurrence of any Event of Default or the existence of any
event which would with the passage of time or giving of notice constitute an
Event of Default immediately after discovery of any such event.
9.02 Remedies Upon Default. Upon the occurrence and during the
continuation of an Event of Default, (i) Bank may refuse to make additional
Advances, and (ii) Bank may terminate this Agreement, declare all sums now or
hereafter owed by Borrower to Bank to be immediately due and payable, charge
Borrower's DDA Account and Restricted Account for any or all sums due and owing
to Bank, and exercise all rights and remedies upon default, in foreclosure and
otherwise, of a secured party under the Uniform Commercial Code and other
applicable law, in addition to the rights and remedies provided herein or in any
other instrument or paper executed by Borrower to the extent allowed by
applicable law, including, at its option and in its sole discretion, until all
sums now or hereafter owed to Bank are paid in full, the right or rights to:
9.02.01 Communicate with and notify the mortgagors under the
Mortgage Loans comprising the Collateral of Borrower's assignments hereunder,
and note any such assignment on Borrower's records;
9.02.02 Take over the exclusive right to collect the Collateral at
the sole expense of the Borrower, without any obligation to preserve rights
against third parties. For any acts done or not done incident to such collection
or liquidation, neither Bank nor Collateral Custodian
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shall be liable in any manner. Bank and Collateral Custodian shall have the
right to settle, compromise, or adjust Collateral and the claims or rights of
Borrower thereunder and accept return of the real estate involved, and in turn
sell and dispose of all said real estate without notice to or approval of
Borrower. Bank may employ agents and attorneys to collect or liquidate any
Collateral, and Bank shall not be liable for such Collateral or defaults of any
such agents and attorneys except in the case of gross negligence or wilful
misconduct;
9.02.03 To effect collection of the Loan, take possession of and
open any mail addressed to Borrower whether on Borrower's premises or elsewhere
and to remove, collect, and apply all payments therein contained and as attorney
in fact for Borrower, sign the Borrower's name to any receipts, checks, notes,
agreements, assignments or other instruments or letters, in order to collect,
sell or liquidate the Collateral. This power shall be irrevocable;
9.02.04 Require Borrower to assemble all books and records of
account relating to the Collateral and make them available to Bank or Collateral
Custodian at its office herein set forth or such other place as may be
designated by Bank or Collateral Custodian;
9.02.05 Enter the office of Borrower and take possession of any of
the Collateral including any records that pertain to the Collateral;
9.02.06 Undertake to service any one or more of the Mortgage Loans
comprising the Collateral and upon the happening of such, Borrower shall
transfer to Bank or Collateral Custodian all escrow funds, records, and any
other documents relating to any such Mortgage Loans then held by it;
9.02.07 Rescind any acceleration of the maturity of the Loan
previously declared (but the tender and acceptance of partial payments of the
Loan shall not rescind or affect in any way any such acceleration of maturity);
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9.02.08 Institute legal proceedings to foreclose upon and against
the lien and security interest granted by this Agreement and the Security
Agreement, to recover judgment for all amounts then due and owing on the Loan,
and to collect the same out of any of the Collateral or the proceeds of any sale
thereof;
9.02.09 Institute legal proceedings for the sale, under the
judgment of decree of any court of competent jurisdiction, of any or all of the
Collateral;
9.02.10 Personally or by agents, attorneys, or appointment of a
receiver enter upon any premises where the Collateral or any part of it may then
be located, and take possession of all or any part of it and/or render it
unusable; and without being responsible for loss or damage to such Collateral,
(a) hold, store, and keep idle, or lease, operate, remove or
otherwise use or permit the use of the Collateral or any part of it, for that
time and upon those terms as Bank, in its sole discretion, deems to be in its
own best interest, and demand, collect and retain all resulting earnings and
other sums due and to become due from any party, accounting only for net
earnings, if any (unless the Collateral is retained in satisfaction of the Loan,
in which case no accounting will be necessary), arising from that use (which net
earnings may be applied against the amounts outstanding on the Loan) and
charging against all receipts from the use of the Collateral or from its sale,
by court proceeds or pursuant to subsection (b) below, all other costs, expenses
charges, damages and other losses resulting from that use; and/or
(b) sell, lease, dispose of, or cause to be sold, leased or
disposed of, all or any part of the Collateral at one or more public or private
sales, leasings or other dispositions, at places and times and on terms and
conditions as Bank may deem fit, without any previous demand or advertisement;
and except as provided in this Agreement and the Security Agreement, all notice
of
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sale, lease or other disposition, and advertisement, and other notice or demand,
any right or equity of redemption, and any obligation of a prospective purchaser
or lessee to inquire as to the power and authority of Bank to sell, lease or
otherwise dispose of the Collateral or as to the application by Bank of the
proceeds of sale or otherwise, which would otherwise be required by, or
available to Borrower under, applicable law are expressly waived by Borrower to
the fullest extent permitted.
At any sale pursuant to or permitted by this Section 9.02, whether
under the power of sale, by virtue of judicial proceedings or otherwise, it
shall not be necessary for Bank, Collateral Custodian or a public officer under
order of a court to have present physical or constructive possession of the
Collateral to be sold. The recitals contained in any conveyances and receipts
made and given by Bank, Collateral Custodian or the public officer to any
purchaser at any sale made pursuant to this Agreement shall, to the extent
permitted by applicable law, conclusively establish the truth and accuracy of
the matters stated with regard to the Loan or the conduct of sale (including,
without limit, as to the amounts of the principal of and interest on the Loan,
the accrual and nonpayment of it and advertisement and conduct of the sale); and
all prerequisites to the sale shall be presumed to have been satisfied and
performed. Upon any sale of any of the Collateral, the receipt of the officer
making the sale under judicial proceedings or that of Bank or Collateral
Custodian shall be sufficient discharge to the purchaser for the purchase money,
and the purchaser shall not be obligated to see to the application of the money.
Any sale of any of the Collateral under this Agreement or the Security Agreement
shall be a perpetual bar against Borrower with respect to that Collateral.
9.03 Remedies Cumulative. All remedies available to Bank shall be
cumulative not alternate in that the exercise of one or more of them shall not
preclude exercising one or more of the others, including any remedy provided in
section 9.03 of Borrower's Operating Agreement.
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9.04 Allocation of Amounts Received. All amounts received by Bank after
an Event of Default shall be allocated as follows:
(a) First, to the payment of reasonable costs and expenses
incurred by the Bank or Collateral Custodian in the performance of its duties
and enforcement of its rights under the Loan Documents or Custodial Agreement,
including, without limitation, all costs and expenses of collection, attorney's
fees, court costs and foreclosure expenses;
(b) Second, to the outstanding and unpaid interest on the Loan;
(c) Third, to the balance of the Loan until it is paid in full.
10. COLLECTIONS.
Upon default if so requested by Bank or Collateral Custodian, in
writing, Borrower shall act as the representative of, and in trust for, Bank and
Collateral Custodian in receiving and collecting all monies payable on any
Mortgage Loan held as part of the Collateral and after collection thereof shall
deposit the same in the Restricted Account, and the same shall be held by
Collateral Custodian as part of the Collateral hereunder. Bank, upon deposit in
the Restricted Account of any monies payable on any such Mortgage Loan, may, in
its sole discretion, apply all or any part thereof to the payment of Borrower's
obligations.
11. EXTENSION AND TERMINATION.
Borrower may at any time after the first twelve months of the term of
the Loan and provided there exists no Event of Default, request in writing an
extension of the maturity date of the Loan for an additional eighteen (18)
months and/or amendments to the terms and conditions of the Loan. Bank shall
respond to Borrower's request in writing within 30 calendar days from the date
of receipt of such request and all information necessary to evaluate such
request. Bank's failure to respond to Borrower's request as provided herein
shall be deemed a rejection of such request.
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Borrower may terminate this Agreement pursuant to Section 4.8 of the
Joint Venture Agreement between Bank and Rock Financial Corporation dated
February 19, 1999, upon which event all Indebtedness then outstanding shall be
immediately due and payable.
Termination of this Agreement by Borrower or Bank as described above
will not alter or affect any of the rights or obligations of the parties hereto
in respect of any transactions then pending hereunder, particularly the
Indebtedness or obligation of Borrower or the right of Bank to the Collateral,
or the right to enforce and use the provisions of this Agreement in respect of
the enforcement and collection of the Collateral.
12. MISCELLANEOUS.
12.01 Notices. All notices given by any party to any other party under
this Agreement shall be in writing (including facsimile transmission) unless
otherwise provided for herein, delivered personally or by depositing the same in
the United States mail, registered with postage prepaid, addressed to the party
at the address or faxed to the fax number set forth below:
If to Borrower: Rock Home Loans at Michigan National,
L.L.C.
30600 Telegraph Road, Suite 4000
Bingham Farms, MI 48025
Attention: William Emerson
Facsimile No. (248) 723-7276
If to Bank: Michigan National Bank
27777 Inkster Road, M/C 10-37
Farmington Hills, MI 48034
Attention: Lisa Ochoa
Facsimile No. (248) 473-4318
If to Collateral Custodian: Comerica Bank
500 Woodward Avenue
Detroit, MI 48226
Attention: Mortgage Warehousing
Facsimile No. (313) 222-9295
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Any party may change the address to which notices are to be sent by notice of
such change to each other party given as provided herein. Such notices shall be
effective on the date received or, if mailed, on the third Business Day
following the date mailed.
12.02 Successors and Assigns. The terms and provisions of this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and assigns. All representations, warranties,
covenants (affirmative and negative) and agreements herein contained on the part
of Borrower shall survive the execution of the Note, and shall be effective as
long as any sums remain due and owing Collateral Custodian or Bank.
12.03 Delay - No Waiver. No delay in exercising, or failure to exercise
any right, power or remedy accruing to Collateral Custodian or Bank, as
applicable, through any breach or default of Borrower under this Agreement, or
any acquiescence to any such breach or default, or to any similar breach or
default thereafter occurring, shall impair any such right, power or remedy of
Collateral Custodian or Bank, as applicable; nor shall any waiver of any single
breach or default be deemed a waiver of any breach or default thereafter
occurring. Any waiver, permit, consent or approval of any kind or character on
the part of Collateral Custodian or Bank, as applicable, of any provision or
condition of the Agreement, must be in writing and shall be effective only to
the extent of such writing specifically set forth. In the event Bank or
Collateral Custodian takes any action to collect sums due under the Note or to
enforce, renegotiate, restructure or modify the terms of this Agreement, or
institutes, defends or otherwise participates in any action at law or suit in
equity in relation to this Agreement, or any Mortgage Loan forming part of the
Collateral, Borrower, in addition to all other sums which it may be called upon
to pay, will pay Bank and Collateral Custodian's attorneys' fees and costs.
Nothing in this Agreement shall be deemed any waiver or prohibition of
Collateral Custodian's or Bank's right of lien or set-off, except that
Collateral
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Custodian and Bank shall not set-off against any legitimate custodial or escrow
account in which Borrower accumulates funds owned by individual mortgagors or
other third parties.
12.04
(a) Entire Agreement-Supplemental Policies and Procedures. This
Agreement, together with the other agreements referred to herein, sets forth the
entire agreement among the parties hereto, and there are no other agreements,
express or implied, written or oral, except as set forth herein. This Agreement
may not be amended, altered or changed except in writing by all parties hereto.
It is contemplated that from time to time Borrower and Bank will enter into
supplemental agreements establishing policies and procedures to carry out the
terms of this Agreement. Such agreements shall constitute amendments hereto
provided they are signed by all parties.
(b) Partial Invalidity. The inapplicability or unenforceability of any
provision of this Agreement shall not limit or impair the operation or validity
of any other provisions of this Agreement.
(c) Counterparts. This Agreement and any amendments hereto may be
executed in any number of counterparts, each of which, when executed and
delivered, shall be an original, but such counterparts shall together constitute
one and the same instrument.
(d) No Assignment by Borrower. This Agreement shall not be assignable
by Borrower without the express written approval of Bank.
(e) Materiality/Reliance by Bank. All covenants, agreements and
representations made herein and in documents delivered in support of this
Agreement, now or in the future, shall be deemed to have been material and
relied on by Collateral Custodian and the Bank and shall not merge with this
Agreement.
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(f) No Third Party Beneficiary. The parties hereto understand and
agree that there is no intention to confer any benefits upon any person or legal
entity not a party to this Agreement.
(g) Confidentiality. All information and materials provided to Bank by
Borrower shall be treated with the same degree of confidentiality as Bank
maintains with regard to similar information of its other customers generally.
Nothing contained herein shall prevent Bank from releasing to actual or proposed
loan participants such information regarding Borrower as Bank may deem pertinent
and necessary.
12.05 Interpretation of Accounting Terms. Each accounting term used in
this Agreement which is not specifically defined shall have the meaning
customarily given to it in accordance with generally accepted accounting
principles.
12.06 Michigan Law/Consent to Jurisdiction and Service. This Agreement,
the Security Agreement, Custodial Agreement, the Note and the Loan Documents
shall be governed by the laws of the State of Michigan. Borrower agrees and
consents to the exclusive jurisdiction of the Oakland County Circuit Court
and/or the United States District Court for the Eastern District of Michigan.
Furthermore, BORROWER HEREBY WAIVES ALL RIGHT TO DEMAND A JURY TRIAL IN ANY AND
ALL ACTIONS AND PROCEEDINGS WHETHER ARISING HEREUNDER OR UNDER ANY OTHER
AGREEMENT OR UNDERTAKING and irrevocably agrees to service of process sent by
certified mail, return receipt requested, and regular mail to the address set
forth herein, or such address as may appear in Bank's or Collateral Custodian's
records.
12.07 Amendments; Waivers. Any term, covenant, agreement or condition
of the Loan Documents may be amended, and any right under the Loan Documents may
be waived, if, but only if, such amendment or waiver is in writing and is signed
by (a) the Bank and, if the rights and duties of the Collateral Custodian are
affected thereby, by the Collateral Custodian; and (b) in the case of
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an amendment, by the Borrower; provided, however, that no amendment or waiver
shall be effective, unless in writing and signed by Bank. Bank agrees to provide
written notice to Borrower should Bank sell any interest in the Loan to another
party.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the day and year first above written.
"BORROWER"
ROCK HOME LOANS AT MICHIGAN NATIONAL, L.L.C.,
a Michigan limited liability company
By:_______________________________
William Emerson
Its: Manager
"BANK"
MICHIGAN NATIONAL BANK,
a national banking association
By:_______________________________
Lisa Ochoa
Its: Relationship Manager
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EXHIBIT A (SECTION 5.06)
SCHEDULE OF BORROWER'S OFFICES
Rock Financial Corporation
30600 Telegraph Road
Fourth Floor
Bingham Farms, MI 48025
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EXHIBIT C (SECTION 7.04)
Other Liens
NONE
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EXHIBIT D
REQUEST FOR ADVANCE
(Form to be provided by and satisfactory to Collateral Custodian)
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EXHIBIT E (SECTION 1.02)
APPROVED INVESTORS
Countrywide Mortgage
Washtenaw Mortgage
Michigan National Bank
Homeside Lending, Inc.
Rock Financial Corporation
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EXHIBIT F (SECTION 5.09)
SCHEDULE OF JUDGMENTS, ACTIONS AND PROCEEDINGS
NONE
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EXHIBIT G
TRANSMITTAL LETTER
[See Exhibit 9 to Custodial Agreement]
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EXHIBIT H
REQUEST FOR PRE-WAREHOUSE ADVANCE AND SECURITY AGREEMENT
(Exhibit 4 to Custodial Agreement)
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EXHIBIT I
TRUST RECEIPT
(See Exhibit 7 to Custodial Agreement)
-65-
<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 SIX MONTHS
ENDED, JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS AND ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 35,405,660
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 81,916,736
<CURRENT-ASSETS> 0
<PP&E> 16,020,961
<DEPRECIATION> 6,192,468
<TOTAL-ASSETS> 137,345,206
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 147,849
<OTHER-SE> 49,302,652
<TOTAL-LIABILITY-AND-EQUITY> 137,345,206
<SALES> 0
<TOTAL-REVENUES> 36,734,657
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 683,559
<INTEREST-EXPENSE> 2,032,259
<INCOME-PRETAX> 3,272,894
<INCOME-TAX> 1,209,000
<INCOME-CONTINUING> 2,148,792
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,148,792
<EPS-BASIC> 0.15
<EPS-DILUTED> 0.14
</TABLE>
