-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VL2m9mnyqhZSeTONNsMXS/GsjeJ44dsq2VuoI+qZIYdo7RCeEhaS4hdys+FfOXtB z85bLOmOSVSsC19/+U32CA== 0000950124-98-000935.txt : 19980226 0000950124-98-000935.hdr.sgml : 19980226 ACCESSION NUMBER: 0000950124-98-000935 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 14 FILED AS OF DATE: 19980225 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ROCK FINANCIAL CORP/MI/ CENTRAL INDEX KEY: 0001055286 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 382603955 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-46885 FILM NUMBER: 98549452 BUSINESS ADDRESS: STREET 1: 30600 TELEGRAPH RD STREET 2: 4TH FL CITY: BINGHAM FARMS STATE: MI ZIP: 49025 BUSINESS PHONE: 8007317625 MAIL ADDRESS: STREET 1: 30600 TELEGRAPH RD STREET 2: 4TH FL CITY: BINGHAM FARMS STATE: MI ZIP: 49025 S-1 1 S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 25, 1998. REGISTRATION NO. 333-______ ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------------------- ROCK FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) MICHIGAN 6162 38-2603955 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification No.)
---------------------- 30600 TELEGRAPH ROAD, FOURTH FLOOR BINGHAM FARMS, MICHIGAN 48025 (248) 540-8000 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) DANIEL GILBERT CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER ROCK FINANCIAL CORPORATION 30600 TELEGRAPH ROAD, FOURTH FLOOR BINGHAM FARMS, MICHIGAN 48025 (248) 540-8000 (Name, address, including zip code, and telephone number, including area code, of agent for service) --------------------- COPIES TO: ALAN S. SCHWARTZ DANIEL G. BERICK HONIGMAN MILLER SCHWARTZ AND COHN BERICK, PEARLMAN & MILLS CO., L.P.A. 2290 FIRST NATIONAL BUILDING 1350 EATON CENTER, 1111 SUPERIOR AVENUE DETROIT, MICHIGAN 48226-3583 CLEVELAND, OHIO 44114 (313) 256-7663 (216) 861-4900 FAX NO.: (313) 962-0176 FAX NO: (216) 861-4929 --------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ___________ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ___________ If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ___________ If the delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [ ] --------------------- CALCULATION OF REGISTRATION FEE
=================================================================================================================================== PROPOSED MAXIMUM OFFERING PROPOSED MAXIMUM TITLE OF EACH CLASS OF AMOUNT TO BE PRICE PER AGGREGATE OFFERING AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED (1) SHARE (2) PRICE (2) REGISTRATION FEE - ----------------------------------------------------------------------------------------------------------------------------------- Common Shares, par value $.01 per share 3,829,500 $10.00 $38,295,000 $11,297.03 ===================================================================================================================================
(1) Includes 499,500 shares which the Underwriters have the option to purchase to cover over-allotments, if any. (2) Estimated solely for the purpose of computing the registration fee, based on a bona fide estimate of the maximum public offering price pursuant to Rule 457(a). --------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. ================================================================================ 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, FEBRUARY 25, 1998 PROSPECTUS 3,330,000 [LOGO] ROCK FINANCIAL CORPORATION COMMON SHARES Of the 3,330,000 common shares, par value $.01 per share (the "Common Shares"), offered hereby (the "Offering") 3,000,000 shares are being offered by Rock Financial Corporation ("Rock" or the "Company") and 330,000 shares are being sold by certain shareholders and option holders of Rock (the "Selling Shareholders"). See "Principal and Selling Shareholders." Rock will not receive any of the proceeds from the sale of shares by the Selling Shareholders, but it will receive approximately $1.5 million of proceeds from the options exercised by some of the Selling Shareholders to acquire the shares they are selling. See "Use of Proceeds." Prior to the Offering, there has been no public market for the Common Shares. It is currently anticipated that the initial public offering price will be between $__ and $__ per share. See "Underwriting" for a discussion of factors to be considered in determining the initial public offering price. Rock intends to apply to The Nasdaq Stock Market, Inc. to have its Common Shares quoted in The Nasdaq National Market under the symbol "RCCK." -------------------- SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON SHARES OFFERED HEREBY. -------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
========================================================================================================================== PROCEEDS PRICE TO UNDERWRITING PROCEEDS TO TO SELLING PUBLIC DISCOUNT (1) COMPANY (2) SHAREHOLDERS - --------------------------------------------------------------------------------------------------------------------------- Per Share . . . . . . $____ $0.___ $_____ $_____ - --------------------------------------------------------------------------------------------------------------------------- Total (3) . . . . . . $__________ $_______ $__________ $__________ ==========================================================================================================================
(1) Rock and the Selling Shareholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting estimated expenses of $800,000, payable by Rock, including expenses of the Selling Shareholders. See "Principal and Selling Shareholders." (3) Rock has granted the Underwriters a 30-day option to purchase up to 499,500 additional Common Shares, on the same terms and conditions as set forth above, solely to cover over-allotments, if any. If such option is exercised in full, the total Price to Public will be $__________, Underwriting Discount will be $_________, Proceeds to Company will be $__________ and Proceeds to Selling Shareholders will be $_________. See "Underwriting." ------------- The Common Shares are offered subject to prior sale, when, as and if delivered to and accepted by the Underwriters, and subject to certain other conditions. The Underwriters reserve the right to withdraw, cancel or modify said offer and to reject orders in whole or in part. It is expected that delivery of the Common Shares will be made on or about ________, 1998 at the offices of Bear, Stearns & Co. Inc., 245 Park Avenue, New York, New York 10167. ------------- BEAR, STEARNS & CO. INC. ________, 1998 3 ----------------- THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL. ----------------- CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON SHARES, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS AND THE IMPOSITION OF PENALTY BIDS. SEE "UNDERWRITING." 2 4 PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements and notes to financial statements appearing elsewhere in this Prospectus. Unless the context indicates otherwise, all references in this Prospectus to "Rock" or the "Company" refer to Rock Financial Corporation. Except as otherwise specified, all information in this Prospectus (i) assumes no exercise of the Underwriters' over-allotment option (see "Underwriting"), and (ii) gives effect to a 1,118.31805-for-one stock split effected January 8, 1997. THE COMPANY Rock is a specialty marketing company of debt consolidation and home financing products secured primarily by first or second mortgages on one- to four-family, owner-occupied residences. The Company originates loans through 24 stores and branches, one marketing center and one call center. Founded in 1985 by its current Chief Executive Officer and Chairman of the Board, Daniel Gilbert, Rock originates 100% of its loans through its retail operations, marketing its loans directly to consumers. The Company uses proprietary marketing methods and technology to increase its market penetration. Rock seeks to provide "world class" service to its customers, thereby encouraging them to return for future loans and refer others to Rock for loans. The Company also focuses on recruiting, developing and motivating talented people, recruited from inside and outside the consumer finance industry, to implement its business strategies. Rock believes it is creating growing brand identities and a retail franchise that will sustain its loan origination efforts. As a retail originator of loans, Rock earns a portion of its revenues from origination points and processing fees charged to its customers. Rock does not currently securitize its loans. Rather, it sells its loans in large bulk and whole loan sales for cash premiums in the secondary market. During 1997, Rock had revenues of $52.1 million, pre-tax income of $11.4 million and pro forma net income of $7.0 million. During 1997, Rock closed $1.2 billion (12,950 units) of loans. As of January 31, 1998, Rock had 717 employees, including 286 loan officers. Rock currently operates through three major divisions. Rock originates loans to individuals with impaired credit characteristics, high levels of debt service to income, unfavorable past credit experience, limited credit history, limited employment history or unverifiable income ("Sub-Prime Home Equity Loans") through its Fresh Start(TM) division. Rock owns the registered trademark for the name "Fresh Start Financial Services(R)" and has applied for a registered service mark for the name "Fresh Start(TM)." Rock originates home equity second mortgage loans to individuals with good credit histories but little or no equity in their homes ("High Loan-to-Value Loans" or "High LTV Loans") through its Specialty Lending division. During 1997, Rock closed $335.3 million (6,232 units, representing 49% of the total units closed) of Sub-Prime Home Equity Loans and High LTV Loans (together, "Non-Prime Loans"). Rock also originates loans that generally conform to Federal National Mortgage Association ("FNMA") or Federal Home Loan Mortgage Corporation ("Freddie Mac") underwriting standards, or that generally meet such standards except for maximum loan size guidelines ("Conventional Loans"), through its Conventional Mortgage Lending division. During 1997, Rock closed $867.5 million (6,513 units) of Conventional Loans. Although only 28% of the total loan closings (by dollar volume) were Non-Prime Loans in 1997, revenues from Non-Prime Loans equaled 63% of total revenues due to the higher profit margins and interest rates associated with Non-Prime Loans. In addition, Rock began to increase its government insured lending operations in 1997, primarily making mortgage loans that meet the underwriting standards for Federal Housing Administration ("FHA") insurance. 3 5 Rock's business in each division is supported by an infrastructure of sophisticated technology, highly-trained people and specialized marketing, including multimedia advertising and direct marketing operations. To identify potential customers, Rock uses internal and external databases of information regarding past and potential customers and their needs. Rock then develops proprietary customer profiles which it uses together with information from outside sources to tailor and direct its marketing efforts for each of its divisions. Rock believes that its focused marketing approach makes more efficient use of its marketing resources and leads to a higher marketing success rate than broad indiscriminate marketing aimed at a wide range of consumers. FRESH START(TM) DIVISION Created in 1994, the Fresh Start(TM) division focuses on customers whose borrowing needs are not served by traditional financial institutions due to impaired credit profiles or other factors. Sub-Prime Home Equity Loans are used typically to consolidate debt (such as credit card debt) and to finance home improvements, home purchases and other consumer needs. By originating loans to individuals with impaired credit profiles, Rock is able to charge higher interest rates on its Sub-Prime Home Equity Loans than for its Conventional Loans. The Fresh Start(TM) division originates Sub-Prime Home Equity Loans through its network of retail loan origination stores. The majority of the Fresh Start(TM) stores are located in retail strip malls or office buildings with substantial signage. Rock supports its Fresh Start(TM) store network with an array of marketing, including multimedia advertising campaigns and direct marketing to build local awareness of the Fresh Start(TM) brand name and to grow loan volume within each market. As of January 31, 1998, Rock had 19 Fresh Start(TM) stores, including five stores opened before 1997, nine stores opened during 1997, and five stores opened during January 1998. In addition, in November 1997, Rock opened a pilot marketing center located within a large national retail superstore. Rock's Fresh Start(TM) division is using the "Fresh Start(TM)" name, adopted in 1997, in its advertising outside of Michigan and plans to convert its current Michigan "Boulder Financial" stores to Fresh Start(TM) stores in 1998. Stores that were open before 1997 closed an average of $11.4 million of Sub-Prime Home Equity Loans per store during the fourth quarter of 1997. Rock believes that its new stores mature over a twelve- to eighteen-month time period. The Fresh Start(TM) division closed $269.3 million (4,196 units) of Sub-Prime Home Equity Loans during 1997, including $91.0 million (1,453 units) closed during the fourth quarter. Based on information provided by the National Mortgage News, Rock believes it was one of the 20 largest retail originators of Sub-Prime Home Equity Loans in the United States in 1997. SPECIALTY LENDING DIVISION The Specialty Lending division, which commenced its current operations in March 1997, originates High LTV Loans secured primarily by second mortgages and with combined loan-to-value ratios (including the first mortgage balance) of up to 125% of the estimated value of the underlying property. Because High LTV Loans have little, if any, equity cushion (unlike Sub-Prime Home Equity Loans), Rock's underwriting relies principally on the creditworthiness of the customer for repayment. High LTV Loans are typically used to consolidate debt (such as credit card debt) and to finance home improvements, education, and other consumer needs. 4 6 The Specialty Lending division markets High LTV Loans to consumers through its call center located in Bingham Farms, Michigan. During 1997, Rock closed $66.0 million (2,036 units) of High LTV Loans, including $29.1 million (883 units) closed during the fourth quarter. As of January 31, 1998, Rock was soliciting High LTV Loans in eight states and was licensed to do business in eight others. Rock uses extensive direct-mail marketing and significant multimedia advertising campaigns to generate inbound call volume into its call center. At various times, outbound telemarketing programs also are launched to targeted lists of consumers. The Specialty Lending division uses a specially trained sales force and relies heavily on technology and systems designed specifically for Rock. Although the current focus of the Specialty Lending division is High LTV Loans, the infrastructure of the division and the call center are designed with the ability to change focus to, or add, other types of loan products as appropriate. CONVENTIONAL MORTGAGE LENDING DIVISION Since its inception in 1985, Rock has originated Conventional Loans through its Conventional Mortgage Lending division. During 1997, Rock originated $867.5 million (6,513 units) of Conventional Loans. Rock believes that it is the largest non-depositary-affiliated retail lender of one- to four-family residential mortgage loans in southeast Michigan. The Conventional Mortgage Lending division originates loans through five branches all located in southeast Michigan. Conventional Loans generally conform to the underwriting guidelines of FNMA or Freddie Mac, or they generally conform except for maximum loan size, and they are generally made to finance the purchase of a home or to refinance a home mortgage. Over the past 13 years, Rock has used marketing and advertising to create and enhance brand name recognition for the Rock Financial name. In conjunction with its multimedia advertising, Rock coordinates extensive direct marketing campaigns. Rock has developed third-party relationships with real estate brokers, home builders, attorneys, accountants, and financial planners, which generate referral business. Rock is also an approved, unsupervised seller/servicer of FNMA and Freddie Mac Conventional Loans and a Department of Housing and Urban Development ("HUD")-approved lender. BUSINESS STRATEGY Rock's business strategy to sustain its growth in profitability while continuing to build its consumer lending operations includes: (i) enhancing consumer recognition of its "Fresh Start(TM)" and "Rock Financial" brand names in its current markets and establishing brand name recognition in new markets, (ii) increasing the number of Fresh Start(TM) stores and expanding its call center operations into additional states, (iii) expanding the cross-selling of existing products and expanding the products offered through existing distribution channels, (iv) exploring establishing additional distribution channels, (v) providing "world class" service, and thereby distinguishing itself from its competitors, (vi) continuing to invest heavily in technology and marketing, and (vii) maintaining consistent underwriting standards, and thereby maintaining secondary market interest in Rock's loans. Simultaneously with the closing of this Offering, Rock will cease to be taxed as an S corporation under Subchapter S (an "S corporation") of the Internal Revenue Code of 1986, as amended (the "Code"), and will become subject to federal and state income taxation as a C corporation. In connection with the termination of its S corporation status, Rock will pay previously earned and undistributed taxable income (the "Shareholder Distribution Amount") out of the net proceeds of the Offering to Rock's shareholders existing immediately before the closing of this Offering (the "Existing Shareholders") and an accounting 5 7 adjustment will be made. Rock was incorporated in the State of Michigan on June 21, 1985. Rock's principal executive offices are located at 30600 Telegraph Road, Fourth Floor, Bingham Farms, Michigan 48025. Its telephone number is (248) 540-8000. RISK FACTORS Before making an investment decision, prospective investors should carefully consider all of the information set forth in this Prospectus and, in particular, should evaluate the factors set forth in "Risk Factors." THE OFFERING Common Shares offered by: Rock . . . . . . . . . . . . . . 3,000,000 shares The Selling Shareholders . . . . 330,000 shares* Common Shares to be outstanding after the Offering . . . . . . . 13,330,000 shares* Use of Proceeds: . . . . . . . . . . . . To fund a distribution to the Existing Shareholders in connection with termination of Rock's status as an S corporation ($18.0 million as of December 31, 1997 and expected to increase by the time of the distribution) and to repay a portion of the amounts outstanding under Rock's warehouse line of credit used to finance, and secured by, a portion of Rock's inventory of loans. See "Use of Proceeds." Proposed Nasdaq National Market Symbol. . "RCCK" - ------------------------ *Excludes an aggregate of up to 4,500,000 Common Shares reserved for issuance under Rock's 1996 Stock Option Plan, under which options to acquire 2,492,184 Common Shares were outstanding as of January 31, 1998 (see Note 11 of Notes to Financial Statements). The 330,000 Common Shares being sold by the Selling Shareholders will be acquired by them on the closing date of this Offering upon exercise of stock options previously granted to them, and Rock has granted to them, effective as of the closing date of this Offering, immediately exercisable replacement options to purchase 450,000 Common Shares at the initial public offering price of the Common Shares in this Offering. At the closing of the Offering, options to purchase 2,612,184 Common Shares will be outstanding. 6 8 SUMMARY FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, (1) --------------------------------------------------------------------- STATEMENT OF INCOME DATA: 1993 1994 1995 1996 1997 ---- ---- ---- ---- ---- Revenue: Interest income ...................................... $ 2,724 $ 2,310 $ 3,003 $ 4,267 $ 8,083 Interest expense ..................................... 1,819 1,746 3,012 3,669 5,150 ----------- ---------- --------- ---------- ---------- Net interest margin ................................. 905 564 (9) 598 2,933 Provision for credit losses -- -- -- -- (300) ----------- ---------- --------- ---------- ---------- Net interest margin after provision for credit losses 905 564 (9) 598 2,633 Loan fees and gains and losses on sale of mortgages 16,251 10,348 17,788 27,960 47,084 Net gain on sale of mortgage servicing (2) ........... -- 2,465 5,728 -- -- Net gain (loss) on sale of marketable securities (3).. 356 (202) 346 991 2,222 Other income ......................................... 677 1,348 399 6 171 ----------- ---------- --------- ---------- ---------- 18,189 14,523 24,252 29,555 52,110 ----------- ---------- --------- ---------- ---------- Expenses: Salaries, commissions and employee benefits .......... 10,306 9,514 11,272 16,425 24,811 General and administrative expenses .................. 2,761 3,159 3,726 4,646 7,630 Marketing expenses ................................... 967 1,465 1,339 2,393 5,370 Depreciation and amortization ........................ 390 510 506 663 1,292 ----------- ---------- --------- ---------- ---------- 14,424 14,648 16,843 24,127 39,103 ----------- ---------- --------- ---------- ---------- Income (loss) before stock and option holders' bonuses 3,765 (125) 7,409 5,428 13,007 Stock and option holders' bonuses .................... 2,026 142 546 2,297 1,592 ----------- ---------- --------- ---------- ---------- Net income (loss) ................................... 1,739 (267) 6,863 3,131 11,415 Pro forma income tax expense (benefit) (4) ............. 687 (105) 2,642 1,205 4,395 ----------- ---------- --------- ---------- ---------- Pro forma net income (loss) ......................... $ 1,052 $ (162) $ 4,221 $ 1,926 $ 7,020 =========== ========== ========= ========== ========== PER SHARE INFORMATION: Pro forma net income per share: Basic ............................................... $ 0.53 ========== Diluted ............................................. $ 0.49 ========== Weighted average number of shares outstanding: Basic ............................................... 13,330,000 ========== Diluted ............................................. 14,434,692 ========== OPERATING DATA: Principal amount of loan closings: Fresh Start(TM) ...................................... $ -- $ 11,703 $ 64,403 $ 147,676 $ 269,275 Specialty Lending .................................... -- -- -- -- 66,043 Conventional Mortgage Lending . ...................... 997,615 677,024 740,408 892,672 867,520 Other ................................................ -- -- 15,860 36,943 16,599 ----------- ---------- --------- ---------- ---------- Total ............................................... $ 997,615 $ 688,727 $ 620,671 $1,077,291 $1,219,437 =========== ========== ========= ========== ========== Weighted average interest rate (fixed rate): Fresh Start(TM) ...................................... -- 12.58% 12.42% 12.64% 12.69% Specialty Lending .................................... -- -- -- -- 15.22% Conventional Mortgage Lending ........................ 7.36% 7.85% 8.18% 7.86% 7.99% Other ................................................ -- -- 8.03% 8.48% 8.42% Weighted average interest rate (adjustable rate): Fresh Start(TM) ...................................... -- 10.25% 10.91% 10.33% 11.09% Conventional Mortgage Lending ........................ 4.68% 6.27% 6.90% 6.51% 6.83% Other ................................................ -- -- 6.90% 7.07% 7.08% Total number of employees at year end .................. 260 255 266 399 667 Number of branches at year end: (5) Fresh Start(TM) Stores ............................... -- 1 3 5 14 Conventional Mortgage Lending Branches ............... 3 8 9 4 5
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FOR THE QUARTER ENDED (1) ----------------------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------- ------- ------------ ----------- 1997 QUARTERLY STATEMENT OF INCOME DATA: Revenues: Net interest margin after provision for credit losses .... $ 405 $ 454 $ 829 $ 945 Loan fees and gains and losses on sale of mortgages ...... 7,173 10,895 12,150 16,866 Net gain (loss) on sale of marketable securities (3) ..... 685 (18) 1,587 (32) Other income ............................................. 50 52 48 21 ---------- ----------- ----------- ----------- 8,313 11,383 14,614 17,800 ---------- ----------- ----------- ----------- Expenses ................................................... 6,700 7,669 11,222 13,512 ---------- ----------- ----------- ----------- Income before stock and option holders' bonuses ............ 1,613 3,714 3,392 4,288 Stock and option holders' bonuses .......................... 492 493 227 380 ---------- ----------- ----------- ----------- Net income ............................................... 1,121 3,221 3,165 3,908 Pro forma income tax expense (4) .......................... 432 1,240 1,218 1,505 ---------- ----------- ----------- ----------- Pro forma net income ..................................... $ 689 $ 1,981 $ 1,947 $ 2,403 ========== =========== =========== =========== PER SHARE INFORMATION: Pro forma net income per share: Basic ................................................. $0.05 $0.15 $0.15 $0.18 ===== ===== ===== ===== Diluted ............................................... $0.05 $0.14 $0.13 $0.17 ===== ===== ===== ===== Weighted average number of shares outstanding: Basic ................................................. 13,330,000 13,330,000 13,330,000 13,330,000 ========== =========== =========== ========== Diluted ............................................... 14,434,692 14,434,692 14,434,692 14,434,692 ========== =========== =========== ========== OPERATING DATA: Principal amount of loan closings: Fresh Start(TM) .......................................... $ 48,212 $ 57,499 $ 72,790 $ 90,773 Specialty Lending ........................................ 1,118 12,575 23,273 29,078 Conventional Mortgage Lending ............................ 184,147 193,629 232,050 257,694 Other .................................................... 2,955 3,938 4,490 5,215 ---------- ----------- ----------- ---------- Total ................................................. $ 236,432 $ 267,641 $ 332,603 $ 382,760 ========== =========== =========== ========== Weighted average interest rate (fixed rate): Fresh Start(TM) .......................................... 12.62% 12.98% 12.84% 12.40% Specialty Lending ........................................ 15.38% 15.33% 15.19% 15.21% Conventional Mortgage Lending ............................ 8.19% 8.47% 7.94% 7.69% Other .................................................... 8.41% 8.93% 8.40% 8.19% Weighted average interest rate (adjustable rate): Fresh Start(TM) .......................................... 10.55% 11.10% 11.21% 11.30% Conventional Mortgage Lending ............................ 6.60% 7.01% 6.87% 6.88% Other .................................................... 7.14% 7.38% 7.02% 6.82% Total number of employees .................................. 423 482 579 667 Number of branches at quarter end: (5) Fresh Start(TM) Stores ................................... 5 6 10 14 Conventional Mortgage Lending Branches ................... 4 4 5 5
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DECEMBER 31, 1997 ----------------- ACTUAL AS ADJUSTED (6) ------ --------------- SELECTED BALANCE SHEET DATA: Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,947 $ 11,947 Mortgage loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . 121,344 121,344 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,138 11,211 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144,429 144,502 Warehouse financing facilities . . . . . . . . . . . . . . . . . . . . . . . 97,455 85,184 Drafts payable and other liabilities . . . . . . . . . . . . . . . . . . . . 31,866 31,866 Shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,108 27,452
- ----------------------- (1) Rock commenced operations in its Fresh Start(TM) division in 1994 and commenced current operations in its Specialty Lending division in 1997. Of the 14 Fresh Start(TM) stores open at December 31, 1997, nine were opened during 1997 (eight of which were opened since July 1, 1997). (2) During 1993 and 1994, Rock elected to retain, rather than sell, the servicing rights to its loans and received lower sales prices as a result. In 1994 Rock sold some of its servicing rights, and in 1995 Rock sold all of its remaining servicing rights and recognized a net gain on the sale of servicing rights. In 1996 and 1997, Rock sold its loans servicing released. (3) Before the end of 1997, Rock invested some of its excess cash in marketable securities. During 1995, 1996 and 1997, Rock sold a portion of its portfolio of marketable securities and recognized net gains of $346,000, $991,000 and $2,222,000, respectively. (4) Pro forma income taxes reflect adjustments for federal and state income taxes as if Rock had been taxed as a C corporation rather than an S corporation. See "Termination of S Corporation Status." No pro forma adjustments have been made for the non-recurring net gains on sales of marketable securities and stock and option holders' bonuses, or estimated earnings from the net proceeds received from the Offering. (5) Two are combined Fresh Start(TM) stores and Conventional Mortgage Lending branches. Does not include one Fresh Start(TM) marketing center opened in 1997. (6) As adjusted to give effect to (i) a distribution to the Existing Shareholders of the Shareholder Distribution Amount in the aggregate amount of approximately $18.0 million (calculated as of December 31, 1997), (ii) the creation of a deferred tax asset in the amount of $1.7 million (calculated as of December 31, 1997) arising in connection with Rock's termination of its S corporation status, (iii) the receipt by Rock of approximately $1.5 million upon exercise by the Selling Shareholders of 330,000 options at $4.68 a share to acquire the Common Shares they are selling in the Offering, and (iv) the sale of the Common Shares offered by Rock by this Prospectus and the application of the estimated net proceeds to Rock therefrom as described under "Use of Proceeds." In addition, Daniel Gilbert expects to repay the balance of his loans from Rock ($1.6 million as of December 31, 1997) with his share of the Shareholder Distribution Amount, and Rock expects to use that cash to repay a portion of the amounts outstanding under its warehouse line of credit. The adjusted amounts give effect to Rock's use of that cash to reduce its warehouse line of credit. The amounts do not include additional borrowings or additional S corporation income (which is expected to increase the Shareholder Distribution Amount) since December 31, 1997. See "Termination of S Corporation Status," "Use of Proceeds," and "Capitalization." 9 11 RISK FACTORS An investment in the Common Shares of Rock involves certain risks. Prospective investors should carefully consider the following risk factors, in addition to the other information contained in this Prospectus, in evaluating an investment in the Common Shares offered by this Prospectus. DEPENDENCE ON LOAN SALES Rock currently expects to sell substantially all of its loans to independent whole or bulk loan buyers and expects that the gain recognized from such sales will continue to represent a significant portion of Rock's revenues and net earnings. Further, Rock is dependent on the cash generated from such sales to fund its future loan closings and repay borrowings under its warehouse financing facilities. The price Rock receives for its loans varies from time to time and may be materially adversely affected by several factors, including, without limitation, any significant reduction in the number of potential buyers of Rock's loans, any significant increase in the amount of similar loans available for sale, general conditions in the loan securitization market, in the secondary market for loans in general or for Rock's loans in particular, which make Rock's loans less desirable to potential buyers, and increased prepayments of, or defaults under, loans in general, the types of loans being sold by Rock or loans previously sold by Rock. A prolonged, substantial reduction in the size of the secondary market for loans of the types closed by Rock may adversely affect Rock's ability to sell loans in the secondary market, with a consequent adverse impact on Rock's profitability and ability to fund future loan closings. Any significant decrease in the prices paid to Rock upon sale of its loans could materially adversely affect its business, operations, financial condition and results of operations. Five loan buyers purchased an aggregate of approximately 91.6% of the Sub-Prime Home Equity Loans sold by Rock in 1997, of which the largest of such buyers purchased approximately 36.5% of such Sub- Prime Home Equity Loans. Two loan buyers purchased approximately 93.5% of the High LTV Loans sold by Rock in 1997. The loss of any of these buyers or any significant reduction in the prices these buyers are willing to pay for Rock's loans could have an adverse effect on Rock's business, financial condition and results of operations. Rock's ability to complete sales of its loans will depend on a number of factors, including conditions in the secondary market generally. Adverse changes in the secondary market could impair Rock's ability to sell its loans on a favorable or timely basis and could have a material adverse effect upon Rock's business, financial condition and results of operations. Furthermore, because Rock's management expects that an important component of Rock's income will be gain on sale of loans, Rock's quarterly operating results may fluctuate significantly as a result of the timing and size of loan sales. If such sales do not close when expected, Rock's results of operations may be materially adversely affected for that period. ABILITY TO SUSTAIN AND MANAGE GROWTH Although Rock has experienced rapid and substantial growth in loan closings and total revenues in recent years, there can be no assurance that Rock can sustain these rates of growth or that it will be able to create an infrastructure or recruit and retain sufficient personnel to keep pace with a prolonged period of growth. Rock's growth and expansion is expected to place a significant strain on Rock's management, customer service, operations, human resources personnel, sales, marketing and administrative personnel and other resources. In order to serve the needs of its existing and future customers, Rock has increased and will continue to increase its workforce, which requires Rock to attract, train, motivate and manage qualified employees. Rock's ability to manage its planned growth depends 10 12 upon Rock's success in continuing to expand its operating, management, information, human resources, marketing and financial systems. If Rock is unable to keep pace in these areas with its rate of growth in revenues, its business, financial condition and results of operations could be materially adversely affected. Rock's recent and rapid growth may have a distortive impact on some of Rock's ratios and financial statistics and may make period-to-period comparisons difficult. In light of Rock's growth, historical performance of Rock's earnings may be of little relevance in predicting future performance. Furthermore, Rock's financial statistics may not be indicative of Rock's results in future periods. Any credit or other problems associated with the large number of loans closed in the recent past may not become apparent until sometime in the future. CONCENTRATION OF OPERATIONS During the year ended December 31, 1997, 91.7% of Rock's loan closings (as measured by the number of loans closed) were secured by properties located in Michigan. To the extent that properties underlying such loans are located in the same geographic region, such loans may be subject to a greater risk of delinquency or default in the event of adverse economic, political or business developments and natural hazard risks that may affect such region. If the region's real estate market should experience an overall decline in property values, the rates of delinquency, foreclosure, bankruptcy and loss on the loans may be expected to increase substantially, which could negatively impact Rock's ability to originate loans or sell them in the secondary market. Any impact on Rock's ability to originate or sell loans could materially adversely affect Rock's business, financial condition and results of operations. PREPAYMENT AND RECAPTURE RISK Decreases in prevailing interest rates or increases in competition could increase prepayments of Rock's loans as customers refinance their loans with lower interest rate loans. An increase in prepayments of Rock's loans or of similar loans in the industry in general could reduce the prices wholesale purchasers are willing to pay for Rock's loans. Also, an increase in prepayments could increase Rock's recapture risk, as, in connection with some Non-Prime Loan sales, Rock agrees to repay to the purchaser of the loan a portion of the premium paid for the loan if the loan is prepaid within the first year after sale. The repayment obligation is generally proportional to the part of the year that the loan was outstanding. An unexpected increase in prepayments of such loans could have a material adverse effect on Rock's business, financial condition and results of operations. COMPETITION The consumer lending industry is highly competitive and fragmented. Rock faces intense competition, primarily from commercial banks, savings and loan associations, credit unions, insurance companies, mortgage brokers, mortgage bankers and other consumer finance companies. If Rock expands into additional geographic markets, it will face competition from consumer lenders with established positions in such markets. There can be no assurance that Rock will be able to compete successfully with these consumer lenders. Competition can take place on various levels, including convenience in obtaining a loan, service, marketing, pricing (including the interest rates, closing costs and processing fees offered) and range of products. Many of Rock's competitors in the consumer lending industry are better established, 11 13 substantially larger and have significantly more capital and other resources than Rock. In addition, FNMA and Freddie Mac are currently developing technologies and business practices that will expand the scope of mortgage loans eligible to be purchased by them, including, potentially, Sub-Prime Home Equity Loans. The effect of these purchases on the consumer lending industry and profit margins is not presently determinable, but such expanded scope could attract additional competitors into the market and significantly erode profit margins. Barriers to entry into the consumer lending industry are low, and the current level of gains realized by Rock and its existing competitors on the sale of loans could attract additional competitors into the market. Consequently, there are many recent market entrants seeking these relatively attractive profit margins. Increases in the number of companies seeking to originate consumer loans could lower the rates of interest or reduce the amount of origination points and fees Rock can charge customers, thereby reducing the potential profitability of such loans. Competition might also reduce Rock's loan closing volume. In addition, during periods of declining interest rates, competitors which have "locked in" low borrowing costs may have a competitive advantage. There can be no assurance that Rock will be able to compete successfully in this market environment and any failure in this regard could have a material adverse effect on Rock's business, financial condition and results of operations. ECONOMIC CONDITIONS General. Rock's results of operation will depend on, among other things, the market value of Rock's loans and the supply of, and demand for, such loans. Prepayment rates, interest rates, borrowing costs and credit losses depend upon the nature and terms of the loans, the geographic location of the properties securing the loans, conditions in financial markets, the fiscal and monetary policies of the United States government, international economic and financial conditions, competition and other factors, none of which can be predicted with any certainty. Risks associated with Rock's business become more acute in any economic slowdown or recession. An economic downturn or recession may be accompanied by decreased home purchases, decreased demand for consumer credit and lower real estate values and increased loan- to-value ratios on loans previously made, thereby weakening collateral coverage and increasing the possibility of a loss in the event of a default. Any material decline in real estate values reduces the ability of customers to use home equity to support borrowings. Furthermore, the rates of delinquencies and foreclosures and the frequency and severity of losses generally increase during economic downturns or recessions. Because Rock lends to some customers who may be credit-impaired, the actual rates of delinquencies, foreclosures and losses on such loans could be higher, and the prices paid by buyers of such loans could be lower, under adverse economic conditions than those for loans in general. Interest Rates. Rock's profitability may be directly affected by the level of, and fluctuations in, prevailing interest rates. The market value of a loan generally declines as interest rates rise, and fixed-rate loans are more sensitive to changes in market interest rates than adjustable-rate loans. To the extent an interest rate is established for a loan before it is committed for sale, a gain or loss on the sale of such loan may result from changes in interest rates during the period between the establishment of the interest rate on the loan and the receipt of a commitment to buy the loan. Rock does not hedge this risk with respect to Non-Prime Loans, and any increase in interest rates during the period between the establishment of the interest rate on the loan and the receipt of a commitment to buy the loan would adversely affect the value of such loans and the price at which Rock would be able to sell them. This risk increases the longer Rock holds these loans before obtaining a commitment to buy them. In order to hedge this interest rate risk with respect to its Conventional Loans (which generally have a lower 12 14 interest spread), Rock sells (on a forward basis), or obtains forward commitments from investors to purchase, the estimated amount of Conventional Loans in process for which an interest rate is established that will ultimately be funded or Rock periodically purchases treasury-based options based on its estimates of its exposure and the probable principal amount of Conventional Loans in process for which an interest rate has been fixed that will ultimately be funded. To the extent Rock's funding estimates differ from actual experience, the resulting mismatching of commitments to fund Conventional Loans at certain interest rates and forward sales or commitments of Conventional Loans with certain interest rates may have a material adverse effect on Rock's business, financial condition and results of operations. In addition, to the extent Rock hedges its exposure to fluctuations in interest rates by purchasing treasury-based options the movements in the interest rates on those securities might not match the changes in pricing of loans in the secondary market, resulting in a potential gain or loss to Rock. An effective hedging strategy is complex and no hedging strategy can completely insulate Rock from changes in interest rates. In addition, hedging strategies involve transaction and other costs, and such costs could increase as the period covered by the hedging protection increases or in periods of rising and more greatly fluctuating interest rates. There can be no assurance that profitability of Rock would not be adversely affected during any period of changes in interest rates. The profitability of Rock is likely to be adversely affected during any period of unexpected or rapid changes in prevailing interest rates. The ability of Rock to close loans, especially in the Conventional Mortgage Lending division, is directly impacted by increases in prevailing interest rates because customers might be less willing to borrow money at higher interest rates. In addition, Rock could experience increasing market pressure to reduce origination fees, especially for loans closed through Rock's Conventional Mortgage Lending division. Also, because the interest rates under Rock's warehouse financing facilities are variable, a rapid or unexpected increase in prevailing interest rates could increase Rock's interest expense on the borrowings required to fund its loans before they are sold faster than Rock is able to pass such costs on to its customers. DEPENDENCE ON FUNDING SOURCES Rock funds substantially all of the loans it closes through borrowings under its warehouse financing facilities and internally generated funds. Rock's borrowings are in turn repaid with the proceeds received by Rock from loan sales. Rock is currently, and may in the future continue to be, dependent upon a few lenders to provide the primary credit facilities for its loans. One of Rock's current warehouse financing facilities is an uncommitted facility that may be discontinued at any time and expires in March 1998. The other current warehouse financing facility expires, with respect to loans committed to be made by any particular lender, 75 days after that lender demands payment, unless that lender is replaced. In addition, both of such facilities provide demand loans, with respect to which the lender may demand repayment at any time. Any demand for payment, any failure to renew or replace existing financing facilities before they expire, any failure to obtain adequate funding under these facilities, any substantial reduction in the size or increase in the cost of such facilities, or any substantial reduction in the size of, or pricing in, the market for Rock's loans (which can affect the amounts available for borrowing), could have a material adverse effect on Rock's business, financial condition and results of operations. In addition, Rock's ability to increase the volume of loans it closes is dependent, in part, on Rock's ability to procure, maintain and manage increasingly larger lines of credit. While Rock believes that the net proceeds of the Offering, together with the funds available under the warehouse financing facilities, will be sufficient to fund Rock's operations for the next twelve months, Rock may need to seek additional financing thereafter if Rock's future operations are consistent with management's expectations. 13 15 Rock has no existing commitments for any such additional financing, and there can be no assurance that Rock will be able to obtain any such additional financing on a favorable or timely basis. Rock may not be able to achieve the degree of leverage it believes to be optimal, which may cause Rock to be less profitable than it might be otherwise. Also, a default by Rock under its warehouse financing facilities could also result in a liquidation of the collateral securing such facilities, including any cross-collateralized assets, and a resulting loss of the difference between the value of the collateral and the amount borrowed. ENVIRONMENTAL LIABILITIES Certain properties securing loans may be contaminated by hazardous substances. As a result, the value of such properties may be diminished. In the event that Rock is forced to foreclose on a defaulted loan secured by a contaminated property, Rock may be subject to environmental liabilities regardless of whether Rock was responsible for the contamination. While Rock intends to exercise due diligence to discover potential environmental liabilities before acquiring any property through foreclosure, hazardous substances or wastes, contaminants, pollutants or sources thereof (as defined by state and federal laws and regulations) may be discovered on properties during Rock's ownership or after a sale thereof to a third party. If such hazardous substances are discovered, Rock may be required to remove those substances or sources and clean up the property at substantial expense. Rock may also be liable to tenants and users of neighboring properties. In addition, Rock may find it difficult or impossible to sell the property before or following any such clean-up. Rock does not conduct or require any environmental testing on the properties securing its loans. POTENTIAL LOSSES IN CONSUMER LENDING Although Rock currently sells substantially all of the loans it closes on a nonrecourse basis, it retains some degree of risk with respect to them. As part of its desire to increase its net interest income Rock began in the last half of 1997 to hold its loans for a period of time pending sale. During this time, Rock is subject to the various business risks associated with the lending business, including the risk of customer default, the risk of foreclosure and interest rate risk. Fresh Start(TM) and Specialty Lending Loans. Credit risks associated with the loans made by Rock's Fresh Start(TM) and Specialty Lending divisions may be greater than those associated with loans made by the Conventional Mortgage Lending division. The loans made by the Fresh Start(TM) and Specialty Lending divisions may differ from the other loans with respect to loan-to-value ratios, the credit and income history of the customers (for the Fresh Start(TM) division loans), and the documentation required for loan approval. As a result of these and other factors, the interest rates charged on these divisions' loans are often higher than those charged for the Conventional Mortgage Lending division's loans. The combination of different underwriting criteria and higher rates of interest may lead to higher delinquency rates and/or credit losses for these categories of loans as compared to the loans made by the Conventional Mortgage Lending division, which could have a material adverse effect on Rock's business, financial condition and results of operations. Real Estate Collateral. Many of the risks of consumer home equity lending reflect risks of investing directly in the real estate securing the loans. If there is a default on a loan, the ultimate extent of the loss, if any, may only be determined after a foreclosure of the mortgage and, if the lender takes title to the property, the liquidation of the underlying property. Factors such as the state of title to the property or its physical condition (including environmental considerations) may make a third party 14 16 unwilling to purchase the property at a foreclosure sale or to pay a price sufficient to satisfy the related loan obligations. Foreclosure laws in various states may require a protracted foreclosure process. In addition, the condition of a property may deteriorate during the period of foreclosure proceedings. Certain customers may become subject to bankruptcy proceedings, in which case the amount and timing of loan payments may be materially adversely affected. In addition, loans closed by Rock's Specialty Lending division may have combined loan-to-value ratios (including the first mortgage balance) of up to 125%, making the underlying property value likely to be significantly less than the loan amount at the time Rock might have to foreclose on such a loan. Even assuming that the underlying property provides adequate security for the loan, substantial delays could be encountered in connection with the liquidation of defaulted loans and a corresponding delay in the receipt and reinvestment of principal and interest could occur. CONTINGENT RISKS Rock may be required to repurchase or substitute loans that is has sold in the event of a breach of representations and warranties, including any fraud or any misrepresentation made during the loan origination process. In connection with some Non-Prime Loan sales, Rock may be required to return a portion of the premium paid for the loan if the loan is prepaid within the first year after sale. Otherwise, Rock's loan sales are generally on a non-recourse basis. In addition, potential losses can arise before the sale from many factors, as summarized in these Risk Factors, and the effects of such factors generally increase during any economic downturn or recession. In the ordinary course of its business, Rock is subject to claims made against it by customers arising from, among other things, losses that are claimed to have been incurred as a result of alleged breaches of fiduciary obligations, misrepresentations, errors and omissions of Rock's employees, officers and agents (including appraisers), incomplete loan documentation and failures by Rock to comply with various laws and regulations applicable to its business. Industry participants are frequently named as defendants in litigation involving alleged violations of federal and state consumer lending laws and regulations, or other similar laws and regulations, as a result of the consumer-oriented nature of the industry in which Rock operates and uncertainties with respect to the application of various laws and regulations in certain circumstances. Some sectors of, and participants in, the consumer finance industry have been adversely affected by regulatory enforcement actions and private class action lawsuits regarding various consumer lending practices. These actions and lawsuits allege violations of the Real Estate Settlement Procedures Act ("RESPA"), the Truth In Lending Act, the Equal Credit Opportunity Act and various other federal and state lending and consumer protection laws. Some of the practices which have been the subject of lawsuits against other companies include, but are not limited to, miscellaneous "add on" fees; truth in lending calculations and disclosures; escrow and adjustable rate mortgage calculations and collections; private mortgage insurance calculations, disclosures and cancellation; forced-placed hazard, flood and optional insurance; payoff statement, release and reconveyance fees; and unfair lending practices. Rock believes that its liability with respect to any currently asserted claims or legal actions is not likely to be material to its financial condition or results of operations; however, any claims asserted in the future may result in legal expenses or liabilities which could have a material adverse effect on Rock's business, financial condition and results of operations. Texas has newly-enacted laws affecting Non-Prime Loans. As a result of these new laws there are increased risks associated with Rock's loans secured by property located in Texas, including (i) risks 15 17 that Rock's Non-Prime Loans will not comply with the provisions permitting mortgage liens on Texas real estate, making Rock's liens invalid, (ii) risks of litigation, including class action lawsuits, if Rock's loans, including the origination points and processing fees charged on such loans, are determined to violate Texas law, and (iii) risks that secondary market loan buyers will not be willing to purchase loans secured by Texas real estate or will pay lower prices for such loans. Rock currently sells Non-Prime Loans originated in Texas on a flow basis and intends to increase its concentration on originating Conventional Loans in its Fresh Start(R) branches in Texas until the new laws are clarified. DEPENDENCE UPON KEY MANAGEMENT PERSONNEL Rock's future performance depends in significant part upon the continued service of its executive officers, including Daniel Gilbert, Chairman of the Board and Chief Executive Officer, and Steven M. Stone, President, any of whom would be difficult to replace. The loss of any of these employees or of other key personnel by Rock could have a material adverse effect on Rock's business, financial condition and results of operations. In addition, competition for qualified employees is intense, and an inability to attract, retain and motivate the additional, highly-skilled employees required for the expansion of Rock's activities could adversely affect Rock's business, financial condition and results of operations. There can be no assurance that Rock will be able to retain its existing personnel or attract the required additional persons on acceptable terms. Rock has an employment agreement with only one of its executive officers. Rock maintains $7,650,000 and $2,100,000 of life insurance on Daniel Gilbert and Lindsay Gross, respectively, in connection with stock purchase obligations under a former shareholders agreement. Rock expects to sell these policies for their cash surrender values to Mr. Gilbert and Mr. Gross after this Offering. Rock does not maintain life insurance on any of its other executive officers. See "Business--Employees;" and "Management." POTENTIAL ORIGINATED MORTGAGE SERVICING RIGHTS RISK Adverse Effect on Cash Flows. Rock would consider selling its loans with the servicing rights retained if it believes that the value of the servicing rights is or may become significantly greater than secondary market buyers are then willing to pay for them. If Rock sold loans with servicing retained, Rock would recognize a gain on the sale equal to the difference between the carrying value of the loan sold on Rock's balance sheet and the sum of (i) the cash received in such sale, and (ii) the amount of an asset recorded on its balance sheet in an initial amount equal to the present value of the servicing fees it would expect to collect over the life of the loan (the "Servicing Asset"). If Rock believes the value of the Servicing Asset in the secondary market becomes high enough, Rock would consider selling its servicing rights as it did in 1994 and 1995. The Servicing Asset is recognized in the period during which loans are sold, while cash payments are received by Rock over the life of the loan. Rock, however, will be required to pay tax on the gain on sale for the year in which the sale occurs. This difference in the timing of cash flows could cause a cash shortfall, which may have a material adverse effect on Rock's business, financial condition and results of operations. Servicing Asset May Be Overstated. The valuation of any Servicing Asset would be based on management's estimates relating to the appropriate discount rate and anticipated average lives of the loans being serviced. To estimate the anticipated average lives of the loans for which servicing is retained, management would estimate prepayment and default rates for such loans. If actual experience varied from management's estimates at the time loans are sold, Rock would be required to write down the remaining Servicing Asset through a charge to earnings in the period of adjustment. 16 18 Prepayment rates and default rates may be affected by a variety of economic and other factors, including prevailing interest rates and the availability of alternative financing, most of which are not within Rock's control. A decrease in prevailing interest rates could cause prepayments to increase, thereby requiring a writedown of the Servicing Asset. Even if actual prepayment rates and default rates are lower than management's original estimates, the Servicing Asset would not increase. Furthermore, management's estimates of prepayment rates and default rates are based, in part, on the historical performance of Rock's loans. A significant portion of Rock's loans were very recently originated. No assurance can be given that these loans, as with any new loan, will perform in the future in accordance with Rock's historical experience. In addition, if Rock introduces new products, it may have little or no experience on which it can base its estimates, and thus its estimates may be less reliable. Accordingly, it is possible that Rock may have to write down its Servicing Asset in the future, and any such writedown could have a material adverse effect on Rock's business, financial condition and results of operations. RISKS OF SECURITIZATION Rock currently does not securitize its loans. If the prices offered in the secondary market for Rock's loans decrease significantly relative to the value Rock believes that it could receive by securitizing such loans, Rock's management would consider securitizing its loans. Securitization is the process of pooling closed loans and selling them to a trust for a cash purchase price and an interest in the loans securitized. The cash purchase price is raised through an offering of securities by the trust. After the securitization, the purchasers of the securities receive principal and interest on their securities, and Rock would receive the excess of (i) the principal and interest payments made on the pool of mortgages, over (ii) the payments to the purchasers of the securities, servicing and other fees, if required, and an amount equal to the estimated credit losses related to the loans. The present value of this amount would be recorded on Rock's balance sheet as an "Excess Spread Receivable." If Rock began securitizing its loans, it would be subject to the following risks: Liquidity. If Rock securitizes its loans its operating cash flow is expected to decrease as its securitization program grows. Demands on Rock's cash would increase as a result of (i) reserve accounts, over-collateralization requirements, fees and expenses incurred in connection with a securitization program, and (ii) tax payments due on Rock's reported net income, which would include Rock's non-cash securitization gain on sale, generally equal to the initial Excess Spread Receivable. The tax would generally be due for the year the related securitization transaction closes. Excess Spread Receivable Risk. If Rock were to sell a pool of mortgages in a securitization transaction, it would recognize a gain on the sale equal to the difference between the carrying value of the loans sold on Rock's balance sheet and the sum of (i) the cash received in such sale (which would generally equal the cash purchase price of the securities sold in the securitization, less any selling discounts and commissions and expenses of the offering of such securities), and (ii) the Excess Spread Receivable. This Excess Spread Receivable would be subject to the same risks described above under the caption "Potential Originated Mortgage Servicing Rights Risk." Securitization Market. Securitization transactions may be affected by a number of factors, some of which are beyond Rock's control, including, among other things, conditions in the securities markets in general, conditions in the asset-backed securitization market and the conformity of loan pools to rating agency requirements and, to the extent that monoline insurance is used, the requirements of such insurers. Failure to obtain acceptable rating agency ratings or insurance company credit enhancements, if required, could decrease the efficiency or affect the timing of any securitizations. In addition, any delay in the sale 17 19 of a loan pool would postpone the recognition of gain on such loans until their sale. Such delays could cause Rock's earnings to fluctuate from quarter to quarter. If Rock were unable to securitize loans due to changes in the secondary market or the unavailability of credit enhancements, it might be required to sell its loans in the secondary market for lower than desired prices or Rock's growth could be materially impaired and its business, financial conditions and results of operations could be materially adversely affected. In addition, the securitization market for many types of assets is relatively undeveloped and may be more susceptible to market fluctuations or other adverse changes than more developed capital markets. GOVERNMENT REGULATION Rock's business is subject to extensive regulation, supervision and licensing by federal, state and local governmental authorities and is also subject to various laws and judicial and administrative decisions imposing requirements and restrictions on part or all of its operations. Regulated matters include, without limitation, loan origination, marketing efforts, credit application and underwriting activities, maximum finance and other charges, disclosure to customers, certain rights of rescission, loan closing, servicing, collection and foreclosure procedures, qualification and licensing requirements for doing business in various jurisdictions and other trade practices. Loan origination activities are subject to the laws and regulations of each of the states in which those activities are conducted. Activities as a lender are also subject to various federal laws. The Truth in Lending Act ("TILA") and Regulation Z promulgated thereunder, as both are amended from time to time, contain disclosure requirements designed to provide consumers with uniform, understandable information with respect to the terms and conditions of loans and credit transactions in order to give them the ability to compare credit terms. TILA also guarantees consumers a three-day right to cancel certain credit transactions. Rock is also required to comply with the Equal Credit Opportunity Act of 1974, as amended ("ECOA"), which prohibits lenders from discriminating against applicants on the basis of race, color, sex, age or marital status. Regulation B promulgated under ECOA restricts lenders from obtaining certain types of information from loan applicants. It also requires certain disclosures by the lender regarding consumer rights and requires lenders to advise applicants of the reasons for any credit denial. In instances where the applicant is denied credit or the rate or charge for a loan increases as a result of information obtained from a consumer credit agency, the Fair Credit Reporting Act of 1970, as amended, requires the lender to supply the applicant with a name and address of the reporting agency. Rock is also subject to RESPA and the Fair Debt Collection Practices Act and is required to file an annual report with HUD pursuant to the Home Mortgage Disclosure Act ("HMDA"). Rock is also subject to the rules and regulations of, and examinations by, HUD, FNMA, Freddie Mac and state regulatory authorities with respect to originating, processing, underwriting, selling and servicing loans. Failure to comply with these requirements can lead to loss of approved status, termination or suspension of servicing contracts without compensation to the servicer, demands for indemnification or loan repurchases, certain rights of rescission, class action lawsuits and administrative and enforcement actions. There can be no assurance that Rock will maintain compliance with these requirements, that maintaining compliance will not result in materially increased expenses, that more restrictive local, state or federal laws, rules and regulations will not be adopted or that existing laws and regulations will not be interpreted in a more restrictive manner, which would make compliance more difficult and more expensive for Rock. In addition, industry participants are frequently named as defendants in litigation involving alleged violations of federal and state consumer lending laws and regulations, or other similar laws and regulations, as a result of the consumer-oriented nature of the industry in which Rock operates 18 20 and uncertainties with respect to the application of various laws and regulations in certain circumstances. If a significant judgment were rendered against Rock in connection with any litigation, it could have a material adverse effect on Rock's business, financial condition and results of operations. See "Business--Government Regulation." The laws and regulations described above are subject to legislative, administrative and judicial interpretation, and certain of these laws and regulations have been infrequently interpreted or only recently enacted. Infrequent interpretations of these laws and regulations or an insignificant number of interpretations of recently enacted laws and regulations can result in ambiguity with respect to permitted conduct under these laws and regulations. Any ambiguity under the laws and regulations to which Rock is subject may lead to regulatory investigations or enforcement actions and private causes of action, such as class action lawsuits, with respect to Rock's compliance with applicable laws and regulations. Rock may also be subject to regulatory enforcement actions and private causes of action from time to time with respect to its compliance with applicable laws and regulations. POTENTIAL ELIMINATION OF MORTGAGE INTEREST DEDUCTION Members of Congress and government officials have from time to time suggested the elimination of the mortgage interest deduction for federal income tax purposes, either entirely or in part, based on customer income, type of loan or principal amount. Some of Rock's loans are made to customers for the purpose of consolidating consumer debt or financing other consumer needs, and the competitive advantages of tax deductible interest, when compared with alternative sources of financing, could be eliminated or seriously impaired by such government action. In addition, the elimination or substantial reduction in the home mortgage interest deduction could decrease home buying, which in turn would decrease the demand for home mortgages. The elimination of, or a substantial reduction in, the current home mortgage interest tax deduction would curtail the number of Rock's loan closings, which would have a material adverse effect on Rock's business, financial condition and results of operations. ABSENCE OF PUBLIC TRADING MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE There is currently no trading market for the Common Shares and there can be no assurance that an active trading market for the Common Shares will develop or that, if developed, will be sustained. The initial public offering price of the Common Shares offered by this Prospectus will be determined by negotiations among Rock and the representative of the Underwriters and may not be indicative of the price at which the Common Shares will trade after the closing of the Offering. See "Underwriting" for a discussion of the factors to be considered in establishing the initial public offering price. If a trading market for the Common Shares develops, the market price of the Common Shares may experience fluctuations as a result of such factors as quarter-to-quarter variations in Rock's results of operations, news announcements, changes in general market or industry condition or other factors unrelated to the ongoing operating performance of Rock. In particular, the price of the Common Shares may be affected by general market price movements as well as developments specifically related to the consumer lending industry such as interest rate movements and credit quality trends. There can be no assurance that the market price for the Common Shares will not fall below the initial public offering price. SUBSTANTIAL DILUTION Purchasers of Common Shares in this Offering will suffer an immediate and substantial dilution in the pro forma net tangible book value per share of the Common Shares from the initial public offering 19 21 price in the amount of $7.94 per share. See "Dilution." SHARES ELIGIBLE FOR FUTURE SALE The 3,330,000 Common Shares sold in the Offering (3,829,500 Common Shares if the Underwriters' over-allotment option is exercised in full) will be freely tradable by persons other than "affiliates" of Rock, as that term is defined in Rule 144 under the Securities Act of 1933, as amended (the "Securities Act"), without restriction under the Securities Act. Ninety days after the date of this Prospectus, 10,000,000 Common Shares could become eligible for sale pursuant to the provisions of Rule 144. However, the holders of these shares have agreed with the Underwriters not to offer such shares for sale, or sell, pledge or grant an option to purchase such shares, for a period of 180 days from the date of this Prospectus without the prior written consent of the representative of the Underwriters. As of January 31, 1998, options to purchase 2,492,184 Common Shares were outstanding under Rock's 1996 Stock Option Plan, which will vest on various dates extending through 2002. At the closing of the Offering, options to purchase 2,612,184 Common Shares will be outstanding. Pursuant to Rule 701 under the Securities Act, beginning 90 days after the effective date of this Prospectus, shares acquired upon exercise of some of such options may be resold pursuant to Rule 144 without compliance with the current public information, holding period, volume limitation or Form 144 filing requirements. Sales of substantial numbers of such shares in the public market, or the perception that such sales could occur, could adversely affect the market price of the Common Shares. However, the holders of some of these options have agreed with the Underwriters not to offer Common Shares they may acquire upon exercise of such options for sale, or sell, pledge or grant an option to purchase such shares, for a period of 180 days from the date of this Prospectus without the prior written consent of the representative of the Underwriters. Rock has reserved up to 4,500,000 Common Shares for issuance upon exercise of options under Rock's 1996 Stock Option Plan. See "Shares Eligible for Future Sale" and "Underwriting." CONTROL OF ROCK Daniel Gilbert will beneficially own 52.9%, and will have voting control pursuant to a Shareholders Agreement over 75.0%, of the outstanding Common Shares of Rock after the closing of the Offering (51.0% and 72.3%, respectively, if the Underwriters' over-allotment option is exercised in full). Accordingly, Mr. Gilbert will have effective control of Rock, with the ability to approve fundamental corporate transactions, including mergers, share exchanges and sales of assets, and to elect the members of the Board of Directors. See "Principal and Selling Shareholders." In addition, as long as Mr. Gilbert is the controlling shareholder of Rock, third parties will not be able to gain control of Rock through purchases of Common Shares not beneficially owned or otherwise controlled by Mr. Gilbert. Accordingly, the price of the Common Shares will not reflect any premium which may be attributable to such ability to exercise or obtain control over Rock. POTENTIAL ANTI-TAKEOVER EFFECTS OF CHARTER, BYLAW AND STATUTORY PROVISIONS The Board of Directors has the authority, pursuant to Rock's Restated Articles of Incorporation and without further approval of Rock's shareholders, to issue preferred shares (the "Preferred Shares") having such rights, preferences and privileges as the Board of Directors may determine. Any such issuance of Preferred Shares could, under certain circumstances, have the effect of delaying or preventing a change in control of Rock and may adversely affect the rights of holders of Common Shares. In addition, Rock is subject to Michigan statutes regulating business combinations, takeovers and control share acquisitions which might also hinder or delay a change in control of Rock. Anti-takeover 20 22 provisions that could be included in the Preferred Shares when issued and the Michigan statutes regulating business combinations, takeovers and control share acquisitions can have a depressive effect on the market price of Rock's securities and can limit shareholders' ability to receive a premium on their shares by discouraging takeover and tender offer bids, even if such events could be viewed as beneficial by Rock's shareholders. See "Description of Capital Stock." The Directors of Rock serve staggered three year terms, and Directors may not be removed without cause. The Articles of Incorporation also set the minimum and maximum number of directors constituting the entire Board at three and fifteen, respectively, and require approval of holders of 90% of Rock's voting shares to amend these provisions. In addition, Rock's bylaws require advance notice of any nominations for director of Rock, along with information about the nominee and the shareholder. These provisions could have an anti-takeover effect by making it more difficult to acquire Rock by means of (i) a tender offer, a proxy contest or otherwise and (ii) the removal of incumbent officers and directors. These provisions could delay, deter or prevent a tender offer or takeover attempt that a shareholder might consider in his or her best interests, including those attempts that might result in a premium over the market price for the shares held by Rock's shareholders. YEAR 2000 COMPLIANCE Rock is engaging a consultant to manage the testing of its equipment and software to determine whether it is year 2000 compliant and to identify and resolve any problems discovered. Rock also plans to explore the strategies of its vendors to discover and resolve any year 2000 problems. Although most of Rock's hardware and software is less than two years old, because of Rock's reliance on its technology and systems and the sophistication of its systems, any significant problems discovered could be expensive, time consuming or both to fix, and any errors caused by Rock's or its vendors' year 2000 hardware or software problems could result in liability to Rock. Any of these problems could have a material adverse effect on Rock's business, financial condition and results of operations. RESTRICTIONS ON DIVIDENDS Under Rock's warehouse line of credit, Rock's ability to pay cash dividends is limited by requirements that it maintain a minimum tangible effective net worth, a maximum leverage ratio, a minimum ratio of current assets to current liabilities, and minimum working capital. 21 23 TERMINATION OF S CORPORATION STATUS Since March 1, 1992, Rock has elected to be treated for federal income tax purposes as an S corporation under Subchapter S of the Code and as an S corporation for certain state corporate income tax purposes under certain comparable state laws. As a result, Rock's historical earnings since March 1, 1992 have been taxed directly to Rock's shareholders, at their individual federal and state income tax rates, rather than to Rock (except for certain state taxes). Upon the issuance of Common Shares at the closing of the Offering, Rock's S corporation status will terminate, and Rock will become subject to federal and state income taxation as a C corporation. At that time, Rock will record a deferred tax asset on its balance sheet, the amount of which will depend upon timing differences between tax and book accounting relating principally to marking loans to market for tax purposes. If the S corporation status had terminated as of December 31, 1997, the amount of the deferred tax asset would have been approximately $1.7 million. See "Capitalization." Since March 1, 1992, Rock has made distributions to shareholders of a portion of Rock's income primarily to permit the shareholders to pay their taxes on such income. The aggregate amount of distributions to shareholders, however, has been less than the aggregate amount of taxable income of Rock during this period. The amount of this previously earned and undistributed taxable income (including estimated taxable income up to the closing of the Offering, with provision for adjustment based on the final determination of such taxable income) will be distributed to the Existing Shareholders out of the net proceeds of the Offering promptly following the closing of the Offering. The Shareholder Distribution Amount as of December 31, 1997 would have been approximately $18.0 million, and it is expected to increase by the time of the distribution as a result of additional S corporation income. Rock and the Existing Shareholders have entered into a Tax Indemnification Agreement (the "Tax Agreement") relating to their respective income tax liabilities. Because Rock will be fully subject to corporate income taxation after termination of Rock's S corporation status, any reallocation of income and deductions between the period during which Rock was treated as an S corporation and the period during which Rock will be subject to corporate income taxation may increase the taxable income of one party while decreasing that of another party. Accordingly, the Tax Agreement is intended to ensure that taxes are borne either by Rock or the Existing Shareholders to the extent that such parties received the related income. The Tax Agreement generally provides that, if an adjustment is made to the taxable income of Rock for a year in which it was treated as an S corporation, each party will indemnify the other against any increase in the indemnified party's income tax liability, including interest and penalties, with respect to such tax year to the extent such increase results in a related decrease in the income tax liability, including interest and penalties, of the indemnifying party (whether with respect to the year of the adjustment or over future years). Rock will also indemnify the Existing Shareholders for all taxes imposed upon them as the result of an indemnification payment under the Tax Agreement. Any payment made by Rock to the Existing Shareholders pursuant to the Tax Agreement may be considered by the Internal Revenue Service or state taxing authorities to be non-deductible by Rock for income tax purposes. None of the parties' obligations under the Tax Agreement is secured, and, therefore, there can be no assurance that the Existing Shareholders or Rock will have funds available to make any payments which may become due under the Tax Agreement. A copy of the Tax Agreement has been filed by Rock as an exhibit to the Registration Statement of which this Prospectus is a part and should be read in its entirety by prospective investors in this Offering. 22 24 USE OF PROCEEDS The net proceeds to Rock from the sale of the 3,000,000 Common Shares offered by Rock by this Prospectus are estimated to be $27,100,000 ($31,745,350 if the Underwriters' over- allotment option is exercised in full), after deducting the underwriting discount and estimated Offering expenses payable by Rock, assuming an initial public offering price of $10.00 per Common Share. Rock will not receive any proceeds from the sale of Common Shares by the Selling Shareholders, but it will receive approximately $1.5 million of proceeds from the options exercised by some of the Selling Shareholders to acquire the shares they are selling. The net proceeds of the Offering will be used (i) to pay the Shareholder Distribution Amount ($18.0 million calculated as of December 31, 1997) to the Existing Shareholders in connection with termination of Rock's status as an S corporation (see "Termination of S Corporation Status"), and (ii) to repay a portion of the amounts outstanding under Rock's warehouse line of credit used to finance, and secured by, a portion of Rock's inventory of loans. The Shareholder Distribution Amount is expected to increase by the distribution date as a result of additional S corporation income. Daniel Gilbert expects to repay the balance of his loans from Rock ($1.6 million as of December 31, 1997) with his share of the Shareholder Distribution Amount, and Rock expects to use that cash to repay a portion of the amounts outstanding under its warehouse line of credit. Rock's warehouse line of credit currently provides for up to $125 million principal amount of demand loans. The loans bear interest at rates that vary, depending on the type of underlying loan, from the bank's prime rate to 1.5% to 2.5% over the federal funds rate (resulting in a weighted average interest rate of 6.94% during 1997). The warehouse line of credit expires, with respect to loans committed to be made by any particular lender, 75 days after that lender demands payment, unless that lender is replaced. Borrowings under the warehouse line of credit are used to fund loans closed by Rock. As of January 31, 1998, Rock had borrowed $37.0 million under this facility. Pending their ultimate application, the net proceeds to Rock from the Offering will be invested in short-term, investment grade, interest-bearing securities, deposit accounts or both. 23 25 CAPITALIZATION The following table sets forth, as of December 31, 1997, (i) the actual capitalization of Rock, and (ii) the pro forma capitalization of Rock as adjusted to give effect to the conversion of Rock from an S corporation to a C corporation, to the receipt by Rock of approximately $1.5 million upon exercise by the Selling Shareholders of 330,000 options at $4.68 a share to acquire the Common Shares they are selling in the Offering, and to the sale of the Common Shares offered by Rock by this Prospectus at an assumed initial public offering price of $10.00 per share, and to the application of the estimated net proceeds to Rock therefrom. This table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Financial Statements and Notes to Financial Statements included elsewhere in this Prospectus. See "Termination of S Corporation Status" and "Use of Proceeds."
DECEMBER 31, 1997 ----------------------------- ACTUAL AS ADJUSTED (1) ------ --------------- (DOLLARS IN THOUSANDS) SHORT-TERM DEBT: Warehouse line of credit............................................... $79,294 $67,023 Reverse repurchase agreement........................................... 18,161 18,161 Notes payable.......................................................... 1,945 1,945 Drafts payable......................................................... 21,875 21,875 -------- -------- Total short-term debt............................................. $121,275 $109,004 ======== ======== SHAREHOLDERS' EQUITY: Preferred shares, authorized, 1,000,000 shares of $.01 par value; no shares issued or outstanding................................... -- -- Common Shares; authorized, 50,000,000 shares of $.01 par value; issued and outstanding, 10,000,000 shares at December 31, 1997 (13,330,000 shares, as adjusted)............................. 100 133 Additional paid-in capital............................................. 1,424 30,035 Retained earnings...................................................... 13,584 (2,716) -------- -------- Total shareholders' equity and total capitalization............... $15,108 $27,452 ======== ========
- --------------------- (1) Assumes that the estimated net proceeds of this Offering are applied as described in "Use of Proceeds" and "Termination of S Corporation Status." Also reflects (i) the creation of a deferred tax asset in the amount of $1.7 million (calculated as of December 31, 1997) arising in connection with the termination of Rock's S corporation status, and (ii) the receipt by Rock of approximately $1.5 million upon exercise by the Selling Shareholders of 330,000 options at $4.68 a share to acquire the Common Shares they are selling in the Offering. In addition, Daniel Gilbert expects to repay the balance of his loans from Rock ($1.6 million as of December 31, 1997) with his share of the Shareholder Distribution Amount, and Rock expects to use that cash to repay a portion of the amounts outstanding under its warehouse line of credit. The adjustments include the reduction in the amounts outstanding under the warehouse line of credit as a result of such use of cash. See "Termination of S Corporation Status," "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." 24 26 DIVIDEND POLICY Rock expects that it will pay a quarterly dividend of $.02 per share beginning in the second quarter of 1998. Even if Rock begins paying such a dividend, it may discontinue it at any time or it may change the amount of the dividend at any time. Any determination to pay dividends at all or to change the amount of any dividend will depend on Rock's financial condition, capital requirements, results of operations, contractual limitations and any other factors deemed relevant by the Board of Directors. Under Rock's warehouse line of credit, Rock's ability to pay cash dividends is limited by requirements that it maintain a minimum tangible effective net worth, a maximum leverage ratio, a minimum ratio of current assets to current liabilities, and minimum working capital. 25 27 DILUTION Purchasers of the Common Shares offered hereby will experience an immediate and substantial dilution in the net tangible book value of the Common Shares from the initial public offering price. The net tangible book value of Rock as of December 31, 1997 was approximately $15,108,136, or $1.51 per Common Share based on 10,000,000 Common Shares outstanding. The net tangible book value per share represents the amount of total assets less liabilities, excluding intangible assets, divided by the number of Common Shares outstanding. After giving effect to (i) the sale by Rock of 3,000,000 Common Shares offered in the Offering at an assumed initial public offering price of $10.00 per share, after deducting the underwriting discount and estimated Offering expenses, (ii) the receipt by Rock of approximately $1.5 million upon exercise by the Selling Shareholders of 330,000 options at $4.68 a share to acquire the Common Shares they are selling in the Offering, (iii) the S corporation distribution to the Existing Shareholders of an aggregate of $18.0 million (calculated as of December 31, 1997 and expected to increase by the distribution date) in payment of the Shareholder Distribution Amount, (iv) the creation of a deferred tax asset in the amount of $1.7 million (calculated as of December 31, 1997) arising in connection with the termination of Rock's S corporation status, and (v) the application of the rest of the estimated net proceeds as described under "Use of Proceeds," the pro forma net tangible book value of Rock as of December 31, 1997 would have been approximately $27,452,536, or $2.06 per share. This represents an immediate increase in pro forma net tangible book value of $0.55 per share to existing shareholders of Rock and an immediate and substantial dilution of $7.94 per share to new investors purchasing shares in the Offering. The following table illustrates this per share dilution:
Assumed initial public offering price.......................................... $10.00 Net tangible book value as of December 31, 1997....................... $1.51 Decrease due to payment of Shareholder Distribution Amount............ (1.80) Increase due to deferred tax asset.................................... 0.17 Increase due to option exercise....................................... 0.15 Increase attributable to new investors................................ 2.03 ----- Pro forma net tangible book value after Offering............................... 2.06 ------ Dilution to new investors...................................................... $ 7.94 ======
The following table sets forth on a pro forma basis as of December 31, 1997 the difference between existing shareholders and the purchasers of shares in the Offering with respect to the number of shares issued by Rock and owned by them, the total consideration received by Rock for those shares and the average price paid per share:
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE --------------------------- ---------------------------- PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ----------- ------------ --------------- ----------- ------------- Existing shareholders....................... 10,000,000 75.0% $1,523,750 4.6% $0.15 Option holders.............................. 330,000 2.5% 1,544,400 4.7% $4.68 New public investors........................ 3,000,000 22.5% 30,000,000 90.7% $10.00 ---------- ------ ----------- ------ Total......................... 13,330,000 100.0% $33,068,150 100.0% ========== ====== =========== ======
The information and tables above exclude the effect of (i) 2,492,184 Common Shares subject to options outstanding at a weighted average exercise price of $4.86 per share as of December 31, 1997, and (ii) options to purchase up to an additional 2,007,816 Common Shares available for issuance under Rock's 1996 Stock Option Plan. To the extent outstanding options are exercised, there may be further dilution to new investors. The 330,000 Common Shares being sold by the Selling Shareholders will be acquired by them on the closing date of this Offering upon exercise of stock options previously granted to them, and Rock has granted to them, effective as of the closing date of this Offering, immediately exercisable replacement options to purchase 450,000 Common Shares at the initial public offering price of the Common Shares in this Offering. See "Capitalization." Rock will receive approximately $1.5 million of proceeds from the options exercised by some of the Selling Shareholders to acquire the shares they are selling. 26 28 SELECTED FINANCIAL DATA The following table sets forth selected financial information of Rock as of December 31, 1993, 1994, 1995, 1996 and 1997, and for each of the five years in the period ended December 31, 1997. The historical income statement and balance sheet data are derived from the audited financial statements of Rock, certain of which appear elsewhere in this Prospectus together with the report of KPMG Peat Marwick LLP, independent auditors, covering the years 1995, 1996 and 1997. The historical income statement and balance sheet data for 1993 and 1994 were audited by Rock's former auditors. The selected financial data should be read in conjunction with the financial statements and notes thereto and with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus.
SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) YEAR ENDED DECEMBER 31, (1) ------------------------------------------------- STATEMENT OF INCOME DATA: 1993 1994 1995 1996 1997 ---- ---- ---- ---- ---- Revenue: Interest income......................................... $ 2,724 $ 2,310 $ 3,003 $ 4,267 $ 8,083 Interest expense........................................ 1,819 1,746 3,012 3,669 5,150 -------- -------- -------- -------- ---------- Net interest margin................................... 905 564 (9) 598 2,933 Provision for credit losses............................. -- -- -- -- (300) -------- -------- -------- -------- ---------- Net interest margin after provision for credit losses. 905 564 (9) 598 2,633 Loan fees and gains and losses on sale of mortgages..... 16,251 10,348 17,788 27,960 47,084 Net gain on sale of mortgage servicing (2).............. -- 2,465 5,728 -- -- Net gain (loss) on sale of marketable securities (3).... 356 (202) 346 991 2,222 Other income............................................ 677 1,348 399 6 171 -------- -------- -------- -------- ---------- 18,189 14,523 24,252 29,555 52,110 -------- -------- -------- -------- ---------- Expenses: Salaries, commissions and employee benefits............. 10,306 9,514 11,272 16,425 24,811 General and administrative expenses..................... 2,761 3,159 3,726 4,646 7,630 Marketing expenses...................................... 967 1,465 1,339 2,393 5,370 Depreciation and amortization........................... 390 510 506 663 1,292 -------- -------- -------- -------- ---------- 14,424 14,648 16,843 24,127 39,103 -------- -------- -------- -------- ---------- Income (loss) before stock and option holders' bonuses..... 3,765 (125) 7,409 5,428 13,007 Stock and option holders' bonuses....................... 2,026 142 546 2,297 1,592 -------- -------- -------- -------- ---------- Net income (loss)...................................... 1,739 (267) 6,863 3,131 11,415 Pro forma income tax expense (benefit) (4)................. 687 (105) 2,642 1,205 4,395 -------- -------- -------- -------- ---------- Pro forma net income (loss)............................ 1,052 (162) 4,221 1,926 7,020 ======== ======== ======== ======== ========== PER SHARE INFORMATION: Pro forma net income per share: Basic................................................. $ 0.53 ========== Diluted............................................... $ 0.49 ========== Weighted average number of shares outstanding: Basic................................................. 13,330,000 ========== Diluted............................................... 14,434,692 ==========
27 29
AS OF DECEMBER 31, (1) ----------------------------------------------------------------- 1993 1994 1995 1996 1997 ---- ---- ---- ---- ---- SELECTED BALANCE SHEET DATA: Cash and cash equivalents ............. $ 1,254 $ -- $ 686 $ 3,289 $ 11,947 Mortgage loans held for sale .......... 77,456 26,717 73,996 85,009 121,344 Other assets .......................... 5,440 8,173 19,613 12,062 11,138 Total assets .......................... 84,150 34,890 94,295 100,360 144,429 Warehouse financing facilities ........ 47,206 15,732 64,107 67,621 97,455 Drafts payable and other liabilities... 31,805 12,885 13,661 20,393 31,866 Shareholders' equity .................. 5,859 6,273 16,527 12,346 15,108
(1) Rock commenced operations in its Fresh Start(TM)division in 1994 and commenced current operations in its Specialty Lending division in 1997. Of the 14 Fresh Start(TM) stores open at December 31, 1997, nine were opened during 1997 (eight of which were opened since July 1, 1997). (2) During 1993 and 1994, Rock elected to retain, rather than sell, the servicing rights to its loans and received lower sales prices as a result. In 1994 Rock sold some of its servicing rights, and in 1995 Rock sold all of its remaining servicing rights and recognized a net gain on the sale of servicing rights. In 1996 and 1997, Rock sold its loans servicing released. (3) Before the end of 1997, Rock invested some of its excess cash in marketable securities. During 1995, 1996 and 1997, Rock sold a portion of its portfolio of marketable securities and recognized net gains of $346,000, $991,000 and $2,222,000, respectively. (4) Pro forma income taxes reflect adjustments for federal and state income taxes as if Rock had been taxed as a C corporation rather than corporation. See "Termination of S Corporation Status." No pro forma adjustments have been made for the non-recurring net gains on sales of marketable securities and stock and option holders' bonuses, or estimated earnings from the net proceeds received from the Offering. 28 30 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following analysis of the financial condition and results of operations of Rock should be read in conjunction with the preceding "Selected Financial Data." Additionally, Rock's financial statements and notes thereto, as well as other data included in this Prospectus, should be read and analyzed in combination with the analysis below. With the exception of historical information, certain of the matters discussed in this Prospectus are forward-looking statements that involve risks and uncertainties and actual results could differ materially from those discussed. The words and phrases "should be," "will be," "predicted," "believe," "expect," "anticipate" and similar expressions identify forward-looking statements. These forward-looking statements reflect Rock's current views in respect of future events in financial performance, but are subject to many uncertainties and factors relating to Rock's operations and business environment which may cause its actual results to differ materially from any future results expressed or implied by such forward-looking statements. GENERAL Rock is a specialty marketing company of debt consolidation and home financing products secured primarily by first or second mortgages on one- to four-family, owner-occupied residences. The Company originates loans through 24 stores and branches, one marketing center and one call center. Founded in 1985 by its current Chief Executive Officer and Chairman of the Board, Daniel Gilbert, Rock originates 100% of its loans through its retail operations, marketing its loans directly to consumers. The Company uses proprietary marketing methods and technology to increase its market penetration. Rock seeks to provide "world class" service to its customers, thereby encouraging them to return for future loans and refer others to Rock for loans. The Company also focuses on recruiting, developing and motivating talented people, recruited from inside and outside the consumer finance industry, to implement its business strategies. Rock believes it is creating growing brand identities and a retail franchise that will sustain its loan origination efforts. Rock currently operates through three major divisions. Rock originates Sub-Prime Home Equity Loans to individuals with impaired credit characteristics, high levels of debt service to income, unfavorable past credit experience, limited credit history, limited employment history or unverifiable income through its Fresh Start(TM) division, created in 1994. Rock originates home equity second mortgage loans to individuals with good credit histories but little or no equity in their homes through its Specialty Lending division, which commenced its current operations in March 1997. Since its inception in 1985, Rock has originated Conventional Loans that generally conform to FNMA or Freddie Mac underwriting standards, or that generally meet such standards except for maximum loan size guidelines, through its Conventional Mortgage Lending division. In addition, Rock began to increase its government insured lending operations in 1997, primarily making mortgage loans that meet the underwriting standards for FHA insurance. SEGMENT ANALYSIS Rock's recent and rapid growth may have a distortive impact on some of Rock's ratios and financial statistics and may make period-to-period comparisons difficult. In light of Rock's growth, historical performance of Rock's earnings may be of little relevance in predicting future performance. Furthermore, Rock's financial statistics may not be indicative of Rock's results in future periods. 29 31 During 1997, Rock's growth and expansion of its Fresh Start(TM) store network, the timing difference between loan closings and loan sales and the seasonality of Rock's business caused its quarterly results to vary significantly. The timing difference between loan closings and loan sales was more significant in the third and fourth quarters of 1997, with larger bulk sales of Fresh Start(TM) loans. The store openings created operating expenses that were absorbed by the earnings of the then existing store network. A new store opening requires Rock to incur monthly expenses in excess of revenues generated by the new store until enough loans are closed for the store to reach break even. For a description of the average closings per store during 1997, see "Business--Operating Divisions--Fresh Start(TM) Division-- Fresh Start(TM) Stores." Because of the seasonality of its business, Rock does not expect the trend in its quarterly revenue or income growth during the four quarters of 1997 to continue at the same level in the first quarter of 1998, if at all. See "Business--Seasonality." The following table shows the contribution to revenues and expenses of each of Rock's divisions for each quarter of fiscal 1997:
Year Ended December 31, 1997 ----------------------------------------------------------------------- 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Total ---------- ----------- ---------- ----------- --------- (In thousands) FRESH START(TM): Revenue ........................................... $ 3,570.8 $ 6,365.9 $ 6,677.5 $ 9,323.9 $ 25,938.1 Expenses .......................................... (2,479.4) (3,033.3) (4,520.6) (5,865.4) (15,898.7) ---------- ---------- ---------- ---------- ----------- Division contribution ........................... 1,091.4 3,332.6 2,156.9 3,458.5 10,039.4 ---------- ---------- ---------- ---------- ----------- SPECIALTY LENDING: Revenue ........................................... 79.5 1,267.1 2,293.9 3,405.3 7,045.8 Expenses .......................................... (188.5) (593.9) (1,221.3) (1,751.0) (3,754.7) ---------- ---------- ---------- ---------- ----------- Division contribution ........................... (109.0) 673.2 1,072.6 1,654.3 3,291.1 ---------- ---------- ---------- ---------- ----------- CONVENTIONAL MORTGAGE LENDING: Revenue ........................................... 3,796.5 3,548.4 3,938.0 5,050.7 16,333.6 Expenses .......................................... (2,261.0) (2,128.5) (2,869.3) (3,099.3) (10,358.1) ---------- ---------- ---------- ---------- ----------- Division contribution ........................... 1,535.5 1,419.9 1,068.7 1,951.4 5,975.5 ---------- ---------- ---------- ---------- ----------- Other revenue ..................................... 867.5 200.5 1,703.9 20.6 2,792.7 Other expenses .................................... (2,263.9) (2,405.5) (2,837.8) (3,175.9) (10,683.1) ---------- ---------- ---------- ---------- ----------- Pre-tax income .................................. 1,121.5 3,220.7 3,164.3 3,908.9 11,415.4 ========== ========== ========== ========== ===========
The Fresh Start(TM) division began to sell loans by bulk sales in the second quarter of 1997. Bulk sales generate higher premiums than sales of individual loans. In addition, the principal amount of loan sales in the second quarter increased 71% over the first quarter. There can be no assurance that the rate of growth in originations and sales of Sub-Prime Home Equity Loans or the premiums received on sales of such loans in 1997 will continue at the same levels in 1998. See "Risk Factors--Dependence on Loan Sales." The nine stores opened during 1997 incurred approximately $1.8 million of expenses in excess of revenues in the third and fourth quarters of 1997. In addition, the Fresh Start(TM) division opened five more stores in the first quarter of 1998. The direct costs for these new stores started late in the fourth quarter of 1997. During the fourth quarter, the principal amount of loan sales increased by 44% over the third quarter. The 1997 revenues were reduced by the provision for premium recapture of 30 32 approximately $600,000 for the estimated amount of premium recapture associated with loans that prepay within the first year after sale. For a description of risks involving the Fresh Start(TM) division's Texas stores, see "Risk Factors--Contingent Risks." Because 13 stores and one marketing center have opened since July 1, 1997 (including four stores in the fourth quarter of 1997 and five in the first quarter of 1998), Rock expects these stores to contribute significantly less to its revenues and net income and more to its expenses in the first and possibly the second and third quarters of 1998 than stores that have been in operation for at least twelve months. The stores opened in 1998 and some of the stores opened late in 1997 are expected to operate at a net loss in the first quarter of 1998. The Specialty Lending division commenced its current operations in the first quarter of 1997. The staffing and expenses of the start-up were incurred in the first quarter of 1997 with minimal contribution to revenues. The subsequent quarters demonstrated a consistent contribution as a percent of revenues. There can be no assurance that the rate of growth in originations and sales of High LTV Loans or the premiums received on sales of such loans in 1997 will continue at the same levels in 1998. See "Risk Factors--Dependence on Loan Sales." The Conventional Mortgage Lending division increased its loan officers from the first quarter to the third quarter of 1997. Additionally, a branch was opened in Michigan during the fourth quarter. The impact of these costs to expand this division are reflected in the third and fourth quarter expenses of the Conventional Mortgage Lending division. Rock's Conventional Mortgage Lending revenues and division contribution increased in the fourth quarter due to increased production resulting, in part, from the favorable interest rate environment. Other revenue includes the net contribution from sales of marketable securities and government insured lending. Most of the $2.8 million of other revenue consisted of non-recurring gains on the sale of marketable securities held for sale, all of which were sold by December 31, 1997. Other expenses include expenses not directly allocable to a particular division, such as the costs associated with Rock's legal, marketing, facilities, information services, executive, human resources, secondary marketing and general and administrative support teams. Included in other expenses was approximately $1.6 million of bonuses to Rock's shareholders and option holders; Rock does not intend to pay aggregate bonuses of that magnitude to these persons after 1997. Other expenses in the third and fourth quarters also include increases in costs of recruiting management members, costs of temporary employees, and increased depreciation and travel expenses as compared to the first half of 1997. TERMINATION OF S CORPORATION STATUS AND INCOME TAXES Simultaneously with the closing of the Offering, Rock will cease to be taxed as an S corporation under the Code. In connection with the termination of its S corporation status, Rock will pay the Shareholder Distribution Amount out of the net proceeds of this Offering to the Existing Shareholders. The Shareholder Distribution Amount would have been $18.0 million calculated as of December 31, 1997. The Shareholder Distribution Amount is expected to increase by the distribution date as a result of additional S corporation income. See "Use of Proceeds" and "Termination of S Corporation Status." As an S corporation, Rock's income, whether or not distributed, was taxed at the shareholder level for federal and state tax purposes. Upon termination of its S corporation status, Rock will be 31 33 subject to federal and state income taxation and will record a deferred tax asset on its balance sheet. The amount of the deferred tax asset to be recorded as of the date of termination of the S corporation status will depend upon timing differences between tax and book accounting relating principally to marking loans to market for tax purposes. If the S corporation status had been terminated as of December 31, 1997, the amount of the deferred tax asset would have been approximately $1.7 million. The pro forma provision for income taxes in the selected consolidated financial data shows results as if Rock had been subject to federal and state taxation at the tax rates effective for the periods presented. RESULTS OF OPERATIONS FISCAL YEAR ENDED DECEMBER 31, 1997 VERSUS FISCAL YEAR ENDED DECEMBER 31, 1996 The following table sets forth the revenues and expenses and pre-tax income for Rock for the years ended December 31, 1996 and 1997:
Year Ended December 31, ----------------------- 1996 1997 -------- -------- (In thousands) Total revenue before gains on sale of marketable securities .............................. $ 28,564 $ 49,888 Net gain on sale of marketable securities ............ 991 2,222 -------- -------- Total revenue ........................................ 29,555 52,110 Total expenses ....................................... (26,424) (40,695) -------- -------- Pre-tax income ....................................... 3,131 11,415 Add back stock and option holders' bonuses ............................................ 2,297 1,592 -------- -------- Pre-tax income before stock and option holders' bonuses ............................ $ 5,428 $ 13,007 ======== ========
Rock's total revenues increased to $52.1 million in 1997 from $29.6 million in 1996, an increase of $22.5 million, or 76.3%, which included a net increase of $1.2 million in gains on sales of marketable securities over 1996. Excluding gains on sales of marketable securities, Rock's total revenues increased to $49.9 million in 1997 from $28.6 million in 1996, an increase of $21.3 million, or 74.7%. The increase in revenues is primarily due to (i) an increased portion of the loans closed by Rock consisting of Non-Prime Loans (27.5% of the total dollar volume of loans closed in 1997, compared to 13.7% in 1996), which have higher origination fees and with respect to which Rock receives a higher premium on sale than Rock's Conventional Loans, (ii) an increase of $121.6 million, or 82.3%, in the volume of Sub- Prime Home Equity Loans closed by Rock in 1997, and (iii) an increase in bulk sales of loans (which generally resulted in higher premiums than sales of individual loans). In 1997, the Fresh Start(TM) division's revenues as a percentage of total revenue increased to 49.8%, compared to 40% in 1996. Total expenses increased from $26.4 million in 1996 to $40.7 million in 1997, an increase of $14.3 million, or 54.0%, primarily due to increased commissions, increased occupancy costs for store openings and increases in general and administrative expenses that fluctuate with increases in volumes of loans closed. As a result of the increased revenues, proportionally lower expenses and lower bonuses, pre-tax income before stock and option holders' bonuses increased 139.6%, from $5.4 million in 1996 to $13.0 million in 1997. 32 34 Because 13 stores and one marketing center have opened since July 1, 1997 (including four stores in the fourth quarter of 1997 and five in the first quarter of 1998), Rock expects these stores to contribute significantly less to its revenues and net income and more to its expenses in the first and possibly the second and third quarters of 1998 than stores that have been in operation for at least twelve months. The stores opened in 1998 and some of the stores opened late in 1997 are expected to operate at a net loss in the first quarter of 1998. Also, because of the seasonality of its business (see "Business-- Seasonality"), Rock does not expect the trend in its quarterly revenue or income growth during the four quarters of 1997 to continue at the same level in the first quarter of 1998, if at all. Stock and option holders' bonuses decreased from $2.3 million in 1996 to $1.6 million in 1997, a decrease of $0.7 million, or 30.7%. During 1996 and 1997, Rock paid bonuses to option holders in accordance with their employment agreements. The agreements do not require these bonuses after December 31, 1997. In addition, Rock paid bonuses to all three of its shareholders in 1996 and one of its shareholders in 1997, partially in recognition of cumulative past services. Rock does not intend to pay aggregate bonuses of this magnitude to these persons after 1997. The following table sets forth information regarding the components of Rock's revenues for the years ended December 31, 1996 and 1997:
Year Ended December 31, ----------------------- 1996 1997 -------- -------- (in thousands) Interest income .......................................... $ 4,267 $ 8,083 Interest expense ......................................... (3,669) (5,150) -------- -------- Net interest margin ................................. 598 2,933 Provision for credit losses .............................. -- (300) -------- -------- Net interest margin after provision for credit losses...................................... 598 2,633 Loan fees and gains and losses on sale of mortgages ...... 27,960 47,084 Net gain on sale of marketable securities ................ 991 2,222 Other income ............................................. 6 171 -------- -------- Total revenue ....................................... $ 29,555 $ 52,110 ======== ========
Net interest margin increased to $2.9 million in 1997 from $0.6 million in 1996, an increase of $2.3 million, or 390.0%. The increase was primarily due to (i) the increase in the dollar volume of loans closed by Rock, and (ii) a change in the manner of selling loans from "flow" sales to "bulk" sales and assignment of trade sales, resulting in an increase in the length of time loans were held before sale, which allowed Rock to take advantage of the positive net interest margin. "Flow" sales are sales of loans underwritten by a third party who commits to purchase each individual loan its underwriters approve. "Bulk" sales are sales of loans underwritten to Rock's underwriting standards that are pooled and then sold to third parties for cash by Rock. Assignment of trade sales are sales of Conventional Loans to a third party who exchanges them with FNMA or Freddie Mac for their securities. The increase in net interest margin is also due to (i) higher weighted average interest rates charged on the loans as a result of the increased proportion of Non-Prime Loans, which generally have higher interest rates, (ii) a decrease in the weighted average interest rates charged on Rock's borrowing facilities (from 7.26% in 1996 to 7.03% in 1997), and (iii) Rock's increased use of internally-generated cash to fund its loans. Rock has employed, and expects to continue to employ, strategies to attempt to increase its net interest margin, including holding its loans longer before it sells them, closing a higher volume of loans, closing a higher proportion of Non-Prime Loans, which generally have higher interest rates, negotiating lower 33 35 borrowing rates and using available cash to fund loans without borrowing additional money. Although this strategy enhances Rock's net interest margin, it exposes Rock to a greater risk of delinquencies. Loans that become delinquent generally can not be sold to third parties increasing the likelihood of foreclosures and charge-offs. Rock may be required to repurchase or substitute loans in the event of a breach of representations and warranties, including any fraud or any misrepresentation made during the loan origination process. Rock recorded a provision for credit losses of $300,000 in 1997 for future repurchase or substitution requirements relating to loans sold before December 31, 1997 and credit risk for loans held for sale and investment. During 1997, two loans were reclassified as real estate owned, resulting in a $30,000 charge against the reserve. Loan fees and gains and losses on sale of mortgages increased to $47.1 million in 1997 from $28.0 million in 1996, an increase of $19.1 million, or 68.4%. This increase is primarily due to an increased portion of the loans closed by Rock consisting of Non-Prime Loans, with respect to which Rock receives higher loan fees and a higher premium on sale, the introduction of Specialty Lending in 1997, resulting in $66.0 million of High LTV Loans closed in 1997 for which Rock also receives relatively higher loan fees and premiums on sale, and the higher volume of loans closed in 1997. The dollar volume of Non-Prime loans increased in 1997 compared to 1996 primarily as a result of an increase in Fresh Start(TM) stores, loan officers, and marketing and the beginning of Rock's Specialty Lending division in 1997. The average premium received by Rock on all loans sold during 1997 also increased, primarily due to changes in the way Rock sold its loans in 1997 and favorable market conditions. Rock sold a majority of its Non-Prime Loans through bulk sales, rather than on a flow basis. In addition, Rock began selling its Conventional Loans pursuant to an assignment of trade, rather than on a flow basis. The increase in loan fees and gains and losses on sale of mortgages was partially offset by an increase in Rock's recapture reserve in 1997. Some Non-Prime Loan sales require Rock to return a portion of the premium received by Rock on the sale of the loan if the loan is prepaid by the customer within the first year after sale. Rock records a provision for this risk based on its evaluation of the terms of its sale contracts and its assumptions concerning prepayments. Rock increased its reserve, and decreased its loan fees and gains and losses on sale of mortgages, by $603,000 for this risk in 1997, compared to an increase of $317,000 in 1996. In addition, by increasing net interest margin by holding loans for longer periods of time, Rock is subject to a higher risk of delinquencies and resulting foreclosure losses. Rock currently does not securitize its loans. Rock sells its loans in large bulk and whole loan sales for cash premiums in the secondary market. If the prices offered in the secondary market for Rock's loans decrease significantly relative to the value Rock believes that it could receive by securitizing such loans, Rock's management would consider securitizing its loans. If Rock began to securitize its loans, it would be subject to the risks described in "Risk Factors--Risks of Securitization." Rock currently services the loans it closes between the date of closing and the date of sale of the loan and the related servicing. Through 1997, Rock sold all of its loans servicing released (i.e., without retaining the right to service the loan) or sells the loan servicing rights separately. Rock would consider selling its loans with the servicing rights retained if it believes that the value of the servicing rights is or may become significantly greater than secondary market buyers are then willing to pay for them. If Rock sold loans with servicing retained, Rock would recognize a gain on the sale equal to the difference between the carrying value of the loan sold on Rock's balance sheet and the sum of (i) the cash received 34 36 in such sale, and (ii) the amount of an asset recorded on its balance sheet in an initial amount equal to the present value of the servicing fees it would expect to collect over the life of the loan (the "Servicing Asset"). If Rock believes the value of the Servicing Asset in the secondary market becomes high enough, Rock would consider selling its servicing rights as it did in 1994 and 1995. If Rock began to sell its loans with servicing retained, it would be subject to the risks described in "Risk Factors--Potential Originated Mortgage Servicing Rights Risk." Net gain on sale of marketable securities increased to $2.2 million in 1997 from $1.0 million in 1996, an increase of $1.2 million, or 124.2%. Before the end of 1997, Rock had invested some of its excess cash in marketable securities. During 1996 and 1997, Rock sold a portion of its portfolio of marketable securities held for sale. No such marketable securities were held by Rock at December 31, 1997, and, therefore, the gains on sales will not continue in the future. The following table sets forth information regarding the components of Rock's expenses for the years ended December 31, 1996 and 1997:
Year Ended December 31, ---------------------------- 1996 1997 ------- ------- (in thousands) Salaries, commissions and employee benefits............................ $16,425 $24,811 General and administrative expenses.................................... 4,646 7,630 Marketing expenses..................................................... 2,393 5,370 Depreciation and amortization.......................................... 663 1,292 Stock and option holders' bonuses...................................... 2,297 1,592 ------- ------- Total expenses.................................................... $26,424 $40,695 ======= =======
Salaries, commissions and employee benefits increased from $16.4 million in 1996 to $24.8 million in 1997, an increase of $8.4 million, or 51.1%. The increase was primarily attributable to Rock hiring additional personnel in order to generate increased levels of loan closings, increased compensation for new management team members hired during 1997, and increased commissions due to increased closings. Rock employed 399 persons as of December 31, 1996, compared to 667 persons as of December 31, 1997, a 72.5% increase. These expenses are expected to increase in 1998 as a result of additional employees hired in 1997 and expected to be hired in 1998 in connection with new stores and expansion of existing operations. General and administrative expenses consist primarily of occupancy costs, professional services, office expenses, automobile and delivery expenses and other expenses, many of which vary with the volume of loan closings. General and administrative expenses increased from $4.6 million in 1996 to $7.6 million in 1997, an increase of $3.0 million, or 64.2%. The increase was primarily attributable to an increase in occupancy expenses as a result of opening nine new Fresh Start(TM) stores and one marketing center in 1997 and one new Conventional Mortgage Lending branch during 1997 and significantly expanded Specialty Lending activities in 1997. In addition, recruiting expenses increased in 1997 primarily due to the opening of the new Fresh Start(TM) stores and the hiring of new management team members. These expenses are expected to increase in 1998 as a result of new stores and expansion of existing operations. Also, legal expenses increased in 1997. Marketing expenses increased from $2.4 million in 1996 to $5.4 million in 1997, an increase of $3.0 million, or 124.4%. Marketing expenses for the Fresh Start(TM) and Specialty Lending divisions in 35 37 1997 increased $1.7 million, or 120.0% and $1.2 million, or 100.0%, respectively, over 1996. The increase was primarily attributable to Rock's greater marketing, both in existing markets and in new markets to generate higher levels of loan closings, as well as the marketing costs associated with the introduction of Rock's High LTV Loans. This increase is primarily the result of Rock's increased focus on its Non-Prime Loan business, which required greater marketing related to new store openings, and ongoing marketing. These expenses are expected to increase in 1998 in connection with new stores and expansion of existing operations into new geographic markets. Depreciation and amortization expenses increased from $0.7 million in 1996 to $1.3 million in 1997, an increase of $0.6 million, or 94.9%. The increase was primarily attributable to Rock's purchase of a front-end origination computer system in early 1997 and purchases of additional equipment and leasehold improvements during 1997 for new stores. These expenses are expected to increase in 1998 as a result of new stores and expansion of existing operations. Stock and option holders' bonuses decreased from $2.3 million in 1996 to $1.6 million in 1997, a decrease of $0.7 million, or 30.7%. During 1996 and 1997, Rock paid bonuses to option holders in accordance with their employment agreements. The agreements do not require these bonuses after December 31, 1997. In addition, Rock paid bonuses to all three of its shareholders in 1996 and one of its shareholders in 1997, partially in recognition of cumulative past services. Rock does not intend to pay aggregate bonuses of this magnitude to these persons after 1997. Upon completion of this Offering Rock's tax status will change from that of an S corporation to that of a C corporation. As a C corporation, Rock will be subject to federal and state income taxation. As an S corporation, Rock's taxable income is included in the individual returns of the shareholders. FISCAL YEAR ENDED DECEMBER 31, 1996 VERSUS FISCAL YEAR ENDED DECEMBER 31, 1995 The following table sets forth the revenues and expenses and pre-tax income for Rock for the years ended December 31, 1995 and 1996:
Year Ended December 31, ----------------------- 1995 1996 -------- -------- (In thousands) Total revenue before gains on sale of mortgage servicing and marketable securities ................ $ 18,178 $ 28,564 Net gain on sale of mortgage servicing ............... 5,728 -- Net gain on sale of marketable securities ............ 346 991 -------- -------- Total revenue ........................................ 24,252 29,555 Total expenses ....................................... (17,389) (26,424) -------- -------- Pre-tax income ....................................... 6,863 3,131 Add back stock and option holders' bonuses ............................................ 546 2,297 -------- -------- Pre-tax income before stock and option holders' bonuses ................................... $ 7,409 $ 5,428 ======== ========
Rock's total revenues increased to $29.6 million in 1996 from $24.3 million in 1995, an increase of $5.3 million, or 21.9%, which included a net increase of $0.6 million in gains on sales of marketable 36 38 securities over 1995 and a gain on the sale of servicing rights of $5.7 million in 1995. Excluding gains on sales of marketable securities and the gain on the sale of servicing rights, Rock's total revenues increased to $28.6 million in 1996 from $18.2 million in 1995, an increase of $10.4 million, or 57.1%. The increase in revenues is primarily due to (i) an increased portion of the loans closed by Rock consisting of Non-Prime Loans (13.7% of the total dollar volume of loans closed in 1996, compared to 7.9% in 1995), which have higher origination fees and with respect to which Rock receives a higher premium on sale than Conventional Loans, and (ii) a 132.0% increase in the volume of Non-Prime Loans closed by Rock. In 1996, the Fresh Start(TM) division's revenues as a percentage of total revenue increased to 40%, compared to 14% in 1995. Total expenses increased from $17.4 million in 1995 to $26.4 million in 1996, an increase of $9.0 million, or 52.0%, primarily due to increased commissions, increased occupancy costs for a branch opening and increases in general and administrative expenses that fluctuate with increases in volumes of loans closed. Included in total revenues for 1995 is a $5.7 million gain on the sale of mortgage servicing rights and a $346,000 gain on the sale of marketable securities, and included in total revenues for 1996 is a $991,000 gain on the sale of marketable securities. As a result of the gain on sale of mortgage servicing rights in 1995 and proportionately higher expenses, partially offset by the lower gain on the sale of marketable securities in 1995, pre-tax income before stock and option holders' bonuses decreased 26.7%, from $7.4 million in 1995 to $5.4 million in 1996. The following table sets forth information regarding the components of Rock's revenues for the years ended December 31, 1995 and 1996:
Year Ended December 31, ----------------------- 1995 1996 -------- -------- (in thousands) Interest income ................................... $ 3,003 $ 4,267 Interest expense .................................. (3,012) (3,669) -------- -------- Net interest margin .......................... (9) 598 Loan fees and gains and losses on sale of mortgages..................................... 17,788 27,960 Net gain on sale of mortgage servicing ............ 5,728 -- Net gain on sale of marketable securities ......... 346 991 Other income ...................................... 399 6 -------- -------- Total revenue ................................ $ 24,252 $ 29,555 ======== ========
Net interest margin increased to $598,000 in 1996 from a loss of $9,000 in 1995, an increase of $607,000. The increase was primarily due to (i) higher weighted average interest rates charged on the loans as a result of the increased proportion of Non-Prime Loans, which generally have higher interest rates, (ii) the increase in the dollar volume of loans closed by Rock, and (iii) Rock's increased use of internally-generated cash to fund its loans. Loan fees and gains and losses on sale of mortgages increased to $28.0 million in 1996 from $17.8 million in 1995, an increase of $10.2 million, or 57.2%. This increase is primarily due to an increased portion of the loans closed by Rock consisting of Non-Prime Loans, with respect to which Rock receives higher loan fees and a higher premium on sale, and an increase of 20.5% in the dollar volume of loans closed. The dollar volume of Non-Prime loans increased in 1996 compared to 1995 primarily because of an increase in Fresh Start(TM) stores, loan officers and marketing. 37 39 The increase in the loan fees and gains and losses on sale of mortgages was partially offset by an increase in Rock's recapture reserve in 1996. Some Non-Prime Loan sales require Rock to return a portion of the premium received by Rock on the sale of the loan if the loan is prepaid by the customer within the first year after sale. Rock records a provision for this risk based on its evaluation of the terms of its sale contracts and its assumptions concerning prepayments. Rock increased its reserve, and decreased its loan fees and gains and losses on sale of mortgages, by $317,000 for this risk in 1996, compared to an increase of $205,000 in 1995. Rock recognized a $5.7 million net gain on the sale of mortgage servicing in 1995. Rock retained the servicing rights to loans it sold in 1993 and 1994 (and received lower sales prices as a result). In 1995, Rock sold all of its remaining servicing rights. In 1996, Rock sold all of its loans servicing released. Other income in 1995 also includes approximately $280,000 of loan servicing fees for the period during which Rock retained servicing rights in 1995. Net gain on sale of marketable securities increased to $991,000 in 1996 from $346,000 in 1995, an increase of $645,000, or 186.7%. During 1995 and 1996, Rock invested some of its excess cash in marketable securities. During 1995 and 1996, Rock sold a portion of its portfolio of marketable securities held for sale and recognized gains on those sales. The net gain in 1995 included recognition of a $850,000 loss due to other than temporary impairment. The following table sets forth information regarding the components of Rock's expenses for the years ended December 31, 1995 and 1996:
Year Ended December 31, ----------------------- 1995 1996 ------- ------- (in thousands) Salaries, commissions and employee benefits $11,272 $16,425 General and administrative ................ 3,726 4,646 Marketing expenses ........................ 1,339 2,393 Depreciation and amortization ............. 507 663 Stock and option holders' bonuses ......... 545 2,297 ------- ------- Total expenses ....................... $17,389 $26,424 ======= =======
Salaries, commissions and employee benefits increased from $11.3 million in 1995 to $16.4 million in 1996, an increase of $5.1 million, or 45.7%. The increase was primarily attributable to Rock hiring additional personnel in order to generate increased levels of loan closings, and increased commissions due to increased closings. Rock employed 266 persons as of December 31, 1995, compared to 399 persons as of December 31, 1996, a 50% increase. General and administrative expenses consist primarily of occupancy costs, professional services, office expenses, automobile and delivery expenses and other expenses, many of which vary with the volume of loan closings. General and administrative expenses increased from $3.7 million in 1995 to $4.6 million in 1996, an increase of $0.9 million, or 24.7%. The increase was primarily attributable to increased occupancy expenses as a result of opening two new Fresh Start(TM) stores in 1996 and increased expenses required to accommodate the significantly expanded loan closing volumes experienced by Rock in 1996. 38 40 Marketing expenses increased from $1.3 million in 1995 to $2.4 million in 1996, an increase of $1.1 million, or 78.7%. The increase was primarily attributable to Rock's greater marketing expenses, both in existing markets and in new markets to generate higher levels of loan closings. This increase is primarily the result of Rock's increased focus on its Non-Prime Loan business, which required greater marketing related to each loan closed and new store openings, and ongoing marketing. Depreciation and amortization expenses increased from $0.5 million in 1995 to $0.7 million in 1996, an increase of $0.2 million, or 30.8%. The increase was primarily attributable to Rock's purchases of additional equipment and leasehold improvements during 1996 for new stores and expansion of Rock's national support center. Stock and option holders' bonuses increased from $0.5 million in 1995 to $2.3 million in 1996, an increase of $1.8 million. During 1996, Rock paid bonuses to option holders in accordance with their employment agreements. The agreements do not require these bonuses after December 31, 1997. In addition, Rock paid bonuses to all of its shareholders in 1996, partially in recognition of cumulative past services. Rock does not intend to pay bonuses of this magnitude to these persons after 1997. LIQUIDITY AND CAPITAL RESOURCES The following table sets forth information concerning Rock's financial condition as of December 31, 1996 and 1997:
As of December 31, ---------------------- 1996 1997 -------- -------- (In thousands) Cash and cash equivalents ............... $ 3,289 $ 11,947 Marketable securities ................... 5,954 -- Mortgage loans held for sale ............ 85,009 121,344 Property and equipment, net ............. 2,681 7,011 Other assets ............................ 3,427 4,127 -------- -------- Total assets ........................ $100,360 $144,429 ======== ======== Warehouse borrowings .................... $ 67,621 $ 97,455 Drafts payable .......................... 14,897 21,875 Other liabilities ....................... 5,596 9,991 Shareholders' equity .................... 12,346 15,108 -------- -------- Total liabilities and shareholders' equity ........... $100,360 $144,429 ======== ========
Cash and cash equivalents increased in 1997 primarily due to the cash generated from operations along with the sale of the remaining marketable equity securities. Mortgage loans held for sale increased due to higher volume of originations in 1997 by the Fresh Start(TM) division, which Rock holds for longer periods of time to accumulate for bulk sales and to increase interest income. See "Results of Operations." Property and equipment increased due to new Fresh Start(TM) store openings and the acquisition of a new front-end origination technology in 1997. Other assets at December 31, 1997 include loans to a shareholder of approximately $1.6 million, which are expected to be repaid out of the Shareholder Distribution Amount. 39 41 Warehouse borrowings and drafts payable increased due to the increase in volumes of originations and holding loans for longer periods of time. See "Results of Operations." The increase in other liabilities is due to increased trade payables relating to increases in the volume of loans closed and financing for equipment acquisitions. Shareholders' equity reflects the increase due to pre-tax income less distributions to shareholders to pay tax liabilities they incur as a result of Rock's status as an S corporation and a special, one-time distribution to shareholders of approximately $4.8 million in 1997. Net cash provided by operating activities during 1997 before increases or decreases in loans held for sale was approximately $19.7 million, compared to approximately $9.2 million in 1996. Cash was provided primarily by (i) Rock's pre-tax income for 1997 (approximately $10.8 million before depreciation and amortization, provision for credit losses and net gain on sales of marketable securities in 1997, compared to approximately $2.8 million in 1996), (ii) an increase in drafts payable, which represent funds advanced for loan closings that have not yet been drawn against the warehouse line of credit (approximately $7.0 million in 1997, compared to approximately $7.5 million in 1996), and (iii) an increase in accounts payable and accrued expenses and other liabilities, primarily as a result of the increase in loan closings and the number of stores opened during 1997 (approximately $2.6 million in 1997, compared to a reduction of approximately $0.8 million in 1996). These sources of cash were more than offset primarily by cash used to fund the increase in loans held for sale resulting from the increased volume of closings in 1997 (approximately $36.3 million in 1997, compared to approximately $11.0 million in 1996). Cash was also used during 1997 (i) to purchase equipment, both for new stores and a marketing center and to upgrade Rock's computer and telephone systems (approximately $5.6 million in 1997, compared to approximately $2.1 million in 1996), (ii) to fund distributions to shareholders both to pay their taxes on Rock's income taxed to them as a result of Rock's S corporation status and to distribute a portion of the additional earnings previously taxed to them (approximately $7.2 million in 1997, compared to approximately $3.5 million in 1996), and (iii) to fund loans to shareholders (approximately $0.9 million in 1997, compared to payments received on such loans of approximately $2.0 million in 1996). These uses of cash were financed primarily by cash generated by operations, proceeds from the sales of marketable securities and a $2 million loan secured by computer equipment purchased with the loan proceeds. Increased borrowings under Rock's warehouse financing facilities (approximately $29.8 million in 1997, compared to approximately $3.5 million in 1996) were used to finance, in part, the higher amount of loans held for sale. Rock's operations require continued access to financing sources. Rock's primary operating cash requirements include the funding of (i) loan closings, (ii) capital expenditures in connection with the expansion of its stores, (iii) beginning after this Offering, income tax payments due on Rock's net income, (iv) ongoing administrative and other operating expenses, including compensation of additional employees expected to be hired in 1998, and (v) repayments of borrowings and related interest. Adequate credit facilities and other sources of funding, which permit Rock to fund the loans it closes, are essential to the continuation of Rock's ability to close loans. After using available working capital, Rock borrows money to fund its loan closings and repays these borrowings as the loans are sold. Loan origination fees are sometimes included in the principal balance of the loan closed, although Rock may receive these fees either at the closing of the loan or at the time of a warehouse line of credit borrowing or reverse repurchase sale of the loan. Upon the sale of loans and the subsequent repayment of the borrowings, Rock's working capital and credit facilities then become available to fund additional loan closings. 40 42 Rock has $225 million of warehouse financing facilities. Rock's warehouse line of credit currently provides for up to $125 million principal amount of demand loans secured by loans held for sale and other assets of Rock. Loans under the warehouse line of credit bear interest at rates that vary depending on the type of underlying loan, and the loans are subject to sublimits, advance rates and warehouse terms that vary depending on the type of underlying loan. Interest rates vary from the bank's prime rate to 1.5% to 2.5% over the federal funds rate (resulting in a weighted average interest rate of 6.94% during 1997). The warehouse line of credit requires Rock to maintain a minimum tangible effective net worth, a maximum leverage ratio, a minimum current ratio and minimum working capital. The warehouse line of credit expires, with respect to loans committed to be made by any particular lender, 75 days after that lender demands payment, unless that lender is replaced. Borrowings under the warehouse line of credit are used to fund loans closed by Rock. As of January 31, 1998, Rock had borrowed $37.0 million under this facility and had a maximum of $88.0 million available for additional borrowings and was in compliance with all associated financial covenants. In addition to the $125 million warehouse line of credit, Rock's reverse repurchase arrangement provides that the lender will purchase from Rock at par, subject to Rock's agreement to repurchase on a daily basis, up to $100 million of fully-amortizing, first or junior lien residential mortgage loans and home equity loans that comply with Rock's origination guidelines and conform to whole and bulk loan sale requirements. This agreement is not a committed facility and the lender may elect to discontinue the repurchase agreement at any time. The term of any financing under the repurchase agreement matures and may be renewed on a daily basis. In any event, the arrangement terminates in March 1998. The effective weighted average interest rate to Rock of this arrangement in 1997 was 6.88%. Rock uses this facility as a supplemental borrowing facility to fund loans closed by Rock until they are sold. As of January 31, 1998, Rock had financed $46.0 million of loans under this facility and an additional $54.0 million was available for future financings. The net proceeds of the Offering, together with cash flows from operations, are expected to be sufficient to fund the payment to the Existing Shareholders of the Shareholder Distribution Amount and Rock's liquidity requirements for the next 12 months, if Rock's future operations are consistent with management's expectations. See "Termination of S Corporation Status" and "Use of Proceeds." Rock, however, expects to continue its expansion and expects that eventually it will need to arrange for additional sources of capital through the issuance of debt, equity or additional bank borrowings. Rock has no commitments for any such additional financings, and there can be no assurance that Rock will be able to obtain any such additional financing at the times required and on terms and conditions acceptable to Rock. In such event, Rock's growth and operations could be curtailed. If Rock begins to securitize its assets or significantly increases its retained mortgage servicing rights, Rock's liquidity could be materially adversely affected. See "Risk Factors--Risks of Securitization" and "--Potential Originated Mortgage Servicing Rights Risk." HEDGING Rock closes loans and subsequently sells them for cash to unaffiliated wholesale purchasers. If prevailing interest rates rise between the time Rock closes loans or fixes the interest rates on such loans and the time such loans are priced for sale, the spread between the amount loaned and the amount the wholesale purchaser is willing to pay for the loan narrows, resulting in a loss in value of the loan. To protect against such losses in respect of its Conventional Loans (where the interest spread is lower), Rock currently enters into forward sales commitments to fix the sales price of the conventional loans expected 41 43 to be closed or hedges the value of those loans through periodic purchases of short-duration treasury-based options. Before entering into forward commitments or hedging, Rock performs an analysis of its Conventional Loans and Conventional Loan applications with committed interest rates taking into account such factors as the estimated portion of loan applications that will ultimately be funded, interest rates, inventories of loans and applications and other factors to determine the type and amount of forward commitment and hedging transactions. Rock attempts to make forward commitments for or hedge substantially all of its estimated interest rate risk on its Conventional Loans. Rock does not believe that hedging its interest rate risk with respect to its Non-Prime Loans is cost effective as a result of their generally higher interest spreads combined with their relative lack of sensitivity to changes in market interest rates and considering the period during which Rock currently intends to accumulate such loans for sale. See "Risk Factors--Economic Conditions--Interest Rates." IMPACT OF INFLATION Inflation has not had a material effect on Rock's results of operations. Increases in the inflation rate generally result in increased interest rates. Because Rock borrows money at variable rates, increased interest rates will increase the borrowing costs of Rock. Inflation will also increase the operating costs of Rock. Rock may not be able to pass on the effects of inflation and the accompanying higher interest rates to its customers due to usury or other regulatory restrictions or competitive pressures. Profitability may also be affected by the level of and fluctuation in interest rates, which affect Rock's ability to earn a spread between interest received on its loans and the costs of its borrowings. The profitability of Rock is likely to be adversely affected during any period of unexpected or rapid changes in interest rates. A substantial and sustained increase in interest rates could adversely affect the ability of Rock to close loans. Fluctuating interest rates also may affect the net interest income earned by Rock resulting from the difference between the yield to Rock on loans held pending sales and the interest paid by Rock for funds borrowed under Rock's warehouse financing facilities. See "Risk Factors--Economic Conditions--Interest Rates." YEAR 2000 COMPLIANCE Rock does not expect the cost of making its computer systems year 2000 compliant will be material. Because most of Rock's computer hardware and software is less than two years old, it believes that its exposure to year 2000-related hardware and software problems is lower than if it used older equipment or software. Nonetheless, Rock is engaging a consultant to manage the testing of its equipment and software and the identification and resolution of any problems discovered. Rock also plans to explore the strategies of its vendors to discover and resolve any year 2000 problems. Rock is already participating with its loan servicing vendor in its year 2000 evaluation process. Rock expects to complete this process during 1998. See "Risk Factors--Year 2000 Compliance." NEW ACCOUNTING PRONOUNCEMENTS In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." This Statement specifies the computation, presentation, and disclosure requirements for earnings per share for entities with publicly- held common stock or potential common stock. This Statement is effective for financial statements for both interim and annual periods ending after December 15, 1997 and will be implemented in Rock's financial statements upon completion of the Offering. The pro forma earnings per share information presented in this Prospectus is computed in accordance with SFAS No. 128. 42 44 In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income." This Statement establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. This Statement is effective for fiscal years beginning after December 15, 1997. Reclassification of financial statements for earlier periods provided for comparative purposes is required. At this time Rock has determined that this Statement will have no significant impact on its financial position or results of operations for 1998. In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." This statement establishes standards for the way public business enterprises report information about their operating segments and requires them to report selected information about operating segments, products and services, activities in different geographic areas, and its reliance on major customers. SFAS No. 131 requires a "management approach" for identifying reportable segments based on the way that management organizes the segments within the enterprise for making operating decisions and assessing performance. SFAS No. 131 is effective for financial statements for periods beginning after December 15, 1997, and will be adopted by Rock in 1998 as required. Rock has presented the required disclosures of financial information for its three divisions, Fresh Start(TM), Specialty Lending and Conventional Mortgage Lending in this "Management's Discussion and Analysis of Financial Condition and Results of Operations." 43 45 BUSINESS OVERVIEW Rock is a specialty marketing company of debt consolidation and home financing products secured primarily by first or second mortgages on one- to four-family, owner-occupied residences. The Company originates loans through 24 stores and branches, one marketing center and one call center. Founded in 1985 by its current Chief Executive Officer and Chairman of the Board, Daniel Gilbert, Rock originates 100% of its loans through its retail operations, marketing its loans directly to consumers. The Company uses proprietary marketing methods and technology to increase its market penetration. Rock seeks to provide "world class" service to its customers, thereby encouraging them to return for future loans and refer others to Rock for loans. The Company also focuses on recruiting, developing and motivating talented people, recruited from inside and outside the consumer finance industry, to implement its business strategies. Rock believes it is creating growing brand identities and a retail franchise that will sustain its loan origination efforts. As a retail originator of loans, Rock earns a portion of its revenues from origination points and processing fees charged to its customers. Rock currently does not securitize its loans. Rather, it sells its loans in large bulk and whole loan sales for cash premiums in the secondary market. During 1997, Rock had revenues of $52.1 million, pre-tax income of $11.4 million and pro forma net income of $7.0 million. During 1997, Rock closed $1.2 billion (12,950 units) of loans. As of January 31, 1998, Rock had 717 employees, including 286 loan officers. Rock currently operates through three major divisions. Rock originates Sub-Prime Home Equity Loans to individuals with impaired credit characteristics, high levels of debt service to income, unfavorable past credit experience, limited credit history, limited employment history or unverifiable income through its Fresh Start(TM) division. Rock owns the registered trademark for the name "Fresh Start Financial Services(R)" and has applied for a registered service mark for the name "Fresh Start(TM)." Rock originates home equity second mortgage loans to individuals with good credit histories but little or no equity in their homes through its Specialty Lending division. During 1997, Rock closed $335.3 million (6,232 units, representing 49% of the total units closed) of Sub-Prime Home Equity Loans and High LTV Loans. Rock also originates Conventional Loans that generally conform to FNMA or Freddie Mac underwriting standards, or that generally meet such standards except for maximum loan size guidelines, through its Conventional Mortgage Lending division. During 1997, Rock closed $867.5 million (6,513 units) of Conventional Loans. Although only 28% of the total loan closings (by dollar volume) were Non-Prime Loans in 1997, revenues from Non-Prime Loans equaled 63% of total revenues due to the higher profit margins and interest rates associated with Non-Prime Loans. In addition, Rock began to increase its government insured lending operations in 1997, primarily making mortgage loans that meet the underwriting standards for FHA insurance. Rock's business in each division is supported by an infrastructure of sophisticated technology, highly-trained people and specialized marketing, including multimedia advertising and direct marketing operations. To identify potential customers, Rock uses internal and external databases of information regarding past and potential customers and their needs. Rock then develops proprietary customer profiles which it uses together with information from outside sources to tailor and direct its marketing efforts for each of its divisions. Rock believes that its focused marketing approach makes more efficient use of its marketing resources and leads to a higher marketing success rate than broad indiscriminate marketing aimed at a wide range of consumers. 44 46 BUSINESS STRATEGY Rock's business strategy to sustain its growth in profitability while continuing to build its consumer lending operations includes: (i) enhancing consumer recognition of its "Fresh Start(TM)" and "Rock Financial" brand names in its current markets and establishing brand name recognition in new markets, (ii) increasing the number of Fresh Start(TM) stores and expanding its call center operations into additional states, (iii) expanding the cross-selling of existing products and expanding the products offered through existing distribution channels, (iv) exploring establishing additional distribution channels, (v) providing "world class" service, and thereby distinguishing itself from its competitors, (vi) continuing to invest heavily in technology and marketing, and (vii) maintaining consistent underwriting standards, and thereby maintaining secondary market interest in Rock's loans. Enhance Consumer Recognition of the "Fresh Start(TM)" and "Rock Financial" Brand Names. Rock uses advertising and marketing to enhance consumer recognition of its "Fresh Start(TM)" and "Rock Financial" brand names in each of the current markets it serves and to establish brand name recognition in new markets it enters. Rock believes that it can differentiate itself from its competitors through strong brand names and increase the likelihood that potential customers will use Rock to meet their financial needs. Increase the Number of Fresh Start(TM) Stores and Expand Call Center Operations. Rock plans to increase the number of its Fresh Start(TM) stores and expand its call center operations into additional states, thereby increasing loan production and diversifying its operations geographically. Rock believes that Non-Prime Loans are less dependent on prevailing interest rates and home purchases and have higher origination fees and margins than Conventional Loans. Rock opened nine Fresh Start(TM) stores and one marketing center during 1997 and opened an additional five Fresh Start(TM) stores in January 1998. Rock plans to open additional stores in 1998. As of January 31, 1998, Rock was soliciting High LTV Loans in eight states and was licensed to do business in eight others. Rock is analyzing the requirements to do business and originate Non-Prime Loans in other states. Expand the Cross-Selling of Existing Products and Expand the Products Offered Through Existing Distribution Channels. Rock plans to place loan officers from each of Rock's other divisions in each Fresh Start(TM) store, thereby enabling Rock to make available a greater variety of products to its customers at these stores and to allow each of Rock's divisions to benefit from cross-selling opportunities. Rock also plans to continue to explore new products which it can cost-effectively originate through each of its existing distribution channels. As part of this strategy, Rock began to increase its government insured lending operations through its existing distribution channels in 1997. Explore Establishing Additional Distribution Channels. Rock has developed a marketing and technology infrastructure that management believes will allow Rock to establish new distribution channels to market financial products directly to the consumer. Rock will explore creating new channels to market such financial products. Provide "World Class" Service. Rock trains its employees in what it calls its "world class" service philosophy, which is Rock's commitment to provide superior customer service, to be responsive to customer needs and to make applying for and closing each loan as quick, efficient and convenient for the customer as possible. Rock believes that "world class" service is necessary to distinguish Rock from 45 47 its competitors. Rock also believes that referral and repeat business are its most important sources of business, and that satisfied customers who received "world class" service are more likely to refer others to Rock for loans and to return to Rock for their future financing needs. Continue to Invest Heavily in Technology and Marketing. Rock has invested heavily in its technology and marketing to create an infrastructure of sophisticated technology, highly trained people and specialized marketing and to create and enhance brand name recognition for the Rock Financial and Fresh Start(TM) brand names. Rock plans to continue to make significant investments in its technology and marketing to maintain and enhance that infrastructure. Maintain Consistent Underwriting Standards. Rock desires to maintain consistent underwriting standards while it increases the volume of loans closed. Rock believes that maintaining consistent underwriting standards is important to develop and maintain its reputation and to maintain secondary market interest in Rock's loans. Also, Rock seeks to maximize its premium on whole and bulk loan sales by closely monitoring secondary market buyers' requirements. KEY COMPONENTS OF ROCK'S RETAIL FRANCHISE Rock originates 100% of its loans through its retail operations, marketing its loans directly to consumers. The Company uses proprietary marketing methods and technology to increase its market penetration. Rock seeks to provide "world class" service to its customers, thereby encouraging them to return for future loans and refer others to Rock for loans. The Company also focuses on recruiting, developing and motivating talented people, recruited from inside and outside the consumer finance industry, to implement its business strategies. Through the use of these key components, Rock believes it is creating growing brand identities and a retail franchise that will sustain its loan origination efforts. Marketing and Advertising. Rock makes extensive use of multimedia advertising campaigns, including television, radio, yellow pages and print advertising, and direct marketing efforts to support its loan officers' sales efforts. Rock uses its proprietary customer profiles to focus its advertising and direct marketing efforts in order to reach its target customer cost-effectively and generate loan inquiries. Rock also uses advertising to increase brand name recognition for its Rock Financial and Fresh Start(TM) brand names. Rock's Fresh Start(TM) division is using the "Fresh Start(TM)" name, adopted in 1997, in its advertising outside of Michigan and plans to convert its current Michigan "Boulder Financial" stores to Fresh Start(TM) stores in 1998. By creating brand name recognition, Rock believes that it is more likely that consumers will use Fresh Start(TM) or Rock Financial to meet their financial needs. Rock has an in-house marketing staff with a marketing product manager dedicated to each division. Rock's marketing team, together with an outside advertising agency, produces Rock's graphic art, places virtually all of Rock's print, radio and television advertising, manages Rock's marketing data base and acquires lists used for call center and direct marketing efforts. Rock has also developed and trademarked a proprietary direct mail product it calls "Mortgage in a Box(R)." After a customer has paid a loan application or processing fee, Rock mails the customer a colorful Mortgage in a Box(R) package that contains application forms and instructions. Rock believes its Mortgage in a Box(R) package simplifies the loan application process and helps customers return complete information necessary for Rock to make underwriting decisions regarding the potential loan. Rock characterizes this product as "the world's most user-friendly loan application kit." Rock has also 46 48 established a web site at http://www.Rockfin.com. The site provides product information about the loans offered by Rock. Using Technology and Information Systems for Marketing. Rock believes that its focused marketing approach makes more efficient use of its marketing resources and leads to a higher marketing success rate than broad indiscriminate marketing aimed at a wide range of consumers. To identify potential customers, Rock uses internal and external databases of information regarding past and potential customers and their needs. Rock then develops proprietary customer profiles which it uses to tailor and direct its marketing efforts for each of its divisions. Rock uses its profiles to attempt to identify homeowners and potential homeowners believed by management to be likely to have a need for a Rock product and who are likely to satisfy its underwriting guidelines. Rock uses these profiles and demographic information to determine where to locate its stores and how to target its multimedia advertising. Rock also monitors the effectiveness of its marketing programs and adjusts them based on their performance. Call center loan officers make outbound calls using Rock's predictive dialer systems. Rock's telephone system also routes inbound calls to available call center loan representatives. The telephone system can also track where calls originate, who handles the call, the time a customer spends waiting on the phone and other information about Rock's phone calls. Rock also uses a customized loan origination system that allows Rock to process loans quickly and efficiently. The system provides real-time access to the information used by each team in operations as well as the secondary marketing and financial teams. Rock also uses these systems to develop computer-generated forms for each of its various loans in each jurisdiction to make the processing of approved loans faster and more efficient. As of January 31, 1998, Rock employed a staff of 41 in its technology team to allow it to analyze better its information regarding past customers, develop customer profiles, create and obtain lists of potential customers and track loan applications, closings and sales. In addition, Rock's software systems help call center and other loan officers make and keep track of calls and assist them with their sales presentations and in gathering the information necessary to determine if a potential customer qualifies for a Rock loan. High Level of Service and Relationship Selling. Rock seeks to provide "world class" service to its customers, thereby encouraging them to return for future loans and to refer others to Rock for loans. Rock strives to recruit and hire employees who share Rock's commitment to provide "world class" service to its customers and who have the attitude and the skills Rock considers necessary to be successful. Through its training programs, Rock seeks to instill in all of its employees Rock's commitment to provide superior customer service and to be responsive to customer needs. Rock strives to make applying for and closing each loan as quick, efficient and convenient for the customer as possible. Rock believes that "world class" service is necessary to distinguish Rock from its competitors. The loan products offered by Rock are generally standardized products offered by many competitors, so potential customers generally can choose among competitors on the basis of price, convenience and service. In addition, Rock believes that referrals and repeat business from satisfied customers are its largest sources of business and that satisfied customers who received "world class" service are more likely to refer others to Rock for loans and to return to Rock for their future financing needs. Rock attempts to measure customers' satisfaction with its service through customer service ratings and compensates its employees based, in part, on those ratings. 47 49 In addition, Rock attempts to establish third-party relationships with persons from whom potential customers might seek advice about the types of loans offered by Rock, such as real estate brokers, home builders and professionals in order to generate referral business. Training. Rock focuses on recruiting, developing and motivating talented people from within and outside the consumer finance industry to implement its business strategies. Rock is committed to its human resources team and its efforts to train Rock's employees in Rock's marketing and "world class" service philosophies. Through its training programs, Rock seeks to instill in all of its employees Rock's commitment to provide superior customer service and to be responsive to customer needs. All new employees are required to undergo a training program. New sales persons are required to take a two to four-week training class to provide them with knowledge of Rock's products and to provide them with extensive training in sales and marketing techniques, including telephone sales techniques, and customer relations. Sales persons are also provided with periodic ongoing training to keep their skills and product knowledge up to date. Rock uses its technology and information systems to provide employees with more standardized training, realistic practice of their skills and quick feedback. Management also uses its technology and information systems to monitor employee performance both in training classes and on the job, which in turn helps Rock assess the ongoing training needs of its employees and develop more effective training programs. Ongoing telephone skill training is provided to all loan officers. The training includes classroom as well as individual training sessions. Employees are trained to return all calls promptly. Employees, especially call center employees, are evaluated and compensated based on, among other things, the number of closed loans, the speed and accuracy of their loan closings, the percentage of proposed loans submitted that receive underwriting approval and the customer's evaluation of the service received. Rock recruits employees who have the attitude and skills Rock considers necessary to be successful. Rock has established a web site for its recruiting efforts at http://www.rockcareers.com. It then strives to develop its loan officers and to promote its most qualified loan officers. Rock monitors the performance of its loan officers on a daily, weekly, monthly and yearly basis. Rock also measures the customer service ratings of each of its loan officers and of its internal staff based on customer feedback at loan closing. Individual compensation is adjusted based in part on the results of these ratings. OPERATING DIVISIONS Rock currently operates through three major divisions. Rock originates Sub-Prime Home Equity Loans to individuals with impaired credit characteristics, high levels of debt service to income, unfavorable past credit experience, limited credit history, limited employment history or unverifiable income through its Fresh Start(TM) division. Rock owns the registered trademark for the name "Fresh Start Financial Services(R)" and has applied for a registered service mark for the name "Fresh Start(TM)." Rock originates High LTV Loans to individuals with good credit histories but little or no equity in their homes through its Specialty Lending division. Rock also originates Conventional Loans that generally conform to FNMA or Freddie Mac underwriting standards, or that generally meet such standards except for maximum loan size guidelines, through its Conventional Mortgage Lending division. In addition, Rock began to increase its government insured lending operations in 1997, primarily making mortgage loans that meet the underwriting standards for FHA insurance. 48 50 FRESH START(TM) DIVISION Rock's Fresh Start(TM) division, which was created in 1994, originates Sub-Prime Home Equity Loans secured primarily by first liens on one- to four-family, owner-occupied residences. The Fresh Start(TM) division focuses on customers whose borrowing needs are not served by traditional financial institutions due to impaired credit profiles or other factors. The Fresh Start(TM) division originates Sub-Prime Home Equity Loans through its network of retail loan origination stores. Rock supports its Fresh Start(TM) store network with an array of marketing, including multimedia advertising campaigns and direct marketing to build local awareness of the Fresh Start(TM) brand name and to grow loan volume within each market. Rock's Fresh Start(TM) division is using the "Fresh Start(TM)" name, adopted in 1997, in its advertising outside of Michigan and plans to convert its current Michigan "Boulder Financial" stores to Fresh Start(TM) stores in 1998. In 1997, this division closed $269.3 million (4,196 units) of Sub-Prime Home Equity Loans, compared to $147.7 million (2,272 units) of Sub-Prime Home Equity Loans in 1996. Based on information provided by the National Mortgage News, Rock believes it was one of the 20 largest retail originators of Sub-Prime Home Equity Loans in the United States in 1997. Sub-Prime Home Equity Loans. Sub-Prime Home Equity Loans do not generally meet the underwriting standards for sale to FNMA or Freddie Mac for any of a variety of reasons, such as impaired credit characteristics, high levels of debt service to income, unfavorable past credit experience, limited credit history, employment history or unverifiable income. These loans are used typically to consolidate debt (such as credit card debt) and to finance home improvements, home purchases and other consumer needs. By originating loans to individuals with impaired credit profiles, Rock is able to charge higher interest rates on its Sub-Prime Home Equity Loans than for its Conventional Loans. The following table shows, for 1995, 1996 and 1997, various information concerning the aggregate of the loans closed by Rock's Fresh Start(TM) division:
1995 1996 1997 ---- ---- ---- (dollars in thousands) Principal amount of loans closed ..................... $ 64,403 $ 147,676 $ 269,275 Number of loans closed ............................... 899 2,272 4,196 Average initial loan balance ......................... $72 $65 $64 Fixed rate loans: Percentage of loans closed (dollars) ............ 50.4% 33.3% 48.8% Weighted average interest rate .................. 12.4% 12.6% 12.7% Weighted average initial combined LTV............ 86.8% 81.4% 78.1% Adjustable rate loans: Percentage of loans closed (dollars) ............ 49.6% 66.7% 51.2% Weighted average initial interest rate .......... 10.9% 10.3% 11.1% Weighted average initial combined LTV............ 77.1% 77.2% 79.0% Lien position: Percentage first mortgages ...................... 96.8% 95.2% 80.7% Percentage second mortgages ..................... 3.2% 4.8% 19.3%
Fresh Start(TM) Stores. The majority of the Fresh Start(TM) stores are located in retail strip malls or office buildings with substantial signage. These stores range in size from approximately 1,400 to 5,400 square feet in size. In addition, Rock is experimenting with one pilot marketing center, opened in 49 51 November 1997, that has 638 square feet of space and is located inside a large national retail superstore. In the future, Rock may use a smaller office building store in a new geographic area to test a new market because such stores are generally less expensive to establish and the leases have shorter terms. If the business is successful in such a test location, Rock may try to relocate into a 2,500 to 5,000 square foot store in a retail strip mall. Each store is headed by a store manager, who is responsible for overseeing all loans originated from that store and is compensated, in part, based on loan closing volume in his or her store. The loan officers in the store also earn the majority of their compensation through commissions. Fresh Start(TM) store managers report to district managers who are responsible for overseeing loan originations for the entire district and are compensated, in part, based on the volume of loans closed in that district. As of December 31, 1997, Rock had 14 Fresh Start(TM) stores (eight in Michigan, three in Illinois and three in Ohio) and one pilot marketing center in Illinois. In addition, Rock opened five new Fresh Start(TM) stores in January 1998, one each in Nevada, Missouri and Indiana and two in Texas. Rock plans to open additional stores in 1998. In addition, Rock plans to place loan officers from each of Rock's other divisions in each Fresh Start(TM) store, allowing Rock to provide a greater variety of products to its customers and to use leads generated by one division to make loans through other divisions, as appropriate. During 1995, 1996 and 1997, Rock closed 92.5%, 100.0% and 89.9%, respectively, of the dollar volume of its Sub-Prime Home Equity Loans secured by property located in Michigan. Establishing stores in new states requires Rock to familiarize itself thoroughly with that state's regulatory requirements and to tailor its loan products and practices to comply with such requirements. Rock must also identify and train store managers and loan officers through its in-house training programs for each new office. Rock attempts to locate stores in neighborhoods where there is a high concentration of likely customers. The Fresh Start(TM) division also makes extensive use of telephone call center marketing and direct mail campaigns. Rock focuses its direct marketing efforts on its profiled customers and those responding to its advertising, generally in the communities around its stores. The customer profiles, combined with information from other sources, are used to create mailing and call lists. The following two tables show, for each calendar quarter of 1997, (i) the total quarterly loan origination volume for Fresh Start(TM) stores grouped by when they were opened, and (ii) the average quarterly loan origination volume per store for Fresh Start(TM) stores grouped by when they were opened, in order to show the historical increase in loan closings as new stores mature. Rock believes that its new stores mature over a twelve- to eighteen-month time period. The following chart does not include the five stores opened in January 1998. 50 52
TOTAL LOAN CLOSINGS Number of 1997 When New ----------------------------------------------------------------- Stores Opened Stores Opened 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter - ---------------------------- ------------- ------------ ----------- ------------ ------------ (dollars in thousands) Before 12/31/96 5 $48,212 $56,067 $56,936 $56,999 1997 - 2nd Quarter 1 -- $3,432 $7,004 $8,827 1997 - 3rd Quarter 4 -- -- $6,658 $17,486 1997 - 4th Quarter 4 -- -- -- $7,653 -- ------ ------ ------ ------- 14 $48,212 $59,499 $70,598 $90,965 == ======= ======= ======= ======= AVERAGE LOAN CLOSINGS PER INDIVIDUAL STORE 1997 When ------------------------------------------------------------ Stores Opened 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter - --------------------------------------------- ----------- ----------- ----------- ----------- (dollars in thousands) Before 12/31/96 $9,642 $11,213 $11,387 $11,400 1997 - 2nd Quarter -- $3,432 $7,004 $8,827 1997 - 3rd Quarter -- -- $1,665 $4,372 1997 - 4th Quarter -- -- -- $1,913
Underwriting. Rock has developed its own underwriting guidelines for some of the loans originated through its Fresh Start(TM) division and adjusts these guidelines to the general standards required by secondary market buyers of such loans. Rock continually monitors its guidelines and adjusts them to changing market conditions. Some of the loans originated through the Fresh Start(TM) division are underwritten by third parties that purchase such loans on a flow basis. When underwriting its Fresh Start(TM) division loans, Rock relies principally on the underlying collateral, and to a lesser extent on the creditworthiness of the customer. Rock classifies such customers as "A" through "D" credits for purposes of underwriting and pricing its Sub-Prime Home Equity Loans. The criteria include the customer's mortgage, installment loan and revolving debt payment history, employment history, capacity to pay, outstanding judgments, and charge offs and repossessions, involvement in bankruptcies and foreclosures. Lower credit rated customers generally must meet higher underwriting standards to obtain a loan, such as lower LTV and lower maximum loan amounts, and generally must pay higher interest rates on their loans. Underwriting reviews and decisions for loans underwritten by Rock are made by separate Rock underwriters at the national support center. Rock has guidelines to assist its underwriters in the credit decision process. Although each loan is secured by a mortgage lien, it is essential that care and consideration be given to the appraisal of the property securing the loan. Rock also evaluates the applicant's creditworthiness through the use of a consumer credit report, verification of employment and a review of the debt-to-income ratio of the customer. After completion of the documentation necessary for underwriting review of a loan, Rock's goal is to make underwriting decisions within 24 to 48 hours. On a case-by-case basis, Rock's underwriters may determine that a prospective customer warrants an exception from Rock's underwriting guidelines due to compensating factors. 51 53 SPECIALTY LENDING DIVISION Rock's Specialty Lending division, which commenced its current operations in March 1997, originates High LTV Loans secured primarily by second mortgages and with combined loan-to-value ratios (including the first mortgage balance) of up to 125% of the estimated value of the underlying property. The Specialty Lending division markets High LTV Loans to consumers through its call center, located at Rock's national support center in Bingham Farms, Michigan. As of January 31, 1998, Rock was soliciting High LTV Loans in eight states and was licensed to do business in eight others. Rock uses extensive direct-mail marketing and significant multimedia advertising campaigns to generate inbound call volume into its call center. At various times, outbound telemarketing programs also are launched to targeted lists of consumers. The Specialty Lending division uses a specially trained sales force and relies heavily on technology and systems designed specifically for Rock. During 1997, Rock closed $66.0 million (2,036 units) of High LTV Loans, including $29.1 million (883 units) closed during the fourth quarter. High LTV Loans. The Specialty Lending division's current product focus is on High LTV Loans (up to 125%, including the first mortgage balance). Rock's High LTV Loans are typically used to consolidate debt (such as credit card debt) and to finance home improvements, education and other consumer needs for customers with good credit histories and high credit scores, generally only customers Rock rates as "A+", "A" or "B" credits. Specialty Lending division loans are limited to $100,000 and require the customer to have a total debt to income ratio of no more than 50%. Although the current focus of the Specialty Lending division is High LTV Loans, the infrastructure of the division and the call center are designed with the ability to change focus to, or add, other types of loan products as appropriate. The following table shows various information concerning the aggregate of the loans closed by Rock's Specialty Lending division for each calendar quarter of 1997. During 1997, Rock's High LTV Loans had an average interest rate of 15.3% and a weighted average combined loan-to-value ratio of 107%. The Specialty Lending division commenced its current operations in March 1997.
1997 ----------------------------------------------------- 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter ----------- ----------- ----------- ----------- (dollars in thousands) Principal amount of loans closed... $ 1,118 $12,574 $23,273 $29,078 Number of loans closed ............ 41 396 716 883 Average initial loan balance ...... $27 $32 $33 $33 Weighted average FICO score ....... 675 675 678 673 Weighted average interest rate .... 15.4% 15.3% 15.2% 15.2% Weighted average initial LTV ...... 91.0% 93.4% 110.4% 109.9%
During 1997, Rock closed 87.7% and 12.3% of the dollar volume of its High LTV Loans secured by property located in Michigan and Illinois, respectively. Underwriting. Rock has developed its own underwriting guidelines for some of the loans originated through its Specialty Lending division and adjusts these guidelines to represent the general standards required by secondary market buyers of such loans. Rock continually monitors its guidelines 52 54 and adjusts them to changing market conditions. Some of the loans originated through the Specialty Lending division are underwritten by third parties that purchase such loans on a flow basis. Because High LTV Loans have little, if any, equity cushion (unlike Sub-Prime Home Equity Loans), Rock's underwriting relies principally on the creditworthiness of the customer for repayment, and to a lesser extent on the underlying collateral. Rock classifies such customers as "A+", "A" or "B" credits for purposes of underwriting and pricing its High LTV Loans. The criteria for such classifications and the evaluation of a customer's creditworthiness include, as a significant component, the credit evaluation scoring methodology developed by Fair, Isaac and Company ("FICO"), a consulting firm specializing in creating default-predictive models through credit scoring mechanisms. The criteria include the customer's mortgage and revolving debt payment history, employment history, capacity to pay, outstanding judgments, involvement in bankruptcies and foreclosures. During 1997, the average FICO score for a High LTV Loan was 675. Underwriting reviews and decisions are made by separate Rock underwriters at the national support center. Rock has guidelines to assist its underwriters in the credit decision process. Rock generally evaluates the applicant's creditworthiness through the use of a FICO score, a consumer credit report, verification of employment and a review of the debt-to-income ratio of the customer. After completion of the documentation necessary for underwriting review of a loan, Rock's goal is to make underwriting decisions within 24 to 48 hours. On a case-by-case basis, Rock's underwriters may determine that a prospective customer warrants an exception from Rock's underwriting guidelines when compensating factors are present. CONVENTIONAL MORTGAGE LENDING DIVISION Since its inception in 1985, Rock has originated Conventional Loans through its Conventional Mortgage Lending division. The Conventional Mortgage Lending division originates loans through five branches all located in southeast Michigan. Over the past 13 years, Rock has used marketing and advertising to create and enhance brand name recognition for the Rock Financial name. In conjunction with its multimedia advertising, Rock coordinates extensive direct marketing campaigns. Rock has developed third-party relationships with real estate brokers, home builders, attorneys, accountants, and financial planners, which generate referral business. Conventional Loans generally conform to the underwriting guidelines of FNMA or Freddie Mac, or they generally conform except for maximum loan size, and they are generally made to finance the purchase of a home or to refinance a home mortgage. Rock is also an approved, unsupervised seller/servicer of FNMA and Freddie Mac Conventional Loans and a HUD-approved lender. During 1997, Rock originated $867.5 million (6,513 units) of Conventional Loans. Rock believes that it is the largest non-depositary-affiliated retail lender of one- to four-family residential mortgage loans in southeast Michigan. Conventional Mortgage Lending Branches. As of December 31, 1997, the Conventional Mortgage Lending division had five southeastern Michigan branches. One branch is located in a retail strip mall, two are in office buildings and two are located near residential real estate brokers' offices. The branches, other than the national support center, range in size from 256 to 6,360 square feet. Each branch is headed by a branch manager, who is responsible for overseeing all loans originated from that branch and is compensated, in part, based on loan closing volume in his or her branch. The loan officers in the branch also earn the majority of their compensation through commissions. 53 55 The Conventional Mortgage Lending division also makes extensive use of telephone call center marketing and direct mail campaigns. Over the past 13 years, Rock has used marketing and advertising to create and enhance brand name recognition for the Rock Financial name. In conjunction with its multimedia advertising, Rock coordinates extensive direct marketing campaigns. Rock focuses its direct marketing efforts on its profiled customers and those responding to its advertising, generally in the communities around its branch offices. The customer profiles, combined with information from other sources, are used to create mailing and call lists. Conventional Loans. The following table shows, for 1995, 1996 and 1997, various information concerning the aggregate of the loans closed by Rock's Conventional Mortgage Lending division:
1995 1996 1997 -------- --------- ---------- (dollars in thousands) Principal amount of loans closed................. $740,408 $892,672 $867,520 Number of loans closed........................... 5,640 6,940 6,513 Average initial loan balance..................... $131 $129 $133 Fixed rate loans: Percentage of loans closed (dollars)........ 38.7% 37.2% 45.9% Weighted average interest rate.............. 8.2% 7.9% 8.0% Weighted average initial LTV................ 75.3% 72.0% 70.1% Adjustable rate loans: Percentage of loans closed (dollars)........ 61.3% 62.8% 54.1% Weighted average initial interest rate...... 6.9% 6.5% 6.8% Weighted average initial LTV................ 75.7% 72.9% 71.9%
Substantially all of the Conventional Mortgage Lending division loans are currently originated in the State of Michigan. Underwriting. Loans originated through Rock's Conventional Mortgage Lending division must generally meet the underwriting standards for sale to FNMA or Freddie Mac or must generally meet such standards except for maximum loan size. These standards include the customer's mortgage, installment loan and revolving debt payment history, employment history, capacity to pay, outstanding judgments, and charge offs and repossessions, involvement in bankruptcies and foreclosures. Underwriting reviews and decisions are made by separate Rock underwriters located at each branch. Although loans are secured by a mortgage lien, it is essential that care and consideration be given to the appraisal of the property securing the loan. Also, Rock generally evaluates the applicant's creditworthiness through the use of a consumer credit report, verification of employment and a review of the debt-to-income ratio of the customer. After completion of the documentation necessary for underwriting review of a loan, Rock's goal is to make underwriting decisions within 24 to 48 hours. On a case-by-case basis, Rock's underwriters may determine that a prospective customer warrants an exception from Rock's underwriting guidelines if compensating factors exist. Also, in January 1998, Rock introduced FNMA's automated underwriting systems to its Conventional Mortgage Lending division. 54 56 OTHER OPERATIONS Rock began to increase its government insured lending operations in 1997, primarily making mortgage loans that meet the underwriting standards for FHA insurance. Rock's FHA loans are generally made to finance or refinance home purchases. Rock currently originates these loans from three branches in Michigan that house operations of other divisions. Rock is considering organizing its government insured lending business as a separate division in 1998. For the year ended December 31, 1997, Rock closed $16.6 million of FHA loans, representing approximately 1.6% of Rock's total loans, with an average principal amount of $81,000 and a weighted average interest rate of 7.7%. COMPLIANCE AND QUALITY CONTROL Rock's legal/compliance team is responsible for compliance and quality control. This centralized compliance function allows Rock to control and supervise regulatory compliance and offer consistency to its customers. The legal/compliance team also assists in developing underwriting and asset quality requirements for its loans and in applying those standards in making underwriting decisions. The legal/compliance team also helps the servicing team handle delinquencies and foreclosures that occur before a loan is sold. The quality control personnel review loans that have already been made (i) to monitor, evaluate and improve the overall quality of loan production, and (ii) to identify and communicate to the legal/compliance team and management existing and potential underwriting and loan file problems or areas of concern. After loans close, the quality control personnel select a percentage of the closed loans to check them for documentation, accuracy, compliance with law and potential fraud. The sample is selected so that each loan officer, branch, store and production employee is checked periodically. The quality control team also does statistical analyses of closed loans to determine if there are any patterns or problems. Any problems found are called to the attention of the legal/compliance team and senior management. LOAN SERVICING Rock currently services the loans it closes between the date of making the loan and the date it sells the loan and the related servicing. Rock employs Alltel Information Services, Inc. for providing its loan servicing computing services. Before April 1995, Rock retained the rights to service the Conventional Loans it sold, and, as a result, had a servicing portfolio of $640.1 million as of July 28, 1994. Rock, however, sold its servicing rights in April 1995 and through 1997 sold all of its loans servicing released (i.e., without retaining the right to service the loan) or sells the servicing rights separately. Rock's technology and personnel, however, are capable of servicing a substantially larger portfolio of loans without significantly increasing costs. Rock would consider selling its loans with the servicing rights retained if it believes that the value of the servicing rights is or may become significantly greater than secondary market buyers are then willing to pay for them. If Rock sold loans with servicing retained, Rock would recognize a gain on the sale equal to the difference between the carrying value of the loan sold on Rock's balance sheet and the sum of (i) the cash received in such sale, and (ii) the amount of an asset recorded on its balance sheet in an initial amount equal to the present value of the servicing fees it would expect to collect over the life of the loan (the "Servicing Asset"). If Rock believes the value of the Servicing Asset in the secondary market becomes high enough, Rock would consider selling its servicing rights as it did in 1994 and 1995. If Rock began to sell its loans with servicing 55 57 retained, it would be subject to the risks described in "Risk Factors--Potential Originated Mortgage Servicing Rights Risk." Loan servicing includes collecting payments from customers, accounting for loan principal and interest, holding custodial funds for payment of mortgage-related expenses, such as taxes and insurance, inspecting the mortgaged premises as required, contacting delinquent customers, supervising foreclosures and property disposition in the event of unremedied defaults, and otherwise administering the loan. SALE OF LOANS Rock closes all of its loans with the intent of selling such loans in the secondary market. Rock attempts to originate loans with characteristics which will be sought by unaffiliated purchasers of loans, including banks and parties seeking loans for securitization pools, at attractive premiums. Sales of Non-Prime Loans and Conventional Loans are conducted by Rock's secondary marketing team. When Rock sells the loans it closes, Rock also reduces its exposure to default risk (other than some first-payment defaults by customers) and most of the prepayment risk normally inherent in the consumer lending business. Rock may be required to repurchase or substitute loans in the event of a breach of representations and warranties, including representations regarding compliance with laws, regulations and program standards, accuracy of information, and lack of fraud or any misrepresentation made during the loan origination process. In addition, in connection with some Non-Prime Loan sales, Rock may be required to return a portion of the premium received upon the sale of the loan if the loan is prepaid by the customer within the first year after sale. Otherwise, Rock's loan sales are generally on a non-recourse basis. For the year ended December 31, 1997, Rock accrued $603,000 with respect to future premium recapture, and during the year made $298,000 of recapture payments. The amount remaining as a reserve with respect to future premium recapture at December 31, 1997 was $694,000. In addition, Rock recorded a provision for credit losses of $300,000 in 1997 for potential repurchase obligations and the credit risk associated with holding loans longer before sale. During 1997, two loans were foreclosed and transferred to real estate owned, resulting in a $30,000 charge to the allowance. NON-PRIME LOANS Rock sells its Non-Prime Loans either through "bulk" sales or "flow" sales. "Bulk" sales are sales of loans underwritten to Rock's underwriting standards that are pooled and then sold to third parties for cash by Rock. "Flow" sales are sales of loans underwritten by a third party who commits to purchase each individual loan its underwriters approve. Rock currently does not securitize its loans. If the prices offered in the secondary market for Rock's loans decrease significantly relative to the value Rock believes that it could receive by securitizing such loans, Rock's management would consider securitizing its loans. If Rock began to securitize its loans, it would be subject to the risks described in "Risk Factors--Risks of Securitization." Five loan buyers purchased an aggregate of approximately 91.6% of the Sub-Prime Home Equity Loans sold by Rock in 1997, of which the largest of such buyers purchased approximately 36.5% of such Sub-Prime Home Equity Loans. Two loan buyers purchased approximately 93.5% of the High LTV Loans sold by Rock in 1997. The loss of any of these buyers or any significant reduction in the prices these buyers are willing to pay for Rock's loans could have an adverse effect on Rock's business, financial condition and results of operations. 56 58 CONVENTIONAL LOANS Rock sells its Conventional Loans either through assignments of trade or whole loan sales. Currently, Rock's fixed-rate Conventional Loans meeting FNMA or Freddie Mac guidelines are sold through assignments of trade. Assignment of trade sales are sales of Conventional Loans to a third party who exchanges them with FNMA or Freddie Mac for their securities. Loans not meeting FNMA or Freddie Mac guidelines are sold in whole loan sales. In a whole loan sale, individual loans are underwritten and sold to a specific buyer on a committed basis. INTEREST RATE RISK MANAGEMENT Rock closes loans and subsequently sells them for cash to unaffiliated wholesale purchasers. If prevailing interest rates rise between the time Rock closes loans or fixes the interest rates on such loans and the time such loans are priced for sale, the spread between the amount loaned and the amount the wholesale purchaser is willing to pay for the loan narrows, resulting in a loss in value of the loan. To protect against such losses in respect of its Conventional Loans (where the interest spread is lower), Rock currently enters into forward sales commitments to fix the sales price of the Conventional Loans expected to be closed or hedges the value of those loans through periodic purchases of short-duration treasury-based options. Before entering into forward commitments or hedging, Rock performs an analysis of its Conventional Loans and Conventional Loan applications with committed interest rates taking into account such factors as the estimated portion of such loan applications that will ultimately be funded, interest rates, inventories of loans and applications and other factors to determine the type and amount of forward commitment and hedging transactions. Rock attempts to make forward commitments for or hedge substantially all of its estimated interest rate risk on its Conventional Loans. Rock does not believe that hedging its interest rate risk with respect to its Non-Prime Loans is cost effective as a result of their generally higher interest spreads combined with their relative lack of sensitivity to changes in market interest rates and considering the period during which Rock intends to accumulate such loans for sale. See "Risk Factors--Economic Conditions--Interest Rates." COMPETITION The consumer lending industry is highly competitive and fragmented. Rock faces intense competition, primarily from commercial banks, savings and loan associations, credit unions, insurance companies, mortgage brokers, mortgage bankers and other consumer finance companies. If Rock expands into additional geographic markets, it will face competition from consumer lenders with established positions in such markets. There can be no assurance that Rock will be able to compete successfully with these consumer lenders. Competition can take place on various levels, including convenience in obtaining a loan, service, marketing, pricing (including the interest rates, closing costs and processing fees offered) and range of products. Rock believes that pricing, service and convenience are the most important competitive factors affecting its business. Many of Rock's competitors in the consumer lending industry are better established, substantially larger and have significantly more capital and other resources than Rock. In addition, FNMA and Freddie Mac are currently developing technologies and business practices that will expand the scope of mortgage loans eligible to be purchased by them, including Sub-Prime Home Equity Loans. The effect of these purchases on the consumer lending industry and profit margins is not presently determinable, but such expanded scope could attract additional competitors into the market and significantly erode profit margins. Barriers to entry into the consumer lending industry are low, and the 57 59 current level of gains realized by Rock and its existing competitors on the sale of loans could attract additional competitors into the market. Consequently, there are many recent market entrants seeking these relatively attractive profit margins. Increases in the number of competitors seeking to originate consumer loans could lower the rates of interest or reduce the amount of origination points and fees Rock can charge customers, thereby reducing the potential profitability of such loans. Competition might also reduce Rock's loan closing volume. In addition, during periods of declining interest rates, competitors which have "locked in" low borrowing costs may have a competitive advantage. There can be no assurance that Rock will be able to compete successfully in this market environment and any failure in this regard could have a material adverse effect on Rock's business, financial condition and results of operations. SYSTEMS Rock is committed to maintaining and enhancing its technology and systems. As of January 31, 1998, Rock employed a staff of 41 in its technology team to allow it better to analyze its information regarding past customers, develop customer profiles, create and obtain lists of potential customers and track loan applications, closings and sales. Rock's offering of a broad range of loan products requires the timely delivery of such loan products and careful monitoring and tracking of loans from their origination through their ultimate sale. Rock uses a loan origination and administration system that allows Rock to process loans quickly and efficiently. The system provides real-time access to the information used by each team in operations as well as the secondary marketing and financial teams. The system provides loan officers with information concerning the status of each loan application and reminds them of the documents and steps needed to close the loan. Rock also uses these systems to develop computer- generated forms for each of its various loans in each jurisdiction to make the processing of approved loans faster and more efficient. Also, in January 1998, Rock introduced FNMA's automated underwriting systems to its Conventional Mortgage Lending division. Because a loan officer's compensation is based, in part, on the number of loans closed each month, this information also provides employees with information about the status of their compensation for the month and gives them an incentive to be more productive. Call center loan officers handle both inbound and outbound calls. Most inbound calls are from homeowners responding to Rock's advertising and direct mail campaigns. Outbound calls use Rock's computerized predictive dialers with scripted, interactive sales presentations to solicit homeowners and current customers. A predictive dialing system is a telecommunications device which initiates phone calls to pre-selected and randomly selected numbers, predicts when sales agents are available to receive calls and automatically forwards calls to an available sales agent. It also routes inbound calls to available call center loan representatives. The telephone system can track where calls originate, who handles the call, the time a customer spends waiting on the phone and other information about Rock's phone calls. Rock does not expect the cost of making its computer systems year 2000 compliant will be material. Because most of Rock's computer hardware and software is less than two years old, it believes that its exposure to year 2000-related hardware and software problems is lower than if it used older equipment or software. Nonetheless, Rock is engaging a consultant to manage the testing of its equipment and software and the identification and resolution of any problems discovered. Rock also plans to explore the strategies of its vendors to discover and resolve any year 2000 problems. Rock is already participating with its loan servicing vendor in its year 2000 evaluation process. Rock expects to complete this process during 1998. See "Risk Factors--Year 2000 Compliance." 58 60 SEASONALITY Rock is affected by consumer demand for home loans, which is partially influenced by regional trends, economic conditions and personal preferences. Rock's business is generally subject to seasonal trends with loan activity generally decreasing during the winter months, especially loans relating to home purchases. Rock's lowest revenue and net income levels during the year have historically been in the first quarter. In addition, Rock believes that new stores typically require twelve to eighteen months of operations before their revenues and expenses are at levels comparable to older stores, and that during their first two to three quarters of operations their expenses might exceed their contribution to income. Because 13 stores and one marketing center have opened since July 1, 1997 (including four stores in the fourth quarter of 1997 and five in the first quarter of 1998), Rock expects these stores to contribute significantly less to its revenues and net income and more to its expenses in the first and possibly the second and third quarters of 1998 than stores that have been in operation for at least twelve months. The stores opened in 1998 and some of the stores opened late in 1997 are expected to operate at a net loss in the first quarter of 1998. GOVERNMENT REGULATION Rock's business is subject to extensive regulation, supervision and licensing by federal, state and local governmental authorities and will be subject to various laws and judicial and administrative decisions imposing requirements and restrictions on part or all of its operations. Regulated matters include, without limitation, loan origination, marketing efforts, credit application and underwriting activities, maximum finance and other charges, disclosure to customers, certain rights of rescission, closing and servicing loans, collection and foreclosure procedures, qualification and licensing requirements for doing business in various jurisdictions and other trade practices. Loan origination activities are subject to the laws and regulations in each of the states in which those activities are conducted. Activities as a lender are also subject to various federal laws. The Truth in Lending Act ("TILA") and Regulation Z promulgated thereunder, as both are amended from time to time, contain disclosure requirements designed to provide consumers with uniform, understandable information with respect to the terms and conditions of loans and credit transactions in order to give them the ability to compare credit terms. TILA also guarantees consumers a three-day right to cancel certain credit transactions. If Rock is found not to be in compliance with TILA, aggrieved customers could have the right to rescind their loan transactions with Rock and to demand the return of finance charges paid to Rock. In September 1994, the Riegle Community Development and Regulatory Improvement Act of 1994 (the "Riegle Act") was enacted. Among other things, the Riegle Act makes certain amendments to TILA. The TILA amendments, which became effective in October 1995, generally apply to mortgage loans (other than mortgage loans to finance the acquisition or initial construction of a dwelling) ("covered loans") with (i) total points and fees upon origination in excess of the greater of eight percent of the loan amount or $400, or (ii) an annual percentage rate of more than 10 percentage points higher than comparably maturing United States Treasury securities. The TILA amendments impose additional disclosure requirements on lenders originating covered loans and prohibit lenders from originating covered loans that are underwritten solely on the basis of the customer's home equity without regard to the customer's ability to repay the loan. Rock applies to all covered loans underwriting criteria that take into consideration the customer's ability to repay. The TILA 59 61 amendments also prohibit lenders from including prepayment fee clauses in covered loans to customers with a debt-to-income ratio in excess of 50% or in covered loans used to refinance existing loans originated by the same lender. Rock did not report any prepayment fee revenue in the years ended December 31, 1995, 1996 and 1997. The TILA amendments impose other restrictions on covered loans, including restrictions on balloon payments and negative amortization features, which Rock does not believe will have a material affect on its operations. Rock is also required to comply with the Equal Credit Opportunity At of 1974, as amended ("ECOA"), which prohibits lenders from discriminating against applicants on the basis of race, color, sex, age or marital status. Regulation B promulgated under ECOA restricts lenders from obtaining certain types of information from loan applicants. It also requires certain disclosures by the lender regarding consumer rights and requires lenders to advise applicants of the reasons for any credit denial. In instances where the applicant is denied credit or the rate or charge for a loan increases as a result of information obtained from a consumer credit agency, the Fair Credit Reporting Act of 1970, as amended ("FCRA"), requires the lender to supply the applicant with a name and address of the reporting agency. Rock is also subject to the Real Estate Settlement Procedures Act ("RESPA") and the Fair Debt Collection Practices Act and is required to file an annual report with HUD pursuant to the Home Mortgage Disclosure Act ("HMDA"). Rock is also subject to the rules and regulations of, and examinations by, HUD, FNMA, Freddie Mac and state regulatory authorities with respect to originating, processing, underwriting, selling and servicing mortgage loans and to various other federal and state laws, rules and regulations governing among other things, the licensing of, and procedures that must be followed by, consumer lenders and servicers, and disclosures that must be made to consumer customers. Texas has newly-enacted laws affecting Non-Prime Loans. As a result of these new laws there are increased risks associated with Rock's loans secured by property located in Texas, including (i) risks that Rock's Non-Prime Loans will not comply with the provisions permitting mortgage liens on Texas real estate, making Rock's liens invalid, (ii) risks of litigation, including class action lawsuits, if Rock's loans, including the origination points and processing fees charged on such loans, are determined to violate Texas law, and (iii) risks that secondary market loan buyers will not be willing to purchase loans secured by Texas real estate or will pay lower prices for such loans. Rock currently sells Non-Prime Loans originated in Texas on a flow basis and intends to increase its concentration on originating Conventional Loans in its Fresh Start(R) branches in Texas until the new laws are clarified. Failure to comply with these requirements can lead to civil or criminal liability, loss of approved status, termination or suspension of servicing contracts without compensation to the servicer, demands for indemnification or loan repurchases, certain rights of rescission for mortgage loans, class action lawsuits and administrative and enforcement actions. There can be no assurance that Rock will maintain compliance with these requirements in the future without additional expenses, or that more restrictive local, state or federal laws, rules and regulations will not be adopted or that existing laws and regulations will not be interpreted in a more restrictive manner, which would make compliance more difficult and more expensive for Rock. In addition, industry participants are frequently named as defendants in litigation involving alleged violations of federal and state consumer lending laws and regulations, or other similar laws and regulations, as a result of the consumer-oriented nature of the industry in which Rock operates and uncertainties with respect to the application of various laws and regulations in certain circumstances. Some sectors of, and participants in, the consumer finance industry have been adversely affected by regulatory enforcement actions and private class action lawsuits regarding various consumer lending 60 62 practices. These actions and lawsuits allege violations of the Real Estate Settlement Procedures Act, the Truth In Lending Act, the Equal Credit Opportunity Act and various other federal and state lending and consumer protection laws. Some of the practices which have been the subject of lawsuits against other companies include, but are not limited to, miscellaneous "add on" fees; truth in lending calculations and disclosures; escrow and adjustable rate mortgage calculations and collections; private mortgage insurance calculations, disclosures and cancellation; forced-placed hazard, flood and optional insurance; payoff statement, release and reconveyance fees; and unfair lending practices. If a significant judgment were rendered against Rock in connection with any litigation, it could have a material adverse effect on Rock's business, financial condition and results of operations. Further, during the course of its business, Rock may acquire properties securing loans that are in default. To date, Rock has not been required to perform any environmental investigation or remediation activities, nor has it been subject to any environmental claims. Rock, however, might be required to perform such investigations or activities, or become subject to environmental claims, in the future. There is a risk that hazardous or toxic waste could be found on properties acquired by Rock. In such event, Rock could be held responsible for the cost of remediating or removing such waste, and such cost could exceed the value of the underlying properties. The laws and regulations described above are subject to legislative, administrative and judicial interpretation, and certain of these laws and regulations have been infrequently interpreted or only recently enacted. Infrequent interpretations of these laws and regulations or an insignificant number of interpretations of recently enacted laws and regulations can result in ambiguity with respect to permitted conduct under these laws and regulations. Any ambiguity under the laws and regulations to which Rock is subject may lead to regulatory investigations or enforcement actions and private causes of action, such as class action lawsuits, with respect to Rock's compliance with applicable laws and regulations. Rock may also be subject to regulatory enforcement actions and private causes of action from time to time with respect to its compliance with applicable laws and regulations. In addition, because Rock's business is highly regulated, the laws, rules and regulations applicable to Rock are subject to modification and change. Any changes in such laws, rules and regulations could make compliance much more difficult or expensive, restrict Rock's ability to originate or sell loans, limit or restrict the amount of interest and other charges earned on loans closed or sold by Rock, or otherwise adversely affect the business or prospects of Rock. EMPLOYEES As of January 31, 1998, Rock employed 717 full-time individuals, including 286 in its sales force. Rock believes that its future success is dependent, in large part, on its ability to attract and retain highly-qualified sales, management, marketing, technical and administrative personnel. Rock's employees are not represented by a union or subject to a collective bargaining agreement. Rock believes that its relations with its current employees are good. PROPERTIES Rock's executive and administrative offices are located in leased premises at 30600 Telegraph Road, Fourth Floor, Bingham Farms, Michigan 48025 and consist of approximately 53,560 square feet. Rock expects to amend its lease to add additional space to its call center and additional office space. 61 63 Rock has options to lease these premises through October 31, 2001, and the current base monthly rental is approximately $58,600. As of January 31, 1998, Rock had 19 Fresh Start(TM) stores and one marketing center (eight in Michigan, four in Illinois, three in Ohio, two in Texas and one each in Nevada, Missouri and Indiana), and five Conventional Lending branches (all in southeast Michigan). The Fresh Start(TM) division's stores are generally located in retail strip malls or office buildings. One Conventional Lending branch is located in a retail strip mall, two are in office buildings and two are located near residential real estate brokers' offices. Rock leases all of its Fresh Start(TM) store, marketing center and Conventional Lending branch locations pursuant to leases that expire at varying times from one month after notice from the landlord to July 2002. See "Operating Divisions--Fresh Start(TM) Division--Fresh Start(TM) Stores" and "Operating Divisions--Conventional Mortgage Lending Division--Conventional Mortgage Lending Branches." Rock believes that its facilities are adequate for its current needs and that additional space is available for future expansion. For a description of Rock's store expansion strategy, see "Business Strategy." SERVICE MARKS Rock has registered the names "Fresh Start Financial Services(R)," "Mortgage in a Box(R)," "Mortgage First(R)" and "Mortgage by Mail(R)" as service marks with the United States Patent and Trademark Office. and has filed applications for the names "Fresh Start(TM)," "Fresh Start Loan Center," "Lender for Life" and "PMI Buster." The Registrations of these service mark are renewable indefinitely. Rock is not aware of any adverse claims concerning its marks. LEGAL PROCEEDINGS Rock is involved from time to time in routine litigation incidental to its business. Although the amount of any liability that could arise with respect to these actions cannot accurately be predicted, in the opinion of Rock, any such liability will not have a material adverse effect on Rock's financial position. 62 64 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The Board of Directors of Rock is divided into three classes: Class I, Class II and Class III. After his or her initial term, each director will serve for a term ending following the third annual meeting following the annual meeting at which such director is elected and until his or her successor is elected and qualified, or until his or her earlier death, resignation or removal. Rock's Restated Articles of Incorporation provide that Directors may only be removed for cause. The initial terms of office of directors in Class I, Class II and Class III end after the annual meetings of shareholders of Rock in 1999, 2000 and 2001, respectively. All officers are appointed by and serve at the discretion of the Board of Directors. The following table sets forth certain information regarding the current directors and executive officers of Rock as of January 31, 1998:
NAME AGE POSITION CLASS - ---- --- -------- ----- Daniel Gilbert 36 Chairman of the Board of Directors and Chief Executive Officer III Steven M. Stone 38 President and Director II David Carroll 35 Chief Operations Officer N/A Lindsay Gross 35 Executive Vice President, Conventional Lending N/A Frank E. Plenskofski 39 Treasurer and Chief Financial Officer N/A Gary L. Gilbert 33 Director I
- -------------------- *Member of the Compensation Committee and Member of the Audit Committee. Daniel Gilbert. Mr. Gilbert founded Rock in June 1985 and has served as its Chief Executive Officer since its inception in June 1985 and as its Chairman of the Board since December 1992. From February 1986 until February 1998 he served as Rock's President. Mr. Gilbert has been a director of Rock since its inception in June 1985. Gary L. Gilbert and Daniel Gilbert are brothers. Steven M. Stone. Mr. Stone has served as President of Rock since January 1998. He previously served as the President of Rock's Fresh Start(TM) division from January 1996 until February 1998 and as its Director of Alternative Lending from June 1994 until January 1996. Before that he served as President, Home Lending, of Worldwide Mortgage Corporation, a company engaged in originating sub-prime mortgage loans, from April 1992 until April 1994. Mr. Stone has been a director of Rock since December 1996. Mr. Stone is a party to an employment agreement with Rock pursuant to which he is required, during the term thereof, to be elected to the office with Rock he currently holds. David Carroll. Mr. Carroll has served as Chief Operations Officer of Rock since September 1994. From July 1992 until September 1994 he served as Rock's Operation's Manager. From April 1992 until July 1992 he served as Rock's Director of Wholesale Lending. Mr. Carroll was a director of Rock from September 1994 until February 1998. Lindsay Gross. Mr. Gross has served as Executive Vice President, Conventional Lending of Rock since December 1992. He also served as Rock's Secretary from March 1987 until September 1994. Mr. Gross was a director of Rock from March 1987 until February 1998. 63 65 Frank E. Plenskofski. Mr. Plenskofski is a certified public accountant and a member of both the American Institute of Certified Public Accountants and of the Pennsylvania Institute of Certified Public Accountants. He has served as Rock's Treasurer and Chief Financial Officer since December 1996. From April 1996 until December 1996 he served as Rock's Chief Financial Officer. From October 1992 until April 1996 he served as Senior Vice President of Secondary Marketing of Com Net Mortgage Services, Inc., a mortgage banking company and a subsidiary of Common Wealth Savings Bank. Gary L. Gilbert. Mr. Gilbert has served as the President and Chief Executive Officer of Option Home Lending, Inc., a company he founded, since February 1997. From December 1992 until January 1997 he served as Rock's Executive Vice President. From March 1987 until December 1992 he served as Rock's Vice President. Gary L. Gilbert was an employee of Rock from June 1985 until March 1987. Mr. Gilbert has been a director of Rock since March 1987. Pursuant to a Stock Purchase Agreement, dated as of January 17, 1997, between Gary L. Gilbert and Daniel Gilbert, Daniel Gilbert has agreed to vote his Common Shares to elect Gary L. Gilbert as a director of Rock until the closing of this Offering. Gary L. Gilbert and Daniel Gilbert are brothers. COMMITTEES OF THE BOARD OF DIRECTORS Rock intends to add two non-employee directors to its Board of Directors and to establish and Audit Committee and a Compensation Committee with these directors as members. The Audit Committee will (i) recommend to the Board the conditions, compensation and term of appointment of independent certified public accountants for the audit of Rock's financial statements, (ii) review examination reports of Rock prepared by regulatory authorities, and (iii) provide the Board with such assistance as is necessary with respect to Rock's corporate and reporting practices. The Audit Committee may also from time to time confer with the auditors to exchange views relating to the scope and results of the audit. The Compensation Committee will make recommendations to the Board of Directors with respect to compensation arrangements and plans for senior management, officers and directors of Rock and will administer Rock's 1996 Stock Option Plan. Rock does not have a nominating committee. 64 66 COMPENSATION SUMMARY COMPENSATION TABLE The following table sets forth information for the year ended December 31, 1997 concerning compensation of (i) Rock's Chief Executive Officer, and (ii) Rock's four most highly-compensated other executive officers of Rock who were serving as executive officers of Rock as of December 31, 1997 and whose total annual salary and bonus exceeded $100,000 in 1997: SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION ------------ AWARDS ------ ANNUAL COMPENSATION SECURITIES ALL OTHER NAME AND ------------------- UNDERLYING COMPENSATION PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) ($) (1) ------------------ ---- --------- -------- ---------- ------------- Daniel Gilbert, Chairman of the Board and Chief Executive Officer . . . . . . . . . 1997 225,000 620,000 (2) -0- 1,900 1996 150,000 1,245,000 -0- 1,385 1995 150,000 377,000 -0- 1,289 Steven M. Stone, President. . . 1997 160,000 540,000 (2) -0- (3) 849 1996 125,000 578,000 1,001,454 -0- 1995 75,385 68,480 -0- -0- David Carroll, Chief Operations Officer . . . . . . . . . 1997 130,000 40,000 50,000 950 1996 120,000 30,000 -0- 1,125 1995 100,000 20,000 -0- 1,000 Lindsay Gross, Executive Vice President, Conventional Lending . . . . . . . . . 1997 175,000 167,030 -0- 469 1996 180,000 69,000 -0- 286 1995 199,500 50,000 -0- 77 Frank E. Plenskofski, Chief Financial Officer (4) . . . 1997 120,000 40,000 50,000 62,877 1996 75,170 20,000 -0- 11,000
- ---------------- (1) Includes $1,900, $849, $950, $469 and $877, contributed by Rock to Messrs. Gilbert, Stone, Carroll, Gross and Plenskofski, respectively, pursuant to the matching contribution provisions of Rock's 401(k) plan for the year ended December 31, 1997. Also, includes $62,000 paid to Mr. Plenskofski in 1997 to reimburse him for relocation expenses. 65 67 (2) Rock does not intend to pay bonuses of this magnitude to Messrs. Gilbert and Stone after 1997. (3) In connection with an amendment to his employment agreement, effective as of the closing date of this Offering, Rock granted Mr. Stone an immediately exercisable option to purchase 292,500 Common Shares with an exercise price equal to the initial public offering price set forth on the cover page of this Prospectus. See "Employment Contracts and Termination of Employment and Change-in-Control Arrangements." (4) Mr. Plenskofski became an executive officer of Rock in December 1996. COMPENSATION OF DIRECTORS Following completion of this Offering, Rock intends to pay each director who is not an officer or employee of Rock ("Outside Directors") a fee of $1,000 for each Board meeting attended in person, $500 for each telephonic Board meeting attended, and $500 for each Board committee meeting attended on a date other than the date of a Board meeting. Rock will also reimburse Outside Directors for their reasonable expenses of attending Board and Board committee meetings. OPTION GRANTS TABLE The following table sets forth information concerning individual grants of stock options made during the year ended December 31, 1997 to each of the executive officers of Rock named in the Summary Compensation Table above: OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants - -------------------------------------------------------------------------------------- % of Potential Total Realizable Value at Number of Options Assumed Annual Securities Granted to Rates of Stock Price Underlying Employees Exercise Appreciation Options in Fiscal Price Expiration for Option Term Granted (#) Year ($/Sh) Date --------------- Name ----------- ---- ------ ---- 5% ($) 10% ($) ---- ------ ------- Daniel Gilbert . . . . -0- 0.0 N/A N/A N/A N/A Steven M. Stone . . . . -0- (1) 0.0 N/A N/A N/A N/A David Carroll . . . . . 50,000 (2) 4.7 $4.68 12/31/06 147,161 372,936 Lindsay Gross . . . . . -0- 0.0 N/A N/A N/A N/A Frank E. Plenskofski . 50,000 (2) 4.7 $4.68 12/31/06 147,161 372,936
- ----------------------------- (1) Mr. Stone received an option to purchase 1,001,454 Common Shares in December 1996, representing approximately 65% of the options granted in 1996. The option is immediately exercisable in full at $4.68 a share through December 28, 2006. The value of such option 66 68 assuming 5% and 10% stock price appreciation from the exercise price over the term of the option would be $2,947,506 and $7,469,560, respectively. The option will continue to be exercisable for three years after termination of Mr. Stone's employment without cause and one year after he ceases to be an employee of Rock because of his death or disability, but in no event after the termination date of the option. In connection with an amendment to his employment agreement, effective as of the closing date of this Offering, Rock granted Mr. Stone an immediately exercisable option to purchase 292,500 Common Shares with an exercise price equal to the initial public offering price set forth on the cover page of this Prospectus. See "Employment Contracts and Termination of Employment and Change-in-Control Arrangements." (2) These options are exercisable in one-fifth cumulative annual installments beginning December 31, 1997. (3) With respect to each of the options described above, if upon exercise of these options Rock must pay any amount for income tax withholding, in the Compensation Committee's or the Board of Directors' sole discretion, either the optionee will pay such amount to Rock or the number of Common Shares delivered by Rock to the optionee will be appropriately reduced to reimburse Rock for such payment. The Compensation Committee or the Board of Directors may also permit the optionee to choose to have such shares withheld or to tender Common Shares the optionee already owns. The Compensation Committee or the Board may also make such other arrangements with respect to income tax withholding as the Compensation Committee shall determine. In addition, each of the options described above contains provisions requiring forfeiture of the gain realized upon exercise of the option if the employee leaves Rock within one year after exercise or engages in certain activities inimical, contrary or harmful to the interests of Rock. AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE TABLE The following table sets forth information concerning each exercise of stock options during the year ended December 31, 1997 by each of the executive officers named in the Summary Compensation Table above and the value of unexercised options held by such persons as of December 31, 1997 (at an assumed market value equal to the estimated initial public offering price of $10.00): 67 69 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNDERLYING UNEXERCISED UNEXERCISED IN-THE-MONEY OPTIONS AT OPTIONS AT SHARES FY-END (#) FY-END ($) ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/ NAME EXERCISE (#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE - ---- ------------ ------------ ------------- ------------- Daniel Gilbert . . . . -0- -0- -0-/-0- -0-/-0- Steven M. Stone . . . . -0- -0- 1,001,454/-0- 5,327,735/-0- David Carroll . . . . . -0- -0- 10,000/40,000 53,200/212,800 Lindsay Gross . . . . . -0- -0- -0-/-0- -0-/-0- Frank E. Plenskofski . -0- -0- 10,000/40,000 53,200/212,800
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS Steven M. Stone. As of June 27, 1994, Rock entered into an employment agreement with Steven M. Stone, which agreement was amended as of December 28, 1996 and as of February 18, 1998. Pursuant to such agreement, he is employed as President of Rock. Such agreement may be terminated by Mr. Stone or Rock at any time. Mr. Stone is entitled to a salary and a discretionary bonus determined by Rock's Chief Executive Officer. Such employment agreement provided for the payment of special bonuses in the amounts of $540,000 by December 31, 1996, $180,000 by July 1, 1997 and $360,000 by December 31, 1997, the grant of a stock option on December 28, 1996 to purchase 1,001,454 Common Shares at $4.68 per share, and the grant of an immediately exercisable stock option on the closing date of this Offering to purchase 292,500 Common Shares at an exercise price equal to the initial public offering price set forth on the cover page of this Prospectus (the "New Option"). Before the February 18, 1998 amendment, Mr. Stone had the right under the agreement to receive a "Distribution Bonus" while employed by Rock until the closing of this Offering. The "Distribution Bonus" was generally equal to the per share amount of any dividend or other distribution payable to Rock's shareholders multiplied by the number of shares subject to Mr. Stone's December 28, 1996 option. In exchange for cancellation of Mr. Stone's right to receive the Distribution Bonus, Rock (i) agreed to permit Mr. Stone to be one of the Selling Shareholders in this Offering (see "Principal and Selling Shareholders"), and (ii) agreed to grant to Mr. Stone the New Option. Mr. Stone is entitled to various fringe benefits under the agreement as determined by Rock's Chief Executive Officer. If Mr. Stone terminates his employment with Rock upon a minimum of 30 days prior written notice and if Mr. Stone is not then in breach of any provision of the agreement (as determined by Rock's Chief Executive Officer), Rock will continue to pay Mr. Stone's salary for four weeks after the date of termination, if Mr. Stone fully cooperates with Rock during the transition period. Mr. Stone has agreed not to compete with Rock during his employment and during specified periods following the termination of his employment, with some exceptions in the event of a Change in Ownership of Rock (as defined in the agreement). 68 70 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During the year ended December 31, 1997, Rock's Board of Directors did not have a Compensation Committee or any other committee performing similar functions. Decisions concerning executive compensation for 1997 were made by the Board of Directors, including Daniel Gilbert, Steven M. Stone, David Carroll, Lindsay Gross and Gary L. Gilbert. All of the directors were, and (except for Gary L. Gilbert, who resigned as an officer of Rock effective January 17, 1997) continue to be, officers and employees of Rock. None of the executive officers of Rock currently serves on the compensation committee of another entity or any other committee of the board of directors of another entity performing similar functions. The directors of Rock have the relationships with Rock described below: Indebtedness of Daniel Gilbert, Lindsay Gross and Gary L. Gilbert. From time to time, Rock has made loans to Daniel Gilbert, Lindsay Gross and Gary L. Gilbert for personal purposes. The interest charged on such loans is 3% per year. Gary L. Gilbert repaid his loans in full on February 26, 1997, and Lindsay Gross repaid his loans in full on February 28, 1997. For the years ended December 31, 1995, 1996 and 1997 the largest amounts of such loans outstanding for Daniel Gilbert were $2,338,000, $2,689,000 and $6,109,000, respectively. For the years ended December 31, 1995, 1996 and 1997 the largest amounts of such loans outstanding for Gary L. Gilbert were $400,000, $745,000 and $970,000, respectively. For the years ended December 31, 1995, 1996 and 1997 the largest amounts of such loans outstanding for Lindsay Gross were $62,000, $99,000 and $680,000, respectively. As of January 31, 1998, no amounts were owed by Gary L. Gilbert or Lindsay Gross, and $1,633,000 of principal and accrued interest were owed by Daniel Gilbert to Rock. Daniel Gilbert expects to repay the balance of his loans with his share of the Shareholder Distribution Amount. Transactions with Title Source, Inc. Title Source, Inc. is a title insurance agency owned 51.60% by Daniel Gilbert, 10.13% by Steven M. Stone, 9.60% by Gary L. Gilbert, 6.00% by Lindsay Gross, and 3.60% by David Carroll. Title Source, Inc. was formed to acquire the assets of an existing title insurance agency, which acquisition occurred as of October 1, 1997. Rock expects to recommend Title Source, Inc. for substantially all of the title insurance policies required in connection with its mortgage loans. For the year ended December 31, 1997, Rock collected $39,000 in fees on behalf of Title Source, Inc. for its closing services. In addition, customers of Rock paid $147,300 in premiums for title insurance placed through Title Source, Inc. in connection with loans closed by Rock. Rock cannot predict with certainty the amount of business proposed to be done with Title Source, Inc. in 1998. Rock made a working capital loan to Title Source, Inc. during 1997 bearing interest at an annual rate of 8.25%. The maximum amount of such loan outstanding during 1997 was $300,000. This loan was repaid in full before December 31, 1997. Transactions with Rock Construction Company, Inc. d/b/a Rock Homes Construction Daniel Gilbert, Gary L. Gilbert and Lindsay Gross were 25%, 12.5% and 12.5% shareholders of Rock Construction, Inc. d/b/a Rock Homes Construction, a home building contractor, until November 11, 1996, and Daniel Gilbert was a Vice President and the Secretary of Rock Construction Company, Inc. until January 2, 1997. In addition, Gary L. Gilbert is a Vice President and Lindsay Gross is the Treasurer of Rock Construction Company, Inc. Rock made working capital loans to Rock Construction Company, Inc. from time to time during 1995, 1996 and 1997 bearing interest at an annual rate of 8.25%. The maximum amounts of such loans outstanding during 1995, 1996 and 1997 were $354,000, $50,000 and $100,000, respectively. All of these loans were repaid in full before December 31, 1997. 69 71 Severance Arrangements with Gary L. Gilbert. Gary L. Gilbert resigned as an officer of Rock effective January 17, 1997 and has started a consumer finance business operating in the Chicago, Illinois area. In connection with his resignation, Daniel Gilbert agreed, pursuant to a Stock Purchase Agreement between Daniel Gilbert and Gary L. Gilbert, to cause Rock to (i) continue Gary L. Gilbert's salary and commissions through February 28, 1997 ($130,000 a year), (ii) pay Gary L. Gilbert a $200,000 bonus in 1996, (iii) continue Gary L. Gilbert's medical and dental insurance for as long as he remains a director of Rock, unless he becomes employed by another entity providing him with such insurance, (iv) transfer assets valued at $3,500 to Gary L. Gilbert, (v) declare a dividend (declared on September 1, 1997) that would result in a distribution to Gary L. Gilbert of at least $1,000,000, and (vi) allow Gary L. Gilbert to consult with Rock employees concerning areas of Rock's business and operations that are similar to the business or operations of any mortgage business formed or acquired by Gary L. Gilbert. Daniel Gilbert also agreed pursuant to the Stock Purchase Agreement to vote his Common Shares to elect Gary L. Gilbert as a director of Rock until the closing of this Offering. STOCK OPTION PLAN In December 1996, the Board of Directors and shareholders of Rock adopted the Rock Financial Corporation 1996 Stock Option Plan (the "Plan"). The purpose of the Plan is to provide key employees (including officers), directors, consultants and advisors of Rock with an increased incentive to make significant and extraordinary contributions to the long-term performance and growth of Rock, to join the interests of key employees, directors, consultants and advisors with the interests of the shareholders of Rock, and to facilitate attracting and retaining key employees, directors, consultants and advisors of exceptional ability. The Plan authorizes the granting of incentive stock options ("Incentive Options") and nonqualified stock options ("Nonqualified Options") to purchase Common Shares to eligible persons. A total of 4,500,000 Common Shares are authorized for sale upon exercise of options granted under the Plan. The Plan is currently administered by the Compensation Committee of the Board of Directors (the "Committee"), which consists of the two non-employee directors of Rock. The Plan provides for adjustments to the number of shares and to the exercise price of outstanding options in the event of stock dividends, stock splits, recapitalizations, mergers, statutory share exchanges or reorganizations of or by Rock. Key employees (including officers), directors, consultants and advisors of or to Rock are eligible to participate in the Plan, and as of January 31, 1998, 97 employees had been granted options to purchase an aggregate of 2,492,184 Common Shares pursuant to the Plan. Options to purchase an aggregate of 1,540,684 Common Shares were granted in December 1996 at an exercise price of $4.68 per share, including grants of 1,001,454 Nonqualified Options to Steven M. Stone. Such options were immediately exercisable in full. Options to purchase an aggregate of 780,000 Common Shares were granted in January 1997 (as adjusted in March 1997) at an exercise price of $4.68 per share, including grants of Nonqualified Options to executive officers as follows: David Carroll (50,000), Richard Chyette (50,000), and Frank E. Plenskofski (45,000). Such options vest in one-fifth cumulative annual installments beginning December 31, 1997. Options to purchase an aggregate of 90,000 Common Shares were granted in April 1997 at an exercise price of $4.68 per share, including a grant of Nonqualified Options to Frank E. Plenskofski (5,000). Such options vest in one-fifth cumulative annual installments beginning December 31, 1997. Options to purchase an aggregate of 196,500 Common Shares were granted in July 1997 at an exercise price of $7.00 per share. Such options vest in one-fifth cumulative annual installments beginning December 31, 1998. In connection with amendments to employment agreements with three key employees, effective as of the closing date of this Offering, Rock granted such employees immediately exercisable options to purchase 450,000 Common Shares with an exercise price equal to the 70 72 initial public offering price set forth on the cover page of this Prospectus. Rock intends to grant additional options effective upon the closing of this Offering. No Incentive Option may be granted with an exercise price per share less than the fair market value of the Common Shares at the date of grant. The Nonqualified Options may be granted with any exercise price determined by the Committee administering the Plan. The exercise price of an option may be paid in cash, or, with the consent of the Committee, (i) in Common Shares, (ii) by delivery of a promissory note payable to the order of Rock which is acceptable to the Committee, (iii) by a cash down payment and delivery of a promissory note in the amount of the unpaid exercise price, (iv) by Rock retaining from the shares to be delivered upon exercise of the stock option that number of shares having a fair market value on the date of exercise equal to the option price of the number of shares with respect to which the participant exercises the option, (v) by delivery to Rock of written notice of the exercise in such form as the Committee may prescribe, accompanied by irrevocable instructions to a stock broker to promptly deliver to Rock full payment for the shares with respect to which the option is exercised from the proceeds of the stock broker's sale of or loan against some or all of the shares, or (vi) in such other manner as the Committee determines is appropriate. An employee may receive more than one Incentive Option, but the maximum aggregate fair market value of the Common Shares (determined when the Incentive Option is granted) with respect to which Incentive Options are first exercisable by such employee in any calendar year cannot exceed $100,000. In addition, no Incentive Option may be granted to an employee owning directly or indirectly stock possessing more than 10% of the total combined voting power of all classes of stock of Rock, unless the exercise price is set at not less than 110% of the fair market value of the shares subject to such Incentive Option on the date of grant and such Incentive Option expires not later than five years from the date of grant. Awards of Nonqualified Options are not subject to these special limitations. To the extent required for Incentive Options or to the extent determined by the Committee, no option granted under the Plan is transferable otherwise than by will, or by the laws or descent and distribution, or, with respect to Nonqualified Options, pursuant to a qualified domestic relations order, and such option is exercisable, during the lifetime of the participant, only by the participant. The Committee may, however, authorize all or a portion of any option granted to be on terms which permit transfer by such optionee to, and the exercise of such option by, (i) the spouse, children or grandchildren of the optionee ("Immediate Family Members"), (ii) a trust or trusts for the exclusive benefit of such Immediate Family Members, (iii) a partnership in which such Immediate Family Members are the only partners, or (iv) such other persons or entities as determined by the Committee, on such terms and conditions as the Committee may determine; provided that (y) the stock option agreement pursuant to which such options are granted must be approved by the Committee and must expressly provide for transferability in a manner consistent with the Plan, and (z) subsequent transfers of transferred options are prohibited except for transfers the original optionee would be permitted to make. Subject to the terms of the Plan, each option granted under the Plan is exercisable at the time or times or in such installments as may be determined by the Committee. Except as described below options may be exercised only while the participant is an employee, director, consultant or advisor of Rock. Subject to the requirements of Incentive Options that are intended to remain Incentive Options, in connection with a participant ceasing to be an employee of Rock for any reason, the stock option agreement may provide for the acceleration of, or the Committee may accelerate, in whole or in part, the time or times or installments with respect to which any option shall be exercisable in connection with 71 73 termination of a participant's employment with Rock, subject to any restrictions, terms and conditions fixed by the Committee. In connection with a business combination involving Rock, the dissolution or liquidation of Rock or a capital reorganization or reclassification such that holders of Common Shares shall be entitled to receive stock, securities, cash or other assets with respect to or in exchange for the Common Shares (a "Transaction"), and effective as of a date selected by the Committee, the Committee may (a) accelerate the time at which stock options then outstanding may be exercised so that such stock options may be exercised in full for a limited period of time on or before a specified date fixed by the Committee after which specified date all unexercised stock options and all rights of participants thereunder shall terminate; (b) accelerate the time at which stock options then outstanding may be exercised so that such stock options may be exercised in full for their then remaining term; or (c) require the mandatory surrender to Rock of outstanding stock options held by such participants (irrespective of whether such stock options are then exercisable) as of a date, before or not later than sixty days after such Transaction, specified by the Committee, and in such event Rock shall thereupon cancel such stock options and shall pay to each participant an amount of cash equal to the excess of the fair market value of the aggregate Common Shares subject to such stock option, determined as of the date such Transaction is effective, over the aggregate option price of such shares; provided, however, the Committee shall not select an alternative (unless consented to by the participant) such that, if a participant exercised his or her accelerated stock option pursuant to alternative (a) or (b) and participated in the Transaction or received cash pursuant to alternative (c), the alternative would result in the participant's owing any money by virtue of the operation of Section 16(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). If all such alternatives have such a result, the Committee shall take such action to put such participants in as close to the same position as such participant would have been in had alternative (a), (b) or (c) been selected but without resulting in any payment by such participant pursuant to Section 16(b) of the Exchange Act. Subject to the other provisions of the Plan, all rights to exercise options terminate when a participant ceases to be an employee, director, consultant or advisor of or to Rock for any cause, except that the Committee may permit the exercise of all or any portion of the options granted to such participant (i) for a period not to exceed three months following such termination with respect to Incentive Options that are intended to remain Incentive Options if such termination is not due to death or permanent disability of the Participant, (ii) for a period not to exceed one year following termination of employment with respect to Incentive Options that are Intended to remain Incentive Options if termination of employment is due to the death or permanent disability of the Participant, and (iii) for a period not to extend beyond the expiration date with respect to Nonqualified Options or Incentive Options that are not intended to remain Incentive Options, all subject to any restrictions, terms and conditions fixed by the Committee. In no event, however, shall an option be exercisable after its expiration date, and, unless the Committee determines otherwise, an option may only be exercised after termination of a participant's employment, consultation or other service by or to Rock to the extent exercisable on the date of such termination or to the extent exercisable as a result of the reason for such termination. If not sooner terminated, each stock option granted under the Plan shall expire not more than 10 years from the date of grant. 401(K) SAVINGS PLAN Effective in March 1987, Rock established Rock's 401(k) Savings Plan (the "401(k) Plan"), which is intended to comply with Sections 401(a) and 401(k) of the Internal Revenue Code of 1986, as 72 74 amended, and the applicable provisions of the Employee Retirement Income Security Act of 1974, as amended. Amounts contributed to the 401(k) Plan are held under a trust intended to be exempt from income tax pursuant to Section 501(a) of the Internal Revenue Code. All full-time and part-time employees of Rock that have completed at least six months of service and are at least 21 years of age are eligible to participate in the 401(k) Plan. Participating employees will be entitled to make pre-tax contributions to their accounts in amounts equal to not less than 1% and not more than 15% of their compensation each year, subject to certain maximum annual limits imposed by law (approximately $9,500 in 1997). Rock matches 20% of employee contributions in amounts of employee contributions up to 5% of their compensation. Rock also has the right to make certain additional matching contributions in amounts not to exceed 15% of employee compensation. Matching contributions made by Rock vest in participating employees over a three-year period after the date of contribution. Distributions generally are payable in a lump sum after retirement or death and, in certain circumstances, upon termination of employment with Rock for other reasons. CERTAIN TRANSACTIONS Since its inception, Rock has had business relationships and engaged in certain transactions with affiliated companies and parties as described below. TRANSACTIONS WITH DIRECTORS See "Compensation--Compensation Committee Interlocks and Insider Participation" for a description of (i) indebtedness of Daniel Gilbert, Lindsay Gross and Gary L. Gilbert to Rock, (ii) transactions between Rock and Title Source, Inc., a company a majority of the shares of which are owned by officers and employees of Rock, and (iii) various severance arrangements with Gary L. Gilbert. TRANSACTIONS WITH SHAREHOLDERS See "Termination of S Corporation Status" for a description of a Tax Indemnification Agreement between Rock and the Existing Shareholders. 73 75 PRINCIPAL AND SELLING SHAREHOLDERS The following table sets forth information regarding the beneficial ownership of the Common Shares as of January 31, 1998, and as adjusted to reflect the sale of the Common Shares offered by this Prospectus, by (i) each person known by Rock to own more than 5% of Rock's Common Shares, (ii) each of the Selling Shareholders, (iii) each director of Rock, (iv) each executive officer of Rock named in the Summary Compensation Table above, and (v) all directors and executive officers of Rock as a group. The address of each person listed below is 30600 Telegraph Road, Fourth Floor, Bingham Farms, Michigan 48025, unless otherwise indicated.
SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED BEFORE OWNED AFTER THE OFFERING (1) THE OFFERING (1) ------------------- SHARES -------------------- PERCENT BEING PERCENT NUMBER OF CLASS OFFERED NUMBER OF CLASS ------ -------- ------- ------ -------- Daniel Gilbert (2) . . . . . . 10,000,000 100 .0 -0- 10,000,000 75.0 Gary L. Gilbert (2)(3) . . . . 2,077,298 20.8 -0- 2,077,298 15.6 Steven M. Stone (2)(4) . . . . 1,001,454 9.1 214,500 (5) 1,079,454 7.5 Lindsay Gross (2) . . . . . . . 865,601 8.7 -0- 865,601 6.5 Adam Schoener (2)(6) . . . . . 269,615 2.6 57,750 (5) 290,615 2.1 Ross Niskar (2)(7) . . . . . . 269,615 2.6 57,750 (5) 290,615 2.1 David Carroll (8) . . . . . . . 10,000 * -0- 10,000 * Frank E. Plenskofski (9) . . . 10,000 * -0- 10,000 * All directors and executive officers as a group (8 persons) (10) . 11,021,454 100.0 330,000 11,099,454 76.9
- ------------------------------ * Represents less than 1% of outstanding Common Shares. (1) Based on 10,000,000 Common Shares outstanding as of January 31, 1998, before the Offering, and 13,330,000 Common Shares outstanding after the Offering. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission (the "Commission") and generally includes voting or investment power with respect to securities. Except as indicated in the footnotes to this table, the persons named in the table have sole investment power with respect to all Common Shares beneficially owned. (2) Pursuant to a Shareholders Agreement, expected to be executed as of the closing date of this Offering, among Rock, Daniel Gilbert, Gary L. Gilbert, Lindsay Gross, Steven M. Stone, Ross Niskar and Adam Schoener, each of the shareholder parties to the agreement (other than Daniel Gilbert) is expected to give Daniel Gilbert all voting power over all shares currently owned or later acquired by them for ten years. As of January 31, 1998, Mr. Daniel Gilbert owned 7,057,101 Common Shares of record, or approximately 70.6% of the outstanding Common Shares before the Offering and approximately 52.9% of the outstanding Common Shares after this Offering. (3) Gary L. Gilbert's address is 640 N. LaSalle St., Suite 330, Chicago, Illinois 60610. 74 76 (4) Includes 1,001,454 Common Shares before the Offering, and 1,079,454 Common Shares after the Offering,that Mr. Stone has the right to acquire pursuant to stock options exercisable within 60 days of January 31, 1998. (5) At the closing of this Offering, each of Messrs. Stone, Schoener and Niskar will exercise options they currently own to purchase Rock Common Shares at $4.68 a share in an amount equal to the number of shares they are selling in this Offering. Rock will receive approximately $1.5 million of proceeds from the options exercised by these Selling Shareholders to acquire the shares they are selling. Pursuant to their amended employment agreements, Rock has granted them immediately exercisable replacement options effective on the closing date of this Offering to purchase 450,000 Common Shares at an exercise price equal to the initial public offering price set forth on the cover page of this Prospectus (the "New Options"). Each of Messrs. Stone, Schoener and Niskar cancelled their rights to receive "Distribution Bonuses" previously required by their employment agreements with Rock in exchange for Rock's agreement (i) to permit them to be Selling Shareholders in this Offering, and (ii) to grant them the New Options. For a description of the former "Distribution Bonus," see the description of Mr. Stone's employment agreement under the caption "Management--Executive Compensation-- Employment Contracts and Termination of Employment and Change-in-Control Arrangements--Steven M. Stone." (6) Includes 269,615 Common Shares before the Offering, and 290,615 Common Shares after the Offering, that Mr. Schoener has the right to acquire pursuant to stock options exercisable within 60 days of January 31, 1998. (7) Includes 269,615 Common Shares before the Offering, and 290,615 Common Shares after the Offering, that Mr. Niskar has the right to acquire pursuant to stock options exercisable within 60 days of January 31, 1998. (8) Includes 10,000 Common Shares that Mr. Carroll has the right to acquire pursuant to stock options exercisable within 60 days of January 31, 1998. (9) Includes 10,000 Common Shares that Mr. Plenskofski has the right to acquire pursuant to stock options exercisable within 60 days of January 31, 1998. (10) Includes 1,021,454 Common Shares before the Offering, and 1,099,454 Common Shares after the Offering, that all directors and executive officers as a group have the right to acquire pursuant to stock options exercisable within 60 days of January 31, 1998. 75 77 DESCRIPTION OF CAPITAL STOCK GENERAL The authorized capital shares of Rock consist of an aggregate of 50,000,000 Common Shares, par value $0.01 per share, and 1,000,000 Preferred Shares, par value $0.01 per share. 10,000,000 Common Shares and no Preferred Shares are outstanding as of January 31, 1998. All of the shares being offered in this Offering are Common Shares. COMMON SHARES Holders of Common Shares have one vote per share on each matter submitted to a vote of the shareholders and the right to participate ratably in the net assets of Rock upon liquidation. Holders of Common Shares participate ratably in dividends and distributions as may be declared by the Board of Directors from funds legally available for that purpose (see "Dividend Policy"), have no conversion rights, are not redeemable and are not entitled to any preemptive or subscription rights. The Common Shares currently outstanding are, and the Common Shares to be issued in connection with this Offering will be, duly authorized, validly issued, fully paid and non-assessable. Holders of Common Shares have no cumulative voting rights, and accordingly, holders of a majority of the outstanding Common Shares are able to elect all of Rock's Directors. The Board of Directors is divided into three classes. After his or her initial term, each director will serve for a term ending at the third Annual Meeting of Shareholders following the meeting at which such director is elected and until his or her successor is elected and qualified, or until his or her earlier death, resignation or removal. Initially, the Class I Director, Gary L. Gilbert, will hold office until the Annual Meeting of Shareholders to be held in 1999, the Class II Director, Steven M. Stone, will hold office until the for the Annual Meeting of Shareholders to be held in 2000, and the Class III Directors, Daniel Gilbert, will hold office until the Annual Meeting of Shareholders to be held in 2001, and until their successors are elected and qualified, or until their earlier death, resignation or removal. Directors may not be removed without cause. Rock's Restated Articles of Incorporation also set the minimum and maximum number of directors constituting the entire Board at three and fifteen, respectively, and require approval of holders of 90% of Rock's voting shares to amend this provision. In addition, Rock's Bylaws require advance notice of any nominations for director of Rock, along with information about the nominee and the shareholder. PREFERRED SHARES Rock has also authorized the issuance of up to 1,000,000 Preferred Shares, $0.01 par value per share, none of which is outstanding as of the date of this Prospectus. The Preferred Shares may be issued from time to time in one or more series. The Board of Directors is authorized to determine the rights, preferences, privileges and restrictions granted to, and imposed upon, each series of Preferred Shares and to fix the number of shares of any series of Preferred Shares and the designation of any such series. The issuance of Preferred Shares could be used, under certain circumstances, as a method of preventing a change in control of Rock and could permit the Board of Directors, without any action of the holders of the Common Shares, to issue Preferred Shares which could have a detrimental effect on the rights of holders of the Common Shares, including loss of voting control. Anti-takeover provisions that could be included in the Preferred Shares when issued may have a depressive effect on the market price of Rock's 76 78 securities and may limit shareholders' ability to receive a premium on their shares by discouraging takeover and tender offer bids. Rock has no present plans to issue any Preferred Shares. CHARTER AND BYLAW PROVISIONS Various provisions in Rock's Restated Articles of Incorporation and Bylaws could have the effect of delaying, deferring or preventing changes in control of Rock. See "Risk Factors-- Potential Anti-Takeover Effects of Charter, Bylaw and Statutory Provisions." BUSINESS COMBINATION PROVISIONS OF MICHIGAN LAW Chapters 7A and 7B of the Michigan Business Corporation Act may affect attempts to acquire control of Rock. In general, under Chapter 7A, "business combinations" (defined to include, among other transactions, certain mergers, dispositions of assets or shares and recapitalizations) between covered Michigan business corporations or their subsidiaries and an "interested shareholder" (defined as the direct or indirect beneficial owner of at least 10% of the voting power of a covered corporation's outstanding shares) can only be consummated if approved by at least 90% of the votes of each class of the corporation's shares entitled to vote and by at least two-thirds of such voting shares not held by the interested shareholder or affiliates, unless five years have elapsed after the person involved became an "interested shareholder" and unless certain price and other conditions are satisfied. The Board of Directors has the power to elect to be subject to Chapter 7A as to specifically identified or unidentified interested shareholders. In general, under Chapter 7B, an entity that acquires "Control Shares" of Rock may vote the Control Shares on any matter only if a majority of all shares, and of all non-"Interested Shares", of each class of shares entitled to vote as a class, approve such voting rights. Interested Shares are shares owned by officers of Rock, employee-directors of Rock and the entity making the Control Share Acquisition. Control Shares are shares that when added to shares already owned by an entity, would give the entity voting power in the election of directors over any of the three thresholds: one-fifth, one-third and a majority. The effect of the statute is to condition the acquisition of voting control of a corporation on the approval of a majority of the pre-existing disinterested shareholders. The Board of Directors may amend the bylaws before a Control Share Acquisition occurs to provide that Chapter 7B does not apply to Rock. In addition, certain provisions in Rock's bylaws could have the effect of delaying, deferring or preventing changes in control of Rock. See "Risk Factors--Potential Anti-Takeover Effects of Charter, Bylaw and Statutory Provisions." INDEMNIFICATION OF DIRECTORS AND OFFICERS The Michigan Business Corporation Act permits Michigan corporations to limit the personal liability of directors for breaches of their fiduciary duties. The Restated Articles of Incorporation of Rock so limit the liability of directors. Rock's Bylaws also provide for indemnification of directors and officers. Rock believes that such indemnification will assist Rock in continuing to attract and retain talented directors and officers in light of the risk of litigation directed against directors and officers of publicly-held corporations. The Restated Articles of Incorporation limit director liability to the maximum extent permitted by Michigan law. Michigan law allows the articles of incorporation of a Michigan corporation to contain a provision eliminating or limiting a director's liability to the corporation or its shareholders for money 77 79 damages for any action taken or any failure to take any action as a director, except for liability for specified acts. As a result of the inclusion of such a provision, shareholders of Rock may be unable to recover monetary damages against directors for actions taken by them which constitute negligence or gross negligence or which are in violation of their fiduciary duties, although it may be possible to obtain injunctive or other equitable relief with respect to such actions. If equitable remedies are found not to be available to shareholders in any particular case, shareholders may not have any effective remedy against the challenged conduct. These provisions, however, do not affect liability under the Securities Act. The Michigan Business Corporation Act authorizes a corporation under specified circumstances to indemnify its directors and officers (including reimbursement for expenses incurred). The provisions of Rock's Bylaws relating to indemnification of directors and executive officers generally provide that directors and executive officers will be indemnified to the fullest extent permissible under Michigan law. The provision also provides for the advancement of litigation expenses at the request of a director or executive officer. These obligations are broad enough to permit indemnification with respect to liabilities arising under the Securities Act or the Michigan Uniform Securities Act. In addition, Rock has obtained Directors' and Officers' liability insurance. The policy provides for $5,000,000 in coverage including liabilities under the Securities Act in connection with this Offering. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling Rock pursuant to the foregoing provisions, Rock has been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. TRANSFER AGENT AND REGISTRAR __________________ is expected to serve as transfer agent and registrar for the Common Shares. As of January 31, 1998 there were three holders of record of Rock's Common Shares. 78 80 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the Offering, Rock will have outstanding 13,330,000 Common Shares (13,829,500 Common Shares if the Underwriters' over-allotment option is exercised in full). The 3,330,000 Common Shares to be sold in the Offering, and any of the 499,500 Common Shares that may be sold upon exercise of the Underwriters' over-allotment option, will be freely tradable by persons other than "affiliates" of Rock, as that term is defined in Rule 144 under the Securities Act, without restriction or registration under the Securities Act. The remaining 10,000,000 shares (all such shares being referred to as the "Restricted Shares") will be held by Rock's current shareholders. The Restricted Shares may not be sold unless they are registered under the Securities Act or sold pursuant to an applicable exemption from registration, including an exemption pursuant to Rule 144 under the Securities Act. As currently in effect, Rule 144 generally permits the public sale in ordinary brokers' transactions of "restricted securities" and of securities owned by "affiliates" beginning 90 days after the date of this Prospectus if the other restrictions enumerated in Rule 144 are met. Restricted securities are securities, such as the Restricted Shares, acquired directly or indirectly from an issuer or an affiliate of the issuer in a transaction not involving a public offering. In general, under Rule 144, if a period of at least one year has elapsed since the later of the date the Restricted Shares were acquired from Rock or an affiliate, as applicable, then the holder of such Restricted Shares (including an affiliate) is entitled, subject to specified conditions, to sell within any three-month period a number of shares not exceeding the greater of (i) 1% of Rock's then outstanding Common Shares, or (ii) the average weekly trading volume of the shares during the four calendar weeks preceding the filing of a Form 144 with respect to such sale. Sales under Rule 144 are also subject to specified manner-of-sale provisions and requirements as to notice and the availability of current public information about Rock. Affiliates may sell Common Shares not constituting Restricted Shares in accordance with the foregoing limitations and requirements but without regard to the one-year period. However, a person who is not and has not been an affiliate of Rock at any time during the 90 days preceding the sale of the Restricted Shares, and who has beneficially owned the Restricted Shares for at least two years, is entitled to sell such Restricted Shares under Rule 144 without regard to the volume limitations, manner-of-sale requirements or notice and public information requirements of Rule 144. Because management believes that all outstanding shares have been held by the current shareholders for more than one year, all of such Restricted Shares will become eligible for sale pursuant to Rule 144 beginning 90 days after the date of this Prospectus. However, the holders of such shares have agreed during the 180-day period immediately following the date of this Prospectus not to sell or otherwise dispose of any securities of Rock without the consent of the representative of the Underwriters, subject to specified exceptions. See "Risk Factors--Shares Eligible for Future Sale" and "Underwriting." Rock has reserved 4,500,000 Common Shares for issuance under the Plan, of which options to purchase 2,492,184 Common Shares were outstanding at January 31, 1998. At the closing of the Offering, options to purchase 2,612,184 Common Shares will be outstanding. The 330,000 Common Shares being sold by the Selling Shareholders will be acquired by them on the closing date of this Offering upon exercise of stock options previously granted to them, and Rock has granted to them, effective as of the closing date of this Offering, immediately exercisable replacement options to purchase 450,000 Common Shares at the initial public offering price of the Common Shares in this Offering. All of the Common Shares issued as a result of any grants under this plan will be restricted securities unless Rock files a registration statement under the Securities Act relating to the issuance of the shares. Rock currently intends to register the Common Shares reserved under the Plan. Subject to compliance with 79 81 Rule 144 by affiliates of Rock, any shares issued upon exercise of options granted under such employee benefit plans will become freely tradable at the effective date of the registration statement for the shares reserved under such plans. In addition, pursuant to Rule 701 under the Securities Act, 90 days after the date of this Prospectus, Common Shares issued upon exercise of options granted under the Plan in reliance on Rule 701 may be resold by persons other than affiliates in reliance on Rule 144, without compliance with the current public information, holding period, volume or notice requirements of Rule 144, and by affiliates without compliance with the holding period requirements of Rule 144. In connection with the Offering, Rock's directors and executive officers, owning in the aggregate all of the outstanding Common Shares, and the Selling Shareholders have agreed that they will not sell, contract to sell or otherwise dispose of any shares of capital stock of Rock for a period of 180 days after the date of this Prospectus without the prior written consent of the Representative, except for the transfers of shares contemplated by this Prospectus, subject to specified limited exceptions. Prior to the Offering, there has been no public market for the Common Shares, and no prediction can be made as to the effect, if any, that sales of Common Shares or the availability of Common Shares for sale will have on the market price prevailing from time to time. Nevertheless, sales of substantial amounts of Common Shares in the public market could adversely affect prevailing market prices. 80 82 UNDERWRITING The Underwriters of the Offering of the Common Shares (the "Underwriters"), for whom Bear, Stearns & Co. Inc. is acting as representative (the "Representative"), have severally agreed, subject to the terms and conditions of the Underwriting Agreement (the form of which is filed as an exhibit to the Registration Statement of which this Prospectus is a part, the "Underwriting Agreement"), to purchase from Rock and the Selling Shareholders the aggregate number of Common Shares set forth opposite their names below:
UNDERWRITERS NUMBER OF COMMON SHARES ------------ ----------------------- Bear, Stearns & Co. Inc............................. --------- --------- Total...................................... 3,330,000 =========
The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent and that, if any of the foregoing Common Shares are purchased by the Underwriters pursuant to the Underwriting Agreement, all such shares must be so purchased. Rock and the Selling Shareholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments that the Underwriters may be required to make in respect thereof. Rock has been advised that the Underwriters propose to offer the Common Shares to the public initially at the initial public offering price set forth on the cover page of this Prospectus and to certain selected dealers (which may include the Underwriters) at such initial public offering price less a concession not to exceed $0.__ per share. The selected dealers may reallow a concession to certain other dealers not to exceed $0.__ per share. After the initial Offering to the public, the initial public offering price, the concession to selected dealers and the reallowance to other dealers may be changed by the Representative. Bear Stearns Home Equity Trust, an affiliate of Bear, Stearns & Co. Inc., currently provides Rock with an uncommitted $100 million reverse repurchase arrangement pursuant to which Bear Stearns Home Equity Trust will purchase from Rock, subject to Rock's agreement to repurchase on a daily basis, up to $100 million of fully-amortizing, first or junior lien residential mortgage loans and home equity loans that comply with Rock's origination guidelines and conform to whole and bulk loan sale requirements. This agreement is not a committed facility and Bear Stearns Home Equity Trust may elect to discontinue the repurchase agreement at any time. The term of any financing under the repurchase agreement matures and may be renewed on a daily basis. In any event, the arrangement terminates on March 1998. Rock uses this facility as a supplemental borrowing facility to fund loans closed by Rock until they are sold. As of January 31, 1998, Rock had financed $46.0 million of loans under this facility and an additional $54.0 million was available for future financings. 81 83 Bear, Stearns & Co. Inc. provided Rock with financial advisory services during 1996 in connection with a reorganization of Rock. Bear, Stearns & Co. Inc. received a fee of $50,000 from Rock for these financial advisory services. Rock has granted to the Underwriters an option to purchase up to 499,500 additional Common Shares at the initial public offering price less the underwriting discount set forth on the cover page of this Prospectus, solely to cover over-allotments, if any. Such option may be exercised at any time until 30 days after the date of this Prospectus. To the extent that the Underwriters exercise such option, each of the Underwriters will be committed, subject to certain conditions, to purchase a number of additional shares proportionate to such Underwriter's initial commitment as indicated in the preceding table. Prior to the Offering there has been no public market for any of Rock's securities. The initial public offering price set forth on the cover page of this Prospectus will be determined by negotiations among Rock, the Selling Shareholders and the Representative. In determining such price, consideration will be given to various factors including (i) the market valuation of comparable companies, (ii) market conditions for initial public offerings, (iii) the history of and prospects for Rock's business, (iv) Rock's past and present operations and earnings, (v) Rock's current financial position, (vi) an assessment of Rock's management, (vii) the position of Rock in its industry, and (viii) the market value of Rock's assets. Consideration also was given to the general condition of the securities markets, the demand for similar securities of comparable companies and other market factors. In connection with the Offering, Rock's directors and executive officers, owning in the aggregate all of the outstanding Common Shares, and the Selling Shareholders have agreed that they will not sell, contract to sell or otherwise dispose of any shares of capital stock of Rock for a period of 180 days after the date of this Prospectus without the prior written consent of the Representative, except for the transfers of shares contemplated by this Prospectus, subject to specified limited exceptions. See "Shares Eligible For Future Sale." Also in connection with the Offering, Rock has agreed that it will not sell, contract to sell or otherwise dispose of any shares of capital stock of Rock for a period of 180 days after the date of this Prospectus without the prior written consent of the Representative, except for Common Shares offered by this Prospectus and except for issuances or sales by Rock under the terms of the 1996 Stock Option Plan. The Representative has informed Rock that the Underwriters do not expect to make sales to accounts over which they exercise discretionary authority in excess of 5% of the number of Common Shares offered by this Prospectus. In order to facilitate the Offering, certain persons participating in the Offering may engage in transactions that stabilize, maintain or otherwise affect the price of the Common Shares during and after the Offering. Specifically, the Underwriters may over-allot or otherwise create a short position in the Common Shares for their own account by selling more Common Shares than have been sold to them by Rock. The Underwriters may elect to cover any such short position by purchasing Common Shares in the open market or by exercising the over-allotment option granted to the Underwriters. In addition, such persons may stabilize or maintain the price of the Common Shares by bidding for or purchasing Common Shares in the open market and may impose penalty bids, under which selling concessions allowed to syndicate members or other broker-dealers participating in the Offering are reclaimed if Common Shares previously distributed in the Offering are repurchased in connection with stabilization transactions or otherwise. The effect of these transactions may be to stabilize or maintain the market price of the Common Shares at a level above that which might otherwise prevail in the open market. The imposition 82 84 of a penalty bid may also affect the price of the Common Shares to the extent that it discourages resales thereof. No representation is made as to the magnitude or effect of any such stabilization or other transactions. Such transactions may be effected on The Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. LEGAL MATTERS The validity of the Common Shares to be offered by this Prospectus will be passed upon for Rock and the Selling Shareholders by Honigman Miller Schwartz and Cohn, Detroit, Michigan. Certain legal matters in connection with the Offering will be passed upon for the Underwriters by Berick, Pearlman & Mills Co., L.P.A., Cleveland, Ohio. EXPERTS The financial statements of Rock Financial Corporation as of December 31, 1996 and 1997, and for each of the years in the three-year period ended December 31, 1997, included in this Prospectus and elsewhere in the Registration Statement have been included in this Prospectus and in the Registration Statement in reliance upon the report of KPMG Peat Marwick LLP, independent auditors, appearing elsewhere in this Prospectus, and upon the authority of such firm as experts in accounting and auditing. CHANGE IN ACCOUNTANTS Rock engaged KPMG Peat Marwick LLP as its independent accountants after it terminated its relationship with Coopers & Lybrand LLP in August 1997. In connection with its audits for 1996 and 1995 and during the interim period preceding such termination, there were no disagreements between Rock and Coopers & Lybrand LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Coopers & Lybrand, would have caused them to make reference thereto in their report on the financial statements. No report issued by Coopers & Lybrand LLP with respect to Rock's financial statements contained any adverse opinion or disclaimer of opinion, or was qualified or modified as to uncertainty, audit scope or accounting principles. The decision to change accountants was made by management of Rock. ADDITIONAL INFORMATION Rock has filed with the Securities and Exchange Commission a Registration Statement on Form S-1 under the Securities Act, of which this Prospectus forms a part, with respect to the Common Shares offered by this Prospectus. This Prospectus omits certain information contained in the Registration Statement, and reference is made to the Registration Statement for further information with respect to Rock and the Common Shares offered by this Prospectus. Statements contained in this Prospectus concerning the provisions of documents are necessarily summaries of such documents and when any such document is an exhibit to the Registration Statement, each such statement is qualified in its entirety by reference to the copy of such document filed with the Commission. Copies of the Registration Statement may be acquired upon payment of the prescribed fees or examined without charge at the public reference facilities of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference rooms. In addition, the Registration Statement may be accessed electronically at the Commission's site on the World Wide Web at http://www.sec.gov. Upon completion of the Offering, Rock will be subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and, in accordance therewith, will file reports, proxy and information statements with the Commission. Such reports, proxy and information statements and other information can be inspected and copied at the address and web site set forth above. 83 85 INDEX TO FINANCIAL STATEMENTS
Page Independent Auditors' Report -- KPMG Peat Marwick LLP............................. F-2 Balance Sheets as of December 31, 1996 and 1997................................... F-3 Statements of Income for the years ended December 31, 1995, 1996 and 1997......... F-4 Statements of Shareholders' Equity for the years ended December 31, 1995, 1996 and 1997 F-5 Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997..... F-6 Notes to Financial Statements..................................................... F-7
F-1 86 INDEPENDENT AUDITORS' REPORT The Shareholders and Board of Directors of Rock Financial Corporation: We have audited the accompanying balance sheets of Rock Financial Corporation (the "Corporation") as of December 31, 1996 and 1997, and the related statements of income, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1997. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Corporation as of December 31, 1996 and 1997, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP Detroit, Michigan February 18, 1998 F-2 87 ROCK FINANCIAL CORPORATION BALANCE SHEETS DECEMBER 31, 1996 AND 1997
ASSETS 1996 1997 ------ ------------ ------------ Cash and cash equivalents.............................................. $3,288,751 $11,946,992 Marketable securities available for sale............................... 5,953,862 -- Mortgage loans held for sale........................................... 85,009,395 121,343,814 Mortgage loans held for investment (net of allowance for losses of $270,000 in 1997).............................................. -- 810,293 Real estate owned...................................................... -- 158,271 Shareholders' advances................................................. 2,519,342 1,626,519 Property and equipment, net............................................ 2,681,314 7,010,537 Other assets........................................................... 906,846 1,532,471 ------------ ------------ Total assets.................................................. $100,359,510 $144,428,897 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Liabilities: Warehouse line of credit.......................................... $67,621,266 $79,293,856 Reverse repurchase agreement...................................... -- 18,161,423 Notes payable..................................................... -- 1,944,445 Drafts payable.................................................... 14,896,675 21,875,184 Accounts payable.................................................. 1,998,939 3,255,503 Accrued expenses and other liabilities............................ 3,496,491 4,790,350 ------------ ------------ Total liabilities............................................. 88,013,371 129,320,761 ------------ ------------ Shareholders' equity: Common shares, $.01 par value. Authorized 50,000,000 shares; issued and outstanding 10,000,000 shares...................... 100,000 100,000 Additional paid-in capital........................................ 1,423,750 1,423,750 Retained earnings................................................. 9,386,020 13,584,386 Unrealized gain on marketable securities.......................... 1,436,369 -- ------------ ------------ Total shareholders' equity.................................... 12,346,139 15,108,136 ------------ ------------ Total liabilities and shareholders' equity.................... $100,359,910 $144,428,897 ============ ============
The accompanying notes are an integral part of the financial statements. F-3 88 ROCK FINANCIAL CORPORATION STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
1995 1996 1997 ---------- ---------- ---------- Revenue: Interest income.............................. $3,002,750 $4,267,824 $8,082,448 Interest expense............................. 3,012,033 3,669,393 5,149,881 ---------- ---------- ---------- Net interest margin...................... (9,283) 598,431 2,932,567 Provision for credit losses.................. -- -- 300,000 ---------- ---------- ---------- Net interest margin after provision for credit losses................... (9,283) 598,431 2,632,567 Loan fees and gains and losses on sale of mortgages................................ 17,788,279 27,959,437 47,084,309 Net gain on sale of mortgage servicing 5,728,411 -- -- Net gain on sale of marketable securities 345,716 991,219 2,221,905 Other income................................. 398,555 6,489 171,085 ---------- ---------- ----------- 24,251,678 29,555,576 52,109,866 ---------- ---------- ----------- Expenses: Salaries, commissions and employee benefits 11,271,770 16,424,971 24,810,597 General and administrative expenses.......... 3,725,601 4,645,820 7,629,889 Marketing expenses........................... 1,338,752 2,392,994 5,369,515 Depreciation and amortization................ 506,634 663,428 1,292,479 ---------- ---------- ----------- 16,842,757 24,127,213 39,102,480 ---------- ---------- ----------- Income before stock and option holders' bonuses.................... 7,408,921 5,428,363 13,007,386 Stock and option holders' bonuses............ 545,480 2,297,625 1,592,030 ---------- ---------- ----------- Net income............................... $6,863,441 $3,130,738 $11,415,356 ========== ========== ===========
The accompanying notes are an integral part of the financial statements. F-4 89 ROCK FINANCIAL CORPORATION STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
Unrealized Additional Gain on Total Common Paid-in Retained Marketable Shareholders' Shares Capital Earnings Securities Equity ------------ ------------ ------------ ------------ ------------ Balance December 31, 1994 $ 100,000 $ 1,423,750 $ 2,957,767 $ 1,792,046 $ 6,273,563 Year ended December 31, 1995 Net income 6,863,441 6,863,441 Shareholder distributions (67,359) (67,359) Change in unrealized gain on marketable securities 3,457,339 3,457,339 ------------ ------------ ------------ ------------ ------------ Balance December 31, 1995 100,000 1,423,750 9,753,849 5,249,385 16,526,984 Year ended December 31, 1996 Net income 3,130,738 3,130,738 Shareholder distributions (3,498,567) (3,498,567) Change in unrealized gain on marketable securities (3,813,016) (3,813,016) ------------ ------------ ------------ ------------ ------------ Balance December 31, 1996 100,000 1,423,750 9,386,020 1,436,369 12,346,139 Year ended December 31, 1997 Net income 11,415,356 11,415,356 Shareholder distributions (7,216,990) (7,216,990) Change in unrealized gain on marketable securities (1,436,369) (1,436,369) ------------ ------------ ------------ ------------ ------------ Balance December 31, 1997 $ 100,000 $ 1,423,750 $ 13,584,386 $ -- $ 15,108,136 ============ ============ ============ ============ ============
The accompanying notes are an integral part of the financial statements F-5 90 ROCK FINANCIAL CORPORATION STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
1995 1996 1997 --------------- --------------- --------------- Cash flows from operating activities: Net income ........................................................ $6,863,441 $3,130,738 $11,415,356 ------------ -------------- -------------- Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization ................................. 506,634 663,428 1,292,479 Provision for credit losses ................................... -- -- 300,000 Net gain on sale of mortgage servicing ........................ (5,728,411) -- -- Net gain on sales of marketable securities .................... (345,716) (991,219) (2,221,905) Change in assets and liabilities: Mortgage loans held for sale - originations ................ (821,916,358) (1,080,765,776) (1,203,722,723) Mortgage loans held for sale - sales ....................... 774,638,605 1,069,751,958 1,167,388,304 Other assets ............................................... 40,942 (314,122) (625,625) Drafts payable ............................................. (3,484,721) 7,513,046 6,978,509 Accounts payable ........................................... 304,475 1,215,113 1,256,564 Accrued expenses and other liabilities ..................... 1,048,546 1,357,558 1,293,858 Accounts payable, broker ................................... 3,354,526 (3,354,526) -- ------------ -------------- -------------- Total adjustments ...................................... (51,581,478) (4,924,540) (28,060,539) ------------ -------------- -------------- Net cash used in operating activities .................. (44,718,037) (1,793,802) (16,645,183) ------------ -------------- -------------- Cash flows from investing activities: Proceeds from sale of marketable securities ....................... 64,201,835 26,056,131 10,846,241 Purchase of marketable securities ................................. (71,564,768) (17,613,113) (4,106,842) Net increase in real estate owned and loans held for investment ... -- -- (1,268,564) Purchase of equipment ............................................. (407,975) (2,084,296) (5,621,702) Proceeds from sale of mortgage servicing .......................... 5,755,610 -- -- Shareholder (advances) repayments ................................. (441,743) (1,978,492) 892,823 ------------ -------------- -------------- Net cash provided by (used in) investing activities ........ (2,457,041) 4,380,230 741,956 ------------ -------------- -------------- Cash flows from financing activities: Net borrowings under warehouse line of credit ..................... 48,374,896 3,514,047 11,672,590 Net borrowings under reverse repurchase agreement ................. -- -- 18,161,423 Net (payments) borrowing under notes payable ...................... (445,616) -- 1,944,445 Shareholder distributions ......................................... (67,359) (3,498,567) (7,216,990) ------------ -------------- -------------- Net cash from financing activities ......................... 47,861,921 15,480 24,561,468 ------------ -------------- -------------- Net increase in cash and cash equivalents ............................. 686,843 2,601,908 8,658,241 Cash and cash equivalents, beginning of year .......................... -- 686,843 3,288,751 ------------ -------------- -------------- Cash and cash equivalents, end of year ................................ $686,843 $3,288,751 $11,946,992 ============ ============== ============== Supplemental disclosure of cash flow information: Cash paid during the year for interest ............................ $3,078,220 $3,915,704 $4,994,752 ============ ============== ============== Transfers of loans from held for sale to held for investment ...... $ -- $ -- $1,095,293 ============ ============== ============== Transfers of loans from held for investment to real estate owned ......................................................... $ -- $ -- $173,271 ============ ============== ============== Write-down of marketable securities for other than temporary impairment .......................................... $846,500 $ -- $ -- ============ ============== ==============
The accompanying notes are an integral part of the financial statements. F-6 91 ROCK FINANCIAL CORPORATION NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995, 1996 AND 1997 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES: Rock Financial Corporation (the "Corporation") is a specialty marketing company of debt consolidation and home financing products secured primarily by first or second mortgages on one- to four-family, owner-occupied residences. The Corporation markets its loans directly to consumers. The Corporation's current loan products include "Sub-Prime Home Equity Loans" and "High LTV Loans" (together, "Non-Prime Loans") and "Conventional Loans." The Corporation currently operates through three major divisions. Rock originates Sub-Prime Home Equity Loans to individuals with impaired credit characteristics, high levels of debt service to income, unfavorable past credit experience, limited credit history, limited employment history or unverifiable income through its Fresh Start(TM) division. Rock originates High LTV Loans to individuals with good credit histories but little or no equity in their homes through its Specialty Lending division. Rock also originates Conventional Loans through its Conventional Mortgage Lending division. In 1997, the Corporation originated its production from 19 branch locations operating in Michigan, Illinois and Ohio. a. CASH EQUIVALENTS The Corporation considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. Included in cash was $222,752 and $257,730 of restricted cash for mortgagor escrows at December 31, 1996 and 1997, respectively. b. MARKETABLE SECURITIES The Corporation accounts for marketable securities in accordance with Statement of Financial Accounting Standards No. 115, Accounting for Certain Debt and Equity Securities ("SFAS 115"). All marketable securities are classified as available-for-sale and are carried at market value. Unrealized gains and losses are included as a separate component of shareholders' equity. Dividends on equity securities are recognized on the ex-dividend date. The Corporation continuously evaluates its marketable investment securities for other-than-temporary or permanent impairment, which is defined as being greater than 20 percent impaired for greater than six consecutive months. When an investment security is determined to have other-than-temporary or permanent impairment, the loss is recognized through a charge against income. c. MORTGAGE LOANS HELD FOR SALE Mortgage loans held for sale are valued at the lower of cost or market, determined on an aggregate basis, based upon commitments from investors to purchase such loans or upon prevailing market rates. Loans determined to be non-salable are transferred to loans held for investment at their estimated fair value at the date of transfer. F-7 92 ROCK FINANCIAL CORPORATION NOTES TO FINANCIAL STATEMENTS, CONTINUED d. MORTGAGE LOANS HELD FOR INVESTMENT Mortgage loans held for investment are stated at their principal amount outstanding, net of an allowance for loan losses. Interest on loans is accrued daily based on the outstanding principal balance. Loans are generally placed on a non-accrual basis when principal or interest is past due 90 days or more and when, in the opinion of management, full collection of principal and interest is unlikely. At the time a loans is placed on non-accrual status, interest previously accrued but not yet collected is charged against current income. Income on such loans is then recognized only to the extent that cash is received and where future collection of principal is probable. Loan origination fees and certain direct loan origination costs are deferred and recognized over the lives of the related loans as an adjustment of the yield. e. ALLOWANCE FOR LOSSES The allowance for losses is based on management's periodic evaluation of the potential loss exposure associated with the portfolio of mortgage loans held for investment and costs to be incurred due to the repurchase of mortgage loans or indemnification of losses based on alleged violations of representations and warranties customary to the mortgage banking industry, and reflects an amount that, in management's opinion, is adequate to absorb such estimated losses. In evaluating the potential exposure, management takes into consideration numerous factors, including current economic conditions, prior loss experience, the provisions of loan sale agreements, the composition of the portfolio of mortgage loans held for investment, and management's evaluation of the collectibility of specific mortgage loans held for investment. f. REAL ESTATE OWNED Real estate owned is recorded at the lower of the cost of acquisition or the asset's fair value, net of disposal cost at the time of foreclosure, which becomes the property's new basis. Any write-downs at date of acquisition are charged to the allowance for losses. Expenses incurred in maintaining assets and subsequent write-downs to reflect declines in value are charged to general and administrative expenses. g. INVESTOR RESERVES Investor reserves represent reserves for the estimated repayment, where applicable, of a portion of the premium received from investors on sales of certain sub-prime loans if such loans are repaid in their entirety within a specified time period after the sale of the loans (generally one year). Provisions for premium recapture are determined based on management's estimates of potential repayments, considering factors such as historical premium recapture experience, projected prepayments on loans sales, existence of prepayment penalties to be paid by the borrower, and general economic conditions. Actual premium recapture experience may vary from management's estimates. F-8 93 ROCK FINANCIAL CORPORATION NOTES TO FINANCIAL STATEMENTS, CONTINUED h. PROPERTY AND EQUIPMENT Property and equipment are stated at cost, less accumulated depreciation. Depreciation of property and equipment is generally computed on a straight line basis over the estimated useful lives of the assets. Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation are removed from the accounts; any resulting gain or loss is credited or charged to operations. Costs of maintenance and repairs are charged to expense when incurred. i. REVENUE RECOGNITION Loan origination revenue and associated incremental direct costs on loans held for sale are deferred until the related loan is sold. Gains and losses on loans are recognized at the time of sale and are based upon the difference between the selling price and the carrying value of the related loans sold. Loan servicing revenue is earned as the related principal is collected. Interest on mortgage loans held for sale and mortgage loans held for investment is credited to income as earned, and interest expense on related borrowings is expensed as incurred. The Corporation adopted the provisions of Statement of Financial Accounting Standards No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, as of January 1, 1997. The impact of the adoption of this standard was not material to the Corporation's financial position or results of operations. j. DERIVATIVE FINANCIAL INSTRUMENTS The Corporation utilizes derivative financial instruments as part of an overall interest rate risk and mortgage pipeline management strategy. Derivative financial instruments utilized by the Corporation include treasury-based options. The Corporation is an end-user of derivative financial instruments and does not conduct trading activities for derivatives. These derivative financial instruments involve, to varying degrees, elements of credit and market risk which are not recognized on the balance sheet. Credit risk is defined as the possibility that a loss may occur from the failure of another party to perform in accordance with the terms of the contract which exceeds the value of existing collateral, if any. Market risk is the possibility that future changes in market conditions may make the derivative financial instrument less valuable. The Corporation evaluates the risks associated with derivatives in much the same way as the risks with on-balance sheet financial instruments. The derivative's risk of credit loss is generally a small fraction of the notional value of the instrument and is represented by the fair value of the derivative instrument. The Corporation attempts to limit its credit risk by dealing with creditworthy counterparties and obtaining collateral where appropriate. The Corporation uses treasury-based options in hedging its interest rate risk exposure. Ultilization of treasury-based options involves some degree of basis risk. Basis risk is defined F-9 94 ROCK FINANCIAL CORPORATION NOTES TO FINANCIAL STATEMENTS, CONTINUED as the risk that the hedge instrument's price does not move as expected relative to the increase or decrease in the market price of the hedged financial instrument. The Corporation calculates an expected hedge ratio to attempt to mitigate a portion of this risk. The Corporation accounts for its options utilizing "Split Accounting." The option's value is categorized into "intrinsic" and "time value" components. The intrinsic value is the amount that the option is "in the money." The time value is the amount by which its price exceeds its intrinsic value. Split Accounting results in accounting for time value and intrinsic value separately. The time value is amortized over the option's exercise period. The intrinsic value is recognized as a component of the gain or loss on settlement of the option. k. INCOME TAXES Effective March 1, 1992, the Corporation elected to have its income taxed directly to the individual shareholders, in accordance with the S corporation provisions of the Internal Revenue Code. Accordingly, no provision for income taxes has been reflected in the financial statements (see note 18 for a description of pro forma basic and diluted earnings per share). l. ADVERTISING COSTS Advertising costs are incurred for non-direct response advertising. Accordingly, the costs of producing the advertising are expensed as incurred, while the costs of communicating the advertising are expensed when the advertising space or airtime is first used. m. EARNINGS PER SHARE Basic earnings per share is computed based on the weighted average number of common shares outstanding during the year. Diluted earnings per share is computed based on the weighted average number of common shares and common share equivalents during the year (see note 18 for a description of pro forma basic and diluted earnings per share). n. MANAGEMENT ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. o. RECLASSIFICATIONS Certain amounts from the prior year have been reclassified to conform with current year presentation. F-10 95 ROCK FINANCIAL CORPORATION NOTES TO FINANCIAL STATEMENTS, CONTINUED 2. MARKETABLE SECURITIES: The marketable securities held by the Corporation at December 31, 1996, which were all equity securities, had an aggregate cost of $4,517,491 and an aggregate fair value of $5,953,860, resulting in a net unrealized gain of $1,436,369, including gross unrealized gains of $1,704,872 and gross unrealized losses of $268,503. Realized gains and losses on marketable securities are computed based on the specific identification method. Realized gains of $4,633,620, $4,511,466, and $3,156,783 and realized losses of $4,287,904, $3,520,247 and $646,895 on the sale of marketable securities for the years ended December 31, 1995, 1996 and 1997, respectively, are included in the determination of net income. Included in realized losses for the year ended December 31, 1995, was a write-down of approximately $846,500 on a marketable security for other than temporary impairment. 3. MORTGAGE LOANS HELD FOR SALE AND HELD FOR INVESTMENT The following summarizes mortgage loans held for sale by type at December 31, 1996 and 1997:
1996 1997 ---- ---- Conventional prime loans held for sale . . . . . . . . . . . . . . $68,972,367 $74,049,209 Sub-prime loans held for sale . . . . . . . . . . . . . . . . . . . 15,459,184 38,372,558 High LTV loans held for sale . . . . . . . . . . . . . . . . . . . 323,400 9,194,343 ----------- ------------ 84,754,951 121,616,110 Net deferred loan origination costs (fees) . . . . . . . . . . . . 254,444 (272,296) ----------- ------------ Mortgage loans held for sale . . . . . . . . . . . . . . . . . $85,009,395 $121,343,814 =========== ============
Included in mortgage loans held for investment at December 31, 1997 was an allowance for credit losses of $270,000, which was established in 1997 through a provision of $300,000 offset by charge-offs of $30,000. As of December 31, 1996, one loan classified as held for sale with an outstanding balance of approximately $45,000 was greater than 90 days past due. As of December 31, 1997, there were no loans held for sale that were greater than 90 days past due. As of December 31, 1997, there were approximately $72,000 of loans held for investment that were greater than 90 days past due (none in 1996), $25,000 of which was classified as nonaccrual at December 31, 1997. 4. PROPERTY AND EQUIPMENT: Property and equipment are depreciated over lives ranging from five to seven years for office furniture, equipment and leasehold improvements. Property and equipment consist of the following: F-11 96 ROCK FINANCIAL CORPORATION NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, December 31, 1996 1997 ------------ ------------ Office furniture and equipment . . . . . . . . . . . . . . . . . . $ 4,133,940 $ 9,779,846 Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . 195,252 600,958 Projects in process . . . . . . . . . . . . . . . . . . . . . . . . 489,600 59,595 ----------- ----------- Total cost . . . . . . . . . . . . . . . . . . . . . . . . . . 4,818,792 10,440,399 Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . 2,137,478 3,429,862 ----------- ----------- Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,681,314 $ 7,010,537 =========== ===========
5. BORROWINGS Advances under the Corporation's warehouse line of credit are based on a formula computation, with interest due monthly, are due on demand, and are collateralized by residential first and second mortgages. Advances may be drawn for working capital and sub-prime, high LTV, and conventional prime mortgage loans. Interest rates are variable and are based on the federal funds rate and prime rate, depending on the type of advance. Interest rates ranged from 7.16 percent to 8.75 percent at December 31, 1996 and 6.69 percent to 7.69 percent at December 31, 1997, with weighted average interest rates of 7.29 percent and 6.94 percent at December 31, 1996 and 1997, respectively. The maximum outstanding balance permitted under the line was $90,000,000 (with certain sublimits for working capital, non-conforming and second mortgage loans) at December 31, 1996 and 1997. The Corporation is required to maintain a minimum tangible net worth and other financial covenants, as defined in the agreement. The Corporation was in compliance with the requirements as of December 31, 1996 and 1997. The Corporation's reverse repurchase agreement entered into in 1997 provides that the lender will purchase from the Corporation, subject to the Corporation's agreement to repurchase on a daily basis, up to $100 million of conventional prime and sub-prime mortgage loans at par. Loans subject to purchase are fixed and adjustable rate, fully-amortizing, first or junior lien residential mortgage loans and home equity loans that comply with the Corporation's origination guidelines and conform to whole and bulk loan sale requirements. This agreement is not a committed facility and the lender may elect to discontinue the repurchase agreement at any time. The term of any financing under the repurchase agreement matures and may be renewed on a daily basis. In any event, the arrangement terminates on March 1998. Interest rates are variable and are based on the London Interbank Offered Rate, depending on the type of advance. The interest rate in effect at December 31, 1997 was 8.25 percent, while the weighted average interest rate during 1997 was 6.88%. In February 1997, the Corporation borrowed $2,000,000 for the purchase of computer equipment and software. The note matures in three years, payments are based on equal monthly installments plus interest at 75 basis points over prime, and the loan is collateralized by the Corporation's equipment. The interest rate in effect at December 31, 1997 was 9.25 percent. F-12 97 ROCK FINANCIAL CORPORATION NOTES TO FINANCIAL STATEMENTS, CONTINUED Drafts payable represent funds advanced for mortgages closed which have not yet been drawn against the warehouse line of credit. 6. INVESTOR RESERVES The following presents the activity in the investor reserves, which are included in accrued expenses and other liabilities, for the periods indicated:
1995 1996 1997 ---------- ---------- ---------- Beginning balance . . . . . . . . . . . . . . . $ 25,249 $ 226,809 $ 389,162 Provision for premium recapture . . . . . . . . 204,935 317,262 602,632 Premium recapture paid . . . . . . . . . . . . (3,375) (154,909) (297,954) ---------- ---------- ---------- Ending balance . . . . . . . . . . . . . . . . $ 226,809 $ 389,162 $ 693,840 ========== ========== ==========
7. RELATED PARTY TRANSACTIONS During the years ended December 31, 1996 and 1997, the Corporation made short-term advances to certain shareholders that bear interest at 3 percent. The highest amounts outstanding during the period to any shareholder totaled approximately $2,700,000 and $6,100,000 in 1996 and 1997, respectively. Interest income relating to such advances totaled approximately $62,000, $98,000 and $148,000 for the years ended December 31, 1995, 1996 and 1997, respectively. In addition, the Corporation made short-term loans to certain affiliates during 1996 and 1997. The maximum amounts outstanding during 1996 and 1997 was $50,000 and $400,000, respectively. No balance was remaining outstanding at either December 31, 1996 or 1997. Interest income relating to such loans totaled approximately $13,000, $300, and $10,000 for the years ended December 31, 1995, 1996, and 1997, respectively. 8. OPERATING LEASES The following is a schedule of future minimum lease payments (for leases with initial or remaining terms in excess of one year) as of December 31, 1997: 1998 $2,500,000 1999 1,700,000 2000 1,200,000 2001 600,000 2002 and thereafter 300,000 ---------- Total $6,300,000 Less sublease payments to be received 100,000 ---------- Net future minimum lease payments $6,200,000 ==========
F-13 98 ROCK FINANCIAL CORPORATION NOTES TO FINANCIAL STATEMENTS, CONTINUED Total rental expense incurred during the years ended December 31, 1995, 1996 and 1997, was $980,000, $990,000 and $1,580,000, respectively. 9. EMPLOYEE BENEFIT PLAN The Corporation maintains a defined contribution 401(k) plan covering substantially all full-time employees. Employees can make elective contributions to the plan. The plan requires the Corporation to contribute 20 percent of employee contributions to the plan up to a maximum of one percent of the employee's gross pay. The Corporation's contributions to the plan for the years ended December 31, 1995, 1996 and 1997 amounted to $42,000, $43,000 and $83,000, respectively. 10. STOCK PURCHASE AGREEMENT The Corporation is a party to a Shareholders Agreement with its three shareholders. The terms of the agreement restrict the sale and pledging of the shareholders' stock in the Corporation. The agreement also gives the Corporation the option to purchase the stock of two of the shareholders upon death. The purchase price is based upon an appraisal of the Corporation and is partially insured by life insurance policies carried on the lives of the shareholders (see note 17). 11. STOCK OPTION PLAN AND EMPLOYMENT AGREEMENTS On December 27, 1996, the Corporation approved a stock option plan in which 3,578,617 common shares have been reserved for issuance (see note 17). Under the plan, the exercise price of any incentive stock option will not be less than the fair market value of the common shares on the date of grant. The exercise price of any nonqualified option and the dates on which the options are first exercisable are determined by the Stock Option Committee or the Board of Directors. The term of any option may not exceed ten years from the date of grant. On December 28, 1996, 1,540,684 immediately exercisable options were granted at $4.68 per share. On January 31, 1997 (as adjusted in March 1997), 780,000 options were granted, vesting in one-fifth cumulative annual installments beginning December 31, 1997, at $4.68 per share. On April 30, 1997, 90,000 options were granted, vesting in one-fifth cumulative annual installments beginning December 31, 1997, at $4.68 per share. On July 30, 1997, 196,500 options were granted, vesting in one-fifth cumulative annual installments beginning December 31, 1998, at $7.00 per share. At December 31, 1997, 1,086,433 common shares were reserved for issuance under the plan. F-14 99 ROCK FINANCIAL CORPORATION NOTES TO FINANCIAL STATEMENTS, CONTINUED Option activity since the plan was adopted in 1996 was as follows:
Number Weighted Average of Shares Exercise Price -------- --------- ---------------------- Options outstanding at December 31, 1995 . . . . . -- N/A Activity during 1996: Granted . . . . . . . . . . . . . . . . . . . . 1,540,684 $4.68 Expired . . . . . . . . . . . . . . . . . . . . -- N/A --------- Options outstanding at December 31, 1996 (all exercisable) . . . . . . . . . . . . . . . . . 1,540,684 $4.68 Activity during 1997: Granted . . . . . . . . . . . . . . . . . . . . 1,066,500 $5.11 Expired . . . . . . . . . . . . . . . . . . . . -- -- Forfeited . . . . . . . . . . . . . . . . . . . 115,000 $4.68 --------- Options outstanding at December 31, 1997 (including exercisable options for 1,691,684 shares) . . . 2,492,184 $4.86 ========= =====
In accordance with SFAS No. 123, Accounting for Stock-Based Compensation, the Corporation applied the intrinsic value method of accounting, as described in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, to its stock-based compensation. Accordingly, no compensation expense has been charged against income for stock option grants. Had compensation expense been determined based on the fair value at the 1996 and 1997 grant dates, consistent with the fair value methodology of SFAS No. 123, the Corporation's net income (loss) would have been ($369,262) and $11,065,356 in 1996 and 1997, respectively. The weighted average fair value of options granted in 1996 and 1997 totalled $2.30 and $2.50 per share, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. The weighted average assumptions used in valuing the option grants for the years ended December 31, 1996 and 1997, respectively, were expected life, five years for both years; interest rate 5.40% and 5.30%; and volatility (the measure by which the stock price has fluctuated or will be expected to fluctuate during the period), 66% for both years. At December 31, 1997, 2,492,184 of the outstanding options have exercise prices that range between $4.68 and $7.00, with a weighted average exercise price of $4.86. Of these options, 1,691,684 options are exercisable, with a weighted average exercise price of $4.68 and a weighted average contractual maturity of 8.8 years. The remaining 800,500 outstanding options have exercise prices that range between $4.68 and $7.00, with a weighted average exercise price of $5.25, and a weighted average contractual maturity of 8.8 years. F-15 100 ROCK FINANCIAL CORPORATION NOTES TO FINANCIAL STATEMENTS, CONTINUED Certain option holders who are officers of the Corporation entered into employment agreements which stipulate a "Distribution Bonus" is entitled to be paid upon certain conditions. The agreements require the Corporation to pay the "Distribution Bonus" at the same time as shareholders receive distributions in respect of their common shares, except for "Excluded Payments", as long as the officers are employed by the Corporation. The amount of the "Distribution Bonus" is determined by the number of common shares of the Corporation that these officers have the right to acquire multiplied by the per share distributions paid to shareholders. "Excluded Payments" mean all the following (1) any distribution that is not cash or property, (2) any distribution of securities issued by the Corporation, (3) salaries, bonuses or other compensation that one or more shareholders may receive as consideration for services rendered, (4) distributions to shareholders to cover their income tax liabilities for the S corporation status, and (5) distributions of up to $5 million paid to shareholders by September 1, 1997. No distributions were made to shareholders in 1995, 1996, or 1997 that resulted in the required payment of the Distribution Bonus. The Corporation's shareholders do not intend to receive distributions in the normal course of business in the foreseeable future in excess of the Excluded Payments. Therefore, the Distribution Bonuses, which would have been approximately $70,000 in 1995, $600,000 in 1996, and $1.1 million in 1997, have not been accrued for or recognized as compensation expense in the accompanying financial statements. Such accrual and corresponding compensation expense will be recognized when such shareholder distributions are declared. In February 1998, the option holders who were entitled to these Distribution Bonuses entered into an agreement whereby their rights to the Distribution Bonuses will be eliminated if the Offering (see note 17) is consummated (if the Offering is not consummated, the prior provisions with respect to the Distribution Bonuses will be reinstated). These rights were replaced with the rights to exercise existing options representing approximately 330,000 of the Corporation's common shares and simultaneously sell the shares as part of a proposed initial public offering of the Corporation's stock. In addition, the option holders were granted additional options for 450,000 common shares at an exercise price equal to the initial public offering price. As the existing options expected to be exercised were granted at the fair value of the stock at the date of grant, and the additional options for 450,000 common shares expected to be granted are being granted at the fair value at the date of grant, the Corporation has recognized no compensation expense associated with such options. 12. FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107, Disclosures About Fair Value of Financial Instruments, requires disclosures of the fair value of certain financial instruments for which it is practical to estimate the value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. The following tables present the carrying amounts and fair value of financial instruments at December 31, 1996 and 1997: F-16 101 ROCK FINANCIAL CORPORATION NOTES TO FIANNCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1996 DECEMBER 31, 1997 ------------------------------- ----------------------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ------------ ------------ ------------- -------------- Cash and cash equivalents . $ 3,288,751 $ 3,290,000 $ 11,949,992 $ 11,950,000 Marketable securities . . . 5,956,471 5,960,000 -- -- Mortgage loans held for sale- Conventional prime . . 69,343,512 70,300,000 74,475,694 75,500,000 Sub-prime home equity 15,277,512 16,000,000 37,896,640 39,900,000 High LTV second mortgages 388,371 400,000 8,971,480 9,700,000 Mortgage loans held for investment . . . . . . -- -- 810,293 900,000 Warehouse line of credit . 67,621,266 67,600,000 79,293,856 79,300,000 Reverse repurchase agreement -- -- 18,161,423 18,200,000 Notes payable . . . . . . . -- -- 1,944,445 1,900,000 Calls on U.S. Treasury securities . . . . . . -- -- 17,000 14,000
Fair value methods and assumptions for the Corporation's financial instruments are as follows: Cash and Cash Equivalents The carrying amounts reported in the balance sheet for cash and cash equivalents reasonably approximate those assets' fair values. Marketable Securities Available for Sale Fair values for marketable securities available for sale are based on quoted market prices. Loans Held for Sale and Loans Held for Investment For mortgage loans held for sale and investment, fair value is estimated using quoted market prices for similar loans, adjusted for differences in loan characteristics, including credit quality. The carrying amount of accrued interest receivable approximates the assets' fair value. Borrowings For borrowings, fair value is estimated based on the discounted value of contractual cash flows using interest rates currently in effect for similar maturities and collateral requirements. As all of the borrowings have variable interest rates that approximate current market interest rates for similar types of liens of credit and are due upon demand, the carrying amount of these borrowings approximates their estimated fair values. F-17 102 ROCK FINANCIAL CORPORATION NOTES TO FINANCIAL STATEMENTS, CONTINUED Off-Balance-Sheet Instruments The fair value of the calls on U.S. Treasury securities are based on quoted market prices for similar instruments. The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the customers. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of commitments to extend credit approximated the book values at both December 31, 1996 and 1997. The Corporation had mandatory forward sales commitments for future delivery of FNMA and Freddie Mac securities of $82,535,000 as of December 31, 1997. The Corporation's exposure to credit loss in the event of non-performance by other parties to the mandatory sales commitments represents the difference between the contractual amount and the fair value of those agreements based on quoted market prices. The fair value of those agreements approximated the contractual amount as of December 31, 1997. 13. LOAN SERVICING PORTFOLIO In April 1995, the Corporation sold its entire remaining loan servicing portfolio. As a result of the sale, the Corporation recognized a gain of $5,728,411, net of the related capitalized purchase mortgage servicing rights. 14. STOCK SPLIT On January 8, 1997, the Corporation effected a stock split of the Corporation's common shares on the basis of 1,118.31805 common shares for each common share formerly issued and outstanding. The financial statements and related disclosures have been retroactively adjusted to reflect this split. 15. LOAN FEES AND GAINS AND LOSSES ON THE SALE OF MORTGAGES Loan fees and gains and losses on the sale of mortgages for the years ended December 31, 1995, 1996 and 1997 were comprised of the following components:
1995 1996 1997 ------------- -------------- ------------- Gain on loan sales . . . . . . . . . . . . . . $ 17,016,142 $ 25,613,600 $ 37,728,135 Net loan origination fees . . . . . . . . . . . 977,072 2,663,099 9,958,806 Provision for premium recapture . . . . . . . . (204,935) (317,262) (602,632) ------------- -------------- ------------- $ 17,788,279 $ 27,959,437 $ 47,084,309 ============= ============== =============
F-18 103 ROCK FINANCIAL CORPORATION NOTES TO FINANCIAL STATEMENTS, CONTINUED 16. COMMITMENTS AND CONTINGENCIES The Corporation is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments are loan commitments to extend credit and treasury-based options. These instruments involve, to varying degrees, elements of credit risk in excess of the amounts recognized in the balance sheets. The Corporation's exposure to credit loss in the event of the non-performance by the other party to the financial instruments for loan commitments to extend credit is represented by the contractual amounts of these instruments, while the risk of credit loss associated with the Corporation's treasury-based options is a small fraction of the notional amount of the instrument and is represented by the fair value of such instruments. The Corporation uses the same credit policies in making credit commitments as it does for on-balance-sheet loans. Financial instruments for loan commitments to extend credit whose contract amounts represent credit risk at December 31, 1996 and 1997, are as follows:
DECEMBER 31, 1996 DECEMBER 31, 1997 -------------------------------- ------------------------------- FIXED-RATE VARIABLE-RATE FIXED-RATE VARIABLE-RATE ---------- ------------- ---------- ------------- Conventional prime loans . $ 59,600,000 $ 43,600,000 $ 58,500,000 $ 17,600,000 Sub-prime loans . . . . . . 300,000 500,000 4,600,000 3,600,000 High LTV loans . . . . . . -- -- 12,300,000 -- ------------ ------------ ------------ ------------ $ 59,900,000 $ 44,100,000 $ 75,400,000 $ 21,200,000 ============ ============ ============ ============
Loan commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Corporation evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained is based on management's credit evaluation of the customer. Market risk may arise if interest rates move adversely subsequent to the extension of loan commitments. The Corporation held calls on U.S. Treasury securities in the amount of $2 million as of December 31, 1997, to mitigate its interest rate risk on its conventional mortgage loan pipeline. The Corporation is subject to various claims and legal proceedings arising out of the normal course of business, none of which, in the opinion of management, is expected to have a material effect on the Corporation's financial position. 17. SUBSEQUENT EVENTS The Corporation is contemplating an initial public offering of common shares (the "Offering"). In connection with the proposed Offering, the Corporation's Board of Directors approved an amendment and restatement of the Corporation's Restated Articles of Incorporation to (i) increase the authorized F-19 104 ROCK FINANCIAL CORPORATION NOTES TO FINANCIAL STATEMENTS, CONTINUED common shares from 20,000,000 to 50,000,000, and (ii) reorganize the Board of Directors into three classes with staggered terms ending on the first, second or third succeeding Annual Meeting of Shareholders of the Corporation and providing that directors may be removed only for cause. The Corporation's shareholders approved such amendment and restatement on February 18, 1998. In connection with the proposed Offering, the Corporation has capitalized approximately $55,000 of costs directly associated with the Offering. Also on February 18, 1998, the Corporation's Board of Directors (i) declared a dividend to the Corporation's then existing shareholders, subject to, and effective immediately before, the closing of the Offering and payable out of the proceeds of the Offering, equal to the entire amount of the Corporation's income taxed or taxable to the existing shareholders while the Corporation was an S corporation, but not yet distributed to them (the "Shareholder Distribution Amount"), and (ii) approved a Tax Indemnification Agreement among the Corporation and its then existing shareholders. The Tax Indemnification Agreement is intended to ensure that, if there is any reallocation of taxable income or deductions between the period during which the Corporation was taxed as an S corporation and the period after the closing of the Offering during which it is taxed as a C corporation, income taxes are borne either by the Corporation or the existing shareholders to the extent that such parties received the related income. In addition, on February 18, 1998, the Corporation's Board of Directors approved a Shareholders Agreement among the Corporation and its existing shareholders. The terms of the agreement provide that two of the minority shareholders will vote their common shares in the manner directed by the majority shareholder. In addition, on February 18, 1998, the Corporation's Board of Directors and shareholders amended and restated the Corporation's 1996 Stock Option Plan to increase the number of shares reserved for issuance under the plan from 3,578,617 Common Shares to 4,500,000 Common Shares. 18. UNAUDITED PRO FORMA FINANCIAL INFORMATION The pro forma financial information has been presented to show what the significant effects on the historical financial position might have been had the distribution of the Shareholder Distribution Amount and the termination of the Corporation's S corporation status occurred as of December 31, 1997, in contemplation of the proposed Offering described in note 17 and to show what the significant effects on the historical results of operations might have been had the Corporation not been treated as an S corporation for income tax purposes as of the beginning of the earliest year presented. Pro Forma Balance Sheet - The Corporation's December 31, 1997 balance sheet would be adjusted for the following pro forma adjustments: (1) the distribution from retained earnings of the Shareholder Distribution Amount of approximately $18 million, and (2) the establishment of a deferred tax asset of approximately $1.7 million in connection with the proposed termination of the Corporation's S corporation status as of December 31, 1997, with an offsetting increase in retained earnings. The principal components of the Corporation's pro forma deferred tax asset related to the temporary F-20 105 ROCK FINANCIAL CORPORATION NOTES TO FINANCIAL STATEMENTS, CONTINUED differences between tax and book accounting for recognition of gains on sales of mortgage loans. The amount of the deferred tax asset to be recorded will be dependent upon the extent of such temporary differences at the date of revocation of the Corporation's S corporation status. In addition, one of the Corporation's shareholders expects to repay the entire outstanding balance of shareholder advances ($1.6 million as of December 31, 1997) with his share of the Shareholder Distribution Amount, and the Corporation expects to use that cash to repay a portion of the amounts outstanding under its warehouse line of credit. Pro Forma Net Income - The following presentation of pro forma net income represents the historical results of operations adjusted to recognize federal and state income taxes as if the Corporation had been taxed as a C corporation rather than an S corporation for all of the periods presented, using a pro forma combined federal and state income tax rate of approximately 38.5%.
1995 1996 1997 ---- ---- ---- Historical net income . . . . . . . . . . . . . $ 6,863,441 $ 3,130,738 $ 11,415,356 ------------- -------------- ------------- Unaudited pro forma information: Provision for pro forma income taxes . . . 2,642,425 1,205,334 4,394,912 ------------- -------------- -------------- Pro forma net income . . . . . . . . . . $ 4,221,016 $ 1,925,404 $ 7,020,444 ============= ============== ============== Pro forma earnings per share: Basic . . . . . . . . . . . . . . . . . $ 0.53 ============= Diluted . . . . . . . . . . . . . . . . $ 0.49 ============= Pro forma weighted average number of shares outstanding Basic . . . . . . . . . . . . . . . . . 13,330,000 ========== Diluted . . . . . . . . . . . . . . . . 14,434,692 ==========
Pro forma basic earnings per share has been computed by dividing pro forma net income by the 13,330,000 average shares assumed to be outstanding including the 3,000,000 shares to be sold by the Corporation in the proposed Offering and the 330,000 shares to be sold by certain existing shareholders in the proposed Offering (after exercising options to purchase those shares from the Corporation). Pro forma diluted earnings per share has been computed by dividing pro forma net income by the 14,434,692 average shares assumed to be outstanding, including the 3,000,000 shares to be sold by the Corporation in the proposed Offering and the 330,000 shares to be sold by certain existing shareholders in the proposed Offering (after exercising options to purchase those shares from the Corporation) as well as the number of common stock equivalent shares assumed to be outstanding upon exercise of the Corporation's stock options existing as of December 31, 1997, using the treasury stock method and an assumed initial public offering price of $10.00 per share. F-21 106 ============================================================================ UNTIL _______, 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ------------------------------ TABLE OF CONTENTS PAGE ---- PROSPECTUS SUMMARY . . . . . . . . . . . . . . . . . . 3 RISK FACTORS . . . . . . . . . . . . . . . . . . . . . 10 TERMINATION OF S CORPORATION STATUS . . . . . . . . . . 22 USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . 23 CAPITALIZATION . . . . . . . . . . . . . . . . . . . . 24 DIVIDEND POLICY . . . . . . . . . . . . . . . . . . . . 25 DILUTION . . . . . . . . . . . . . . . . . . . . . . . 26 SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . 27 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . 29 BUSINESS . . . . . . . . . . . . . . . . . . . . . . . 44 MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . 63 CERTAIN TRANSACTIONS . . . . . . . . . . . . . . . . . 73 PRINCIPAL AND SELLING SHAREHOLDERS . . . . . . . . . . . . . . . . . 74 DESCRIPTION OF CAPITAL STOCK . . . . . . . . . . . . . 76 SHARES ELIGIBLE FOR FUTURE SALE . . . . . . . . . . . . . . . . . . . . . 79 UNDERWRITING . . . . . . . . . . . . . . . . . . . . . 81 LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . 83 EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . 83 CHANGE IN ACCOUNTANTS . . . . . . . . . . . . . . . . . 83 ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . 83 INDEX TO FINANCIAL STATEMENTS . . . . . . . . . . . . . F-1 -------------------------------- NO DEALER, SALES REPRESENTATIVE, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY ROCK, THE SELLING SHAREHOLDERS OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE COMMON SHARES TO WHICH IT RELATES OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. ============================================================================ ============================================================================ 3,330,000 [LOGO] ROCK CORPORATION COMMON SHARES ---------------------- PROSPECTUS ---------------------- BEAR, STEARNS & CO. INC. _________, 1998 ============================================================================ 107 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the estimated amounts of expenses to be borne by Rock in connection with the issuance and distribution of the securities being registered (other than underwriting discounts and commissions): Securities and Exchange Commission Registration Fee . . . $ 11,297 NASD Filing Fee . . . . . . . . . . . . . . . . . . . . . 4,330 Nasdaq Listing Fee . . . . . . . . . . . . . . . . . . . . 15,000 Printing and Engraving Expenses . . . . . . . . . . . . . 150,000 Accounting Fees and Expenses . . . . . . . . . . . . . . . 250,000 Legal Fees and Expenses . . . . . . . . . . . . . . . . . 225,000 Blue Sky Fees and Expenses . . . . . . . . . . . . . . . . 7,500 Transfer Agent's and Registrar's Fees and Expenses . . . . 10,000 Premium on Directors and Officers Insurance . . . . . . . 100,000 Miscellaneous Expenses . . . . . . . . . . . . . . . . . . 26,873 --------- Total . . . . . . . . . . . . . . . . . . . . . . . $ 800,000 =========
All of these expenses, except the Securities and Exchange Commission registration fee and the NASD filing fee, represent estimates only. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Under Sections 561-571 of the Michigan Business Corporation Act, directors and officers of a Michigan corporation may be entitled to indemnification by the corporation against judgments, expenses, fines and amounts paid by the director or officer in settlement of claims brought against them by third persons or by or in the right of the corporation if those directors and officers acted in good faith and in a manner reasonably believed to be in, or not opposed to, the best interests of the corporation or its shareholders. Rock is obligated under its bylaws to indemnify a present or former director or officer of Rock and may indemnify any other person, to the fullest extent now or hereafter permitted by law in connection with any actual or threatened civil, criminal, administrative or investigative action, suit or proceeding arising out of their past or future service to Rock or a subsidiary, or to another organization at the request of Rock or a subsidiary. In addition, the Articles of Incorporation of Rock limit certain personal liabilities of Directors of Rock. Reference is also made to Section 7 of the Underwriting Agreement (a form of which is attached to this Registration Statement as Exhibit 1.1) with respect to undertakings by the Underwriters to indemnify Rock, its directors and officers and each person who controls Rock within the meaning of the Securities Act of 1933, as amended (the "Securities Act"), against certain civil liabilities, including certain liabilities under the Securities Act. II-1 108 Rock has obtained Directors' and Officers' liability insurance. The policy provides for $5,000,000 in coverage including prior acts dating to Rock's inception and liabilities under the Securities Act in connection with this Offering. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES The following securities of Rock were sold by Rock during the past three years without being registered under the Securities Act: 1. In December 1996, Rock granted options to purchase an aggregate of 1,540,684 Common Shares at an exercise price of $4.68 a share to three key employees of Rock. Options to purchase 330,000 of these Common Shares are expected to be exercised on or before the closing of the Offering. The options and the underlying Common Shares were not registered, but were issued in reliance upon the exemption from registration contained in Section 4(2) of the Securities Act. 2. During 1997, Rock granted options to purchase an aggregate of 1,066,500 Common Shares at exercise prices ranging from $4.68 to $7.00, to an aggregate of 94 key employees of Rock. Such Common Shares and the underlying options were not registered, but were issued in reliance upon the exemption from registration contained in Rule 701 or Section 4(2) under the Securities Act of 1933. 3. During 1998 and effective on the closing date of this Offering, Rock granted options to purchase an aggregate of 450,000 Common Shares at an exercise price equal to the initial public offering price set forth on the cover page of this Prospectus to three key employees of Rock. Such Common Shares and the underlying options were not registered, but were issued in reliance upon the exemption from registration contained in Section 4(2) and Rule 701 under the Securities Act of 1933. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) EXHIBITS See Exhibit Index immediately preceding the exhibits. (b) FINANCIAL STATEMENT SCHEDULES All schedules are either inapplicable or the information is included in Rock's financial statements and, therefore, have been omitted. ITEM 17. UNDERTAKINGS (a) The undersigned Registrant hereby undertakes to provide to the Underwriters, at the closing specified in the Underwriting Agreement, certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. (b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act and is, II-2 109 therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (c) The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 110 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Bingham Farms, State of Michigan, on February 25, 1998. ROCK FINANCIAL CORPORATION (Registrant) By: /s/ Daniel Gilbert ------------------------------ DANIEL GILBERT Its: Chairman of the Board and Chief Executive Officer ----------------------------- POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each of the undersigned officers and directors of Rock Financial Corporation, a Michigan corporation ("Rock"), hereby constitutes and appoints Daniel Gilbert, Richard Chyette and Frank E. Plenskofski, and each of them (with full power of substitution and re-substitution), his or her true and lawful attorneys-in-fact and agents for each of the undersigned and on his or her behalf and in his or her name, place and stead, in any and all capacities, with full power and authority in such attorneys-in-fact and agents and in any one or more of them, to sign, execute and affix his seal thereto and file with the Securities and Exchange Commission and any state securities regulatory board or commission the registration statement on Form S-1 to be filed by Rock under the Securities Act of 1933, as amended, which registration statement relates to the registration and sale of Common Shares, par value $0.01 a share, by Rock, any and all amendments or supplements to such registration statement, including any amendment or supplement thereto changing the amount of securities for which registration is being sought, any post-effective amendment, and any registration statement or amendment to such registration statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, with all exhibits and any and all documents required to be filed with respect thereto with any regulatory authority, including, without limitation, The Nasdaq Stock Market, the National Association of Securities Dealers, Inc. and any federal or state regulatory authority pertaining to such registration statement; granting unto such attorneys-in-fact, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same as fully to all intents and purposes as he or she might or could do if personally present, hereby ratifying and confirming all that such attorneys-in-fact and agents, and each of them and any of their substitutes, may lawfully do or cause to be done by virtue of this Power of Attorney. ----------------------------- II-4 111 Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Daniel Gilbert Chairman of the Board, Chief Executive February 25, 1998 - -------------------------------- Officer and Director DANIEL GILBERT (Principal Executive Officer) /s/ Frank E. Plenskofski Chief Financial Officer February 25, 1998 - -------------------------------- (Principal Financial Officer and FRANK E. PLENSKOFSKI Principal Accounting Officer) /s/ Steven M. Stone Director February 25, 1998 - -------------------------------- STEVEN M. STONE /s/ Gary L. Gilbert Director February 25, 1998 - -------------------------------- GARY L. GILBERT
II-5 112 EXHIBIT INDEX
Exhibit Description - ------- ----------- 1.1* Proposed form of Underwriting Agreement. 3(i) Form of Restated Articles of Incorporation of Rock Financial Corporation. 3(ii) Amended and Restated Bylaws of Rock Financial Corporation. 4.1* Specimen Common Share Certificate. 5.1* Opinion of Honigman Miller Schwartz and Cohn concerning the legality of the securities being offered. 10.1 Amended and Restated Rock Financial Corporation 1996 Stock Option Plan. 10.2 Form of Stock Option Agreement granted under the 1996 Stock Option Plan. 10.3 Employment Agreement, dated as of June 27, 1994, as amended as of December 28, 1996 and as of February 18, 1998, between Rock Financial Corporation and Steven M. Stone. 10.4 Stock Purchase Agreement, dated as of January 17, 1997, as amended February 26, 1997 and April 1997, between Daniel Gilbert and Gary L. Gilbert. 10.5 Second Amended and Restated Mortgage Warehousing Agreement, dated as of November 13, 1997, as amended January 30, 1998, among Rock Financial Corporation, the lenders named therein, and Comerica Bank, as agent. 10.6 Master Repurchase Agreement and Custody Agreement, dated as of March 26, 1997, between Rock Financial Corporation and Bear Stearns Home Equity Trust. 10.7 Form of Tax Indemnification Agreement among Rock Financial Corporation and the Existing Shareholders. 10.8 Form of Shareholders Agreement among Rock Financial Corporation and its shareholders before this Offering. 16.1 Letter, dated February 24th, 1998, from Coopers & Lybrand LLP to Rock Financial Corporation and the Securities and Exchange Commission. 23.1 Consent of KPMG Peat Marwick LLP. 23.2* Consent of Honigman Miller Schwartz and Cohn (included in the opinion filed as Exhibit 5.1 to this registration statement). 24.1 Powers of Attorney (included after the signature of the Registrant contained on page II-4 of this registration statement). 27.1 Financial data schedule.
- --------------------- *To be filed by amendment. 1 EX-3.(I) 2 EXHIBIT 3.(I) 1 C&S 510 (Rev. 8/96) Exhibit 3(i) MICHIGAN DEPARTMENT OF CONSUMER AND INDUSTRY SERVICES CORPORATION, SECURITIES AND LAND DEVELOPMENT BUREAU - -------------------------------------------------------------------------------- Date Received (FOR BUREAU USE ONLY) - ----------------------------- - ----------------------------- Name Robert J. Krueger - ---------------------------------------------- Address Honigman Miller Schwartz and Cohn 2290 First National Building - ---------------------------------------------- EFFECTIVE DATE: City State Zip Code Detroit, Michigan 48226-3583 - ----------------------------------------------------------------- DOCUMENT WILL BE RETURNED TO THE NAME AND ADDRESS YOU ENTER ABOVE RESTATED ARTICLES OF INCORPORATION FOR USE BY DOMESTIC PROFIT CORPORATIONS (Please read information and instructions on the last page) Pursuant to the provisions of Act 284, Public Acts of 1972, the undersigned corporation executes the following Articles: - -------------------------------------------------------------------------------- 1. The present name of the corporation is: Rock Financial Corporation ---------------------------------------------------------------------------- 2. The identification number assigned by the Bureau is: 242-863 3. All former names of the corporation are: Rock Mortgage Corporation 4. The date of filing the original Articles of Incorporation was: June 21, 1985 --------------- - -------------------------------------------------------------------------------- The following Restated Articles of Incorporation supersede the Articles of Incorporation as amended and shall be the Articles of Incorporation for the corporation: ARTICLE I - -------------------------------------------------------------------------------- The name of the corporation is: Rock Financial Corporation - -------------------------------------------------------------------------------- ARTICLE II - -------------------------------------------------------------------------------- The purpose or purposes for which the corporation is formed is to engage in any activity within the purposes for which corporations may be organized under the Business Corporation Act of Michigan. - -------------------------------------------------------------------------------- 2 ARTICLE III - -------------------------------------------------------------------------------- The total authorized shares: 1. Common Shares 50,000,000, par value $0.01 per share --------------------------------------------- Preferred Shares 1,000,000, par value $0.01 per share -------------------------------------------- 2. A statement of all or any of the relative rights, preferences and limitations of the shares of each class is as follows: a. Preferred Shares. The Board of Directors may cause the Corporation to issue Preferred Shares in one or more series, each series to bear a distinctive designation and to have such relative rights and preferences as shall be prescribed by resolution of the Board. Such resolutions, when filed, shall constitute amendments to these Articles of Incorporation. - -------------------------------------------------------------------------------- ARTICLE IV - -------------------------------------------------------------------------------- 1. The address of the current registered office is: 30600 Telegraph Road Bingham Farms, Michigan 48025 ------------------------------------------------- ------------ (Street Address) (City) (ZIP Code) 2. The mailing address of the current registered office, if different than above: Michigan ------------------------------------------------- ------------ (Street Address or P.O. Box) (City) (ZIP Code) 3. The name of the current resident agent is: The Corporation Company ----------------------------- ARTICLE V - -------------------------------------------------------------------------------- Any action required or permitted by the Act to be taken at an annual or special meeting of shareholders may be taken without a meeting, without prior notice, and without a vote, if consents in writing, setting forth the action so taken, are signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take the action at a meeting at which all shares entitled to vote on the action were present and voted. The written consents shall bear the date of signature of each shareholder who signs the consent. No written consents shall be effective to take the corporate action referred to unless, within 60 days after the record date for determining shareholders entitled to express consent to or to dissent from a proposal without a meeting, written consents dated not more than 10 days before the record date and signed by a sufficient number of shareholders to take the action are delivered to the Corporation. Delivery shall be to the Corporation's registered office, its principal place of business, or an officer or agent of the Corporation having custody of the minutes of the proceedings of its shareholders. Delivery made to a Corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. Prompt notice of the taking of corporate action without a meeting by less than unanimous written consent shall be given to shareholders who would have been entitled to notice of the shareholder meeting if the action had been taken at a meeting and who have not consented in writing. - -------------------------------------------------------------------------------- 3 ARTICLE VI - -------------------------------------------------------------------------------- To the full extent permitted by the Michigan Business Corporation Act or any other applicable laws presently or hereinafter in effect, no director of the Corporation shall be personally liable to the Corporation or its shareholders for or with respect to any acts or omissions in the performance of his or her duties as a director of the Corporation. Any repeal or modification of this Article VI shall not adversely affect any right or protection of any director of the Corporation existing immediately prior to, or for, or with respect to, any acts or omissions occurring before, such repeal or modification. - -------------------------------------------------------------------------------- ARTICLE VII - -------------------------------------------------------------------------------- Pursuant to Section 784(1)(b) of the Michigan Business Corporation Act, the Corporation expressly elects not to be governed by Chapter 7A of the Michigan Business Corporation Act, being Sections 775 through 784 of the Michigan Business Corporation Act; provided that the Corporation's Board of Directors may terminate this election in whole or in part by action of the majority of directors then in office. - -------------------------------------------------------------------------------- 4 ARTICLE VIII - -------------------------------------------------------------------------------- The business and affairs of the Corporation shall be managed by or under the direction of a Board of Directors consisting of not less than three or more than fifteen directors, the exact number of directors to be determined from time to time solely by a resolution adopted by an affirmative vote of a majority of the directors then in office. The directors shall be divided into three classes, designated Class I, Class II and Class III. Each class shall consist, as nearly as may be possible, of one-third of the total number of directors constituting the entire Board of Directors. At the 1998 Annual Meeting of Shareholders, Class I directors shall be elected for a one-year term, Class II directors for a two-year term and Class III directors for a three-year term. At each succeeding annual meeting of shareholders, commencing in 1999, successors to the class of directors whose term expires at that annual meeting shall be elected for a three-year term. If the number of directors is changed, any increase or decrease shall be apportioned among the classes of directors so as to maintain the number of directors in each class as nearly equal as possible, but in no case will a decrease in the number of directors shorten the term of any incumbent director. When the number of directors is increased by the Board of Directors and any newly-created directorships are filled by the Board, the additional directors shall be classified as provided by the Board. A director shall hold office until the meeting for the year in which his or her term expires and until his or her successor shall be elected and shall qualify, subject, however, to prior death, resignation, retirement, disqualification or removal from office. Newly-created directorships resulting from an increase in the number of directors and any vacancy on the Board of Directors may be filled only by the Board by an affirmative vote of a majority of the directors then in office. If the number of directors then in office is less than a quorum, such newly-created directorships and vacancies may be filled by a majority of the directors then in office, although less than a quorum, or by the sole remaining director. A director elected by the Board of Directors to fill a vacancy shall hold office until the next election of the class for which the director shall have been chosen and until his or her successor shall be elected and shall qualify. A director or the entire Board of Directors may be removed only for cause. Notwithstanding the foregoing, whenever the holders of any one or more classes of Preferred Shares or series thereof issued by the Corporation shall have the right, voting separately by class or series, to elect directors at an annual or special meeting of shareholders, the election, term of office, filling of vacancies and other features of such directorship shall be governed by the terms of these Restated Articles of Incorporation applicable thereto, and such directors so elected shall not be divided into classes pursuant to this Article. This Article VIII may not be amended by less than unanimous written consent of shareholders, and may only be amended by the affirmative vote of holders of 90% of the outstanding Common Shares of the Corporation, in addition to the vote otherwise required by the Michigan Business Corporation Act. - -------------------------------------------------------------------------------- ARTICLE IX - -------------------------------------------------------------------------------- No action by written consent of holders of less than all of the outstanding shares entitled to vote on such action shall be effective unless the proposed action shall have been approved by the Board of Directors before the consent of shareholders is executed. - -------------------------------------------------------------------------------- 5 (ADDITIONAL PROVISIONS, IF ANY, MAY BE INSERTED HERE; ATTACH ADDITIONAL PAGES IF NEEDED.) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 5. COMPLETE SECTION (a) IF THE RESTATED ARTICLES WERE ADOPTED BY THE UNANIMOUS CONSENT OF THE INCORPORATOR(S) BEFORE THE FIRST MEETING OF THE BOARD OF DIRECTORS; OTHERWISE, COMPLETE SECTION (b). DO NOT COMPLETE BOTH. a. [ ] These Restated Articles of Incorporation were duly adopted on the ________ day of __________________, 19_______, in accordance with the provisions of Section 642 of the Act by the unanimous consent of the incorporator(s) before the first meeting of the Board of Directors. Signed this day of , 19 . ---------- ----------------- ----------- ------------------------------ -------------------------------------- ------------------------------ -------------------------------------- (Signatures of Incorporators; Type or Print Name Under Each Signature) b. [X] These Restated Articles of Incorporation were duly adopted on the 18th day of February, 1998 in accordance with the provisions of Section 642 of the Act and: (check one of the following) [ ] were duly adopted by the Board of Directors without a vote of the shareholders. These Restated Articles of Incorporation only restate and integrate and do not further amend the provisions of the Articles of Incorporation as heretofore amended and there is no material discrepancy between those provisions and the provisions of these Restated Articles. [ ] were duly adopted by the shareholders. The necessary number of shares as required by statute were voted in favor of these Restated Articles. [ ] were duly adopted by the written consent of the shareholders having not less than the minimum number of votes required by statute in accordance with Section 407(1) of the Act. Written notice to shareholders who have not consented in writing has been given. (Note: Written consent by less than all of the shareholders is permitted only if such provision appears in the Articles of Incorporation.) [X] were duly adopted by the written consent of all the shareholders entitled to vote in accordance with section 407(2) of the Act. Signed this day of , 1998 --------- ------------- By ----------------------------------------------------- (Signature of President, Vice-President, Chairperson, or Vice-Chairperson) Daniel B. Gilbert, President ----------------------------------------------------- (Type or Print Name) (Type or Print Title) 6 C&S 510 Name of person or organization Preparer's name and remitting fees: business telephone number: Rock Financial Corporation Robert J. Krueger - ----------------------------------- ---------------------- (313) 256-7675 - ----------------------------------- ---------------------- - -------------------------------------------------------------------------------- INFORMATION AND INSTRUCTIONS 1. The articles of incorporation cannot be restated until this form, or a comparable document, is submitted. 2. Submit one original of this document. Upon filing, the document will be added to the records of the Corporation, Securities and Land Development Bureau. The original will be returned to the address appearing in the box on the front as evidence of filing. Since this document will be maintained on optical disk media, it is important that the filing be legible. Documents with poor black and white contrast, or otherwise illegible, will be rejected. 3. This document is to be used pursuant to sections 641 through 643 of the Act for the purpose of restating the articles of incorporation of a domestic profit corporation. Restated articles of incorporation are an integration into a single instrument of the current provisions of the corporation's articles of incorporation, along with any desired amendments to those articles. 4. Restated articles of incorporation which do not amend the articles of incorporation may be adopted by the board of directors without a vote of the shareholders. Restated articles of incorporation which amend the articles of incorporation require adoption by the shareholders. Restated articles of incorporation submitted before the first meeting of the board of directors require adoption by all of the incorporators. 5. Item 2 - Enter the identification number previously assigned by the Bureau. If this number is unknown, leave it blank. 6. The duration of the corporation should be stated in the restated articles of incorporation only if it is not perpetual. 7. This document is effective on the date endorsed "filed" by the Bureau. A later effective date, no more than 90 days after the date of delivery, may be stated as an additional article. 8. If the restated articles are adopted before the first meeting of the board of directors, item 5(a) must be completed and signed in ink by a majority of the incorporators. Other restated articles must be signed by the president, vice-president, chairperson or vice-chairperson of the corporation. 9. FEES: Make remittance payable to the State of Michigan. Include corporation name and identification number on check or money order. NONREFUNDABLE FEE......................................................$10.00 TOTAL MINIMUM FEE......................................................$10.00 ADDITIONAL FEES DUE FOR INCREASED AUTHORIZED SHARES ARE: each additional 20,000 authorized shares or portion thereof.........$30.00 maximum fee per filing for first 10,000,000 authorized shares....$5,000.00 each additional 20,000 authorized shares or portion thereof in excess of 10,000,000 shares..............................................$30.00 maximum fee per filing for authorized shares in excess of 10,000,000 shares.......................................................$200,000.00 10. Mail form and fee to: The office is located at: Michigan Department of Consumer and Industry 6546 Mercantile Way Services Corporation, Securities and Land Lansing, MI 48910 Development Bureau (517) 334-6302 Corporation Division P.O. Box 30054 Lansing, MI 48909-7554 EX-3.(II) 3 EXHIBIT 3.(II) 1 EXHIBIT 3(ii) BYLAWS OF ROCK FINANCIAL CORPORATION, a Michigan corporation 2 BYLAWS OF ROCK FINANCIAL CORPORATION, a Michigan corporation TABLE OF CONTENTS
Page ARTICLE 1 - OFFICES ........................................................ 1 1.1 Registered Office ............................................ 1 1.2 Other Offices ................................................ 1 ARTICLE 2 - MEETINGS OF SHAREHOLDERS ....................................... 1 2.1 Time and Place ............................................... 1 2.2 Annual Meetings .............................................. 1 2.3 Special Meetings ............................................. 1 2.4 Notice of Meetings ........................................... 1 2.5 List of Shareholders ......................................... 1 2.6 Quorum; Adjournment .......................................... 2 2.7 Voting ....................................................... 2 2.8 Proxies....................................................... 2 2.9 Questions Concerning Elections ............................... 2 2.10 Telephonic Attendance ........................................ 2 2.11 Action by Written Consent .................................... 3 ARTICLE 3 - DIRECTORS ...................................................... 3 3.1 Number and Residence ......................................... 3 3.2 Classification, Election and Term ............................ 3 3.3 Resignation .................................................. 3 3.4 Removal....................................................... 3 3.5 Nominations for Director...................................... 3 3.6 Vacancies..................................................... 4 3.7 Place of Meetings............................................. 4 3.8 Annual Meetings .............................................. 5 3.9 Regular Meetings ............................................. 5 3.10 Special Meetings.............................................. 5 3.11 Quorum ....................................................... 5 3.12 Voting ....................................................... 5 3.13 Telephonic Participation ..................................... 5 3.14 Action by Written Consent .................................... 5 3.15 Committees ................................................... 6 3.16 Compensation ................................................. 6
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Page ---- ARTICLE 4 - OFFICERS ....................................................... 7 4.1 Officers and Agents .............................................. 7 4.2 Compensation ..................................................... 7 4.3 Term ............................................................. 7 4.4 Removal........................................................... 7 4.5 Resignation ...................................................... 7 4.6 Vacancies ........................................................ 7 4.7 Chairperson of the Board ......................................... 7 4.8 Chief Executive Officer .......................................... 7 4.9 President ........................................................ 8 4.10 Executive Vice Presidents and Vice Presidents .................... 8 4.11 Secretary ........................................................ 8 4.12 Treasurer ........................................................ 8 4.13 Assistant Vice Presidents, Secretaries and Treasurers ............ 9 4.14 Execution of Contracts and Instruments ........................... 9 4.15 Voting of Shares and Securities of Other Corporations and Entities ....................................................... 9 ARTICLE 5 - NOTICES AND WAIVERS OF NOTICE .................................. 9 5.1 Delivery of Notices .............................................. 9 5.2 Waiver of Notice ................................................. 10 ARTICLE 6 - SHARE CERTIFICATES AND SHAREHOLDERS OF RECORD .................. 10 6.1 Certificates for Shares .......................................... 10 6.2 Lost or Destroyed Certificates ................................... 10 6.3 Transfer of Shares ............................................... 11 6.4 Record Date ...................................................... 11 6.5 Registered Shareholders........................................... 12 ARTICLE 7 - INDEMNIFICATION ................................................ 12 ARTICLE 8 - GENERAL PROVISIONS ............................................. 12 8.1 Checks and Funds ................................................. 12 8.2 Fiscal Year ...................................................... 12 8.3 Corporate Seal ................................................... 12 8.4 Books and Records ................................................ 13 8.5 Financial Statements ............................................. 13 ARTICLE 9 - AMENDMENTS ..................................................... 13 ARTICLE 10 -- CONTROL SHARE ACQUISITIONS ................................... 13 10.1 Power to Redeem if no Acquiring Person Statement is Filed ........ 13 10.2 Power to Redeem After Shareholder Vote ........................... 13 10.3 Procedure for Redemption ......................................... 13 10.4 Interpretation of Article 10 ..................................... 14 ARTICLE 11 - SCOPE OF BYLAWS................................................ 14
-ii- 4 ROCK FINANCIAL CORPORATION, a Michigan corporation ARTICLE 1 - OFFICES 1.1 Registered Office. The registered office of the Corporation shall be located at such place in Michigan as the Board of Directors from time to time determines. 1.2 Other Offices. The Corporation may also have offices or branches at such other places as the Board of Directors from time to time determines or the business of the Corporation requires. ARTICLE 2 - MEETINGS OF SHAREHOLDERS 2.1 Time and Place. All meetings of the shareholders shall be held at such place and time as the Board of Directors determines. 2.2 Annual Meetings. An annual meeting of shareholders shall be held on a date, not later than 180 days after the end of the immediately preceding fiscal year, to be determined by the Board of Directors. At the annual meeting, the shareholders shall elect directors and transact such other business as is properly brought before the meeting and described in the notice of meeting. If the annual meeting is not held on its designated date, the Board of Directors shall cause it to be held as soon thereafter as convenient. 2.3 Special Meetings. Special meetings of the shareholders, for any purpose, (a) may be called by the Corporation's chief executive officer or the Board of Directors, and (b) shall be called by the President or Secretary upon written request (stating the purpose for which the meeting is to be called) of the holders of a majority of all the shares entitled to vote at the meeting. 2.4 Notice of Meetings. Written notice of each shareholders' meeting, stating the place, date and time of the meeting and the purposes for which the meeting is called, shall be given (in the manner described in Section 5.1 below) not less than 10 nor more than 60 days before the date of the meeting to each shareholder of record entitled to vote at the meeting. Notice of adjourned meetings is governed by Section 2.6 below. 2.5 List of Shareholders. The officer or agent who has charge of the stock transfer books for shares of the Corporation shall make and certify a complete list of the shareholders entitled to vote at a shareholders' meeting or any adjournment of the meeting. The list shall be arranged alphabetically within each class and series and shall show the address of, and the 1 5 number of shares held by, each shareholder. The list shall be produced at the time and place of the meeting and may be inspected by any shareholder at any time during the meeting. 2.6 Quorum; Adjournment. At all shareholders' meetings, the shareholders present in person or represented by proxy who, as of the record date for the meeting, were holders of shares entitled to cast a majority of the votes at the meeting, shall constitute a quorum. Once a quorum is present at a meeting, all shareholders present in person or represented by proxy at the meeting may continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum. Regardless of whether a quorum is present, a shareholders' meeting may be adjourned to another time and place by a vote of the shares present in person or by proxy without notice other than announcement at the meeting; provided, that (a) only such business may be transacted at the adjourned meeting as might have been transacted at the original meeting and (b) if the adjournment is for more than 60 days or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting must be given to each shareholder of record entitled to vote at the meeting. 2.7 Voting. Each shareholder shall at every meeting of the shareholders be entitled to one vote in person or by proxy for each share having voting power held by such shareholder and on each matter submitted to a vote. A vote may be cast either orally or in writing. When an action, other than the election of directors, is to be taken by vote of the shareholders, it shall be authorized by a majority of the votes cast by the holders of shares entitled to vote on such action. Directors shall be elected by a plurality of the votes cast at any election. 2.8 Proxies. A shareholder entitled to vote at a meeting of shareholders or to express consent or dissent without a meeting may authorize other persons to act for him or her by proxy. Each proxy shall be in writing and signed by the shareholder or the shareholder's authorized agent or representative. A proxy is not valid after the expiration of three years after its date unless otherwise provided in the proxy. 2.9 Questions Concerning Elections. The Board of Directors may, in advance of the meeting, or the presiding officer may, at the meeting, appoint one or more inspectors to act at a shareholders' meeting or any adjournment thereof. If appointed, the inspectors shall determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, the validity and effect of proxies, and shall receive votes, ballots or consents, hear and determine challenges and questions arising in connection with the right to vote, count and tabulate votes, ballots or consents, determine the result, and do such acts as are proper to conduct the election or vote with fairness to all shareholders. 2.10 Telephonic Attendance. Shareholders may participate in any shareholders' meeting by means of conference telephone or similar communications equipment through which all persons participating in the meeting may communicate with the other participants. All participants shall be advised of the communications equipment and the names of the participants in the conference shall be divulged to all participants. Participation in a meeting pursuant to this Section 2.10 constitutes presence in person at such meeting. 2 6 2.11 Action by Written Consent. To the extent permitted by the Articles of Incorporation or applicable law, any action required or permitted to be taken at any shareholders' meeting may be taken without a meeting, prior notice and a vote, by written consent of shareholders. ARTICLE 3 - DIRECTORS 3.1 Number and Residence. The business and affairs of the Corporation shall be managed by or under the direction of a Board of Directors consisting of not less than three nor more than fifteen directors, the exact number of directors to be determined from time to time solely by a resolution adopted by an affirmative vote of a majority of the directors the in office. Directors need not be Michigan residents or shareholders of the Corporation. 3.2 Classification, Election and Term. The directors shall be divided into three classes, designated Class I, Class II and Class III. Each class shall consist, as nearly as may be possible, of one-third of the total number of directors constituting the entire Board of Directors. At the 1998 Annual Meeting of Shareholders, Class I directors shall be elected for a one-year term, Class II directors for a two-year term and Class III directors for a three-year term. At each succeeding Annual Meeting of Shareholders, commencing in 1999, successors to the class of directors whose term expires at that annual meeting shall be elected for a three-year term. Except as provided in Section 3.6 below, directors shall be elected at the annual shareholders' meeting. Each director elected shall hold office until the meeting for the year in which his or her term expires and until his or her successor is elected and qualified, subject, however, to prior death, resignation, retirement, disqualification or removal from office. If the number of directors is changed, any increase or decrease shall be apportioned among the classes of directors so as to maintain the number of directors in each class as nearly equal as possible, but in no case will a decrease in the number of directors shorten the term of any incumbent director. When the number of directors is increased by the Board of Directors and any newly-created directorships are filled by the Board, the additional directors shall be classified as provided by the Board. 3.3 Resignation. A director may resign by written notice to the Corporation. A director's resignation is effective upon its receipt by the Corporation or a later time set forth in the notice of resignation. 3.4 Removal. A director or the entire Board of Directors may be removed, only for cause, by vote of the holders of a majority of the shares entitled to vote at an election of directors. 3.5 Nominations for Director. Except as provided in Section 3.6, only persons who are nominated in accordance with the procedures set forth in this Section 3.5 shall be eligible for 3 7 election as directors. Nominations of persons for election to the Board of Directors of the Corporation may be made at a meeting of shareholders by or at the direction of the Board of Directors or by any shareholder of the Corporation entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in this Section 3.5. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the Corporation. To be timely, a shareholder's notice shall be delivered to, or mailed and received at, the principal executive offices of the Corporation not less than 60 days nor more than 90 days before the meeting; provided, that if less than 70 days' notice or prior public disclosure of the date of the meeting is given or made to shareholders, notice by the shareholder to be timely must be so received not later than the close of business on the 10th day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. Such shareholder's notice shall set forth (a) as to each person whom the shareholder proposes to nominate for election or re-election as a director, (1) the name, age, business, address and residence address of such person, (2) the principal occupation or employment of such person, (3) the class and number of shares of the Corporation which are beneficially owned by such person and (4) any other information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including each such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); and (b) as to the shareholder giving the notice (1) the name and address, as they appear on the Corporation's books, of such shareholder and (2) the class and number of shares of the Corporation which are beneficially owned by such shareholder. At the request of the Board of Directors any person nominated by the Board of Directors for election as a director shall furnish to the Secretary that information required to be set forth in a shareholder's notice of nomination which pertains to the nominee. The presiding officer of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by these Bylaws, and if the presiding officer should so determine, the presiding officer shall so declare to the meeting and the defective nominations shall be disregarded. 3.6 Vacancies. Newly-created directorships resulting from an increase in the number of directors and any vacancy on the Board of Directors may be filled only by the Board by an affirmative vote of a majority of the directors then in office. If the number of directors then in office is less than a quorum, such newly-created directorships and vacancies may be filled by a majority of the directors then in office, although less than a quorum, or by the sole remaining director. A director elected by the Board of Directors to fill a vacancy shall hold office until the next election of the class for which the director shall have been chosen and until his or her successor shall be elected and shall qualify, subject, however, to prior death, resignation, retirement, disqualification or removal from office. 3.7 Place of Meetings. The Board of Directors may hold meetings at any location. The location of annual and regular Board of Directors' meetings shall be determined by the Board and the location of special meetings shall be determined by the person calling the meeting. 4 8 3.8 Annual Meetings. Each newly elected Board of Directors may meet promptly after the annual shareholders' meeting for the purposes of electing officers and transacting such other business as may properly come before the meeting. No notice of the annual directors' meeting shall be necessary to the newly elected directors in order to legally constitute the meeting, provided a quorum is present. 3.9 Regular Meetings. Regular meetings of the Board of Directors or Board committees may be held without notice at such places and times as the Board or committee determines at least 30 days before the date of the meeting. 3.10 Special Meetings. Special meetings of the Board of Directors may be called by the chief executive officer, and shall be called by the President or Secretary upon the written request of two directors, on two days notice to each director or committee member by mail or 24 hours notice by any other means provided in Section 5.1. The notice must specify the place, date and time of the special meeting, but need not specify the business to be transacted at, nor the purpose of, the meeting. Special meetings of Board committees may be called by the Chairperson of the committee or a majority of committee members pursuant to this Section 3.10. 3.11 Quorum. At all meetings of the Board or a Board committee, a majority of the directors then in office, or of members of such committee, constitutes a quorum for transaction of business, unless a higher number is otherwise required by the Articles of Incorporation, these Bylaws or the Board resolution establishing such Board committee. If a quorum is not present at any Board or Board committee meeting, a majority of the directors present at the meeting may adjourn the meeting to another time and place without notice other than announcement at the meeting. Any business may be transacted at the adjourned meeting which might have been transacted at the original meeting, provided a quorum is present. 3.12 Voting. The vote of a majority of the members present at any Board or Board committee meeting at which a quorum is present constitutes the action of the Board of Directors or of the Board committee, unless a higher vote is otherwise required by the Michigan Business Corporation Act, the Articles of Incorporation, these Bylaws, or the Board resolution establishing the Board committee. 3.13 Telephonic Participation. Members of the Board of Directors or any Board committee may participate in a Board or Board committee meeting by means of conference telephone or similar communications equipment through which all persons participating in the meeting can communicate with each other. Participation in a meeting pursuant to this Section 3.13 constitutes presence in person at such meeting. 3.14 Action by Written Consent. Any action required or permitted to be taken under authorization voted at a Board or Board committee meeting may be taken without a meeting if, before or after the action, all members of the Board then in office or of the Board committee consent to the action in writing. Such consents shall be filed with the minutes of the proceedings 5 9 of the Board or committee and shall have the same effect as a vote of the Board or committee for all purposes. 3.15 Committees. The Board of Directors may, by resolution passed by a majority of the directors then in office, designate one or more committees, each consisting of one or more directors. The Board may designate one or more directors as alternate members of a committee, who may replace an absent or disqualified member at a committee meeting. In the absence or disqualification of a member of a committee, the committee members present and not disqualified from voting, regardless of whether they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in place of such absent or disqualified member. Any committee, to the extent provided in the resolution of the Board, may exercise all powers and authority of the Board of Directors in management of the business and affairs of the Corporation, except a committee does not have power or authority to: (a) Amend the Articles of Incorporation. (b) Adopt an agreement of merger or share exchange. (c) Recommend to shareholders the sale, lease or exchange of all or substantially all of the Corporation's property and assets. (d) Recommend to shareholders a dissolution of the Corporation or a revocation of a dissolution. (e) Amend the Bylaws of the Corporation. (f) Fill vacancies in the Board. (g) Unless the resolution designating the committee or a later Board of Directors' resolution expressly so provides, declare a distribution or dividend or authorize the issuance of shares. Each committee and its members shall serve at the pleasure of the Board, which may at any time change the members and powers of, or discharge, the committee. Each committee shall keep regular minutes of its meetings and report them to the Board of Directors when required. 3.16 Compensation. The Board, by affirmative vote of a majority of directors in office and irrespective of any personal interest of any of them, may establish reasonable compensation of directors for services to the Corporation as directors, officers or members of a Board committee. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation for such service. 6 10 ARTICLE 4 - OFFICERS 4.1 Officers and Agents. The Board of Directors, at its first meeting after each annual meeting of shareholders, shall elect a President, a Secretary and a Treasurer, and may also elect and designate as officers a Chairperson of the Board, a Vice Chairperson of the Board and one or more Executive Vice Presidents, Vice Presidents, Assistant Vice Presidents, Assistant Secretaries and Assistant Treasurers. The Board of Directors may also from time to time appoint, or delegate authority to the Corporation's chief executive officer to appoint, such other officers and agents as it deems advisable. The Chairperson of the Board and Vice Chairperson of the Board, if such offices are filled, amy be officers of the Corporation or may be Directors who are not officers of the Corporation, as designated by the Board of Directors. In the absence of sch designation, the Chairperson of the Board and Vice Chairperson of the board, if such officer are filled, shall be Directors who are not officers of the Corporation. Any number of offices may be held by the same person, but an officer shall not execute, acknowledge or verify an instrument in more than one capacity if the instrument is required by law to be executed, acknowledged or verified by two or more officers. An officer has such authority and shall perform such duties in the management of the Corporation as provided in these Bylaws, or as may be determined by resolution of the Board of Directors not inconsistent with these Bylaws, and as generally pertain to their offices, subject to the control of the Board of Directors. 4.2 Compensation. The compensation of all officers of the Corporation shall be fixed by the Board of Directors. 4.3 Term. Each officer of the Corporation shall hold office for the term for which he or she is elected or appointed and until his or her successor is elected or appointed and qualified, or until his or her death, resignation or removal. The election or appointment of an officer does not, by itself, create contract rights. 4.4 Removal. An officer elected or appointed by the Board of Directors may be removed by the Board of Directors with or without cause. The removal of an officer shall be without prejudice to his or her contract rights, if any. 4.5 Resignation. An officer may resign by written notice to the Corporation. The resignation is effective upon its receipt by the Corporation or at a subsequent time specified in the notice of resignation. 4.6 Vacancies. Any vacancy occurring in any office of the Corporation shall be filled by the Board of Directors. 4.7 Chairperson of the Board. The Chairperson of the Board, if such office is filled, shall be a director and shall preside at all shareholders' and Board of Directors' meetings. 4.8 Chief Executive Officer. The Chairperson of the Board, if any, or the President, as designated by the Board, shall be the chief executive officer of the Corporation and shall have 7 11 the general powers of supervision and management of the business and affairs of the Corporation usually vested in the chief executive officer of a corporation and shall see that all orders and resolutions of the Board of Directors are carried into effect. If no designation of chief executive officer is made, or if there is no Chairperson of the Board, the President shall be the chief executive officer. The chief executive officer may delegate to the other officers such of his or her authority and duties at such time and in such manner as he or she deems advisable. 4.9 President. If the office of Chairperson of the Board is not filled, the President shall perform the duties and execute the authority of the Chairperson of the Board. If the Chairperson of the Board is designated by the Board as the Corporation's chief executive officer, the President shall be the chief operating officer of the Corporation, shall assist the Chairperson of the Board in the supervision and management of the business and affairs of the Corporation and, in the absence of the Chairperson of the Board, shall preside at all shareholders' and Board of Directors' meetings. The President may delegate to the officers other than the Chairperson of the Board, if any, such of his or her authority and duties at such time and in such manner as he or she deems appropriate. 4.10 Executive Vice Presidents and Vice Presidents. The Executive Vice Presidents and Vice Presidents shall assist and act under the direction of the Corporation's chief executive officer, unless otherwise determined by the Board of Directors or the chief executive officer. The Board of Directors may designate one or more Executive Vice Presidents and may grant other Vice Presidents titles which describe their functions or specify their order of seniority. In the absence or disability of the President, the authority of the President shall descend to the Executive Vice Presidents or, if there are none, to the Vice Presidents in the order of seniority indicated by their titles or otherwise specified by the Board. If not specified by their titles or the Board, the authority of the President shall descend to the Executive Vice Presidents or, if there are none, to the Vice Presidents, in the order of their seniority in such office. 4.11 Secretary. The Secretary shall act under the direction of the Corporation's chief executive officer and President. The Secretary shall attend all shareholders' and Board of Directors' meetings, record minutes of the proceedings and maintain the minutes and all documents evidencing corporate action taken by written consent of the shareholders and Board of Directors in the Corporation's minute books. The Secretary shall perform these duties for Board committees when required. The Secretary shall see to it that all notices of shareholders' meetings and special Board of Directors' meetings are duly given in accordance with applicable law, the Articles of Incorporation and these Bylaws. The Secretary shall have custody of the Corporation's seal and, when authorized by the Corporation's chief executive officer, President or the Board of Directors, shall affix the seal to any instrument requiring it and attest such instrument. 4.12 Treasurer. The Treasurer shall act under the direction of the Corporation's chief executive officer and President. The Treasurer shall have custody of the corporate funds and securities and shall keep full and accurate accounts of the Corporation's assets, liabilities, receipts and disbursements in books belonging to the Corporation. The Treasurer shall deposit all moneys 8 12 and other valuables in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. The Treasurer shall disburse the funds of the Corporation as may be ordered by the Corporation's chief executive officer, the President or the Board of Directors, taking proper vouchers for such disbursements, and shall render to the Corporation's chief executive officer, the President and the Board of Directors (at its regular meetings or whenever they request it) an account of all his or her transactions as Treasurer and of the financial condition of the Corporation. If required by the Board of Directors, the Treasurer shall give the Corporation a bond for the faithful discharge of his or her duties in such amount and with such surety as the Board prescribes. 4.13 Assistant Vice Presidents, Secretaries and Treasurers. The Assistant Vice Presidents, Assistant Secretaries and Assistant Treasurers, if any, shall act under the direction of the Corporation's chief executive officer, the President and the officer they assist. In the order of their seniority, the Assistant Secretaries shall, in the absence or disability of the Secretary, perform the duties and exercise the authority of the Secretary. The Assistant Treasurers, in the order of their seniority, shall, in the absence or disability of the Treasurer, perform the duties and exercise the authority of the Treasurer. 4.14 Execution of Contracts and Instruments. The Board of Directors may designate an officer or agent with authority to execute any contract or other instrument on the Corporation's behalf; the Board may also ratify or confirm any such execution. If the Board authorizes, ratifies or confirms the execution of a contract or instrument without specifying the authorized executing officer or agent, the Corporation's chief executive officer, the President, any Executive Vice President or Vice President or the Treasurer may execute the contract or instrument in the name and on behalf of the Corporation and may affix the corporate seal to such document or instrument. 4.15 Voting of Shares and Securities of Other Corporations and Entities. Unless the Board of Directors otherwise directs, the Corporation's chief executive officer shall be entitled to vote or designate a proxy to vote all shares and other securities which the Corporation owns in any other corporation or entity. ARTICLE 5 - NOTICES AND WAIVERS OF NOTICE 5.1 Delivery of Notices. All written notices to shareholders, directors and Board committee members shall be given personally or by mail (registered, certified or other first class mail, with postage pre-paid), addressed to such person at the address designated by him or her for that purpose or, if none is designated, at his or her last known address. Written notices to directors or Board committee members may also be delivered at his or her office on the Corporation's premises, if any, or by overnight carrier, telegram, telex, telecopy, radiogram, cablegram, facsimile, computer transmission or similar form of communication, addressed to the address referred to in the preceding sentence. Notices given pursuant to this Section 5.1 shall be 9 13 deemed to be given when dispatched, or, if mailed, when deposited in a post office or official depository under the exclusive care and custody of the United States postal service. Notices given by overnight carrier shall be deemed "dispatched" at 10:00 a.m. on the day the overnight carrier is reasonably requested to deliver the notice. The Corporation shall have no duty to change the written address of any director, Board committee member or shareholder unless the Secretary receives written notice of such address change. 5.2 Waiver of Notice. Action may be taken without a required notice and without lapse of a prescribed period of time, if at any time before or after the action is completed the person entitled to notice or to participate in the action to be taken or, in the case of a shareholder, his or her attorney-in-fact, submits a signed waiver of the requirements, or if such requirements are waived in such other manner permitted by applicable law. Neither the business to be transacted at, nor the purpose of, the meeting need be specified in the written waiver of notice. Attendance at any shareholders' meeting (in person or by proxy) will result in both of the following: (a) Waiver of objection to lack of notice or defective notice of the meeting, unless the shareholder at the beginning of the meeting objects to holding the meeting or transacting business at the meeting. (b) Waiver of objection to consideration of a particular matter at the meeting that is not within the purpose or purposes described in the meeting notice, unless the shareholder objects to considering the matter when it is presented. A director's attendance at or participation in any Board or Board committee meeting waives any required notice to him or her of the meeting unless he or she, at the beginning of the meeting or upon his or her arrival, objects to the meeting or the transacting of business at the meeting and does not thereafter vote for or assent to any action taken at the meeting. ARTICLE 6 - SHARE CERTIFICATES AND SHAREHOLDERS OF RECORD 6.1 Certificates for Shares. The shares of the Corporation shall be represented by certificates signed by the Chairperson of the Board, Vice-chairperson of the Board, President or a Vice-president. The certificates also may be signed by another officer of the Corporation. The officers' signatures may be facsimiles if the certificate is countersigned by a transfer agent or registered by a registrar other than the Corporation or its employee. If any officer who has signed or whose facsimile signature has been placed upon a certificate ceases to be such officer before the certificate is issued, it may be issued by the Corporation with the same effect as if the person were such officer at the date of issue. 6.2 Lost or Destroyed Certificates. The Board of Directors may direct or authorize an officer to direct that a new certificate for shares be issued in place of any certificate alleged 10 14 to have been lost or destroyed. When authorizing such issue of a new certificate, the Board of Directors or officer may, in its discretion and as a condition precedent to the issuance thereof, require the owner (or the owner's legal representative) of such lost or destroyed certificate to give the Corporation an affidavit claiming that the certificate is lost or destroyed or a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to such old or new certificate. 6.3 Transfer of Shares. Shares of the Corporation are transferable only on the Corporation's stock transfer books upon surrender to the Corporation or its transfer agent of a certificate for the shares, duly endorsed for transfer, and the presentation of such evidence of ownership and validity of the transfer as the Corporation requires. 6.4 Record Date. The Board of Directors may fix, in advance, a date as the record date for determining shareholders for any purpose, including determining shareholders entitled to (a) notice of, and to vote at, any shareholders' meeting or any adjournment of such meeting; (b) express consent to, or dissent from, a proposal without a meeting; or (c) receive payment of a share dividend or distribution or allotment of a right. The record date shall not be more than 60 nor less than 10 days before the date of the meeting, nor more than 10 days after the Board resolution fixing a record date for determining shareholders entitled to express consent to, or dissent from, a proposal without a meeting, nor more than 60 days before any other action. If a record date is not fixed: (a) the record date for determining the shareholders entitled to notice of, or to vote at, a shareholders' meeting shall be the close of business on the day next preceding the day on which notice of the meeting is given, or, if no notice is given, the close of business on the day next preceding the day on which the meeting is held; and (b) if prior action by the Board of Directors is not required with respect to the corporate action to be taken without a meeting, the record date for determining shareholders entitled to express consent to, or dissent from, a proposal without a meeting, shall be the first date on which a signed written consent is properly delivered to the Corporation; and (c) the record date for determining shareholders for any other purpose shall be the close of business on the day on which the resolution of the Board of Directors relating to the action is adopted. A determination of shareholders of record entitled to notice of, or to vote at, a shareholders' meeting shall apply to any adjournment of the meeting, unless the Board of Directors fixes a new record date for the adjourned meeting. 11 15 Only shareholders of record on the record date shall be entitled to notice of, or to participate in, the action to which the record date relates, notwithstanding any transfer of shares on the Corporation's books after the record date. This Section 6.4 shall not affect the rights of a shareholder and the shareholder's transferor or transferee as between themselves. 6.5 Registered Shareholders. The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of a share for all purposes, including notices, voting, consents, dividends and distributions, and shall not be bound to recognize any other person's equitable or other claim to interest in such share, regardless of whether it has actual or constructive notice of such claim or interest. ARTICLE 7 - INDEMNIFICATION The Corporation shall, to the fullest extent authorized or permitted by the Michigan Business Corporation Act, (a) indemnify any person, and his or her heirs, personal representatives, executors, administrators and legal representatives, who was, is, or is threatened to be made, a party to any threatened, pending or completed action, suit or proceeding (whether civil, criminal, administrative or investigative) by reason of the fact that such person is or was a director or officer of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee, member or agent of another corporation, partnership, limited liability company, joint venture, trust or other enterprise (collectively, "Covered Matters"); and (b) pay or reimburse the reasonable expenses incurred by such person and his or her heirs, executors, administrators and legal representatives in connection with any Covered Matter in advance of final disposition of such Covered Matter. The Corporation may provide such other indemnification to directors, officers, employees and agents by insurance, contract or otherwise as is permitted by law and authorized by the Board of Directors. ARTICLE 8 - GENERAL PROVISIONS 8.1 Checks and Funds. All checks, drafts or demands for money and notes of the Corporation must be signed by such officer or officers or such other person or persons as the Board of Directors from time to time designates. All funds of the Corporation not otherwise employed shall be deposited or used as the Board of Directors from time to time designates. 8.2 Fiscal Year. The fiscal year of the Corporation shall end on such date as the Board of Directors from time to time determines. 8.3 Corporate Seal. The Board of Directors may adopt a corporate seal for the Corporation. The corporate seal, if adopted, shall be circular and contain the name of the Corporation and the words "Corporate Seal Michigan". The seal may be used by causing it or a facsimile of it to be impressed, affixed, reproduced or otherwise. 12 16 8.4 Books and Records. The Corporation shall keep within or outside of Michigan books and records of account and minutes of the proceedings of its shareholders, Board of Directors and Board committees, if any. The Corporation shall keep at its registered office or at the office of its transfer agent within or outside of Michigan records containing the names and addresses of all shareholders, the number, class and series of shares held by each and the dates when they respectively became recordholders of shares. Any of such books, records or minutes may be in written form or in any other form capable of being converted into written form within a reasonable time. 8.5 Financial Statements. The Corporation shall cause to be made and distributed to its shareholders, within four months after the end of each fiscal year, a financial report (including a statement of income, year-end balance sheet, and, if prepared by the Corporation, its statement of sources and application of funds) covering the preceding fiscal year of the Corporation. ARTICLE 9 - AMENDMENTS These Bylaws may be amended or repealed, or new Bylaws may be adopted, by action of either the shareholders or a majority of the Board of Directors then in office. The Articles of Incorporation or these Bylaws may from time to time specify particular provisions of the Bylaws which may not be altered or repealed by the Board of Directors. ARTICLE 10 -- CONTROL SHARE ACQUISITIONS 10.1 Power to Redeem if no Acquiring Person Statement is Filed. Control shares acquired in a control share acquisition, with respect to which no acquiring person statement has been filed with the Corporation, may, at any time during the period ending 60 days after the last acquisition of control shares or the power to direct the exercise of voting power of control shares by the acquiring person, be redeemed by the Corporation at the fair value of the shares. 10.2 Power to Redeem After Shareholder Vote. After an acquiring person statement has been filed and after the meeting at which the voting rights of the control shares acquired in a control share acquisition are submitted to the shareholders, the shares are subject to redemption by the Corporation at the fair value of the shares unless the shares are accorded full voting rights by the shareholders pursuant to Section 798 of the Michigan Business Corporation Act. 10.3 Procedure for Redemption. A redemption of shares by the Corporation pursuant to Sections 10.1 or 10.2 shall be made upon election to redeem by the Board of Directors. Written notice of the election shall be sent to the acquiring person within seven days after the election is made. The determination of the Board of Directors as to fair value shall be conclusive. Payment shall be made for the control shares subject to redemption within 30 days 13 17 after the election to redeem is made at a date and place selected by the Board of Directors. The Board of Directors may adopt additional procedures to accomplish a redemption. 10.4 Interpretation of Article 10. This Article 10 is adopted pursuant to Section 799 of the Michigan Business Corporation Act, and the terms used in this Article 10 shall have the meanings of the terms in Section 799. ARTICLE 11 - SCOPE OF BYLAWS These Bylaws govern the regulation and management of the affairs of the Corporation to the extent that they are consistent with applicable law and the Articles of Incorporation; to the extent they are not consistent, applicable law and the Articles of Incorporation shall govern. 14 EX-10.1 4 EXHIBIT 10.1 1 EXHIBIT 10.1 AMENDED AND RESTATED ROCK FINANCIAL CORPORATION 1996 STOCK OPTION PLAN 1. Definitions: As used herein, the following terms shall have the following meanings: (a) "Code" shall mean the Internal Revenue Code of 1986, as amended, and the applicable rules and regulations thereunder. (b) "Committee" shall mean, (i) with respect to administration of the Plan regarding Participants who are subject to Section 16(a) and (b) of the Exchange Act, a committee meeting the standards of Rule 16b-3 of the Rules and Regulations under the Exchange Act, or any similar successor rule, appointed by the Board of Directors of the Company to perform any of the functions and duties of the Committee under the Plan, or the Board of Directors as a whole, and (ii) with respect to administration of the Plan regarding all other Participants, such committee or the Board of Directors of the Company, as described in clause (i), or such other committee or entity appointed by the Board of Directors of the Company to perform any of the functions and duties of the Committee under the Plan. (c) "Common Shares" shall mean the Common Shares, par value $0.01 per share, of the Company. (d) "Company" shall mean Rock Financial Corporation, a Michigan corporation, or any successor thereof. (e) "Discretion" shall mean the sole discretion of the Committee, with no requirement whatsoever that the Committee follow past practices, act in a manner consistent with past practices, or treat any key employee, director, consultant or advisor in a manner consistent with the treatment afforded other key employees, directors, consultants or advisors with respect to the Plan or otherwise. (f) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder. (g) "Incentive Option" shall mean an option to purchase Common Shares which meets the requirements set forth in the Plan and also is intended to be, and qualifies as, an incentive stock option within the meaning of Section 422 of the Code. (h) "Nonqualified Option" shall mean an option to purchase Common Shares which meets the requirements set forth in the Plan but is not intended to be, or does not qualify as, an incentive stock option within the meaning of the Code. 2 (i) "Participant" shall mean any individual designated by the Committee under Paragraph 6 for participation in the Plan. (j) "Plan" shall mean this Amended and Restated Rock Financial Corporation 1996 Stock Option Plan. (k) "Securities Act" shall mean the Securities Act of 1933, as amended, and the rules and regulations thereunder. (l) "Subsidiary" shall mean any corporation or other entity in which the Company has a direct or indirect ownership interest of 50% or more of the total combined voting power of all classes of outstanding voting equity interests. 2. Purpose of Plan: The purpose of the Plan is to provide key employees (including officers), directors, consultants and advisors of the Company and its Subsidiaries (collectively, "key employees") with an increased incentive to make significant and extraordinary contributions to the long-term performance and growth of the Company and its Subsidiaries, to join the interests of key employees, directors, consultants and advisors with the interests of the shareholders of the Company, and to facilitate attracting and retaining key employees, directors, consultants and advisors of exceptional ability. 3. Administration: The Plan shall be administered by the Committee. Subject to the provisions of the Plan, the Committee shall determine, from those eligible to be Participants under the Plan, the persons to be granted stock options, the amount of stock to be optioned to each such person, the time such options shall be granted and the terms and conditions of any stock options. Such terms and conditions may, in the Committee's Discretion, include, without limitation, provisions providing for termination of the option, forfeiture of the gain on any option exercises or both if the Participant competes with the Company or otherwise acts contrary to the Company's interests, and provisions imposing restrictions, potential forfeiture or both on shares acquired upon exercise of options granted pursuant to this Plan. The Committee may condition any grant on the potential Participant's agreement to such terms and conditions. Subject to the provisions of the Plan, the Committee is authorized to interpret the Plan, to promulgate, amend and rescind rules and regulations relating to the Plan and to make all other determinations necessary or advisable for its administration. Interpretation and construction of any provision of the Plan by the Committee shall, unless otherwise determined by the Board of Directors of the Company, be final and conclusive. A majority of the Committee shall constitute a quorum, and the acts of a majority of the members present at any meeting at which a quorum is present, or acts approved in writing by a majority of the Committee, shall be the acts of the Committee. 4. Indemnification: In addition to such other rights of indemnification as they may have, the members of the Committee shall be indemnified by the Company in connection with any claim, action, suit or proceeding relating to any action taken or failure to act under or in -2- 3 connection with the Plan or any option granted hereunder to the full extent provided for under the Company's articles of incorporation or bylaws with respect to indemnification of directors of the Company. 5. Maximum Number of Shares Subject to Plan: The maximum number of shares with respect to which stock options may be granted under the Plan shall be an aggregate of 4,500,000 Common Shares, which may consist in whole or in part of authorized and unissued or reacquired Common Shares. Unless the Plan shall have been terminated, shares covered by the unexercised portion of canceled, expired or otherwise terminated options under the Plan shall again be available for option and sale. Subject to Paragraph 16, the number and type of shares subject to each outstanding stock option, the option price with respect to outstanding stock options, the aggregate number and type of shares remaining available under the Plan, and the maximum number and type of shares what may be granted to any Participant in any fiscal year of the Company pursuant to Paragraph 6, shall be subject to such adjustment as the Committee, in its Discretion, deems appropriate to reflect such events as stock dividends, stock splits, recapitalizations, mergers, statutory share exchanges or reorganizations of or by the Company; provided that no fractional shares shall be issued pursuant to the Plan, no rights may be granted under the Plan with respect to fractional shares, and any fractional shares resulting from such adjustments shall be eliminated from any outstanding option. 6. Participants: The Committee shall determine and designate from time to time, in its Discretion, those key employees (including officers), directors, consultants and advisors of or to the Company or any Subsidiary to whom options are to be granted and who thereby become Participants under the Plan; provided, however, that (a) Incentive Options shall be granted only to employees (as defined in the Code) of the Company or a corporate Subsidiary, to the extent required by Section 422 of the Code, or any successor provision, and (b) no Participant may be granted stock options to purchase more than 2,000 Common Shares in the aggregate in any fiscal year of the Company, subject to any adjustments provided in the final paragraph of Paragraph 5 and in Paragraph 16. 7. Allotment of Shares: The Committee shall determine and fix the number of Common Shares to be offered to each Participant; provided that no Incentive Option may be granted under the Plan to any one Participant which would result in the aggregate fair market value, determined as of the date the option is granted, of the underlying stock with respect to which Incentive Options are exercisable for the first time by such individual during any calendar year (under all of such plans of the Company and its parent and Subsidiary corporations) exceeding $100,000. 8. Option Price: Subject to the rules set forth in this Paragraph 8, the Committee, in its Discretion, shall establish the option price at the time any option is granted. With respect to an Incentive Option, such option price shall not be less than 100% of the fair market value of the stock on the date on which such option is granted; provided that with respect to an -3- 4 Incentive Option granted to an employee who at the time of the grant owns (after applying the attribution rules of Section 425(d) of the Code) more than 10% of the total combined voting stock of the Company or of any parent or Subsidiary, the option price shall not be less than 110% of the fair market value of the stock subject to the Incentive Option on the date such option is granted. With respect to a Nonqualified Option, the option price shall be not less than the par value, if any, of the Common Shares. Fair market value of a share shall be determined by the Committee using any method it deems reasonable, including, without limitation, an appraisal of the Company by an investment banking firm or other appraiser, or by using the closing sale price of the Company's stock on any exchange or other market on which the Common Shares shall be traded on such date, or if there is no sale on such date, on the next following date on which there is a sale, or the average of the closing bid and asked prices in any market or quotation system in which the Common Shares shall be listed or traded on such date. The option price will be subject to adjustment in accordance with the provisions of Paragraphs 5 and 16 and of the Plan. 9. Granting and Exercise of Options: The granting of options under the Plan shall be effected in accordance with determinations made by the Committee pursuant to the provisions of the Plan, by execution of instruments in writing in form approved by the Committee. Such instruments shall constitute binding contracts between the Company and the Participant. Subject to the terms of the Plan, the Committee, in its Discretion, may grant to Participants Incentive Options, Nonqualified Options or any combination thereof. Each option granted under the Plan shall designate the number of shares covered thereby, if any, with respect to which the option is an Incentive Option and the number of shares covered thereby, if any, with respect to which the option is a Nonqualified Option. Subject to the terms of the Plan, each option granted under the Plan shall be exercisable at any such time or times or in any such installments as may be determined by the Committee in its Discretion; provided that the aggregate fair market value (determined as of the date the option is granted) of the underlying stock with respect to which Incentive Options are exercisable for the first time by such individual during any calendar year (under all of such plans of the Company and its parent and Subsidiary corporations) shall not exceed $100,000. Except as provided in Paragraph 13, options may be exercised only while the Participant is an employee, director, consultant or advisor of the Company or a Subsidiary. Notwithstanding any other term or provision of this Plan, but subject to the requirements of the Code with respect to Incentive Options that are intended to remain Incentive Options, in connection with a Participant ceasing to be an employee of the Company or a Subsidiary for any reason, the stock option agreement may provide for the acceleration of, or the Committee may accelerate, in its Discretion (exercised at the date of the grant of the stock option or after the date of grant), in whole or in part, the time or times or installments with respect to which any option granted under this Plan shall be exercisable in connection with termination of a Participant's employment with the Company or a Subsidiary, subject to any restrictions, terms and conditions fixed by the Committee either at the date of the award or at the date it exercises such Discretion. -4- 5 Successive stock options may be granted to the same Participant, whether or not the option or options previously granted to such Participant remain unexercised. A Participant may exercise any option granted under the Plan, if then exercisable, notwithstanding that options granted to such Participant prior to the option then being exercised remain unexercised. 10. Payment of Option Price: At the time of the exercise in whole or in part any option granted under this Plan, payment in full in cash, or with the consent of the Committee, in its Discretion, in Common Shares or by a promissory note payable to the order of the Company which is acceptable to the Committee, shall be made by the Participant for all shares so purchased. Such payment may, with the consent of the Committee, in its Discretion, also consist of a cash down payment and delivery of such a promissory note in the amount of the unpaid exercise price. In the Discretion of, and subject to such conditions as may be established by, the Committee, payment of the option price may also be made by the Company retaining from the shares to be delivered upon exercise of the stock option that number of shares having a fair market value on the date of exercise equal to the option price of the number of shares with respect to which the Participant exercises the option. In the Discretion of the Committee, a Participant may exercise an option, if then exercisable, in whole or in part, by delivery to the Company of written notice of the exercise in such form as the Committee may prescribe, accompanied by irrevocable instructions to a stock broker to promptly deliver to the Company full payment for the shares with respect to which the option is exercised from the proceeds of the stock broker's sale of or loan against some or all of the shares. Such payment may also be made in such other manner as the Committee determines is appropriate, in its Discretion. No Participant shall have any of the rights of a shareholder of the Company under any option until the actual issuance of shares to such Participant, and prior to such issuance no adjustment shall be made for dividends, distributions or other rights in respect of such shares, except as provided in Paragraphs 5 and 16. 11. Transferability of Option: Except as otherwise provided in this Paragraph 11, to the extent required by Section 422 of the Code, or any successor section, but only with respect to Incentive Options, or to the extent determined by the Committee in its Discretion (either by resolution or by a provision in, or amendment to, the option), (i) no option granted under the Plan to a Participant shall be transferable by such Participant otherwise than by will, or by the laws of descent and distribution or, with respect to Nonqualified Options only (unless permitted by Section 422 of the Code or any successor section), pursuant to a qualified domestic relations order as defined in the Code or Title I of the Employee Retirement Income Security Act, or the rules thereunder, and (ii) such option shall be exercisable, during the lifetime of the Participant, only by the Participant. The Committee may, in its Discretion, authorize all or a portion of the options to be granted to an optionee to be on terms which permit transfer by such optionee to, and the exercise of such option by, (i) the spouse, children or grandchildren of the optionee ("Immediate Family Members"), (ii) a trust or trusts for the exclusive benefit of such Immediate Family Members, (iii) a partnership in which such Immediate Family Members are the only partners, or (iv) such other persons or entities as determined by the Committee, in its Discretion, on such terms and -5- 6 conditions as the Committee, in its Discretion, may determine; provided that (y) the stock option agreement pursuant to which such options are granted must be approved by the Committee and must expressly provide for transferability in a manner consistent with this Paragraph 11, and (z) subsequent transfers of transferred options shall be prohibited except for transfers the original optionee would be permitted to make (if he or she were still the owner of the option) in accordance with this Paragraph 11. Following transfer, any such options shall continue to be subject to the same terms and conditions as were applicable immediately before transfer, provided that for purposes of Paragraphs 9, 10, 14, 16 and 18 the term "Participant" shall be deemed to refer to the transferee. The events of termination of employment of Paragraph 13 shall continue to be applied with respect to the original optionee, following which the options shall be exercisable by the transferee only to the extent, and for the periods, specified in Paragraph 13. The original optionee shall remain subject to withholding taxes and related requirements upon exercise provided in Paragraph 15. The Company shall have no obligation to provide any notice to any transferee, including, without limitation, notice of any termination of the option as a result of termination of the original optionee's employment with, or other service to, the Company. 12. Continuance of Employment; No Right to Continued Employment: The Committee may require, in its Discretion, that any Participant under the Plan to whom an option shall be granted shall agree in writing as a condition of the granting of such option to remain in his or her position as an employee, director, consultant or advisor of the Company or a Subsidiary for a designated minimum period from the date of the granting of such option as shall be fixed by the Committee. Nothing contained in the Plan or in any option granted pursuant to the Plan, nor any action taken by the Committee hereunder, shall confer upon any Participant any right with respect to continuation of employment, consultation or other service by or to the Company or a Subsidiary nor interfere in any way with the right of the Company or a Subsidiary to terminate such person's employment, consultation or other service at any time. 13. Termination of Employment; Expiration of Options: Subject to the other provisions of the Plan, including, without limitation, Paragraphs 9 and 16 and this Paragraph 13, all rights to exercise options shall terminate when a Participant ceases to be an employee, director, consultant or advisor of or to the Company or a Subsidiary for any cause, except that the Committee may, in its Discretion, permit the exercise of all or any portion of the options granted to such Participant (i) for a period not to exceed three months following such termination with respect to Incentive Options that are intended to remain Incentive Options if such termination is not due to death or permanent disability of the Participant, -6- 7 (ii) for a period not to exceed one year following termination of employment with respect to Incentive Options that are Intended to remain Incentive Options if termination of employment is due to the death or permanent disability of the Participant, and (iii) for a period not to extend beyond the expiration date with respect to Nonqualified Options or Incentive Options that are not intended to remain Incentive Options, all subject to any restrictions, terms and conditions fixed by the Committee either at the date of the award or at the date it exercises such Discretion. In no event, however, shall an option be exercisable after its expiration date, and, unless the Committee in its Discretion determines otherwise (pursuant to Paragraph 9 or Paragraph 16), an option may only be exercised after termination of a Participant's employment, consultation or other service by or to the Company to the extent exercisable on the date of such termination or to the extent exercisable as a result of the reason for such termination. The Committee may evidence the exercise of its Discretion under this Paragraph 13 in any manner it deems appropriate, including by resolution or by a provision in, or amendment to, the option. If not sooner terminated, each stock option granted under the Plan shall expire not more than 10 years from the date of the granting thereof; provided that with respect to an Incentive Option granted to a Participant who, at the time of the grant, owns (after applying the attribution rules of Section 425(d) of the Code) more than 10% of the total combined voting stock of all classes of stock of the Company or of any parent or Subsidiary, such option shall expire not more than 5 years after the date of granting thereof. 14. Investment Purpose: If the Committee in its Discretion determines that as a matter of law such procedure is or may be desirable, it may require a Participant, upon any exercise of any option granted under the Plan or any portion thereof and as a condition to the Company's obligation to deliver certificates representing the shares subject to exercise, to execute and deliver to the Company a written statement, in form satisfactory to the Committee, representing and warranting that the Participant's purchase of Common Shares upon exercise thereof shall be for such person's own account, for investment and not with a view to the resale or distribution thereof and that any subsequent sale or offer for sale of any such shares shall be made either pursuant to (a) a Registration Statement on an appropriate form under the Securities Act, which Registration Statement has become effective and is current with respect to the shares being offered and sold, or (b) a specific exemption from the registration requirements of the Securities Act, but in claiming such exemption the Participant shall, prior to any offer for sale or sale of such shares, obtain a favorable written opinion from counsel for or approved by the Company as to the availability of such exemption. The Company may endorse an appropriate legend referring to the foregoing restriction upon the certificate or certificates representing any shares issued or transferred to the Participant upon exercise of any option granted under the Plan. 15. Withholding Payments: If upon the exercise of any Nonqualified Option or a disqualifying disposition (within the meaning of Section 422 of the Code) of shares acquired upon -7- 8 exercise of an Incentive Option, there shall be payable by the Company or a Subsidiary any amount for income tax withholding, in the Committee's Discretion, either the Participant shall pay such amount to the Company, or the amount of Common Shares delivered by the Company to the Participant shall be appropriately reduced, to reimburse the Company or such Subsidiary for such payment. The Company or any of its Subsidiaries shall have the right to withhold the amount of such taxes from any other sums or property due or to become due from the Company or any of its Subsidiaries to the Participant upon such terms and conditions as the Committee shall prescribe. The Company may also defer issuance of the stock upon exercise of such option until payment by the Participant to the Company of the amount of any such tax. The Committee may, in its Discretion, permit Participants to satisfy such withholding obligations, in whole or in part, by electing to have the amount of Common Shares delivered or deliverable by the Company upon exercise of a stock option appropriately reduced, or by electing to tender Common Shares back to the Company subsequent to exercise of a stock option to reimburse the Company for such income tax withholding, subject to such rules and regulations, if any, as the Committee may adopt. The Committee may make such other arrangements with respect to income tax withholding as it shall determine. 16. Extraordinary Transactions: In case the Company (i) consolidates with or merges into any other corporation or other entity and is not the continuing or surviving entity of such consolidation or merger, or (ii) permits any other corporation or other entity to consolidate with or merge into the Company and the Company is the continuing or surviving entity but, in connection with such consolidation or merger, the Common Shares are changed into or exchanged for stock or other securities of any other corporation or other entity or cash or any other assets, or (iii) transfers all or substantially all of its properties and assets to any other corporation or other person or entity, or (iv) dissolves or liquidates, or (v) effects a capital reorganization or reclassification in such a way that holders of Common Shares shall be entitled to receive stock, securities, cash or other assets with respect to or in exchange for the Common Shares, then, and in each such case, proper provision shall be made so that, each Participant holding a stock option upon the exercise of such option at any time after the consummation of such consolidation, merger, transfer, dissolution, liquidation, reorganization or reclassification (each transaction, for purposes of this Paragraph 16, being herein called a "Transaction"), shall be entitled to receive (at the aggregate option price in effect for all Common Shares issuable upon such exercise immediately prior to such consummation and as adjusted to the time of such Transaction), in lieu of Common Shares issuable upon such exercise prior to such consummation, the stock and other securities, cash and assets to which such Participant would have been entitled upon such consummation if such Participant had so exercised such stock option in full immediately prior thereto (subject to adjustments subsequent to such Transaction provided for in Paragraph 5). Notwithstanding anything in the Plan to the contrary, in connection with any Transaction and effective as of a date selected by the Committee, which date shall, in the Committee's judgment, be far enough in advance of the Transaction to permit Participants holding stock options to exercise their options and participate in the Transaction as a holder of Common Shares, the Committee, acting in its Discretion without the consent of any Participant, may effect one or more of the following alternatives with respect to all of the outstanding stock options -8- 9 (which alternatives may be made conditional on the occurrence of the applicable Transaction and which may, if permitted by law, vary among individual Participants): (a) accelerate the time at which stock options then outstanding may be exercised so that such stock options may be exercised in full for a limited period of time on or before a specified date fixed by the Committee after which specified date all unexercised stock options and all rights of Participants thereunder shall terminate; (b) accelerate the time at which stock options then outstanding may be exercised so that such stock options may be exercised in full for their then remaining term; or (c) require the mandatory surrender to the Company of outstanding stock options held by such Participants (irrespective of whether such stock options are then exercisable) as of a date, before or not later than sixty days after such Transaction, specified by the Committee, and in such event the Company shall thereupon cancel such stock options and shall pay to each Participant an amount of cash equal to the excess of the fair market value of the aggregate Common Shares subject to such stock option, determined as of the date such Transaction is effective, over the aggregate option price of such shares; provided, however, the Committee shall not select an alternative (unless consented to by the Participant) such that, if a Participant exercised his or her accelerated stock option pursuant to alternative (a) or (b) and participated in the Transaction or received cash pursuant to alternative (c), the alternative would result in the Participant's owing any money by virtue of the operation of Section 16(b) of the Exchange Act. If all such alternatives have such a result, the Committee shall, in its Discretion, take such action to put such Participants in as close to the same position as such Participant would have been in had alternative (a), (b) or (c) been selected but without resulting in any payment by such Participant pursuant to Section 16(b) of the Exchange Act. Notwithstanding the foregoing, with the consent of affected Participants, each with respect to such Participant's option only, the Committee may in lieu of the foregoing make such provision with respect to any Transaction as it deems appropriate. 17. Effectiveness of Plan: This Plan shall be effective on the date the Board of Directors of the Company adopts this Plan, provided that the shareholders of the Company approve the Plan within 12 months before or after its adoption by the Board of Directors. Options may be granted before shareholder approval of this Plan, but each such option shall be subject to shareholder approval of this Plan. No option granted under this Plan shall be exercisable unless and until this Plan shall have been approved by the Company's shareholders. 18. Termination, Duration and Amendments to the Plan: The Plan may be abandoned or terminated at any time by the Board of Directors of the Company. Unless sooner terminated, the Plan shall terminate on the date ten years after the earlier of its adoption by the Board of Directors or its approval by the shareholders of the Company, and no stock options may be granted under the Plan thereafter. The termination of the Plan shall not affect the validity of any option which is outstanding on the date of termination. For the purpose of conforming to any changes in applicable law or governmental regulations, or for any other lawful purpose, the Board of Directors shall have the right, with or without approval of the shareholders of the Company, to amend or revise the terms of this Plan or any option agreement under this Plan at any time; provided, however, that (i) to the extent required by Section 162(m) of the Code and related regulations, or any successor rule, but only -9- 10 with respect to amendments or revisions affecting Participants whose compensation is subject to Section 162(m) of the Code, and to the extent required by Section 422 of the Code, or any successor section, but only with respect to Incentive Options, no such amendment or revision shall increase the maximum number of shares in the aggregate which are subject to this Plan (subject, however, to the provisions of Paragraphs 5 and 16) without the approval or ratification of the shareholders of the Company, and (ii) no such amendment or revision shall change the option price (except as contemplated by Paragraphs 5 and 16) or alter or impair any option which shall have been previously granted under this Plan, in a manner adverse to a Participant, without the consent of such Participant. As adopted by the Board of Directors on December 27, 1996 and amended on February 18, 1998. -10- EX-10.2 5 EXHIBIT 10.2 1 EXHIBIT 10.2 STOCK OPTION AGREEMENT Dated as of: March 6, 1997 To: Optionee~ Pursuant to the 1996 Stock Option Plan ("1996 Plan") of Rock Financial Corporation (the "Company") and with the approval of the Company's Compensation Committee in accordance with the 1996 Plan, the Company hereby grants to you an option (the "Option") to purchase Shares Words~ (Shares Number~) Common Shares, par value $0.01 per share, of the Company (the "Shares") at $4.68 per Share, upon the terms and conditions contained in this Stock Option Agreement and in the 1996 Plan, a copy of which is attached to, and, as amended from time to time, is made a part of, this Stock Option Agreement. You agree that this Option is not in lieu of any salary or other compensation for services rendered or to be rendered by you to the Company or any Subsidiary. Capitalized terms not otherwise defined in this Stock Option Agreement shall have the meanings given them in the 1996 Plan. 1. Nonqualified Option. The Option is intended to be a Nonqualified Option, as defined in the 1996 Plan. 2. Vesting and Term. (a) Vesting. Subject to the other terms of this Option and the 1996 Plan, you may exercise the Option in accordance with the following schedule: (1) Between the date of this option and December 31, 1997, none of the Shares may be purchased. (2) Commencing December 31, 1997, one-fifth (1/5) of the Shares may be purchased. (3) Commencing December 31, 1998, an additional one-fifth (1/5) of the Shares may be purchased. (4) Commencing December 31, 1999, an additional one-fifth (1/5) of the Shares may be purchased. (5) Commencing December 31, 2000, an additional one-fifth (1/5) of the shares may be purchased. (6) Commencing December 31, 2001, the final one-fifth (1/5) of the Shares may be purchased. (b) Term. The Option shall expire (to the extent not previously exercised), and all rights to exercise any unexercised portion of this Option shall cease, on the earliest of (i) December 31, 2006, (ii) the date you cease to be an employee of the Company or a Subsidiary 2 because of termination for "cause" (as defined in Section 2.(c) or because of your retirement, resignation or other termination by you of employment with the Company (other than by your death or disability), (iii) only with respect to the portion of this Option, if any, that is not exercisable at the date of termination of your employment with the Company or a Subsidiary, the date you cease to be an employee of the Company or a Subsidiary for any reason or for no reason, and (iv) only with respect to the portion of this Option, if any, that is exercisable at the date of termination of your employment with the Company, (A) one year after such termination, if such termination is a result of your death or permanent disability, and (B) 90 days after such termination, if such termination is by the Company without "cause" (as defined in Section 2.(c). (c) Cause. For purposes of this Option, "cause" has the same meaning as in your employment agreement with the Company, if any, or if you do not have an employment agreement with the Company, "cause" means the occurrence of any of the following: (1) A material breach of any term or provision of your employment agreement, if any, with the Company or a Subsidiary, the Company's Employee Handbook, or this Stock Option Agreement. (2) Your failure to perform your duties of employment in a reasonable and business-like manner. (3) Your conviction of a felony or any crime involving moral turpitude, including, without limitation, crimes involving drugs or liquor, regardless of whether appealed. (4) Your commission of, or participation in, any act of fraud, false pretense, forgery, embezzlement or dishonesty against the Company or any Subsidiary. (5) Your commission of, or participation in, any other act or omission, wantonly, willfully, or recklessly, or in a manner that is negligent against, and having an adverse effect upon, the affairs of the Company or any Subsidiary. (6) Your substantial dependence on any mind altering or other harmful substance, including, without limitation, alcohol, marijuana, amphetamines, barbiturates, LSD, cocaine, narcotic drugs, or any natural or synthetic substance having the same or similar effects as any of the foregoing, to the extent that such use would constitute reasonable cause for termination under applicable law. (d) Special Termination Provisions. The purpose of the 1996 Plan is to provide key employees with an increased incentive to make significant and extraordinary contributions to the long-term performance and growth of the Company and its Subsidiaries, to join the interests of key employees with the interests of the shareholders of the Company, and to facilitate attracting and retaining key employees of exceptional ability. You acknowledge that the Company expends considerable time, money and resources in recruiting, training and developing -2- 3 the skills and abilities of its employees, developing business relationships with referral sources and customers so as to improve the good will of the Company, establishing and maintaining close business relationships between employees and the Company's customers and obtaining, compiling and developing confidential customer lists, various internal computer reports and other proprietary business information not readily available to the public or through other sources. You agree that the provisions in this Section 2.(d) are necessary to preserve and protect the legitimate business interests of the Company. In return for granting this Option to you, notwithstanding any other term of this Option to the contrary, you agree to the following: (1) Forfeiture of Option Gain if You Leave the Company Within One Year After Exercise. If you exercise any portion of this Option and your employment with the Company terminates within one year after such exercise for any reason except death, disability, normal retirement or termination by the Company without "cause", then the gain represented by the fair market value of a Share, determined pursuant to Paragraph 8 of the 1996 Plan, on the date of such exercise over the exercise price, multiplied by the number of Shares you purchased ("option gain"), without regard to any subsequent increase or decrease in fair market value, shall be paid by you to the Company. (2) Forfeiture of Option Gain and Unexercised Options if You Engage In Certain Activities. If, at any time within (i) one year after termination of your employment with the Company, or (ii) one year after you exercise any portion of this Option, whichever is later, you engage in any activity in competition with any activity of the Company or inimical, contrary or harmful to the interests of the Company, including, but not limited to, (A) conduct related to your employment for which either criminal or civil penalties against you may be sought, (B) violation of published Company policies, including, without limitation, the Company's insider trading policy, (C) owning, maintaining, operating or engaging in the same or similar line of business or activity as the Company or any Subsidiary or in any business or activity that competes with the Company or any Subsidiary ("Competing Business") in any county of any state in which the Company or any Subsidiary is operating a prime or sub-prime mortgage loan origination office or is engaged in telemarketing operations or call center operations, (D) accepting employment with or serving as a consultant, advisor or in any other capacity to an employer (including, without limitation, any individual, firm, agency, partnership, limited liability company, unincorporated association, corporation or pre-incorporated association ("Person or Entity")) that -3- 4 is a Competing Business or is acting against the interests of the Company or any Subsidiary, (E) undertaking any efforts or activities toward pre-incorporating, incorporating, financing or commencing any Competing Business, (F) advising, serving, or consulting with any Person or Entity which is or will be undertaking efforts towards incorporating, financing or commencing any Competing Business or activity which engages in a Competing Business, (G) employing, offering employment to, soliciting for the purpose of employing or recruiting any present, former or future employee of the Company or any Subsidiary for or on behalf of any Person or Entity, (H) calling upon, soliciting, diverting or referring to any Person or Entity customers or referral sources of the Company or any Subsidiary who have conducted business with the Company or any Subsidiary within the two years before the time in question, (I) disclosing, copying, communicating, distributing, revealing, or using any confidential information, material, trade secrets, proprietary information, or confidential business information concerning the Company, any Subsidiary or any of their customers ("Confidential Information"), except as your employment duties with the Company or a Subsidiary may require during your employment with the Company or a Subsidiary, (J) failing to return any Confidential Information or any documents, records, files, lists and the like (including originals and copies) containing Confidential Information immediately upon your termination or separation of employment with the Company or any Subsidiary, or (K) participating in a hostile takeover attempt of the Company or any Subsidiary, then (y) this Option shall terminate effective on the date on which you enter into such activity, unless terminated sooner by operation of another term or condition of this Stock Option Agreement or the 1996 Plan, and (z) any option gain realized by you from exercising all or a portion of this Option shall be paid by you to the Company. (3) Right of Set-off. By accepting this Option, you consent to a deduction from any amounts the Company or any Subsidiary owes to you from time to time (including amounts owed to you as wages or other compensation, fringe benefits, or vacation pay, as well as any other amounts owed to you by the Company or any Subsidiary), to the extent of the amounts you owe the Company under Sections 2.(d)(1) -4- 5 and 2.(d)(2) above. Whether or not the Company elects to make any set-off in whole or in part, if the Company does not recover by means of set-off the full amount you owe it, calculated as set forth above, you agree to pay immediately the unpaid balance to the Company. (4) Committee Discretion. You may be released from all or any portion of your obligations under Sections 2.(d)(1), 2(d)(2) and 2.(d)(3) above only if the Committee (or its duly appointed agent) determines in its Discretion that such action is in the best interests of the Company. 3. Exercise of the Option. The Option shall be exercised by giving a written notice of exercise to the Treasurer of the Company. Such notice shall specify the number of Shares to be purchased and shall be accompanied by payment in full in cash (or in such other manner as is approved by the Committee pursuant to the 1996 Plan) of the aggregate option price for the number of Shares purchased and by the representation required by Paragraph 14 of the 1996 Plan if the Shares to be issued under the 1996 Plan have not been registered under the Securities Act of 1933. Such exercise shall be effective only upon the actual receipt of such written notice, such exercise price and an executed shareholders agreement (on terms and conditions consistent with this Stock Option Agreement or otherwise mutually acceptable to you and the Company) and no rights or privileges of a shareholder of the Company in respect of any of the Shares issuable upon the exercise of any part of the Option shall inure to you, or any other person entitled to exercise the Option, unless and until certificates representing such Shares shall have been issued. 4. Miscellaneous Representations, Warranties and Covenants. (a) Investment Purpose. It is your current intention to, and, if the Company has not both (i) closed a public offering of its securities registered under the Securities Act of 1933, as amended (an "IPO"), and (ii) registered the Shares under the Securities Act of 1933, as amended, at the time of exercise of this Option (the "Registration Events") you will, acquire any of the Shares subject to the Option for investment and not with a view toward their sale in connection with any distribution thereof. If the Registration Events have not occurred, any Shares you acquire pursuant to this Option will be acquired for your own account, and no one else will have any interest in such Shares. You acknowledge that, as of the date of this Stock Option Agreement, the Shares have not been registered under federal or state law, have no ready marked for resale, and may not be resold without registration under state and federal securities laws or applicable exemptions from such registration requirements. You also acknowledge that the Company is relying on these representations, warranties and covenants for purposes of determining whether you are eligible to receive this Option or purchase any Shares without registration under applicable state and federal securities laws. (b) Ability to Bear Risk; Sophistication; Access to Information. If, at the time you exercise all or any part of this Option, the Registration Events have not occurred, you represent, warrant and covenant that you will be able to bear the economic risk of any investment in the Shares for an indefinite period. In addition, if the Registration Events have not occurred, -5- 6 you represent, warrant and covenant that at the time you exercise this Option, you, or your financial advisor, will have such knowledge and experience in financial and business matters that you will be capable of evaluating the merits and risks of the prospective investment in the Shares. In addition, if the Registration Events have not occurred, you represent, warrant and covenant that at the time you exercise this Option, you will have, or your financial advisor will have, carefully reviewed all of the information regarding the Company, access to which will be accorded to you, and you will be thoroughly familiar with the business, operations, properties, financial condition, results of operations, prospects and risks of the Company and its business by virtue of your review and of your relationship with the Company as an employee and will have discussed with officers of the Company any questions you may have with respect to the Company or its securities. (c) Opinion of Counsel for Transfers. You will not dispose of all or any part of or any interest in this Option or any of the Shares you acquire upon exercise of this Option, or encumber, pledge, hypothecate, sell or transfer this Option, any of such Shares or any interest therein, unless you furnish the Company, upon its request, with an opinion of counsel in form and substance satisfactory to the Company to the effect that the disposition will not require registration of any of the Shares. The Company may refuse to transfer any Shares if its believes that such transfer will require registration or qualification of the Shares under any securities laws or result in a breach of any of your representations, warranties or covenants in this Stock Option Agreement. 5. No Exercise Until Required Registrations, Listings, and Approvals Obtained. This Option is subject to the requirement that, if at any time the Committee shall determine, in its Discretion, that the listing, registration, or qualification of the Shares with any securities exchange or association or under any state or federal law, or the consent or approval or any governmental regulatory body, or imposed by any securities underwriter, is necessary or desirable as a condition of, or in connection with, the granting of this Option or the issue or purchase of the Shares pursuant to this Option, this Option may not be exercised in whole or in part unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Committee. The Company shall use its best efforts to obtain expeditiously any such registration, qualification, consent or approval. 6. No Employment Rights Created. It is understood and agreed that nothing contained in the 1996 Plan or in this Stock Option Agreement, nor any action taken by the Committee, shall confer upon you any right with respect to the continuation of your employment by the Company or any Subsidiary, nor interfere in any way with the right of the Company or a Subsidiary to terminate your employment at any time. 7. Income Tax Withholding Requirements. Pursuant to the 1996 Plan, if upon or as a result of your exercise of this Option there shall be payable by the Company or any Subsidiary any amount for income tax withholding, you will pay such amount to the Company to reimburse it for such income tax withholding. -6- 7 8. Restrictions on Sale or Transfer. You agree that you shall not sell, assign, pledge, encumber, hypothecate, make a gift of, exchange, dispose of, or otherwise transfer or alienate, by operation of law or otherwise (each a "transfer"), all or any part of this Option, any right to exercise this Option or any of the Shares you may acquire upon exercise of this Option (collectively, the "Securities"), except for any transfer described in, and made in accordance with (i) Section 8.(g), and (ii) one or more of the other subsections of this Section 8. Any purported transfer in violation of this Section 8 will be void, and if you try to make any purported transfer in violation of any of the terms of this Section 8, you will retain beneficial ownership of such Securities, including the right to vote any Shares you may acquire upon exercise of this Option and to receive dividends and liquidation proceeds upon such Shares, and you will continue to report the income or loss allocated to such Shares by the Company in accordance with the relevant sections of the Internal Revenue Code of 1986, as amended (the "Code"), as long as the Company is taxed as an S corporation under the Code. (a) Permitted Transfer With First Refusal Rights. You and any person or entity to whom any of your Securities are transferred (each such person or entity is referred to in this Section 8(a) as a "transferor") may transfer all or any part of any Shares you may acquire upon exercise of this Option to any person or entity if (i) the transfer is made pursuant to, and in accordance with, the terms of this Section 8.(a), (ii) the purchase price for such Shares, if any, shall consist only of cash, a promissory note or some combination of the foregoing, and (iii) the only security for any indebtedness in connection with any such transfer shall be the Shares being transferred. (1) Notice. The transferor shall first give written notice to the Company and to the each of the other holders of outstanding common shares of the Company (the "Shareholders") of any such proposed transfer, which notice shall state the name and address of the proposed transferee (such person or entity is referred to in this Section 8.(a) as the "transferee"), the number of Shares proposed to be transferred, and the price, terms of payment, and other terms and conditions of such proposed transfer. Attached to such notice shall be a copy of the offer and all other pertinent documents in connection with the proposed transfer of the Shares. (2) First Refusal Rights. (A) Daniel B. Gilbert. Daniel B. Gilbert shall have the exclusive option for a period of 30 days after receipt of such a notice under Section 8.(a)(1) in which to purchase all or any part of the Shares proposed to be transferred at the same price and on the same terms (including, without limitation, payment terms) as are offered by the proposed transferee for the Shares. (B) Company. To the extent Daniel B. Gilbert does not exercise such option to purchase all of the Shares proposed to be transferred, the Company shall have the exclusive option for a period of 30 days immediately after the expiration of Daniel B. Gilbert's 30-day option to purchase all or any part of the -7- 8 Shares proposed to be transferred and not being purchased by Daniel B. Gilbert pursuant to his option, at the same price and on the same terms (including, without limitation, payment terms) as are offered by the proposed transferee for the Shares. (C) Other Shareholders. To the extent Daniel B. Gilbert and the Company do not exercise their options to purchase all of the Shares proposed to be transferred, the remaining Shareholders shall have the exclusive option for a period of 30 days immediately after the expiration of the Company's 30-day option to purchase all or any part of the Shares proposed to be transferred and not being purchased by Daniel B. Gilbert or the Company pursuant to their options, at the same price and on the same terms (including, without limitation, payment terms) as are offered by the proposed transferee for the Shares. (D) All or None. Notwithstanding anything to the contrary in this Section 8.(a)(2), Daniel B. Gilbert, the Company and the remaining Shareholders (other than Daniel B. Gilbert and the transferor) must exercise their options to purchase, in the aggregate, all or none of the Shares proposed to be transferred pursuant to this Section 8.(a). If the options described in this Section 8.(a) are not exercised to purchase, in the aggregate, all of the Shares proposed to be transferred pursuant to this Section 8.(a), within the time periods provided in this Section 8.(a)(2), such options shall expire unexercised, and the transferor may transfer all of the Shares proposed to be transferred pursuant to Section 8.(a)(5). (3) Allocation of Option Among Other Shareholders. Subject to Section 8.(a)(2)(D), the right of the Shareholders (other than the transferor and Daniel B. Gilbert) to purchase such Shares, if any, shall be in proportion to their relative ownership of Shares; provided that if such Shareholders do not initially elect to purchase all of the Shares available to them, each of such Shareholders purchasing all of the Shares available to him shall have the right to purchase the remaining Shares available in proportion to his relative ownership of Shares until such Shareholders have exercised their options to purchase all of the Shares available to them in connection with such transfer. If the options described in Section 8.(a)(2) are not exercised to purchase all of the Shares, pursuant to Section 8(a)(2)(D), all of the options shall expire unexercised. (4) Exercise of First Refusal Rights. The options in favor of Daniel B. Gilbert, the Company and the Shareholders (other than the transferor and Daniel B. Gilbert), described in this Section 8.(a), shall be exercised by giving written notice of such exercise to the transferor, to the Company, and to any other Shareholders. Such notice shall also specify a date for closing which shall be not more than thirty days after the date the option to purchase all of the remaining Shares being transferred is exercised. The closing of any sale pursuant to the exercise of the options described in this Section 8.(a) will be made at the Company's principal executive offices or such other place as may be agreed upon by the applicable parties. On the closing date, the transferor will, upon -8- 9 receipt of the consideration for the Shares being sold, transfer, assign and deliver to the person exercising the option certificates for the Shares being transferred, together with such assignments separate from certificate and such other documents and instruments as the person exercising the option may reasonably request to properly and validly effectuate or evidence such transfer. (5) Right to Transfer. To the extent Daniel B. Gilbert, the Company and the other Shareholders do not elect to purchase all of the Shares proposed to be transferred pursuant to this Section 8.(a), then the transferor shall be free, for thirty days immediately after the expiration of the option periods provided in this Section 8.(a), to sell all of the Shares proposed to be transferred to the proposed transferee, on the same terms and conditions described in the notice of such transfer; provided that (i) the transferee shall take such Shares subject to all the restrictions of this Section 8 as though such transferee were an original signatory to this Stock Option Agreement, (ii) the transferee agrees in writing to comply with, and be bound by, the terms and conditions of this Section 8 as if such transferee were you, and that any Shares owned by any such transferee will be subject to such terms and conditions, and (iii) such transferee shall be treated for all purposes of this Section 8 as you. Such written agreement must be delivered to the Company and the other Shareholders on or before the date of such transfer to such transferee. If such transfer is not consummated within such thirty-day period, the restrictions and options provided in this Section 8.(a) shall be restored and shall continue in full force and effect with respect to any transfer of such Shares. (b) Permitted Transfers To Daniel B. Gilbert. You and all transferees deemed to be you pursuant to this Section 8 or any agreement by which such transferees agree to be bound by this Section 8 may transfer any Shares you may acquire upon exercise of this Option or any interest in any Shares you may acquire upon exercise of this Option to Daniel B. Gilbert on any terms and conditions. (c) Transfers Pursuant to Your Death or Termination of Your Employment. Upon your death, upon any exercise of this Option after your death, upon the termination of your employment with the Company and upon any exercise of this Option after the termination of your employment with the Company (each an "Event"), Daniel B. Gilbert, the Company, and the other Shareholders shall have a right to purchase all of the Shares acquired upon exercise of this Option (regardless of whether acquired before or after the Event occurs and regardless of who owns them at the time the Event occurs) on the same terms and conditions set forth in Section 8.(a) as if you owned all of such Shares and had given notice of a proposed transfer of all of such Shares, except as such terms and conditions are modified by the remaining provisions of this Section 8.(c). The Option may be transferred only by will or by the laws of descent and distribution; provided that (i) the transferee shall take such Option and any Shares acquired upon exercise of this Option subject to all the restrictions of this Section 8 as though such transferee were an original signatory to this Stock Option Agreement, (ii) the transferee agrees in writing to comply with, and be bound by, the terms and conditions of this Section 8 as if such transferee were you, and that this Option and any Shares owned by any such transferee will be subject to -9- 10 such terms and conditions, and (iii) such transferee shall be treated for all purposes of this Section 8 as you. During your lifetime, however, the Option is exercisable only by you. (1) Notice and Period for First Option. You, your representative or agent or the person to whom this Option is transferred by will or by the laws of descent and distribution, as the case may be (the "Agent"), shall give written notice to the Company and to the other Shareholders of the occurrence of the Event, which notice shall identify the Event, state when the Event occurred, and state the number of Shares that are subject to the provisions of this Section 8.(c) as a result of the Event. Attached to such notice shall be a copy of all pertinent documents in connection with the Event. The first exclusive option period shall begin on the date of the Event and shall end 30 days after receipt of the notice described in this Section 8.(c)(1). (2) Purchase Price. The purchase price to anyone exercising his option will be an appraised price determined in accordance with this Section 8.(c)(2). The appraised price shall be determined by one business appraiser selected by mutual agreement of (i) the persons with options to purchase Shares pursuant to this Section 8.(c), and (ii) the Agent, or, if the parties are unable to agree on an appraiser, the Company's independent public accountants at the time of such determination (or, if they decline so to serve, an appraiser selected by the Company's independent public accountants) (the "Appraiser"). The Appraiser shall determine the appraised value by (i) determining the fair market value of the Company as an operating entity as of the date of the Event, (ii) dividing such amount by the number of Shares outstanding as of the date of the Event, and (iii) multiplying such amount by the number of Shares being transferred. Such appraised value shall not include (i) any discounts and premiums based on the size of the shareholdings being transferred, or (ii) any increase in value of the Company resulting from any life insurance proceeds received by the Company as a result of the Event or of your prior death. The appraisal provided for in this Section 8.(c)(2) shall be final and binding and shall be in lieu of any other settlement procedure with respect to the valuation of the applicable Shares under this Section 8 or otherwise. Any determination of such appraised value pursuant to this Section 8.(c)(2) shall be deemed to be, and shall have the same effect as, an arbitration pursuant to Michigan Compiled Laws Annotated Section 600.5001, and a judgment of any Michigan Circuit Court may be rendered upon any appraisal made pursuant to this Section 8.(c)(2). (3) Right to Maintain Life Insurance. While this Section 8.(c) is in effect, the Company may, but shall not be required to, maintain in full force and effect at its sole cost and expense, life insurance on your life in an amount it deems appropriate to pay the exercise price of any option it might have pursuant to this Section 8.(c). The Company shall be the absolute owner of each policy of life insurance issued in accordance with the terms of this Section 8.(c)(3), shall pay all premiums on such policies and, subject to the provisions of this Section 8.(c), shall have the exclusive right to exercise every privilege or right set forth in such policy or policies, which privileges and rights shall be exercised only by and for the benefit of the Company by the Board of Directors -10- 11 or its designee. This Section 8.(c)(3) shall apply to all policies of insurance issued on your life for purposes of this Section 8.(c)(3). The Company is not obligated to obtain or continue in force any insurance policies on your life. You will cooperate with the Company in connection with its obtaining such life insurance (including having a physical examination). (4) Payment of the Purchase Price. At the closing, any purchaser exercising his purchase option, must pay in cash, by check or by wire transfer the total purchase price for the Shares being purchased by him. (5) Closing Place and Time. The closing of such purchase and sale shall take place at the offices of the Company on the date designated by the person or entity purchasing the Shares in the notice of exercise of the option. Such closing date shall be not more than 120 days after the date options to purchase all of the Shares being transferred have been exercised. (6) Transfers Upon Death After Failure to Exercise First Refusal Rights. To the extent such first refusal rights are not exercised after your death, such Shares may be transferred pursuant to your will or by the applicable laws of descent and distribution or pursuant to your trust holding such Shares, as the case may be, if (i) the transferee takes such Shares subject to all the restrictions of this Section 8 as though such transferee were an original signatory to this Stock Option Agreement, and (ii) such transferee first agrees in writing to comply with, and be bound by, the terms and conditions of this Section 8 as if such transferee were you, and that any Shares owned by any such transferee will be subject to such terms and conditions. Such transferee shall be treated for all purposes of this Section 8 as you. Such written agreement must be delivered to the Company and the other Shareholders on or before the date of such transfer to such transferee. (d) Transfers Pursuant to Sale of the Company. Daniel B. Gilbert shall have the right to request that you and all transferees deemed to be you pursuant to this Section 8 or any agreement by which such transferees agree to be bound by this Section 8 transfer or cause to be transferred all of the Company common shares then held by any of the foregoing in connection with a sale of all of the Company's common shares to a third party (a "Sale Request"). Upon receipt by any of the foregoing of a Sale Request, each of the foregoing shall transfer or cause to be transferred all of his Company common shares for the consideration per common share, and otherwise on the same terms and conditions, received by Daniel B. Gilbert. Such transfers shall not be subject to any of the transfer restrictions contained in any other section of this Section 8, and, upon the closing of such transfer, the transferee shall acquire such common shares free of the restrictions contained in this Section 8, and this Section 8 shall terminate. (e) Transfers to Revocable Inter Vivos Trusts. You may transfer during your lifetime all or part of the Shares you may acquire upon exercise of this Option to a revocable inter vivos trust, the terms of which trust provide that you are the grantor, the sole trustee and -11- 12 the sole beneficiary of the trust during your lifetime, and that you have the power at any time during your lifetime to withdraw your Shares from the trust. In case of any such transfer, you, as trustee of such trust, shall receive and hold such Shares subject to, and the trust and the Shares transferred to the trust, shall be bound by, the terms and conditions of this Section 8, and any reference to you in this Section 8 shall include the trust and the trustee. Upon any transfer into such a trust, the trust and the trustee (i) shall take such Shares subject to all the restrictions of this Section 8 as though such trust and trustee were original signatories to this Stock Option Agreement, (ii) shall agree in writing to comply with, and be bound by, the terms and conditions of this Section 8 as if such trust and trustee were you, and that any Shares owned by any such trust and trustee will be subject to such terms and conditions, and (iii) shall be treated for all purposes of this Section 8 as you. Such written agreement must be delivered to the Company and the other Shareholders on or before the date of such transfer to such trust and trustee. Such trust may also transfer all or any part of such Shares back to you upon any withdrawal of such Shares from such trust, upon any revocation of the trust, upon any distribution from the trust, or pursuant to the terms of the trust. Any distribution of Shares from the trust to the beneficiaries upon your death shall be subject to Section 8.(c). (f) Transfer with Consent. You may transfer all or any part of the Shares you may acquire upon exercise of this Option with the prior express written consent of the Company and all of the other Shareholders, if such transfer occurs within 30 days after such consent is given. Any such transferee shall take such Shares subject to all the restrictions of this Section 8 as though such transferee were an original signatory to this Stock Option Agreement, and the transferee must agree in writing to comply with, and be bound by, the terms and conditions of this Section 8 as if such transferee were you, and that any Shares owned by any such transferee will be subject to such terms and conditions. Such transferee shall be treated for all purposes of this Section 8 as you. Such written agreement must be delivered to the Company and the other Shareholders on or before the date of such transfer to such transferee. (g) Overriding Subchapter S Transfer Restriction; Termination of S Corporation election. (1) Transfer Restriction. Except as otherwise provided in Section 8.(g)(2), as a condition to every transfer of Shares, so long as the Company continues to be taxed as an S corporation, you agrees that you (i) will not transfer any or all of any Shares you may acquire upon exercise of this Option to any person or entity if the ownership of Shares by the transferee would result in the loss of the Company's election to be taxed as an S corporation under the provisions of the Code, and (ii) will not transfer any or all of any Shares you may acquire upon exercise of this Option unless the Company has first obtained from counsel approved by the Company an opinion, satisfactory in form and substance to the Company, to the effect that your proposed transfer will not cause the Company's S corporation election to terminate under the provisions of the Code in effect at the time of such transfer. -12- 13 (2) Termination of Election. The Company's election to be taxed as an S corporation under the provisions of the Code shall terminate upon either of the following events: (i) the approval of such termination by written consent of the holders of a majority of the outstanding Company common shares at any time, or (ii) upon the closing of an IPO. After such termination, if you are a holder of Company common shares, you shall file such documents with the IRS and any other authorities consenting to the Company's termination of its S corporation election. If the S corporation election is terminated, but this Section 8 is not terminated, all references in this Section 8 to actions required or permitted in connection with the S corporation election shall be of no further force or effect, including, without limitation, all of the provisions of this Section 8 providing restrictions relating to the Company's maintenance of its status as an S corporation, this Section 8.(g) and Section 9. (h) Endorsement on Stock Certificates. Each certificate representing Shares issuable upon exercise of this Option now or later held by you while this Section 8 is in effect, except as otherwise provided in this Section 8, shall be endorsed with a legend in substantially the following form: "The securities represented by this certificate are subject to the terms of the Stock Option Agreement, dated as of January 10, 1997, between Rock Financial Corporation, a Michigan corporation, and Optionee~ (the "Agreement"). The Agreement imposes restrictions on any sale, assignment, pledge, encumbrance, hypothecation, gift, exchange, disposition, or other transfer or alienation, by operation of law or otherwise, of the common shares represented by this certificate and restrictions to preserve the Company's S corporation election. Any purported transfer in violation of the Agreement will be void. Any person accepting an interest in these securities, by accepting such interest, will be deemed to agree to, and become bound by, all of the provisions of Section 8 of the Agreement. A copy of the Agreement is on file and is available for examination at the principal office of Rock Financial Corporation." (i) Termination. This Section 8 shall terminate upon the occurrence of any of the following events: (i) dissolution of the Company, (ii) final, and unappealed from, adjudication of bankruptcy of the Company, (iii) joint written agreement of the Company and the Shareholders, (iv) joint written agreement of Daniel B. Gilbert and Gary Gilbert, (v) pursuant to Section 8.(d), or (vi) the closing of an IPO. Upon the termination of this Section 8, you shall surrender to the Company the certificate or certificates for any Shares you have acquired upon exercise of this Option, and the Company shall issue to you in lieu of such certificate or certificates a new certificate for an equal number of Shares without the endorsement set forth in Section 8.(h). The remedies contained in this Section 8 shall survive and remain in full force and effect after the termination of this Section 8. You shall have the right within 30 days after the termination of this Section 8 to purchase from the Company any existing policies of insurance on your life at a price equal to then cash surrender value of those policies as of the date of such termination. Upon receipt of the purchase price, the Company shall deliver the policies to you -13- 14 and shall execute any necessary instruments of transfer. You shall have no further rights in any policies not purchased within the above 30-day period. 9. Maintaining Election of S Corporation Status. You consent to the election that the Company be taxed as an S corporation under the provisions of the Code. If you exercise this Option, you will, in your capacity as a shareholder of the Company, sign any documents, agreements, certificates, or communications that may be reasonably requested by the Company so that the Company will continue to be taxed as an S corporation under the provisions of the Code, including, without limitation, such elections to be filed with the Internal Revenue Service ("IRS") for the Company to continue to be treated as an S corporation under the Code. You will sign such elections or requests to be filed with the IRS for the Company to be treated as continuing to be an S corporation notwithstanding inadvertent termination of its status as such, to the extent reasonably requested by the Company consistent with this Stock Option Agreement. Unless and until the Company's S corporation election is terminated in a manner which is either contemplated by or consistent with the provisions of this Stock Option Agreement, you will not, in your capacity as a shareholder of the Company, sign any document (including, without limitation, any election to be filed with the IRS) indicating your consent to a revocation of the Company's status as an S corporation under the Code or take any other action which is inconsistent with the foregoing, and you shall cooperate and work with the other Shareholders to make the benefits of the Company's S corporation election as fully available to all of the Shareholders as possible. (a) Two or More Taxable Years. The Board of Directors of the Company shall determine whether or not to treat the taxable year of the Company in which the interest of any Shareholder is terminated or is subject to a qualifying disposition (within the meaning of Section 1.1368-1(g) of the Treasury Regulations) as two or more separate taxable years (depending on the number of events of termination) pursuant to Section 1377(a)(2) of the Code or Section 1.1368-1(g) of the Treasury Regulations, as the case may be. If the Board of Directors decides to treat such taxable year as two or more separate taxable years pursuant to Section 1377(a)(2) of the Code or Section 1.1368-1(g) of the Treasury Regulations, then if you have exercised this Option, you shall execute and file any and all consents and other documents required by Section 1377(a)(2) of the Code, the underlying Treasury Regulations or Section 1.1368-1(g) of the Treasury regulations to effectuate the purposes of this Section 9.(a). (b) Beneficial Ownership. You represent and warrant that if you exercise this Option, you will be the sole beneficial owner of the Shares you acquire upon such exercise and that no person (including your spouse) or entity will have any right, title or interest in or to such Shares. 10. Injunctive Relief. The terms, covenants and obligations of this Stock Option Agreement relate to special, unique and extraordinary matters, and a violation of any of the terms, covenants and obligations of this Stock Option Agreement will cause the Company and its Shareholders irreparable injury in an amount which would be difficult, if not impossible, to estimate or determine and for which adequate compensation could not be fashioned. Therefore, -14- 15 the Company and the other Shareholders will be entitled, jointly and severally, to an injunction, restraining order or other equitable relief as a matter of course from any court of competent jurisdiction, restraining you and any other person(s) the court may order from committing any violation or threatened violation of the terms, covenants or obligations in this Stock Option Agreement. The Company's and the Shareholders' rights and remedies under this Section 10 are cumulative and are in addition to any other rights and remedies that the Company or any Shareholder may have under this Stock Option Agreement or any other agreement or at law or in equity. 11. Indemnification. You and your his personal representatives, guardians, conservators, heirs, devisees, successors and assigns (collectively, "Successors") shall indemnify and hold harmless the Company, its successors and assigns and any of its officers, agents, employees and directors and each of the other Shareholders (collectively, the "Indemnified Parties"): (a) against any and all damages, liabilities, claims, losses, taxes and expenses (including reasonable attorneys' fees, court costs, interest and expenses) incurred by any Indemnified Party arising out of or relating to any breach by you or by any of your Successors of any of your representations, warranties, covenants, terms or agreements in this Stock Option Agreement or any document executed in connection with this Stock Option Agreement, including, without limitation, any such breach which results in or causes the S corporation election of the Company to terminate in an manner inconsistent with the terms and conditions of this Stock Option Agreement; (b) against any and all damages, liabilities, claims, losses, taxes and expenses (including reasonable attorneys' fees, court costs, interest, judgments, fines and amounts paid in settlement) incurred by any Indemnified Party in connection with any threatened, pending or completed action, suit or proceeding (whether civil, criminal, administrative or investigative) instituted by the Internal Revenue Service, any state tax authority or any other third party relating to or arising out of any actual or alleged breach by you or any of your Successors of the representations, warranties, covenants, terms or agreements in this Stock Option Agreement or any document executed in connection with this Stock Option Agreement; and (c) against any and all damages, liabilities, claims, losses and expenses, including reasonable attorneys' fees and court costs) incurred by any Indemnified Party in connection with any action, suit or proceeding in which any Indemnified Party either enforces or defends the validity of this Stock Option Agreement or any other document executed in connection with this Stock Option Agreement against you or any of your Successors. 12. Severability. It is the desire and intent of the parties to this Stock Option Agreement that the terms, provisions, conditions, covenants, representations, warranties and remedies contained in this Stock Option Agreement will be enforceable to the fullest extent permitted by law. The provisions of this Stock Option Agreement will be deemed severable, and if any term, provision, condition, covenant, representation, warranty or remedy in this Stock -15- 16 Option Agreement or the application thereof to any person or circumstance will, to any extent, be construed to be illegal, invalid or unenforceable, in whole or in part, then such term, provision, condition, covenant, representation, warranty or remedy may be changed to the extent necessary to make such term, provision, condition, covenant, representation, warranty or remedy, as so changed, legal, valid, binding and enforceable and such term, provision, condition, covenant, representation, warranty or remedy will be construed in a manner so as to permit its enforceability under the applicable law to the fullest extent permitted by such law. If a court or agency determines that all or any part of Section 2 is unreasonable or unenforceable, you agree to be bound by a less restrictive covenant within the stated covenants as shall be permitted by law and which a court shall specifically enforce. If any term, provision, condition, covenant, representation, warranty or remedy of this Stock Option Agreement is held illegal, void, invalid or unenforceable in its entirety, the remaining terms, provisions, conditions, covenants, representations, warranties and remedies of this Stock Option Agreement and the application thereof to any person or circumstance, except those which have been held illegal, invalid or unenforceable, will not in any way be affected or impaired but will remain valid, binding and enforceable in accordance with their terms. 13. Entire Agreement. This Stock Option Agreement, including the 1996 Plan, are the entire agreement between you and the Company with respect to the subject matter of this Stock Option Agreement, and any prior or contemporaneous understandings, arrangements or agreements are superseded by this Stock Option Agreement and the 1996 Plan and are merged into this Stock Option Agreement. 14. Governing Law and Choice of Forum. The laws of the State of Michigan shall govern this Stock Option Agreement, its construction, and the determination of any rights, duties or remedies of the parties arising out of or relating to this Stock Option Agreement. The parties acknowledge that the United States District Court for the Eastern District of Michigan or the Michigan Circuit Court for the County of Oakland shall have exclusive jurisdiction over any case or controversy arising out of or relating to this Stock Option Agreement and that all litigation arising out of or relating to this Stock Option Agreement shall be commenced in the United States District Court for the Eastern District of Michigan or the Oakland County (Michigan) Circuit Court. You irrevocably consent to the jurisdiction of the United States District Court for the Eastern District of Michigan and the Oakland County (Michigan) Circuit Court in connection with all actions and proceedings arising out of, or in any way related to this Stock Option Agreement. 15. Notices. Any and all notices, designations, consents, offers, acceptances or other communications provided for in this Stock Option Agreement shall be given in writing and shall be delivered in person, sent by certified or registered mail, sent by facsimile or similar method of transmission or sent by overnight courier, addressed in the case of the Company to its principal office and in the case of you or a Shareholder to his address appearing on the stock records of the Company or such other address as may be designated by you or such Shareholder. -16- 17 16. Counterparts. This Stock Option Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 17. Interpretation. The headings contained in this Stock Option Agreement are solely for the purpose of reference, are not part of the agreement of the parties and shall not in any way affect the meaning or interpretation of this Stock Option Agreement. Wherever in this Stock Option Agreement, words, including pronouns, are used in the masculine, they shall be read and construed in the feminine or neuter whenever they would so apply, and wherever in this Stock Option Agreement, words, including pronouns, are used in the singular or plural, they shall be read and construed in the plural or singular, respectively, wherever they would so apply. 18. No Waiver. No waiver of any Section or provision of this Stock Option Agreement will be valid unless in a writing signed by the party to be charged and only to the extent set forth in that writing. Unless such a writing expressly provides otherwise, no waiver of any breach of any agreement or provision contained in this Stock Option Agreement shall be deemed a waiver of any preceding or succeeding breach of this Stock Option Agreement or of any other agreement or provision contained in this Stock Option Agreement, and no such waiver shall constitute a course of conduct which may be relied upon to justify any subsequent breach of this Stock Option Agreement. No extension of time for the performance of any obligations or acts shall be deemed an extension of time for the performance of any other obligations or acts. 19. Binding Effect; Assignment. This Stock Option Agreement, and the rights and duties under it, shall be binding upon and inure to the benefit of the parties to this Agreement and (i) the Company's successors and assigns, (ii) your beneficiaries, personal representatives, guardians, conservators, heirs, and devisees, and (iii) and any transferee of yours permitted under this Stock Option Agreement, regardless of whether such transferee has agreed in writing to be bound by this Stock Option Agreement or any portion of this Stock Option Agreement. You may not assign or transfer any of your rights or delegate any of your duties or obligations under this Stock Option Agreement, except that you may both assign your rights and delegates your duties under Section 8 in connection with a transfer of Shares that is permitted by, and is made in accordance with, the provisions of Section 8, and then only to the extent of such transfer. Any purported assignment or transfer by you contrary to the preceding sentence shall be void. 20. Subsequent Documents. The parties agree that they will, at any time, duly execute and deliver to any party any additional documents and instruments that such party may reasonably determine to be necessary in connection with the transactions contemplated in this Stock Option Agreement, and the failure of a party to demand such documents or instruments on or before the date of this Stock Option Agreement shall not alleviate the obligation of any party to execute and deliver such documents or instruments at any time, upon the written demand of a party. 21. Counsel. You acknowledge that you have had an opportunity to obtain separate counsel before execution of this Stock Option Agreement. This Stock Option Agreement is made voluntarily and without duress of any kind. -17- 18 22. Committee and Board of Directors Determinations Conclusive. Each determination, interpretation, or other action made or taken pursuant to the provisions of the 1996 Plan by the Committee or the Company's Board of Directors shall be final and shall be binding and conclusive for all purposes on you and the Company and our respective successors in interest. Very truly yours, ROCK FINANCIAL CORPORATION, a Michigan corporation By: ------------------------------- Its: -------------------------- The above is agreed to and accepted. - ----------------------------- Optionee~ Dated: ------------------------ -18- EX-10.3 6 EXHIBIT 10.3 1 EXHIBIT 10.3 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as of this 27th day of June, 1994 by and between ROCK FINANCIAL CORPORATION, a Michigan corporation ("Employer"), and STEVEN STONE ("Employee"). RECITALS: Employer has established a separate, independently operated, unincorporated, nonconforming mortgage lending division known as "Boulder Financial" ("Boulder"). Employer maintains separate books and records, and prepares separate financial statements, for Boulder. Employer wishes to employ Employee to perform services for Boulder, and Employee desires to accept such employment with Employer, upon the terms and conditions set forth in this Agreement. NOW, THEREFORE, for and in consideration of the mutual covenants and agreements set forth below, Employer and Employee agree as follows: 1. TERMS OF EMPLOYMENT A. Engagement: Employer hereby employs Employee to perform, on a full-time basis, for and on behalf of Boulder, such services ("Services") as are customarily performed by executive-level employees of mortgage lending institutions (including, but not necessarily limited to, those described in Section 1D below) or as may from time-to-time be assigned to him by the President of Employer to whom Employee shall report, and Employee hereby accepts such employment and agrees to perform such Services on a full-time basis, all upon the terms and conditions set forth in this Agreement. B. Full-Time Employment: Employee acknowledges that Employer is employing him on a full-time basis, and Employee agrees to devote all of his business time, attention and skills to, and to use his best efforts in, the performance of the Services. For the purposes of this Agreement, "full-time" refers to Employer's regularly-established business hours plus such additional time as is necessary for Employee to fulfill his duties, obligations and responsibilities under this Agreement. C. Term: For purposes of this Agreement, Employee's "Employment Commencement Date" shall be June 27, 1994. The term of Employer's employment of Employee (the "Term") shall commence on the Employment Commencement Date and shall end on the date employment is terminated or otherwise discontinued in accordance with Section 3A below. D. Position: Employee's title shall be "Director of Alternative Lending". In such capacity, Employee is an executive and administrative employee of Employer and his responsibilities shall include, among other things: (i) overseeing, managing, and directing the day-to-day operations of Employment Agreement: Page 1 of 11 Initials _______ 2 Boulder; (ii) budgeting loan production expenses and operational expenses; (iii) maximizing Boulder's quality of customer service; (iv) implementing cost-effective marketing strategies; (v) reporting to Employer with data and in formats designated by Employer; (vi) maximizing the level and market share of Boulder's non-conforming residential loan production; (vii) assisting in site location and the coordination of the opening of new locations; (viii) maintaining investor relations and investor agreements on terms favorable to Boulder; (ix) ensuring all Boulder loans are originated, documented, processed and closed in compliance with all applicable federal and state laws and regulations and in conformity with Employer's policies; (x) ensuring all loans are originated, documented, processed and closed in compliance with the terms and guidelines of the applicable investors and warehouse lenders; (xi) avoiding any secondary market losses, loan repurchases, and funding/warehouse problems; (xii) developing and marketing referral sources to improve Boulder's non-conforming residential loan business; (xiii) personally assisting in and supervising the day-to-day processing and closing of loans; (xiv) properly managing, evaluating, supervising and directing the subordinate staff and employees of Employer assigned to Boulder; (xv) effectively recruiting and staffing operations and recommending the hiring, disciplinary action and termination of subordinate loan officers and staff members of Employer assigned to Boulder in compliance with all applicable state and federal laws; (xvi) working with the officers, managers, and employees of Employer to facilitate an efficient, beneficial and cooperative working relationship with all other divisions of Employer; and (xvii) effectively and efficiently carrying out the missions, goals and directives of Employer as directed by Employer's President. Employee shall report to the President of Employer and to such other person or persons as the President of Employer may designate from time-to-time. E. Standard of Care: Employee shall use his best efforts to make Boulder a profitable division of Employer. Employee specifically acknowledges that as Boulder's Director of Alternative Lending, he is employed in a fiduciary capacity and is charged with a duty of loyalty and trust to Employer. Employee shall discharge his duties in good faith, with the care that an ordinarily prudent person in a like position would exercise under similar circumstances, and in a manner he reasonably believes is in the best interests of Employer. F. Adherence to Rules and Regulations: Employee agrees to adhere to and comply with: (i) all applicable state and federal regulations affecting lending institutions and the origination and closing of residential mortgage loans; (ii) generally accepted residential mortgage lending practices, and (iii) all policies, rules and regulations of Employer (including, without limitation, any applicable quality control plans and employee handbooks of Employer or Boulder) which have been, or in the future may be, adopted. Employee acknowledges that it is his responsibility to properly maintain any licenses or certifications necessary for him to perform the Services. Employee shall notify Employer of any change in the status of such licenses or certifications. G. Employee Status: Notwithstanding any provision of this Agreement to the contrary, Employee shall perform the Services as an employee of Employer and not as an independent contractor, and Employer shall withhold appropriate federal, state and local withholding taxes from all sums which Employer shall pay to or on behalf of Employee, pay its share of Social Security taxes, pay all unemployment insurance, and make any other contributions which may be required of Employer in an employer/employee relationship. Employment Agreement: Page 2 of 11 Initials________ 3 2. COMPENSATION A. Compensation: For all Services to be rendered by Employee under this Agreement, Employer shall, during the Term, compensate Employee as follows: (i) Salary: Employer shall pay Employee a salary ("Salary") on a biweekly basis in an amount to be determined and established by the President of Employer on a periodic basis in his sole discretion. (ii) Discretionary Bonus: Employer may pay Employee a discretionary bonus (the "Discretionary Bonus") in such amount, if any, and at such times, and subject to such conditions, as the President may, in his sole discretion, determine. (iii) Distribution Bonus: Employer may pay Employee a "Distribution Bonus", at such time as the shareholders of Employer receive a distribution from Employer (other than any salaries, bonuses or other compensation which one or more shareholders may receive as consideration for any services rendered by such shareholders to Employer and any distributions which Employer declares in order to provide its shareholders with funds with which to pay any federal, state and/or local taxes for which they are responsible as a result of Employer's status as an "S Corporation"), if such distribution reduces the retained earnings of Boulder (as determined by the President of the Employer in his sole discretion), and if, but only if, Employee is still employed by under this Agreement on the date of such distribution, in an amount equal to eighteen percent (18%) of the amount by which Boulder's retained earnings have been reduced by such distribution (as determined by the President of Employer in his sole discretion). B. Benefits: During the Term, Employee may participate in such employee benefits plans, at such times, and, subject to such rules, conditions, modifications, and/or cancellations as determined by the President of the Employer in his sole discretion. 3. TERMINATION OF EMPLOYMENT A. Termination: Notwithstanding any provision of this Agreement to the contrary, either Employer or Employee may terminate Employee's employment under this Agreement at any time, with or without cause, for any reason whatsoever. B. Severance Pay: Upon the termination of Employee's employment under this Agreement, and if, but only if: (i) Employee is not in breach of any provision of this Agreement (as determined by the President of Employer in his sole discretion) on the date of such termination; (ii) the employment relationship was terminated by Employee; and (iii) Employee provided Employer with a minimum of thirty (30) days prior written notice, Employer shall continue to pay Employee his biweekly Salary for four (4) weeks after the date of such termination (the "Severance Pay"); provided, however, that Employer shall have no obligations under this Section 3B whatsoever unless, during such four week period, Employee fully and completely cooperates with Employer and Boulder in the transition period. Any provision of this Agreement to the contrary notwithstanding, Employee shall not be entitled to any Severance Pay in the event Boulder Employment Agreement: Page 3 of 11 Initials________ 4 becomes a separate legal entity or is "spun-off" as a subsidiary or affiliate of Employer and (a) Employer or one or more of Employer's shareholders retains an equity interest in the resultant entity, and (b) Employee is employed by or offered employment with such resultant entity. C. Severance Pay upon Death or Disability: Upon the death of Employee or in the event Employee becomes disabled during the term of this Agreement, the Company shall pay Employee, or his estate, as the case may be, in five (5) equal annual installments, without interest, an aggregate amount equal to eighteen percent (18%) of Boulder's retained earnings on the last day of Employer's last fiscal quarter preceding Employee's death or the date Employee is first deemed to be disabled (the "Effective Date") less any bonuses, subsequently paid or accrued to or on behalf of Employee or any other employee of Boulder prior to the Effective Date. The first such installment shall be paid within one (1) year of the Effective Date, and the remaining four (4) installments shall be paid on the second, third, fourth and fifth anniversaries of such Effective Date. For the purposes of this Section 3C, Employee shall be deemed to be disabled if he becomes unable to perform his duties under this Agreement by reason of physical or mental incapacity or other cause for 120 consecutive days or more. In the event a disagreement arises as to whether Employee is or is not disabled, the President of Employer shall make the final determination, and such determination shall be binding upon the Company and Employee. Prior to making such determination, the President of Employer shall have the right to have a physician and/or a psychiatrist conduct an independent examination of Employee's physical and/or medical condition. In the event Employee refuses to submit to such examination, the President of Employer may, in his sole discretion, and without regard to whatever other information is available, conclude that Employee is not disabled. D. Return of Property: Employee acknowledges that the following shall be, are and shall remain the exclusive property of Employer: (i) All Employer and Boulder documents, manuals, handbooks and marketing materials (including, without limitation, all form documents such as Employer's compliance agreement, loan pricing disclosure agreements, status-grams and the like); books, records, reports and files (including, without limitation, applications, appraisals, credit reports, VOE's and the like); office equipment and supplies (including beepers, phones, keys, credit cards, lists, training materials, computer diskettes and alike); and documents, records, files, lists and the like (including originals and copies thereof) containing trade secrets or proprietary or confidential business information of Employer, obtained by Employee in the course of Employee's employment with Employer; and (ii) All marketing and advertising ideas, designs, programs, improvements, literature and the like which pertain to or relate to the Business and products of Employer or Boulder and which Employee makes, develops or contributes to while employed by Employer. Upon the termination of Employee's employment under this Agreement for any reason, Employee shall immediately, without demand, return and deliver to Employer all of Employer's property in his possession. Employment Agreement: Page 4 of 11 Initials_______ 5 4. COVENANT NOT TO COMPETE AND RELATED MATTERS A. Employee's Acknowledgment: Employee acknowledges that Employer has expended considerable time, money and resources in initiating and commencing the operations of Boulder; recruiting, training and developing the skills and abilities of the employees assigned to Boulder; developing business relationships with investors, referral sources and customers so as to improve the goodwill of Boulder; establishing and maintaining close business relationships between Employer and its customers; and obtaining, compiling and developing confidential customer lists, various internal computer reports, and other proprietary business information not readily available to the public or through other sources. Employee further acknowledges that Employer is entitled to keep the results of such efforts for its exclusive use. Accordingly, Employee agrees to the provisions of this Section 4 and agrees that such provisions are necessary to preserve and protect the legitimate business interests of Employer. B. Employee's Covenant: Employee represents, warrants, covenants and agrees, for the benefit of Employer and its affiliates, successors and assigns, that during the Term and continuing for a period of two (2) years thereafter (the "Covenant Period"), he shall not, either directly or indirectly, whether on his on behalf or on behalf of any other person, business or entity whatsoever: (i) engage in, or have any interest in or be associated with (whether as an officer, director, shareholder, partner, member, associate, employee, consultant, advisor, owner or otherwise), any corporation, partnership, limited liability company, association, trust, firm or other enterprise (including any pre-incorporated association): (a) which is engaged in the same or similar lines of business as Employer (the "Business") or any facet of such Business, anywhere in the Geographic Area (defined in Section 4C below), or (b) which competes during the Covenant Period anywhere in the Geographic Area with Employer or Boulder or any of Employer's affiliates (without first obtaining the express written consent of the President of Employer); except that notwithstanding the foregoing, Employee may invest in any publicly-held corporation engaged in the Business, if such investment does not exceed one (1%) percent in the aggregate in value of the issued and outstanding capital stock of such corporation; (ii) divert from the Business of Employer, or by aid of others, do anything which would tend to divert from the Business of Employer, any trade or business with any customer or vendor with whom Employer, Boulder or Employee has or, at any time within two (2) years immediately preceding the end of the Term, had any contact or association in connection with the Business; (iii) solicit, induce or attempt to induce any employee of Employer (excluding Ross Niskar and/or Adam Schoener, but specifically including any former employee of Employer who left the employ of Employer at any time within one (1) year immediately preceding the end of the Term), to leave the employment of Employer or enter into the employ of (i) Employee, (ii) any entity of or to which Employee is an employee, consultant or advisor or in which Employee otherwise has any interest whatsoever, or (iii) any competitor of Employer; (iv) use, copy, publish, disseminate, distribute or otherwise disclose any proprietary or confidential information of Employer or Boulder, of any kind or nature whatsoever, including, Employment Agreement: Page 5 of 11 Initials_______ 6 without limitation, all Employer and Boulder business and marketing plans, customer and prospect lists, information concerning loans in process, information and lists concerning referral sources and investors, computer programs, internal business reports (including, without limitation, pipeline reports, lock/expiration reports, closed loan reports, warehousing reports, application aging reports and the like), agreements, manuals, loan documents (including, without limitation, form documents such as Employer's compliance agreement, loan pricing disclosure agreements and the like), training materials, marketing materials (including, without limitation, status-grams and the like), information concerning financial arrangements with outside lending institutions, terms of vendor agreements, internal pricing, fee and cost information and the like, and any and all other information which is confidential, treated as confidential by Employer or not generally known in the industry; or (v) undertake any efforts or activities toward, or advise, assist or consult with any person, business or entity which is or will be undertaking efforts towards, pre-incorporating, incorporating, organizing, financing or otherwise commencing any business which will engage in the Business or any facet of such Business or compete with Employer. C. Geographic Area: For the purposes of this Section 4, the term "Geographic Area" shall mean (i) during the Term, the continental United States, and (ii) during the remainder of the Covenant Period, (a) Oakland, Macomb, Wayne, Genesee, Washtenaw, Ottawa, Kent, Monroe and Livingston Counties in the State of Michigan; (b) Lucas, Ottawa, Cuyahoga, Summit, Lake, Geagua, Franklin, Madison, Licking and Delaware Counties in the State of Ohio; and (c) any other county in any other state in which Employer or Boulder is operating or non-conforming mortgage loan origination office at the end of the Term. D. Distinct Covenants: Employer and Employee intend that the covenants set forth in Section 4B above (the "Covenants") shall be deemed to be a series of separate covenants with respect to the Business of the Employer, one for each and every political subdivision of each state and county to which such Covenants apply. Employee acknowledges and agrees that the Covenants are reasonable and valid in geographical and temporal scope and in all other respects. If any court determines that any Covenant, or any portion of any Covenant, is invalid or unenforceable, the remainder of the Covenants shall not be affected and shall be given full force and effect, without regard to the invalid Covenant or the invalid portion. If any court determines that any Covenant, or any portion of any Covenant, is unenforceable because of its duration or geographic scope, such court shall have the power to reduce such duration or scope, as the case may be, and, enforce such Covenant or portion in such reduced form. Employee intends to and hereby confers jurisdiction to enforce the Covenants above upon the courts of any jurisdiction within the geographical scope of such Covenants. If the courts of any one or more of such jurisdictions hold the Covenants, or any portion of any Covenant, unenforceable by reason of their breadth of scope or otherwise, it is the intention of the Employee that such determination not bar or in any way affect the right of Employer to the relief provided above in the courts of any other jurisdiction within the geographical scope of such Covenants as to breaches of such Covenants in such other respective jurisdictions. Employment Agreement: Page 6 of 11 Initials_______ 7 E. Breach of Covenants Constitutes Breach of Agreement/Specific Enforcement: Employee covenants and agrees that a breach or attempted breach of any of the Covenants, constitutes a breach of this Agreement. (i) In the event of a breach of Employee's Covenant under only Sections 4B(i) and/or 4B(v), Employee shall not be entitled to nor shall Employer be obligated to pay any consideration, monies, or further compensation in whatever form whatsoever to Employee, and Employee shall immediately forfeit, relinquish, surrender, release and waive any all rights, claims or demands to any and all consideration, monies, or compensation which Employee may be or is eligible for or owed (whether or not such consideration could be considered accrued or vested) under Section 4F of this Agreement and under any other provision of this Agreement. Employer's sole remedy for a breach of Employee's Covenant under only Sections 4B(i) and/or 4B(v) shall be that which is described in this Section 4E(i). (ii) In the event of a breach of any other Employee Covenant or any other provision of this Agreement: in addition to the remedies set forth in Section 4E(i) and any and all legal and equitable rights available to Employer, such Covenants may be specifically enforced by a temporary and/or permanent injunction in an action in equity. Employee hereby acknowledges that remedies at law for such a breach or threatened breach of Employee Covenants, except as provided above in Section 4E(i), are inadequate. F. Consideration: In consideration for the Covenants, Employer shall, upon the termination of Employee's employment with Employer for any reason whatsoever (other than death or disability requiring the payment of Severance Pay pursuant to Section 3C), pay Employee, in five (5) equal annual installments, without interest, an aggregate amount equal to the product of: (i) eighteen percent (18%) of Boulder's retained earnings on the last day of Employer's last fiscal quarter preceding the termination of Employee's employment with Employer less any bonuses subsequently paid or accrued to or on behalf of Employee or any other employee of Boulder prior to the termination date, and (ii) a percentage which shall be determined from the table set forth below, based upon the number of years of/Employee's service to the Employer (based on the Employment Commencement Date) and whether Employee terminated his employment with the Employer or Employer terminated Employee's employment with Employer:
PERCENTAGE IF EMPLOYMENT PERCENTAGE IF EMPLOYEE TERMINATED BY THE YEARS OF SERVICE TERMINATES EMPLOYMENT COMPANY Less than 1 year 0% 0% 1, but less than 4 years 25% 50% 4, but less than 7 years 50% 70% 7, but less/than 10 75% 85% years 10 or more years 100% 100%
Employment Agreement: Page 7 of 11 Initials________ 8 The first such installment shall be paid within ninety (90) days after the date of such termination, and the remaining four (4) installments shall be paid on the second, third, fourth and fifth anniversaries of the first installment pay date; provided, however, that Employee shall not be entitled to and Employer shall have no obligation whatsoever to make further installment payments pursuant to this Section 4F if Employee breaches, violates or fails to comply in full with any provision of this Agreement, including, without limitation, the Covenants. 5. Change In Control A. Bonus Upon Change In Control: Upon the occurrence of any of the following events, Employee shall (provided Employee is employed by Employer under the terms of this Agreement upon the date of said event) be entitled to a "Change-In-Control Bonus" in an amount equal to eighteen percent (18%) of the "New Worth" of the Boulder division as determined by the "Methods for Determining Net Worth" of the Boulder division specified below: (i) the sale of all or substantially all of the assets of Employer, (ii) Employer's sale of Boulder or all or substantially all of Boulder's assets, (iii) An initial public offering of Employer's stock, or (iv) A Change-In-Control (defined in Section 5B below) of Employer. B. Definition: For the purposes of this Section 5, a "Change-In-Control" shall be any transaction pursuant to which, and upon the consummation of which, more than fifty percent (50%) of the issued and outstanding shares of Employer's voting capital stock are owned by a person or persons (other than parents, grandparents, children, grandchildren, aunts, uncles, nieces, nephews or first cousins of, or trusts established by or for the benefit of, shareholders of Employer) who, immediately prior to such transaction, were not shareholders of Employer. C. Methods For Determining Net Worth Of Boulder Division: For purposes of calculating Employee's Change-In-Control Bonus upon the occurrence of an event mentioned above, the Net Worth of the Boulder Division shall be determine pursuant to the following methods/factors: (i) the purchaser's opinion as to the net worth of the Boulder division as it relates to the transaction and/or relative to the Employer as a whole; (ii) the opinion of the investment banking firm, if any, involved in the transaction as to the net worth of the Boulder division as it relates to the transaction and/or relative to the Employer as a whole; (iii) the opinion of a qualified business appraiser as to the net worth of the Boulder division as it relates to the transaction and/or relative to the Employer as a whole; and Employment Agreement: Page 8 of 11 Initials_______ 9 (iv) the net worth of the Boulder division as it relates to the transaction and/or relative to the Employer as a whole as determined by way of negotiation and conferral with Employee. After evaluating the foregoing methods/factors and conferring with Employee, the President of Employer shall, within his reasonable business judgment, make a final determination of Boulder's Net Worth. D. Form of Change-In-Control Bonus Payment: Upon the occurrence of any of the events mentioned above in which Employer becomes obligated to pay a Change-In-Control Bonus, in the event that the triggering event involves a transaction in which shares of stock are being issued by the Employer or shares of stock are being received by the Employer, the Employer may in its sole discretion pay any portion of the Change-In-Control Bonus in shares of stock being issued or received by the Employer, in lieu of cash. E. Other Payment Obligations Terminated: Upon making the payment called for by Section 5A above, Employer shall have no further obligation under this Agreement to pay Employee any Distribution/Bonus or Severance Pay or to make the installment payments called for by Section 4F above; provided, however, that the restrictions and Covenants of Section 4 shall continue to apply to Employee. 6. ADDITIONAL TERMS A. Agreement Binding: The terms and conditions of this Agreement shall be binding upon and inure to the benefit of Employer, Employee and their respective heirs, executors, administrators, personal representatives, successors and permitted assigns, as the case may be. B. Authority: Employee represents and warrants to Employer that (i) he has full right, power and authority to execute and to perform his obligations under this Agreement; and (ii) be is neither a party to nor bound by or subject to any other agreement, written or oral, which would preclude him from entering into this Agreement and working for Employer. C. Choice of Law: This Agreement has been executed in, and shall be construed and enforced in accordance with, the laws of the State of Michigan, without giving effect to the conflict of laws principles of such state. D. Amendments: This Agreement may not be modified or amended except pursuant to a written instrument executed by both Employee and the President of Employer. E. Entire Agreement: This Agreement sets forth the entire understanding and agreement of Employer and Employee with respect to its subject matter and supersedes all prior understandings and agreements, whether written or oral, in respect thereof. F. Headings: The section headings and captions used in this Agreement are for convenience of reference only and shall not be considered in construing this Agreement. Employment Agreement: Page 9 of 11 Initials_______ 10 G. No Assignment: Employee may not assign his rights, duties and obligations under this Agreement to a third-party (including, without limitation, Employee's beneficiaries and legal representatives) without the prior written consent of the President of Employer. Employer may assign its rights, duties and obligations under this Agreement. H. Severability: If any provision of this Agreement shall be held by a court of competent jurisdiction to be invalid, illegal or unenforceable, such provision shall be modified so as to be enforceable to the fullest extent permitted by applicable law, and the validity, legality and enforceability of the remaining provisions of this Agreement shall not in any way be affected or impaired thereby. I. Breach by Employee: Upon Employee's breach or violation of, or failure to comply with, any provision of this Agreement, Employer shall have, in addition to any other remedies provided in this Agreement, no further obligation under this Agreement to pay Employee any Discretionary Bonus, Distribution Bonus or Severance Pay or to make the installment payments called for by Section 4F above or the payment called for by Section 5A above. This Section 61 shall not be construed to limit any other remedies which Employer may have at law or in equity, except as specifically provided in Section 4E(i). J. Breach by Employer: Employee agrees that he shall not commence any legal action or proceeding relating to or arising out of this Agreement or his employment relationship with Employer (including, without limitation, any and all claims for compensation or employment discrimination or claims based upon a violation or alleged violation of any other labor- or employment-related federal, state or local law) more than one hundred eighty (180) days after the date such claim first arises, and Employee hereby voluntarily waives any statutes or periods of limitations to the contrary. Employee's sole remedy for any alleged breach of this Agreement by Employer shall be limited to the amount of Severance Pay which otherwise would have been payable. K. Indemnity: Employee represents, warrants, covenants and agrees, for the benefit of Employer and its affiliates, successors and assigns, that (i) he will not utilize, in connection with his employment under this Agreement, any materials, confidential business information or trade secrets which may be deemed to be confidential or proprietary information of any other person or entity, and (ii) he will not engage (or direct or cause Employer or Boulder to engage) in any illegal activities in connection with his employment under this Agreement. Employee agrees to indemnify, defend and hold Employer (and its officers, directors, shareholders, employees, agents, successors, assigns and affiliates) harmless from and against any and all losses, liabilities, claims, causes of action, damages or expenses, including attorneys' fees, whether known or unknown, accrued or unaccrued, liquidated or unliquidated, contingent or certain, suffered or incurred (or to be suffered or incurred) by any such persons in connection with Employee's violation or alleged violation of the foregoing sentence. L. Counter parts: This Agreement may be executed in counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same agreement. Employment Agreement: Page 10 of 11 Initials_______ 11 M. Financial Information: Unless otherwise provided in this Agreement, in those circumstances in which the terms and conditions of this Agreement call for the retained earnings or other financial information of or concerning Boulder to be determined, such information shall be determined by Employer's regularly-employed independent or in-house accountants (the "Accountants") from financial statements which shall be prepared, in accordance with generally accepted accounting principles applied consistently with the manner in which such principles have been applied to Employer itself, for Boulder, as if Boulder was a separate and distinct entity apart from Employer, after taking into account all items which are and may be reasonably attributed and apportioned to Boulder, including, but not necessarily limited to, all taxes to which Employer is subject which are attributable and apportioned to Boulder, salaries and operational expenses attributable and apportioned to Boulder, and the corporate allocation of expenses and overhead, as determined in the sole judgment of the Accountants in accordance with generally accepted accounting principles consistently applied. In the event Employee disagrees with the Accountants' determination of Boulder's retained earnings or other financial information, such disagreement shall be resolved by the President of Employer in his sole discretion, and such resolution shall be binding upon Employee and Employer. IN WITNESS WHEREOF, Employer and Employee have executed this Agreement as of the day and year first above written. In the Presence of: "EMPLOYEE": /s/ Adam Schoener /s/ STEVEN STONE - --------------------------------- ------------------------------------- STEVEN STONE Print Name: Adam Schoener ---------------------- In the Presence of: "EMPLOYER": /s/ Charlene Callagy ROCK FINANCIAL CORPORATION, - --------------------------------- a Michigan corporation Print Name: Charlene Callagy ---------------------- By: /s/ Daniel Gilbert -------------------------------- Print Name: Its: -------------------------------- Employment Agreement: Page 11 of 11 Initials --------- 12 AMENDMENT TO EMPLOYMENT AGREEMENT THIS AMENDMENT TO EMPLOYMENT AGREEMENT (the "Amendment") is made as of December 28, 1996 by and between Rock Financial Corporation, a Michigan corporation ("Employer"), and Steven Stone ("Employee"). RECITALS: A. Employer and Employee have entered into an Employment Agreement, dated as of June 27, 1994 (the "Agreement"). Capitalized terms used in this Amendment, but not otherwise defined in this Amendment, shall have the meanings set forth in the Agreement. B. Employer and Employee desire to revise the Agreement, on the terms and conditions set forth in this Amendment, to, among other things, revise the Distribution Bonus and substitute an option to purchase common shares of Employer and a special bonus for various compensation under the Agreement based on the retained earnings of Boulder. THEREFORE, Employer and Employee agree as follows: 1. Change in Title. The first sentence of Section 1.D. of the Agreement is hereby amended to read as follows: "Employee's title shall be "President of Boulder Financial"." 2. Revised Distribution Bonus. Section 2.A.(iii) of the Agreement is hereby amended and restated, effective as of the date of this Amendment, to read as follows: "(iii) Distribution Bonus: Employer shall pay Employee "Distribution Bonuses", at the same times as the shareholders of Employer receive distributions from Employer in respect of their common shares of Employer, except for "Excluded Payments" (as defined below), if, but only if, Employee is still employed by Employer under this Agreement on the date of such distribution. The amount of each Distribution Bonus payable to Employee shall be (i) the number of common shares of Employer that Employee has the right to acquire pursuant to the unexercised portion of the option granted to Employee pursuant to Section 2.C. as of the record date for the applicable distribution, multiplied by (ii) the "Per Share Distribution Amount" (as defined below). "For purposes of this Section 2.A.(iii), the "Per Share Distribution Amount" shall equal (i) the actual amount distributed to Employer's shareholders, excluding any Excluded Payments, as determined by the President of Employer in his sole discretion based on the cash distributed and the fair market value of any property distributed, divided by (ii) the aggregate number of common shares of Employer outstanding as of the record date for the applicable distribution. 13 "For purposes of this Section 2.A.(iii), "Excluded Payments" means all of the following: (i) any distribution that is not in cash or property of Employer, (ii) any distribution of securities issued by Employer, (iii) salaries, bonuses or other compensation that one or more shareholders may receive as consideration for any services rendered by such shareholders to Employer, (iv) any distributions which Employer declares in order to provide its shareholders with funds with which to pay any federal, state and/or local taxes for which they are responsible as a result of Employer's status as an "S corporation" (the purpose for such distribution to be determined by the President of Employer in his sole discretion), and (v) one distribution by Employer payable to Shareholders of record on or before September 1, 1997 in an aggregate amount not to exceed $5,000,000 (as designated by the President of Employer in his sole discretion). After the closing date of a public offering of common shares of Employer registered under the Securities Act of 1933, as amended (an "IPO"), this Section 2.A.(iii) shall terminate, and it shall not apply to any distributions payable to shareholders of record on or after the closing of the IPO. 3. Removal of Severance Pay Upon Death or Disability. Section 3.C. of the Agreement is hereby amended and restated, effective as of June 27, 1994, to read as follows: "C. [RESERVED]." 4. Removal of Separate Non-Compete Consideration. Section 4.F. of the Agreement is hereby amended and restated, effective as of June 27, 1994, to read as follows: "F. [RESERVED]." 5. Removal of Change in Control Provisions. Section 5 of the Agreement is hereby amended and restated, effective as of June 27, 1994, to read as follows: "5. [RESERVED]." 6. Removal of Financial Information Section. Section 6.M. of the Agreement is hereby amended and restated, effective as of June 27, 1994, to read as follows: "M. [RESERVED]." 7. Removal of Reference to Section 4.F in Section 4.E.(i). Section 4.E.(i) of the Agreement is hereby amended and restated, effective as of June 27, 1994, to read as follows: "(i) In the event of a breach of Employee's Covenant under only Sections 4B(i) and/or 4B(v), Employee shall not be entitled to nor shall Employer be obligated to pay any consideration, monies, or further compensation in -2- 14 whatever form whatsoever to Employee, and Employee shall immediately forfeit, relinquish, surrender, release and waive any and all rights, claims or demands to any and all consideration, monies, or compensation which Employee may be or is eligible for or owed (whether or not such consideration could be considered accrued or vested) under any provision of this Agreement, except for the special bonuses provided in Section 11 of the Amendment, which shall be non-forfeitable. Notwithstanding anything in this Agreement to the contrary, Employer's sole remedy for a breach of Employee's Covenant under only Sections 4B(i) and/or 4B(v) shall be that which is described in this Section 4E(i)." 8. Removal of Reference to Section 4.F and Section 5.A. in Section 6.I. Section 6.I. of the Agreement is hereby amended and restated, effective as of June 27, 1994, to read as follows: "I. Breach by Employee: Upon Employee's breach or violation of, or failure to comply with, any provision of this Agreement, Employer shall have, in addition to any other remedies provided in this Agreement, no further obligation under this Agreement to pay Employee any Discretionary Bonus or Severance Pay. This Section 6I shall not be construed to limit any other remedies which Employer may have at law or in equity, except as specifically provided in Section 4E(i)." 9. Exception to Non-Competition. Section 4.B. of the Agreement is hereby amended by adding the following to the end of Section 4.B.: "Notwithstanding anything in this Section 4.B. to the contrary, Section 4.B.(i), (ii) and (v) shall not apply after the termination of Employee's employment with Employer, if (i) Employee terminates his employment with Employer, or (ii) Employer terminates Employee's employment with Employer without "cause" (as defined in Section 2(c) of the Stock Option Agreement between Employer and Employee, dated the same date as the Amendment), in either case within one year after a "Change in Ownership". "For purposes of this Agreement, a "Change in Ownership" occurs when, as a result of a voluntary transaction (i) (A) by Daniel B. Gilbert, a single person or entity owns more of Employer's outstanding voting equity securities than Daniel B. Gilbert and takes operational control of Employer, or (B) by Employer, all or substantially all of Employer's assets are sold to a third party, not in the ordinary course of Employer's business, and such third party takes operational control of Employer's business, and (ii) Employee is not permitted continued employment with Employer or such third party, as the case may be, on substantially the same terms and conditions as set forth in this Agreement and on terms that require Employer or such third party, as the case may be, to (A) employ Employee for a year after such change in operational control occurs at the salary in effect immediately before such change in operational control occurs, (B) -3- 15 provide Employee with a continuation of Employee's salary through one year after such change in operational control occurs at the rate in effect immediately before such change in operational control occurs if Employer or such third party, as the case may be, terminates Employee's employment without "cause" (as defined in Section 2(c) of the Stock Option Agreement between Employer and Employee, dated the same date as the Amendment) (in lieu of any other severance compensation due to Employee under this Agreement or otherwise), or (C) any combination of the foregoing." 10. Current Salary Pursuant to Section 2.A.(i) of the Agreement the President of Employer has determined and established Employee's salary, beginning January 1, 1997, at $160,000 a year. 11. Special Bonuses. Employer shall pay Employee the following amounts on or before the following dates as special bonuses: (i) $540,000 on or before December 31, 1996, (ii) $180,000 on or before July 1, 1997, and (iii) $360,000 on or before December 31, 1997. Such special bonuses shall be non-forfeitable. 12. Additional Compensation Provisions. Section 2 of the Agreement is hereby amended by adding the following additional Sections to the end of Section 2 effective as of the date of this Amendment: "C. Stock Option. Effective as of the date of this Amendment, Employer shall grant to Employee an option to purchase 895.50 common shares of employer at $5,233.73 a share pursuant to the Rock Financial Corporation 1996 Stock Option Plan and a Stock Option Agreement in substantially the form attached as Exhibit A. "D. Interest in Gary Gilbert's New Business. Employer shall cause Daniel B. Gilbert to transfer to Employee, all of his and any of his affiliates' right, title and interest in that portion of any option granted to Daniel B. Gilbert or any of his affiliates by Gary Gilbert to purchase a 3% equity interest in a mortgage business that is formed or acquired by Gary Gilbert (the "Business"). The option granted to Employee shall be exercisable at any time within 80 days after Gary Gilbert notifies Daniel B. Gilbert in writing that he has both formed or acquired the Business and signed a lease for the premises from which the Business will be operated. The exercise price of Employee's option will be the same cost per share paid by Gary Gilbert for his interest. "This right is not transferable by Employee without Daniel B. Gilbert's consent, and if not exercised by Employee within the 80-day exercise period, may be exercised by Daniel B. Gilbert or his affiliates, as the case may be, on his own behalf, in whole or in part, or Daniel B. Gilbert or his affiliates, as the case may be, may transfer all or any portion of such equity interest, such option or any -4- 16 combination of the foregoing to any person or entity without obtaining the consent of any person or entity. "If Employee desires to sell or transfer all or any part of such equity interest (other than to a revocable inter vivos trust for the benefit of Employee and of which Employee is the sole trustee, which trust shall be treated for all purposes as the Employee for purposes of this Section 2.D., and such trust and the shares transferred to the trust, shall be bound by the terms and conditions of this Section 2.D.), he must first give written notice to Daniel B. Gilbert of such proposed sale or transfer, which notice shall state the name and address of the proposed transferee, the amount of the equity interest, and the price, terms of payment, and conditions of such proposed sale or transfer. Daniel B. Gilbert shall have the exclusive option for a period of sixty days after receipt of such notice in which to purchase all or none of such equity interest proposed to be sold or transferred at the price and on the other terms and conditions stated in such notice. Such option shall be exercised by giving written notice thereof to Employee. If Daniel B. Gilbert fails to exercise his option within such sixty-day period, Employee shall be free, for the next sixty days after the expiration of the sixty-day option period, to sell or transfer such equity interest to the proposed person or entity on the proposed terms and conditions free of any restrictions under this Agreement. If the sale or transfer is not consummated within such sixty-day period, the restrictions and option provided in this Section 2.D. shall again apply." "E. Election as a Director. Employer will cause its Board of Directors to increase its size by one member and appoint Employee to fill the newly-created vacancy, effective as of the date of this Amendment." 13. Information. At all times following Employee's initial contact with Employer pertaining to this Amendment, Employer has made available to Employee the opportunity to ask questions of, and receive answers from, Employer and persons acting on its behalf concerning the terms and conditions of the transactions contemplated by this Amendment, concerning the transactions described in Section 14, and concerning the Employer (including its financial condition, results of operations, cash flows, prospects, business, products, facilities, management, principals, business risks, securities, capitalization, financial needs and shareholders), and to obtain any additional information, to the extent Employer possessed such information or could acquire it without unreasonable effort or expense, that was necessary to verify the information furnished about the foregoing to Employee by Employer. Employee acknowledges receipt of a copy of this Amendment, Employer's audited financial statements for the fiscal year ended December 31, 1995 and Employer's unaudited financial statements for the nine months ended September 30, 1996. Employee is assuming responsibility, and is not relying on Employer in any manner whatsoever, to analyze and evaluate any information Employee has received and any additional information Employee desires to obtain. Employee has been furnished, or will obtain, all information Employee requests or desires to know before entering into this Amendment. -5- 17 Employee has had the opportunity to consult with counsel concerning the terms and conditions of this Amendment and the transactions described in this Amendment. 14. Purchase Price. Employee acknowledges and accepts that the exercise price for the option being granted to Employee pursuant to Section 2.C. of the Agreement has been determined by negotiations between Employer and Employee based primarily on the implied valuation of Employer used in connection with two purchases of common shares of Employer by Daniel B. Gilbert from other shareholders of Employer entered into at substantially the same time as this Amendment. Employee acknowledges and accepts that such exercise price is not necessarily related to Employer's asset value, net worth, earnings potential or other established criteria of value. Employee acknowledges that such exercise price has been determined without obtaining a full valuation of Employer or Employee's potential interest in Employer. Employee further acknowledges that he is aware that Employer has received a preliminary indication of the range of its valuation under various circumstances from an investment banking firm that may differ from those on which the option exercise price is based. Notwithstanding the foregoing, Employee has satisfied himself regarding the exercise price for the option granted pursuant to Section 2.C. of the Agreement, and Employee agrees that he is assuming sole responsibility to evaluate the fairness of such exercise price. 15. Release. As of the date of this Amendment, Employee acknowledges and agrees that no amounts are owing to Employee by Employer under the Agreement or otherwise, except for (i) any accrued, but unpaid salary with respect to the period after the period covered by the last regular payroll payment made by Employer to Employee, (ii) any amounts due to Employee under Employer's employee benefit plans, payable in the ordinary course of Employer's business, and (iii) any amounts provided in this Amendment (collectively, the "Exceptions"). As of the date of this Amendment, Employee releases Employer and its directors, officers, employees, affiliates, representatives, agents and attorneys, and their successors and assigns from all causes of action, claims, and damages based on any facts existing at the date of this Amendment, except for the Exceptions. As of the date of this Amendment, Employer releases Employee and his successors and assigns from all causes of action, claims, and damages based on any facts existing at the date of this Amendment, except for any claims under the Agreement, as amended by this Amendment. 16. No Other Change. Except as modified by this Amendment, the Agreement shall continue in full force according to its terms and is ratified. 17. Counterparts. This Amendment may be signed in counterparts, both of which together will be deemed an original of this Amendment. This Amendment will also be effective if evidenced by signed copies transmitted by telecopier or facsimile transmission. -6- 18 IN WITNESS WHEREOF, Employer and Employee have signed this Amendment as of the date set forth in the introductory paragraph of this Amendment. ROCK FINANCIAL CORPORATION By: /s/ Daniel B. Gilbert ------------------------ Daniel B. Gilbert Its: President /s/ Steven Stone --------------------------- Steven Stone The undersigned is signing this Amendment solely to agree to the provisions applicable to the undersigned contained in the portion of Section 12 adding Section 2.D. to the Agreement. /s/ Daniel B. Gilbert --------------------------- Daniel B. Gilbert -7- 19 SECOND AMENDMENT TO EMPLOYMENT AGREEMENT THIS SECOND AMENDMENT TO EMPLOYMENT AGREEMENT (the "Amendment') is made as of February 18, 1998 by and between Rock Financial Corporation, a Michigan corporation ("Employer"), and Steven Stone ("Employee"). RECITALS: A. Employer and Employee have entered into an Employment Agreement, dated as of June 27, 1994 and amended as of December 28, 1996 (the "Agreement"). Capitalized terms used in this Amendment, but not otherwise defined in this Amendment, shall have the meanings set forth in the Agreement. B. Employer and Employee desire to revise the Agreement, on the terms and conditions set forth in this Amendment, to, among other things, delete the Distribution Bonus and substitute an option to purchase common shares of Employer and the right to sell common shares in the initial public offering of common shares of Employer registered under the Securities Act of 1933, as amended (an "IPO"), all subject to the terms and conditions of this Amendment. THEREFORE, Employer and Employee agree as follows: 1. Change in Title. Effective as of the "Effective Date" (as defined in Section 5 below), the reference in Section 1.E. of the Agreement to "Boulder's Director of Alternative Lending" is changed to "Employer's President". Effective as of the "Effective Date" (as defined in Section 5 below), the first sentence of Section 1.D. of the Agreement is amended to read as follows: "Employee's title shall be "President"." 2. Deletion of Distribution Bonus. Effective as of the "Effective Date" (as defined in Section 5 below), Section 2.A.(iii) of the Agreement is amended and restated to read as follows: "(iii) [RESERVED]." 3. Additional Compensation Provisions. If the "Effective Date" (as defined in Section 5 below) occurs, Section 2 of the Agreement is hereby amended by adding the following additional Sections to the end of Section 2: "F. Stock Option. Effective as of the closing date of the IPO, Employer shall grant to Employee pursuant to the Rock Financial Corporation 1996 Stock Option Plan and a Stock Option Agreement in substantially the form attached as Exhibit A an option to purchase 292,500 common shares of Employer at an exercise price per share equal to the public offering price per share of the common shares in the IPO." "G. Right to Participate in the IPO. Employer shall use its best efforts to cause the underwriters in its IPO to permit Employee to sell 214,500 common shares in 20 the IPO. If Employee is permitted to sell such common shares in the IPO, Employee shall acquire such shares by exercising stock options he owns to purchase that number of shares on or before the closing date of the IPO and shall deliver certificates representing such shares, free of any adverse claims (as defined in the Michigan Uniform Commercial Code) to the underwriters on the closing date of the IPO, duly endorsed for transfer or accompanied by stock powers. Employee shall also enter into an underwriting agreement with such underwriters and such other documents and agreements as are reasonably requested by Employer or the underwriters in connection with the IPO." 4. Change of References to President. Effective as of the "Effective Date" (as defined in Section 5 below), all references in the Agreement to "President" (other than the references to "President" in the first sentence of Section 1.D. of the Agreement and in Section 1.E. of the Agreement) are amended and restated to read "Chief Executive Officer", including those references in Sections 1.A., 1.D. (except the first sentence of Section 1.D.), 2.A.(i), 2.A.(ii), 2.B., 3.B., and 6.G. of the Agreement. In addition, effective as of the "Effective Date" (as defined in Section 5 below), all references in the Stock Option Agreement, dated as of December 28, 1996 between Employer and Employee to "President" are amended and restated to read "Chief Executive Officer", including those references in Sections 2(d)(2)(D) and 2(d)(2)(F) in such Stock Option Agreement. 5. Conditional Effectiveness of Amendment. The "Effective Date" shall be March 15, 1998, if and only if, the closing date of the IPO occurs on or before June 30, 1998. If the closing date of the IPO does not occur on or before June 30, 1998, this Amendment shall be void and shall be treated as if it never existed without any liability or obligation of Employer or Employee under this Amendment. 6. Information. At all times following Employee's initial contact with Employer pertaining to this Amendment, Employer has made available to Employee the opportunity to ask questions of, and receive answers from, Employer and persons acting on its behalf concerning the terms and conditions of the transactions contemplated by this Amendment, concerning the transactions described in Sections 2 and 3, and concerning the Employer (including its financial condition, results of operations, cash flows, prospects, business, products, facilities, management, principals, business risks, securities, capitalization, financial needs and shareholders), and to obtain any additional information, to the extent Employer possessed such information or could acquire it without unreasonable effort or expense, that was necessary to verify the information furnished about the foregoing to Employee by Employer. Employee acknowledges receipt of a copy of this Amendment and Employer's financial statements for the fiscal year ended December 31, 1997. Employee is assuming responsibility, and is not relying on Employer in any manner whatsoever, to analyze and evaluate any information Employee has received and any additional information Employee desires to obtain. Employee has been furnished, or will obtain, all information Employee requests or desires to know before entering into this Amendment. Employee has had the opportunity to consult with counsel concerning the terms and conditions of this Amendment and the transactions described in this Amendment. -2- 21 7. Release. As of the date of this Amendment, Employee acknowledges and agrees that no amounts are owing to Employee by Employer under the Agreement or otherwise, except for (i) any accrued, but unpaid salary with respect to the period after the period covered by the last regular payroll payment made by Employer to Employee, (ii) any amounts due to Employee under Employer's employee benefit plans, payable in the ordinary course of Employer's business, and (iii) any amounts provided in this Amendment (collectively, the "Exceptions"). As of the date of this Amendment, Employee releases Employer and its directors, officers, employees, affiliates, representatives, agents and attorneys, and their successors and assigns from all causes of action, claims, and damages based on any facts existing at the date of this Amendment, except for the Exceptions. As of the date of this Amendment, Employer releases Employee and his successors and assigns from all causes of action, claims, and damages based on any facts existing at the date of this Amendment, except for any claims under the Agreement, as amended by this Amendment. 8. No Other Change. Except as modified by this Amendment, the Agreement shall continue in full force according to its terms and is ratified. 9. Counterparts. This Amendment may be signed in counterparts, both of which together will be deemed an original of this Amendment. This Amendment will also be effective if evidenced by signed copies transmitted by telecopier or facsimile transmission. IN WITNESS WHEREOF, Employer and Employee have signed this Amendment as of the date set forth in the introductory paragraph of this Amendment. ROCK FINANCIAL CORPORATION By: /s/ Daniel B. Gilbert ----------------------------- Daniel B. Gilbert Its: President /s/ Steven Stone -------------------------------- Steven Stone -3- EX-10.4 7 EXHIBIT 10.4 1 EXHIBIT 10.4 STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT (the "Agreement") is made as of January 17, 1997 between Gary Gilbert ("Seller") and Daniel B. Gilbert ("Buyer"). R E C I T A L S A. Seller is the owner of record of 3,099,978 common shares of Rock Financial Corporation, a Michigan corporation (the "Company"). B. Seller desires to sell to Buyer, and Buyer desires to purchase from Seller, 1,022,680 common shares of the Company on the terms and conditions set forth in this Agreement. THEREFORE, the parties agree as follows: 1 PURCHASE AND SALE OF STOCK. 1.1 Agreement to Purchase and Sell Stock. Upon the terms and subject to the conditions of this Agreement, at the Closing, as defined in Section 1.3, Buyer shall buy from Seller, and Seller shall sell and deliver to Buyer, 1,022,680 common shares of the Company (the "Shares"). The certificates for the Shares shall, when so delivered by Seller, be duly endorsed for transfer to Buyer or have executed stock powers endorsed to Buyer attached to the Shares, and Seller shall have paid or provided for all requisite documentary and/or stock transfer stamps. Such certificates for the Shares shall also be accompanied by any other documents that are necessary to transfer to Buyer good and marketable title to the Shares. 1.2 Purchase Price. The purchase price for the Shares shall be $4,242,500. If, on or before the Closing Date, Bear Stearns & Co., Inc. or another similar financing source shall have funded a loan to Buyer sufficient to pay the entire purchase price for the Shares or if Buyer otherwise desires to pay the entire purchase price in cash at the Closing, such purchase price shall be payable in cash, by check or by wire transfer delivered by Buyer to Seller at the Closing, subject to the provisions of Section 3.2. If, on or before the Closing Date, Bear Stearns & Co., Inc. or another similar financing source shall not have funded a loan to Buyer sufficient to pay the entire purchase price for the Shares and Buyer does not otherwise desire to pay the entire purchase price in cash at the Closing, such purchase price shall be payable as follows: 1.2.1 payment of $300,000 in cash, by check or by wire transfer delivered by Buyer to Seller at the Closing, subject to the provisions of Section 3.2; and 1.2.2 delivery to Seller at the Closing of a promissory note in the principal amount of $3,942,500, maturing on August 31, 1998, bearing interest at the annual rate of 9%, in substantially the form attached as Exhibit 1.2.2. . 1.3 The Closing. The Closing under this Agreement shall be held at 10:00 a.m. at the offices of Rock Financial Corporation, 30600 Telegraph Road, Fourth Floor, Bingham Farms, 2 Michigan 48025, on the earlier of (i) February 28, 1997, or (ii) two business days after Bear Stearns & Co., Inc. or another similar financing source funds a loan to Buyer sufficient to pay the purchase price for the Shares, or such other day and time as Buyer and Seller shall mutually agree upon in writing, or such date as extended pursuant to Section 4.1.2 or Section 4.2.2. The consummation of the transactions set forth in this Agreement at such place and time are sometimes referred to in this Agreement as the "Closing", and such date is sometimes referred to as the "Closing Date". At the Closing, Seller shall deliver the Shares pursuant to Section 1.1, Buyer shall pay or deliver the purchase price pursuant to Section 1.2, and Buyer and Seller shall comply with the covenants and conditions to closing set forth in Sections 3 and 4. 2 REPRESENTATIONS AND WARRANTIES. 2.1 Seller's Representations and Warranties. Seller hereby represents and warrants the following to Buyer as of the date of this Agreement and as of the Closing Date: 2.1.1 Authority Relative to This Agreement. Seller has full power and authority to execute, deliver and perform the terms of this Agreement. No other action on the part of Seller or any other individual, person or entity, is necessary to authorize this Agreement or the performance by Seller of the terms of this Agreement. This Agreement has been duly and validly executed and delivered by Seller and constitutes a valid and binding agreement of Seller. 2.1.2 Consents and Approvals; No Violation. Except for the consent of the other shareholders pursuant to the Rock Financial Corporation Stock Purchase Agreement, dated as of June 29, 1987, among Buyer, Seller, Ronald Berman, Lindsay Gross and the Company (the "Shareholder Agreement"), neither the execution and delivery by Seller of this Agreement nor the performance by Seller of the terms of this Agreement, (i) will require any authorization, consent or approval of any governmental or regulatory authority or of any other person or entity, (ii) will breach any provision of, constitute a default under, or result in the creation of any lien or security interest under any of the terms or conditions of any license, agreement, evidence of indebtedness, mortgage, security agreement, lease or other obligation to which Seller is a party, or by which Seller or any of his properties or assets may be bound, or (iii) will violate any order, writ, injunction, decree, judgment or arbitration award or any statute, rule, regulation or ruling of any court or governmental authority, applicable to Seller or to his property or assets. 2.1.3 Ownership of the Shares. The Shares are all of the issued and outstanding shares of capital stock of the Company of any class or nature whatsoever and all rights to acquire any such shares owned of record or beneficially by Seller, except for the 2,077,298 common shares of the Company retained by Seller. The transfer of the Shares pursuant to this Agreement will effectively transfer full and complete ownership of the Shares to Buyer. All of the Shares are validly issued, fully paid, nonassessable, and free of preemptive rights. Seller has, and upon consummation of the sale of the Shares to Buyer, Buyer will acquire, good title to all of the Shares, free and clear of all pledges, warrants, calls, options, rights, commitments, subscriptions, contracts, agreements, understandings, arrangements, voting trusts or agreements, proxies, unpaid taxes, adverse claims and other claims and options of whatever nature, except for any such rights -2- 3 in favor of Buyer. Seller has owned the Shares since at least February 1992, and fully paid the purchase price for the Shares on or before February 1992. 2.1.4 Sophistication. Seller has substantial prior investment experience, including investments in non-listed and non-registered securities of corporations and partnership interests in various partnerships, and Seller has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the potential sale of Seller's Shares. 2.1.5 Independent Decision. Seller will make his own investment decision concerning the sale of the Shares and the sale price of the Shares. Seller has not received, and has not and will not rely on, any representations, opinions or recommendations from Buyer concerning the sale, except as otherwise provided in this Agreement, including, without limitation, concerning the Shares, Buyer or the Company. 2.1.6 Information. At all times following Seller's initial contact with Buyer pertaining to the Shares, Buyer and the Company have made available to Seller the opportunity to ask questions of, and receive answers from, Buyer, the Company and persons acting on its behalf concerning the terms and conditions of the transactions contemplated by this Agreement, concerning the transactions described in Section 2.1.7 and concerning the Company (including its financial condition, results of operations, cash flows, prospects, business, products, facilities, management, principals, business risks, securities, capitalization, financial needs and shareholders), and to obtain any additional information, to the extent Buyer or the Company possessed such information or could acquire it without unreasonable effort or expense, that was necessary to verify the information furnished about the foregoing to Seller by Buyer or the Company. Seller acknowledges receipt of a copy of this Agreement, the Company's audited financial statements for the fiscal year ended December 31, 1995 and the Company's unaudited financial statements for the nine months ended September 30, 1996. Seller is assuming responsibility, and is not relying on Buyer in any manner whatsoever, to analyze and evaluate any information Seller has received and any additional information Seller desires to obtain. Seller has been furnished, or will obtain, all information Seller requests or desires to know before selling any Company common shares or other equity securities. Seller has had the opportunity to consult with counsel concerning the terms and conditions of this Agreement and the transactions described in this Agreement. 2.1.7 Purchase Price. Seller acknowledges and accepts that the purchase price for the Shares has been determined by negotiations between Seller and Buyer based primarily on the net proceeds Seller desires to receive and the amount Buyer is willing to pay, and the price is not necessarily related to the Company's asset value, net worth, earnings potential or other established criteria of value. Seller acknowledges that he is selling the Shares without obtaining a full valuation of the Company or Seller's interest in the Company. Seller further acknowledges that he is aware (i) that the Company has received a preliminary indication of the range of its valuation under various circumstances from an investment banking firm that may differ from those on which Seller's purchase price is based, (ii) that the Company is discussing potential -3- 4 capital raising transactions, including, without limitation, a potential initial public offering, that might occur as soon as 6 to 18 months after the date of this Agreement, which, if done, could be based on implied valuations that are significantly higher than those on which Seller's purchase price is based, and (iii) that management's projections indicate a significant increase in revenues and income in the near future. However, as with any estimate or projection, the numbers in the estimated valuations and projections are estimates and reflect numerous assumptions, including various assumptions with respect to the anticipated future performance of the Company, industry performance, general business and economic conditions, interest rates, buyers' interests in the Company's business and other matters, most of which are beyond the control of the Company. In addition, unanticipated events and circumstances may affect the actual financial results of the Company. Notwithstanding the foregoing, Seller has satisfied himself regarding the purchase price for the Shares, and Seller agrees that he is assuming sole responsibility to evaluate the fairness of the purchase price. To Buyer's knowledge, there are no current agreements or commitments for an initial public offering of the Company's securities or a business combination involving the Company. 2.2 Buyer's Representations and Warranties. Buyer hereby represents and warrants the following to Seller as of the date of this Agreement and as of the Closing Date: 2.2.1 Authority Relative to This Agreement. Buyer has full power and authority to execute, deliver and perform the terms of this Agreement. No other action on the part of Buyer or any other individual, person or entity, is necessary to authorize this Agreement or the performance by Buyer of the terms of this Agreement. This Agreement has been duly and validly executed and delivered by Buyer and constitutes a valid and binding agreement of Buyer. 2.2.2 Consents and Approvals; No Violation. Except for the consent of the other shareholders pursuant to the Shareholder Agreement, neither the execution and delivery by Buyer of this Agreement nor the performance by Buyer of the terms of this Agreement, (i) will require any authorization, consent or approval of any governmental or regulatory authority or of any other person or entity, (ii) will breach any provision of, constitute a default under, or result in the creation of any lien or security interest under any of the terms or conditions of any license, agreement, evidence of indebtedness, mortgage, security agreement, lease or other obligation to which Buyer is a party, or by which Buyer or any of his properties or assets may be bound, or (iii) will violate any order, writ, injunction, decree, judgment or arbitration award or any statute, rule, regulation or ruling of any court or governmental authority, applicable to Buyer or to his property or assets. 2.2.3 Accredited Investor. Buyer is an "accredited investor" as such term is defined in Rule 501 of Regulation D promulgated under the Securities Act of 1933, as amended (the "Securities Act"). Buyer is an individual with a net worth (including Buyer's spouse's net worth) is in excess of $1,000,000, and with individual income was in excess of $200,000 (or $300,000 with Buyer's spouse's income) for each of 1994 and 1995 and is reasonably expected to be so for 1996. -4- 5 2.2.4 Sophistication. Buyer has substantial prior investment experience, including investments in non-listed and non-registered securities of corporations, and Buyer has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the potential purchase of Seller's Shares. 2.2.5 Investment Intent; Resale. Buyer is purchasing Seller's Shares for Buyer's own account, and not with a view to, or for sale in connection with, any distribution of the Shares, unless the Shares are registered under the Securities Act of 1933, as amended, or an exemption from the registration requirements of such act is available. 2.2.6 Independent Decision. Buyer will make his own investment decision concerning the purchase of the Shares and the purchase price of the Shares. Buyer has not received, and has not and will not rely on, any representations, opinions or recommendations from Seller concerning the purchase, except as otherwise provided in this Agreement, including, without limitation, concerning the Shares, Seller or the Company. 3 COVENANTS. 3.1 Additional Loans. Buyer shall cause the Company to make additional officer loans available to Seller at any time between the date of this Agreement and the Closing Date in an aggregate outstanding principal amount not to exceed $225,000 at the same interest rate (3% per year) and on the same terms and conditions as other loans outstanding from the Company to Seller. 3.2 Repayment of Loans from the Company. On the Closing Date, Seller shall repay, or cause to be repaid, all indebtedness, including, without limitation, all accrued interest, of Seller to the Company (collectively, the "Indebtedness"), including without limitation, (i) the officer loan from the Company to Seller in the original principal amount of $545,000, plus accrued interest, and (ii) any loans made pursuant to Section 3.1 and all accrued interest with respect to such loans. If any of the Indebtedness is not repaid before the purchase price for the Shares is paid, Seller authorizes Buyer to pay to the Company, on behalf of Seller, that portion of the purchase price for the Shares equal to all remaining unpaid Indebtedness to the Company (but not more than the entire purchase price). Such payment shall be credited to the purchase price for the Shares, and Buyer's obligations under Section 1.2 shall be reduced by the amount of such payment. Notwithstanding anything in this Section 3.2 to the contrary, if Buyer pays a portion of the purchase price for the Shares under this Agreement by delivery to Seller at the Closing of a promissory note, (i) Seller's obligation to repay any Indebtedness shall be deferred (and shall continue to accrue interest at the same rate as before the Closing Date) until Buyer makes principal payments under the promissory note described in Section 1.2.2, and (ii) if any of the Indebtedness remains unpaid at the time such principal payments are made on such promissory note, Seller authorizes Buyer to pay to the Company, on behalf of Seller, that portion of the amount due under such promissory note equal to all remaining unpaid Indebtedness to the Company (but not more than the entire amount of such principal payment under such promissory -5- 6 note). Such payment shall be credited to the amount due under such promissory note, and Buyer's obligations under such promissory note shall be reduced by the amount of such payment. 3.3 Resignation. Buyer shall cause the Company to continue to employ Seller as its Executive Vice President in charge of the Rock Direct division at an annual salary of $130,000 until the date of this Agreement (the "Resignation Date"). After the Resignation Date, Seller shall not perform any duties for the Company, including, without limitation, directing the activities of any other employee of the Company; provided that, from the Resignation Date through February 28, 1997, Seller shall continue to perform only such duties for the Company and only at such times as are requested by Buyer on behalf of the Company. On or before the Resignation Date, Seller shall resign from all of his positions with the Company, except as a director of the Company, pursuant to a resignation substantially in the form of the attached Exhibit 3.3. Seller shall deliver a copy of such resignation to Buyer at the Closing. Buyer shall cause the Company to provide the following to Seller as his exclusive severance compensation: 3.3.1 Salary. The ratable portion of Seller's $130,000 per year annual salary through February 28, 1997, payable in accordance with the Company's usual payroll procedures. 3.3.2 Loan Officer Commissions. Seller's loan officer commissions for loans closed on or before February 28, 1997, on the same basis and at the same times as Seller has been paid such commissions in the past. 3.3.3 Bonus. A $200,000 bonus, payable on or before December 31, 1996. 3.3.4 Use of Office. Continued use of Seller's office at the Company through July 1, 1997 for personal purposes or for purposes of carrying on non-Company business; provided that Seller shall reimburse the Company for any extraordinary, incremental (i.e., beyond those incurred if Seller were not using such office) out-of-pocket expenses the Company must pay to third party vendors as a result of Seller's presence in, or use of, that office or his activities in connection with the use of that office. Such purposes may include Seller's use of such office to train his employees for his Business (as defined in Section 3.6). 3.3.5 Medical Insurance. Continued medical and dental insurance for as long as Seller remains a director of the Company, except that (i) if Seller resigns as a director of the Company as described in Section 3.5, the Company will continue to provide such insurance for one year after the date Seller resigns as a director of the Company, and (ii) notwithstanding anything in this Section 3.3.5 to the contrary, the Company's obligation (and Buyer's obligation to cause the Company) to provide Seller with such insurance shall end on the date Seller is employed by another entity providing health coverage. 3.3.6 Office Furniture. Effective on the Resignation Date, Buyer will cause the Company to transfer to Seller all of its right, title and interest in the furniture in Seller's -6- 7 office at the Company on the date of this Agreement. Buyer and Seller agree that the value of such furniture is $3,500, and Seller will, and Buyer will cause the Company to, use that value for federal income tax purposes. 3.3.7 Additional Severance Compensation. The Company has provided, or Buyer will cause the Company to provide, Darren Schwartz and Louis Rubin with their loan officer commissions, overrides and other normal severance compensation (not including any continuation of salary beyond the dates on which their respective employments with the Company terminated) for loans closed on or before January 31, 1997, on the same basis and at the same times as they have been paid such amounts in the past. In addition, Buyer will cause the Company to pay $20,000 in additional severance compensation to each of Darren Schwartz and Louis Rubin on or before July 1, 1997. Also, the Company has provided, or Buyer will cause the Company to provide, Jay Farner and Jeff Perry with their loan officer commissions, overrides and other normal severance compensation (not including any continuation of salary beyond the dates on which their respective employments with the Company terminate) for loans closed on or before 30 days after the termination of their employment with the Company if they are offered employment in Seller's Business (as defined in Section 3.6) and agree to be so employed, on the same basis and at the same times as they have been paid such amounts in the past. 3.4 Dividend. Buyer will cause the Company to declare a dividend, payable on or before September 1, 1997, that will result in Seller receiving a distribution of $1,000,000, and will cause the Company to pay such $1,000,000 distribution to Seller. 3.5 Service as a Director of the Company. Buyer will vote his common shares in the Company to elect Seller as a director of the Company until the earlier of (i) the date on which a company of which Seller is a director, officer, key employee or at least 10% shareholder engages in a business similar to that of the Company and has annual gross revenues of at least $10,000,000, and (ii) the date the Company closes a public offering of its securities registered under the Securities Act of 1933, as amended, pursuant to a registration statement filed with the Securities and Exchange Commission (each a "Terminating Event"). On the date of any Terminating Event, at the request of Buyer, Seller will resign as a director of the Company. 3.6 Consulting with Company Employees. Buyer will cause the Company to permit (i) Seller, and (ii) if Buyer is informed in advance, including, without limitation, by voice mail message, Darren Schwartz and Louis Rubin, if they become executive officers of Seller's Business (as defined below), and (iii) with Buyer's advance permission, any other executive officer of Seller's Business (as defined below), at any time through December 31, 1998 (and thereafter as Buyer, Seller and the Company may agree), to consult with Company employees concerning areas of the Company's business and operations that are similar to the business or operations of any mortgage business formed or acquired by Seller and that is consistent with Seller's obligations under Section 3.8 (the "Business"); provided that (i) such consultation shall not disrupt the Company's business, (ii) such right to consult shall expire when the Business has annual gross revenues in any year of at least $10,000,000, (iii) if such consultation requires more -7- 8 than occasional personal or telephone conversations or sporadic meetings with Company employees, Seller must (A) obtain Buyer's prior consent to such consultation, and (B) pay fair market value for the consulting services provided to Seller, and (iv) any request for any documentation or anything else in writing must be made through Buyer, including, without limitation, any requests for books, memoranda and forms of agreements. 3.7 Reimbursement for Costs of Outstanding Promises. Seller shall indemnify, defend and save and hold harmless the Company from and against any damage, liability, loss, claim, cost, debt, expense, obligation, tax, assessment, public charge, lawsuit, contract, agreement, undertaking, deficiency of any kind or nature, demand, lawsuit, action or cause of action, whether known or unknown, fixed, actual, accrued, or contingent, liquidated or unliquidated (including but not limited to, interest, penalties, reasonable attorneys' fees and other actual reasonable costs and expenses incident to proceedings or investigations or the defense of any claim, whether or not litigation has commenced) arising out of, resulting from, or relating to, and will pay the Company on demand the full amount of any sum which the Company pays or becomes obligated to pay on account of, (i) Seller's written commitments on behalf of the Company to provide Stuart Perlman and A. Steven Shapiro with mortgage loans at fixed rates and with specified maturities, which rates and/or maturities differ from the loans actually made to them, or (ii) any other written commitment made by Seller on behalf of the Company outside of the ordinary course of the Company's business that is similar to those described in clause (i). 3.8 Covenant Not to Compete and Related Matters. 3.8.1 Seller's Acknowledgment. Seller acknowledges that the Company has expended considerable time, money and resources in initiating and commencing the operations of the Company; recruiting, training and developing the skills and abilities of the employees of the Company; developing business relationships with investors, referral sources and customers so as to improve the goodwill of the Company; establishing and maintaining close business relationships between the Company and its customers; and obtaining, compiling and developing confidential customer lists, various internal computer reports, and other proprietary business information not readily available to the public or through other sources. Seller further acknowledges that, except as otherwise provided in this Section 3.8, the Company is entitled to keep the results of such efforts (to the extent they represent protectable proprietary information or other protectable intellectual property of the Company) for its exclusive use. Accordingly, Seller agrees to the provisions of this Section 3.8 and agrees that such provisions are necessary to preserve and protect the legitimate business interests of the Company. 3.8.2 Seller's Non-Compete Covenant. Seller represents, warrants, covenants and agrees, for the benefit of Buyer, the Company and their affiliates, successors and assigns, that from the date of this Agreement through December 31, 1998 (the "Covenant Period'), he shall not, either directly or indirectly, whether on his own behalf or on behalf of any other person, business or entity whatsoever, engage in, or have any interest in or be associated with (whether as an officer, director, shareholder, partner, member, associate, employee, consultant, advisor, owner or otherwise), any corporation, partnership, limited liability company, association, trust, -8- 9 firm or other enterprise (including any pre-incorporated association) which is engaged in originating any loans secured by any property located in the State of Michigan (the "Mortgage Activity") without first obtaining the express written consent of the President of the Company; except that notwithstanding the foregoing, Seller may (i) invest in any publicly-held corporation engaged in the Competing Activity, if such investment does not exceed one (1%) percent in the aggregate in value of the issued and outstanding capital stock of such corporation, and (ii) continue to own the interest in the Company he owns as of the date of this Agreement. 3.8.3 Seller's Non-Solicitation Covenant. Seller represents, warrants, covenants and agrees, for the benefit of Buyer, the Company and their affiliates, successors and assigns, that from the date of this Agreement through two years after the Closing Date, he shall not, either directly or indirectly, whether on his own behalf or on behalf of any other person, business or entity whatsoever, solicit, induce or attempt to induce any present employee of the Company or any former employee of the Company who left the employ of the Company at any time within one year immediately preceding the date of this Agreement to leave the employment of the Company or enter into the employ of (i) Seller, (ii) any entity of or to which Seller is an employee, member, officer, consultant or advisor or in which Seller otherwise has any interest whatsoever, or (iii) any competitor of the Company, without the Company's prior written consent, except that Seller may (A) during the 30-day period beginning on the date Seller notifies Buyer that such period is starting (which must be on or before June 1, 1997), talk about the possibility of employment by the Business (subject to the restrictions described in Section 3.8) to Darren Schwartz, Louis Rubin, Jay Farner, Jeff Perry and any four additional employees, provided that only three of such four additional employees may be employed in the Company's Boulder Financial division (the "Additional Employees"), outside of the Company's offices only (except that he may talk to Darren Schwartz, Louis Rubin, Jay Farner and Jeff Perry at any time before the beginning of such 30-day period through the end of such 30-day period), and (B) hire, only during the same 30-day period, any of such persons for such Business, if they agree to be so employed and if no more than two of the Additional Employees hired for such Business were employed in the Company's Boulder Financial division; and Buyer shall cause the Company to waive any of its non-competition restrictions prohibiting such persons from being so employed, but not otherwise. If Jay Farner and Jeff Perry are offered such employment and agree to be so employed, Buyer will cause the Company, at no cost to Seller or the Business, to allow them to participate in the Company's Boulder Financial division's normal training program. 3.8.4 Seller's Confidentiality Covenant. Seller represents, warrants, covenants and agrees, for the benefit of Buyer, the Company and their affiliates, successors and assigns, that before, on and after the date of this Agreement, he shall not, either directly or indirectly, whether on his own behalf or on behalf of any other person, business or entity whatsoever use, copy, publish, disseminate, distribute or otherwise disclose any proprietary information, customer lists, advertising materials or copy, trademarks, service marks, copyrights, logos, packaging, trade secrets or other intellectual property of the Company, including, without limitation, any of the foregoing relating to any of the Company's proprietary applications packages, such as "MORTGAGE IN A BOX(R)" products and forms (collectively, "Proprietary Information"); provided that the parties agree the Proprietary Information does not include any of the following: -9- 10 (i) internal Company documents, such as management report forms, employee handbooks and similar documents, or (ii) standardized industry and other non-proprietary legal forms, other than those relating to any of the Company's proprietary application kits, such as "MORTGAGE IN A BOX(R)" products and forms and other than those containing any Company trademarks, service marks, copyrights, logos, proprietary packaging or similar rights. 3.8.5 Distinct Covenants. Buyer, Seller and the Company intend that the covenants set forth in this Section 3.8 (the "Covenants") shall be deemed to be a series of separate covenants with respect to the Mortgage Activities of the Company, one for each and every political subdivision of each state and county to which such Covenants apply. Seller acknowledges and agrees that the Covenants are reasonable and valid in geographical and temporal scope and in all other respects. If any court determines that any Covenant, or any portion of any Covenant, is invalid or unenforceable, the remainder of the Covenants shall not be affected and shall be given full force and effect, without regard to the invalid Covenant or the invalid portion. If any court determines that any Covenant, or any portion of any Covenant, is unenforceable because of its duration or geographic scope, such court shall have the power to reduce such duration or scope, as the case may be, and, enforce such Covenant or portion in such reduced form. Seller intends to and hereby confers jurisdiction to enforce the Covenants above upon the courts of any jurisdiction within the geographical scope of such Covenants. If the courts of any one or more of such jurisdictions hold the Covenants, or any portion of any Covenant, unenforceable by reason of their breadth of scope or otherwise, it is the intention of Seller that such determination not bar or in any way affect the right of Buyer or the Company to the relief provided above in the courts of any other jurisdiction within the geographical scope of such Covenants as to breaches of such Covenants in such other respective jurisdictions. 3.8.6 Breach of Covenants Constitutes Breach of Agreement/Specific Enforcement. Seller covenants and agrees that a breach or attempted breach of any of the Covenants, constitutes a breach of this Agreement. In the event of a breach of any Covenant or any other provision of this Agreement, in addition to any and all legal and equitable rights available to Buyer, the Company or both, such Covenants may be specifically enforced by a temporary and/or permanent injunction in an action in equity. Seller hereby acknowledges that remedies at law for such a breach or threatened breach of the Covenants are inadequate. 3.9 Rock Insurance Interest. Buyer hereby grants Seller an option to purchase, at any time within 90 days after a time chosen by Buyer, but the time chosen by Buyer must be on or before March 31, 1997 (because Buyer intends to address the capitalization of Rock Insurance Company during the first quarter of 1997), sufficient shares of Buyer's Rock Insurance Company stock so that Seller would own 30% of the combined Rock Insurance Company shares owned by Seller and Buyer on the date of the exercise of such option. The exercise price of such option is payable by Seller to Buyer, in cash at the time of such exercise, and equals the same average cost per share paid by Buyer for his equity interest in Rock Insurance Company through the first date such option is exercisable. Notwithstanding the preceding sentence, if Buyer pays a portion of the purchase price for the Shares under this Agreement by delivery to Seller at the Closing of a promissory note, Seller may pay such exercise price by delivery of a promissory note in the -10- 11 principal amount equal to such exercise price, maturing on August 31, 1998, and bearing interest at the annual rate of 9%, in substantially the form attached as Exhibit 1.2.2, except that Buyer and Seller would be reversed and the principal amount would be adjusted to equal the option exercise price. This option is not transferrable by Seller without Buyer's consent. It is a condition to the exercise of such option that Seller enter into a shareholders agreement among Rock Insurance Company's shareholders with respect to their interests in Rock Insurance Company on the same terms and conditions as the agreement among the Company's shareholders as of the date of such exercise, except as modified by mutual agreement of the parties to such shareholders agreement. If Seller exercises such option and desires to sell or transfer all or any part of such shares (other than to a revocable inter vivos trust for the benefit of Seller and of which Seller is the sole trustee, which trust shall be treated for all purposes as the Seller for purposes of this Section 3.9, and such trust and the shares transferred to the trust, shall be bound by the terms and conditions of this Section 3.9), he must first give written notice to Buyer of such proposed sale or transfer, which notice shall state the name and address of the proposed transferee, the amount of the equity interest, and the price, terms of payment, and conditions of such proposed sale or transfer. Buyer shall have the exclusive option for a period of sixty days after receipt of such notice in which to purchase all or none of such shares proposed to be sold or transferred at the price and on the other terms and conditions stated in such notice. Such option shall be exercised by giving written notice thereof to Seller. If Buyer fails to exercise his option within such sixty-day period, Seller shall be free, for the next sixty days after the expiration of the sixty-day option period, to sell or transfer such equity interest to the proposed person or entity on the proposed terms and conditions free of any restrictions under this Agreement. If the sale or transfer is not consummated within such sixty-day period, the restrictions and option provided in this Section 3.9 shall again apply. 3.10 Interest in Seller's New Business. Seller hereby grants Buyer an option to purchase, at any time within 90 days after Seller notifies Buyer in writing that he has both formed the Business and signed a lease for the premises from which the Business will be operated, a 17% equity interest in the Business, at the same average cost per share paid by Gary Gilbert for his interest. Until the later of two years after the Closing Date and six months after Seller provides Buyer with the notice described in the preceding sentence (the "Period"), Buyer may sell or transfer all or any portion of such equity interest, such option or any combination of the foregoing to Lindsay Gross, Steven Stone, Adam Schoener, Ross Niskar, or any combination of the foregoing, without obtaining the consent of any person or entity and without providing any person or entity a right of first refusal with respect to such sale or transfer. During the Period, no other sale or transfer of such equity interest, such option or any combination of the foregoing shall be permitted without Seller's consent. It is a condition to the exercise by any person (including, Buyer, Lindsay Gross, Steven Stone, Adam Schoener, Ross Niskar, or any combination of the foregoing, as the case may be) of such option that such person enter into a Shareholders Agreement among the shareholders of the Business on the same terms and conditions as the agreement among the Company's shareholders as of the date of such exercise (except that Seller would be substituted for Buyer and Buyer would be substituted for Seller in -11- 12 the new agreement), except as modified by mutual agreement of the parties to such Shareholders Agreement. After the end of the Period, if Buyer desires to sell or transfer all or any part of such equity interest (other than to a revocable inter vivos trust for the benefit of Buyer and of which Buyer is the sole trustee, which trust shall be treated for all purposes as the Buyer for purposes of this Section 3.10, and such trust and the shares transferred to the trust, shall be bound by the terms and conditions of this Section 3.10), he must first give written notice to Seller of such proposed sale or transfer, which notice shall state the name and address of the proposed transferee, the amount of the equity interest, and the price, terms of payment, and conditions of such proposed sale or transfer. Seller shall have the exclusive option for a period of sixty days after receipt of such notice in which to purchase all or none of such equity interest proposed to be sold or transferred at the price and on the other terms and conditions stated in such notice. Such option shall be exercised by giving written notice thereof to Buyer. If Seller fails to exercise his option within such sixty-day period, Buyer shall be free, for the next sixty days after the expiration of the sixty-day option period, to sell or transfer such equity interest to the proposed person or entity on the proposed terms and conditions free of any restrictions under this Agreement. If the sale or transfer is not consummated within such sixty-day period, the restrictions and option provided in this Section 3.10 shall again apply. 3.11 Consent. Buyer, Seller and the Company are all parties to the Rock Financial Corporation Stock Purchase Agreement, dated as of June 29, 1987 (the "Shareholders Agreement"). Each of Buyer, Seller and the Company has received, has read and understands this Agreement. Each of Buyer, Seller and the Company agrees that this Section 3.11 constitutes prior written consent of the Company, Buyer and Seller (i.e., the Corporation, as defined in the Shareholders Agreement, and two of the Shareholders, as defined in the Shareholders Agreement) pursuant to Section 1 of the Shareholders Agreement with respect to the transactions described in this Agreement. Each of Buyer, Seller and the Company consents to the sale and transfer of the Shares to Buyer pursuant to the terms and conditions of this Agreement, notwithstanding any restrictions on sale or transfer of such Shares or any options to purchase such equity interest or Shares pursuant to the Shareholders Agreement, all of which are hereby waived. Each of Buyer, Seller and the Company also agrees that the provisions of Section 3 of the Shareholders Agreement shall not apply to the Shares being sold pursuant to this Agreement as a result of Seller's resignation as an employee of Rock Financial Corporation. 3.12 Subchapter S Filings. If the Company's Board of Directors determines to treat the taxable year of the Company in which Seller's interest in the Shares is sold to Buyer as two taxable years pursuant to Section 1377(a)(2) of the Internal Revenue Code of 1986, as amended (the "Code") or Section 1.1368-1(g) of the Treasury Regulations, then Seller shall execute and file any and all consents and other documents required by Section 1377(a)(2) of the Code, the underlying Treasury Regulations or Section 1.1368-1(g) of the Treasury Regulations as may be necessary to effect such determination. -12- 13 3.13 Further Assurances. Each of the parties will promptly prepare, execute and deliver to the other party such lists, instruments and documents and cooperate with the other party in such other respects as the other party may from time to time, before or after the Closing, reasonably request. 4 CONDITIONS TO CLOSING. 4.1 Conditions to Buyer's Obligations. The obligations of Buyer under this Agreement are subject to the satisfaction of the following conditions at or before the Closing, provided that Buyer may waive the satisfaction of any such condition pursuant to a writing signed by Buyer: 4.1.1 Accuracy of Seller's Representations and Warranties. All representations and warranties made by Seller in this Agreement, including, without limitation, the representations and warranties in Section 2.1, shall be true, accurate and correct in all material respects at and as of the Closing Date, with the same force and effect as though such representations and warranties had been made at and as of the Closing Date. 4.1.2 Compliance with Covenants. All actions, undertakings, covenants or agreements required to be performed by Seller, on or before the Closing Date, including, without limitation, the covenants of Seller in Section 3, shall have been so performed or complied with in all material respects within 30 days after Buyer notifies Seller in writing of any failure of such performance or compliance by Seller, and Seller shall have delivered evidence of such performance or compliance on the Closing Date. The parties agree to extend the Closing Date until the earlier of the expiration of such 30-day period or the date such failure is cured. 4.1.3 Resignation. Seller shall have signed and delivered the resignation described in Section 3.3 and shall have delivered a copy of such executed resignation to Buyer. 4.2 Conditions to Seller's Obligations. The obligations of Seller under this Agreement are subject to the satisfaction of the following conditions at or before the Closing, provided that Seller may waive the satisfaction of such conditions pursuant to a writing signed by Seller: 4.2.1 Accuracy of Buyer's Representations and Warranties. All representations and warranties made by Buyer in this Agreement, including, without limitation, the representations and warranties in Section 2.2, shall be true, accurate and correct in all material respects at and as of the Closing Date, with the same force and effect as though such representations and warranties had been made at and as of the Closing Date. 4.2.2 Compliance with Covenants. All actions, undertakings, covenants or agreements required to be performed by Buyer, on or before the Closing Date, including, without limitation, the covenants of Buyer in Section 3, shall have been so performed or complied with in all material respects within 30 days after Seller notifies Buyer in writing of any failure of such performance or compliance by Buyer, and Buyer shall have delivered evidence of such -13- 14 performance or compliance on the Closing Date. The parties agree to extend the Closing Date until the earlier of the expiration of such 30-day period or the date such failure is cured. 4.3 Remedy for Failure of a Condition. If any condition to Buyer's obligations under this Agreement, as set forth in Section 4.1, is not met on or before the Closing Date, Buyer's sole and exclusive remedy shall be to terminate this Agreement by written notice to Seller. If any condition to Seller's obligations under this Agreement, as set forth in Section 4.2, is not met on or before the Closing Date, Seller's sole and exclusive remedy shall be to terminate this Agreement by written notice to Buyer. If this Agreement is terminated pursuant to this Section 4.3, this Agreement shall be void and treated as if it never existed; for example, Seller's resignation pursuant to Section 3.3 shall be void and treated as if it had never been given. 5 INDEMNITY. Notwithstanding the Closing, and regardless of any investigation made at any time by or on behalf of either party, each of the parties shall indemnify, defend and save and hold harmless the other party from and against any damage, liability, loss, claim, cost, debt, expense, obligation, tax, assessment, public charge, lawsuit, contract, agreement, undertaking, deficiency of any kind or nature, demand, lawsuit, action or cause of action, whether known or unknown, fixed, actual, accrued, or contingent, liquidated or unliquidated (including but not limited to, interest, penalties, reasonable attorneys' fees and other actual reasonable costs and expenses incident to proceedings or investigations or the defense of any claim, whether or not litigation has commenced) arising out of, resulting from, or relating to, and to pay the other party on demand the full amount of any sum which the other party pays or becomes obligated to pay on account of (i) any breach by such party of the terms, provisions, conditions, representations, warranties or covenants contained in this Agreement, or (ii) any actions of such party, or his agents or representatives inconsistent with such terms, provisions, conditions, representations, warranties or covenants. Notwithstanding anything in this Section 5 to the contrary, no party (the "Paying Party") shall be liable to indemnify, defend and save and hold harmless any other party under this Section 5 unless (i) the Paying Party shall have received notice of a claim under this Section 5, which notice identifies the breach or actions giving rise to such claim, and (ii) such breach or actions shall not have been cured within 30 days after the Paying Party receives such notice. 6 RELEASE. As of the Closing Date, Seller releases Buyer, the Company and the Company's directors, officers, employees, affiliates, representatives, agents and attorneys, and their successors and assigns from all causes of action, claims, and damages based on any facts existing at the Closing Date, except for any claims under this Agreement. As of the Closing Date, Buyer and the Company release Seller and his successors and assigns from all causes of action, claims, and damages based on any facts existing at the Closing Date, except for any claims under this Agreement. 7 DISCLAIMER. Neither party is recommending the purchase or sale of the Shares to the other party or giving the other party any representations, warranties or opinions whatsoever, including any concerning such purchase and sale, the purchase price, or the Shares, except for those explicitly contained in this Agreement. Each party has determined and evaluated the -14- 15 purchase price for the Shares himself. Seller is assuming full responsibility to independently evaluate its sale of the Shares and the sale price of the Shares without any reliance on Buyer, and to obtain, verify and evaluate all material information necessary or desired by Seller to make his decision, including, without limitation, information concerning Buyer, the Company, its directors, officers and principal shareholders, its related party transactions, its financial condition and needs, its business, its products, markets, customers, suppliers, and competitors, its facilities, its contingent obligations, its securities and their relative rights, preferences and privileges, and any potential issuance of additional securities. The parties agree that no representations or warranties are made regarding the transactions described in this Agreement, except for those representations and warranties explicitly contained in this Agreement. 8 MISCELLANEOUS. 8.1 Transfer or Other Taxes. Any sales, use, stock transfer, excise or other taxes payable in connection with the sale of the Shares to Buyer and consummation of the transactions described in this Agreement shall be paid by Seller, and evidence of the payment of such taxes shall be furnished to Buyer upon its request. 8.2 Finder's Fee. Buyer and Seller each represents and warrants that no broker, finder or other person is entitled to any brokerage fee, commission, or finder's fee in connection with the transactions contemplated by this Agreement. Buyer and Seller shall each pay or discharge and shall indemnify and hold the other harmless from and against any and all claims or liabilities for brokerage commissions or finder's fees incurred in any action taken by him. 8.3 Survival of Provisions. The representations, warranties and covenants of the parties contained in this Agreement shall survive the Closing, and each of them shall be binding upon the parties at all times after the execution of this Agreement, including, without limitation, after the Closing, and they shall be enforceable against each of the parties by the other party at all times after the execution of this Agreement, including, without limitation, after the Closing. 8.4 Governing Law and Forum. The laws of the State of Michigan shall govern this Agreement, its construction, and the determination of any rights, duties or remedies of the parties arising out of or relating to this Agreement. The parties acknowledge that the United States District Court for the Eastern District of Michigan or the Michigan Circuit Court of the County of Oakland shall have exclusive jurisdiction over any case or controversy arising out of or relating to this Agreement and that all litigation arising out of or relating to this Agreement shall be commenced in the United States District Court for the Eastern District of Michigan or in the Oakland County (Michigan) Circuit Court. 8.5 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. -15- 16 8.6 Interpretation. The headings contained in this Agreement are solely for the purpose of reference, are not part of the agreement of the parties and shall not in any way affect the meaning or interpretation of this Agreement. 8.7 Entire Agreement. This Agreement, including the exhibits and other documents referred to in this Agreement, embodies the entire agreement and understanding of the parties to this Agreement with respect to the subject matter of this Agreement. There are no restrictions, promises, representations, warranties, covenants or undertakings, other than those expressly set forth in this Agreement. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter, and any such prior agreements or understandings are merged into this Agreement. 8.8 Severability. If any provision of this Agreement is determined to be illegal or invalid, such illegality or invalidity shall have no effect on the other provisions of this Agreement, which shall remain valid, operative and enforceable. 8.9 Notices. Any notice required or permitted to be given pursuant to this Agreement shall be delivered in person, sent by certified or registered mail, sent by facsimile or similar method of transmission or sent by overnight courier, (i) if to Buyer, to Daniel B. Gilbert, c/o Rock Financial Corporation, 30600 Telegraph Road, Fourth Floor, Bingham Farms, MI 48025 (fax number (810) 540-9113), and (ii) if to Seller, to Gary Gilbert, 584 Hanna, Birmingham, Michigan 48009. Such notice shall be deemed given as of the earliest of (i) when received, (ii) three business days after sent by certified or registered mail, (iii) the day sent by facsimile or similar transmission, and (iv) the date by which the overnight courier guaranties delivery. Either party may change his address for such notice by notice to the other party. 8.10 No Waiver. No waiver of any breach of any agreement or provision contained in this Agreement shall be deemed a waiver of any preceding or succeeding breach of this Agreement or of any other agreement or provision contained in this Agreement. No extension of time for the performance of any obligations or acts shall be deemed an extension of time for the performance of any other obligations or acts. 8.11 Binding Effect; Assignment. This Agreement shall be binding upon and inure to the benefit of the parties to this Agreement and their respective successors. Neither party may assign or transfer any of his rights or delegate any of his obligations under this Agreement without the prior written consent of the other party, and any purported assignment or transfer by either party without such consent shall be void. -16- 17 IN WITNESS WHEREOF, Buyer and Seller have executed this Agreement as of the date set forth in the introductory paragraph of this Agreement. /s/ Daniel B. Gilbert ------------------------- Daniel B. Gilbert "Buyer" /s/ Gary Gilbert ------------------------- Gary Gilbert "Seller" The undersigned is signing this Agreement solely to agree to the provisions of Sections 3.11 and 6. ROCK FINANCIAL CORPORATION By: /s/ Daniel Gilbert ----------------------- Its: President ------------------ The undersigned is signing this Agreement solely to agree to the provisions of Section 3.11. /s/ Lindsay Gross -------------------------- Lindsay Gross -17- 18 EXHIBIT 1.2.2 PROMISSORY NOTE $3,942,500 Date of Note: February 28, 1997 Bingham Farms, Michigan FOR VALUE RECEIVED, Daniel B. Gilbert ("Buyer"), promises to pay to Gary Gilbert (the "Seller"), (i) the principal sum of Three Million Nine Hundred Forty-Two Thousand Five Hundred Dollars ($3,942,500) on or before August 31, 1998 (the "Maturity Date"), and (ii) accrued, but unpaid, interest on the unpaid principal from time to time outstanding from and including the date of this Promissory Note (the "Note") until the full amount of principal has been paid, all as specified below, and all subject to the prepayment provisions specified below. Buyer will pay interest on the indebtedness outstanding under this Note from time to time (calculated on the basis of a year of 365 or 366 days, as applicable, for the actual number of days elapsed) at an annual interest rate of nine percent (9%) until paid; provided that such annual interest rate shall be twelve percent (12%) on any installment of principal or interest due (including by acceleration) and not paid by 10 days after its due date, from the date the installment was due until the date it is paid. All accrued interest shall be payable on the first day of each month beginning April 1, 1997, and on the Maturity Date, but not at the date of any prepayment under this Note. This Note may also be prepaid, in whole or in part, at any time and from time to time at Buyer's discretion without any prepayment charge, premium or penalty, except that this Note may not be prepaid without Seller's consent before January 1, 1998. Any partial prepayment shall be applied first against the principal amount outstanding under this Note and then against the accrued interest under this Note. If any payment of interest made under this Note or made in connection with the indebtedness evidenced by this Note, or if any law that applies to this loan and which sets maximum loan charges, shall at any time be determined by a competent court to be in excess of the amount which can lawfully be charged under applicable law, then any such payment, to the extent of such excess, shall be credited to the payment of principal, or, at the election of the Seller, returned to Buyer. Any such amounts credited to the payment of principal shall be treated as a partial prepayment. Both principal and interest shall be payable in lawful money of the United States of America at the Seller's address set forth in the Stock Purchase Agreement, dated as of January 17, 1997, between Buyer and Seller (the "Stock Purchase Agreement"), or at such other place as the Seller may from time to time designate in writing. Buyer will be in default under this Note if he does not pay the full amount of each payment (principal, interest or both) within 10 days after the date it is due. If Buyer is in default, unless such default is remedied, Seller may require Buyer to pay immediately the full amount of 19 principal under this Note which has not been paid and all interest that Buyer owes on that amount. Seller's exercise of this right shall be by written notice to Buyer. Even if, at a time when Buyer is in default, Seller does not require Buyer to pay immediately in full as described above, Seller will still have the right to do so if Buyer is in default at a later time. Seller will also have all rights and remedies afforded by law or available under this Note upon any default under this Note. The Seller shall not, by any act or omission, be deemed to waive any of his rights, remedies or powers under this Note or otherwise, unless such waiver is in writing signed by the Seller. Any written waiver of a default shall not be construed as a waiver of such default in the future or of any other default. Buyer agrees to pay all costs of enforcement of this Note, including reasonable attorneys' fees and court costs. This Note is subject to the terms and conditions of Section 3.2 of the Stock Purchase Agreement. Unless applicable law requires a different method, any notice that must be given under this Note will be given in the manner described in Section 8.9 of the Stock Purchase Agreement. This Note shall not be transferable or assignable by Buyer or Seller without the prior written consent of the other party. No party shall be deemed, by an act or omission to have waived any right or remedy under this Note, unless the waiver is in writing and signed by such party, and then only to the extent specifically set forth in that writing. A waiver with reference to one event shall not be construed as continuing, or as a bar or waiver to any right or remedy as to a subsequent event. This Note is executed and delivered in the State of Michigan, and the laws of the State of Michigan shall govern this Note, its construction, and the determination of any rights, duties or remedies of the parties arising out of or relating to this Note. Buyer and Seller acknowledge that the United States District Court for the Eastern District of Michigan or the Michigan Circuit Court of the County of Oakland shall have exclusive jurisdiction over any case or controversy arising out of or relating to this Note and that all litigation arising out of or relating to this Note shall be commenced in the United States District Court for the Eastern District of Michigan or in the Oakland County (Michigan) Circuit Court. Buyer waives presentment, notice of dishonor and nonpayment of this Note. All references in this Note to the Seller or the Buyer shall apply to their respective successors and assigns. -------------------------- Daniel B. Gilbert -2- 20 EXHIBIT 3.3 RESIGNATION Effective January 17, 1997, I, Gary Gilbert, resign from all of my positions with, including, without limitation, as Executive Vice President of, Rock Financial Corporation, a Michigan corporation (the "Company"), except as a director of the Company. Effective January 17, 1997, I, Gary Gilbert, also resign from all of my positions with, including, without limitation, as trustee of, and from any other fiduciary capacity with, any of the Company's employee benefit plans. IN WITNESS WHEREOF, I have signed this Resignation as of January 17, 1997. ---------------------- Gary Gilbert 21 AMENDMENT TO STOCK PURCHASE AGREEMENT THIS AMENDMENT TO STOCK PURCHASE AGREEMENT (the "Amendment") is made as of February 26, 1997 between Gary Gilbert ("Seller") and Daniel B. Gilbert ("Buyer"). R E C I T A L S A. Seller and Buyer have entered into the Stock Purchase Agreement, dated as of January 17, 1997 (the "Agreement"). B. Neither Bear Stearns & Co., Inc. nor any other similar financing source has funded a loan to Buyer sufficient to pay the entire purchase price for the Shares (as defined in the Agreement), and Buyer and Seller desire to revise the provisions of the Agreement concerning the payment of the purchase price for the Shares. THEREFORE, the parties agree as follows: 1. Purchase Price. Section 1.2 of the Agreement is deleted and restated to read as follows: "1.2 Purchase Price. The purchase price for the Shares shall be $4,242,500. Such purchase price shall be payable as follows: "1.2.1 payment in cash, by check or by wire transfer delivered by Buyer to Seller at the Closing, subject to the provisions of Section 3.2, of (i) $2,000,000, plus (ii) an amount of cash equal to all indebtedness, including, without limitation, all accrued interest, of Seller to the Company as of the Closing Date; and "1.2.2 delivery to Seller at the Closing of 142,857 shares of iCat Corporation, a Delaware corporation, Series C Convertible Preferred Stock, par value $.001 per share, valued for purposes of this Agreement at $3.50 a share (the "iCat Shares"). The certificates for the iCat Shares shall, when so delivered by Buyer, be duly endorsed for transfer to Seller or have executed stock powers endorsed to Seller attached to the iCat Shares, and Buyer shall have paid or provided for all requisite documentary and/or stock transfer stamps. Such certificates for the iCat Shares shall also be accompanied by any other documents that are necessary to transfer to Seller good and marketable title to the Shares. 1.2.2.1 Buyer represents, warrants and covenants that (i) he is the legal and beneficial owner of the iCat Shares, (ii) the iCat Shares are free and clear of all liens, encumbrances, security interests, mortgages, pledges, rights, options, warrants, and adverse claims of any nature whatsoever, except that the iCat Shares are restricted securities under the Securities Act of 1933 and are subject to the terms and conditions of a Shareholders Agreement and a Registration Rights Agreement, both dated as of January 11, 1994, as amended, 22 among iCat Corporation and its shareholders listed on the signature pages to the agreements, as amended, (iii) Buyer's assignment of the iCat Shares will vest in Seller valid title to such iCat Shares without the approval, agreement, consent, authorization, or similar action of any party which has not been obtained (assuming Seller executes and delivers an investment representation required by iCat Corporation at the Closing), (iv) the assignment of the iCat Shares will not violate any applicable law, ordinance, rule, regulation, or iCat Corporation bylaw, and (v) all expenses imposed by third parties to register the transfer of the iCat Shares from Buyer to Seller will be paid by Buyer. 1.2.2.2 Seller represents, warrants and covenants that (i) the iCat Shares will be acquired for investment for Seller's own account, not as a nominee or agent, and not with a view to distributing all or any part of such iCat Shares, (ii) Seller has no present intention of selling, granting any participation in or otherwise distributing any of the iCat Shares in any manner contrary to the Securities Act of 1933 or any applicable state securities law, (iii) Seller does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person with respect to any of the iCat Shares, (iv) Seller is solely responsible for his own due diligence investigation of iCat Corporation and its business, and his analysis of the merits and risks of the investment in the iCat Shares, (v) Seller is a current shareholder of iCat Corporation, has access to full and complete information regarding iCat Corporation and has used such access to his satisfaction for the purpose of obtaining information about iCat Corporation, (vi) Seller, either alone or with the assistance of his professional advisor, is a sophisticated investor, is able to fend for himself in the acquisition of the iCat Shares pursuant to this Agreement, and has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the prospective investment in the iCat Shares, and (vii) Seller is a natural person whose individual net worth at the time of the acquisition of the iCat Shares exceeds $1,000,000; and "1.2.3 delivery to Seller at the Closing of a promissory note in the principal amount equal to (i) $4,242,500, minus (ii) (A) $2,000,000, (B) an amount equal to all indebtedness, including, without limitation, all accrued interest, of Seller to the Company as of the Closing Date, and (C) $499,999.50. The promissory note shall mature one year after the Closing Date, bear interest at the annual rate of 9%, payable quarterly, and be in substantially the form attached as Exhibit 1.2.3." 2. Repayment of Loans. Section 3.2 of the Agreement is deleted and restated to read as follows: "3.2 Repayment of Loans from the Company. On the Closing Date, Seller shall repay, or cause to be repaid, all indebtedness, including, without -2- 23 limitation, all accrued interest, of Seller to the Company (collectively, the "Indebtedness"), including without limitation, (i) the officer loan from the Company to Seller in the original principal amount of $545,000, plus accrued interest, and (ii) any loans made pursuant to Section 3.1 and all accrued interest with respect to such loans. If any of the Indebtedness is not repaid before the purchase price for the Shares is paid, Seller authorizes Buyer to pay to the Company, on behalf of Seller, that portion of the purchase price for the Shares equal to all remaining unpaid Indebtedness to the Company (but not more than the entire purchase price). Such payment shall be credited to the purchase price for the Shares, and Buyer's obligations under Section 1.2 shall be reduced by the amount of such payment." 3. Rock Insurance. The first paragraph of Section 3.9 of the Agreement is deleted and restated to read as follows: "3.9 Rock Insurance Interest. Buyer hereby grants Seller an option to purchase, at any time within 90 days after a time chosen by Buyer, but the time chosen by Buyer must be on or before March 31, 1997 (because Buyer intends to address the capitalization of Rock Insurance Company during the first quarter of 1997), sufficient shares of Buyer's Rock Insurance Company stock so that Seller would own 30% of the combined Rock Insurance Company shares owned by Seller and Buyer on the date of the exercise of such option. The exercise price of such option is payable by Seller to Buyer, in cash at the time of such exercise, and equals the same average cost per share paid by Buyer for his equity interest in Rock Insurance Company through the first date such option is exercisable. This option is not transferrable by Seller without Buyer's consent. It is a condition to the exercise of such option that Seller enter into a shareholders agreement among Rock Insurance Company's shareholders with respect to their interests in Rock Insurance Company on the same terms and conditions as the agreement among the Company's shareholders as of the date of such exercise, except as modified by mutual agreement of the parties to such shareholders agreement." 4. Promissory Note. Exhibit 1.2.2 to the Agreement is deleted and restated to read as follows: EXHIBIT 1.2.3 PROMISSORY NOTE $ ------------ Date of Note: February 26, 1997 Bingham Farms, Michigan -3- 24 FOR VALUE RECEIVED, Daniel B. Gilbert ("Buyer"), promises to pay to Gary Gilbert (the "Seller"), (i) the principal sum of ___________________ ($____________) on or before [February 28, 1998] (the "Maturity Date"), and (ii) accrued, but unpaid, interest on the unpaid principal from time to time outstanding from and including the date of this Promissory Note (the "Note") until the full amount of principal has been paid, all as specified below, and all subject to the prepayment provisions specified below. Buyer will pay interest on the indebtedness outstanding under this Note from time to time (calculated on the basis of a year of 365 or 366 days, as applicable, for the actual number of days elapsed) at an annual interest rate of nine percent (9%) until paid; provided that such annual interest rate shall be twelve percent (12%) on any installment of principal or interest due (including by acceleration) and not paid by 10 days after its due date, from the date the installment was due until the date it is paid. All accrued interest shall be payable on May 31, 1997, August 31, 1997, November 30, 1997 and the Maturity Date, but not at the date of any prepayment under this Note. This Note may also be prepaid, in whole or in part, at any time and from time to time at Buyer's discretion without any prepayment charge, premium or penalty, except that this Note may not be prepaid in any amount without Seller's consent before January 1, 1998. Any partial prepayment shall be applied first against the principal amount outstanding under this Note and then against the accrued interest under this Note. If any payment of interest made under this Note or made in connection with the indebtedness evidenced by this Note, or if any law that applies to this loan and which sets maximum loan charges, shall at any time be determined by a competent court to be in excess of the amount which can lawfully be charged under applicable law, then any such payment, to the extent of such excess, shall be credited to the payment of principal, or, at the election of the Seller, returned to Buyer. Any such amounts credited to the payment of principal shall be treated as a partial prepayment. Both principal and interest shall be payable in lawful money of the United States of America at the Seller's address set forth in the Stock Purchase Agreement, dated as of January 17, 1997, between Buyer and Seller (the "Stock Purchase Agreement"), or at such other place as the Seller may from time to time designate in writing. Buyer will be in default under this Note if he does not pay the full amount of each payment (principal, interest or both) within 10 days after the date it is due or if Buyer breaches the Stock Purchase Agreement and fails to cure such breach within 10 days after notice of such breach from Seller to Buyer. If Buyer is in default, unless such default is remedied, Seller may require Buyer to pay immediately the full amount of principal under this Note which has not been paid and all interest that Buyer owes on that amount. Seller's exercise of this right shall be by written notice to Buyer. Even if, at a time when Buyer is in default, Seller does not require Buyer to pay immediately in full as described above, Seller will still have the right to do so if Buyer is in default at a later time. Seller will also have all rights and remedies afforded by law -4- 25 or available under this Note upon any default under this Note. The Seller shall not, by any act or omission, be deemed to waive any of his rights, remedies or powers under this Note or otherwise, unless such waiver is in writing signed by the Seller. Any written waiver of a default shall not be construed as a waiver of such default in the future or of any other default. Buyer agrees to pay all costs of enforcement of this Note, including reasonable attorneys' fees and court costs. Unless applicable law requires a different method, any notice that must be given under this Note will be given in the manner described in Section 8.9 of the Stock Purchase Agreement. This Note shall not be transferable or assignable by Buyer or Seller without the prior written consent of the other party. No party shall be deemed, by an act or omission to have waived any right or remedy under this Note, unless the waiver is in writing and signed by such party, and then only to the extent specifically set forth in that writing. A waiver with reference to one event shall not be construed as continuing, or as a bar or waiver to any right or remedy as to a subsequent event. This Note is executed and delivered in the State of Michigan, and the laws of the State of Michigan shall govern this Note, its construction, and the determination of any rights, duties or remedies of the parties arising out of or relating to this Note. Buyer and Seller acknowledge that the United States District Court for the Eastern District of Michigan or the Michigan Circuit Court of the County of Oakland shall have exclusive jurisdiction over any case or controversy arising out of or relating to this Note and that all litigation arising out of or relating to this Note shall be commenced in the United States District Court for the Eastern District of Michigan or in the Oakland County (Michigan) Circuit Court. Buyer waives presentment, notice of dishonor and nonpayment of this Note. All references in this Note to the Seller or the Buyer shall apply to their respective successors and assigns. ------------------------------- Daniel B. Gilbert 5. No Other Change. Except as modified by this Amendment, the Agreement shall continue in full force according to its terms and is ratified. 6. Counterparts. This Amendment may be signed in counterparts, both of which together will be deemed an original of this Amendment. This Amendment will also be effective if evidenced by signed copies transmitted by telecopier or facsimile transmission. -5- 26 IN WITNESS WHEREOF, Buyer and Seller have executed this Amendment as of the date set forth in the introductory paragraph of this Amendment. /s/ Daniel B. Gilbert ---------------------------- Daniel B. Gilbert "Buyer" /s/ Gary Gilbert ---------------------------- Gary Gilbert "Seller" -6- 27 SECOND AMENDMENT TO STOCK PURCHASE AGREEMENT THIS SECOND AMENDMENT TO STOCK PURCHASE AGREEMENT (the "Amendment") is made as of April 1997 between Gary Gilbert ("Seller") and Daniel B. Gilbert ("Buyer"). R E C I T A L S A. Seller and Buyer have entered into the Stock Purchase Agreement, dated as of January 17, 1997, as amended by the Amendment to Stock Purchase Agreement, dated as of February 26, 1997 (as amended, the "Agreement"). B. Buyer does not currently intend to change the capitalization of Rock Insurance Company, and neither Buyer nor Seller currently owns any interest in Rock Insurance Company. Therefore, Buyer and Seller desire to eliminate the provisions of the Agreement concerning Rock Insurance Company. THEREFORE, the parties agree as follows: 1. Rock Insurance. Section 3.9 of the Agreement, as amended, is deleted and restated to read as follows: "3.9 [RESERVED]." 2. No Other Change. Except as modified by this Amendment, the Agreement shall continue in full force according to its terms and is ratified. 3. Counterparts. This Amendment may be signed in counterparts, both of which together will be deemed an original of this Amendment. This Amendment will also be effective if evidenced by signed copies transmitted by telecopier or facsimile transmission. IN WITNESS WHEREOF, Buyer and Seller have executed this Amendment as of the date set forth in the introductory paragraph of this Amendment. /s/ Daniel B. Gilbert --------------------------------- Daniel B. Gilbert "Buyer" /s/ Gary Gilbert --------------------------------- Gary Gilbert "Seller" EX-10.5 8 EXHIBIT 10.5 1 EXHIBIT 10.5 SECOND AMENDED AND RESTATED MORTGAGE WAREHOUSING AGREEMENT COMERICA BANK CORESTATES BANK, N.A. NORWEST BANK MINNESOTA, N.A. RESIDENTIAL FUNDING CORPORATION AND ROCK FINANCIAL CORPORATION NOVEMBER 13, 1997 2 SECOND AMENDED AND RESTATED MORTGAGE WAREHOUSING AGREEMENT THIS SECOND AMENDED AND RESTATED MORTGAGE WAREHOUSING AGREEMENT is made and entered into as of this 13th day of November, 1997, by and between Comerica Bank, a Michigan banking corporation ("Comerica"), CoreStates Bank, N.A., a national banking association ("CBNA"), Residential Funding Corporation, a Delaware corporation ("RFC") and Norwest Bank Minnesota, National Association, a national banking association ("Norwest") (collectively, Comerica, CBNA, RFC and Norwest are referred to as "Lenders"), Comerica Bank, as Agent for Lenders (in such capacity, "Agent"), and Rock Financial Corporation, a Michigan corporation ("Borrower"). WITNESSETH WHEREAS, Agent, Lenders and Borrower previously entered into that certain Amended and Restated Mortgage Warehousing Agreement dated August 23, 1994, as amended by Amendment No. 1 dated November 10, 1994, Amendment No. 2 dated February 21, 1996, Amendment No. 3 dated July 26, 1996 and Amendment No. 4 dated November 12, 1996 (as amended, the "Existing Loan Agreement"), under which the Lenders have extended credit to Borrower to finance the origination, purchase and sale of Mortgage Warehousing Loans (as defined below); and WHEREAS, Agent, Lenders and Borrower desire to amend and restate in its entirety the Existing Loan Agreement; NOW, THEREFORE, in consideration of the premises and mutual promises herein contained, Agent, Lenders and Borrower agree that the Existing Loan Agreement is amended and restated to read in its entirety as follows: 1. DEFINITIONS. 1.01 For all purposes of this Agreement, except as otherwise expressly provided or unless the context otherwise requires, the terms defined in this Paragraph shall have the meanings assigned to them in this Paragraph and include the plural as well as the singular. 1.02 The terms which follow have the meanings herein ascribed to them: Accumulated Funding Deficiency means a funding deficiency described in section 302 of ERISA. Advance means each separate advance of the Loan made hereunder from time to time. 3 Affiliate means, as to any Person, any other person directly or indirectly controlling, controlled by or under direct or indirect common control with, such Person, whether through the ownership of voting securities, by contract or otherwise. "Control" as used herein means the power to direct the management and policies of such Person. Aged Mortgage Loan means a Mortgage Loan (i) which would be an Eligible Mortgage Loan except for noncompliance with subsections (d) and (q) of the definition of Eligible Mortgage Loan, (ii) which could be a Second Mortgage Loan except for noncompliance with subsection (c) of the definition of Second Mortgage Loan, (iii) which is not a High LTV Second Mortgage Loan, (iv) has not been included in the Borrowing Base for more than two hundred seventy (270) days, and (v) with respect to which no payment is more than one hundred twenty (120) days past due the payment due date set forth in the underlying promissory note and deed of trust or mortgage, and no foreclosure proceedings have been instituted. Aged Mortgage Loan Advance means an Advance against the Borrowing Base Value of Aged Mortgage Loans. Agreement means this Agreement as executed as of the date first above written or, if amended or supplemented as herein provided, as so amended or supplemented. Bailee Letter means a letter in the form of Exhibit G attached hereto. Bear Stearns Custodial Agreement means the Custodial Agreement by and among Borrower, Comerica, as custodian, and Bear Stearns dated __________, 1997, as the same may be amended from time to time. Borrowing Base means: (a) For Committed Mortgage Loan Advances, 99% of the lesser of (i) the principal amount of, or (ii) the Committed Purchase Price for, (A) all Committed Mortgage Loans in Agent's possession, and (B) all Committed Pre-warehouse Loans, plus (b) For Conforming Mortgage Loan Advances which are Uncommitted Mortgage Loan Advances, the lesser of (i) 95% of the principal amount or Cost (if applicable), whichever is less, of (A) all Uncommitted Mortgage Loans in Agent's possession, and (B) all Uncommitted Pre-warehouse Loans, and (ii) One Million Dollars ($1,000,000.00), plus (c) For Non-Conforming Mortgage Loan Advances, the lesser of (i) ninety-eight percent (98%) of the lesser of (A) the principal amount of, or (B) the Committed Purchase Price (when a Take-Out Commitment exists with respect thereto), for, each Non-Conforming Mortgage Loan, or (ii) Fifty Million Dollars ($50,000,000), plus 2 4 (d) For Second Mortgage Loan Advances, the lesser of (i) (A) with respect to all Second Mortgage Loans other than Title I Second Mortgage Loans and High LTV Second Mortgage Loans, ninety-five percent (95%) of the lesser of (1) the principal amount of, or (2) the Committed Purchase Price for, each such Second Mortgage Loan, plus (B) with respect to Title I Second Mortgage Loans and High LTV Second Mortgage Loans, the lesser of (1) ninety-five percent (95%) of the lesser of (x) the principal amount of, or (y) the Committed Purchase Price for, each such Second Mortgage Loan, or (2) Ten Million Dollars ($10,000,000), or (ii) Fifteen Million Dollars ($15,000,000), (e) For Aged Mortgage Loan Advances, the lesser of (i) (A) with respect to all Aged Mortgage Loans with respect to which any payment thereunder is sixty (60) days or more past due the payment due date set forth in the underlying promissory note and deed of trust (or mortgage), eighty percent (80%) of the least of (1) the principal amount of, or (2) if said Aged Mortgage Loan meets all FNMA or FHLMC conditions for purchase at the time made, the Market Value for, each such Aged Mortgage Loan, plus (b) with respect to all Aged Mortgage Loans with respect to which any payment thereunder is less than sixty (60) days past due the payment due date set forth in the underlying promissory note and deed of trust (or mortgage), ninety percent (90%) of the least (1) the principal amount of, or (2) if said Aged Mortgage Loan meets all FNMA or FHLMC conditions for purchase at the time made, the Market Value for, each such Aged Mortgage Loan, or (ii) One Million Dollars ($1,000,000), provided, however, that the principal amount of all Pre-warehouse Loans included in the Borrowing Base shall not exceed $18,000,000, and provided that no Unfunded Drafts may be used to calculate the Borrowing Base. Borrowing Base Certificate means a certificate in form satisfactory to Lenders showing a calculation of the Borrowing Base as of a certain date. 3 5 Borrowing Base Report means a report prepared by Agent which summarizes the contents of the Borrowing Base, in form satisfactory to Agent. Closing Media means a title company, closing attorney or other entity which would disburse funds at settlement and insure the lien of the Mortgage. Collateral means Mortgage Loans, Mortgage Notes, Mortgages and all other documents, property rights, proceeds and payments relating to (a) Mortgage Loans which secure the Loan and (b) all other collateral of Borrower hereinafter described in Section 3.01.01 of this Agreement, and/or from time to time deposited with, delivered or to be delivered to or held by or for Agent pursuant to this Agreement, and the proceeds thereof in each case, whether now or hereafter arising. Committed Mortgage Loan means an Eligible Mortgage Loan as to which Agent has received a Take-Out Commitment identifying the Investor and the Committed Purchase Price. Committed Mortgage Loan Advance means an Advance against the Borrowing Base value of Committed Mortgage Loans. Committed Pre-warehouse Loan means a Pre-warehouse Loan as to which Agent has received a Take-Out Commitment. Committed Purchase Price means, with respect to a Mortgage Loan, the price at which the Investor under the applicable Take-Out Commitment has agreed to purchase said Mortgage Loan. Conforming Mortgage Loan shall be an Eligible Mortgage Loan or Pre-warehouse Loan which meets all FNMA or FHLMC conditions for purchase at the time made, except for conditions regarding the loan amount in the case of Jumbo Loans and Super Jumbo Loans. Conforming Mortgage Loan Advance means an Advance against the Borrowing Base value of Mortgage Warehousing Loans other than Non-Conforming Mortgage Loans. Cost means the acquisition price of a Mortgage Loan net of discount points and fees associated with yield. Current Assets means, as of any applicable date of determination, all assets of a person that should be classified as current in accordance with GAAP, including without limitation cash, non-affiliated customer receivables, United States government securities, claims against the United States government, and inventories, but excluding: (a) all Mortgage Loans owned by Borrower; 4 6 (b) Investments or securities in any corporation not listed on the New York Stock Exchange, NASDAQ National Market or American Stock Exchange; (c) Investments or securities in any limited liability company, partnership, limited partnership, joint venture or other business venture or legal entity; (d) Investments or securities in any options or derivatives; (e) Investments or securities in any corporation to the extent to which the cost basis of Borrower's securities exceeds twenty five percent (25%) of the Tangible Effective Net Worth of Borrower as calculated without the inclusion of such investments or securities; and (f) Investments or securities in any corporation in which Borrower owns in excess of a four percent (4%) ownership interest. Current Liabilities means, as of any applicable date of determination, all liabilities of a person that should be classified as current in accordance with GAAP, including without limitation any portion of the principal of the Notes classified as current, but excluding indebtedness owed by Borrower relating to the Mortgage Loans. Current Ratio means Current Assets divided by Current Liabilities. DDA Account means Borrower's demand deposit account with Agent. Debtor's Property in Possession of Agent or Lenders means goods, securities, stocks, bonds, notes, instruments, documents, policies and certificates of insurance, deposits, money or other property now owned or later acquired by Borrower or in which Borrower now has or later acquires an interest and which are now or later in the possession of Agent or Lenders, or as to which Agent or Lenders now or later control possession by documents or otherwise; excluding, however, any such items held by Comerica under the Bear Stearns Custodial Agreement. Draft means a draft on Borrower's Restricted Account which is signed by the Borrower and presented to a title company or other closing agent for purpose of closing a Mortgage Loan. Eligible Mortgage Loan means a Mortgage Loan with respect to which each of the following statements shall be accurate and complete (and Borrower by including such Mortgage Loan in any computation of the Borrowing Base shall be deemed to so represent and warrant to the Agent and the Lenders as of the date of such computation): 5 7 (a) Said Mortgage Loan is a binding and valid obligation of the obligor thereon, in full force and effect and enforceable in accordance with its terms. (b) Said Mortgage Loan is genuine in all respects as appearing on its face and as represented in the books and records of Borrower and all information set forth therein is true and correct. (c) Said Mortgage Loan is free of any default of any party thereto (including Borrower), other than as expressly permitted pursuant to subparagraph (d) below, counterclaims, offsets and defenses and from any rescission, cancellation or avoidance, and all right thereof, whether by operation of law or otherwise. (d) No payment under said Mortgage Loan is more than fifty-nine (59) days past due the payment due date set forth in the underlying promissory note and deed of trust (or mortgage). (e) Said Mortgage Loan contains the entire agreement of the parties thereto with respect to the subject matter thereof, has not been modified or amended in any respect and is free of concessions or understandings with the obligor thereon of any kind not expressed in writing therein. (f) Said Mortgage Loan is in all respects as required by and in accordance with all applicable laws and regulations governing the same, including, without limitation, the federal Consumer Credit Protection Act and the regulations promulgated thereunder and all applicable usury laws and restrictions, and all notices, disclosures and other statements or information required by law or regulation to be given, and any other act required by law or regulation to be performed, in connection with said Mortgage Loan have been given and performed as required. (g) All advance payments and other deposits required to be paid on said Mortgage Loan have been paid in cash, and no part of said sums has been loaned, directly or indirectly, by Borrower to the obligor and there have been no prepayments on account of said Mortgage Loan. (h) At all times said Mortgage Loan will be free and clear of all liens, except in favor of the Agent for the benefit of the Lenders. (i) The property covered by said Mortgage Loan is insured against loss or damage by fire, flood (when required by the Investor) and all other hazards normally included within standard extended coverage in accordance with the provisions of said Mortgage Loan with Borrower named as a loss payee thereon. (j) The property covered by said Mortgage Loan is free and clear of all liens except (a) Borrower's first mortgage loan, (b) liens for real estate taxes, special 6 8 assessments and the like which are not delinquent, and (c) liens which are subordinate to the lien of the Mortgage Loan. (k) As to those Mortgage Loans represented by Borrower to be covered by a Take-Out Commitment, the Take-Out Commitment is in full force and effect, and Borrower and the Mortgage Loan are in full compliance therewith. (l) The date of the underlying promissory note is no earlier than one hundred twenty (120) days prior to the date said Mortgage Loan is first included in the Borrowing Base. (m) If said Mortgage Loan is FHA insured or VA guaranteed, such insurance or guaranty (or a binding commitment to issue such insurance or guaranty) is in full force and effect. (n) The improvements on the property consist of a completed one-to-four unit single family residence, including but not limited to a condominium, planned unit development or townhouse but excluding in any event a co-op. (o) There has been delivered to the Agent the Required Documents or the Prewarehouse Required Documents. (p) Said Mortgage Loan is not subject to any servicing arrangement with any person other than Borrower nor are any servicing rights relating to said Mortgage Loan subject to any lien, claim, interest or negative pledge in favor of any person other than Agent for and on behalf of Lenders. (q) Said Mortgage Loan has not been included in the Borrowing Base for more than ninety (90) days. (r) Said Mortgage Loan has not previously been included in the Borrowing Base. (s) The Borrower has obtained an appraisal in connection with the origination of said Mortgage Loan which would satisfy all appraisal requirements for said Mortgage Loan if such had been originated by a federally insured depository institution; provided, however, that no such appraisal shall be required for a Second Mortgage Loan (i) where the Investor for such Second Mortgage Loan has issued a Take-Out Commitment therefor and has not required an appraisal for such Second Mortgage Loan, or (ii) with an original principal amount of less than $40,000. (t) If the Mortgage Loan has been sent to an Investor, not more than forty-five (45) days have elapsed from the date of delivery, unless the Mortgage Loan has been returned to the Agent. 7 9 (u) If the Mortgage Note or other Required Document has been released to Borrower, not more than ten (10) days shall have elapsed from the date of delivery to Borrower. (v) Super Jumbo Loans shall be Eligible Mortgage Loans only if a Take-Out Commitment exists for such loans. (w) Jumbo Loans which satisfy all of the above conditions shall be Eligible Mortgage Loans. ERISA means the Employee Retirement Income Security Act of 1974, as the same may from time to time be supplemented or amended, and the rules and regulations issued thereunder, as in effect from time to time. ERISA Affiliate means each trade or business, including Borrower, whether or not incorporated, that, together with Borrower would be treated as a single employer under section 4001 of ERISA. Event of Default means an event or condition listed under Section 9.01 of this Agreement. Excess Advances shall have the meaning given the term in Section 2.06 hereof. FHA means the Federal Housing Administration and any successor thereto or to the functions thereof. FHA Mortgage Loans means Mortgage Loans within acceptable limits to and insured, or committed to be insured, by the FHA, and evidenced by instruments and documents which comply, and arising from a transaction which complies, in all respects, with the requirements of the FHA. FHLMC means the Federal Home Loan Mortgage Corporation and any successor thereto or to the functions thereof. FNMA means the Federal National Mortgage Association and any successor thereto or to the functions thereof. GAAP means generally accepted accounting principles consistently applied. Gestation Loan means a gestation repurchase agreement financing or "As Soon As Pooled" transaction under the FNMA Selling and Servicing Guidelines. GNMA means the Government National Mortgage Association and any successor thereto or to the functions thereof. 8 10 Governmental Authority means any nation or government, any state or other political subdivision thereof, and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. High LTV Second Mortgage Loan means a Second Mortgage Loan (i) having a loan to value ratio which is greater than .90 to 1.0 but which does not exceed 1.25 to 1.0 and (ii) which is covered by a Take-Out Commitment. Indebtedness means any and all sums, indebtedness and liabilities of any and every kind now owing or later to become due from Borrower to Agent or the Lenders under this Agreement, whether joint or several, contingent or absolute, now existing or later arising, and however created incurred, evidenced, acquired or arising, and any and all modifications, renewals or extensions of it. Investor means a bank, trust company, savings and loan association, pension fund, governmental authority, insurance company, institutional investor, investment brokerage firm, mortgage banker, or other entity, determined by Majority Lenders, in their sole discretion, to be acceptable. A list of approved Investors for Conforming Mortgage Loans and Non-Conforming Mortgage Loans is attached hereto as Exhibit E, which list may be changed from time to time by Majority Lenders. Jumbo Loan means a Mortgage Loan which exceeds the maximum loan amount permitted by then current FNMA or FHLMC purchase guidelines but otherwise meets FHLMC or FNMA purchase criteria and does not exceed $750,000. Lenders' Allocation Amount means $32,727,273 as to Comerica, $12,272,727 as to CBNA, $24,545,455 as to Norwest, and $20,454,545 as to RFC. Leverage Ratio means a fraction, determined as of the pertinent financial statement date, the numerator of which is the sum total of Borrower's outstanding liabilities plus the unadvanced amount of the Loan and the denominator of which is Tangible Effective Net Worth, all determined in accordance with GAAP. Liabilities means all indebtedness that, in accordance with generally accepted accounting principles consistently applied, should be classified as liabilities on a balance sheet of Borrower. Loan means a $90,000,000 demand mortgage warehouse facility of which Comerica shall advance up to $32,727,273, CBNA shall advance up to $12,272,727, Norwest shall advance up to $24,545,455 and RFC shall advance up to $20,454,545, in each case subject to the terms and conditions of this Agreement. Loan Documents means this Agreement and all documents evidencing or securing the Loan. 9 11 Majority Lenders means the Lender or Lenders whose individual or aggregate Percentage Share respectively is at least sixty-six and two thirds percent (66 2/3%). Market Value means an amount determined by Agent from time to time, in its sole discretion, to be the amount an Investor would pay to purchase a particular Mortgage Loan. Maximum Loan Amount means $90,000,000, subject to Section 12 hereof. Mortgage means a mortgage or a deed of trust on real estate, and securing a Mortgage Loan and also creating a valid first lien on the fee simple title to real estate referred therein subject only to (a) liens for taxes, not yet due and payable, special assessments or similar governmental charges not yet due and payable or still subject to payment without interest or penalty, (b) zoning restrictions, utility easements, covenants, or conditions and restrictions of record, which shall neither defeat nor render invalid such lien or the priority thereof, nor materially impair the marketability or value of such real estate, nor be violated by the existing improvements or the intended use thereof; (c) subordinate liens, (d) in the case of Second Mortgage Loans, a first mortgage; and (e) such other liens as may have been approved in writing by Lenders. Mortgage Loan means a loan evidenced by a Mortgage Note and secured by a Mortgage covering a fee simple interest in residential (1-4 unit single family) real property and all improvements located thereon located in the United States. Mortgage Note means a valid and binding note, bond or other evidence of indebtedness evidencing a Mortgage Loan and secured by a Mortgage, which (a) was executed by a bona fide third person who has capacity to contract (b) matures in 30 years or less, and (d) complies with any other terms as may be required in writing in advance of the closing date by Lenders, from time to time. Mortgage Warehousing Advance means a Conforming Mortgage Loan Advance, a Non-Conforming Mortgage Loan Advance, a Committed Mortgage Loan Advance, an Uncommitted Mortgage Loan Advance, a Second Mortgage Loan Advance or an Aged Mortgage Loan Advance made in accordance with the terms of this Agreement. Mortgage Warehousing Loan means a Conforming Mortgage Loan, a NonConforming Mortgage Loan, a Committed Mortgage Loan, an Uncommitted Mortgage Loan, a Pre-warehouse Loan, a Second Mortgage Loan or an Aged Mortgage Loan. Multiemployer Plan means a plan described in section 4001(a)(3) of ERISA to which Borrower or any ERISA Affiliate is required to contribute on behalf of any of its employees. Non-Conforming Mortgage Loan shall be a Mortgage Loan which (i) is a Committed Mortgage Loan or an Uncommitted Mortgage Loan, but which does not meet all FNMA or FHLMC conditions for purchase at the time made, (ii) at the time of origination had a principal balance that (A) did not exceed 80% of the appraised value of the real estate and 10 12 improvements securing such Mortgage Loan unless private mortgage insurance was obtained covering such Mortgage Loan or the Investor did not require such insurance, or if such Mortgage Loan is an Uncommitted Mortgage Loan, an ordinary and prudent Investor would not require such insurance as determined by Agent, and (B) did not exceed 95% of such appraised value in any event, (iii) has a term of not more then thirty (30) years, (iv) if Agent has received a Take-Out Commitment with respect to the Mortgage Loan identifying the Investor and the Committed Purchase Price, the Mortgage Loan meets all of the then current requirements for sale to an Investor purchasing such type of Mortgage Loan from Borrower, (v) has an outstanding principal balance of less than $600,000 on the date the Required Documents are delivered to Agent, and (vi) has not been included in the Borrowing Base for more than one hundred twenty (120) days. Non-Conforming Mortgage Loan Advance means an Advance against the Borrowing Base value of Non-Conforming Mortgage Loans. Note or Notes means the instruments described in Section 2.08 hereof, as they may be amended, restated, extended, replaced or renewed from time to time. Overnight-based Rate means a per annum interest rate equal to (i) in the case of Conforming Mortgage Loan Advances, 1.5% above the Overnight Rate, (ii) in the case of Non-Conforming Mortgage Loan Advances, 1.875% above the Overnight Rate, and (iii) in the case of Second Mortgage Loan Advances, 2.5% above the Overnight Rate. Overnight Rate means, for any day, a per annum rate of interest determined by Agent, in its sole discretion, to be the prevailing overnight federal funds rate on such date. Changes in the overnight federal funds rate during any day after Agent has determined the prevailing overnight federal funds rate for that day shall not change the interest rate for that day. PBGC means the Pension Benefit Guaranty Corporation established pursuant to Subtitle A of Title IV of ERISA and any successor thereto. Percentage Share means, for each Lender, a percentage equal to the Lender's Allocation Amount divided by the Maximum Loan Amount (currently 36.36% for Comerica, 27.27% for Norwest, 22.73% for RFC and 13.64% for CBNA). Person means any corporation, natural person, firm, joint venture, partnership, trust, unincorporated organization or any governmental entity or body. Plan means any plan (other than a Multiemployer Plan) subject to Title IV of ERISA maintained for employees of Borrower or any ERISA Affiliate (and any such plan no longer maintained by Borrower or any of its ERISA Affiliates to which Borrower or any of its ERISA Affiliates has made or was required to make any contributions during the five (5) years preceding the date on which such plan ceased to be maintained. 11 13 Pre-warehouse Loan means a loan which (i) would be an Eligible Mortgage Loan or a Second Mortgage Loan, except that the Required Documents have not been delivered to Agent, and (ii) has not been included in the Borrowing Base for more than five (5) business days. Pre-warehouse Required Documents means a Request for Pre-warehouse Advance and Security Agreement. Prime Rate means the per annum interest rate established by Agent as its prime rate, as such rate may vary from time to time, which rate is not necessarily the lowest rate on loans made by Agent at any such time. Prime-based Advance means an Advance which bears interest at the Prime-based Rate. Prime-based Rate means, for any day, a per annum interest rate which is equal to the Prime Rate. Prohibited Transaction means any transaction described in section 406 of ERISA that is not exempt by reason of section 408 of ERISA or the transitional rules set forth in section 414(c) of ERISA and any transaction described in section 4975(c)(1) of the Code that is not exempt by reason of section 4975(c)(2) or section 4975(d) of the Code, or the transitional rules of section 2003(c) of ERISA. Reportable Event means any of the events set forth in section 4043(b) of ERISA or the regulations thereunder, a withdrawal from a Plan described in section 4063 of ERISA, a cessation of operations described in section 4068(f) of ERISA, an amendment to a Plan necessitating the posting of security under section 401(a)(29) of the Code, or a failure to make a payment required by section 412(m) of the Code and section 302(e) of ERISA when due. Request for Advance means the form attached hereto as Exhibit D, or such other form as Agent may require from time to time, filled in and executed by Borrower to the satisfaction of Agent. Request for Pre-warehouse Advance and Security Agreement means the form attached hereto as Exhibit H, or such other form as Agent may require from time to time, filled in and executed by Borrower to the satisfaction of Agent. Required Documents means all of the following: (a) the original Mortgage Note endorsed by Borrower in blank (including all interim endorsements, if applicable); (b) a copy of the Mortgage; 12 14 (c) a title policy, title commitment or first lien letter insuring the Mortgage Loan to be a first lien on the property; (d) an original executed assignment in recordable form of the Mortgage to Agent on behalf of the Lenders; (e) copies of all interim assignments of the Mortgage; and (f) any other loan documents required by Lenders. Restricted Account means a DDA Account to be maintained with Agent on Borrower's behalf, as to which Borrower shall not have the ability to write drafts or withdraw funds, except for Drafts to title companies. Second Mortgage Loan means a Mortgage Loan which would be an Eligible Mortgage Loan except for noncompliance with the requirements of paragraph (j) of the definition of Eligible Mortgage Loan, and with respect to which each of the following statements shall be accurate and complete (and Borrower by including such Mortgage Loan in any computation of the Borrowing Base shall be deemed to so represent and warrant to the Agent and the Lenders as of the date of such computation): (a) The property covered by said Mortgage Loan is free and clear of all liens except (i) a first mortgage loan, (ii) Borrower's second mortgage loan, (iii) liens for real estate taxes, special assessments and the like which are not delinquent, and (iv) liens which are subordinate to the lien of the Mortgage Loan. (b) The principal amount of the Mortgage Loan does not exceed One Hundred Thousand Dollars ($100,000). (c) The Mortgage Loan has not been included in the Borrowing Base for more than sixty (60) days. (d) The Mortgage Loan has a loan to value ratio which does not exceed .90 to 1.0, except in the case of a High LTV Second Mortgage Loan, which shall have a loan to value ratio which does not exceed 1.25 to 1.0. Second Mortgage Loan Advance means an Advance against the Borrowing Base value of Second Mortgage Loans. Securities Margin means a fraction, the numerator of which shall be total dollar amount borrowed from any Persons in connection with any and all investments or securities (excluding Mortgage Loans), which has not been paid and discharged in full, and 13 15 the denominator of which shall be the market value of Borrower's entire portfolio of investments and securities (excluding Mortgage Loans). Security Agreement means that certain Amended and Restated Security Agreement (Negotiable Collateral) by and between Borrower and Agent, for and on behalf of Lenders, dated as at the date hereof. Servicing Portfolio means, as of any date, the portfolio of Mortgage Loans with respect to which the Borrower has direct servicing rights. Stockholder's Equity means the following, as set forth in Borrower's balance sheet prepared in accordance with GAAP: (a) the par or stated value of all outstanding capital stock; plus (b) capital surplus; plus (c) retained earnings; less (d) declared dividends not yet paid. Subsidiary means a corporation of which 50% or more of the outstanding voting stock (except for directors' qualifying shares, if and to the extent required by law) is owned, at the time of determination, directly or indirectly, by Borrower. Super Jumbo Loan means a Mortgage Loan which would be a Jumbo Loan except that the amount thereof exceeds $750,000, but is less than $1,000,000. Take-Out Commitment means (i) an existing written commitment to Borrower in form and substance satisfactory to Lenders from an Investor satisfactory to Lenders, under the terms of which the such Investor agrees to purchase Mortgage Notes or a specific Mortgage Note, (ii) a certified commitment representation, or (iii) a trade confirmation by an Investor committing to purchase a participation certificate or mortgage backed security, each of which must identify the Investor and the Committed Purchase Price. Tangible Effective Net Worth means, at any time, Stockholders' Equity determined in accordance with GAAP, less the sum of: (a) Any surplus resulting from any write-up of assets, except any such surplus which constitutes Stockholders' Equity in accordance with GAAP; (b) Goodwill including any amounts, however designated on a balance sheet of the Borrower, representing the excess of the purchase price paid for assets or stock acquired over the value assigned thereto on the books of the Borrower; (c) Patents, trademarks, trade names and copyrights; (d) Any amount at which shares of capital stock of the Borrower appear as an asset on the Borrower's balance sheet; 14 16 (e) Loans and advances to stockholders, directors, officers, employees or affiliated companies; (f) Deferred expenses; (g) Assets, the marketability, and/or liquidity value of which are not readily ascertainable, in Lenders' sole discretion; (h) Investments or securities in any corporation not listed on the New York Stock Exchange, NASDAQ National Market or American Stock Exchange; (i) Investments or securities in any limited liability company, partnership, limited partnership, joint venture or other business venture or legal entity; (j) Investments or securities in any options or derivatives; (k) Investments or securities in any corporation to the extent to which the cost basis of Borrower's securities exceeds twenty-five percent (25%) of the Tangible Effective Net Worth of Borrower as calculated without the inclusion of such investments or securities; and (l) Investments or securities in any corporation in which Borrower owns in excess of a four percent (4%) ownership interest. Title I Second Mortgage Loans means a Second Mortgage Loan which qualifies under the Housing and Urban Development Title I Program. Trust Receipt means a receipt in the form of Exhibit I attached hereto. Uncommitted Mortgage Loan means an Eligible Mortgage Loan as to which a Take-Out Commitment does not exist. Uncommitted Mortgage Loan Advance means an Advance against the Borrowing Base value of Uncommitted Mortgage Loans. Uncommitted Pre-warehouse Loan means a Pre-warehouse Loan as to which a Take-Out Commitment does not exist. Unfunded Draft means a Draft which has not been honored by Agent. VA means the Veterans Administration and any successor thereto or to the functions thereof. 15 17 VA Mortgage Loans means Mortgage Loans within acceptable limits to and guaranteed by the VA, and evidenced by instruments and documents which comply, and arising from a transaction which complies, in all respects, with the requirements of the VA. Working Capital means, as of any applicable date of determination, Current Assets less Current Liabilities. 2. THE LOAN. 2.01 The Loan. Subject to the terms and conditions of this Agreement, Lenders each agree that they shall make Advances to Borrower (severally and not jointly) in the aggregate at any date outstanding such that the total Advances for any Lender then outstanding (taking into account any current request for advance), shall not exceed the lesser of (a) Each Lender's Allocation Amount; or (b) Each Lender's Percentage Share of (i) the Borrowing Base at such date, less (ii) the aggregate Advances then outstanding. 2.02 Request for Advance. Borrower shall deliver to Agent a Request for Advance no later than 10:30 a.m. on the proposed funding date. 2.03 Advances. (a) Subject to all of the terms and conditions of this Agreement, including but not limited to Sections 2.01 and 2.02, above, Agent will make requested Advances on the same business day that a Request for Advance is submitted. Immediately upon (i) the occurrence of an Event of Default, (ii) a Request for Advance which if made would result in Agent exceeding its Allocation Amount, (iii) each Friday based upon the Loan outstanding as of the prior Business Day, or (iv) Agent's demand, Lenders shall deliver to Agent by wire transfer immediately available funds in an amount sufficient to restore each Lender's loan balance to their respective Percentage Share of the Loan. (b) If a Draft is presented to Agent for closing a Mortgage Warehouse Loan, Agent shall be obligated to honor such Draft only if, (i) Borrower instructs 16 18 Agent to pay the Draft, and (ii) by 2:30 p.m., Detroit, Michigan time, Agent shall have received the Required Documents or the Pre-warehouse Required Documents for the Mortgage Loan to which such Draft relates. 2.04 Borrowing Base Conformity. (a) In support of its obligation to repay the Loan hereunder, Borrower shall cause to be maintained with the Agent a Borrowing Base such that (i) the Borrowing Base is not less than, at any date, the sum of the aggregate outstanding principal amount of the Loan and (ii) the Borrowing Base for Committed Mortgage Loan Advances, Uncommitted Mortgage Loan Advances, Non-Conforming Mortgage Loan Advances, Pre-Warehouse Loans, Second Mortgage Loan Advances and Aged Mortgage Loan Advances are each not less than, at any date, the sum of the aggregate outstanding principal amounts of Committed Mortgage Loan Advances, Uncommitted Mortgage Loan Advances, Non-Conforming Mortgage Loan Advances, Pre-Warehouse Loans and Second Mortgage Loan Advances respectively. (b) Borrower shall prepay the Loan to the Agent on behalf of the Lenders, on any day (i) in the amount by which the aggregate outstanding principal amount of the Loan exceeds the Borrowing Base, or (ii) in the amount by which the aggregate outstanding principal amount of Committed Mortgage Loan Advances, Uncommitted Mortgage Loan Advances, Non-Conforming Mortgage Loan Advances, Pre-Warehouse Loans and Second Mortgage Loan Advances, Aged Mortgage Loan Advances exceeds the Borrowing Base for Committed Mortgage Loan Advances, Uncommitted Mortgage Loan Advances, Non-Conforming Mortgage Loan Advances, Pre-Warehouse Loans, Second Mortgage Loan Advances and Aged Mortgage Loan Advances respectively. (c) Provided Borrower is not then in default hereunder, in lieu of prepaying the Loan as required above, Borrower may deliver to the Agent on such date additional Eligible Mortgage Loans such that the Borrowing Base, after giving effect to the inclusion of such Eligible Mortgage Loans in the Borrowing Base, shall be in compliance with the requirements of (a) and (b) above. 2.05 Payments. All payments made on account of the Loan shall be made without setoff or counterclaim in lawful money of the United States of America in immediately available same day funds, free and clear of and without deduction for any taxes, fees or other charges of any nature whatsoever and must be received by the Agent by 3:00 p.m. on the day of payment, it being expressly agreed and understood that if a payment is received after 3:00 p.m. by the Agent, such payment will be considered to have been made on the next succeeding business day and interest thereon shall be payable at the then 17 19 applicable rate until such date. The proceeds from the sale of Mortgage Loans securing the Loan shall be paid directly to the Restricted Account and applied against the Loan by Agent on a daily basis. 2.06 Allocation of Payments Received. All amounts received by the Agent on account of the Loan shall be disbursed by the Agent to the Lenders in accordance with their Percentage Shares, provided, however, that if advances by Comerica under section 2.03, above, result in Comerica having advanced more than its Percentage Share of the Loan ("Excess Advances"), payments first shall be disbursed to Comerica to the extent of Excess Advances and interest thereon. 2.07 [Reserved] 2.08 The Notes. The Loan, which shall be in the form of a revolving credit, shall be evidenced by Borrower's demand promissory note to each Lender in the amount of each Lender's Allocation Amount (hereinafter called the "Notes"), in form and content satisfactory to Lenders. All terms of the Notes are incorporated herein. The Notes shall be dated the date of this Agreement, shall bear interest payable at the rate and in the manner provided for in Section 2.10 hereof, and shall evidence advances of the Loan. Borrower agrees that the date and amount of each advance of the Loan shall be as set forth in the books and records of Agent relating to such matters which shall be presumed accurate but subject to verification and correction by Borrower within 30 days of Borrower's receipt of a statement. 2.09 Use of Proceeds. The proceeds of the Loan shall be used by Borrower solely to finance its making of Mortgage Warehousing Loans pending sale thereof to Investors. Use of Loan proceeds for any other purpose, including but not limited to, the repurchase of loans purchased by an Investor and subsequently returned to Borrower, shall be an Event of Default under this Agreement. 2.10 Rate of Interest. Borrower shall pay to Agent for the benefit of the Lenders interest on the daily outstanding principal balance of the Loan at a per annum rate equal to the following: (a) For Conforming Mortgage Loan Advances, Non-Conforming Mortgage Loan Advances and Second Mortgage Loan Advances, the Overnight-based Rate. (b) For Aged Mortgage Loan Advances, the Prime-based Rate. Agent shall determine the daily Borrowing Base value for Conforming Mortgage Loan Advances, Non-Conforming Mortgage Loan Advances Second Mortgage Loan Advances and Aged Mortgage Loan Advances to 18 20 calculate the interest owed using Agent's records, which records shall be conclusive evidence thereof, absent manifest error. After demand or an Event of Default, and during the continuation thereof, the Advances shall bear interest, payable on demand, at a rate per annum equal to three percent (3%) above the otherwise applicable rate of interest. A late payment charge of five percent (5%) of each late payment may be charged on any payment not received by Agent within ten (10) calendar days after payment is due. Interest shall continue to accrue on the unpaid principal balance even if all sums due hereunder are accelerated and reduced to judgment. 2.11 Balance Credit. Comerica (but no other Lender) may in its sole discretion, but shall not be obligated to, grant to Borrower a reduced interest rate (which shall not be less than 5% per year) on a portion of Comerica's Advances to Borrower in consideration of Borrower maintaining deposit accounts with Comerica. 2.12 Automatic Charges to Borrower's Account. Interest shall be due and payable on the first day of each month at which date Agent may at its option direct charge Borrowers's DDA Account for (a) interest calculated as aforesaid on the daily outstanding principal balances for the preceding month; and, (b) Agent's fee in the amount agreed upon between Borrower and Agent. 2.13 Banker's year. All interest and fee calculations shall be based on a 360 day year for the actual days elapsed. 3. COLLATERAL. 3.01 The Indebtedness and Borrower's obligations hereunder and under the other Loan Documents shall be secured and supported by the following, all of which shall be in form and substance satisfactory to Lenders: 3.01.01 Security Agreements and financing statements in favor of the Agent for the benefit of the Lenders creating (subject in the case of Mortgage Loans to delivery of the Notes to Agent following the 21 day period of automatic perfection) a first priority lien on the following: 1. All Mortgage Loans, now owned or hereafter acquired or originated by Borrower, including, without limitation, the promissory notes or other instruments or agreements evidencing the indebtedness of obligors thereon, all mortgages, deeds to secure debt, trust deeds and security agreements related thereto, all rights to payment thereunder, all rights in the properties securing payment of the indebtedness of the obligors thereon, all rights under documents related thereto, such as guaranties and insurance policies (issued by governmental agencies or otherwise), including, without limitation, mortgage and title insurance policies, fire 19 21 and extended coverage insurance policies (including the right to any return premiums) and FHA insurance and VA guaranties, and all rights in cash deposits consisting of impounds, insurance premiums or other funds held on account thereof; 2. All rights of Borrower (but not its obligations) under all Take-Out Commitments, now existing or hereafter arising, covering any part of the Collateral, all rights to deliver Mortgage Loans to Investors and other purchasers pursuant thereto and all proceeds resulting from the disposition of such Collateral pursuant thereto; 3. All now existing and hereafter arising accounts, chattel paper, contracts rights and general intangibles constituting or arising in connection with any of the Collateral; 4. All now existing and hereafter acquired files, documents, instruments, surveys, certificates, correspondence, appraisals, computer programs, tapes, discs, cards, accounting records and other books, records, information and data of the Debtor relating to the Collateral; 5. All insurance policies and guarantees relating to any of the Collateral; 6. All amounts in the DDA Account and Restricted Account and in Debtor's operating accounts with Agent and Lenders; 7. Debtor's Property in Possession of Agent or Lenders; 8. All property substituted for any of the Collateral or for any part thereof; and 9. All proceeds of all of the aforementioned. 3.02 Lenders release Daniel B. Gilbert and Gary L. Gilbert from their obligations to each Lender under the Guaranies executed and delivered by Daniel B. Gilbert and Gary L. Gilbert to each Lender dated August 23, 1994. 4. CONDITIONS OF LENDING. 4.01 Documentation Required Prior to First Advance Only. Delivery by Borrower of each of the following to Agent shall be conditions precedent to the making of the first Advance: 4.01.01 A duly executed copy of this Agreement, the Security Agreement and the Notes. 20 22 4.01.02 Duly executed copies of all financing statements and other documents, instruments and agreements, properly executed, deemed necessary or appropriate by the Agent, in its reasonable discretion, to obtain for the Agent on behalf of the Lenders a perfected, first priority security interest in and lien upon the Collateral. 4.01.03 Such credit applications, financial statements, authorizations and such information concerning the (financial and otherwise) condition of Borrower as any Lender may reasonably request. 4.01.04 Certified copies of a resolution of the Board of Directors of Borrower approving the execution and delivery of the Loan Documents to which such person is a party, the performance of the obligations thereunder and the consummation of the transactions contemplated thereby. 4.01.05 A duly completed Borrowing Base Certificate dated as of the date of the first Advance hereunder. 4.01.06 An opinion of counsel for Borrower (in a form and content satisfactory to Lenders) as to all the matters referenced in Section 5 hereof, excepting only 5.02 and 5.04. 4.01.07 (i) A true, complete and correct copy of Borrower's Articles of Incorporation and all amendments thereto; (ii) a true, complete and correct copy of Borrower's By-Laws and all amendments thereto; (iii) a Certification by Borrower's Secretary as to the incumbency and specimen signatures of each party executing this Agreement and any endorsements or assignments to be executed in the performance of this Agreement; (iv) a certificate issued by the Secretary of the State of Borrower's state of incorporation as to the good standing and continued existence of Borrower; (v) certificates of the appropriate officials of each state in which Borrower conducts business as to the qualification of the Borrower to transact business and its good standing and as a foreign corporation in said jurisdiction. 4.01.08 Evidence of Borrower's receipt of FNMA seller approval certification. 4.02 Delivery of Documents to Investor. For each Mortgage Loan which is the subject of an Advance, Borrower shall deliver directly to the Investor within the time frame permitted by the applicable Take Out Commitment all documents required by the Investor. Agent shall deliver Mortgage Notes to Investors under a Bailee Letter. 4.03 Continuing Warranties. At the time any Advance is requested by Borrower, and as a precondition to the making of any advance hereunder, no default by Borrower shall have occurred and be continuing, and no event shall have occurred which, with the lapse of time or notice or both, shall constitute such default; and Borrower shall have paid all fees and charges payable by Borrower hereunder. 21 23 4.04 Other Requested Documents. Borrower shall deliver directly to Agent any documents pertaining to each Mortgage Loan which Agent reasonably specifically requests. 4.05 Trade Confirmations. Each request for delivery of a Mortgage Warehousing Loan to an Investor, in which it is contemplated that a participation certificate (PC) or mortgage backed security (MBS) will be issued in lieu of cash, shall be accompanied by a trade confirmation committing to purchase the PC/MBS identifying the purchaser (which must be acceptable to Lenders) and the purchase price. 4.06 Financing Statements. Borrower will execute one or more financing statements covering the Collateral pursuant to the Uniform Commercial Code, in form satisfactory to Lenders, and will pay the cost of filing the same in all public offices. 4.07 Limited Power of Attorney. Borrower hereby irrevocably makes, constitutes and appoints Agent its attorney-in-fact with full power of substitution for and on behalf and in the name of Borrower (which Agent is under no obligation to use) if an Event of Default has occurred hereunder to endorse any checks, instruments or other papers in Agent's possession representing payments on assigned Mortgage Notes and Mortgages or TakeOut Commitments to purchase Mortgage Notes and Mortgages; to complete, execute, deliver and record any assignment or other document, including financing statements covering the Collateral; to endorse any Mortgage Note in the name of Borrower and do every other act or thing necessary or desirable to effect transfer of a Mortgage Note, Mortgage or any related Collateral and/or to protect the interest of Lenders in the Collateral; to take all necessary and appropriate action in Borrower's name with respect to any Advances hereunder and servicing of Mortgage Notes and Mortgages or sale of Collateral under any Commitment; to take any and all action which Agent deems appropriate to commence, prosecute, settle, discontinue, defend or otherwise dispose of any claim relating to any Commitment, insurance or guarantee, assigned Mortgage Note, Mortgage or other Collateral; and to sign Borrower's name whenever and wherever appropriate to the performance of this Agreement, including, but not limited to, whether or not Borrower is in default, execution in Borrower's name of any document necessary to perfect or protect Lender's security interest granted hereunder. This appointment shall be deemed coupled with an interest but shall only extend to dealings with regard to the Collateral. 4.08 Perfecting Lenders' Lien. Borrower hereby agrees, upon Agent's request, to sign any additional documents which the Agent, any Lender, or any of their counsel, deems necessary to evidence or perfect the lien on any Collateral, or which may be required by GNMA, FNMA, FHLMC or other investor in order to secure the investor's acknowledgment and recognition of the lien on the Collateral. 5. CONTINUING REPRESENTATIONS AND WARRANTIES. 22 24 In order to induce Lenders to enter into this Agreement and to make the Loan, Borrower warrants and represents that as of the date hereof and, at the time of the making of each Advance hereunder, that: 5.01 Borrower's Organization. Borrower is a corporation duly organized and existing and in good standing under the laws of the place of its incorporation, and Borrower is qualified as a foreign corporation and in good standing in every other jurisdiction where its business or operations requires such qualification. The execution, delivery and performance of this Agreement, the Notes and other documents required of Borrower have been duly authorized by all requisite action and will not violate the charter or by-laws of Borrower or any applicable statutes or regulations or any agreements or judgements to which Borrower is a party. This Agreement and the Notes are valid and binding obligations of Borrower, enforceable in accordance with their terms except as may be limited by bankruptcy, insolvency, moratorium, reorganization and other similar laws or equitable principles affecting generally the enforcement of creditors, rights, and the consent or approval of governmental authorities or of third parties is not required for the validity of Borrower's obligations hereunder or thereunder or, if required, has been obtained; nor does this Agreement or the Notes violate any applicable Federal, state or local law, rule or regulation relating to usury. 5.02 Financial Statements. All financial statements and financial information heretofore delivered to Agent or any Lender are true and correct in all material respects as of the date made. As of the date of this Agreement and as of the date of any borrowing hereunder, there has not been, nor does Borrower anticipate the occurrence of, any material change of an adverse nature sufficient to impair Borrower's ability to repay the Loan or to continue to conduct its business as it is being conducted on the date hereof. Borrower has no material contingent liabilities or unusual forward or long-term commitments which are not disclosed by or reserved against in said financial statements furnished to Lenders or have not been disclosed to Lenders in writing. At the date of this Agreement and at the date of each Advance requested by Borrower hereunder, Borrower warrants and reaffirms there are no material unrealized or anticipated losses from any commitments of the Borrower except as previously disclosed in writing to Lenders. 5.03 Authority. All requisite action for the authorization, execution and delivery by Borrower of this Agreement and the Notes, and for the assigning and endorsing by Borrower of the Collateral as provided for hereunder, has been duly taken and has not been rescinded. 5.04 Title to Collateral. Borrower is or will be the legal and beneficial owner (subject only to potential claims of an Investor arising solely out of a Take-Out Commitment) of the Mortgage Loans and the Collateral at the time pledged, free and clear of all adverse security interests, liens and encumbrances, and has the right to assign the same to Agent for the benefit of the Lenders as contemplated by the Agreement. 23 25 5.05 Compliance with Laws of Applicable Jurisdiction. Borrower is fully familiar with the requirements of the laws of the applicable jurisdiction(s) from which all Mortgage Loans assigned as Collateral hereunder originate and all Mortgage Loans assigned as Collateral hereunder have been made in strict compliance with the provisions of any act, law or regulation which governs lending practices enacted by the applicable jurisdiction. 5.06 Borrower's Locations. The address of Borrower set forth above in this Agreement is its chief executive office; and the addresses indicated on Exhibit A, if any, attached hereto are all of the Borrower's offices or locations; 5.07 No Subsidiaries. Borrower has no Subsidiaries other than those designated and described in writing to Agent on or prior to the date hereof. 5.08 No Default. Borrower has no knowledge of any default under any material term or provision of any agreement to which it is a party or by which it is bound or to which any of its property is subject, which default would have a material adverse effect on Borrower's creditworthiness. 5.09 Outstanding Judicial Proceedings. Except as disclosed on Exhibit F hereto, there are no outstanding criminal proceedings pending or threatened, or judgements, actions or proceedings pending or threatened before any court or governmental authority, bureau or agency, with respect to or affecting the Borrower wherein damages alleged or owed exceed $50,000.00, nor are there any such actions or proceedings in which Borrower is a plaintiff or complainant (excepting routine foreclosures) wherein damages alleged exceed the sum of $50,000.00. 5.10 Accuracy of Submitted Information; No Material Omissions. No financial statements, nor any certificate, opinion or any other statement made or furnished to Agent or any Lender by or on behalf of the Borrower in connection with this Agreement or the transaction contemplated herein, contains any untrue statement of a material fact, or omits a material fact necessary in order to make the statements contained therein or herein not misleading. 5.11 Loan Not Usurious. The Loan as contemplated herein is not usurious. 5.12 [Reserved]. 5.13 Title to Assets. Borrower has good and marketable title to all property and assets reflected in the financial statements referred to in Section 5.02 hereof, except property and assets sold or otherwise disposed of in the ordinary course of business subsequent to the respective dates thereof and property subject to a capital lease made in the ordinary course of business. Borrower does not have outstanding liens on any of its property or assets, and is not a party to any security agreements or title retention agreements whether in the form of leases or otherwise, of any personal property, except as permitted under Section 7.02 hereof. 24 26 5.14 Taxes. Borrower and each of its Subsidiaries, if any, have filed or caused to be filed all tax returns that are required to be filed and have paid all taxes shown to be due and payable on such returns, or on any assessments made against them or any of their property, other than taxes and assessments that are being contested in good faith by appropriate proceedings and as to which the Borrower or such Subsidiary has established adequate reserves in conformance with GAAP. 5.15 Investment Company Act. Borrower is not an "investment company" within the meaning of the Investment Company Act of 1940, as amended. 5.16 ERISA. (a) No Prohibited Transactions, Accumulated Funding Deficiencies, withdrawals from Multiemployer Plans, or Reportable Events have occurred with respect to any Plans or Multiemployer Plans that, in the aggregate, could subject Borrower to any material tax, penalty or other liability where such tax, penalty, or liability is not covered in full, for the benefit of Borrower or such Subsidiary, by insurance; (b) no notice of intent to terminate a Plan has been filed, nor has any Plan been terminated under Section 4041 of ERISA, nor has the PBGC instituted proceedings to terminate, or appointed a trustee to administer, a Plan and no event has occurred or condition exists that might constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan; (c) the present value of all benefits liabilities (as defined in Section 4001(a) (16) of ERISA) under all Plans (based on the actuarial assumptions used to fund the Plans) does not exceed the assets of the Plans; and (d) the execution, delivery, and performance by Borrower of the Loan Documents and the borrowing of the Loans hereunder and the use of the proceeds thereof will not involve any Prohibited Transaction. 6. AFFIRMATIVE COVENANTS. Borrower covenants and agrees: 6.01 Loan Payments. To pay the Loan (as provided in the Notes and this Agreement) when due including but not limited to interest upon the Loan on the first day of each month. 6.02 Casualty Insurance. To place, or cause to be placed, and maintained at all times, such fire and extended coverage insurance on all real estate forming the basis of 25 27 the Collateral as may be required by the Investor or if there is no Investor, by the Lenders but in no event less than the Mortgage Loan amount, to the extent permitted by law. 6.03 Other Insurance. To maintain (a) errors and omissions insurance or mortgage impairment insurance and blanket bond coverage, with such companies and in such amounts as satisfy prevailing FNMA and FHLMC requirements applicable to a qualified mortgage originating institution, even though Borrower may not be approved by that agency, and (b) liability insurance and fire and other hazard insurance on its properties, with responsible insurance companies approved by the Agent, in such amounts and against such risks as is customarily carried by similar businesses operating in the same vicinity; and (c) within thirty (30) days after notice from the Agent, will obtain such additional insurance as the Agent shall reasonably require, all at the sole expense of the Borrower. Copies of such policies shall be furnished to the Agent without charge upon request of the Agent. 6.04 Enforcement of Mortgage Notes. To enforce payment and collection, at Borrower's expense, of all Mortgage Notes assigned to Agent hereunder as Collateral. 6.05 Costs of Collection. To pay the reasonable cost of collection (including attorneys' fees) of any of the Collateral, the enforcement of collection of which has been undertaken by Agent or any of the Lenders. 6.06 Notation of Mortgage Assignments. To make appropriate notations on its books of all assignments to Agent hereunder, and to give such notice hereof as Agent may from time to time reasonably require. 6.07 Execution of Additional Documents. To execute such additional instruments or assignments of the Collateral as Agent may from time to time reasonably require. 6.08 Submission of Financial Statements and Reports. To deliver the following to the Lenders, in form satisfactory to the Lenders: 6.08.01 Quarterly Financial Statements. Within forty-five (45) days after the close of each quarterly accounting period in each fiscal year: (a) an income statement of the Borrower for such quarterly period; (b) a balance sheet of the Borrower as of the end of such quarterly period; (c) a year-to-date Mortgage Loan closing report and (d) a servicing portfolio report; all in detail, subject to year end audit adjustments and prepared by Borrower, and certified true, correct and in compliance with the terms and conditions of the Loan Documents during any such period and on the date thereof, by Borrower's chief financial officer or President. 6.08.02 Year End Financial Statement. Within ninety (90) days after the close of each fiscal year: (a) a statement of stockholders' equity; (b) an income statement of the Borrower for such fiscal year; (c) a cash flow statement for such fiscal period; and (d) a balance sheet of the Borrower as of the end of such fiscal year, all in reasonable 26 28 detail, including all supporting schedules and comments and the accountant's management letter on internal procedures and controls; the statements and balance sheet to be audited by an independent certified public accountant selected by the Borrower and acceptable to Lenders; and accompanied by such accountant's opinion letter satisfactory to Lenders. 6.08.03 Quarterly Compliance Certificate. Within forty-five (45) days after the close of each quarterly accounting period in each fiscal year, a Compliance Certificate showing Borrower's (a) Tangible Effective Net Worth, (b) Leverage Ratio and (c) Current Ratio, accompanied by calculations supporting the reported results. The calculations and results shall be certified as true, correct and in compliance with the terms and conditions of the Loan Documents during any such period and on the date thereof, by Borrower's chief financial officer or President. 6.08.04 [RESERVED]. 6.08.05 Brokerage Statements. Within forty-five (45) days after the close of the second quarterly accounting period in each fiscal year, provided that at such time the market value of the Borrower's marketable securities portfolio is greater than $750,000, brokerage statements from each and every broker of Borrower, certified by Borrower to be true, correct and in compliance with the terms and conditions of the Loan Documents during any such period and on the date thereof, by Borrower's chief financial officer or president. 6.08.06 Monthly Mark-to-Market Reports. Within seven (7) days after and as of the end of each calendar month, provided that at such time the market value of the Borrower's marketable securities portfolio is greater than $750,000, a mark-to-market report regarding the Borrower's marketable securities portfolio prepared by Borrower, and certified by Borrower to be true, correct and in compliance with the terms and conditions of the Loan Documents during any such period and on the date thereof, by Borrower's chief financial officer or president. 6.08.07 Monthly Delinquency Reports. Within seven (7) days after and as of the end of each calendar month, a mortgage loan delinquency report in form satisfactory to Agent. 6.9 Maintenance Books and Records. To maintain adequate books, accounts and records in accordance with GAAP with appropriate notations thereon of all assignments to Agent; and to permit Agent, any Lender or their representatives at any reasonable time to inspect or examine or audit the books, accounts and records of Borrower. 6.10 Compliance with Administrative Requests. To comply with such reasonable administrative directions as Agent may give in order to provide proper servicing of the Advances hereunder. 27 29 6.11 Submission of Pipe Line Report. To provide when requested by any Lender, a copy of the Borrower's pipeline report in form and substance satisfactory to Lenders. 6.12 [Reserved]. 6.13 Notification of Borrower's Default. To advise Lenders in writing within three business days after the expiration of any applicable cure period, of any uncured material default known to Borrower in connection with any loan or line of credit whether from Lenders or not in excess of $50,000. 6.14 Maintenance of Take-Out Commitments. To keep all Take-Out Commitments in full force and effect and subject to no lien, assignment or other interest (other than that to Agent for the benefit of the Lenders). 6.15 Financial Covenants. To maintain at all times: (i) Tangible Effective Net Worth in the minimum amount of Seven Million Five Hundred Thousand Dollars ($7,500,000), (ii) a Leverage Ratio not to exceed 12.0 to 1.0. (iii) a Current Ratio of not less than 1.5:1.0. (iv) Working Capital of not less than Three Million Dollars ($3,000,000). (v) a Securities Margin not to exceed .35. 6.16 Tax Returns. To furnish Lenders with copies of federal income tax returns previously filed by the Borrower, within ten (10) days of a Lender's written request. 6.17 Payment of Taxes. To pay or cause to be paid when due, all taxes, assessments and charges or levies imposed upon it or on any of its property or which it is required to withhold and pay over, except where contested in good faith by appropriate proceedings with adequate reserves therefor having been set aside on its books provided, however that the Borrower shall pay or cause to be paid all such taxes, assessments, charges or levies forthwith whenever foreclosure on any lien that attaches (or security therefor) appears imminent. 6.18 New Locations and Subsidiaries. To furnish Lenders, when required to furnish the financial statements required by Section 6.08.01 hereof, the names and addresses of all new offices, locations, and subsidiaries. 6.19 Changes to Authorizational Documents. To promptly furnish to each Lender copies of any changes to the documents required by Paragraph 4.01.07 hereof, which 28 30 copies shall be certified to be true and correct by the applicable governmental agency responsible for recording such documents. 6.20 Mortgage Banker's Financial Reporting Form. To provide Lenders within 60 days of the end of each quarterly accounting period, with a copy of the quarterly Mortgage Banker's Financial Reporting Form (either FNMA Form 1002 or FHLMC Form 1055, as applicable). 6.21 Additional Reports. To promptly furnish Agent and each Lender with such reports and information as any of them deems reasonably necessary from time to time. 6.22 Demand Deposit Account. To maintain operating accounts, the Restricted Account and the DDA Account with Agent. 6.23 FNMA, FHLMC and HUD Audits. To provide to Lenders within thirty (30) days of receipt copies of all FNMA, FHLMC and HUD audit reports. 6.24 Compliance With Laws. To comply with all present and future Laws applicable to it in the operation of its business, and all material agreements to which it is subject. 6.25 Notice of Litigation. To give immediate notice to the Lenders of: (1) any litigation in which it is a party if an adverse decision therein would require it to pay over more than $50,000 or deliver assets the value of which exceeds such sum (whether or not the claim is considered to be covered by insurance); and (2) the institution of any other suit or any administrative proceeding involving it that might materially and adversely affect its operations, financial conditions, property or business. 6.26 Payment of Obligations When Due. To pay when due (or within applicable grace periods) all indebtedness due third persons, except when the amount thereof is being contested in good faith, by appropriate proceedings and with adequate reserves therefor being set aside on the books of the Borrower. 6.27 [Reserved.] 6.28 Operational Reviews. To, from time to time upon request, permit access to its premises, records and employees (including internal staff accountants) by Agent, Lenders or their representatives, for the purpose of conducting a review of Borrower's general mortgage business methods, policies, and procedures, auditing loan files, and reviewing financial and operational aspects of Borrower's business. 6.29 Third Party Originations. To, on a quarterly basis, provide Lenders with a then current list of all third party loan originators. Lenders reserve the right to advise Borrower, from time to time in its sole discretion, that they elect not to include any Mortgage Loans originated by any or all third party originator(s) in the Borrowing Base. 29 31 6.30 Exchange of Information. That so long as any sums due Lenders shall remain outstanding, Agent, Lenders or their successors may exchange credit and/or collateral information relating to Borrower, with any of Borrower's other creditors. 6.31 [Reserved.] 6.32 Preservation of Corporate Existence. To preserve and maintain its corporate existence, rights, franchises and privileges in the jurisdiction of its incorporation, and qualify and remain qualified as a foreign corporation in each jurisdiction in which such qualification is necessary in view of its business operation or ownership of its properties. 6.33 Subordinate Debt. To subordinate to Borrower's Indebtedness to Agent and Lenders hereunder, any and all debts to shareholders, officers, employees or affiliates of Borrower. 6.34 Maintenance of Approvals, Filings and Registrations. At all times maintain in effect, renew and comply with, and cause each of its Subsidiaries, if any, to effect, renew and comply with all the terms and conditions of all consents, licenses, approvals and authorizations as may be necessary under any applicable law or regulation for the execution, delivery and performance of this Agreement, the Security Agreement and the Notes and to make this Agreement and such other documents legal, valid, binding and enforceable. 7. NEGATIVE COVENANTS. Without the prior written consent of Agent, Borrower will not: 7.01 No Compromise of Collateral. Make any compromise, adjustment or settlement in respect of any of the Collateral or accept anything other than cash in payment or liquidation of the Collateral. 7.02 No Other Liens. Permit any lien or financing statement covering all or any part of the Collateral to be on file or recorded in any public office, or pledge, grant or permit to exist a security interest or lien upon any of its assets of any kind, real or personal, tangible, intangible, now owned or hereafter acquired, except: (a) liens created in favor of Agent on behalf of Lenders hereunder; (b) liens or charges for current taxes, assessments or other governmental charges that are not delinquent or that remain payable without penalty; (c) purchase money liens on specific equipment; (d) liens shown on Exhibit C attached; 30 32 (e) liens on its investments and securities which are not Collateral and which have been margined by Borrower for working capital purposes, provided that Borrower complies with Section 6.15(v) of this Agreement; and (f) liens on any of its assets other than the Collateral where such liens secure indebtedness in the aggregate of not more than $75,000. 7.03 No Change in Borrower's Name or Organizational Status. Change its name or liquidate, dissolve, consolidate or merge, reorganize, recapitalize or reclassify its capital stock, nor permit any subsidiary to do so, nor acquire, or permit any subsidiary to acquire, substantially all the assets of another entity. 7.04 No Sale of Assets or Capital Stock. Sell, transfer, lease or otherwise dispose of or cancel all or (except in the ordinary course of business) any material part of its assets or capital stock. 7.05 Improper Use of Proceeds. Use the proceeds of the Loan, or permit them to be used, for any purpose other than as permitted by Section 2.09 hereof. 7.06 No Additional Loans. Incur, create, assume or permit to exist any mortgage warehousing loans, working capital loans or gestation loans except (a) to Lenders under the terms of this Agreement, (b) liens on its investments and securities which have been margined by Borrower for working capital purposes, provided that the Borrower complies with Section 6.15(v) of this Agreement, (c) gestation-type or sale-purchase loan facilities for the purpose of temporarily bulking/accumulating Non-Conforming Mortgage Loans previously funded by the Lenders under the terms of this Agreement, and (d) loans secured by liens permitted under Section 7.02 hereof. 7.07 No Misleading Information. Furnish to Agent or any Lender any certificate or document that contains any untrue statement of material fact or omits a material fact necessary to make it not misleading in light of the circumstances under which it was furnished. 7.08 No Guarantees. Become liable directly or indirectly, as guarantor, surety, endorser or otherwise for any obligation of any other entity or person in excess of $20,000. 7.09 No Change in Management, Ownership or Control. Change in any material respect its executive management, ownership or control of its business operations. 7.10 [Reserved]. 7.11 Regulation U. Use the proceeds of any Advance, directly or indirectly, for the purpose, whether immediate, incidental, or ultimate, of buying or carrying any "margin stock" within the meaning of Regulation U of the Board of Governors of the Federal 31 33 Reserve System of the United States or any successor thereto, as in effect from time to time. 7.12 No Pledge of Servicing. Pledge, assign or grant a security interest or lien on all or any part of Borrower's Servicing Portfolio to anyone other than Agent for and on behalf of Lenders. 7.13 No Prepayment of Subordinated Debt. Prepay any debt subordinated to Borrower's indebtedness to Agent and Lenders under the Loan Documents. 7.14 Transactions with Affiliates. Directly or indirectly enter into, or permit any of its Subsidiaries directly or indirectly to enter into, any transaction (including the purchase, sale, lease, or exchange of any property, the making or borrowing of any loan or the rendering of any service) with any Affiliate on terms that are less favorable to Borrower or such Subsidiary than those that might be obtained at the time from Persons who are not Affiliates. 7.15 No Loss of Agency Approvals and Licenses. Take any of the following actions: (a) Terminate or withdraw from any Plan, so as to result in any material liability to the PBGC; (b) Engage in or permit any person to engage in any Prohibited Transaction involving any Plan that would subject Borrower or any of its subsidiaries to any material tax, penalty, or other liability; (c) Incur or suffer to exist any material Accumulated Funding Deficiency involving any Plan; (d) Amend any Plan, so as to require the posting of security under section 401(a)(29) of the Code; or (e) Fail to make payments required under section 412(m) of the Code and section 302(e) of ERISA that would subject Borrower or any of its Subsidiaries to any material tax, penalty or other liability. 7.16 Repurchase of Mortgage Loans. Fail to repurchase a Mortgage Loan when requested by the Investor or otherwise required to do so pursuant to any agreement between Borrower and the Investor, except, in the case of a repurchase requested by an Investor, for so long as Borrower shall in good faith contest its obligation to comply with such request under the terms of the agreement with the Investor. 8. AGENT. 32 34 8.01 Appointment of Agent. Lenders irrevocably appoint and authorize the Agent to act on behalf of Lenders under this Agreement and the Loan Documents and to exercise such powers hereunder and thereunder as are specifically delegated to Agent by the terms hereof and thereof, together with such powers as may be reasonably incidental thereto, including without limitation the power to execute or authorize the execution of financing or similar statements or notices, and other documents. In performing its functions and duties under this Agreement, the Agent shall act solely as agent of the Lenders and does not assume and shall not be deemed to have assumed any obligation towards or relationship of agency or trust with or for Borrower. With respect to Mortgage Notes for Mortgage Loans in Agents possession from time to time, Agent shall be deemed to hold them as bailee for the Lenders for the purpose of perfection under the Uniform Commercial Code, provided, however, that Agent shall have only those duties and responsibilities expressly stated in this Agreement and shall retain all rights, protections and indemnities provided herein. Each Lender agrees (which agreement shall survive any termination of this Agreement) to reimburse Agent for all reasonable out-of-pocket expenses (including outside attorneys' fees and disbursements) incurred by Agent hereunder or in connection herewith or with an Event of Default under this Agreement or in enforcing the obligations of Borrower under this Agreement or the Loan Documents or any other instrument executed pursuant hereto, and for which Agent is not reimbursed by Borrower, pro rata according to such Lender's Percentage Share. Agent shall not be required to take any action under the Loan Documents, or to prosecute or defend any suit in respect of the Loan Documents, unless indemnified to its satisfaction by the Lenders against loss, costs, liability and expense. If any indemnity furnished to Agent shall become impaired, they may call for additional indemnity and cease to do the acts indemnified against until such additional indemnity is given. 8.02 Deposit Account with Agent. Borrower hereby authorizes Agent, in Agent's sole discretion, to charge its general deposit account(s) if any, maintained with Agent for the amount of any principal, interest, or other amounts or costs due under this Agreement when the same becomes due and payable under the terms of this Agreement or the Notes. 8.03 Scope of Agent's Duties. The Agent shall have no duties or responsibilities except those expressly set forth herein, and shall not, by reason of this Agreement or otherwise, have a fiduciary relationship with any Lender (and no implied covenants or other obligations shall be read into this Agreement against the Agent). Neither Agent nor any of its directors, officers, employees or agents shall be liable to any Lender for any action taken or omitted to be taken by it under this Agreement or any document executed pursuant hereto, or in connection herewith or therewith with the consent or at the request of the Majority Lenders or in the absence of their own gross negligence or wilful misconduct, nor be responsible for or have any duties to ascertain, inquire into or verify (a) any recitals or warranties herein or therein, (b) the effectiveness, enforceability, validity or due execution of this Agreement or any document executed pursuant hereto or any security thereunder, (c) the performance by Borrower of its obligations hereunder or thereunder, or (d) the satisfaction of any condition hereunder or thereunder. Agent shall be entitled to rely upon any certificate, notice, document or other communication (including 33 35 any cable, telegraph, telex, facsimile transmission or oral communication) believed by it to be genuine and correct and to have been sent or given by or on behalf of a proper person. Agent may employ agents and may consult with legal counsel, independent public accountants and other experts selected by it and shall not be liable to the Lenders (except as to money or property received by them or their authorized agents), for the negligence or misconduct of any such agent selected by it with reasonable care or for any action taken or omitted to be taken by it in good faith in accordance with the advice of such counsel, accountants or experts. Agent agrees to review the eligibility of Mortgage Loan collateral consistent with Agent's practices for loans made for its sole account, but will not be liable to the Borrower or any Lender for any loss, costs, liability, or expense which arises from or is the consequence of any act or omission made by Agent in connection with such review. 8.04 Successor Agent. Agent may resign as such at any time upon at least 30 days prior notice to Borrower and Lenders. If Agent at any time shall resign or if the office of Agent shall become vacant for any other reason, all Lenders shall, by written instrument, appoint successor agent(s) (satisfactory to such Lenders) which shall have an office in the Detroit metropolitan area, and which shall thereupon become the Agent hereunder, as applicable, and shall be entitled to receive from the prior Agent such documents of transfer and assignment as such successor Agent may reasonably request. Lenders agree that any Lender may withhold approval of a proposed successor agent on the basis that the proposed successor agent is not a participant or assignee holding a material portion of the Loan. Such successor Agent shall succeed to all of the rights and obligations of the resigning Agent as if originally named. The resigning Agent shall duly assign, transfer and deliver to such successor Agent all moneys at the time held by the resigning Agent hereunder after deducting therefrom its expenses for which it is entitled to be reimbursed. Upon such succession of any such successor Agent, the provisions of this Section 8 shall continue in effect for the benefit of the resigning Agent in respect of any actions taken or omitted to be taken by it while it was acting as Agent. 8.05 Loans by Agent. Comerica, in its capacity as a Lender hereunder, shall have the same rights and powers hereunder as any other Lender and may exercise or refrain from exercising the same as though it were not the Agent. Comerica and its affiliates may (without having to account therefor to any Lender) accept deposits from, lend money to, and generally engage in any kind of banking, trust, financial advisory or other business with Borrower as if it were not acting as Agent hereunder, and may accept fees and other consideration therefor without having to account for the same to the Lenders. 8.06 Credit Decisions. Each Lender acknowledges that it has, independently of Agent and each other Lender and based on the financial statements of Borrower and such other documents, information and investigations as it has deemed appropriate, made its own credit decision to extend credit hereunder from time to time. Each Lender also acknowledges that it will, independently of Agent and each other Lender and based on such other documents, information and investigations as it shall deem appropriate at any 34 36 time, continue to make its own credit decisions as to exercising or not exercising from time to time any rights and privileges available to it under this Agreement or any document executed pursuant hereto. 8.07 Agent's Fees. Borrower shall pay to Agent a monthly Agent fee for Agent's services hereunder, pursuant to a separate agreement between Borrower and Agent. 8.08 Authority of Agent to Enforce Notes and This Agreement. Each Lender, subject to the terms and conditions of this Agreement, authorizes the Agent with full power and authority as attorney-in-fact to institute and maintain actions, suits or proceedings for the collection and enforcement of the Notes and to file such proofs of debt or other documents as may be necessary to have the claims of the Lenders allowed in any proceeding relative to Borrower or its creditors or affecting its properties, and to take such other actions which Agent consider to be necessary or desirable for the protection, collection and enforcement of the Notes, this Agreement or the Loan Documents. 8.09 Indemnification. The Lenders agree to indemnify the Agent (to the extent not reimbursed by Borrower, but without limiting any obligation of Borrower to make such reimbursement) ratably according to their respective percentages, from and against any and all claims, damages, losses, liabilities, costs or expenses of any kind or nature whatsoever (including, without limitation, fees and disbursements of counsel) which may be imposed on, incurred by, or asserted against the Agent in any way relating to or arising out of this Agreement, any of the Loan Documents or the transactions contemplated hereby or any action taken or omitted by the Agent under this Agreement or any of the Loan Documents, provided, however, that no Lender shall be liable for any portion of such claims, damages, losses, liabilities, costs or expenses resulting from the Agent's gross negligence or willful misconduct. Without limitation of the foregoing, each Lender agrees to reimburse the Agent promptly upon demand for its Percentage Share of any out-of-pocket expenses (including, without limitation, fees and expenses of counsel) incurred by the Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement or any of the Loan Documents, to the extent that the Agent is not reimbursed for such expenses by Borrower, but without limiting the obligation of Borrower to make such reimbursement. Each Lender agrees to reimburse the Agent promptly upon demand for its Percentage Share of any amounts owing to the Agent by the Lenders pursuant to this Section. If the indemnity furnished to the Agent under this Section shall, in the judgment of the Agent, be insufficient or become impaired, the Agent may call for additional indemnity from the Lenders and cease, or not commence, to take any action until such additional indemnity if furnished. 8.10 Knowledge of Default. It is expressly understood and agreed that the Agent shall be entitled to assume that no Event of Default has occurred and is continuing, unless the officers of the Agent immediately responsible for matters concerning this Agreement shall have been notified in writing specifying such Event of Default and stating that such 35 37 notice is a "notice of default" by a Lender or by Borrower. Upon receiving such a notice, the Agent shall promptly notify each Lender of such Event of Default. If any Lender acquires actual knowledge of an Event of Default, such Lender shall promptly notify the other Lenders and Agent. 8.11 Agent's Authorization; Action by Lenders. Except as otherwise expressly provided herein, whenever the Agent is authorized and empowered hereunder on behalf of the Lenders to give any approval or consent, or to make any request, or to take any other action on behalf of the Lenders (including without limitation the exercise of any right or remedy hereunder or under the other Loan Documents), the Agent shall be required to give such approval or consent, or to make such request or to take such other action only when so requested in writing by the Majority Lenders or all Lenders, as applicable hereunder. Action that may be taken by the Majority Lenders or all of the Lenders, as the case may be (as provided for hereunder) may be taken (i) pursuant to a vote at a meeting (which may be held by telephone conference call) as to which all of the Lenders have been given reasonable advance notice, or (ii) pursuant to the written consent of the requisite percentages of the Lenders as required hereunder, provided that all of the Lenders are given reasonable advance notice of the requests for such consent. 8.12 Enforcement Actions by the Agent. Except as otherwise expressly provided under this Agreement or in any of the other Loan Documents and subject to the terms hereof, Agent will take such action, assert such rights and pursue such remedies under this Agreement and the other Loan Documents as the Lenders shall direct, provided, however, that the Agent shall not be required to act or omit to act if, in the judgment of the Agent, such action or omission may expose the Agent to personal liability or is contrary to this Agreement, any of the Loan Documents or applicable law. Except as expressly provided above or elsewhere in this Agreement or the other Loan Documents, no Lender (other than the Agent, acting in its capacity as agent) shall be entitled to take any enforcement action of any kind under any of the Loan Documents. 8.13 Agent shall provide to Lenders a monthly Borrowing Base Report. 9. DEFAULT. 9.01 Events of Default. Borrower shall be in default under this Agreement upon the happening of any of the following events or conditions (each an "Event of Default"): 9.01.01 Default in the payment of any of the Notes or payment or performance of any other obligation, covenant or liability of Borrower contained or referred to herein, or in any other obligation owed by Borrower to Lenders or Agent; 9.01.02 Any warranty, representation or statement furnished to Lenders by or on behalf of Borrower in connection with this Agreement proves to have been false in any material respect when made or furnished; 36 38 9.01.03 Loss, theft, substantial damage, destruction, abandonment, sale (except as permitted by this Agreement) or encumbrances to or of the Collateral or any substantial part thereof, or the making of any levy, seizure or attachment thereof, or thereon; 9.01.04 Dissolution, termination of existence, insolvency, business failure, appointment of a receiver for benefit of creditors by, or the commencement of any case or proceeding under any bankruptcy or insolvency law by or against Borrower unless said proceeding, if commenced against Borrower, is dismissed within 30 days from the date it is filed; 9.01.05 Occurrence of any material adverse change in the financial or operating condition of Borrower; 9.01.06 If presently held or later obtained, subsequent loss for cause of FNMA and/or FHLMC certification; 9.01.07 Failure of Borrower or any shareholder or director of Borrower to observe the terms of or perform any agreement with Lenders; 9.01.08 Borrower's default under the terms and conditions of any loan or credit agreement with any third party for over $50,000; or 9.01.09 If any one of the following shall occur: (a) Any Reportable Event or a Prohibited Transaction shall occur with respect to any Plan; (b) a notice of intent to terminate a Plan under section 4041 of ERISA shall be filed; (c) a notice shall be received by the plan administrator of a Plan that the PBGC has instituted proceedings to terminate a Plan or appoint a trustee to administer a Plan; (d) any other event or condition shall exist that might, in the opinion of the Majority, constitute grounds under section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan; (e) Borrower or any ERISA Affiliate shall withdraw from a Multiemployer Plan under circumstances that the Majority Lenders determine could have a material adverse effect on the financial condition of Borrower; and in case of the occurrence of any event or condition described in clauses (a) through (e) above, such event or condition together with all other such events or conditions, if any, could subject Borrower to any tax, penalty, or other liabilities in the aggregate business, operations, property, or financial or other condition of Borrower and its Subsidiaries, taken as a whole. 9.02 Remedies Upon Default. Upon the occurrence and during the continuation of an Event of Default, at the direction of the Majority Lenders, (i) Lenders may refuse to make additional advances, and (ii) Agent may terminate this Agreement, declare all sums now or hereafter owed by Borrower to Lenders to be immediately due and payable, charge Borrower's DDA Account and Restricted Account for any or all sums due and owing to Lenders, and exercise all rights and remedies upon default, in foreclosure and otherwise, of a secured party under the Uniform Commercial Code and other applicable law, in 37 39 addition to the rights and remedies provided herein or in any other instrument or paper executed by Borrower to the extent allowed by applicable law, including, at its option and in its sole discretion, until all sums now or hereafter owed Agent or to Lenders are paid in full, the right or rights to: 9.02.01 Communicate with and notify the mortgagors under the Mortgage Loans comprising the Collateral of Borrower's assignments hereunder, and note any such assignment on Borrowers records; 9.02.02 Take over the exclusive right to collect the Collateral at the sole expense of the Borrower, without any obligation to preserve rights against third parties. For any acts done or not done incident to such collection or liquidation, Agent shall not be liable in any manner. Agent shall have the right to settle, compromise, or adjust Collateral and the claims or right of Borrower thereunder and accept return of the real estate involved, and in turn sell and dispose of all said real estate without notice to or approval of Borrower, Agent may employ agents and attorneys to collect or liquidate any Collateral, and Agent shall not be liable for such Collateral or defaults of any such agents and attorneys; 9.02.03 To effect collection of the Loan, take possession of and open any mail addressed to Borrower whether on Borrower's premises or elsewhere and to remove, collect, and apply all payments therein contained and as attorney in fact for Borrower, sign the Borrower's name to any receipts, checks, notes, agreements, assignments or other instruments or letters, in order to collect, sell or liquidate the Collateral. This power shall be irrevocable; 9.02.04 Require Borrower to assemble all books and records of account relating to the Collateral and make them available to Agent at its office herein set forth or such other place as may be designated by Agent; 9.02.05 Enter the office of Borrower and take possession of any of the Collateral including any records that pertain to the Collateral; 9.02.06 Undertake to service any one or more of the Mortgage Loans comprising the Collateral and upon the happening of such, Borrower shall transfer to Agent all escrow funds, records, and any other documents relating to any such Mortgage Loans then held by it; 9.02.07 Rescind any acceleration of the maturity of the Loan previously declared (but the tender and acceptance of partial payments of the Loan shall not rescind or affect in any way any such acceleration of maturity); 9.02.08 Institute legal proceedings to foreclose upon and against the lien and security interest granted by this Agreement and the Security Agreement, to recover judgment for all amounts then due and owing on the Loan, and to collect the same out of any of the Collateral or the proceeds of any sale thereof; 38 40 9.02.09 Institute legal proceedings for the sale, under the judgment of decree of any court of competent jurisdiction, of any or all of the Collateral; 9.02.10 Personally or by agents, attorneys, or appointment of a receiver enter upon any premises where the collateral or any part of it may then be located, and take possession of all or any part of it and/or render it unusable; and without being responsible for loss or damage to such Collateral, (a) hold, store, and keep idle, or lease, operate, remove or otherwise use or permit the use of the Collateral or any part of it, for that time and upon those terms as Agent, in its sole discretion, deems to be in its own best interest, and demand, collect and retain all resulting earnings and other sums due and to become due from any party, accounting only for net earnings, if any (unless the Collateral is retained in satisfaction of the Loan, in which case not accounting will be necessary), arising from that use (which net earnings may be applied against the amounts outstanding on the Loan) and charging against all receipts from the use of the Collateral or from its sale, by court proceeds or pursuant to subsection (b) below, all other costs, expenses charges, damages and other losses resulting from that use; and/or (b) sell, lease dispose of, or cause to be sold, leased or disposed of, all or any part of the Collateral at one or more public or private sales, leasings or other dispositions, at places and times and on terms and conditions as Agent may deem fit, without any previous demand or advertisement; and except as provided in this Agreement and the Security Agreement, all notice of sale, lease or other disposition, and advertisement, and other notice or demand, any right or equity of redemption, and any obligation of a prospective purchaser or lessee to inquire as to the power and authority of Agent to sell, lease or otherwise dispose of the Collateral or as to the application by Agent of the proceeds of sale or otherwise, which would otherwise be required by, or available to Borrower under, applicable law are expressly waived by Borrower to the fullest extent permitted. At any sale pursuant to or permitted by this Section 9.02, whether under the power of sale, by virtue of judicial proceedings or otherwise, it shall not be necessary for Agent or a public officer under order of a court to have present physical or constructive possession of the Collateral to be sold. The recitals contained in any conveyances and receipts made and given by Agent or the public officer to any purchaser at any sale made pursuant to this Agreement shall, to the extent permitted by applicable law, conclusively establish the truth and accuracy of the matters stated with regard to the Loan or the conduct of sale (including, without limit, as to the amounts of the principal of and interest on the Loan, the accrual and nonpayment of it and advertisement and conduct of the sale); and all 39 41 prerequisites to the sale shall be presumed to have been satisfied and performed. Upon any sale of any of the Collateral, the receipt of the officer making the sale under judicial proceedings or Agent shall be sufficient discharge to the purchaser for the purchase money, and the purchaser shall not be obligated to see to the application of the money. Any sale of any of the Collateral under this Agreement or the Security Agreement shall be a perpetual bar against Borrower with respect to that Collateral; and/or 9.03 Remedies Cumulative. All remedies available to Agent shall be cumulative not alternate in that the exercise of one or more of them shall not preclude exercising one or more of the others. Further, nothing in this Default section or elsewhere in this Agreement shall affect the demand nature of Borrower's obligations to Lenders or preclude the Lenders from demanding full payment of all sums due by Borrower to Lenders, at any time. 9.04 Allocation of Amounts Received. All amounts received by Agent after an Event of Default shall be allocated as follows: (a) First, to the payment of reasonable costs and expenses incurred by the Agent in the performance of its duties and enforcement of its rights under the Loan Documents, including, without limitation, all costs and expenses of collection, attorney's fees, court costs and foreclosure expenses; (b) Second, to Comerica to the extent of Excess Advances and interest thereon; (c) Third, to the Lenders, pro rata in accordance with their respective Percentage Shares until the Loan shall have been paid in full; and (d) Fourth, to such persons as may be legally entitled thereto. 10. Sale of Mortgage Notes. So long as Borrower is not in default hereunder Agent shall: 10.01 Delivery of Mortgage Notes by Agent. Upon sale by Borrower of any Mortgage Loan assigned to Agent hereunder, deliver the Mortgage Note as requested by Borrower to the Investor under a Bailee Letter. Agent agrees to send the original Mortgage Note together with the loan document delivery package received from Borrower directly to the pertinent Investor no later than one business day after receipt of the request from Borrower. Delivery by Agent as aforesaid shall be deemed a conditional delivery to the Investor conditioned on receipt by Agent of the sale proceeds from the Investor. Borrower directs Agent to apply said proceeds to the principal balance of the Loan. Agent may require Borrower to deliver a cover letter, in form satisfactory to Agent, directing Investor to make payment directly to Agent. 40 42 11. Collections. Upon default if so requested by Agent, in writing, Borrower shall act, as the representative of, and in trust for, Agent in receiving and collecting all monies payable on any Mortgage Loan held as part of the Collateral and after collection thereof shall deposit the same in a special account at Agent in the name of the Borrower, and the same shall be held by Agent as part of the Collateral hereunder. Agent, upon deposit in such special account of any monies payable on any such Mortgage Loan, may, in its sole discretion, apply all or any part thereof to the payment of Borrower's obligations. 12. Termination; Demand for Payment. Borrower may terminate this Agreement at any time upon thirty (30) days written notice to the Agent and the Lenders, upon which date all sums then outstanding all be immediately due and payable. Whether or not an Event of Default exists and without affecting Lenders' rights upon the occurrence of an Event of Default, any Lender may at any time, upon seventy-five (75) days prior written notice to Agent, Borrower and the other Lenders, demand payment of such Lender's unpaid and outstanding Advances and interest. By the effective date of such demand, any other Lender may elect, in its sole discretion, to (i) demand payment of its unpaid and outstanding Advances and interest, upon seventy-five days prior notice to Borrower and all nondemanding Lenders, (ii) purchase the demanding Lender's Allocation Amount, in which event this Agreement shall continue in effect, or (iii) locate an assignee of the demanding Lender's Allocation Amount, which shall purchase the demanding Lender's Allocation Amount, in which case the assignee shall be substituted for the demanding Lender and this Agreement shall continue in effect. If a demanding Lender's Allocation Amount is not purchased or assigned, and one or more Lenders have not elected to demand payment, then this Agreement shall continue in effect, the Maximum Loan Amount will be reduced by the amount of the demanding Lender(s) Allocation Amount(s), and the nondemanding Lender(s) Percentage Share(s) shall increase accordingly. Should all Lenders elect to demand payment, this Agreement shall terminate. Termination of this Agreement by Borrower or Lenders as described above will not alter or affect any of the rights or obligations of the parties hereto in respect of any transactions then pending hereunder, particularly the indebtedness or obligation of Borrower or the right of Lenders to the Collateral, or the right to enforce and use the provisions of this Agreement in respect of the enforcement and collection of the Collateral. 13. Miscellaneous. 13.01 Notices. Except as to routine business matters, any and all communications between the parties hereto or notices provided herein to be given in writing shall be (i) delivered in person, (ii) sent by both certified or registered mail, return receipt requested, and by regular mail, or (iii) by overnight courier service that provides for proof of delivery; addressed as follows: 41 43 Comerica: Comerica Bank 500 Woodward Ave., MC 3256 Detroit, MI 48226 Attention: Von L. Ringger CBNA: CoreStates Bank, N.A. Banking and Finance Company Group 1339 Chestnut St. F.C. 1-8-12-7 Philadelphia, PA 19107-3579 Attention: Edmund J. Furphy Norwest: Norwest Bank Minnesota, N.A. 7900 Xerxes Avenue South, Ste. 300 Minneapolis, MN 55431 Attention: Heidi Bye RFC: Residential Funding Corporation 4800 Montgomery Lane, Ste. 300 Bethesda, Maryland 20814 Attention: Barbara Repetti Borrower: Rock Financial Corporation 30600 Telegraph Road, Suite 4000 Bingham Farms, Michigan 48025 Attention: Daniel B. Gilbert With a copy to: Rock Financial Corporation 30600 Telegraph Road, Suite 4000 Bingham Farms, Michigan 48025 Attention: Corporate Counsel or to such other address as any party may by notice indicate to the other from time to time. Unless sooner received, all notices shall be deemed delivered two (2) days after mailing, as herein set forth. Actual knowledge of the contents of the notice, however received, shall constitute proper notice hereunder. 13.02 Successors and Assigns. The terms and provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective 42 44 successors and assigns. All representations, warranties, covenants (affirmative and negative) and agreements herein contained on the part of Borrower shall survive the execution of the Notes, and shall be effective as long as any sums remain due and owing Agent or any Lender. 13.03 Delay - No Waiver. No delay in exercising, or failure to exercise any right, power or remedy accruing to Agent or any Lender, as applicable, through any breach or default of Borrower under this Agreement, or any acquiescence to any such breach or default, or to any similar breach or default thereafter occurring, shall impair any such right, power or remedy of Agent or any Lender, as applicable; nor shall any waiver of any single breach or default be deemed a waiver of any breach or default thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of Agent or any Lender, as applicable, of any provision or condition of the Agreement, must be in writing and shall be effective only to the extent of such writing specifically set forth. The forgoing two sentences shall be deemed to be applicable to Agent, the Lenders and Borrower. In the event Agent is required to take any action to collect sums due under the Notes or to enforce, renegotiate, restructure or modify the terms of this Agreement, or is required to institute, defend or otherwise participate in any action at law or suit in equity in relation to this Agreement, or any Mortgage Loan forming part of the Collateral, Borrower, in addition to all other sums which it may be called upon to pay, will pay Agent's attorneys' fees and costs. Nothing in this Agreement shall be deemed any waiver or prohibition of Agent's or any Lender's right of lien or set-off, except that Agent and each Lender agrees to not set-off against any legitimate custodial or escrow account in which Borrower accumulates funds owned by individual mortgagors or other third parties. 13.04 (a) Entire Agreement-Supplemental Policies and Procedures. This Agreement, together with the other agreements referred to herein, set forth the entire agreement among the parties hereto, and there are no other agreements, express or implied, written or oral, except as set forth herein. This Agreement may not be amended, altered or changed except in writing by all parties hereto. It is contemplated that from time to time Borrower and Lenders will enter into supplemental agreements establishing policies and procedures to carry out the terms of this agreement. Such agreements shall constitute amendments hereto provided they are signed by all parties. (b) Partial Invalidity. The inapplicability or unenforceability of any provision of this Agreement shall not limit or impair the operation or validity of any other provisions of this Agreement. (c) Counterparts. This Agreement and any amendments hereto may be executed in any number of counterparts, each of which, when executed and delivered, shall be an original, but such counterparts shall together constitute one and the same instrument. (d) No Assignment by Borrower. This Agreement shall not be assignable by Borrower without the express written approval of Agent and all Lenders. 43 45 (e) Materiality/Reliance by Lenders. All covenants, agreements and representations made herein and in documents delivered in support of this Agreement, now or in the future, shall be deemed to have been material and relied on by Agent and the Lenders and shall not merge with this Agreement. (f) No Third Party Beneficiary. The parties hereto understand and agree that there is no intention to confer any benefits upon any person or legal entity not a party to this Agreement. (g) Confidentiality. All information and materials provided to Lenders by Borrower shall be treated with the same degree of confidentiality as Lenders maintain with regard to similar information of its other customers generally. Nothing contained herein shall prevent Lenders from releasing to actual or proposed loan participants such information regarding Borrower as Lenders may deem pertinent and necessary. 13.05 Interpretation of Accounting Terms. Each accounting term used in this Agreement which is not specifically defined shall have the meaning customarily given to it in accordance with generally accepted accounting principles. 13.06 Michigan Law/Consent to Jurisdiction and Service. This Agreement and the Notes shall be governed by the laws of the State of Michigan. Borrower agrees and consents to the exclusive jurisdiction of the Oakland County Circuit Court and/or the United States District Court for the Eastern District of Michigan. Furthermore, BORROWER HEREBY WAIVES ALL RIGHT TO DEMAND A JURY TRIAL IN ANY AND ALL ACTIONS AND PROCEEDINGS WHETHER ARISING HEREUNDER OR UNDER ANY OTHER AGREEMENT OR UNDERTAKING and irrevocably agrees to service of process sent by certified mail, return receipt requested, and regular mail to the address set forth herein, or such address as may appear in Agent's records. 13.07 Assignment; Participation. No Lender shall assign its rights or obligations hereunder. Comerica may grant participations in its portion of the Loan, in Comerica's sole discretion, provided that Comerica shall at all times retain at least $10,000,000 for the Loan for its own account. With Agent's prior written consent, which consent will not be unreasonably withheld, Lenders (other than Comerica) may grant participations in their respective portions of the Loan. 13.08 Amendments; Waivers. Any term, covenant, agreement or condition of the Loan Documents may be amended, and any right under the Loan Documents may be waived, if, but only if, such amendment or waiver is in writing and is signed by (a) the Majority Lenders and, if the rights and duties of the Agent are affected thereby, by the Agent, and (b) in the case of an amendment, by the Borrower; provided, however, that no amendment or waiver shall be effective, unless in writing and signed by each Lender 44 46 affected thereby, to the extent it (i) changes the amount of such Lender's Allocation Amount, (ii) reduces the principal of or the rate of interest on the Loan, (iii) postpones any date fixed for any payment of principal of or interest on the Loan, (iv) releases any Collateral, (v) waives any default under Section 9.01.01, (vi) changes the definition of "Majority Lenders", or (vii) amends this Section 13.08 or any other provision of this Agreement requiring the consent or other action of all of the Lenders. IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the day and year first above written. ROCK FINANCIAL CORPORATION COMERICA BANK By: /s/ Daniel B. Gilbert By: /s/ Von L. Ringger ----------------------------- ----------------------------- Daniel B. Gilbert Von L. Ringger Its: President Its: First Vice President CORESTATES BANK, N.A. By: /s/ ------------------------------ Its: ------------------------------ NORWEST BANK MINNESOTA, N.A. By: /s/ ------------------------------ Its: ------------------------------ RESIDENTIAL FUNDING CORPORATION By: /s/ ------------------------------ Its: ------------------------------ 45 47 EXHIBIT A (SECTION 5.06) SCHEDULE OF BORROWER'S OFFICES Rock Financial Corporation 30600 Telegraph Road Fourth Floor Bingham Farms, MI 48025 Rock Financial Corporation 25201 Chargrin Blvd. Suite 180 Beachwood, OH 44122 Rock Financial Corporation 43681 Ford Road Canton, MI 48187 Rock Financial Corporation 14229 Torrey Road Fenton, MI 48430 Rock Financial Corporation 410 W. University Rochester, MI 48307 Rock Financial Corporation One East Campus View Blvd. Suite 230 Columbus, OH 43235 46 48 EXHIBIT C (SECTION 7.04) OTHER LIENS $2,000,000 line of credit with Michigan National Bank evidenced by ___________, the proceeds of which finance construction of offices of the Borrower and purchase of computer systems. 49 EXHIBIT D REQUEST FOR ADVANCE 50 EXHIBIT E (SECTION 1.02) APPROVED INVESTORS
==================================================================================================== Conforming Mortgage Loans: Non-Conforming Mortgage Loans: - ---------------------------------------------------------------------------------------------------- American Residential Advanta (Colonial National Bank) Anchor Mortgage Chase Residential Mortgage Bancboston ContiMortgage Banc One Mortgage D&N Savings Bank Barclays American Mortgage First Security Savings Bank Capstead Mortgage Ford Chase Home Mortgage GE Home Equity Chemical Bank Portfolio Acceptance Corp. (Nationsbank) Citicorp Mortgage Prudential Home Mortgage Citifed Mortgage Saxon Mortgage Countrywide Unicor (United Lending) FHLMC First Federal of Rochester First Nationwide Bank First Security Savings Bank First Union Mortgage FNMA General Electric Hamilton Financial Loan America Merrill Lynch NationsBank Norwest Funding Prudential Home Mortgage Residential Funding Corp. Saxon Mortgage ==================================================================================================== High LTV Second Mortgage Loans: - ----------------------------------------------------------------------------------------------------
51 EXHIBIT F (SECTION 5.09) SCHEDULE OF JUDGMENTS, ACTIONS AND PROCEEDINGS 1. Victoria McNeill (Plaintiff/Counter Defendent) vs. Rock Financial Corporation (Defendent/Counter Plaintiff), Oakland County Court Case No. 97-544583-NZ. 50 52 EXHIBIT G BAILEE LETTER [Agent's Letterhead] [Date] [Investor] RE: ROCK FINANCIAL CORPORATION Account #: 1840-13366-2 Gentlemen: Enclosed please find for your review and inspection, the following complete mortgage files: Comerica Bank, as Agent for and on behalf of Lenders ("Agent"), has a security interest in the enclosed mortgage note(s), mortgage(s) and in their proceeds. The mortgage notes are sent to you for your inspection and purchase. Pending your purchase of the enclosed loans, you agree to hold the mortgage loans as bailee on behalf of Agent. All documents pertaining to mortgages not purchased by you must be returned directly to Agent, no later than twenty-one (21) days from the date of this letter. UNDER NO CIRCUMSTANCES ARE ANY OF THE ENCLOSED FILES TO BE RETURNED TO THE ORIGINATING MORTGAGE COMPANY. Any purchase you elect to make will be free of the Agent's security interest, however, your payment, which is proceeds of the Agent's collateral, must be sent directly to the Bank and NOT to the mortgage company. Please direct your payment to: Comerica Bank, 500 Woodward Avenue, MC:3256, Detroit, MI 48226, Attention: _____, Mortgage Warehouse Operations Officer. ABA #072-000-096. If you are unable to complete the purchase of any of the enclosed loans within fourteen (14) business days from the date of this letter, kindly return the unpurchased loan files to Agent. Please acknowledge receipt of the above mortgage loans and your acceptance of and consent to the terms upon which the mortgage loans have been sent to you, by signing the enclosed copy of this letter and return it in the enclosed self-addressed envelope. If you have any questions, please call this department at 313/222/6111. Sincerely, - --------------- Mortgage Warehouse Operations Officer Acknowledged and Agreed to: By: Date , 199 -------------------------- ------------------ -- Its: Phone No: -------------------------- ------------------ 53 EXHIBIT H REQUEST FOR PRE-WAREHOUSE ADVANCE AND SECURITY AGREEMENT 54 EXHIBIT I TRUST RECEIPT 55 AMENDMENT NO. 1 TO SECOND AMENDED AND RESTATED MORTGAGE WAREHOUSING AGREEMENT (ROCK FINANCIAL CORPORATION) THIS AMENDMENT ("Amendment") is dated as of January 30, 1998, by and among Comerica Bank, a Michigan banking corporation ("Comerica"), Corestates Bank, N.A., a national banking association ("CBNA"), Residential Funding Corporation, a Delaware corporation ("RFC") and Norwest Bank Minnesota, National Association, a national banking association ("Norwest"), (collectively, Comerica, CBNA, RFC and Norwest are referred to as "Lenders"), Comerica Bank, as Agent for Lenders (in such capacity, "Agent"), and Rock Financial Corporation, a Michigan corporation ("Borrower"). R E C I T A L S : A. Borrower, Agent and Lenders entered into a certain Second Amended and Restated Mortgage Warehousing Agreement dated November 13, 1997 (the "Agreement"). B. Borrower, Agent and Lenders desire to amend the Agreement as hereinafter set forth. NOW THEREFORE, the parties agree as follows: 1. The definition of "Lenders' Allocation Amount" in Section 1.02 of the Agreement is amended and restated in its entirety as follows: "Lenders' Allocation Amount means $48,000,000 as to Comerica, $21,000,000 as to CBNA, $24,000,000 as to Norwest, and $32,000,000 as to RFC." 2. The definition of "Loan" in Section 1.02 of the Agreement is amended and restated in its entirety as follows: "Loan means a demand mortgage warehouse facility in the amount of up to the Maximum Loan Amount, of which each Lender shall advance up to its Lender's Allocation Amount, in each case subject to the terms and conditions of this Agreement." 3. The definition of "Maximum Loan Amount" in Section 1.02 of the Agreement is amended and restated in its entirety as follows: "Maximum Loan Amount means $125,000,000, subject to Section 12 hereof." 56 4. The Percentage Share, as defined in the Agreement, on the effective date of this Amendment, shall be 38.40% for Comerica, 19.20% for Norwest, 25.60% for RFC and 16.80% for CBNA. 5. Borrower hereby represents and warrants that, after giving effect to the amendments and waivers contained herein, (a) execution, delivery and performance of this Amendment, and any other documents and instruments required under this Amendment, or the Agreement are within the Borrower's corporate powers, have been duly authorized, are not in contravention of law or the terms of Borrower's Articles of Incorporation or Bylaws, and do not require the consent or approval of any governmental body, agency or authority; and this Amendment and any other documents and instruments required under this Amendment or the Agreement will be valid and binding in accordance with their terms; (b) the continuing representations and warranties of Borrower set forth in Section 5 of the Agreement (Sections 5.01-5.16) are true and correct on and as of the date herewith, with the same force and effect as if made on and as of the date herewith; and (c) no Event of Default, or condition or event which, with the giving of notice or the running of time, or both, would constitute an Event of Default under the Agreement, has occurred and is continuing on or as of the date hereof. 6. Except as expressly modified by this Amendment, all of the terms and conditions of the Agreement shall remain in full force and effect. 7. This Amendment shall not become effective until the Agent shall have received, in form and substance satisfactory to the Agent: (a) duly executed counterpart originals of this Amendment; (b) duly executed replacement Notes, which replacement Notes shall amend, restate and supersede in their entirety all of the existing Notes; and (c) certificates of the Secretary of the Borrower as to (i) resolutions of the Board of Directors authorizing the execution and delivery of this Amendment and the replacement Notes and the performance by the Borrower of its obligations under the Agreement as amended hereby, and (ii) the incumbency and signature of those of its officers authorized to execute and deliver this Amendment and the replacement Notes. 8. Capitalized terms not defined herein shall have the meanings ascribed to them in the Agreement. 9. This Amendment may be signed in any number of counterparts and by different parties on separate counterparts, and each such counterpart when executed and delivered shall constitute an original but all such counterparts shall together constitute one and the same Amendment. 57 IN WITNESS WHEREOF, the parties have executed this Amendment as of the date set forth above. COMERICA BANK, AS AGENT AND ROCK FINANCIAL CORPORATION LENDER By: /s/ Von L. Ringger By: /s/ Daniel B. Gilbert ----------------------------- ------------------------------ Von L. Ringger Daniel B. Gilbert Its: First Vice President Its: President CORESTATES BANK, N.A. By: /s/ ---------------------------- Its: -------------------------- NORWEST BANK MINNESOTA, N.A. By: /s/ ---------------------------- Its: --------------------------- RESIDENTIAL FUNDING CORPORATION By: /s/ ----------------------------- Its: ---------------------------- EX-10.6 9 EXHIBIT 10.6 1 EXHIBIT 10.6 MASTER REPURCHASE AGREEMENT Dated as of March 26, 1997 Between: BEAR STEARNS HOME EQUITY TRUST 1996-1 and ROCK FINANCIAL CORPORATION 1. APPLICABILITY From time to time the parties hereto may enter into transactions in which Rock Financial Corporation (herein referred to as "Seller") agrees to transfer to Bear Stearns Home Equity Trust 1996-1 ("Buyer") Mortgage Loans (as defined herein) against the transfer of funds by Buyer, with a simultaneous agreement by Buyer to transfer to Seller such Mortgage Loans at a date certain or on demand, against the transfer of funds by Seller. Each such transaction shall be referred to herein as a "Transaction" and shall be governed by this Agreement, as the same shall be amended from time to time. 2. DEFINITIONS (a) "A Quality Non-Conforming Mortgage Loans", Mortgage Loans qualified under the relevant sections of the Rock Financial Corporation Guide; (b) "Act of Insolvency", with respect to either Buyer or Seller, (i) the commencement by such party as debtor of any case or proceeding under any bankruptcy, insolvency, reorganization, liquidation, dissolution or similar law, or such party seeking the appointment of a receiver, trustee, custodian or similar official for such party or any substantial part of its property, or (ii) the commencement of any such case or proceeding against such party, or another seeking such an appointment, or the filing against a party of an application for a protective decree under the provisions of the Securities Investor Protection Act of 1970, which (A) is consented to or not timely contested by such party, 2 (B) results in the entry of an order for relief, such an appointment, the issuance of such a protective decree or the entry of an order having a similar effect, or (C) is not dismissed within 15 days, (iii) the making by a party of a general assignment for the benefit of creditors, or (iv) the admission in writing by a party of such party's inability to pay such party's debts as they become due; (c) "Additional Purchased Mortgage Loans", Mortgage Loans provided by Seller to Buyer pursuant to Paragraph 4(a) hereof; (d) "B Quality Non-Conforming Mortgage Loans", Mortgage Loans qualified under the relevant sections of the Rock Financial Corporation Guide; (e) "Business Day", any day other than a Saturday, Sunday and any day on which banks located in the State of New York are authorized or required to close for business; (f) "Buyer's Margin Amount", with respect to any Transaction as of any date, the amount obtained by application of a percentage, agreed to by Buyer and Seller prior to entering into the Transaction and specified in the related Request/Confirmation, to the Repurchase Price for such Transaction as of such date; (g) "C Quality Non-Conforming Mortgage Loans", Mortgage Loans qualified under the relevant sections of the Rock Financial Corporation Guide; (h) "Custodian", the custodian named in the Custody Agreement and any permitted successor thereto; (i) "Custody Agreement", the Custody Agreement among Buyer, Seller and the Custodian providing for the custody of records relating to the Purchased Mortgage Loans; (j) "FNMA", the Federal National Mortgage Association; (k) "Income", with respect to any Mortgage Loan at any time, any principal thereof then due and payable and all payments of interest and other distributions thereon or proceeds thereof then due and payable; (l) "Loan Schedule", a schedule of Mortgage Loans identifying each Mortgage Loan by Seller's loan number, Mortgagor's name and address (including the state and zip code) of the mortgaged property, whether such Mortgage Loan is an A Quality Non-Conforming Mortgage Loan, a B Quality Non-Conforming Mortgage Loan or a C Quality Non-Conforming Loan, the outstanding principal amount as of a specified date, the initial interest rate borne by such Mortgage Loan, the original principal balance 2 3 thereof, the current scheduled monthly payment of principal and interest, the maturity of the related Note, the property type, the occupancy status, the original term to maturity and whether or not the Mortgage Loan (including the related Note) has been modified; provided, however, that the items of information set forth on the Loan Schedule may be expanded or contracted by mutual agreement of Buyer and Seller. (m) "Margin Deficit", the meaning specified in Paragraph 4(a) hereof; (n) "Market Value", with respect to any Mortgage Loans as of any date, the fair market value of such Mortgage Loans on such date as reasonably determined in good faith by Buyer in accordance with its current practices for determining the fair market value of similar residential loans from time to time and at such times as it may elect in its sole discretion; provided, however, that a Market Value of zero shall be assigned to (i) any Mortgage Loan that has been delinquent for at least eighty-nine (89) days, (ii) any Mortgage Loan that has been subject to this Agreement for more than one hundred and eighty (180) days in aggregate or (iii) any Mortgage Loan with respect to which there is a breach of a representation or warranty made by Seller in this Agreement or the Custody Agreement that materially adversely affects Buyer's interests hereunder. (o) "Mortgage", the mortgage, deed of trust or other instrument creating a first or junior lien on an estate in fee simple interest in real property securing a Note; (p) "Mortgage File", the meaning specified in the Custody Agreement; (q) "Mortgage Loan", the mortgage loans secured by first liens on single family residential real property (including, without limitation, condominiums and planned unit developments) delivered to the Custodian pursuant to the Custody Agreement and shall be either A Quality Non-Conforming Mortgage Loans, B Quality Non-Conforming Mortgage Loans or C Quality Non-Conforming Mortgage Loans; (r) "Mortgaged Property", the property (real, personal or mixed) encumbered by the Mortgage which secures the Note evidencing a secured Mortgage Loan; (s) "Mortgagor", the obligor on a Note; (t) "Note", the Note or other evidence of indebtedness evidencing the indebtedness of a Mortgagor under a Mortgage Loan; (u) "Price Differential", with respect to any Transaction hereunder as of any date, the aggregate amount obtained by daily 3 4 application of the Pricing Rate for such Transaction to the Purchase Price for such Transaction on a 360 day per year basis for the actual number of days during the period commencing on (and including) the Purchase Date for such Transaction and ending on (but excluding) the date of determination (reduced by any amount of such Price Differential previously paid by Seller to Buyer with respect to such Transaction); (v) "Pricing Rate", the per annum percentage rate for determination of the Price Differential, which rate shall be specified in the related Request/Confirmation; (w) "Prime Rate", the prime rate of U.S. money center commercial banks as published in The Wall Street Journal; (x) "Purchase Date", the date with respect to each Transaction on which Purchased Mortgage Loans are sold by Seller to Buyer hereunder; (y) "Purchase Price", (i) on the Purchase Date, the price at which Purchased Mortgage Loans are sold by Seller to Buyer hereunder, and (ii) thereafter, such price decreased by the amount of any cash transferred by Seller to Buyer pursuant to Paragraph 4(a) hereof; (z) "Purchased Mortgage Loans", the Mortgage Loans sold by Seller to Buyer in a Transaction hereunder, and any Mortgage Loans substituted therefor in accordance with Paragraph 9 hereof. The term "Purchased Mortgage Loans" with respect to any Transaction at any time also shall include Additional Purchased Mortgage Loans delivered pursuant to Paragraph 4(a); (aa) "Qualified Subservicer", a subservicer engaged by Seller to service all or part of the Purchased Mortgage Loans that has been approved in writing by Buyer. (ab) "Replacement Mortgage Loans", the meaning specified in Paragraph 11(e)(ii) hereof; (ac) "Repurchase Date", the date on which Seller is to repurchase the Purchased Mortgage Loans from Buyer, including any date determined by application of the provisions of Paragraphs 3(e) or 11 hereof; (ad) "Repurchase Price", the price at which Purchased Mortgage Loans are to be resold by Buyer to Seller upon termination of a Transaction, which will be determined in each case (including Transactions terminable upon demand) as the sum of the Purchase Price and the Price Differential as of the date of such determination, increased by any amount determined by the application of the provisions of Paragraph 11 hereof; 4 5 (ae) "Request/Confirmation", the request and confirmation substantially in the form of Exhibit A hereto delivered pursuant to Paragraph 3 hereof; (af) "Rock Financial Corporation Guide", the Seller's origination procedures previously provided in writing to Buyer, as such guide may hereafter from time to time be amended with the written approval of Buyer; (ag) "Seller", Rock Financial Corporation. 3. INITIATION; REQUEST/CONFIRMATION; TERMINATION; TRANSACTIONS OPTIONAL (a) Any agreement to enter into a Transaction shall be made in writing at the initiation of Seller. In the event that Seller desires to enter into a Transaction hereunder, Seller shall deliver to Buyer prior to 5:00 p.m., New York City time, on the Business Day prior to the proposed Purchase Date, a Request/Confirmation complete in every respect except for any terms to be completed by Buyer and the signature of an authorized representative of Buyer. Buyer shall, upon its receipt and approval thereof, promptly execute and return the signed Request/Confirmation to Seller. (b) The Request/Confirmation shall describe the Purchased Mortgage Loans in a manner satisfactory to Buyer (which may be by attaching a Loan Schedule thereto), identify Buyer and Seller and set forth (i) the Purchase Date, (ii) the Purchase Price, (iii) the Repurchase Date, unless the Transaction is to be terminable on demand, (iv) the Pricing Rate or Repurchase Price applicable to the Transaction, and (v) any additional terms or conditions of the Transaction mutually agreeable to Buyer and Seller. (c) Each Request/Confirmation shall be binding upon the parties hereto unless written notice of objection is given by the objecting party to the other party within one (1) Business Day after Buyer has delivered the completed Request/Confirmation to Seller. (d) In the event of any conflict between the terms of a Request/Confirmation and this Agreement, such Request/Confirmation shall prevail. (e) In the case of Transactions terminable upon demand, such demand shall be made by Buyer or Seller, no later than such time as is customary in accordance with market practice, by telephone or otherwise on or prior to the Business Day immediately preceding the day on which such termination will be effective. On the date specified in such demand, or on the date fixed for termination in the case of Transactions having a fixed 5 6 term, termination of the Transaction will be effected by resale by Buyer to Seller or its agent of the Purchased Mortgage Loans and any Income in respect thereof received by Buyer (and not previously credited or transferred to, or applied to the obligations of, Seller hereunder) against the transfer of the Repurchase Price to an account of Buyer. (f) Notwithstanding any provision of this Agreement or the Custody Agreement to the contrary, the initiation of each Transaction is subject to the approval of Buyer in its sole discretion. Buyer may, in its sole discretion, reject any Mortgage Loan from inclusion in a Transaction hereunder for any reason. 4. MARGIN MAINTENANCE (a) If at any time the aggregate Market Value of all Purchased Mortgage Loans subject to all Transactions hereunder is less than the aggregate Buyer's Margin Amount for all such Transactions (a "Margin Deficit"), then Buyer may by notice to Seller require Seller in such Transactions, at Seller's option, to transfer to Buyer cash or additional Mortgage Loans reasonably acceptable to Buyer ("Additional Purchased Mortgage Loans"), so that the cash and aggregate Market Value of the Purchased Mortgage Loans, including any such Additional Purchased Mortgage Loans, will thereupon equal or exceed such aggregate Buyer's Margin Amount. (b) If the notice to be given by Buyer to Seller under subparagraph (a) above is given at or prior to 10:00 a.m. New York City time on a Business Day, Seller shall transfer cash or Additional Purchased Mortgage Loans to Buyer prior to the close of business in New York City on the date of such notice, and if such notice is given after 10:00 a.m. New York City time, Seller shall transfer cash or Additional Purchased Mortgage Loans prior to the close of business in New York City on the Business Day following the date of such notice. (c) Any cash transferred pursuant to this Paragraph shall be held by Buyer as though it were Additional Purchased Mortgage Loans and, unless Buyer shall otherwise consent, shall not reduce the Repurchase Price of the related Transaction. 5. INCOME PAYMENTS Where a particular Transaction's term extends over an Income payment date on the Mortgage Loans subject to that Transaction, all payments and distributions, whether in cash or in kind, made on or with resect to the Purchased Mortgage Loans shall, unless otherwise mutually agreed by Buyer and Seller and so long as an Event of Default on the part of Seller shall not have occurred and be continuing, be paid directly to Seller by the related 6 7 Mortgagor. Buyer shall not be obligated to take any action pursuant to the preceding sentence to the extent that such action would result in the creation of a Margin Deficit, unless prior thereto or simultaneously therewith Seller transfers to Buyer, at Buyer's option, cash or Additional Purchased Mortgage Loans sufficient to eliminate such Margin Deficit. 6. SECURITY INTEREST Although the parties intend that all Transactions hereunder be sales and purchases and not loans, in the event any such Transactions are deemed to be loans, Seller shall be deemed to have pledged to Buyer as security for the performance by Seller of its obligations under each such Transaction, and shall be deemed to have granted to Buyer a security interest in, all of the Purchased Mortgage Loans with respect to all Transactions hereunder and all proceeds thereof. Seller shall pay all fees and expenses associated with perfecting such security interest including, without limitation, the cost of filing financing statements under the Uniform Commercial Code and recording assignments of mortgage as and when required by Buyer in its sole discretion. In the event that any such fees and expenses are incurred directly by Buyer, Seller shall promptly reimburse Buyer for such fees and expenses upon the presentation by Buyer to Seller of invoices or other documentation indicating the services rendered and the fees and expenses incurred. 7. PAYMENT AND TRANSFER (a) Unless otherwise mutually agreed, all transfers of funds hereunder shall be in immediately available funds. All Mortgage Loans transferred by one party hereto to the other party shall be transferred by notice to the Custodian to the effect that the Custodian is now holding for the benefit of the transferee the related documents and assignment forms delivered to it under the Custody Agreement. 8. SEGREGATION OF DOCUMENTS RELATING TO PURCHASED MORTGAGE LOANS All documents relating to Purchased Mortgage Loans in the possession of Seller shall be segregated on its books and records from other documents and securities in its possession and shall be identified as being subject to this Agreement. Ownership of all Purchased Mortgage Loans shall pass to Buyer and nothing in this Agreement shall preclude Buyer from engaging in repurchase transactions with the Purchased Mortgage Loans or otherwise pledging or hypothecating the Purchased Mortgage Loans, but no such transaction shall relieve Buyer of its obligations to resell and transfer Purchased Mortgage Loans to Seller pursuant to the terms hereof and no such transaction shall have a maturity date 7 8 later than the Repurchase Date unless such transaction permits the substitution of collateral. Buyer hereby grants to Seller the right to perform in Buyer's stead under any repurchase, reverse repurchase, loan or similar transaction in which Buyer has sold, pledged or otherwise transferred the Mortgage Loans, in the event that Buyer has defaulted on its obligations to repurchase or accept redelivery of such Mortgage Loans in conformity with the terms of any such transaction and so long as an Event of Default under this Agreement by Seller shall not have occurred and be continuing. Buyer further acknowledges that each Mortgage Loan identified on a Loan Schedule and included in a Transaction hereunder is unique and identifiable on the date of the related Transaction and that an award of money damages would be insufficient to compensate Seller for the losses and damages incurred by Seller in the event of Buyer's failure to transfer and deliver the Mortgage Loans as provided in Paragraphs 3(e) or 11 hereof. 9. SUBSTITUTION Seller may, subject to agreement with and acceptance by Buyer, substitute other Mortgage Loans for any Purchased Mortgage Loans. Such substitution shall be made by transfer to Buyer of such other Mortgage Loans and transfer to Seller of such Purchased Mortgage Loans. After substitution, the substituted Mortgage Loans shall be deemed to be Purchased Mortgage Loans. 10. REPRESENTATIONS, WARRANTIES AND COVENANTS (a) Buyer and Seller each represents and warrants, and shall on and as of the Purchase Date of any Transaction be deemed to represent and warrant, to the other that: (i) it is duly authorized to execute and deliver this Agreement, to into the Transactions contemplated hereunder and to perform its obligations hereunder and has taken all necessary action to authorize such execution, delivery and performance; (ii) it will engage in such Transactions as principal (or, if agreed in writing in advance of any Transaction by the other party hereto, as agent for a disclosed principal); (iii) the person signing this Agreement on its behalf is duly authorized to do so on its behalf (or on behalf of any such disclosed principal); (iv) it has obtained all authorizations of any governmental body required in connection with this Agreement and the Transactions hereunder and such authorizations are in full force and effect; and 8 9 (v) the execution, delivery and performance of this Agreement and the Transactions hereunder will not violate any law, ordinance, charter, by-law or rule applicable to it or any agreement by which it is bound or by which any of its assets are affected. (b) Seller represents and warrants to Buyer, and shall on and as of the Purchase Date of any Transaction be deemed to represent and warrant, as follows: (i) The documents disclosed by Seller to Buyer pursuant to this Agreement are either original documents or genuine and true copies thereof; (ii) Seller is a separate and independent corporate entity from the Custodian, Seller does not own a controlling interest in the Custodian either directly or through affiliates and no director or officer of Seller is also a director or officer of the Custodian; (iii) None of the Purchase Price for any Mortgage Loan will be used either directly or indirectly to acquire any security, as that term is defined in Regulation T of the Regulations of the Board of Governors of the Federal Reserve System, and Seller has not taken any action that might cause any Transaction to violate any regulation of the Federal Reserve Board; (iv) Each Mortgage Loan was underwritten in accordance with the written underwriting standards of Seller furnished by Seller to Buyer, and no change to such underwriting standards has occurred since the date of the last written revision to such standards was furnished to Buyer by Seller; (v) Seller shall be at the time it transfers to Buyer any Mortgage Loans for any Transaction the legal and beneficial owner of such Mortgage Loans, free of any lien, security interest, option or encumbrance; and (vi) Seller used no selection procedures that identified the Mortgage Loans relating to a Transaction as being less desirable or valuable than other comparable assets in Seller's portfolio on the related Purchase Date. (c) Seller makes the representations and warranties set forth at Exhibit B with respect to the Mortgage Loans as of the related Purchase Date. 9 10 (d) Seller covenants with Buyer, from and after the date hereof, as follows: (i) Seller shall immediately notify Buyer if an Event of Default shall have occurred; (ii) Seller shall deliver to Buyer a current Loan Schedule with respect to all Mortgage Loans subject to this Agreement with such frequency as Buyer may reasonably require; and (iii) Not withstanding any other provision of the Agreement, no Mortgage Loan shall be subject to this Agreement for more than 180 days in aggregate. 11. EVENTS OF DEFAULT; EVENT OF TERMINATION (a) The following events shall constitute events of default (each an "Event of Default") hereunder with respect to Buyer or Seller, as applicable: (i) Seller fails to repurchase or Buyer fails to transfer Purchased Mortgage Loans upon the applicable Repurchase Date pursuant to the terms hereof; (ii) Seller or Buyer fails, after one (1) Business Day's notice, to comply with Paragraph 4 hereof; (iii) An Act of Insolvency occurs with respect to Seller or Buyer or any controlling entity thereof; (iv) Any representation or warranty made by Seller or Buyer shall have been incorrect or untrue in any material respect when made or repeated or deemed to have been made or repeated; provided, however, that in the case of representations and warranties made with respect to the Purchased Mortgage Loans, such circumstance shall not constitute an Event of Default if, after determining the Market Value of the Purchased Mortgage Loans without taking into account the Purchased Mortgage Loans with respect to which such circumstance has occurred, no other Event of Default shall have occurred and be continuing; (v) Any covenant shall have been breached in any material respect; provided, however, that in the case of covenants made with respect to the Purchased Mortgage Loans, such circumstance shall not constitute an Event of Default if, after determining the Market Value of the Purchased Mortgage Loans without taking into account the Purchased Mortgage Loans with respect to which such circumstance has 10 11 occurred, no other Event of Default shall have occurred and be continuing; (vi) Buyer shall have reasonably determined that Seller is or will be unable to meet its commitments under this Agreement, shall have notified Seller of such determination and Seller shall not have responded with appropriate information to the contrary to the satisfaction of Buyer within one (1) Business Day; (vii) This Agreement shall for any reason cease to create a valid, first priority security interest in any of the Purchased Mortgage Loans purported to be covered hereby; (viii) A final judgment by any competent court in the United States of America for the payment of money in an amount of at least $100,000 is rendered against Seller, and the same remains undischarged for a period of sixty (60) days during which execution of such judgment is not effectively stayed; (ix) Any event of default or any event which with notice, the passage of time or both shall constitute an event of default shall occur and be continuing under any repurchase or other financing agreement for borrowed funds or indenture for borrowed funds by which Seller is bound or affected shall occur and be continuing; (x) In the reasonable judgment of Buyer a material adverse change shall have occurred in the business, operations, properties, prospects or condition (financial or otherwise) of Seller; (xi) Seller shall be in default with respect to any normal and customary covenants under any debt contract or agreement, any servicing agreement or any lease to which it is a party, which default could materially adversely affect the financial condition of Seller (which covenants include, but are not limited to, an Act of Insolvency of Seller or the failure of Seller to make required payments under such contract or agreement as they become due); (xii) Seller shall fail to promptly notify Buyer of (i) the acceleration of any debt obligation or the termination of any credit facility with respect to which Seller is the debtor and involving an amount in excess of $1,000,000 (each a "Debt Obligation"); (ii) the amount and maturity of any such Debt Obligation assumed after the date hereof; (iii) the filing of any class action law suit naming Seller as a defendant or respondent; (iv) the filing of any law suit with an amount in controversy in excess of $1,000,000 naming Seller as a defendant or respondent; (v) the occurrence 11 12 adverse developments with respect to existing litigation involving Seller; and (vi) any other developments which might materially and adversely affect the financial condition of Seller; (xiii) Any Mortgage Loan shall have been subject to the Agreement or the Custody Agreement for more than 180 days in aggregate; or (xiv) Seller shall have failed to comply in any material respect with its obligations under the Custody Agreement. (b) If an Event of Default shall have occurred and be continuing, then, at the option of the nondefaulting party, exercised by written notice to the defaulting party (which option shall be deemed to have been exercised, even if no notice is given, immediately upon the occurrence of an Act of Insolvency), the Repurchase Date for each Transaction hereunder shall be deemed immediately to occur. (c) In all Transactions in which the defaulting party is Seller, if Buyer is deemed to have exercised the option referred to in subparagraph (b) of this Paragraph, (i) Seller's obligations hereunder to repurchase all Purchased Mortgage Loans in such Transactions shall thereupon become immediately due and payable, (ii) to the extent permitted by applicable law, the Repurchase Price with respect to each such Transaction shall be increased by the aggregate amount obtained by daily application of (x) the greater of the Pricing Rate for such Transaction or the Prime Rate to (y) the Repurchase Price for such Transaction as of the Repurchase Date as determined pursuant to subparagraph (b) of this Paragraph (decreased as of any day by (A) any amounts retained by Buyer with respect to such Repurchase Price pursuant to clause (iii) of this subparagraph, (B) any proceeds from the sale of Purchased Mortgage Loans pursuant to subparagraph (e)(i) of this Paragraph, and (C) any amounts credited to the account of Seller pursuant to subparagraph (f) of this Paragraph) on a 360 day per year basis for the actual number of days during the period from and including the date of the Event of Default giving rise to such option to but excluding the date of payment of the Repurchase Price as so increased, (iii) all Income paid after such exercise or deemed exercise shall be payable to and retained by Buyer applied to the aggregate unpaid Repurchase Prices owed by Seller, and (iv) Seller shall immediately deliver or cause the Custodian to deliver to Buyer any documents relating to Purchased Mortgage Loans subject to such Transactions then in Seller's possession. (d) In all Transactions in which the defaulting party is Buyer, upon tender by Seller of payment of the aggregate Repurchase Prices for all such Transactions, Buyer's right, title and interest in all Purchased Mortgage Loans subject to such 12 13 Transactions shall be deemed transferred to Seller, and Buyer shall deliver or cause the Custodian to deliver all documents relating to such Purchased Mortgage Loans to Seller. (e) After one (1) Business Day's notice to the defaulting party (which notice need not be given if an Act of Insolvency shall have occurred, and which may be the notice given under subparagraph (b) of this Paragraph or the notice referred to in clause (ii) of the first sentence of subparagraph (a) of this Paragraph), the nondefaulting party may: (i) as to Transactions in which the defaulting party is Seller, (A) immediately sell on a servicing released or servicing retained basis as Buyer deems desirable, in a recognized market (in a commercially reasonable manner) at such price or prices as Buyer may deem satisfactory, any or all Purchased Mortgage Loans subject to such Transactions and apply the proceeds thereof to the aggregate unpaid Repurchase Prices and any other amounts owing by Seller hereunder or (B) in its sole discretion elect, in lieu of selling all or a portion of such Purchased Mortgage Loans, to give Seller credit for such Purchased Mortgage Loans in an amount equal to the Market Value therefor on such date against the aggregate unpaid Repurchase Prices and any other amounts owing by Seller hereunder; and (ii) as to Transactions in which the defaulting party is Buyer, (A) purchase mortgage loans of substantially the same type ("Replacement Mortgage Loans") having substantially the same outstanding principal amount, maturity and interest rate as any Purchased Mortgage Loans that are not transferred by Buyer to Seller as required hereunder or (B) in its sole discretion elect, in lieu of purchasing Replacement Mortgage Loans, to be deemed to have purchased Replacement Mortgage Loans at the price therefor on such date, calculated as the average of the prices obtained from three (3) nationally recognized registered broker/dealers that buy and sell mortgage loans of substantially the same type in the secondary market. (f) As to Transactions in which the defaulting party is Buyer, Buyer shall be liable to Seller (i) with respect to Purchased Mortgage Loans (other than Additional Purchased Mortgage Loans), for any excess of the price paid (or deemed paid) by Seller for Replacement Mortgage Loans therefor over the Repurchase Price for such Purchased Mortgage Loans and (ii) with respect to Additional Purchased Mortgage Loans, for the price paid (or deemed paid) by Seller for the Replacement Mortgage Loans therefor. In addition, Buyer shall be liable to Seller for interest on such remaining liability with respect to each such purchase (or deemed purchase) of Replacement Mortgage Loans from the date of such purchase (or deemed purchase) until paid in full 13 14 by Buyer. Such interest shall be at a rate equal to the greater of the Pricing Rate for such Transaction or the Prime Rate. (g) For purposes of this Paragraph 11, and except as provided in Paragraph 11(f), the Repurchase Price for each Transaction hereunder in respect of which the defaulting party is Buyer shall not increase above the amount of such Repurchase Price for such Transaction determined as of the date of the exercise or deemed exercise by Seller of its option under subparagraph (b) of this Paragraph. (h) The defaulting party shall be liable to the nondefaulting party for the amount of all reasonable out-of-pocket legal or other expenses incurred by the nondefaulting party in connection with or as a consequence of an Event of Default, together with interest thereon at a rate equal to the greater of the Pricing Rate for the relevant Transaction or the Prime Rate. Expenses incurred in connection with an Event of Default shall include without limitation those costs and expenses incurred by the nondefaulting party as a result of the early termination of any repurchase agreement or reverse repurchase agreement entered into by the nondefaulting party in connection with the Transaction then in default. (i) The nondefaulting party shall have, in addition to its rights hereunder, any rights otherwise available to it under any other agreement or applicable law. (j) At the option of Buyer, exercised by forty-five (45) day's prior written notice to Seller, the Repurchase Date for any or all Transactions shall be deemed to immediately occur in the event that the senior debt obligations or short-term debt obligations of Bear Stearns Companies, Inc. shall be rated below the four highest generic grades (without regard to any pluses or minuses reflecting gradations within such generic grades) by any nationally recognized statistical rating organization. (k) The exercise by any party of remedies after the occurrence of an Event of Default shall be conducted in a commercially reasonable manner. 12. SERVICING OF THE PURCHASED MORTGAGE LOANS (a) The parties hereto agree and acknowledge that, notwithstanding the purchase and sale of the Purchased Mortgage Loans contemplated hereby, Seller shall service, or cause a Qualified Subservicer to service, the Purchased Mortgage Loans for the benefit of Buyer and, if Buyer shall exercise its rights to sell the Purchased Mortgage Loans pursuant to this Agreement prior to the related Repurchase Date, Buyer's assigns; provided, however, that the obligation of Seller to service, directly or indirectly, Purchased Mortgage Loans for the benefit of Buyer as 14 15 aforesaid shall cease upon the payment to Buyer of the Repurchase Price therefor. Seller shall remain responsible to Buyer for the servicing of the Purchased Mortgage Loans without diminution by reason of Seller's having engaged one or more Qualified Subservicers. (b) Seller shall service and administer the Purchased Mortgage Loans and shall have full power and authority, acting alone, to do any and all things in connection with such servicing which Seller may deem necessary or desirable and consistent with the terms of this Agreement, and shall retain all principal prepayments and Income received by Seller with respect to such Purchased Mortgage Loans pursuant to the terms hereof. Seller, in administering and servicing the Purchased Mortgage Loans, shall employ procedures (including collection procedures) and exercise the same care it customarily employs and exercises in servicing and administering the same type of mortgage loans for its own account, in accordance with accepted residential mortgage loan servicing practices of prudent lending institutions and giving due consideration to Buyer's reliance on Seller. Seller will provide Buyer with monthly reports, in a form substantially similar to FNMA's standard form of remittance report and reasonably acceptable to Buyer, with respect to all Purchased Mortgage Loans then involved in any Transaction hereunder. (c) Buyer may, in its sole discretion if an Event of Default shall have occurred and be continuing, without payment of any termination fee or any other amount to Seller or any Qualified Subservicer, (i) sell the Mortgage Loans on a servicing released basis or (ii) terminate Seller or any Qualified Subservicer as the servicer of the Purchased Mortgage Loans with or without cause. 13. SINGLE AGREEMENT Buyer and Seller acknowledge that, and have entered hereinto and will enter into each Transaction hereunder in consideration of and in reliance upon the fact that, all Transactions hereunder constitute a single business and contractual relationship and have been made in consideration of each other. Accordingly, each of Buyer and Seller agrees (i) to perform all of its obligations in respect of each Transaction hereunder, and that a default in the performance of any such obligations shall constitute a default by it in respect of all Transactions hereunder, (ii) that each of them shall be entitled to set off claims and apply property held by them in respect of any Transaction against obligations owing to them in respect of any other Transactions hereunder and (iii) that payments, deliveries and other transfers made by either of them in respect of any Transaction shall be deemed to have been made in consideration of payments, deliveries and other transfers in respect of any other Transactions hereunder, and the obligations to make any such payments, 15 16 deliveries and other transfers may be applied against each other and netted. 14. NOTICES AND OTHER COMMUNICATIONS Except as otherwise expressly provided herein, all such notices or communications shall be in writing (including, without limitation, telegraphic, facsimile or telex communication) or confirmed in writing and such notices and other communications shall, when mailed, telegraphed, communicated by facsimile transmission or telexed, be effective when received at the address for notices for the party to whom such notice or communications is to be given as follows: if to Seller: Rock Financial Corporation 30600 Telegraph Road, 4th Floor Bingham Farms, MI 48025 Attn: Frank Plenskofski (810) 540-8000 (810) 258-6455 if to Buyer: Bear Stearns Home Equity Trust 1996-1 c/o Bear Stearns Mortgage Capital Corporation 245 Park Avenue New York, New York 10167 Attn: John Garzone Telephone: (212) 272-3853 Telecopy: (212) 272-2053 Notwithstanding the foregoing, however, any notice sent by facsimile transmission shall be deemed to be received when transmitted so long as the transmitting machine has provided an electronic confirmation of such transmission, and provided further, however, that all financial statements delivered shall be hand-delivered or sent by first-class mail. Either party may revise any information relating to it by notice in writing to the other party, which notice shall be effective on the third business day following receipt thereof. 15. PAYMENT OF EXPENSES Seller shall pay on demand all reasonable fees and expenses (including, without limitation, the fees and expenses for legal services of any kind whatsoever) incurred by Buyer or the Custodian in connection with this Agreement and the Custody Agreement and the transactions contemplated hereby and thereby, 16 17 whether or not any Transactions are entered into hereunder, including, by way of illustration and not by way of limitation, the fees and expenses incurred in connection with (i) the preparation, reproduction and distribution of this Agreement and the Custody Agreement and any opinions of counsel, certificates of officers or other documents contemplated by the aforementioned agreements and (ii) any Transaction under this Agreement; provided, however, that Seller shall not be required to pay the fees and expenses of Buyer incurred as a result of Buyer's default under this Agreement; and provided further, however, that Seller shall not be required to pay the fees and expenses of Buyer in excess of $15,000. The obligation of Seller to pay such fees and expenses incurred prior to or in connection with the termination of this Agreement shall survive the termination of this Agreement. 16. OPINIONS OF COUNSEL Seller shall, on the Purchase Date of the first Transaction hereunder and, upon the request of Buyer, on the Purchase Date of any subsequent Transaction, cause to be delivered to Buyer, with reliance thereon permitted as to any person or entity that purchases the Mortgage Loans from Buyer in a repurchase transaction, a favorable opinion of counsel with respect to the matters set forth in Exhibit C hereto, in form and substance acceptable to Buyer and its counsel. 17. FURTHER ASSURANCES; ADDITIONAL INFORMATION (a) Seller shall promptly provide such further assurances or agreements as Buyer may reasonably request in order to effect the purposes of this Agreement. (b) At any reasonable time, Seller shall permit Buyer, its agents or attorneys, at Buyer's expense, to inspect and copy any and all documents and data in its possession pertaining to each Purchased Mortgage Loan that is the subject of such Transaction. Such inspection shall occur upon the request of Buyer at a mutually agreeable location during regular business hours and on a date not more than two (2) Business Days after the date of such request. (c) Seller agrees to provide Buyer or its agents, from time to time, with such information concerning Seller of a financial or operational nature as Buyer may reasonably request. (d) Seller shall provide Buyer or its agents, with copies of all filings made by or on behalf of Seller or any entity that controls Seller, with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended, promptly upon making such filings. 17 18 18. BUYER AS ATTORNEY-IN-FACT After the occurrence and during the continuation of an Event of Default, Buyer will automatically be appointed the attorney-in-fact of Seller for the purpose of carrying out the provisions of this Agreement and taking any action and executing any instruments that Buyer may deem necessary or advisable to accomplish the purposes hereof, which appointment as attorney-in-fact will be irrevocable and coupled with an interest. Without limiting the generality of the foregoing, Buyer shall have the right and power during the occurrence and continuation of any Event of Default to receive, endorse and collect all checks made payable to the order of Seller representing any payment on account of the principal of or interest on any of the Purchased Mortgage Loans and to give full discharge for the same. 19. APPOINTMENT OF AGENT Buyer hereby appoints Bear Stearns Mortgage Capital Corporation as its agent for purposes of issuing Requests/Confirmations, determining Market Value, exercising Buyer's rights under any margin maintenance provision of this Agreement and such other purposes as Buyer may direct. The appointment of such agent shall not relieve Buyer of its obligations hereunder. 20. WIRE INSTRUCTIONS (a) Any amounts to be transferred by Buyer to Seller hereunder shall be sent by wire transfer in immediately available funds to the account of Seller identified in the Request/Confirmation for the related Transaction. (b) Any amounts to be transferred by Seller to Buyer hereunder shall be sent by wire transfer in immediately available funds to the account of Buyer at: FNB Chicago/Bear Stearns MBS ABA #: 071-000-013 Attn.: John Garzone Acct.: 5801230 (c) Amounts received after 3:00 p.m., New York City time, on any Business Day shall be deemed to have been paid and received on the next succeeding Business Day. 21. ENTIRE AGREEMENT; SEVERABILITY This Agreement shall supersede any existing agreements between the parties containing general terms and conditions for repurchase transactions. Each provision and agreement herein shall be treated as separate and independent from any other 18 19 provision or agreement herein and shall be enforceable notwithstanding the unenforceability of any such other provision or agreement. 22. NON-ASSIGNABILITY; TERMINATION (a) The rights and obligations of the parties under this Agreement and under any Transaction shall not be assigned by either party without the prior written consent of the other party. Subject to the foregoing, this Agreement and any Transactions shall be binding upon and shall inure to the benefit of the parties and their respective successors and assigns. (b) This Agreement and all Transactions outstanding hereunder shall terminate automatically without any requirement for notice on the date occurring three hundred and sixty-four (364) days after the date as of which this Agreement is entered into; provided, however, that this Agreement and any Transaction outstanding hereunder may be extended by mutual agreement of Buyer and Seller; and provided further, however, that no such party shall be obligated to agree to such an extension. 23. COUNTERPARTS This Agreement may be executed in any number of counterparts, each of which counterparts shall be deemed to be an original, and such counterparts shall constitute but one and the same instrument. 24. GOVERNING LAW This Agreement shall be governed by the laws of the State of New York without giving effect to the conflict of law principles thereof. 25. NO WAIVERS, ETC. No express or implied waiver of any Event of Default by either party shall constitute a waiver of any other Event of Default and no exercise of any remedy hereunder by any party shall constitute a waiver of its right to exercise any other remedy hereunder. No modification or waiver of any provision of this Agreement and no consent by any party to a departure herefrom shall be effective unless and until such shall be in writing and duly executed by both of the parties hereto. Without limitation on any of the foregoing, the failure to give a notice pursuant to subparagraph 4(a) hereof will not constitute a waiver of any right to do so at a later date. 19 20 26. USE OF EMPLOYEE PLAN ASSETS (a) If assets of an employee benefit plan subject to any provision of the Employee Retirement Income Security Act of 1974 ("ERISA") are intended to be used by either party hereto (the "Plan Party") in a Transaction, the Plan Party shall so notify the other party prior to the Transaction. The Plan Party shall represent in writing to the other party that the Transaction does not constitute a prohibited transaction under ERISA or is otherwise exempt therefrom, and the other party may proceed in reliance thereon but shall not be required so to proceed. (b) Subject to the last sentence of subparagraph (a) of this Paragraph, any such Transaction shall proceed only if Seller furnishes or has furnished to Buyer its most recent available audited statement of its financial condition and its most recent subsequent unaudited statement of its financial condition. (c) By entering into a Transaction pursuant to this Paragraph, Seller shall be deemed (i) to represent to Buyer that since the date of Seller's latest such financial statements, there has been no material adverse change in Seller's financial condition which Seller has not disclosed to Buyer, and (ii) to agree to provide Buyer with future audited and unaudited statements of its financial condition as they are issued, so long as it is a Seller in any outstanding Transaction involving a Plan Party. 27. INTENT (a) The parties intend and acknowledge that each Transaction is a "repurchase agreement" as that term is defined in Section 101 of Title 11 of the United States Code, as amended (except insofar as the type of Mortgage Loans subject to such Transaction or the term of such Transaction would render such definition inapplicable), and a "securities contract" as that term is defined in Section 741 of Title 11 of the United States Code, as amended. (b) It is understood that either party's right to liquidate Mortgage Loans delivered to it in connection with Transactions hereunder or to exercise any other remedies pursuant to Paragraph 11 hereof, is a contractual right to liquidate such Transaction as described in Sections 555 and 559 of Title 11 of the United States Code, as amended. 28. LIMITED ROLE OF TRUSTEE; SUCCESSOR TRUSTEE (a) The execution and delivery of this Agreement by the undersigned Trustee is solely and strictly in its capacity as Trustee under that certain Trust Agreement dated as of March 29, 1996 (the "Trust Agreement") by and between State Street Bank and 20 21 Trust Company of California, N.A., (the "Trustee") and Bear Stearns Mortgage Capital Corporation, as Depositor (the "Depositor"), and not individually, and has been undertaken at the direction of the Depositor pursuant to the terms of the Trust Agreement. It is hereby expressly acknowledged that any obligations, liabilities, covenants, duties, representations and warranties hereunder are those of Buyer only and not of the Trustee. There shall be no individual or corporate liability against or on the part of the Trustee (or any of its officers, directors or employees) under this Agreement, and there shall be no recourse against the Trustee in its individual or corporate capacity (or any of its directors, officers or employees) or against any of its properties or assets, for recovery of or as a result of any claim, debt, liability or obligation (whether of payment or performance) of or against Buyer under or pursuant to this Agreement (whether arising out of or relating to any covenant, agreement, representation or warranty, or otherwise). Recourse against Buyer for any claims, liabilities, debts or obligations under this Agreement is limited to the trust established by the Trust Agreement. Bear Stearns Mortgage Capital Corporation, as the depositor and owner of 100% of the equity of the trust established under the Trust Agreement, is liable for all fees, expenses, taxes, indemnity payments and other liabilities of the trust. (b) With regard to Section 22(a) hereof, Seller hereby acknowledges and consents that any and all rights and remedies of Buyer under this Agreement shall automatically transfer to and vest in any successor trustee under the Trust Agreement in the event of the removal or resignation of the Trustee as trustee thereunder. 29. DISCLOSURE RELATING TO CERTAIN FEDERAL PROTECTIONS The parties acknowledge that they have been advised that: (a) in the case of Transactions in which one of the parties is a broker or dealer registered with the Securities and Exchange Commission ("SEC") under Section 15 of the Securities Exchange Act of 1934 ("1934 Act"), the Securities Investor Protection Corporation has taken the position that the provisions of the Securities Investor Protection Act of 1970 ("SAPPY") do not protect the other party with respect to any Transaction hereunder; (b) in the case of Transactions in which one of the parties is a government securities broker or a government securities dealer registered with the SEC under Section 15C of the 1934 Act, SAPPY will not provide protection to the other party with respect to any Transaction hereunder; and 21 22 (c) in the case of Transactions in which one of the parties is a financial institution, funds held by the financial institution pursuant to a Transaction hereunder are not a deposit and therefore are not insured by the Federal Deposit Insurance Corporation, the Federal Savings and Loan Insurance Corporation or the National Credit Union Share Insurance Fund, as applicable. BEAR STEARNS HOME EQUITY TRUST 1996-1 ROCK FINANCIAL By: State Street Bank and Trust CORPORATION Company of California, N.A., as Trustee solely and not individually By /s/ By /s/ ---------------------------- -------------------------- Title Title ------------------------- ----------------------- Date Date -------------------------- ------------------------ 22 23 EXHIBIT A REQUEST/CONFIRMATION TO: Rock Financial Corporation ____________________________ ____________________________ Attention: _________________ FROM: Bear Stearns Home Equity Trust 1996-1 RE: Request/Confirmation under Master Repurchase Agreement, dated as of March __, 1997 between Bear Stearns Home Equity Trust 1996-1 and Rock Financial Corporation Bear Stearns Home Equity Trust 1996-1 ("Buyer") is pleased to confirm your sale and its purchase of the Mortgage Loans described below and listed on the attached Loan Schedule pursuant to the above-referenced Master Repurchase Agreement under the following terms and conditions: Additional ORIG. PRINCIPAL AMOUNT OF MORTGAGE LOANS: ________ CURRENT PRINCIPAL AMOUNT OF MORTGAGE LOANS: ________ PURCHASE DATE: ________ REPURCHASE DATE: ________ PURCHASE PRICE: ________ PRICING RATE: ________ MINIMUM REQUIRED MARGIN PERCENTAGE: ________ PRICE DIFFERENTIAL DUE DATE: ________ Wire transfer instructions of Rock Financial Corporation: Bank Name: __________ ABA No.: ____________ Account No.: ________ Attention: __________ Reference: __________ A-1 24 The Master Repurchase Agreement is incorporated by reference into this Request/Confirmation and made a part hereof as if it were fully set forth herein. All capitalized terms used herein but not otherwise defined shall have the meanings specified in the Master Repurchase Agreement. BEAR STEARNS HOME EQUITY TRUST 1996-1 By: Bear Stearns Mortgage Capital Corporation, as agent BY: _______________________________ NAME: _____________________________ TITLE: ____________________________ A-2 25 EXHIBIT B REPRESENTATIONS AND WARRANTIES RELATING TO THE PURCHASED MORTGAGE LOANS (a) Mortgage Loan Information. The information with respect to each Mortgage Loan set forth in the Loan Schedule is true and correct in all material respects as of the date specified on such Loan Schedule. (b) Delivery of Mortgage Loan Documents. All of the original or certified documentation required to be delivered to the Custodian on or prior to the related Purchase Date or as otherwise provided in this Agreement has or will be so delivered. (c) Payments Current. No scheduled payments on the Mortgage Loans are delinquent eighty-nine (89) days or more based on the terms under which the related Mortgage Loans have been made. Seller has not advanced funds, or induced, solicited or knowingly received any advance of funds from a party other than Buyer, directly or indirectly, for the payment of any amount required by any Mortgage Loan. (d) No Waiver or Modification. The terms of each Note and Mortgage have not been impaired, waived, altered or modified in any respect, except by written instruments reflected in the Custodian's Mortgage Loan File and no provision of any Mortgage or Note has been "whited out" or erased unless such modification has been initialed by each of the parties to the related Mortgage Loan. No instrument of waiver, alteration, modification or assumption has been executed except for the instruments that are part of the Mortgage File and the terms of which are reflected in the Mortgage File. (e) No Defenses. No Note or Mortgage is subject to any set-off, counterclaim or defense, including the defense of usury, nor will the operation of any of the terms of any Note or Mortgage, or the exercise of any right thereunder, render such Note or Mortgage unenforceable, in whole or in part, or subject to any right of rescission, set-off, counterclaim or defense, including the defense of usury, and to the best of Seller's knowledge, no such right of rescission, set-off, counterclaim or defense has been asserted in any proceeding or was asserted in any state or federal bankruptcy or insolvency proceeding at the time the related Mortgage Loan was originated. B-1 26 (f) Compliance with Laws. Any and all requirements of any federal, state or local law applicable to each Mortgage Loan have been complied with including, without limitation, all consumer, usury, truth-in-lending, consumer credit protection, equal credit opportunity or disclosure laws applicable to each Mortgage Loan; each Mortgage Loan was originated in compliance with all applicable laws and no fraud or misrepresentation was committed by any Person in connection therewith; any Mortgage Loan originated in the State of Texas, was originated pursuant to Chapter 6 of the Texas Consumer Credit Code. (g) No Satisfaction or Release of Lien. No Mortgage has been satisfied, canceled, subordinated or rescinded, in whole or in part. No Mortgaged Property has been released from the lien of the related Mortgage, in whole or in part, nor has any instrument been executed that would effect any such release, cancellation, subordination or rescission, other than the subordination of the lien of a Mortgage securing a Mortgage Loan, with respect to which a related superior lien was released in connection with the refinancing of the mortgage loan relating to such superior lien. (h) Valid Lien. Each Note is secured by a Mortgage and each Mortgage is or creates a valid, subsisting and enforceable lien on the related Mortgaged Property, including, in the case of a Mortgage securing a property improvement loan, the land and all buildings on the Mortgaged Property. (i) Validity of Mortgage Loan Documents. Each Note and each Mortgage is genuine and each is the legal, valid and binding obligation of the related Mortgagor, enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization or other similar laws affecting creditors' rights in general and by general principles of equity. All parties to each Note and each Mortgage had legal capacity at the time to enter into the related Mortgage Loan and to execute and deliver such Note and Mortgage, and such Note and Mortgage have been duly and properly executed by such parties. (j) Full Disbursement of Proceeds. The proceeds of each Mortgage Loan have been fully disbursed and there is no requirement for future advances thereunder, all costs, fees and expenses incurred in making or closing each Mortgage Loan and the recording of the Mortgage were disbursed, the Mortgagor is not entitled to any refund of any amounts paid or due under the Note or any related Mortgage and any and all requirements set forth in the related Mortgage Loan documents have been complied with. B-2 27 (k) Ownership. Immediately prior to the conveyance thereof to Buyer, Seller had good and marketable title to each Mortgage Loan, Note and Mortgage, was the sole owner thereof and had full right to sell each Mortgage Loan, Note and Mortgage to Buyer and upon the conveyance thereof by Seller to Buyer, Buyer became the sole owner of each Mortgage Loan, Note and Mortgage free and clear of any encumbrance, equity, lien, pledge, charge, claim or security interest. (l) No Defaults. Except with respect to any delinquent scheduled payment which is not more than eighty-nine (89) days delinquent as of the applicable Purchase Date, there is no default, breach, violation or event of acceleration existing under any Mortgage or any Note and, to the best of Seller's knowledge, there is no event which, with the passage of time or with notice and/or the expiration of any grace or cure period, would constitute such a default, breach, violation or event of acceleration and neither Seller nor its predecessors have waived any such default, breach, violation or event of acceleration, except as set forth in an instrument of waiver, alteration, modification or assumption that is included in the Mortgage File. (m) No Condemnation or Damage. To the best of Seller's knowledge, the physical condition of each Mortgaged Property has not deteriorated since the date of origination of the related Mortgage Loan (normal wear and tear excepted) and there is no proceeding pending for the total or partial condemnation of any Mortgaged Property. (n) Mortgage Remedies Adequate. Each Mortgage contains customary and enforceable provisions such as to render the rights and remedies of the holder thereof adequate for the realization against the related Mortgaged Property of the benefits of the security provided thereby, including, (i) in the case of a Mortgage designated as a deed of trust, by trustee's sale, and (ii) otherwise, by judicial foreclosure. (o) Underwriting of Mortgage Loans. Each Mortgage Loan has been underwritten by the originator thereof in accordance with such originator's then current underwriting guidelines. (p) Terms of Mortgage Loans. Each Note has an original term to maturity of not less than __ months nor more than __ years and __ days from the date of origination; each Note is payable in monthly installments of principal and interest, with interest payable in arrears, and requires a monthly payment which is sufficient to amortize the original principal balance over the original term and to pay interest at the related interest rate borne by the Note; and no Note provides for any extension of the original term. B-3 28 (q) Security. No Note is, or has been, secured by any collateral except the lien of the related Mortgage. (r) Deed of Trust. If a Mortgage constitutes a deed of trust, a trustee, duly qualified under applicable law to serve as such, has been properly designated and currently so serves as such and is named in the Mortgage, or a valid substitution of trustee has been recorded or may be recorded and no extraordinary fees or expenses are, or will become, payable by Seller to the trustee under the deed of trust, except in connection with default proceedings and a trustee's sale after default by the related Mortgagor. (s) Value. Except with respect to conditions and circumstances expressly permitted pursuant to the applicable underwriting guidelines, Seller has no knowledge of any conditions or circumstances (that are not reflected in the Mortgage File or in the files of the related servicer) that could reasonably be expected to materially and adversely affect the value of the related Mortgaged Property with respect to any Mortgage Loan. (t) Servicing Practices. Each Mortgage Loan has been serviced in accordance with all applicable laws and, to the best of Seller's knowledge, no fraud or misrepresentation was committed by any Person in connection therewith. (u) No Bulk Transfer. The sale, transfer, assignment, conveyance and grant of the Notes and the Mortgages by Seller to Buyer were not subject to the bulk transfer laws or any similar statutory provisions in effect in any applicable jurisdiction. (aa) Relief Act Matters. No Mortgagor has notified Seller, and Seller has no knowledge of any relief requested or allowed to an Mortgagor under the Soldiers' and Sailors' Civil Relief Act of 1940. (bb) Selection Criteria. The Mortgage Loans were not selected by Seller for sale to Buyer on any basis intended to adversely affect Buyer. (cc) REMIC Qualification. With respect to each Mortgage Loan, either: (i) the original principal balance of the Mortgage Loan as of the date of origination thereof was less than 125% of the value of the Mortgaged Property attributable to only the real property securing such Mortgage Loan less the amount of all indebtedness secured by such Mortgaged Property which is senior or pari passu with the lien of such Mortgage Loan; or (ii) substantially all of the proceeds of such Mortgage Loan were used to acquire or to improve or protect an interest in real property that, at B-4 29 the date of origination of such Mortgage Loan, was the only security therefor. B-5 30 EXHIBIT C OPINION OF COUNSEL TO ROCK FINANCIAL CORPORATION 1. Rock Financial Corporation ("Seller) is duly organized and validly existing as a corporation in good standing under the laws of the State of __________ and has power and authority to enter into and perform its obligations under this Agreement and the Custody Agreement. Seller is duly qualified to do business and is in good standing in each jurisdiction in which the character of the business transacted by it requires such qualification and in which the failure so to qualify would have a material adverse effect on the business, properties, assets or condition (financial or other) of Seller and its subsidiaries, considered as a whole. 2. This Agreement and the Custody Agreement have each been duly authorized, executed and delivered by Seller, and each constitutes a valid and legally binding obligation of Seller enforceable against Seller in accordance with its terms, subject, as to enforcement, to bankruptcy, insolvency, reorganization and other laws of general applicability relating to or affecting creditors' rights generally and to general equity principles. 3. No consent, approval, authorization or order of any state or federal court or government agency or body is required to be obtained by Seller for the consummation of the transactions contemplated by this Agreement or the Custody Agreement. 4. The consummation of any of the transactions contemplated by this Agreement and the Custody Agreement will not conflict with, result in a breach of, or constitute a default under the articles of incorporation or bylaws of Seller or the terms of any indenture or other agreement or instrument known to us to which Seller is party or bound, or any order known to such counsel to be applicable to Seller or any regulations applicable to Seller, of any state or federal court, regulatory body, administrative agency, governmental body or arbitrator having jurisdiction over Seller. 5. There is no pending or threatened action, suit or proceeding before any court or governmental agency, authority or body or any arbitrator involving Seller or relating to the transaction contemplated by this Agreement or the Custody Agreement which, if adversely determined, would have a material adverse effect on Buyer. 6. Seller is duly registered as a finance company in each state in which Mortgage Loans were originated, to the extent such registration is required by applicable law. C-1 31 7. Each Mortgage Loan will have been endorsed in a manner which satisfies any requirement of endorsement in order to transfer all right, title and interest in and to that Mortgage Loan from Seller to Buyer. Each assignment of Mortgage related to each such Mortgage Loan is in recordable form and is sufficient under applicable law to validly and effectively transfer all right, title and interest of Seller to Buyer. This Agreement together with (a) the delivery of such related Mortgage Loans to Custodian, (b) the endorsement of such Mortgage Loans to Buyer and (c) the delivery of the assignments of Mortgages related to the Mortgage Loans to the Custodian in recordable form assigning such Mortgages to Buyer, creates a valid, perfected security interest in such Mortgage Loans in favor of Buyer. Such security interest will have the same priority and will be subject to the same security interests and liens as apply to such Mortgage Loans in the hands of Seller. C-2 32 CUSTODY AGREEMENT among ROCK FINANCIAL CORPORATION Seller BEAR STEARNS HOME EQUITY TRUST 1996-1, Buyer and COMERICA BANK as Custodian Dated as of March 26, 1997 33 TABLE OF CONTENTS
Page RECITALS .................................................................................... 1 SECTION 1. Definitions......................................................................... 1 SECTION 2. Delivery of Mortgage Files to Custodian............................................. 4 SECTION 3. The Custodian's Receipt, Examination and Certification of Mortgage Files and Issuance of Trust Receipt .................................................... 6 SECTION 4. Possession of Mortgage Files ....................................................... 8 SECTION 5. Release of Custodian's Mortgage Files for Servicing................................. 10 SECTION 6. Review and Deposit of Additional Mortgage Loans..................................... 10 SECTION 7. Waiver by the Custodian............................................................. 11 SECTION 8. Right of Inspection by Buyer and Third Persons ..................................... 11 SECTION 9. Custodian's Fees and Expenses....................................................... 11 SECTION 10. Termination of Agreement ........................................................... 12 SECTION 11. Resignation and Removal of Custodian. .............................................. 12 SECTION 12. Limitation on Obligations of the Custodian ......................................... 14 SECTION 13. Notices ............................................................................ 15 SECTION 14. No Assignment or Delegation by the Custodian ....................................... 15 SECTION 15. Controlling Law .................................................................... 15 SECTION 16. Agreement for the Exclusive Benefit of
i 34 Parties ........................................................................... 16 SECTION 17. Entire Agreement .................................................................. 16 SECTION 18. Exhibits. ......................................................................... 16 SECTION 19. Indulgences, Not Waivers .......................................................... 16 SECTION 20. Titles Not to Affect Interpretation ............................................... 16 SECTION 21. Provisions Separable............................................................... 16 SECTION 22. Representations and Warranties of the Custodian ................................... 17 SECTION 23. Limited Role of Trustee; Successor Trustee......................................... 18 SECTION 24. Counterparts....................................................................... 19 EXHIBITS EXHIBIT A - LETTER OF TRANSMITTAL ............................................ A-1 EXHIBIT B - NOTICE TO THE CUSTODIAN .......................................... B-1 EXHIBIT C - TRUST RECEIPT .................................................... C-1 EXHIBIT D - NOTICE OF TERMINATION ............................................ D-1 EXHIBIT E - NOTICE OF DEFAULT CERTIFICATE .................................... E-1 EXHIBIT F - LETTER TO CUSTODIAN RE: BUYER'S TRUST RECEIPT ................... F-1 EXHIBIT G - LETTER TO CUSTODIAN RE: ENDORSEE'S TRUST RECEIPT................. G-1 EXHIBIT H - REQUEST FOR RELEASE OF DOCUMENTS ................................. H-1 EXHIBIT I - CONFIRMATION OF RESALE AND RECEIPT ............................... I-1
ii 35 THIS CUSTODY AGREEMENT entered into as of March 26, 1997, by and among ROCK FINANCIAL CORPORATION (herein referred to as "Seller"), BEAR STEARNS HOME EQUITY TRUST 1996-1 ("Buyer"), and COMERICA BANK (the "Custodian"), recites and provides: RECITALS Seller and Buyer have entered into a Master Repurchase Agreement dated as of March 26, 1997 and a Request/Confirmation between Seller and Buyer with respect to each transaction thereunder. The Master Repurchase Agreement and the Request/Confirmations are hereinafter referred to collectively as the "Repurchase Agreement." Seller is obligated to service the Mortgage Loans pursuant to the terms and conditions of the Repurchase Agreement. Seller desires to deposit with the Custodian all Notes and Mortgages evidencing the Mortgage Loans, together with the other documents included in the Mortgage Files related to the Mortgage Loans, to be held by the Custodian as custodian for Buyer and its assigns until otherwise instructed by Buyer, all in connection with transactions under the Repurchase Agreement (each a "Transaction"). Buyer may transfer its interest in the Mortgage Loans to one or more Third Persons and the Custodian shall act as custodian for such Third Persons. Custodian desires and is able to perform the duties and obligations as custodian for Buyer as set forth herein. NOW, THEREFORE, in consideration of the mutual promises and covenants hereinafter set forth, and for good and valuable consideration the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. Definitions. For the purposes of this Agreement, the following terms shall have the indicated meanings unless the context or use indicates another or different meaning and intent, the definitions of such terms are equally applicable to the singular and the plural forms of such terms, the words "herein," "hereof" and "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular section or other subdivision, and section references refer to sections of this Agreement. All terms used herein and not defined shall have the respective meanings set forth in the Repurchase Agreement. "A Quality Non-Conforming Mortgage Loans" shall refer to Mortgage Loans qualified under the relevant sections of the Rock Financial Corporation Guide. "Agreement" shall mean this Custody Agreement, as supplemented or amended from time 3 36 to time. "B Quality Non-Conforming Mortgage Loans" shall refer to Mortgage Loans qualified under the relevant sections of the Rock Financial Corporation Guide; "Business Day" shall mean any day excluding Saturday, Sunday and any day which is a legal holiday under the laws of the States of New York, Michigan or the Commonwealth of Massachusetts or any day on which a bank located in the States of New York, Michigan or the Commonwealth of Massachusetts or the New York Stock Exchange is authorized or permitted to close for business. "C Quality Non-Conforming Mortgage Loans" shall refer to Mortgage Loans qualified under the relevant sections of the Rock Financial Corporation Guide; "Custodial Register" shall mean the register maintained by Custodian pursuant to Section 4(f), which reflects as to each Mortgage Loan the Person to whom the related Trust Receipt has been issued. "Custodian" shall mean COMERICA BANK, or its successor custodian. "Lender" shall mean the original lender as set forth in the Note, or any successor or assignee under such Note. "Loan Number" shall have the meaning set forth in Section 2(a) of this Agreement. "Loan Schedule" shall mean a schedule of Mortgage Loans identifying each Mortgage Loan by Seller's loan number, Mortgagor's name and address (including the state and zip code) of the mortgaged property, whether such Mortgage Loan is an A Quality Non-Conforming Mortgage Loan, a B Quality Non-Conforming Mortgage Loan or a C Quality Non-Conforming Mortgage Loan, the outstanding principal amount as of a specified date, the initial interest rate borne by such Mortgage Loan, the original principal balance thereof, the current scheduled monthly payment of principal and interest, the maturity of the related Note, the property type, the occupancy status, the original term to maturity and whether or not the Mortgage Loan (including the related Note) has been modified; provided, however, that the items of information set forth on the Loan Schedule may be expanded or contracted by mutual agreement of Buyer and Seller. "Mortgage" means the mortgage, deed of trust or other instrument creating a first or second lien on an estate in fee simple interest in real property securing the Note. "Mortgage Assignment" shall mean an assignment of the Mortgage in recordable form, sufficient under the laws of the jurisdiction wherein the related Mortgaged Property is located to 4 37 reflect the sale of the Mortgage. "Mortgage File" shall have the meaning set forth in Section 2(b) hereof. "Mortgage Loan" shall mean the mortgage loans secured by first or second liens on single family residential real property (including, without limitation, condominiums and planned unit developments), delivered to the Custodian pursuant to this Agreement, and shall be either A Quality Non-Conforming Mortgage Loans, B Quality Non-Conforming Mortgage Loans or C Quality Non-Conforming Mortgage Loans. "Mortgaged Property" shall mean the real property securing repayment of a Mortgage Loan. "Mortgagor" shall mean the obligor on a Note. "Note" shall mean any promissory note or other evidence of indebtedness evidencing the indebtedness of a Mortgagor under a Mortgage Loan. "Notice Loan Schedule" shall have the meaning set forth in Section 4(b) of this Agreement. "Notice of Termination" shall mean the notice substantially in the form of Exhibit D hereto. "Officer's Certificate" shall mean a certificate signed by (i) an officer or an employee, authorized to sign an officer's certificate, of Seller or other Person having officers, submitting a Mortgage File to the Custodian or (ii) the closing attorney for the Mortgage Loan. (The text of any particular Officer's Certificate may be stamped upon a document constituting a portion of a Mortgage File so long as such stamped text is signed by manual or facsimile signature by an officer or an employee authorized to sign an Officer's Certificate.) "Person" shall mean any individual, corporation, partnership, joint venture, association, joint stock company, trust (including any beneficiary thereof), unincorporated organization or government or any agency or political subdivision thereof. "Request/Confirmation" shall mean a written confirmation of a Transaction substantially in the form attached as an exhibit to the Repurchase Agreement. "Rock Financial Corporation Guide" shall refer to the Rock Financial Corporation origination procedures previously provided in writing to Buyer, as such guide may hereafter from time to time be amended with the written approval of Buyer; 5 38 "Seller" shall have the meaning set forth in the first paragraph of this Agreement. "Servicer" shall mean Seller in its capacity as servicer of the Mortgage Loans. "Third Person" shall mean a Person other than Seller, Buyer or the Custodian which Person has acquired an interest in any Mortgage Loans from Buyer and continues to have an interest in such Mortgage Loans. "Trust Receipt" shall mean an instrument substantially in the form of Exhibit C hereto. 2. Delivery of Mortgage Files to Custodian. (a) Representations of Seller. With respect to each Transaction, Seller represents that it has, prior to the sale of any Mortgage Loans to Buyer pursuant to the Repurchase Agreement, delivered to the Custodian those documents designated in items 1--7 below (to the extent applicable to such Mortgage Loans). All documents delivered to the Custodian shall have been placed by Seller or its representative in an appropriate file folder, properly secured, marked with the name of the Mortgaged Property and the loan number (the "Loan Number") and placed in the same order as referenced in the Loan Schedule. (b) By delivery of a Letter of Transmittal, substantially in the form of Exhibit A hereto, Seller will from time to time certify that it has delivered and released to the Custodian the related Mortgage Files for the Mortgage Loans referred to in such Letter of Transmittal and has in its possession the other documents with respect to the Mortgage Loans identified in the mortgage loan schedule attached to the Letter of Transmittal as Schedule 1 (the "Loan Schedule"). The Loan Schedule is the Loan Schedule referred to in the Repurchase Agreement. "Mortgage File" means the following documents (all of which together constitute an original mortgage file): (1) the original Note, endorsed, "Pay to the order of __________, without recourse" and signed, by facsimile or manual signature, in the name of Seller by an authorized officer. If the Note has been signed by a Person on behalf of the Mortgagor, the original power of attorney or other instrument that authorized and empowered such Person to sign or a copy of such power of attorney together with an Officer's Certificate certifying that such copy represents a true and correct copy and that such original has been duly recorded in the appropriate records depository for the jurisdiction in which the Mortgaged Property is located. To the extent that there is no room on the face of the Note for endorsements, the endorsement may be contained on an allonge, if the law by which such Note is governed so permits. Such allonge shall be firmly affixed to the Note so as to become a part thereof; 6 39 (2) the original of any loan agreement and guarantee(s) executed in connection with the Note; (3) the original Mortgage, with evidence of recording thereon, or, if the original Mortgage has not yet been returned from the recording office, a copy of the original Mortgage together with an Officer's Certificate (which may be a blanket Officer's Certificate of Seller covering all such Mortgage Loans) certifying that the copy is a true copy of the original of the Mortgage which has been delivered for recording in the appropriate recording office of the jurisdiction in which the Mortgaged Property is located, or a copy of the Mortgage certified by the public recording office in those instances where the original Mortgage has been lost, destroyed or retained by the public recording office; and if the Mortgage has been signed by a Person on behalf of the Mortgagor, the original power of attorney or other instrument that authorized and empowered such Person to sign or a copy of such power of attorney together with an Officer's Certificate certifying that such copy represents a true and correct copy and that such original has been duly recorded in the appropriate records depository for the jurisdiction in which the Mortgaged Property is located; (4) the original Mortgage Assignment assigned in blank for each Mortgage Loan, in form and substance acceptable for recording (except for the name of the assignee) and signed in the name of the last endorsee by an authorized officer; (5) the originals of all intervening assignments of mortgage, if any, with evidence of recording thereon or copies thereof certified by the related recording office or, if the original of any such assignment has not yet been returned from the recording office, a copy of the original of any such assignment without evidence of recording thereon together with an Officer's Certificate (which may be a blanket Officer's Certificate of Seller covering all such Mortgage Loans) certifying that the copy is a true copy of the original of any such assignment which has been delivered by a closing attorney, such officer or a title insurance company for recording in the appropriate recording office of the jurisdiction in which the Mortgaged Property is located, or a copy of the intervening assignment certified by the public recording office in those instances where the original recorded intervening assignment has been lost, destroyed or retained by the public recording office; (6) the originals of all assumption, modification, consolidation or extension agreements, if any, with evidence of recording thereon or, if the original of any such agreement has not yet been returned from the recording office, a copy of the original of any such agreement without evidence of recording thereon together with an Officer's Certificate (which may be a blanket Officer's Certificate of Seller covering all such Mortgage Loans) certifying that the copy is a true copy of the original of any such agreement which has been delivered by a closing attorney, such officer or a title insurance 7 40 company for recording in the appropriate recording office of the jurisdiction in which the Mortgaged Property is located, or a copy of such agreement certified by the public recording office in those instances where the original recorded agreement has been lost, destroyed or retained by the public recording office. (7) as to each Mortgage Loan, (I) the original mortgagee title insurance policy or (ii) if such policy has not been issued, (a) a first lien letter, a written commitment or binder for such policy issued by a title insurer and an officer's certificate of the title insurer certifying that all of the requirements specified in such commitment have been satisfied or (b) a preliminary title report issued by a title insurer in anticipation of issuing a title insurance policy which evidences existing liens and gives a preliminary opinion as to the absence of any encumbrance on title to the Mortgaged Property except liens to be removed on or before purchase by the Mortgagor or which constitute customary exceptions acceptable to lenders generally. 3. The Custodian's Receipt, Examination and Certification of Mortgage Files and Issuance of Trust Receipt. (a) The Custodian shall examine the documents received by it and confirm, as of the date of the Trust Receipt, that on their faces: (1) the Note and Mortgage each bears an original signature or signatures purporting to be the signature or signatures of the Person or Persons named as the maker and mortgagor or grantor or, in the case of copies of the Mortgage permitted under Section 2, that such copies bear a reproduction of such signature or signatures; (2) (a) the principal amount of the indebtedness secured by the Mortgage is identical to the original principal amount of the Note and the original principal amount on the Loan Schedule; (b) the Note term is the same as set forth on the Loan Schedule; and (c) the initial interest rate on the Note is the same as set forth on the Loan Schedule; (3) the Note bears original endorsements, by either manual or facsimile signature, which complete the chain of ownership from the original holder or payee to either the owner of the related Trust Receipt or in blank; (4) the original of the Mortgage Assignment and any intervening mortgage assignment bears the original signature purporting to be the signature of the named mortgagee or beneficiary (and any other necessary party, including subsequent assignors) or in the case of copies permitted under Section 2, that such copies bear a reproduction of such signature or signatures and that the Mortgage Assignment and any intervening mortgage assignment complete the chain of title from the originator to Seller and from Seller in blank; 8 41 (5) the power of attorney (if any), as specified in Sections 2(b)(1) and 2(b)(3), (A) bears an original signature purporting to be the signature of the maker of the Note and the mortgagor or grantor of the Mortgage and (B) bears evidence that such power of attorney was recorded in the appropriate records depository for the jurisdiction where the Mortgaged Property is located or, in case of copies permitted under Sections 2(b)(1) and (2)(b)(3), that such copies bear a reproduction of such signatures and such evidence of recordation; and (6) if a Note or a Mortgage was executed by an attorney-in-fact, the power of attorney specified in Sections 2(b)(1) and 2(b)(3) is included and conforms to the requirements of such section. (b) If the Custodian has determined that all the required documents are included in the Mortgage Files delivered to it and that such related documents on their faces satisfy the requirements enumerated in Sections 3(a)(1) through 3(a)(6) hereof, the Custodian shall (i) sign a copy of the related Letter of Transmittal and return the Letter of Transmittal to Seller, and (ii) remit to Buyer or its designee a Trust Receipt with respect to such Mortgage Files signed by the Custodian. If upon examination of the documents included in any Mortgage File, the Custodian determines that such documents do not satisfy the above requirements, or is unable to confirm that such documents satisfy such requirements, the Custodian shall mark such Mortgage Loan as an exception on its Trust Receipt. Except as set forth in the preceding sentence, the Trust Receipt of the Custodian with respect to each Mortgage File shall be deemed to include a certification that the documents reviewed by the Custodian appear regular on their face and relate to the Mortgage Loan described in the Mortgage File and are in the possession and control of the Custodian. Custodian shall have no responsibility for curing any exception relating to a Mortgage Loan other than notifying Buyer and Seller of Custodian's receipt of documents. (c) Under no circumstances shall the Custodian be obligated to verify the authenticity of any signature on any of the documents received or examined by it in connection with this Agreement or the authority or capacity of any person to execute or issue any such document, nor shall the Custodian be responsible for the value, form, substance, validity, perfection, priority, effectiveness or enforceability of any of such documents or of any Mortgage Loan. (d) Any provision of this Agreement to the contrary notwithstanding, Seller shall notify the Custodian of the need to examine a Mortgage File and deliver a related Trust Receipt not less than two (2) full Business Days prior to the date on which such Trust Receipt is required to be delivered. (e) With respect to any Trust Receipt delivered to Buyer hereunder, the Custodian shall revise its own internal books and records from time to time to reflect its receipt or release of Mortgage Loans under the terms of this Agreement so that the applicable Loan Schedule for any 9 42 such Trust Receipt shall always accurately reflect the Mortgage Loans held by the Custodian under this Agreement. 4. Possession of Mortgage Files. (a) Possession of Mortgage Files on Behalf of Buyer. Upon payment by Buyer of the Purchase Price, the Custodian shall segregate and retain possession and custody of the Mortgage Files for the exclusive use and benefit of Buyer and as agent and bailee of and custodian for Buyer for all purposes until otherwise notified by Buyer pursuant to subsection (b) hereof. The Custodian shall also make appropriate notations in the Custodian's books and records reflecting that the Mortgage Files are owned by Buyer unless otherwise notified by Buyer pursuant to subsection (b) hereof. The Custodian shall not release any portion of the Mortgage Files to Seller or to any other party without the prior written authorization of the owner of the Trust Receipt. (b) Possession of Mortgage Files on Behalf of Third Persons. The Custodian acknowledges that Buyer may transfer its interest in the Mortgage Loans to one or more Third Persons. Upon receipt of written notice from Buyer, substantially in the form of Exhibit B hereto, that Buyer has transferred its interest in the Mortgage Loans identified on a schedule to such notice (the "Notice Loan Schedule") to a Third Person together with the Trust Receipt for amendment of the Schedule attached thereto, the Custodian will promptly issue a Trust Receipt to such Third Person and shall issue an amended Trust Receipt to Buyer, each of which will reflect the transfer of Buyer's interest in certain Mortgage Loans to such Third Person. The notice sent by Buyer to the Custodian shall be in substantially the form of Exhibit B hereto and shall (i) specify the name of the Third Person, (ii) specify the address of the Third Person, which may be an address in care of Buyer and (iii) have attached the Notice Loan Schedule. Upon receipt of any such notice from Buyer, the Custodian shall (a) segregate and retain possession and custody of the Mortgage Files with respect to the Mortgage Loans in the Notice Loan Schedule as agent and bailee of and custodian for such Third Person, and (b) make appropriate notations in the Custodian's books and records reflecting that the Mortgage Files identified in the Notice Loan Schedule are owned by such Third Person. The Custodian shall segregate and maintain continuous custody of all Mortgage Files for the benefit of the Person to whom it has issued a Trust Receipt. Buyer's agreements with each holder of a Trust Receipt other than an affiliate of Buyer (each such holder, a "Transferee") will specify that the Transferee cannot issue instructions regarding the Mortgage Loans or Mortgage Files unless Buyer has defaulted on Buyer's obligations to such Transferee. Accordingly, the Custodian may not act on requests from a Transferee to withdraw or otherwise dispose of Mortgage Loans unless the Transferee delivers to the Custodian an executed Notice of Default Certificate in the form of Exhibit E hereto. The Custodian shall be entitled to presume conclusively that the Notice of Default Certificate is properly executed and that when delivered to the Custodian an Event of Default exists under Buyer's agreement with its Transferee. Notwithstanding the above, nothing contained in this section shall obligate Custodian to provide the custodial services contemplated pursuant to this Custody Agreement to such Third Person once Custodian has received a Notice of Default 10 43 Schedule from such Third Person, provided however, that Custodian shall provide such Third Person with not less than sixty (60) days notice of Custodian's intent to terminate this Custody Agreement subject, in any event, to Section 11 hereof. (c) Upon surrender of the Trust Receipt by Buyer to the Custodian, Buyer may issue instructions regarding the Mortgage Loans designated in the applicable Trust Receipt, including instructions to withdraw Mortgage Loans. (d) In the event a Trust Receipt is lost, destroyed or otherwise unavailable for surrender to the Custodian, Buyer will present to the Custodian documentation in the form attached as Exhibit F or Exhibit G hereto. Upon receipt by the Custodian of such documentation, Buyer will have the right to issue instructions regarding the Mortgage Loans covered by a Trust Receipt without surrender of the related Trust Receipt. (e) The Custodian understands that Buyer may need to examine Mortgage Loans subject to a Trust Receipt on a periodic basis. Such examination shall take place on the premises of the Custodian. Buyer will give the Custodian two (2) Business Days' notice before Buyer makes an examination. Buyer's agreements with each Transferee will grant Buyer the right to make such examinations. (f) The Custodian shall cause to be kept at its office records in the form, scope and substance of a register (the "Custodial Register") in which, subject to such reasonable regulations as it may prescribe, the Custodian shall reflect the ownership of Mortgage Loans as confirmed by Trust Receipts as herein provided. The Custodial Register shall be deemed to contain proprietary information and only Custodian and Buyer shall have access to such information. (g) With respect to the repurchase of any Mortgage Loan by Seller from Buyer under the Repurchase Agreement, the interest of any Third Person in any such Mortgage Loan shall automatically terminate simultaneously with the payment to Buyer of the Repurchase Price for such Mortgage Loan under the Repurchase Agreement and any such interest shall be deemed to have been transferred to Buyer as of such time, except with respect to any Mortgage Loans delivered to a Third Person pursuant to the Notice of Default Certificate attached hereto as Exhibit E. Pursuant to the preceding sentence, the interest of any Third Person shall automatically terminate irrespective of whether such Third Person receives the appropriate payment for such Mortgage Loan. 5. Release of Custodian's Mortgage Files for Servicing. From time to time and as appropriate for the servicing of any of the Mortgage Loans by Seller, the Custodian is hereby authorized, upon written request and receipt of Seller and consent and acknowledgement of Buyer (to the extent required by Exhibit H) in the form of Exhibit H, to release to Seller or its designee the related Mortgage File, or any documents contained therein, set forth in such receipt to Seller; provided that there shall not be more than ten (10) Mortgage Files outstanding to 11 44 Seller, or its designee at any one time. All documents so released to Seller or its designee shall be held by it in trust for the benefit of Buyer and Third Persons from time to time. Seller or its designee shall return to the Custodian the Mortgage File or such documents when Seller's need therefor in connection with servicing no longer exists but in no event later than ten (10) Business Days after their release by the Custodian as provided herein. Custodian shall notify Buyer of any Mortgage Files outstanding more than ten (10) Business Days, but shall not be responsible to actively pursue the return of Mortgage Files not returned within ten (10) Business Days. Upon the payment in full of any Mortgage Loan by the mortgagor, and upon receipt by the Custodian of Seller's request for release and acknowledgement by Buyer in the form of Exhibit H, the Custodian shall promptly release the related Mortgage File to Seller. Seller agrees that, at the time any request for release of Mortgage Files is made to the Custodian under this Agreement, Buyer shall be so notified and a copy of any written request for release shall be furnished to Buyer by Seller. Upon its receipt of any released Mortgage Files, Seller shall so notify Buyer. 6. Review and Deposit of Additional Mortgage Loans. (a) If, pursuant to the Repurchase Agreement, Seller is required to deliver additional Mortgage Loans to the Custodian to cure a Margin Deficit or if Seller and Buyer agree to cause additional Mortgage Loans to become subject to the Repurchase Agreement ("Additional Mortgage Loans"), the Custodian shall retain possession and custody of the Mortgage Files relating thereto pursuant to Section 4 hereof and, upon receipt and review thereof, shall transmit to Buyer a Trust Receipt that shall supersede any Trust Receipt bearing an earlier date and have attached thereto a complete Loan Schedule revised so as to give effect to the transaction contemplated by such Trust Receipt. (b) Two (2) full Business Days prior to the delivery of any Additional Mortgage Loans, Seller will advise the Custodian whether the Custodian will be required to review any Additional Mortgage Loans. Seller undertakes to use its best efforts to make available for review any such Additional Mortgage Loans as soon as is reasonably possible. Upon receipt thereof, the Custodian shall perform its review of the Mortgage Files relating to any Additional Mortgage Loans in the manner contemplated by Section 3 hereof. (c) Seller covenants and agrees to provide to the Custodian at the time Seller delivers any Additional Mortgage Loans under this Agreement, and at the time any Mortgage Loans are transferred to Seller pursuant to Section 4(c) hereof, a revised Loan Schedule reflecting current information with respect to all Mortgage Loans subject to the applicable Trust Receipt, after giving effect to the related delivery or transfer. 7. Waiver by the Custodian. Notwithstanding any other provisions of this Agreement, 12 45 the Custodian shall not at any time exercise or seek to enforce any claim, right or remedy, including any statutory or common law rights of set-off, if any, that the Custodian might otherwise have against all or any part of a Mortgage File or the proceeds thereof. The Custodian warrants that it currently holds, and during the existence of this Agreement shall hold, no adverse interest, by way of a security interest or otherwise, in any Mortgage Loan. 8. Right of Inspection by Buyer and Third Persons. Upon reasonable notice to the Custodian (which in no event shall be less than two (2) Business Days notice), the Person or Persons for whom the Custodian is acting as custodian, or their duly authorized representatives, may at any time, during ordinary business hours, inspect and examine the Mortgage Files in the possession and custody of the Custodian at such place or places where such Mortgage Files are deposited. 9. Custodian's Fees and Expenses. The Custodian hereby acknowledges that Seller has agreed to pay all fees due and owing to, and except as otherwise provided herein, any expenses incurred by the Custodian under this Agreement. The fees due to the Custodian for its services hereunder shall be as set forth in a separate letter agreement between the Custodian and Seller. In addition to the fees referred to in the two foregoing sentences, Seller has agreed to pay all out-of-pocket expenses incurred by the Custodian in connection with the review of each Mortgage File by it or its agent pursuant to the terms of this Agreement and its issuance of a Trust Receipt relating thereto. Neither Buyer nor any Third Person shall have any liability or obligation to pay any such fees or expenses, and the duties of the Custodian hereunder shall be independent of Seller's performance of its obligations to the Custodian in respect of such fees and expenses. 13 46 10. Termination of Agreement. This Agreement shall become effective on and as of the date hereof and shall terminate upon the earlier of (i) the Custodian's receipt of written Notice of Termination signed by the Person or all of the Persons to whom the Custodian has issued Trust Receipts and on whose behalf the Custodian is acting as agent, bailee and custodian, (ii) the removal of all Mortgage Files from the possession of the Custodian pursuant to the instructions of the Person or Persons entitled to request such removal pursuant to this Agreement. The Custodian shall be entitled to rely, and shall be protected in relying, on any such Notice of Termination delivered to it by such Person or Persons and (iii) if such Mortgage Loan is repurchased by Seller from Buyer, the receipt by Buyer of the Repurchase Price for such Mortgage Loan under the Repurchase Agreement. If this Agreement terminates with respect to any Mortgage Loan by operation of clause (i) above, the Custodian shall deliver the related Mortgage File then subject to this Agreement to the Person indicated in the Notice of Termination. If any Mortgage Loan is repurchased by Seller from Buyer pursuant to clause (iii) above, then Buyer shall execute and deliver to the Custodian a document in substantially the form of Exhibit I which confirms the receipt of the Repurchase Price for such Mortgage Loan and the termination and release of all of Buyer's right, title and interest in such Mortgage Loan, and the Custodian upon receipt of such document shall deliver the related Mortgage File for such Mortgage Loan to Seller or such other Person as Seller so directs. Upon such termination the Custodian shall deliver all Mortgage Files then subject to this Agreement to the Person indicated in such Notice of Termination or if no such Person is indicated, then to the Person or Persons to whom the Custodian has issued Trust Receipts and for whom the Custodian is acting on such date and the Custodian shall endorse the Notes without recourse, representation and warranties and execute mortgage assignments pursuant to any instruction by the Person on whose behalf the Custodian is acting as agent and bailee pursuant to this Agreement. 11. Resignation and Removal of Custodian. (a) Resignation. The Custodian shall have the right, with or without cause, to resign as the Custodian under this Agreement upon sixty (60) days' prior written notice to Seller, Buyer and, to the extent of its interest, any Third Person. Following any such resignation, the Custodian shall continue to act as the "Custodian" under this Agreement until it delivers the Mortgage Files to a duly appointed successor Custodian as provided in (c) below, if any, or to any designee specified by Buyer or any Third Person, as applicable. (b) Removal. Buyer and, to the extent of its interest, any Third Persons may remove and discharge the Custodian from the performance of its duties under this Agreement, by providing thirty (30) days' written notice to the Custodian, signed jointly by Buyer and any Third Person or Persons with any interest in the Mortgage Loans, as evidenced by the holding of a Trust Receipt, with a copy to Seller. Following any such removal, the Custodian shall continue to act as the "Custodian" under this Agreement until it delivers the Mortgage Files to a duly appointed successor Custodian as provided in (c) below, if any, or to any designee specified by Buyer or any Third Person, as applicable. 14 47 (c) Appointment of Successor Custodian; Transfer of Mortgage Loans. Upon resignation or removal of the Custodian, Buyer and, to the extent of its interest and if permitted by Section 4 hereof, any Third Person shall have 60 days in which to appoint and designate a successor to take possession of their respective Mortgage Files or select one or more designees to take possession thereof. Upon receipt of written direction regarding the foregoing from Buyer and any Third Person with respect to the Mortgage Loans in which they have an interest, as applicable, the Custodian shall deliver all Mortgage Files to the person so designated within 10 Business Days following delivery to the Custodian of such written notice. If a successor Custodian is appointed, the Custodian shall deliver the Mortgage Files in accordance with the written instructions of Buyer and the Third Persons, if any, having interests in the Mortgage Loans to the extent such Third Persons are permitted to take action with respect thereto under Section 4 hereof setting forth the name and address of the successor Custodian. If Buyer and, to the extent of its interest, any such Third Person, fail to jointly designate a successor Custodian or specify one or more designees within such 60-day period, then the Custodian shall deliver possession and custody to Buyer and, if otherwise permitted under Section 4 hereof, any Third Person, of their respective Mortgage Files, as applicable, at the address specified in the Custodian's records. The Custodian shall, as part of the transfer of the Mortgage Files, deliver the Mortgage Assignment for each Mortgage Loan in recordable form and shall endorse the Note without recourse, representation and warranties in accordance with Buyer's or the applicable Third Person's instructions. Any successor Custodian hereunder shall be a financial institution whose deposits are insured by FDIC, have a net worth of not less than $10,000,000 and shall have secure vault storage facilities located in the States of New York or Michigan or such other State as Buyer and Seller may agree, in which the Mortgage Files are to be retained. 12. Limitation on Obligations of the Custodian. The Custodian shall have no duties or obligations other than those specifically set forth herein, and no further duties or obligations shall arise by implication or otherwise. The Custodian agrees to use its best judgment and good faith in the performance of such obligations and duties and shall incur no liability to Seller for its acts or omissions hereunder, except as may result from its gross negligence or willful misconduct. In no event shall Custodian be liable, directly or indirectly, for any special or consequencial damages, even if Custodian has been advised of the possibility of such damages. The Custodian shall also be entitled to rely (and shall be protected in relying) upon written advice of its legal counsel and to rely upon any written notice, document, correspondence, request or directive received by it from Buyer, any Third Person (if applicable), or Seller, as the case may be, that the Custodian believes to be genuine and to have been signed or presented by the proper and duly authorized officer or representative thereof, and shall not be obligated to inquire as to the authority or power of any Person so executing or presenting such documents or as to the truthfulness of any statements set forth therein. No provision of this Agreement shall require the Custodian to expend or risk its own funds or otherwise incur financial liability in the performance of its duties hereunder if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity is not reasonably assured to it. Seller agrees to 15 48 indemnify, defend and hold the Custodian harmless from and against any claim, legal action, liability or loss that is initiated against or incurred by the Custodian, including court costs and reasonable attorney's fees and disbursements, and all of the Custodian's other cost, damage or expense incurred in connection with the Custodian's performance of its duties under this Agreement, but excluding any such claim, legal action, liability, loss, cost, damage or expense caused by Custodian's gross negligence or willful misconduct. Custodian shall be under no responsibility or duty with respect to any Mortgage Loans or documents relating thereto once the Mortgage Loan has been delivered by Custodian to Buyer or its designee in accordance with any of the provisions of this Agreement. The Custodian shall at its own expense maintain at all times during the existence of this Agreement and keep in full force and effect (a) fidelity insurance, (b) theft and loss of documents insurance, (c) forgery insurance, and (d) errors and omissions insurance. All such insurance shall be in amounts, with standard coverage and subject to deductibles, as are customary for insurance typically maintained by banks which act as the Custodian in similar transactions. The Custodian shall, upon written request, provide to Seller, or to any other Person as Seller shall direct, a certificate signed by an authorized officer of the Custodian certifying that the foregoing insurance policies are in full force and effect. The Custodian shall use its best efforts to ensure that such insurance shall not terminate prior to receipt by Buyer by registered mail of 30 days' prior written notice thereof. 13. Notices. Any notice, demand or consent required or permitted by this Agreement shall be in writing and shall be effective and deemed delivered only when received by the party to which it is sent. Any such notice, demand or consent shall be delivered in person or transmitted by a recognized private courier service or deposited with the United States Postal Service, certified mail, postage prepaid, return receipt requested, addressed as follows, unless such address is changed by written notice hereunder: If to Seller: Rock Financial Corporation 30600 Telegraph Road, 4th Fl. Bingham Farms, MI 48025 Attn: Mr. Frank Plenskofski Telephone: (810) 258-2300 Telecopy: (810) 540-9113 If to Buyer: Bear Stearns Home Equity Trust 1996-1 c/o Bear Stearns Mortgage Capital Corporation 245 Park Avenue 16 49 New York, New York 10167 Attn: Mr. John Garzone Telephone:(212) 272-3853 Telecopy:(212) 272-7803 If to the Custodian: COMERICA BANK P.O.Box 75000 Detroit, Michigan 48275-3226 Attn: Ms. Patricia Cvornyeh Telephone: (313) 222-6111 Telecopy: (313) 222-9889 14. No Assignment or Delegation by the Custodian. The Custodian shall not assign, transfer, pledge or grant a security interest in any of its rights, benefits or privileges hereunder nor delegate or appoint any other person to perform or carry out any of its duties, responsibilities or obligations under this Agreement; any act or instrument purporting to effect any such assignment, transfer, pledge, grant, delegation or appointment shall be void. 15. Controlling Law. This Agreement and all questions relating to validity, interpretation, performance and enforcement shall be governed by and construed, interpreted and enforced in accordance with the laws of the State of New York, without regard to any New York or other conflict-of-law provisions. 16. Agreement for the Exclusive Benefit of Parties. This Agreement is for the exclusive benefit of the parties hereto, and their respective successors and permitted assigns, and shall not be deemed to create or confer any legal or equitable right, remedy or claim upon any other person whatsoever except a Third Person to the extent rights are explicitly conferred on any one or more Third Persons pursuant to this Agreement. 17. Entire Agreement. This Agreement contains the entire agreement among the parties hereto with respect to the subject matter hereof, and supersedes all prior and contemporaneous agreements, understandings, inducements and conditions, express or implied, oral or written, of any nature whatsoever with respect to the subject matter hereof, including any prior custody agreements. The express terms hereof control and supersede any course of performance and/or usage of the trade inconsistent with any of the terms hereof. This Agreement may not be modified or amended other than by an agreement in writing signed by Buyer, Seller and the Custodian. 18. Exhibits. All Exhibits referred to herein or attached hereto are hereby incorporated by reference into, and made a part of, this Agreement. 19. Indulgences, Not Waivers. Neither the failure nor any delay on the part of a party 17 50 hereto to exercise any right, remedy, power or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, power or privilege preclude any other or further exercise of the same or of any other right, remedy, power or privilege, nor shall any waiver of any right, remedy, power or privilege with respect to any occurrence be construed as a waiver of such right, remedy, power or privilege with respect to any other occurrence. No waiver shall be effective unless it is in writing and is signed by the parties asserted to have granted such waiver. 20. Titles Not to Affect Interpretation. The titles of sections and subsections contained in this Agreement are for convenience only, and they neither form a part of this Agreement nor are they to be used in the construction or interpretation hereof. 21. Provisions Separable. The provisions of this Agreement are independent of and separable from each other, and no provision shall be affected or rendered invalid or unenforceable by virtue of the fact that for any reason any other provision or provisions may be invalid or unenforceable in whole or in part. 22. Representations and Warranties of the Custodian. The Custodian represents, warrants to, and covenants with Buyer that on the date hereof, and on the date of the issuance of any Trust Receipt by the Custodian: (1) The Custodian is (i) a Michigan banking corporation duly organized, validly existing and in good standing under the laws of the State of Michigan and (ii) duly qualified and in good standing and in possession of all requisite authority, power, licenses, permits and franchises in order to execute, deliver and comply with its obligations under the terms of this Agreement; (2) The execution, delivery and performance of this Agreement have been duly authorized by all necessary corporate action and the execution and delivery of this Agreement by the Custodian in the manner contemplated herein and the performance of and compliance with the terms hereof by it will not (i) violate, contravene or create a default under any applicable laws, licenses or permits to the best of its knowledge, or (ii) violate, contravene or create a default under any charter document or bylaw of the Custodian or to the best of the Custodian's knowledge any contract, agreement, or instrument to which the Custodian or by which any of its property may be bound and will not result in the creation of any lien, security interest or other charge or encumbrance upon or with respect to any of its property; (3) The execution and delivery of this Agreement by the Custodian and the performance of and compliance with its obligations and covenants hereunder do not require the consent or approval of any governmental authority or, if such consent or approval is required, it has been obtained; 18 51 (4) This Agreement, and the original Trust Receipt issued hereunder, when executed and delivered by the Custodian will constitute valid, legal and binding obligations of the Custodian, enforceable against the Custodian in accordance with their respective terms, except as the enforcement thereof may be limited by applicable debtor relief laws and that certain equitable remedies may not be available regardless of whether enforcement is sought in equity or at law; (5) Custodian does not believe, nor does it have any reason or cause to believe, that it cannot perform each and every covenant contained in this Agreement; (6) To Custodian's knowledge after due inquiry, there is no litigation pending or threatened which, if determined adversely to Custodian, would adversely affect the execution, delivery or enforceability of this Agreement, or any of the duties or obligations of Custodian thereunder, or which would have a material adverse effect on the financial condition of Custodian; 23. Limited Role of Trustee; Successor Trustee. (a) The execution and delivery of this Agreement by the undersigned Trustee is solely and strictly in its capacity as Trustee under that certain Trust Agreement dated as of March 29, 1996 (the "Trust Agreement") by and between State Street Bank and Trust Company of California, N.A., as Trustee (the "Trustee") and Bear Stearns Mortgage Capital Corporation, as Depositor (the "Depositor"), and not individually, and has been undertaken at the direction of the Depositor. It is hereby expressly acknowledged that any obligations, liabilities, covenants, duties, representations and warranties hereunder are those of Buyer only and not of the Trustee. There shall be no individual or corporate liability against or on the part of the Trustee (or any of its officers, directors or employees) under this Agreement, and there shall be no recourse against the Trustee in its individual or corporate capacity (or any of its directors, officers or employees), or against any of its properties or assets, for recovery of or as a result of any claim, debt, liability or obligation (whether of payment or performance) of or against Buyer under or pursuant to this Agreement (whether arising out of or relating to any covenant, agreement, representation or warranty, or otherwise). Recourse against Buyer for any claims, liabilities, debts or obligations under this Agreement is limited to the trust established by the Trust Agreement. Bear Stearns Mortgage Capital Corporation, as the depositor and owner of 100% of the equity of the trust established under the Trust Agreement, is liable for all fees, expenses, taxes, indemnity payments and other liabilities of the trust. (b) It is hereby acknowledged that the rights and remedies of Buyer under or pursuant to this Agreement shall automatically be transferred to and vest in any successor trustee under the Trust Agreement, in the event of the resignation or removal of the Trustee as trustee thereunder. 24. Counterparts. For the purpose of facilitating the execution of this Agreement as herein provided and for other purposes, this Agreement may be executed simultaneously in any 19 52 number of counterparts, each of which counterpart shall be deemed to be an original, and such counterparts shall constitute and be one and the same instrument. 20 53 IN WITNESS WHEREOF, the parties have entered into this Agreement as of the date set forth above. ROCK FINANCIAL CORPORATION By: /s/ ------------------------------ Name: Title: COMERICA BANK as Custodian By: /s/ ------------------------------ Name: Title: BEAR STEARNS HOME EQUITY TRUST 1996-1 By: State Street Bank and Trust Company of California, N.A., as Trustee solely and not individually By: /s/ ------------------------------ Name: Title: 21 54 EXHIBIT A LETTER OF TRANSMITTAL To: COMERICA BANK From: Rock Financial Corporation [Address] [Address] Pursuant to the Custody Agreement dated as of March 26, 1996 the "Custody Agreement") among COMERICA BANK (the "Custodian"), Rock Financial Corporation ("Seller"), and Bear Stearns Home Equity Trust 1996-1, Seller hereby delivers to you (i) the documents described below in connection with the Mortgage Loans identified on the attached schedule and (ii) an updated Loan Schedule identifying each Mortgage Loan in your custody (including the Mortgage Loans referred to in clause (i) above). We understand that the list set forth below indicates in summary fashion the materials for transmittal; it is not intended to describe fully all the required characteristics of each item. We further understand that each item sent to the Custodian must comply with the applicable requirements of the Custody Agreement, and that all required documents must be delivered together before the Custodian will accept the Mortgage Loans. With respect to each of the Mortgage Loans referred to in clause (i) above, Seller has delivered, to the extent required by the Custody Agreement, the following documents: Section 2 (1) Letter of Transmittal (original and one copy) (2) Original Note (endorsed in blank), including all intervening endorsements Power of Attorney (if applicable) (3) Original of any loan agreement and guarantee executed in connection with the Notes, if applicable (4) Mortgage original, or Conformed Copy, together with the appropriate certificate (5) Assignment of Mortgage in blank original, or Conformed Copy, together with the appropriate certificate 22 55 (6) Intervening Mortgage Assignment, if any original, or Conformed Copy, together with the appropriate certificate (7) originals of all assumption, modification, consolidation or extension agreements (8) Lender's Title Insurance Policy original, or Written commitment issued by the title insurance company, together with the appropriate certificate, or Preliminary Title Report (9) other. Submitted The Custodian acknowledges By:_____________________________ receipt of the documents referred to and agrees to Date: __________________________ hold and retain possession thereof pursuant to the Telephone Number:_______________ terms of the Custody Agreement. COMERICA BANK, as Custodian By:______________________ Name: Title: 23 56 EXHIBIT B NOTICE TO THE CUSTODIAN TO: COMERICA BANK, as Custodian FROM: Bear Stearns Home Equity Trust 1996-1 DATE:____________________ Pursuant to the Custody Agreement dated as of March 26, 1997, among Rock Financial Corporation, Bear Stearns Home Equity Trust 1996-1 and COMERICA BANK, as Custodian ("Custody Agreement"), the undersigned hereby notifies you that it has transferred its interest in the Mortgage Files with respect to the Mortgage Loans identified in the mortgage loan schedule attached hereto (the "Notice Loan Schedule") to [TRANSFEREE NAME AND ADDRESS]. Included with this notice is the original Trust Receipt for amendment of the Loan Schedule attached thereto. Capitalized terms used herein without definition are as defined in the Custody Agreement. BEAR STEARNS HOME EQUITY TRUST 1996-1 By: State Street Bank and Trust Company of California, N.A., as Trustee By:________________________________ Name: Title: [Name of transferee] hereby acknowledges that (i) the Mortgage Loans listed on the Notice Loan Schedule are being held for it by the Custodian pursuant to the terms of the Custody Agreement, (ii) it agrees to be bound by the Custody Agreement, (iii) the Custodian shall not comply with the request of a Third Person to deliver Mortgage Files unless B-1 57 such Third Person has delivered to the Custodian an executed Notice of Default Certificate and (iv) it is responsible for payment of any fees and expenses of the Custodian incurred in connection with the issuance of periodic reports to it or in complying with its requests. [NAME OF TRANSFEREE] By: ______________________________ Name: ____________________________ Title: ___________________________ cc: Rock Financial Corporation 58 EXHIBIT C TRUST RECEIPT [Date] Bear Stearns Home Equity Trust 1996-1 Re: Custody Agreement dated as of March 26, 1997, among Rock Financial Corporation, Bear Stearns Home Equity Trust 1996-1 and COMERICA BANK, as Custodian Gentlemen: In accordance with the provisions of Paragraph 3 of the above-referenced Custody Agreement (the "Custody Agreement"), the undersigned, as Custodian, hereby certifies that as to each Mortgage Loan described in the Loan Schedule, a copy of which is attached hereto, it has reviewed the Mortgage File and has determined that, except as set forth on the Exception Report attached hereto, (i) all documents required to be delivered to it pursuant to the Custody Agreement are in its possession, (ii) such documents have been reviewed by it and appear regular on their face and relate to such Mortgage Loan, and (iii) based on its examination of the foregoing documents, such documents on their face satisfy the requirements set forth in Sections 3(a)(1) through 3(a)(6) of the Custody Agreement. The Custodian hereby confirms that it is holding each such Mortgage File as agent and bailee of and custodian for and for the exclusive use and benefit of Bear Stearns Home Equity Trust 1996-1 ("BS Trust") or its transferee pursuant to the terms of the Custody Agreement. This Trust Receipt is not a negotiable instrument. BS Trust may, however, transfer this receipt by a special endorsement to one other party. The party that takes this receipt from BS Trust or its affiliate by special endorsement may only transfer this receipt by a second endorsement in BS Trust's or its affiliate's favor. The Custodian will accept and act on instructions with respect to the Mortgage Loans only upon surrender of this receipt at its Corporate Trust Office, [ADDRESS], Attention: _________________. If the receipt has been endorsed and is held by a Person other than BS Trust or one of its affiliates, we will accept and act on instructions from the endorsee only if the attached Notice of Default Certificate is executed and delivered to us stating that an Event of Default has occurred under a repurchase agreement relating to this Trust Receipt between BS Trust and the endorsee. 59 All initially capitalized terms used herein shall have the meanings ascribed to them in the above-referenced Custody Agreement. COMERICA BANK, as Custodian By:________________________________ Name: Title: 60 EXHIBIT D NOTICE OF TERMINATION [date] TO: COMERICA BANK, as Custodian FROM: Bear Stearns Home Equity Trust 1996-1 [and, one or more Third Persons, if applicable] DATE:____________________ You are hereby notified that the Custody Agreement, dated as of 26, 1997, among Rock Financial Corporation, Bear Stearns Home Equity Trust 1996-1 and COMERICA BANK as Custodian, is terminated pursuant to Section 10 of such Agreement and you are instructed to deliver all property in your possession with respect to such Agreement to [the undersigned Person or Persons as their interests in the Mortgage Loans appear on your records]. BEAR STEARNS HOME EQUITY TRUST 1996-1 By: State Street Bank and Trust Company of California, N.A., as Trustee By:________________________________ Name: Title: [_________________________________] By:________________________________ Name: Title: cc: Rock Financial Corporation D-1 61 EXHIBIT E NOTICE OF DEFAULT CERTIFICATE _____________, 199__ COMERICA BANK, as Custodian [ADDRESS] Gentlemen: As the transferee of a Trust Receipt for certain Mortgage Loans, which Trust Receipt is attached hereto, we hereby notify you that an event of default has occurred under our agreement with ________________________ and we are entitled to receive the Mortgage Loans subject to the aforementioned Trust Receipt. [_________________________________] By:________________________________ Name: Title: Notice Received by Custodian on [Date]: By:________________________________ Title: Date: 62 EXHIBIT F COMERICA BANK, as Custodian [ADDRESS] Re: Custody Agreement dated as of March 26, 1997, among Rock Financial Corporation, Bear Stearns Home Equity Trust 1996-1 and COMERICA BANK, as Custodian Gentlemen: On [date] you issued a trust receipt in the name of BS Trust evidencing entitlement to the Mortgage Loans described on Schedule A hereto and held by you as Custodian. You issued that receipt pursuant to our agreement with Rock Financial Corporation dated as of March 26, 1997. The trust receipt has been [lost, destroyed, etc.]. Every effort was made to recover the receipt; those efforts were unsuccessful. It is, therefore, now unavailable for surrender to you. At the time of its [loss, destruction, etc.], the receipt was held by us under [the terms of original issue, special endorsement]. Since its [issuance, endorsement] to us, we have not sold, assigned, transferred, pledged or otherwise granted an interest in the trust receipt that has not been released prior to the date hereof. Accordingly, this letter authorizes you to act on our instructions regarding such Mortgage Loans without surrender of the receipt to you. We hereby agree to indemnify and hold you harmless against any loss, liability or expense that you may incur as a result of acting on our instructions regarding such Mortgage Loans without our surrender of the receipt to you, excluding, however, any such loss, liability or expense caused by your gross negligence or willful misconduct. 63 If the trust receipt is ever recovered by us, we will immediately notify you, cancel the receipt and surrender the receipt to you. BEAR STEARNS HOME EQUITY TRUST 1996-1 By: State Street Bank and Trust Company of California, N.A., as Trustee By:________________________________ Name: Title: 64 EXHIBIT G COMERICA BANK, as Custodian [ADDRESS] Re: Custody Agreement dated as of March 26, 1997, among Rock Financial Corporation, Bear Stearns Home Equity Trust 1996-1 and COMERICA BANK, as Custodian Gentlemen: On [date] you issued a trust receipt in the name of Bear Stearns Home Equity Trust 1996-1 ("BS Trust") evidencing entitlement to the Mortgage Loans described on Schedule __ hereto and held by you in the name of ____________________, as Custodian. You issued that receipt pursuant to our agreement with Rock Financial Corporation dated as of March 26, 1997. The trust receipt has been [lost, destroyed, etc.]. Every effort was made to recover the receipt; those efforts were unsuccessful. It is, therefore, now unavailable for surrender to you. At the time of its [loss, destruction, etc.], the receipt was held by [name of transferee] under a special endorsement by us. We have attached to this letter a special endorsement, from [name of transferee] conveying to us its interest in the trust receipt and authorizing us to issue instructions regarding the Mortgage Loans subject thereto without surrender of the receipt. [name of transferee] has represented to us that it has not sold, assigned, transferred, pledged or otherwise granted an interest in the trust receipt to any party other than BS Trust. Accordingly, this letter authorizes you to act on our instructions regarding such Mortgage Loans without surrender of the receipt to you. We hereby agree to indemnify and hold you harmless against any loss, liability or expense that you may incur as a result of acting on our instructions regarding such Mortgage Loans without our surrender of the receipt to you, excluding, however, any such loss, liability or expense caused by your gross negligence or willful misconduct. 65 If the trust receipt is ever recovered by us, we will immediately notify you, cancel the receipt and surrender the receipt to you. BEAR STEARNS HOME EQUITY TRUST 1996-1 By: State Street Bank and Trust Company of California, N.A., as Trustee By: ___________________________ Name: Title: 66 EXHIBIT H REQUEST FOR RELEASE OF DOCUMENTS To: COMERICA BANK, as Custodian [ADDRESS] Re: Custody Agreement dated as of March 26, 1997, among Rock Financial Corporation, Bear Stearns Home Equity Trust 1996-1 and COMERICA BANK, as Custodian In connection with the administration of Mortgage Loans held by you as Custodian for Buyer and Third Persons from time to time pursuant to the above-referenced Custodial Agreement, we hereby request the release, and acknowledge receipt, of the [specify documents] [related Mortgage Files] for the Mortgage Loans described in the attached Loan Schedule, for the reason indicated. Mortgagor's Name Address and Zip Code: Mortgage Loan Number: Reason for Requesting Documents (check one): 25. Mortgage Loan paid in full. (The Custodian shall delete the Mortgage Loan from the applicable Loan Schedule and send the amended Loan Schedule to Buyer and any related Third Person.) 26. Repurchase of Mortgage Loan pursuant to the Repurchase Agreement. (The Custodian shall delete the Mortgage Loan from the applicable Loan Schedule and send the amended Loan Schedule to Buyer and any related Third Person.) 27. Delivery of substituted Mortgage Loan. (The Custodian is hereby authorized to delete the Mortgage Loan from the applicable Loan Schedule attached hereto and send the amended Loan Schedule to Buyer and any related Third Person.) 28. Mortgage Loan liquidated by . (The Custodian is hereby authorized to delete the Mortgage Loan from the applicable Loan Schedule attached hereto and send the amended Loan Schedule to Buyer and any related Third Person.) 29. Mortgage Loan in foreclosure or otherwise released for servicing. If box 1, 2, 3 or 4 above is checked, and if all or part of the Mortgage Files were previously 67 released to Seller, please release to Seller its previous request and receipt on file with you, as well as any additional documents in your possession relating to the specified Mortgage Loan. If box 5 above is checked, upon the return of all of the above documents to you as the Custodian, please acknowledge your receipt by signing in the space indicated below, and returning this form. Seller understands and agrees that all documents delivered to Seller or its subservicer pursuant to this request for release (other than with respect to Items 1-4) shall be returned to the Custodian no later than twenty-one (21) days from the date hereof. Capitalized terms used and not otherwise defined herein shall have the meanings set forth in the Custody Agreement. ROCK FINANCIAL CORPORATION By:_______________________ Name______________________ Title_____________________ Date:_____________________ Acknowledged and Agreed: BEAR STEARNS HOME EQUITY TRUST 1996-1 By: State Street Bank and Trust Company of California, N.A., as Trustee (Required if documentation relating to more than three (3) Mortgage Files are outstanding or the release of a Note or Mortgage Assignment is requested.) By:________________ Name:______________ Title:_____________ Date:______________ 68 Acknowledgement of documents returned to the Custodian, for the reasons listed in item 5: COMERICA BANK as Custodian By:_______________________ Name:_____________________ Title:____________________ Date:_____________________ 69 EXHIBIT I CONFIRMATION OF RESALE AND RECEIPT To: COMERICA BANK, as Custodian ROCK FINANCIAL CORPORATION, as Seller Date: ________, 199__ Re: Custody Agreement, dated as of March 26, 1997, among Bear Stearns Home Equity Trust 1996-1 (the "Buyer"), Rock Financial Corporation (the "Seller") and COMERICA BANK, as custodian thereunder Buyer hereby: 30. Acknowledges receipt of $______________ in immediately available funds on behalf of Seller; (b) Acknowledges that the funds referred to in clause (a) above constitute sufficient consideration under the terms of the Master Repurchase Agreement, dated as of March 26, 1997, among Buyer and Seller, for the release by Buyer of its interest in the Mortgage Loans listed on Schedule A hereto; (c) Confirms that it has released to Seller all of its right, title and interest in and to the Mortgage Loans listed on Schedule A hereto; and (d) Confirms that it has not granted or created any interest in the Mortgage Loans listed on Schedule A hereto other than interests that have been fully discharged or satisfied on or prior to the date hereof. Dated: ___ _, 199_ BEAR STEARNS HOME EQUITY TRUST By: Bear Stearns Mortgage Capital Corporation, as agent By:_______________________________ Name______________________________ Title_____________________________ EX-10.7 10 EXHIBIT 10.7 1 EXHIBIT 10.7 TAX INDEMNIFICATION AGREEMENT This Tax Indemnification Agreement (this "Agreement") is made this ___ day of ____________, 1998, by and among Rock Financial Corporation, a Michigan corporation ("Rock"), and each of Daniel Gilbert, Gary Gilbert and Lindsay Gross (collectively, the "Shareholders"). R E C I T A L S A. Rock made an election to be treated as an S corporation within the meaning of Section 1361 of the Internal Revenue Code of 1986, as amended (the "Code"), and corresponding provisions of state income tax law, for the period commencing March 1, 1992, to the date of termination of such election upon Rock's issuance of stock to the public pursuant to an initial public offering ("IPO") of such stock (the "S Period"). B. Rock will be a C corporation within the meaning of Section 1361 of the Code and corresponding provisions of state income tax law from and after the date of termination of Rock's S election. C. Pursuant to Section 1362(e)(2) of the Code, Rock's income or loss for all of 1998 will be pro rated among the days in 1998 for purposes of allocating Rock's income for 1998 between (i) the period commencing on January 1, 1998, and ending on the last day of the S Period and (ii) the balance of the year, provided that such allocation is not required under Section 1362(e)(6)(D) of the Code to be based on a closing of the books. D. The Board of Directors of Rock is expected to declare a dividend, payable to shareholders of record on the date preceding the day that Rock's S election is revoked, in the amount determined by Rock to be Rock's "accumulated adjustments account" within the meaning of Section 1368(e) of the Code, which accumulated adjustments account includes (is increased by) the amount of Rock's taxable income allocable to the Shareholders during the S Period. NOW, THEREFORE, in consideration of the premises and of the mutual agreements contained herein, the parties hereto agree as follows: 1. Covenants of Rock. (a) Promptly following the issuance of stock to the public pursuant to the IPO, Rock shall distribute to the Shareholders cash in the amount of Rock's accumulated adjustments account as of the end of 1997, adjusted for Rock's estimate of income or loss for the period from January 1, 1998 through the last day of the S Period, taking into account Rock's projection of income or loss for all of 1998 and the allocation of such income or loss ratably over the days in 1998. 2 (b) Rock shall, as soon as practical following the end of 1998, determine (i) Rock's income or loss for 1998, (ii) the allocation of such income or loss as between (A) the period commencing on January 1, 1998 and ending on the last day of the S Period and (B) the balance of 1998, using the method prescribed by Section 1362(e) of the Code and (iii) the balance, if any, of Rock's accumulated adjustments account. (c) Promptly following the determination and allocation of Rock's income or loss for 1998 pursuant to (b) above, but in any event within the one year "post-termination transition period" as defined in Section 1377(b)(1) of the Code, Rock shall pay, to the Shareholders, the balance of Rock's accumulated adjustments account, if any, as determined pursuant to (b) above. 2. Representations, Warranties and Covenants of Shareholders. The Shareholders jointly and severally represent, warrant and covenant to Rock that: (a) The Shareholders have duly and timely filed, or will duly and timely file, their personal income tax returns for each period with or within which ends any taxable year of Rock included in the S period ("Shareholder Tax Returns"). (b) The Shareholders have duly included, or will duly include, in their Shareholder Tax Returns their respective shares of Rock's taxable income from all sources through and including the last business day of the S Period (the "S Corporation Taxable Income"). (c) There are no audits, inquiries, investigations or examinations relating to any of the Shareholder Tax Returns pending, and there are no claims which have been asserted relating to any of the Shareholder Tax Returns which, if determined adversely, would result in the assertion by the Internal Revenue Service, Michigan Department of Treasury or any other tax authority or agency of any income tax ("Tax") deficiency against Rock. (d) To the extent that the amount distributed to them pursuant to Section 1(a) above exceeds the amount of Rock's accumulated adjustments account as determined pursuant to Section 1(b) above (but without taking into account the distribution pursuant to Section 1(a) above), the Shareholders shall promptly remit the difference to Rock. 3. Indemnifications. Following the "post termination transition period" as defined in Section 1377(b)(1) of the Code: (a) The Shareholders, jointly and severally, shall be responsible for and shall indemnify and save and hold harmless Rock from and against all Tax, interest and penalties imposed on Rock resulting from a final determination of an adjustment to the 2 3 Shareholders' taxable income resulting in a decrease in the Shareholders' S Corporation Taxable Income and a corresponding increase in Rock's taxable income. (b) Rock shall indemnify and save and hold harmless each Shareholder from and against all Tax, interest and penalties imposed on such Shareholder resulting from a final determination of an adjustment to Rock's taxable income resulting in a decrease in Rock's taxable income and a corresponding increase in such Shareholder's S Corporation Taxable Income. Further, Rock shall indemnify and hold harmless each Shareholder from and against Tax incurred by such Shareholder resulting from the receipt of any indemnification payments made to such Shareholder pursuant hereto. (c) The Shareholders or Rock, as the case may be, shall make any payment required under this Section 3 within thirty (30) days after receipt of notice from the other party that a payment is due by such party to the appropriate taxing authority. (d) If a Tax audit is commenced with respect to the S Period or any Tax is claimed for which the Shareholders would be required to indemnify Rock, written notice thereof shall be given to the Shareholders as promptly as practicable; provided, however, that the failure to give timely notice shall not affect rights to indemnification hereunder except to the extent that the Shareholders demonstrate actual damage caused by such failure. After such notice, if the Shareholders shall acknowledge in writing to Rock that they are obligated under the terms of their indemnity hereunder in connection with such audit or claim, then the Shareholders shall be entitled, if they so elect, to take control of the defense and investigation of such audit or claim and to employ and engage attorneys of their own choice to handle and defend the same, at the Shareholders' cost, risk and expense provided that the Shareholders and their counsel shall proceed with diligence and in good faith with respect thereto. Rock shall cooperate in all reasonable respects with the Shareholders and such attorneys in the defense and investigation of such audit or claim and any appeal arising therefrom, and shall not enter into any agreement with any tax authority with respect to such audit or claim without the prior consent of the Shareholders; provided, however, that Rock may, subject to the Shareholders' control of the defense and investigation of such audit or claim, at its own cost, participate in the defense and investigation of such audit or claim and any appeal arising therefrom. 4. Notice. All notices and other communications made in connection with this Agreement shall be in writing and shall be deemed given when delivered personally or sent by facsimile transmission to the numbers indicated below (if physical confirmation of transmission is retained) or on the third succeeding business day after being mailed by registered or certified mail, deposited in the United States mail, postage prepaid, return receipt requested, to the appropriate party at its or his address below or at such other address for such party as shall be specified by written notice when in fact delivered pursuant hereto: If to Rock, at: 3 4 Dan Gilbert c/o Rock Financial Corporation 30600 Telegraph Road Fourth Floor Bingham Farms, Michigan 48025 Fax: (248) 540-9113 If to the Shareholders, at: Dan Gilbert c/o Rock Financial Corporation 30600 Telegraph Road Fourth Floor Bingham Farms, Michigan 48025 Fax: (248) 540-9113 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year first above written. ROCK FINANCIAL CORPORATION, a Michigan corporation By: ------------------------------ Its: --------------------------- --------------------------------- DAN GILBERT --------------------------------- GARY GILBERT --------------------------------- LINDSAY GROSS 4 EX-10.8 11 EXHIBIT 10.8 1 EXHIBIT 10.8 ROCK FINANCIAL CORPORATION SHAREHOLDERS AGREEMENT THIS ROCK FINANCIAL CORPORATION SHAREHOLDERS AGREEMENT (the "Agreement") is made as of April __, 1998, among Gary Gilbert, Lindsay Gross, Steven Stone, Ross Niskar and Adam Schoener (individually a "Shareholder", and collectively, the "Shareholders"), Daniel Gilbert and Rock Financial Corporation, a Michigan corporation (the "Company"). R E C I T A L S A. Daniel Gilbert, Gary Gilbert and Lindsay Gross are the beneficial owners and holders of record of an aggregate of 10,000,000 Common Shares, $0.01 par value per share, of the Company. The Company's Common Shares outstanding from time to time are referred to in this Agreement as the "Shares". B. Each of Daniel Gilbert's, Gary Gilbert's and Lindsay Gross's current individual ownership of Shares (after giving effect to the initial public offering of the Company's Common Shares (the "IPO")) is as follows:
Common Shares $0.01 Par Value Owned --------------------- Daniel B. Gilbert 7,057,101 Gary Gilbert 2,077,298 Lindsay Gross 865,601 ----------- 10,000,000 ===========
C. Steven Stone, Ross Niskar and Adam Schoener are the holders of options to purchase an aggregate of 1,660,684 Common Shares, $0.01 par value per share, of the Company. Each of Steven Stone's, Ross Niskar's and Adam Schoener's current individual ownership of options to purchase Common Shares (after giving effect to the initial public offering of the Company's Common Shares (the "IPO")) is as follows:
Options to Purchase Common Shares $0.01 Par Value Owned --------------------- Steven Stone 1,079,454 Ross Niskar 290,615 Adam Schoener 290,615 ----------- 1,660,684 ===========
2 D. The Shareholders, Daniel Gilbert and the Company desire to provide for continuity in, and harmonious management of, the affairs of the Company by providing certain restrictions on the voting rights of some of the Shareholders. THEREFORE, the Shareholders, Daniel Gilbert and the Company agree as follows: 1 Voting. From the date of this Agreement until the termination of this Agreement pursuant to Section 4, each Shareholder and "Transferee" (as defined below) shall vote all of his, her or its Shares and any other voting shares of the Company's stock owned by such Shareholder or Transferee, upon any matter submitted to the shareholders of the Company at any annual or special meeting of the shareholders of the Company, or by written consent, as directed by Daniel Gilbert. The voting rights set forth in this Section 1 shall be irrevocable until the termination of this Agreement pursuant to Section 4. For purposes of this Agreement, "Transferee" means any person or entity to whom or to which any Shares are transferred by any Shareholder, other than (i) in a public offering registered under the Securities Act of 1933, as amended (the "Act"), or (ii) in a transaction complying with Rule 144 under the Act. 2 All Shares Held or Acquired By a Shareholder Are Subject to Agreement. Any shares of the stock of the Company sold or transferred to, or otherwise acquired by, any of the Shareholders or any Transferee at any time shall be, become and remain subject to all the provisions of this Agreement in the same manner and to the same extent as though owned by such Shareholder at the date of the execution of this Agreement. 3 Endorsement on Stock Certificates. Each certificate representing Shares now or later held by the Shareholders and each certificate representing Shares now or later held by a Transferee during the term of this Agreement, except as otherwise provided in this Agreement, shall be endorsed with a legend in substantially the following form: "The securities represented by this certificate are subject to the terms of the Rock Financial Corporation Shareholders Agreement, dated as of April __, 1998, among Rock Financial Corporation, a Michigan corporation, Daniel Gilbert, Gary Gilbert, Lindsay Gross, Steven Stone, Ross Niskar and Adam Schoener (the "Agreement"). The Agreement imposes restrictions on the voting of the common shares represented by this certificate. Except as described in the Agreement, any person accepting an interest in these securities, by accepting such interest, will be deemed to agree to, and become bound by, all of the provisions of the Agreement. A copy of the Agreement is on file and is available for examination at the principal office of Rock Financial Corporation." 4 Termination. This Agreement shall terminate upon the occurrence of any of the following events: 4.1 Dissolution of the Company; or -2- 3 4.2 Final, and unappealed from, adjudication of bankruptcy of the Company; or 4.3 Joint written agreement of the Company, Daniel Gilbert and the Shareholders; or 4.4 Ten years after the date of this Agreement. Upon the termination of this Agreement, each Shareholder and each Transferee shall surrender to the Company the certificate or certificates for his Shares, and the Company or its transfer agent shall issue to him, her or it in lieu of such certificate or certificates a new certificate for an equal number of Shares without the endorsement set forth in Section 3. The indemnities and remedies contained in this Agreement shall survive and remain in full force and effect after the termination of this Agreement. 5 Injunctive Relief. The terms, covenants and obligations of this Agreement relate to special, unique and extraordinary matters, and a violation of any of the terms, covenants and obligations of this Agreement will cause the Company, Daniel Gilbert and the Shareholders irreparable injury in an amount which would be difficult, if not impossible, to estimate or determine and for which adequate compensation could not be fashioned. Therefore, the Company, Daniel Gilbert and the other Shareholders will be entitled, jointly and severally, to an injunction, restraining order or other equitable relief as a matter of course from any court of competent jurisdiction, restraining each Shareholder and any other person(s) the court may order from committing any violation or threatened violation of the terms, covenants or obligations in this Agreement. The Company's, Daniel Gilbert's and the Shareholders' rights and remedies under this Section 5 are cumulative and are in addition to any other rights and remedies that the Company, Daniel Gilbert or any Shareholder may have under this Agreement or any other agreement or at law or in equity. 6 Indemnification. Each Shareholder and his, her or its Transferees, personal representatives, guardians, conservators, heirs, devisees, successors and assigns (collectively, "Successors") indemnifies and holds harmless the Company and Daniel Gilbert, their successors and assigns, any of the Company's officers, agents, employees and directors and each of the other Shareholders (collectively, the Indemnified Parties"): 6.1 against any and all damages, liabilities, claims, losses, taxes and expenses (including reasonable attorneys' fees, court costs, interest and expenses) incurred by any Indemnified Party arising out of or relating to any breach by such Shareholder or by any of his Successors of any of the representations, warranties, covenants, terms or agreements in this Agreement or any document executed in connection with this Agreement; 6.2 against any and all damages, liabilities, claims, losses and expenses, including reasonable attorneys' fees and court costs) incurred by any Indemnified Party in connection with any action, suit or proceeding in which any Indemnified Party either enforces or defends the validity of this Agreement or any other document executed in connection with this Agreement against the Shareholder or any of his Successors. -3- 4 7 Employment. Nothing in this Agreement shall be construed to allow or guarantee any Shareholder any rights to employment with the Company. 8 Notices. Any and all notices, designations, consents, offers, acceptances or other communications provided for in this Agreement shall be given in writing and shall be delivered in person, sent by certified or registered mail, sent by facsimile or similar method of transmission or sent by overnight courier, addressed in the case of the Company to its principal office and in the case of a Shareholder or Daniel Gilbert to his address appearing on the stock records of the Company or such other address as may be designated by him. 9 Severability. It is the desire and intent of the parties to this Agreement that the terms, provisions, conditions, covenants, representations, warranties and remedies contained in this Agreement will be enforceable to the fullest extent permitted by law. If any term, provision, condition, covenant, representation, warranty or remedy of this Agreement or the application thereof to any person or circumstance will, to any extent, be construed to be illegal, invalid or unenforceable, in whole or part, then such term, provision, condition, covenant, representation, warranty or remedy will be construed in a manner so as to permit its enforceability under the applicable law to the fullest extent permitted by such law. In any case, the remaining terms, provisions, conditions, covenants, representations, warranties and remedies of this Agreement or the application thereof to any person or circumstance, except those which have been held illegal, invalid or unenforceable, will remain in full force and effect. 10 Amendment. No change or modification of this Agreement shall be valid unless it is in writing and signed by the Company, Daniel Gilbert and all of the Shareholders. As soon as practicable after this Agreement has been amended, copies of such amendment shall be furnished to Daniel Gilbert and each of the Shareholders then parties to this Agreement. 11 Governing Law and Forum. The laws of the State of Michigan shall govern this Agreement, its construction, and the determination of any rights, duties or remedies of the parties arising out of or relating to this Agreement. The parties acknowledge that the United States District Court for the Eastern District of Michigan or the Michigan Circuit Court of the County of Oakland shall have exclusive jurisdiction over any case or controversy arising out of or relating to this Agreement and that all litigation arising out of or relating to this Agreement shall be commenced in the United States District Court for the Eastern District of Michigan or in the Oakland County (Michigan) Circuit Court. Each Shareholder irrevocably consents to the jurisdiction of the United States District Court for the Eastern District of Michigan and the Oakland County (Michigan) Circuit Court in connection with all actions and proceedings arising out of, or in any way related to this Agreement. 12 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. -4- 5 13 Interpretation. The headings contained in this Agreement are solely for the purpose of reference, are not part of the agreement of the parties and shall not in any way affect the meaning or interpretation of this Agreement. Wherever in this Agreement, words, including pronouns, are used in the masculine, they shall be read and construed in the feminine or neuter whenever they would so apply, and wherever in this Agreement, words, including pronouns, are used in the singular or plural, they shall be read and construed in the plural or singular, respectively, wherever they would so apply. 14 Entire Agreement. This Agreement embodies the entire agreement and understanding of the parties to this Agreement with respect to the subject matter of this Agreement. There are no restrictions, promises, representations, warranties, covenants or undertakings, other than those expressly set forth in this Agreement. This Agreement supersedes all prior discussions, agreements, promises, representations, warranties, statements and understandings between the parties with respect to such subject matter, including, without limitation, the Rock Financial Corporation Shareholders Agreement, dated as of January 17, 1997, among Daniel Gilbert, Gary Gilbert, Lindsay Gross and the Company (which agreement shall no longer have any effect), and any such prior discussions, agreements, promises, representations, warranties, statements and understandings are merged into this Agreement. 15 No Waiver. No waiver of any Section or provision of this Agreement will be valid unless in a writing signed by the party to be charged and only to the extent set forth in that writing. Unless such a writing expressly provides otherwise, no waiver of any breach of any agreement or provision contained in this Agreement shall be deemed a waiver of any preceding or succeeding breach of this Agreement or of any other agreement or provision contained in this Agreement, and no such waiver shall constitute a course of conduct which may be relied upon to justify any subsequent breach of this Agreement. No extension of time for the performance of any obligations or acts shall be deemed an extension of time for the performance of any other obligations or acts. 16 Binding Effect; Assignment. This Agreement, and the rights and duties under it, shall be binding upon and inure to the benefit of the parties to this Agreement and (i) the Company's successors and assigns, (ii) the beneficiaries, personal representatives, guardians, conservators, heirs, and devisees of Daniel Gilbert or any Shareholder, and (iii) any Transferee. This Agreement may not be assigned by any party (other than Daniel Gilbert) without the prior written consent of the other parties. 17 Subsequent Documents. The parties agree that they will, at any time, duly execute and deliver to any party any additional documents and instruments that such party may reasonably determine to be necessary in connection with the transactions contemplated in this Agreement, and the failure of a party to demand such documents or instruments on or before the date of this Agreement shall not alleviate the obligation of any party to execute and deliver such documents or instruments at any time, upon the written demand of a party. -5- 6 18 Counsel. All parties acknowledge that they have had an opportunity to obtain separate counsel before execution of this Agreement. This Agreement is made voluntarily and without duress of any kind. IN WITNESS WHEREOF, the Company, Daniel Gilbert and the Shareholders have signed this Agreement as of the day and year set forth in the introductory paragraph of this Agreement. In the Presence of: ROCK FINANCIAL CORPORATION By: - ----------------------------- ------------------------------ Daniel B. Gilbert Its: President ------------------------ - ----------------------------- ------------------------------ Daniel Gilbert, Shareholder - ----------------------------- ------------------------------ Gary Gilbert, Shareholder - ----------------------------- ------------------------------ Lindsay Gross, Shareholder - ----------------------------- ------------------------------ Steven Stone, Shareholder - ----------------------------- ------------------------------ Ross Niskar, Shareholder - ----------------------------- ------------------------------ Adam Schoener, Shareholder -6- EX-16.1 12 EXHIBIT 16.1 1 EXHIBIT 16.1 [COOPERS & LYBRAND L.L.P. LETTERHEAD] February 24, 1998 Securities and Exchange Commission 450 Fifth Street N.W. Washington, D.C. 20549 Gentlemen: We have read the statements made by Rock Financial Corporation (copy attached), which we understand will be filed with the Commission, pursuant to Item 11 of Form S-1, as part of the corporation's registration statement on Form S-1. We agree with the statements concerning our firm in such Form S-1. Very truly yours, /s/ Coopers & Lybrand L.L.P. Coopers & Lybrand L.L.P. 2 of a penalty bid may also affect the price of the Common Shares to the extent that it discourages resales thereof. No representation is made as to the magnitude or effect of any such stabilization or other transactions. Such transactions may be effected on The Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. LEGAL MATTERS The validity of the Common Shares to be offered by this Prospectus will be passed upon for Rock and the Selling Shareholders by Honigman Miller Schwartz and Cohn, Detroit, Michigan. Certain legal matters in connection with the Offering will be passed upon for the Underwriters by Berick, Pearlman & Mills Co., L.P.A., Cleveland, Ohio. EXPERTS The financial statements of Rock Financial Corporation as of December 31, 1996 and 1997, and for each of the years in the three-year period ended December 31, 1997, included in this Prospectus and elsewhere in the Registration Statement have been included in this Prospectus and in the Registration Statement in reliance upon the report of KPMG Peat Marwick LLP, independent auditors, appearing elsewhere in this Prospectus, and upon the authority of such firm as experts in accounting and auditing. CHANGE IN ACCOUNTANTS Rock engaged KPMG Peat Marwick LLP as its independent accountants after it terminated its relationship with Coopers & Lybrand LLP in August 1997. In connection with its audits for 1996 and 1995 and during the interim period preceding such termination, there were no disagreements between Rock and Coopers & Lybrand LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Coopers & Lybrand, would have caused them to make reference thereto in their report on the financial statements. No report issued by Coopers & Lybrand LLP with respect to Rock's financial statements contained any adverse opinion or disclaimer of opinion, or was qualified or modified as to uncertainty, audit scope or accounting principles. The decision to change accountants was made by management of Rock. ADDITIONAL INFORMATION Rock has filed with the Securities and Exchange Commission a Registration Statement on Form S-1 under the Securities Act, of which this Prospectus forms a part, with respect to the Common Shares offered by this Prospectus. This Prospectus omits certain information contained in the Registration Statement, and reference is made to the Registration Statement for further information with respect to Rock and the Common Shares offered by this Prospectus. Statements contained in this Prospectus concerning the provisions of documents are necessarily summaries of such documents and when any such document is an exhibit to the Registration Statement, each such statement is qualified in its entirety by reference to the copy of such document filed with the Commission. Copies of the Registration Statement may be acquired upon payment of the prescribed fees or examined without charge at the public reference facilities of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference rooms. In addition, the Registration Statement may be accessed electronically at the Commission's site on the World Wide Web at http://www.sec.gov. Upon completion of the Offering, Rock will be subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and, in accordance therewith, will file reports, proxy and information statements with the Commission. Such reports, proxy and information statements and other information can be inspected and copied at the address and web site set forth above. 83 EX-23.1 13 EXHIBIT 23.1 1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT The Board of Directors Rock Financial Corporation: We consent to the use of our report included herein and to the reference to our firm under the headings "Selected Financial Data" and "Experts" in the prospectus. /s/ KPMG Peat Marwick LLP Detroit, Michigan February 25, 1998 EX-27 14 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF ROCK FINANCIAL CORPORATION AS OF, AND FOR THE YEAR ENDED, DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 11,946,992 0 1,626,519 0 121,343,814 0 10,440,399 3,429,862 144,428,897 0 0 0 0 100,000 15,008,136 144,428,897 0 52,109,866 0 0 0 300,000 5,149,881 11,415,356 0 11,415,356 0 0 0 11,415,356 0 0
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