<PAGE> 1
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
LITCHFIELD FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
MASSACHUSETTS 04-3023928
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
</TABLE>
789 MAIN ROAD, STAMFORD, VERMONT 05352, (802) 694-1200
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
RICHARD A. STRATTON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
LITCHFIELD FINANCIAL CORPORATION
P.O. BOX 488, WILLIAMSTOWN, MASSACHUSETTS 01267
(802) 694-1200
COPIES TO:
<TABLE>
<S> <C>
JAMES WESTRA, ESQ. BOB F. THOMPSON, ESQ.
HUTCHINS, WHEELER & DITTMAR BASS, BERRY & SIMS
A PROFESSIONAL CORPORATION 2700 FIRST AMERICAN CENTER
101 FEDERAL STREET NASHVILLE, TENNESSEE 37238
BOSTON, MASSACHUSETTS 02110 (615) 742-6200
(617) 951-6600
</TABLE>
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
------------------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
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 of
1933, other than securities offered only in connection with dividend or interest
investment plans, 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, please 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 delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=============================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER NOTE PRICE(2) REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
% Notes due.................... $51,750,000 $1,000.00 $51,750,000 $15,682
=============================================================================================================
</TABLE>
(1) Includes $6,750,000 in aggregate principal amount of % Notes which the
Underwriters have the option to purchase to cover over-allotments, if any.
(2) Estimated solely for the purposes of calculating the registration fee
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, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
================================================================================
<PAGE> 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, DATED OCTOBER , 1997
- --------------------------------------------------------------------------------
PROSPECTUS
$45,000,000
LITCHFIELD FINANCIAL CORPORATION LOGO
% NOTES DUE
------------------------
The % Notes due November 1, (the "Notes") offered hereby are unsecured
general obligations of Litchfield Financial Corporation ("Litchfield" or the
"Company"). Interest on the Notes is payable monthly in arrears commencing
December 1, 1997.
The Company will redeem, at any time, at par plus accrued interest, Notes
tendered by the personal representative or surviving joint tenant, tenant in
common or tenant by the entirety of a deceased holder within 60 days of
presentation of the necessary documents, up to an annual maximum of $25,000 per
holder and up to an annual aggregate maximum of 5% of the original aggregate
principal amount of the Notes. The Company will redeem Notes tendered by other
beneficial holders commencing December 1, 1998 and on each anniversary thereof
subject to the per holder and aggregate limitations. The Notes are redeemable at
the option of the Company, in whole or in part, at any time on or after November
1, , at the redemption prices set forth herein, plus accrued interest.
The Notes will be issued in integral multiples of $1,000 and will be in
fully registered form. No sinking fund will be established for the Notes. See
"Description of the Notes." The minimum principal amount of Notes which may be
purchased is $2,000. The Company has been advised by the Underwriters that each
Underwriter intends to make a market in the Notes; however, the Notes will not
be listed for trading on the NASDAQ stock market or any exchange, and no
assurance can be given that an active trading market for the Notes will develop.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR MATTERS WHICH SHOULD BE CAREFULLY
CONSIDERED BY INVESTORS.
------------------------
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.
<TABLE>
<CAPTION>
======================================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)(3)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Note............................. 100% % %
- ----------------------------------------------------------------------------------------------------------------------
Total................................ $45,000,000 $ $
======================================================================================================================
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated to be $ .
(3) The Company has granted the Underwriters an option exercisable within 30
days from the date of this Prospectus to purchase up to $6,750,000 aggregate
principal amount of additional Notes on the same terms and conditions set
forth above to cover over-allotments, if any. If all such Notes are
purchased, the total Price to Public, Underwriting Discount and Proceeds to
the Company will be $51,750,000, $[ ] and $[ ],
respectively. See "Underwriting."
------------------------
The Notes are offered by the Underwriters, subject to receipt and acceptance
of such Notes by the Underwriters and subject to their rights to reject any
order in whole or in part and to withdraw, cancel or modify the offer without
notice. The Notes will bear interest from the date of delivery to the
Underwriters. It is expected that the Notes will be ready for delivery on or
about November , 1997.
MCDONALD & COMPANY
SECURITIES, INC.
J.C. BRADFORD & CO.
TUCKER ANTHONY
INCORPORATED
, 1997
- --------------------------------------------------------------------------------
<PAGE> 3
[Graphic to Come]
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements, including the notes thereto,
appearing elsewhere in this Prospectus or incorporated herein by reference.
THE COMPANY
Litchfield Financial Corporation is a specialty finance company which
provides financing to creditworthy borrowers for assets not typically financed
by banks. The Company provides such financing by purchasing consumer loans, by
making loans to businesses secured by consumer receivables and by making other
secured loans to businesses.
Currently, the Company provides financing for the purchase of rural and
vacation properties and vacation ownership interests, popularly known as
timeshare interests ("Purchased Loans"). The Company also provides financing to
rural land dealers, timeshare resort developers and others secured by consumer
receivables ("Hypothecation Loans"), to dealers and developers for the
acquisition and development of rural land and timeshare resorts ("A&D Loans")
and for other secured loans ("Other Loans").
Purchased Loans consist of "Land Loans" and "VOI Loans." Land Loans are
typically secured by three to twenty acre rural parcels. Land Loans are secured
by property located in 34 states, predominantly in the southern United States.
VOI Loans finance the purchase of ownership interests in fully furnished
vacation properties. VOI Loans are secured by property located in 17 states,
predominantly in California, Florida and Pennsylvania. The Company requires most
dealers or developers from whom it buys loans to guarantee repayment or
replacement of any loan in default. Ordinarily, the Company retains a percentage
of the purchase price as a reserve until the loan is repaid.
The Company makes Hypothecation Loans to rural land dealers, resort
developers and others secured by consumer receivables consisting primarily of
Land Loans and VOI Loans. Hypothecation Loans typically have advance rates of
75% to 85% of the current balance of the pledged consumer receivables and
variable interest rates based on the prime rate plus 2% to 4%. Hypothecation
Loans are secured by receivables from timeshare resorts and rural land in 25
states.
The Company also makes A&D Loans to rural land dealers with whom it has
ongoing relationships for the acquisition and subdivision of rural land and to
resort developers for the acquisition and development of timeshare resorts. At
the time the Company makes A&D Loans, it receives a right of first refusal to
purchase or finance the related consumer receivables generated by the sale of
the subdivided land or timeshare interests. A&D Loans typically have loan to
value ratios of 60% to 80% and variable interest rates based on the prime rate
plus 2% to 4%. A&D Loans are secured by timeshare resort developments and rural
land subdivisions in 19 states.
The principal sources of the Company's revenues are (i) interest and fees
on loans, (ii) gain from the sale of loans and (iii) servicing and other fee
income. Gains on sales of loans are based on the difference between the
allocated cost basis of the assets sold and the proceeds, which includes the
fair value of any assets or liabilities that are newly created as a result of
the transaction. Because a significant portion of the Company's revenue is
comprised of gains realized upon sales of loans, the timing of such sales has a
significant effect on the Company's results of operations. As of June 30, 1997,
the Company had sold $222.0 million, $52.0 million and $15.3 million of Land
Loans, VOI Loans and Hypothecation Loans, respectively, since its inception.
As of June 30, 1997, the Company serviced loans with a principal balance of
$282.0 million (the "Serviced Portfolio"), of which the Company owned $143.2
million. As of June 30, 1997 the Serviced Portfolio was comprised of 60.8%
Purchased Loans, 24.2% Hypothecation Loans, 11.8% A&D Loans and 3.2% Other
Loans. The average principal balance of the Land Loans in the Serviced Portfolio
was $12,600 with a weighted average remaining maturity of 12.0 years and a
weighted average interest rate of 12.2%. Approximately 79.7% of such loans had
fixed rates of interest. The average principal balance of the VOI Loans in the
3
<PAGE> 5
Serviced Portfolio was $3,800 with a weighted average remaining maturity of 3.9
years and a weighted average interest rate of 14.6%. Approximately 96.9% of such
loans had fixed rates of interest. The average principal balance of the
Hypothecation Loans in the Serviced Portfolio was $1,004,000 with a weighted
average interest rate of 12.1% and an average advance rate of 74.0%.
Approximately 6.5% of such loans had a fixed rate of interest. The average
principal balance of the A&D Loans in the Serviced Portfolio was $742,000 with a
weighted average interest rate of 11.9% and an average loan to value ratio of
64%. Approximately 19.1% of such loans had fixed rates of interest. As of June
30, 1997, loans 30 days or more past due were .99% of the Serviced Portfolio.
For the six months ended June 30, 1997, annualized net charge-offs were .69% of
the average Serviced Portfolio.
4
<PAGE> 6
THE OFFERING
Securities Offered......... $45,000,000 principal amount of % Notes due
assuming no exercise of the Underwriters'
over-allotment option to purchase up to an
additional $6,750,000 principal amount of Notes.
The Notes are unsecured, general obligations of the
Company. See "Description of the Notes" for a more
detailed description of the Notes offered hereby.
Maturity................... November 1,
Interest Payment Dates..... Interest is payable monthly in arrears commencing
December 1, 1997.
Redemption at Noteholder's
Options.................. UPON THE DEATH OF A NOTEHOLDER: Notes tendered by
the personal representative or surviving joint
tenant or tenant in common of a deceased beneficial
owner shall be redeemed within 60 days of tender,
at par plus accrued interest, subject to the amount
limitations set forth below.
BY OTHER NOTEHOLDERS: Notes tendered by the last
day of September each year shall be redeemed at par
plus accrued interest, subject to the amount
limitations set forth below, on December 1 each
year, commencing in 1998.
AMOUNT LIMITATIONS: Of the Notes tendered, the
Company is only required to redeem, for the period
from date of issue until December 1, 1998 and for
each twelve month period ending December 1
thereafter, an aggregate maximum of 5% of the
original aggregate principal amount of the Notes
issued under the Indenture, subject to a maximum of
$25,000 per beneficial owner, per period. Notes
tendered by representatives of deceased beneficial
owners will be redeemed prior to Notes tendered by
other Noteholders.
Redemption Upon Occurrence
of Certain Events.......... In the event of a Fundamental Structural Change or
a Significant Subsidiary Disposition (as those
terms are defined herein), each holder of Notes
will have the right to require the Company to
purchase the holder's Notes at a price equal to the
principal amount thereof plus accrued interest;
provided that such right shall not be exercisable
if within 40 days after the occurrence of such
event the Notes have received a specified rating
from a nationally recognized statistical rating
organization. See "Description of the
Notes -- Noteholders' Right to Prepayment After
Fundamental Structural Change or Significant
Subsidiary Disposition."
Redemption at Company's
Option................... The Notes may be redeemed at the Company's option
on or after November 1, , at the redemption
prices set forth herein.
Sinking Fund............... None.
Certain Covenants of the
Company.................. In the Indenture, the Company agrees to certain
limitations on dividends and additional
indebtedness, to maintain certain levels of cash or
marketable investment securities, and, unless
certain conditions are met, to redeem Notes
tendered by Noteholders in the event of certain
transactions relating to the Company.
5
<PAGE> 7
Use of Proceeds............ The net proceeds from the sale of the Notes will be
used to redeem the Company's outstanding 10% Notes
due 2002 (the "1992 Notes"), repay other
indebtedness of the Company and for general
corporate purposes.
Investment
Considerations............. Certain factors should be considered in connection
with the purchase of the Notes. See "Risk Factors."
Trustee.................... The Bank of New York, New York, New York.
6
<PAGE> 8
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------------- ---------------------
STATEMENT OF INCOME DATA:(1) 1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Interest and fees on loans... $ 2,305 $ 4,330 $ 5,669 $ 11,392 $ 15,396 $ 6,640 $ 9,329
Gain on sale of loans........ 2,501 4,550 4,847 5,161 7,331 3,354 4,067
Servicing and other fee
income.................... 368 501 459 908 1,456 757 702
--------- --------- --------- --------- --------- --------- ---------
Total revenues............ 5,174 9,381 10,975 17,461 24,183 10,751 14,098
--------- --------- --------- --------- --------- --------- ---------
Expenses:
Interest expense............. 629 2,717 3,158 6,138 7,197 3,297 5,042
Salaries and employee
benefits.................. 1,017 1,350 1,776 2,798 3,233 1,382 1,646
Other operating expenses..... 810 1,017 1,164 2,120 3,225 1,282 1,756
Provision for loan losses.... 270 620 559 890 1,954 954 735
--------- --------- --------- --------- --------- --------- ---------
Total expenses............ 2,726 5,704 6,657 11,946 15,609 6,915 9,179
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes and
extraordinary item........... 2,448 3,677 4,318 5,515 8,574 3,836 4,919
Provision for income taxes..... 942 1,426 1,619 2,066 3,301 1,474 1,894
--------- --------- --------- --------- --------- --------- ---------
Income before extraordinary
item......................... 1,506 2,251 2,699 3,449 5,273 2,362 3,025
Extraordinary item(2).......... -- -- (126) -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net income................ $ 1,506 $ 2,251 $ 2,573 $ 3,449 $ 5,273 $ 2,362 $ 3,025
======== ======== ======== ======== ======== ======== ========
Primary per common share
amounts:
Income before extraordinary
item...................... $ .42 $ .53 $ .63 $ .76 $ .93 $ .41 $ .52
Extraordinary item........... -- -- (.03) -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net income per share...... $ .42 $ .53 $ .60 $ .76 $ .93 $ .41 $ .52
======== ======== ======== ======== ======== ======== ========
Primary weighted average number
of shares outstanding........ 3,572,289 4,224,402 4,280,006 4,522,983 5,674,264 5,672,999 5,840,526
Fully-diluted per common share
amounts:
Income before extraordinary
item...................... $ .42 $ .53 $ .63 $ .76 $ .92 $ .41 $ .52
Extraordinary item........... -- -- (.03) -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net income per share...... $ .42 $ .53 $ .60 $ .76 $ .92 $ .41 $ .52
======== ======== ======== ======== ======== ======== ========
Fully-diluted weighted average
number of shares
outstanding.................. 3,589,264 4,246,945 4,280,006 4,543,009 5,736,467 5,698,866 5,861,180
Cash dividends declared per
common share................. $ -- $ .02 $ .03 $ .04 $ .05 $ -- $ --
OTHER STATEMENT OF INCOME DATA:
Net income as a percentage of
revenues..................... 29.1% 24.0% 23.4% 19.8% 21.8% 22.0% 21.5%
Ratio of earnings to fixed
charges(3)................... 4.89 2.35 2.37 1.90 2.19 2.16 1.98
Return on average assets(4).... 6.2% 5.0% 4.3% 3.7% 4.0% 4.0% 3.7%
Return on average equity(4).... 20.3% 17.0% 16.4% 16.6% 13.3% 12.2% 13.4%
</TABLE>
- ---------------
(1) Certain amounts in the 1992 through 1996 financial information have been
restated to conform to the 1997 presentation.
(2) Reflects loss on early extinguishment of a portion of the 1992 Notes net of
applicable tax benefit of $76,000.
(3) For purposes of calculating the ratio of earnings to fixed charges,
earnings consist of income before income taxes and extraordinary item and
fixed charges. Fixed charges consist of interest charges and the
amortization of debt expense.
(4) The return on average assets and average equity for the six month periods
are calculated on an annualized basis.
7
<PAGE> 9
SUMMARY CONSOLIDATED FINANCIAL INFORMATION - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------ JUNE 30,
BALANCE SHEET DATA(5): 1992 1993 1994 1995 1996 1997
------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Total assets............................. $33,980 $54,444 $ 63,487 $112,459 $152,689 $175,310
Loans held for sale(6)................... 5,086 5,931 11,094 14,380 12,260 20,475
Other loans(6)........................... 3,501 10,306 15,790 33,613 79,996 91,750
Retained interests in loan sales(6)...... 9,652 11,764 11,996 22,594 28,912 27,759
Secured debt............................. -- -- 5,823 9,836 43,727 40,683
Unsecured debt........................... 16,210 32,302 29,896 47,401 46,995 66,382
Stockholders' equity..................... 11,813 14,722 16,610 37,396 42,448 47,603
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------- JUNE 30,
OTHER FINANCIAL DATA: 1992 1993 1994 1995 1996 1997
-------- -------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Loans purchased and originated(7)........ $ 32,214 $ 42,410 $ 59,798 $ 121,046 $ 133,750 $ 83,311
Loans sold(7)............................ 24,632 28,099 40,116 65,115 54,936 39,501
Serviced Portfolio(8).................... 58,968 84,360 105,013 176,650 242,445 281,965
Loans serviced for others................ 43,623 59,720 72,731 111,117 129,619 138,771
Dealer/developer reserves................ 3,512 4,926 6,575 9,644 10,628 10,626
Allowance for loan losses(9)............. 498 1,064 1,264 3,715 4,528 5,541
Allowance ratio(10)...................... .84% 1.26% 1.20% 2.10% 1.87% 1.97%
Net charge-off ratio(7)(11).............. .37% .69% .38% .67% .94% .69%
Non-performing asset ratio(12)........... 1.09% 1.48% 1.02% 1.35% 1.57% 1.47%
</TABLE>
- ---------------
(5) In 1997 the Company adopted Statement of Financial Accounting Standards No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." Consequently, certain amounts included in
the 1992 through 1996 financial statements have been reclassified to
conform with the 1997 presentation: "Subordinated pass through certificates
held to maturity," "Excess servicing asset" and "Allowance for loans sold"
have been reclassified as "Retained interests in loan sales." In addition,
"Loans held for investment" have been reclassified as "Other loans."
(6) Amount indicated is net of allowance for losses and recourse obligation on
retained interests in loan sales.
(7) During the relevant period.
(8) The Serviced Portfolio consists of the principal amount of loans serviced
by or on behalf of the Company.
(9) The allowance for loan losses includes allowance for losses under the
recourse provisions of loans sold. See Note 4 to financial statements.
(10) The allowance ratio is the allowances for loan losses divided by the amount
of the Serviced Portfolio.
(11) The net charge-off ratio is determined by dividing the amount of net
charge-offs for the period by the average Serviced Portfolio for the
period. The June 30, 1997 amount is calculated on an annualized basis.
(12) The non-performing asset ratio is determined by dividing the sum of the
amount of those loans which are 90 days or more past due and other real
estate owned by the amount of the Serviced Portfolio.
8
<PAGE> 10
THE COMPANY
Litchfield Financial Corporation is a specialty finance company which
provides financing to creditworthy borrowers for assets not typically financed
by banks. The Company provides such financing by purchasing consumer loans, by
making loans to businesses secured by consumer receivables and by making other
secured loans to businesses.
Currently, the Company provides financing for the purchase of rural and
vacation properties and vacation ownership interests, popularly known as
timeshare interests ("Purchased Loans"). The Company also provides financing to
rural land dealers, timeshare resort developers and others secured by consumer
receivables ("Hypothecation Loans"), to dealers and developers for the
acquisition and development of rural land and timeshare resorts ("A&D Loans")
and for other secured loans ("Other Loans".)
Purchased Loans consist of "Land Loans" and "VOI Loans." Land Loans are
typically secured by three to twenty acre rural parcels. Land Loans are secured
by property located in 34 states, predominantly in the southern United States.
VOI Loans finance the purchase of ownership interests in fully furnished
vacation properties. VOI Loans are secured by property located in 17 states,
predominantly in California, Florida and Pennsylvania. The Company requires most
dealers or developers from whom it buys loans to guarantee repayment or
replacement of any loan in default. Ordinarily, the Company retains a percentage
of the purchase price as a reserve until the loan is repaid.
The Company makes Hypothecation Loans to rural land dealers, resort
developers and others secured by consumer receivables consisting primarily of
Land Loans and VOI Loans. Hypothecation Loans typically have advance rates of
75% to 85% of the current balance of the pledged consumer receivables and
variable interest rates based on the prime rate plus 2% to 4%. Hypothecation
Loans are secured by receivables from timeshare resorts and rural land in 25
states.
The Company also makes A&D Loans to rural land dealers with whom it has
ongoing relationships for the acquisition and subdivision of rural land and to
resort developers for the acquisition and development of timeshare resorts. At
the time the Company makes A&D Loans, it receives a right of first refusal to
purchase or finance the related consumer receivables generated by the sale of
the subdivided land or timeshare interests. A&D Loans typically have loan to
value ratios of 60% to 80% and variable interest rates based on the prime rate
plus 2% to 4%. A&D Loans are secured by timeshare resort developments and rural
land subdivisions in 19 states.
The principal sources of the Company's revenues are (i) interest and fees
on loans, (ii) gain from the sale of loans and (iii) servicing and other fee
income. Gains on sales of loans are based on the difference between the
allocated cost basis of the assets sold and the proceeds, which includes the
fair value of any assets or liabilities that are newly created as a result of
the transaction. Because a significant portion of the Company's revenue is
comprised of gains realized upon sales of loans, the timing of such sales has a
significant effect on the Company's results of operations. As of June 30, 1997,
the Company had sold $222.0 million, $52.0 million and $15.3 million of Land
Loans, VOI Loans and Hypothecation Loans, respectively, since its inception.
As of June 30, 1997, the Company serviced loans with a principal balance of
$282.0 million (the "Serviced Portfolio"), of which the Company owned $143.2
million. As of June 30, 1997, the Serviced Portfolio was comprised of 60.8%
Purchased Loans, 24.2% Hypothecation Loans, 11.2% A&D Loans and 3.2% Other
Loans. The average principal balance of the Land Loans in the Serviced Portfolio
was $12,600 with a weighted average remaining maturity of 12.0 years and a
weighted average interest rate of 12.2%. Approximately 79.7% of such loans had
fixed rates of interest. The average principal balance of the VOI Loans in the
Serviced Portfolio was $3,800 with a weighted average remaining maturity of 3.9
years and a weighted average interest rate of 14.6%. Approximately 96.9% of such
loans had fixed rates of interest. The average principal balance of the
Hypothecation Loans in the Serviced Portfolio was $1,004,000 with a weighted
average interest rate of 12.1% and an average advance rate of 74.0%.
Approximately 6.5% of such loans had a fixed rate of interest. The average
principal balance of the A&D Loans in the Serviced Portfolio was $742,000 with a
weighted average interest rate of 11.9% and an average loan to value ratio of
64%. Approximately 19.1% of
9
<PAGE> 11
such loans had fixed rates of interest. As of June 30, 1997, loans 30 days or
more past due were .99% of the Serviced Portfolio. For the six months ended June
30, 1997, annualized net charge-offs were .69% of the average Serviced
Portfolio.
The Company was founded in November 1988. The Company's strategy has been
to build its Serviced Portfolio by acquiring loan portfolios from rural land
dealers, resort developers and financial institutions, and by providing loans to
such dealers, developers and other businesses secured by consumer receivables.
The Company also provides financing to such dealers and developers for the
acquisition and development of rural land and timeshare resorts in order to
finance additional receivables generated by these A&D loans. As part of its
business and financing strategy, the Company seeks niche markets where its
underwriting expertise and ability to provide value-added services enable it to
distinguish itself from its competitors and earn an attractive rate of return on
its invested capital. Initially, the Company pursued this strategy by financing
consumer Land Loans through a land dealer network and portfolio acquisitions.
Subsequently, the Company extended its strategy to financing consumer VOI Loans
and providing Hypothecation Loans to land dealers and resort developers. In
1995, the Company significantly expanded its financing of VOIs when it acquired
approximately $41.5 million of VOI related loans and assets as part of its
purchase of the Government Employees Financial Corporation ("GEFCO") portfolio.
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the Notes
offered hereby:
General Business Risks. The Company's business is subject to various
business risks. The level of the Company's revenues is dependent upon demand for
the type of loans purchased, sold and serviced by the Company from both
potential borrowers and investors. Future declines in real estate values,
changes in prevailing interest rates and changes in the availability of
attractive returns on alternative investments each could make loans of the type
originated and purchased by the Company less attractive to borrowers and
investors.
Funding and Liquidity. The Company has a constant need for working capital
to fund its lending, purchasing and securitization activities and, as a result,
generally has experienced negative cash flows from operations. Historically, the
Company has funded any negative cash flows from operations by borrowing under
secured lines of credit and issuing long-term debt and equity securities. The
Company's lines of credit are renewable on one to three year bases. The Company
had secured lines of credit totaling $106.0 million with five financial
institutions as of June 30, 1997. To date, the Company has issued $71.0 million
of long-term debt and has publicly issued $25.6 million of equity securities.
The Company also has a $100.0 million revolving line of credit and sale
facility as part of an asset backed commercial paper facility with a
multi-seller commercial paper conduit. The facility expires in June 1998. As of
June 30, 1997, the outstanding balance of the sold or pledged loans securing
this facility was $83.4 million. The Company has an additional revolving line of
credit and sale facility of $25.0 million with another multi-seller commercial
paper conduit. The facility expires in March 2000. As of June 30, 1997, the
outstanding aggregate balance of the sold or pledged loans under the facility
was $13.8 million.
There can be no assurance that the Company will continue to be able to
obtain financing or raise capital on terms satisfactory to the Company. To the
extent the Company cannot raise additional funds, it could have a material
adverse impact on its operations and its ability to repay the Notes. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Impact of Economic Cycles. The business risks associated with the
Company's business become more acute in an economic slowdown. Such an
environment is generally characterized by decreased demand for rural and
vacation real estate and VOIs and declining real estate values in many areas of
the country. Delinquencies, foreclosures and loan losses generally increase
during economic slowdowns or recessions, and any such future slowdowns could
adversely affect future operations of the Company. See "Business -- Collections
and Delinquencies."
10
<PAGE> 12
Interest Rate Risk. The Company's interest and fees on loans, gain on sale
of loans and interest expense are affected by changes in interest rates. The
Company could be adversely affected by interest rate increases if its variable
rate liabilities exceed its variable rate assets or if the rates on its variable
rate liabilities increase sooner or to a greater extent than the rates on its
variable rate assets.
The Company seeks to mitigate a portion of its interest rate risk by
attempting to match fixed and variable rate assets and liabilities, instituting
interest rate floors and by entering into interest rate swaps on certain of its
variable rate assets, and purchasing interest rate caps on certain of its
variable rate liabilities.
There can be no assurance that the Company's attempts to mitigate its
interest rate risk will be effective.
Competition. The financing of VOIs is highly competitive and many of the
Company's competitors have greater financial resources. The Company's strategy
will be to service and finance VOIs primarily at small to medium size resorts.
The Company believes that financing of such VOIs is less competitive.
Nonetheless, there can be no assurance that the Company's strategy will be
successful. In addition, the Company may enter new lines of business that may be
highly competitive and may have competitors with greater financial resources
than the Company.
Credit Risks. The Company's loans are subject to delinquency and default
risk. General downturns in the economy and other factors beyond the Company's
control may have an adverse affect on the Company's delinquency and default
rates. The Company's A&D Loans and, to a lesser extent, its Hypothecation Loans
have a greater concentration of credit risk due to their larger size and, in the
case of A&D Loans their development and marketing risk.
The Company's VOI business is subject to certain risks associated with VOI
ownership. Although individual VOI owners are obligated to make payments under
their notes irrespective of any defect in, damage to, or change in conditions of
the vacation resort (such as erosion, construction of adjacent or nearby
properties, or environmental problems) or of any breach of contract by the
property owners association to provide certain services to the VOI borrowers
(including any such breach resulting from a destruction of the resort) or of any
other loss of benefits of ownership of their unit week(s) (including cessation
of the ability of the borrowers to exchange their time intervals in the resort
for time intervals in other unaffiliated resorts), any such material defect,
damage, change, breach of contract, or loss of benefits is likely to result in a
delay in payment or default by a substantial number of the borrowers whose VOIs
are affected. The costs of foreclosure and resale of unit weeks securing
defaulted loans are likely to be substantially higher than such costs for
traditional mortgage loans, and this may materially affect the amounts realized
by the Company on defaulted loans.
Estimates of Future Prepayment and Default Rates. A significant portion of
the Company's revenues historically has been comprised of gains on sales of
loans. The gains are recorded in the Company's revenues and on its balance sheet
(as retained interests on loan sales) at the time of sale, and the amount of
gains recorded is based in part on management's estimates of future prepayment
and default rates and other considerations in light of then-current conditions.
If actual prepayments with respect to loans occur more quickly than was
projected at the time such loans were sold, as can occur when interest rates
decline, interest would be less than expected and earnings would be charged in
the current period. If actual defaults with respect to loans sold are greater
than estimated, charge-offs would exceed previously estimated amounts and
earnings would be charged in the current period.
Expansion of Business. The Company has increased the number and average
principal amount of its Hypothecation and A&D Loans. A&D Loans are larger
commercial loans to land dealers and resort
developers and, consequently, have a greater concentration of credit risk than
the Company's Purchased Loans. A&D Loans for timeshare resorts are also subject
to greater risk because their repayment depends on the successful completion of
the development of the resort and the subsequent successful sale of a
substantial portion of the resort's timeshare interests. The Company may seek to
limit its exposure to any one developer by participating a portion of an A&D
Loan with another lender.
11
<PAGE> 13
The Company has historically made Hypothecation Loans to land dealers and
resort developers secured by Land Loans and VOI Loans, respectively.
Hypothecation Loans are commercial loans that have significantly larger balances
than the Company's Purchased Loans and, consequently, have a greater
concentration of credit risk which is only partially offset by the lesser
concentration of credit risk of the underlying collateral.
In addition, the Company has recently expanded its marketing of
Hypothecation Loans to include loans to other finance companies secured by other
types of collateral. These loans may be subject to additional risk because the
Company has relatively less experience with these other types of collateral than
with Land Loans or VOI Loans. In addition, these loans may be larger than the
Company's average Hypothecation Loans and may provide the Company with an option
to take an equity position in the borrower.
Fluctuations in Quarterly Results of Operations. Since gains on sales of
loans are a significant portion of the Company's revenues, the timing of loan
sales has a significant effect on the Company's quarterly results of operations,
and the results of one quarter are not necessarily indicative of results for the
next quarter. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Contingent Repurchase Obligations. In connection with certain of the
Company's whole loan sales to investors, the Company has committed to repurchase
such loans that become 90 days past due. These contingent obligations are
subject to various terms and conditions, including limitations on the amounts of
loans which must be repurchased. The Company has also guaranteed payment of
mortgage loans included in certain of its mortgage securitization programs. As
of June 30, 1997, Litchfield had outstanding contingent repurchase obligations
in the aggregate amount of approximately $8.9 million. In addition, when the
Company sells mortgage loans through mortgage securitization programs, the
Company commits to replace any loans that do not conform to certain
representations and warranties included in the operative loan sale documents.
Third Party Servicer. The Company uses a third party servicer to service
its loans. The third party servicer's systems and controls support the
servicing, collecting and monitoring of the Serviced Portfolio as well as
certain accounting and management functions of the Company. There can be no
assurance that the third party servicer will continue to provide these services
in the future or that its systems and controls will continue to be adequate to
support the Company's growth. A failure of the third party servicer's automated
systems or its controls over data integrity or accuracy could have a material
adverse affect on the Company's operations and financial condition.
Regulation. The operations of the Company are subject to extensive
regulation by federal, state and local government authorities and are subject to
various laws and judicial and administrative decisions imposing various
requirements and restrictions, including among other things, regulating credit
granting activities establishing maximum interest rates and finance charges,
requiring disclosures to customers, governing secured transactions and setting
collection, repossession and claims handling procedures and other trade
practices. In addition, certain states have enacted legislation which restricts
the subdivision of rural land and numerous states have enacted regulations in
connection with VOIs. Although the Company believes that it is in compliance in
all material respects with applicable federal, state and local laws, rules and
regulations, there can be no assurance that more restrictive laws, rules and
regulations or interpretations thereof will not be adopted in the future which
could make compliance much more difficult or expensive, restrict the Company's
ability to originate or sell loans, further limit or restrict the amount of
interest and other charges earned under loans originated or purchased by the
Company, or otherwise adversely affect the business or prospects of the Company.
See "Business -- Regulation."
Environmental Liabilities. In the course of its business, the Company has
acquired, and may in the future acquire, properties securing defaulted loans.
Although substantially all of the Company's Land Loans are secured by mortgages
on rural land, there is a risk that hazardous substances or waste could be
discovered on such properties after foreclosure by the Company. In such event,
the Company might be required to remove such substances from the affected
properties at its sole cost and expense. There can be no assurances that the
cost of such removal would not substantially exceed the value of the affected
properties or the loans secured by the properties or that the Company would have
adequate remedies against the prior owner or other
12
<PAGE> 14
responsible parties, or that the Company would not find it difficult or
impossible to sell the affected properties either prior to or following any such
removal.
Dependence on Senior Management. The Company's success depends upon the
continued contributions of its senior management. The loss of services of
certain of the Company's executive officers could have an adverse effect upon
the Company's business. The Company maintains key man insurance on the life of
one member of its senior management, Chief Executive Officer and President,
Richard A. Stratton.
Leverage. The issuance of the Notes will increase the Company's leverage
to the extent that the proceeds of the Offering are not used to satisfy
indebtedness of the Company and/or over time to the extent the Company reborrows
on any indebtedness paid down with such proceeds. The consequences of increased
leverage include: (i) the Company's increased vulnerability to changes in
economic conditions and competition; (ii) the potential limitations on the
Company's access to capital markets and ability to refinance its secured
financing facilities; and (iii) the dedication of a substantial portion of the
Company's available cash to debt service, thereby reducing cash available to
fund expanding business operations and future business opportunities.
Limited Covenants in the Indenture; Absence of Sinking Fund. The Indenture
pursuant to which the Notes will be issued contains financial and operating
covenants including, among others, limitations on the Company's ability to pay
dividends, incur additional indebtedness and engage in certain transactions.
This includes limitations on certain consolidations, mergers or transfers of all
or substantially all of its assets. The covenants in the Indenture are limited
and are not designed to protect the Noteholders in the event of a material
adverse change in the Company's financial condition or results of operations.
Further, the Notes do not have the benefit of any sinking fund payments by the
Company. See "Description of the Notes."
13
<PAGE> 15
INCORPORATION OF DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission pursuant
to the Exchange Act, are incorporated in and made a part of this Prospectus by
reference:
(a) The Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
(b) The Company's Quarterly Report on Form 10-Q for the quarters ended
March 31, 1997 and June 30, 1997.
(c) The definitive Proxy Statement dated March 27, 1997 for the
Special Meeting in Lieu of the Annual Meeting of the Company's stockholders
held on April 25, 1997.
All reports and any definitive proxy or information statements filed by the
Company with the Commission pursuant to Sections 13, 14 and 15(d) of the
Exchange Act subsequent to the date of this Prospectus and prior to the
termination of the offering of the shares offered hereby shall be deemed to be
incorporated by reference in this Prospectus and to be a part hereof from the
date of filing of such documents.
Any statement contained in a document incorporated or deemed to be
incorporated herein by reference shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated herein by reference modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, on the written
or oral request of any such person, a copy of any or all of the documents
incorporated herein by reference (other than exhibits not specifically
incorporated in such documents). Requests for such copies should be directed to
Ronald E. Rabidou, Litchfield Financial Corporation, 789 Main Road, Stamford, VT
(telephone number: 802-694-1200).
FORWARD-LOOKING STATEMENTS
Except for the historical information contained or incorporated by
reference in this Prospectus, the matters discussed or incorporated by reference
herein are forward-looking statements. Such forward-looking statements involve
known and unknown risks, uncertainties and other factors that may cause the
actual results, performance or achievements of the Company, or industry results,
to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the risk factors set forth under "Risk Factors" as well as the
following: general economic and business conditions; industry trends; changes in
business strategy or development plans; availability and quality of management;
and availability, terms and deployment of capital. Special attention should be
paid to such forward-looking statements including, but not limited to,
statements relating to (i) the Company's ability to execute its growth
strategies and to realize its growth objectives and (ii) the Company's ability
to obtain sufficient resources to finance its working capital needs and provide
for its known obligations.
14
<PAGE> 16
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Notes offered hereby
are estimated to be $ ($ if the Underwriters' over-allotment
option is exercised in full), after deducting the underwriting discount and
estimated offering expenses payable by the Company. It is expected that the net
proceeds of this Offering will be used to redeem the Company's outstanding 10%
Notes due 2002 (the "1992 Notes"), repay other indebtedness of the Company and
for general corporate purposes. Until used for the purposes indicated, the
Company will invest the net proceeds of this Offering in short-term
investment-grade interest-bearing securities.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1997, and as adjusted to reflect the sale by the Company of $45,000,000 of
Notes (assuming the Underwriters' over-allotment option is not exercised) and
the application of the net proceeds as set forth under "Use of Proceeds."
<TABLE>
<CAPTION>
JUNE 30, 1997
-----------------------------
ACTUAL AS ADJUSTED
------------ ------------
<S> <C> <C>
Long-term debt:
1992 Notes(1)................................................. $ 12,785,000 $ --
1993, 1995 and April 1997 Notes(1)............................ 53,597,000 53,597,000
Notes......................................................... -- 45,000,000
------------ -----------
Total long-term debt.................................. 66,382,000 98,597,000
------------ -----------
Stockholders' equity:
Preferred stock, $.01 par value; authorized 1,000,000 shares,
none issued and outstanding................................ -- --
Common stock, $.01 par value; authorized 8,000,000 shares,
5,616,372 shares issued and outstanding(2)................. 56,000 56,000
Additional paid in capital.................................... 36,238,000 36,238,000
Net unrealized gain on retained interests in loan sales....... 523,000 523,000
Retained earnings............................................. 10,786,000 10,786,000
------------ -----------
Total stockholders' equity............................ 47,603,000 47,603,000
------------ -----------
Total capitalization(3)............................... $113,985,000 $146,200,000
============ ===========
</TABLE>
- ---------------
(1) The 1992 Notes, 1993 Notes, 1995 Notes and April 1997 Notes were issued in
November 1992, May 1993, March 1995 and April 1997, respectively, and rank
on a parity with the Notes.
(2) Does not include 1,188,469 shares reserved for issuance under the Company's
stock option plans, of which 786,782 are issuable upon exercise of options
outstanding as of June 30, 1997.
(3) Total capitalization includes total stockholders' equity and total long-term
debt.
15
<PAGE> 17
SELECTED CONSOLIDATED FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------------- ---------------------
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:(1)
Revenues:
Interest and fees on loans.... $ 2,305 $ 4,330 $ 5,669 $ 11,392 $ 15,396 $ 6,640 $ 9,329
Gain on sale of loans......... 2,501 4,550 4,847 5,161 7,331 3,354 4,067
Servicing and other fee
income..................... 368 501 459 908 1,456 757 702
--------- --------- --------- --------- --------- --------- ---------
Total revenues............. 5,174 9,381 10,975 17,461 24,183 10,751 14,098
--------- --------- --------- --------- --------- --------- ---------
Expenses:
Interest expense.............. 629 2,717 3,158 6,138 7,197 3,297 5,042
Salaries and employee
benefits................... 1,017 1,350 1,776 2,798 3,233 1,382 1,646
Other operating expenses...... 810 1,017 1,164 2,120 3,225 1,282 1,756
Provision for loan losses..... 270 620 559 890 1,954 954 735
--------- --------- --------- --------- --------- --------- ---------
Total expenses............. 2,726 5,704 6,657 11,946 15,609 6,915 9,179
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes and
extraordinary item............ 2,448 3,677 4,318 5,515 8,574 3,836 4,919
Provision for income taxes...... 942 1,426 1,619 2,066 3,301 1,474 1,894
--------- --------- --------- --------- --------- --------- ---------
Income before extraordinary
item.......................... 1,506 2,251 2,699 3,449 5,273 2,362 3,025
Extraordinary item(2)........... -- -- (126) -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net income................. $ 1,506 $ 2,251 $ 2,573 $ 3,449 $ 5,273 $ 2,362 $ 3,025
======== ======== ======== ======== ======== ======== ========
Primary per common share
amounts:
Income before extraordinary
item....................... $ .42 $ .53 $ .63 $ .76 $ .93 $ .41 $ .52
Extraordinary item............ -- -- (.03) -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net income per share....... $ .42 $ .53 $ .60 $ .76 $ .93 $ .41 $ .52
======== ======== ======== ======== ======== ======== ========
Primary weighted average number
of shares outstanding......... 3,572,289 4,224,402 4,280,006 4,522,983 5,674,264 5,672,999 5,840,526
Fully-diluted per common share
amounts:
Income before extraordinary
item....................... $ .42 $ .53 $ .63 $ .76 $ .92 $ .41 $ .52
Extraordinary item............ -- -- (.03) -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net income per share....... $ .42 $ .53 $ .60 $ .76 $ .92 $ .41 $ .52
======== ======== ======== ======== ======== ======== ========
Fully-diluted weighted average
number of shares
outstanding................... 3,589,264 4,246,945 4,280,006 4,543,009 5,736,467 5,698,866 5,861,180
Cash dividends declared per
common share.................. $ -- $ .02 $ .03 $ .04 $ .05 $ -- $ --
OTHER STATEMENT OF INCOME DATA:
Net income as a percentage of
revenues...................... 29.1% 24.0% 23.4% 19.8% 21.8% 22.0% 21.5%
Ratio of earnings to fixed
charges(3).................... 4.89 2.35 2.37 1.90 2.19 2.16 1.98
Return on average assets(4)..... 6.2% 5.0% 4.3% 3.7% 4.0% 4.0% 3.7%
Return on average equity(4)..... 20.3% 17.0% 16.4% 16.6% 13.3% 12.2% 13.4%
</TABLE>
- ---------------
(1) Certain amounts in the 1996 through 1996 financial information have been
restated to conform to the 1997 presentation.
(2) Reflects loss on early extinguishment of a portion of the 1992 Notes, net of
applicable tax benefit of $76,000.
(3) For purposes of calculating the ratio of earnings to fixed charges, earnings
consist of income before income taxes and extraordinary item and fixed
charges. Fixed charges consist of interest charges and the amortization of
debt expense.
(4) The return on average assets and average equity for the six month periods
are calculated on an annualized basis.
16
<PAGE> 18
SELECTED CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------- JUNE 30,
1992 1993 1994 1995 1996 1997
------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:(5)
Total assets...................... $33,980 $54,444 $ 63,487 $112,459 $152,689 $175,310
Loans held for sale(6)............ 5,086 5,931 11,094 14,380 12,260 20,475
Other loans(6).................... 3,501 10,306 15,790 33,613 79,996 91,750
Retained interests in loan
sales(6)........................ 9,652 11,764 11,996 22,594 28,912 27,759
Secured debt...................... -- -- 5,823 9,836 43,727 40,683
Unsecured debt.................... 16,210 32,302 29,896 47,401 46,995 66,382
Stockholders' equity.............. 11,813 14,722 16,610 37,396 42,448 47,603
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------- JUNE 30,
1992 1993 1994 1995 1996 1997
------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
Loans purchased and
originated(7)................... $32,214 $42,410 $ 59,798 $121,046 $133,750 $ 83,311
Loans sold(7)..................... 24,632 28,099 40,116 65,115 54,936 39,501
Serviced Portfolio(8)............. 58,968 84,360 105,013 176,650 242,445 281,965
Loans serviced for others......... 43,623 59,720 72,731 111,117 129,619 138,771
Dealer/developer reserves......... 3,512 4,926 6,575 9,644 10,628 10,626
Allowance for loan losses(9)...... 498 1,064 1,264 3,715 4,528 5,541
Allowance ratio(10)............... .84% 1.26% 1.20% 2.10% 1.87% 1.97%
Net charge-off ratio(7)(11)....... .37% .69% .38% .67% .94% .69%
Non-performing asset ratio(12).... 1.09% 1.48% 1.02% 1.35% 1.57% 1.47%
</TABLE>
- ---------------
(5) In 1997 the Company adopted Statement of Financial Accounting Standards No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." Consequently, certain amounts included in
the 1992 through 1996 financial statements have been reclassified to
conform with the 1997 presentation: "Subordinated pass through certificates
held to maturity," "Excess servicing asset" and "Allowance for loans sold"
have been reclassified as "Retained interests in loan sales." In addition,
"Loans held for investment" have been reclassified as "Other loans."
(6) Amount indicated is net of allowance for losses and recourse obligation on
retained interests in loan sales.
(7) During the relevant period.
(8) The Serviced Portfolio consists of the principal amount of loans serviced
by or on behalf of the Company.
(9) The allowance for loan losses includes allowance for losses under the
recourse provisions of loans sold. See Note 4 to financial statements.
(10) The allowance ratio is the allowances for loan losses divided by the amount
of the Serviced Portfolio.
(11) The net charge-off ratio is determined by dividing the amount of net
charge-offs for the period by the average Service Portfolio for the period.
The June 30, 1997 amount is calculated on an annualized basis.
(12) The non-performing asset ratio is determined by dividing the sum of the
amount of those loans which are 90 days or more past due and other real
estate owned by the amount of the Serviced Portfolio.
17
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Litchfield Financial Corporation is a specialty finance company which
provides financing to creditworthy borrowers for assets not typically financed
by banks. The Company provides such financing by purchasing consumer loans, by
making loans to businesses secured by consumer receivables and by making other
secured loans to businesses.
Currently, the Company provides financing for the purchase of rural and
vacation properties and vacation ownership interests, popularly known as
timeshare interests. The Company also provides financing to rural land dealers,
timeshare resort developers and others secured by consumer receivables, to
dealers and developers for the acquisition and development of rural land and
timeshare resorts and for other secured loans.
The principal sources of the Company's revenues are (i) interest and fees
on loans, (ii) gain from the sale of loans and (iii) servicing and other fee
income. Gains on sales of loans are based on the difference between the
allocated cost basis of the assets sold and the proceeds received, which
includes the fair value of any assets or liabilities that are newly created as a
result of the transaction. Because a significant portion of the Company's
revenues is comprised of gains realized upon sales of loans, the timing of such
sales has a significant effect on the Company's results of operations.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship to revenues of
certain items included in the Company's statements of income.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------- ---------------
1994 1995 1996 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues:
Interest and fees on loans....................... 51.6% 65.2% 63.7% 61.8% 66.2%
Gain on sale of loans............................ 44.2 29.6 30.3 31.2 28.8
Servicing and other fee income................... 4.2 5.2 6.0 7.0 5.0
----- ----- ----- ----- -----
100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- -----
Expenses:
Interest expense................................. 28.8 35.2 29.7 30.7 35.8
Salaries and employee benefits................... 16.2 16.0 13.4 12.8 11.7
Other operating expenses......................... 10.6 12.1 13.3 11.9 12.4
Provision for loan losses........................ 5.1 5.1 8.1 8.9 5.2
----- ----- ----- ----- -----
60.7 68.4 64.5 64.3 65.1
----- ----- ----- ----- -----
Income before income taxes and extraordinary
item............................................. 39.3 31.6 35.5 35.7 34.9
Provision for income taxes......................... 14.7 11.8 13.7 13.7 13.4
Income before extraordinary item................... 24.6 19.8 21.8 22.0 21.5
Extraordinary item................................. (1.2) -- -- -- --
----- ----- ----- ----- -----
Net income......................................... 23.4% 19.8% 21.8% 22.0% 21.5%
===== ===== ===== ===== =====
</TABLE>
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
Revenues increased 31.1% to $14,098,000 for the six months ended June 30,
1997, from $10,751,000 for the same period in 1996. Net income for the six
months ended June 30, 1997 increased 28.1% to $3,025,000 compared to $2,362,000
for the same period in 1996. Loan originations grew 41.3% to $83,311,000 for the
six
18
<PAGE> 20
months ended June 30, 1997 from $58,902,000 for the same period in 1996. The
Serviced Portfolio increased 39.7% to $281,965,000 at June 30, 1997 from
$201,797,000 at June 30, 1996.
Interest and fees on loans increased 40.5% to $9,329,000 for the six months
ended June 30, 1997 from $6,640,000 for the same period in 1996, primarily as
the result of the increase in other loans and retained interests in loan sales.
The average rate earned on loans owned and retained interests in loan sales
decreased to 12.4% at June 30, 1997 from 13.0% at June 30, 1996, primarily due
to the effect of the growth in Dealer/Other Loans as a percentage of the
Serviced Portfolio. Hypothecation Loan yields are usually less than Land Loan or
VOI Loan yields, but Hypothecation Loan servicing costs and loan losses are
generally less as well.
Gain on the sale of loans increased 21.3% to $4,067,000 for the six months
ended June 30, 1997 from $3,354,000 in the same period in 1996. The volume of
loans sold increased 65.6% to $39,501,000 for the six months ended June 30, 1997
from $23,848,000 during the corresponding period in 1996. Gain on sale of loans
increased less than the volume of loans sold primarily due to the lower amount
of discount relating to loans sold and, to a lesser extent, the lower spread
between the coupon rate of the loans sold and the pass-through rate. In
addition, the yield on the securitization of Hypothecation Loans in the second
quarter was significantly less than the typical yield on sales of consumer
receivables, primarily due to shorter average maturities.
Loans serviced for others increased 22.8% to $138,771,000 as of June 30,
1997 from $113,037,000 at June 30, 1996. Servicing and other fee income
decreased 7.3% to $702,000 for the six months ended June 30, 1997, from $757,000
for the same period in 1996. For the six months ended June 30, 1997, servicing
income decreased despite the increase in loans serviced for others due to a
decrease in the average servicing fee per loan.
Interest expense increased 52.9% to $5,042,000 during the six months ended
June 30, 1997 from $3,297,000 for the same period in 1996. The increase in
interest expense primarily reflects an increase in average borrowings which was
only partially offset by a slight decrease in average rates. During the six
months ended June 30, 1997, borrowings averaged $103,551,000 at an average rate
of 9.1% compared to $63,733,000 at an average rate of 9.3% during the same
period in 1996. Interest expense includes the amortization of deferred debt
issuance costs.
Salaries and employee benefits increased 19.1% to $1,646,000 for the six
months ended June 30, 1997 from $1,382,000 for the same period in 1996 because
of an increase in the number of employees in 1997 and, to a lesser extent, an
increase in salaries. The number of full time equivalents increased to 66 at
June 30, 1997 compared to 53 at June 30, 1996. Personnel costs as a percentage
of revenues decreased to 11.7% for the six months ended June 30, 1997 from 12.8%
for the same period in 1996 primarily as a result of subcontracting of
additional servicing to a third party in April, 1996. As a percentage of the
Serviced Portfolio, personnel costs decreased to 0.58% for the six months ended
June 30, 1997 from 0.68% for the same period in 1996.
Other operating expenses increased 37.0% to $1,756,000 for the six months
ended June 30, 1997 from $1,282,000 for the same period in 1996 primarily as the
result of subcontracting of servicing to a third party and growth in the
Serviced Portfolio. As a percentage of revenues, other operating expenses
increased slightly to 12.4% for the six months ended June 30, 1997 compared to
11.9% for the corresponding period in 1996. As a percentage of the Serviced
Portfolio, other operating expenses decreased to 0.62% for the six months ended
June 30, 1997 from 0.64% for the same period in 1996.
During the six months ended June 30, 1997, the Company decreased its
provision for loan losses 23.0% to $735,000 from $954,000 for the same period in
1996. The provision for loan losses increased less than the increase in loans
owned and retained interests in loan sales because of the growth in
Hypothecation Loans as a percentage of the Serviced Portfolio. Hypothecation
Loans have experienced significantly lower delinquency and default rates than
Land Loans and VOI Loans.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenues increased 38.5% to $24,183,000 for the year ended December 31,
1996, from $17,461,000 for the year ended December 31, 1995. Net income for the
year ended December 31, 1996 increased 52.9% to $5,273,000 compared to
$3,449,000 in 1995. Net income as a percentage of revenues was 21.8% for the
year
19
<PAGE> 21
ended December 31, 1996 compared to 19.8% for the year ended December 31, 1995.
Loan originations grew 10.5% to $133,750,000 in 1996 from $121,046,000 in 1995.
Excluding the 1995 purchase of $41,500,000 of loans from the Government
Employees Financial Corporation ("GEFCO"), originations increased 68.1%. The
Serviced Portfolio increased 37.2% to $242,445,000 at December 31, 1996 from
$176,650,000 at December 31, 1995.
Interest and fees on loans increased 35.2% to $15,396,000 in 1996 from
$11,392,000 in 1995, primarily as the result of increases in loans held for
investment, subordinated pass-through certificates and fees related to
Hypothecation Loan originations. The average rate earned on loans owned and
subordinated pass-through certificates decreased to 12.5% for the year ended
December 31, 1996 from 13.2% in 1995, primarily due to the effect of the growth
in Hypothecation Loans as a percentage of the loan portfolio. Hypothecation Loan
yields are usually less than Land Loan or VOI Loan yields, but Hypothecation
Loan servicing costs and loan losses are generally less as well. Fees on loans
representing an adjustment of yield comprised 7.2% of interest and fees on loans
in 1996 compared to 6.5% in 1995. Such fees increased 48.4% in 1996 compared to
1995 primarily as the result of the increase in Hypothecation Loans.
Gain on the sale of loans increased 42.0% to $7,331,000 in 1996 from
$5,161,000 in 1995. The volume of loans sold decreased 15.6% to $54,936,000 for
the year ended 1996 from $65,115,000 in 1995. The primary reason for the
increase in the gain on sale of loans despite the decrease in the volume of
loans sold was that the Company did not recognize any gain on the sale of
$27,155,000 of VOI Loans purchased from GEFCO in the second quarter of 1995.
Loans serviced for others increased 16.7% to $129,619,000 at December 31,
1996 from $111,117,000 at December 31, 1995. Servicing and other fee income
increased 60.4% to $1,456,000 for the year ended December 31, 1996, from
$908,000 in 1995 because of the higher average Serviced Portfolio in 1996. In
connection with the Company's continued growth, the Company decided to
subcontract its servicing rights in order to avoid incurring additional fixed
overhead costs associated with such servicing. Accordingly, the Company
subcontracted to an unaffiliated third party the servicing of VOI Loans in 1995
and the remaining loans in April 1996.
Interest expense increased 17.3% to $7,197,000 for the year ended December
31, 1996, from $6,138,000 in 1995. The increase in interest expense primarily
reflects an increase in average borrowings which was only partially offset by a
decrease in average rates. During the year ended December 31, 1996, borrowings
averaged $71,800,000 at an average rate of 9.3% as compared to $60,500,000 and
9.7%, respectively, during 1995. Interest expense includes the amortization of
deferred debt issuance costs.
Salaries and employee benefits increased 15.6% to $3,233,000 for the year
ended December 31, 1996 from $2,798,000 in 1995 because of increases in
incentive compensation, salaries and the average number of employees in 1996.
The average number of employees increased to 56 in 1996 from 45 in 1995,
primarily as the result of the GEFCO acquisition. The number of full time
equivalents increased to 57 at December 31, 1996 compared to 55 at December 31,
1995. The small increase in the number of full-time equivalents despite the
significant growth in originations and the Serviced Portfolio described above is
partially the result of subcontracting servicing to a third party. As a result,
personnel costs as a percentage of revenues decreased to 13.4% for the year
ended December 31, 1996 compared to 16.0% in 1995.
Other operating expenses increased 52.1% to $3,225,000 for the year ended
December 31, 1996 from $2,120,000 for the same period in 1995 primarily as the
result of the subcontracting of servicing to a third party. As a percentage of
revenues, other operating expenses increased to 13.3% in 1996 compared to 12.1%
in 1995.
During 1996, the Company increased its provision for loan losses 119.6% to
$1,954,000 from $890,000 in 1995, primarily as the result of the overall
increase in the Serviced Portfolio as well as the proportionate increase in the
percentage of nonguaranteed loans in the Serviced Portfolio. Historically, the
loan loss rate for nonguaranteed loans has been higher than the rate for
guaranteed loans.
20
<PAGE> 22
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Revenues increased 59.1% to $17,461,000 for the year ended December 31,
1995, from $10,975,000 for the year ended December 31, 1994. Net income for the
year ended December 31, 1995 increased 34.0% to $3,449,000 compared to
$2,573,000 in 1994. Net income as a percentage of revenues was 19.8% for the
year ended December 31, 1995 compared to 23.4% for the year ended December 31,
1994. This decrease was primarily due to the Company's strategy of retaining
more of its loans and the increased interest costs associated with long-term
debt incurred to support this strategy.
Interest and fees on loans increased 101.0% to $11,392,000 in 1995 from
$5,669,000 in 1994, primarily as the result of increases in loans and
subordinated pass-through certificates. The average rate earned on loans owned
and subordinated pass-through certificates increased to 13.2% for the year ended
December 31, 1995 from 12.6% in 1994, primarily due to the effect of the higher
yield of the VOI Loans. Fees on loans comprised 6.5% of interest and fees on
loans in 1995 compared to 11.0% in 1994. Such fees increased 18.8% in 1995
compared to 1994.
Gain on the sale of loans increased 6.5% to $5,161,000 in 1995 from
$4,847,000 in 1994. The volume of loans sold increased 62.3% to $65,115,000 for
the year ended 1995 from $40,116,000 in 1994. The primary reason the gain on
sale of loans increased less than the volume of loans sold was that the Company
did not recognize any gain on the sale of $27,155,000 of VOI Loans purchased
from GEFCO consistent with the purchase method of accounting.
Loans serviced for others increased 52.8% to $111,117,000 as of December
31, 1995 from $72,731,000 at December 31, 1994. This growth resulted in a 97.8%
increase in servicing and other fee income to $908,000 for the year ended
December 31, 1995, from $459,000 in 1994. In connection with the Company's
continued growth, the Company made a strategic decision to subcontract a portion
of its servicing rights in order to avoid incurring additional fixed overhead
costs associated with such servicing. Accordingly, the Company subcontracted the
servicing of VOI Loans to an unaffiliated third party in 1995 and its remaining
loans in April 1996.
Interest expense increased to $6,138,000 for the year ended December 31,
1995, from $3,158,000 in 1994. The increase in interest expense primarily
reflects an increase in borrowings. During the year ended December 31, 1995,
borrowings averaged $60,500,000 at an average rate of 9.7% as compared to
$32,000,000 and 9.3%, respectively, during 1994. Interest expense includes the
amortization of deferred debt issuance costs.
Salaries and employee benefits increased 57.5% to $2,798,000 for the year
ended December 31, 1995 from $1,776,000 in 1994 due to hiring additional staff
to support an increase in the Serviced Portfolio and an increase in certain
incentive based compensation. As a result of the Company's growth, the Company
increased total full-time equivalent employees to 55 in 1995 from 36 in 1994.
Personnel costs as a percentage of revenues remained relatively constant at
16.0% for the year ended December 31, 1995 compared to 16.2% in 1994.
Other operating expenses increased 82.1% to $2,120,000 for the year ended
December 31, 1995 from $1,164,000 for the same period in 1994. As a percentage
of revenues, other operating expenses increased to 12.1% in 1995 as compared to
10.6% in 1994. This increase is attributable to additional overhead incurred
with the significant growth of the Company primarily in connection with the
purchase of the GEFCO portfolio.
During 1995, the Company increased its provision for loan losses 59.2% to
$890,000 from $559,000 in 1994 primarily as the result of the increase in the
Serviced Portfolio.
LIQUIDITY AND CAPITAL RESOURCES
The Company's business requires continued access to short and long-term
sources of debt financing and equity capital. The Company's principal cash
requirements arise from loan originations, repayment of debt on maturity,
payments of operating and interest expenses and loan repurchases. The Company's
primary sources of liquidity are loan sales, short-term borrowings under secured
lines of credit, long-term debt and equity offerings and cash flows from
operations.
21
<PAGE> 23
In connection with certain loan sales, the Company commits to repurchase
from investors any loans that become 90 days or more past due. This obligation
is subject to various terms and conditions, including, in some instances, a
limitation on the amount of loans that may be required to be repurchased. There
were approximately $8,936,000 of loans at June 30, 1997 and $8,780,000 at
December 31, 1996 which the Company could be required to repurchase in the
future should such loans become 90 days or more past due. The Company
repurchased $454,000 compared to $514,000 of such loans under the recourse
provisions of loan sales during the months ended June 30, 1997 and 1996,
respectively. The Company repurchased $991,000, $448,000, and $259,000 of such
loans under the recourse provisions of loan sales in 1996, 1995, and 1994,
respectively. As of June 30, 1997, $20,136,000 of the Company's cash was
restricted as credit enhancement for certain securitization programs.
The Company funds its loan purchases in part with borrowings under various
bank lines of credit. Lines are paid down when the Company receives the proceeds
from the sale of the loans or when cash is otherwise available. In May 1997, a
secured line of credit was renewed and amended to include an increase in the
amount of the line from $30,000,000 to $50,000,000 and an extension of the
maturity to April 2000. Outstanding borrowings under the line of credit were
$28,000,000 and $26,200,000 at June 30, 1997 and December 31, 1996,
respectively. This line of credit is secured by consumer receivables and other
secured loans.
In January 1997, an additional secured line of credit was increased from
$5,000,000 to $8,000,000 with another financial institution. This line of credit
matures in January 1998. There were no outstanding borrowings on this line of
credit at June 30, 1997 and December 31, 1996. This line of credit is secured by
consumer receivables and other secured loans.
In January 1997, an additional secured line of credit was increased from
$15,000,000 to $20,000,000. There were no outstanding borrowings under this
facility at June 30, 1997. At December 31, 1996, the outstanding borrowings were
$8,300,000. This facility is secured by certain retained interests in loan
sales, restricted cash and certain other loans and matures in September 1999.
On March 5, 1997, the Company entered into an additional $25,000,000
secured line of credit. The outstanding borrowings at June 30, 1997 were
$6,058,000. The facility is secured by loans to developers of VOI resorts for
the acquisition and development of VOI resorts ("Facility A") and the related
financing of consumer purchases of VOIs ("Facility B"). Although the maximum
amount that can be borrowed on each facility is $15,000,000, the aggregate
outstanding borrowings cannot exceed $25,000,000. This facility expires in March
2000.
On March 21, 1997, the Company entered into a $3,000,000 secured line of
credit with an additional financial institution. This line of credit is secured
by consumer receivables and other secured loans and matures in March 1998. There
were no outstanding borrowings at June 30, 1997.
Interest rates on the above lines of credit range from the Eurodollar or
LIBOR rate plus 2% to the prime rate plus 1.25%. The Company is not required to
maintain compensating balances or forward sales commitments under the terms of
these lines of credit.
The Company also has a revolving line of credit and sale facility as part
of an asset backed commercial paper facility with a multi-seller commercial
paper issuer ("Conduit A"). In October 1996 the Company amended the facility to
increase the facility from $75,000,000 to $100,000,000, reduce certain credit
enhancement requirements and expand certain loan eligibility criteria. The
outstanding aggregate balance of the loans pledged and sold under the facility
at any time cannot exceed $100,000,000. The facility expires in June 1998.
In connection with the facility, the Company formed a wholly owned
subsidiary, Litchfield Mortgage Securities Corporation 1994 ("LMSC"), to
purchase loans from the Company. LMSC either pledges the loans on a revolving
line of credit with Conduit A or sells the loans to Conduit A. Conduit A issues
commercial paper or other indebtedness to fund the purchase or pledge of loans
from LMSC. Conduit A is not affiliated with the Company or its affiliates. As of
June 30, 1997, the outstanding balance of eligible loans sold under the facility
was $83,200,000. Outstanding borrowings under the line of credit at June 30,
1997 and
22
<PAGE> 24
December 31, 1996 were $229,000 and $1,799,000, respectively. Interest is
payable on the line of credit at an interest rate based on certain commercial
paper rates.
On March 21, 1997, the Company closed an additional revolving line of
credit and sale facility of $25,000,000 with another multi-seller commercial
paper conduit ("Conduit B"). The facility, which expires in March 2000, is
subject to certain terms and conditions, credit enhancement requirements and
loan eligibility criteria. The outstanding balance of the loans pledged and sold
under the facility at any time cannot exceed $25,000,000.
In connection with the facility, the Company formed a wholly owned
subsidiary, Litchfield Capital Corporation 1996 ("LCC"), to purchase loans from
the Company. LCC either pledges the loans on a revolving line of credit with
Conduit B or sells the loans to Conduit B. Conduit B issues commercial paper or
other indebtedness to fund the purchase or pledge of loans from LCC. Conduit B
is not affiliated with the Company or its affiliates. As of June 30, 1997 the
outstanding balance of the eligible loans previously sold under the facility was
$13,767,000. There were no outstanding borrowings under the line of credit as of
June 30, 1997. Interest is payable on the line of credit at an interest rate
based on certain commercial paper rates.
During the first quarter of 1995, the Company issued a 10.43% promissory
note with an initial balance of $12,500,000 to an insurance company. Principal
is payable monthly based on collection of the underlying collateral. The note is
redeemable only with the approval of the noteholder. The note is collateralized
by certain of the Company's retained interests in loan sales and cash. The
balance outstanding on the note was $6,396,000 and $7,428,000 at June 30, 1997
and December 31, 1996, respectively. As of June 30, 1997 the approximate value
of the underlying collateral was $14,231,000.
In April 1997, the Company issued unsecured notes with an initial principal
balance of $20,000,000. Interest is payable at 9.3% semiannually in arrears. The
notes require principal reductions of $7,500,000, $6,000,000, $6,000,000 and
$500,000 in March 2001, 2002, 2003 and 2004, respectively. The proceeds were
used to repay the outstanding balance on certain of the Company's lines of
credit.
In June 1997, the Company completed its first securitization of $15,325,000
of Hypothecation Loans in a private placement with a bank.
The Company manages its exposure to changes in interest rates by attempting
to match its proportion of fixed versus variable rate assets, liabilities and
loan sale facilities. The Company has further mitigated its interest rate
exposure due to interest rate declines by instituting interest rate floors on
certain of its adjustable rate loans. The Company has also mitigated its
interest rate exposure due to basis risk attributable to differences between the
prime rate and the commercial paper and LIBOR rates by entering into interest
rate swap agreements.
Historically, the Company has not required major capital expenditures to
support its operations.
CREDIT QUALITY AND ALLOWANCES FOR LOAN LOSSES
The Company maintains allowances for loan losses and recourse obligations
on retained interests in loan sales at levels which, in the opinion of
management, provide adequately for current and possible future losses on such
assets. Past-due loans (loans 30 days or more past due which are not covered by
dealer/developer reserves and guarantees) as a percentage of the Serviced
Portfolio were .99% as of June 30, 1997 compared with 1.34% at December 31, 1996
and 1.74% at June 30, 1996. Management evaluates the adequacy of the allowances
on a quarterly basis by examining current delinquencies, the characteristics of
the accounts, the value of the underlying collateral, and general economic
conditions and trends. Management also evaluates the extent to which
dealer/developer reserves and guarantees can be expected to absorb loan losses.
A provision for loan losses is recorded in an amount deemed sufficient by
management to maintain the allowances at adequate levels. Total allowances for
loan losses and recourse obligations on retained interests in loan sales
increased to $5,541,000 at June 30, 1997 compared to $4,528,000 at December 31,
1996. The allowance ratio (the allowances for loan losses divided by the amount
of the Serviced Portfolio) at June 30, 1997 increased slightly to 1.97% from
1.87% at December 31, 1996.
23
<PAGE> 25
As part of the Company's financing of Land Loans and VOI Loans,
arrangements are entered into with dealers and resort developers, whereby
reserves are established to protect the Company from potential losses associated
with such loans. As part of the Company's agreement with the dealers and resort
developers, a portion of the amount payable to each dealer and resort developer
for a Land Loan or a VOI Loan is retained by the Company and is available to the
Company to absorb loan losses for those loans. The Company negotiates the amount
of the reserves with the dealers and developers based upon various criteria, two
of which are the financial strength of the dealer or developer and credit risk
associated with the loans being purchased. Dealer/developer reserves amounted to
$10,626,000 and $10,628,000 at June 30, 1997 and December 31, 1996,
respectively. The Company generally returns any excess reserves to the
dealer/developer on a quarterly basis as the related loans are repaid by
borrowers.
INFLATION
Inflation has not had a significant effect on the Company's operating
results to date.
24
<PAGE> 26
BUSINESS
OVERVIEW
The Company purchases and services Land Loans which are typically secured
by three to twenty acre rural parcels. The Company also purchases and services
VOI Loans which finance the purchase of ownership interests in a fully furnished
vacation property. The Company makes Hypothecation Loans to rural land dealers
and resort developers and other businesses secured by consumer receivables
consisting primarily of Land Loans and VOI Loans. The Company also makes A&D
Loans to rural land dealers and resort developers in order to finance additional
receivables generated by these A&D Loans. The Company sells substantially all
the Land Loans and VOI Loans it purchases and certain of the Hypothecation Loans
it originates either as whole loans or securitizations. The principal sources of
the Company's revenues are (i) interest and fees on loans, (ii) gain from the
sale of loans and (iii) servicing and other fee income. Because a significant
portion of the Company's revenues is comprised of gains realized upon sales of
loans, the timing of such sales has a significant effect on the Company's
results of operations.
CHARACTERISTICS OF THE SERVICED PORTFOLIO, LOAN PURCHASES AND ORIGINATIONS
The following table shows the growth in the diversity of the Serviced
Portfolio from primarily Purchased Loans to a mix of Purchased Loans,
Hypothecation Loans, A&D Loans and Other Loans:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------- JUNE 30,
1992 1993 1994 1995 1996 1997
----- ----- ----- ----- ----- --------
<S> <C> <C> <C> <C> <C> <C>
Purchased Loans.......................... 98.3% 89.0% 85.3% 81.6% 67.1% 60.8%
Hypothecation Loans...................... -- 5.0 9.0 12.5 20.7 24.2
A&D Loans................................ 1.7 4.3 3.3 3.1 8.7 11.8
Other Loans.............................. -- 1.7 2.4 2.8 3.5 3.2
---- ---- ----- ----- ----- -----
Total.......................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
==== ==== ===== ===== ===== =====
</TABLE>
The following table shows the growth in the diversity of the Company's
originations from primarily Purchased Loans to a mix of Purchased Loans,
Hypothecation Loans, A&D Loans and Other Loans:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------------- ---------------
1992 1993 1994 1995 1996 1996 1997
----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Purchased Loans................... 96.6% 77.8% 67.6% 71.4% 49.9% 52.8% 39.3%
Hypothecation Loans............... -- 11.8 22.2 20.9 29.6 28.6 35.9
A&D Loans......................... 3.4 7.1 6.0 3.1 14.4 9.8 18.0
Other Loans....................... -- 3.3 4.2 4.6 6.1 8.8 6.8
---- ---- ---- ----- ----- ---- ----
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
==== ==== ==== ===== ===== ==== ====
</TABLE>
(1) Purchased Loans
The Company provides indirect financing to consumers through a large number
of experienced land dealers and resort developers from which it regularly
purchases loans. The dealers and resort developers make loans to consumers using
Litchfield's standard forms and subject to its terms. Then the Company purchases
the loans from the land dealers and resort developers on an individually
approved basis in accordance with its credit guidelines.
Each land dealer and resort developer from whom Litchfield purchases loans
must be interviewed by the Company's management and approved by its credit
committee. Management evaluates each land dealer's and resort developer's
experience, financial statements and credit references and personally inspects a
substantial portion of the land dealer's and resort developer's inventory of
land and VOIs prior to approval of loan purchases.
25
<PAGE> 27
In order to enhance the creditworthiness of loans purchased from land
dealers and resort developers, Litchfield requires most land dealers and resort
developers to guarantee payment of the loans and ordinarily retains a portion of
the amount payable by the Company to each land dealer and resort developer on
purchase of the loan. The retained portion, or reserve, is released to the land
dealer or resort developer as the related loan is repaid.
Litchfield also engages in the purchase of portfolios of seasoned loans
from land dealers, resort developers and financial institutions. Most purchases
are from land dealers and resort developers, most of which guarantee the loans
sold and from which the Company ordinarily withholds a reserve. Management
believes that the portfolio acquisition program is attractive to land dealers
and resort developers because it provides them with liquidity to purchase
additional inventory.
Prior to purchasing such loans, Litchfield evaluates the credit and payment
history of each borrower in accordance with the Company's underwriting
guidelines, performs a sampling of borrower interviews, reviews the
documentation supporting the loans for completeness and obtains an appropriate
opinion from local legal counsel. Out of a land dealer's or resort developer's
total portfolio, Litchfield selects only individual loans which meet its credit
standards. In addition, Litchfield evaluates the dealer's or developer's credit
references, experience and financial statements and inspects a substantial
portion of the dealer's inventory prior to approval.
The Company, from time to time, acquires loan portfolios from financial
institutions and certain land dealers and resort developers secured by rural and
vacation land. In evaluating the portfolios, the Company conducts its normal
review of the borrower's documentation, payment history and underlying
collateral. Although the Company reviews loans included in these portfolios, the
Company may not always be able to reject individual loans, but rather must
purchase the entire portfolio offered. When the Company does not receive
guarantees, it adjusts its purchase price to reflect anticipated losses and its
required yield.
The Company's portfolio of Purchased Loans is secured by property located
in 39 states.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT OF LOANS
------------------------------------------------
DECEMBER 31,
----------------------------------- JUNE 30,
1992 1993 1994 1995 1996 1997
--- --- --- --- --- --------
<S> <C> <C> <C> <C> <C> <C>
Southwest........................................ 17% 18% 19% 16% 26% 31%
South............................................ 36 33 37 31 31 30
West............................................. -- 2 3 20 20 17
Mid-Atlantic..................................... 16 17 16 16 10 10
Northeast........................................ 31 30 25 17 13 12
--- --- --- --- --- ---
Total....................................... 100% 100% 100% 100% 100% 100%
=== === === === === ===
</TABLE>
a. Land Loans
Dealers from whom the Company purchases Land Loans are typically
closely-held firms with annual revenues of less than $3.0 million. Dealers
generally purchase large rural tracts (generally 100 or more acres) from farmers
or other owners and subdivide the property into five to twenty acre parcels for
resale to consumers. Generally the subdivided property is not developed
significantly beyond the provision of graded access roads. In recreational
areas, sales are made primarily to urban consumers who wish to use the property
for a vacation or retirement home or for recreational purposes such as fishing,
hunting or camping. In other rural areas, sales are more commonly made to
persons who will locate a manufactured home on the parcel. The aggregate
principal amount of Land Loans purchased from individual dealers during the six
months ended June 30, 1997 varied significantly from a low of approximately
$2,000 to a high of approximately $2.4 million. As of June 30, 1997, the five
largest dealers accounted for approximately 22.3% of the principal amount of the
Land Loans in the Serviced Portfolio, and no single dealer accounted for more
than 5.5%.
26
<PAGE> 28
As of June 30, 1997, 48.5% of the Serviced Portfolio consisted of Land
Loans with an average principal balance of approximately $12,600. The following
table sets forth as of June 30, 1997 the distribution of Land Loans in the
Company's Serviced Portfolio:
<TABLE>
<CAPTION>
PERCENTAGE OF PERCENTAGE OF
PRINCIPAL PRINCIPAL NUMBER OF NUMBER OF
PRINCIPAL BALANCE AMOUNT AMOUNT LOANS LOANS
- ----------------------------------------- ------------ ------------- --------- -------------
<S> <C> <C> <C> <C>
Less than $10,000........................ $ 24,469,000 17.9% 4,973 45.8%
$10,000-$19,999.......................... 54,816,000 40.1 4,010 37.0
$20,000 and greater...................... 57,413,000 42.0 1,867 17.2
------------ ------ --------- ------
Total............................... $136,698,000 100.0% 10,850 100.0%
=========== ========== ======== ==========
</TABLE>
As of June 30, 1997, the weighted average interest rate of the Land Loans
included in the Company's Serviced Portfolio was 12.2% and the weighted average
remaining maturity was 12.0 years. The following table sets forth as of June 30,
1997 the distribution of interest rates payable on the Land Loans:
<TABLE>
<CAPTION>
PERCENTAGE OF
PRINCIPAL
INTEREST RATE PRINCIPAL AMOUNT AMOUNT
- ---------------------------------------------------------------- ---------------- -------------
<S> <C> <C>
Less than 12.0%................................................. $ 46,341,000 33.9%
12.0%-13.9%..................................................... 56,320,000 41.2
14.0% and greater............................................... 34,037,000 24.9
------------ -----
Total...................................................... $136,698,000 100.0%
============ =====
</TABLE>
A Land Loan borrower generally uses the property which secures the loan as
a site for a lower-cost primary residence, often consisting of manufactured
housing, as a site for a vacation or retirement home or for recreational
purposes. As of June 30, 1997, the Company's Land Loan borrowers resided in 50
states, the District of Columbia and two territories or foreign countries.
b. VOI Loans
The Company purchases VOI Loans from various resort developers. The Company
generally targets small to medium size resorts with completed amenities and
established property owners associations. These resorts participate in programs
that permit purchasers of VOIs to exchange their time intervals for time
intervals in other resorts around the world. During the six months ended June
30, 1997, the Company acquired approximately $1.9 million of VOI Loans. As of
June 30, 1997, the five largest developers accounted for approximately 52.3% of
the principal amount of the VOI Loans in the Serviced Portfolio, and no single
developer accounted for more than 15.0%.
As of June 30, 1997, 12.3% of the Serviced Portfolio consisted of VOI
Loans, with an average principal balance of approximately $3,800. The following
table sets forth as of June 30, 1997 the distribution of VOI Loans.
<TABLE>
<CAPTION>
PERCENTAGE OF PERCENTAGE OF
PRINCIPAL PRINCIPAL NUMBER OF NUMBER OF
PRINCIPAL BALANCE AMOUNT AMOUNT LOANS LOANS
- ------------------------------------------ ----------- ------------- --------- -------------
<S> <C> <C> <C> <C>
Less than $4,000.......................... $ 9,030,000 26.1% 4,676 50.8%
$4,000-$5,999............................. 10,967,000 31.7 2,472 26.9
$6,000 and greater........................ 14,601,000 42.2 2,068 22.3
----------- ----- ----- -----
Total................................ $34,598,000 100.0% 9,216 100.0%
=========== ===== ===== =====
</TABLE>
As of June 30, 1997, the weighted average interest rate of the VOI Loans
included in the Company's Serviced Portfolio was 14.6% and the weighted average
remaining maturity was 3.9 years. The following table sets forth as of June 30,
1997 the distribution of interest rates payable on the VOI Loans:
27
<PAGE> 29
<TABLE>
<CAPTION>
PERCENTAGE OF
PRINCIPAL PRINCIPAL
INTEREST RATE AMOUNT AMOUNT
- ------------------------------------------------------------------ ----------- -------------
<S> <C> <C>
Less than 14.0%................................................... $ 9,203,000 26.6%
14.0%-15.9%....................................................... 12,317,000 35.6
16.0% and greater................................................. 13,078,000 37.8
----------- -------------
Total........................................................ $34,598,000 100.0%
========== ==========
</TABLE>
As of June 30, 1997, the Company's VOI borrowers resided in 50 states, the
District of Columbia and eight territories or foreign countries.
(2) Hypothecation Loans
The Company extends Hypothecation Loans to land dealers and resort
developers and other businesses secured by consumer receivables. During the six
months ended June 30, 1997, the Company extended or acquired approximately $29.9
million of Hypothecation Loans, of which $12.3 million, or 41.1%, were secured
by Land Loans and $17.6 million, or 58.9%, were secured by VOI Loans.
The Company typically extends Hypothecation Loans to land dealers and
resort developers based on advance rates of 75% to 85% of the eligible consumer
receivables which serve as collateral. The Company's Hypothecation Loans are
typically made at variable rates based on the prime rate of interest plus 2% to
4%. As of June 30, 1997, the Company had $66.6 million of Hypothecation Loans
outstanding, none of which were 90 days or more past due. Hypothecation Loans
are secured by receivables from timeshare resorts and rural land in 25 states.
Hypothecation Loans range in size from $3,000 to $7.5 million with an average
principal balance of $1,004,000. The five largest Hypothecation Loans represent
8.5% of the Serviced Portfolio.
In addition, the Company has recently expanded its marketing of
Hypothecation Loans to include loans to other finance companies secured by other
types of collateral. The Company's objective is to identify other lending
opportunities or lines of business to diversify its portfolio as it did with VOI
Loans and Hypothecation Loans. These loans may be larger than the Company's
average Hypothecation Loans and may provide the Company with an option to take
an equity position in the borrower.
(3) A&D Loans
The Company also makes A&D Loans to dealers and developers in order to
finance the receivables generated from the sale of the properties. During the
six months ended June 30, 1997, the Company made $15.1 million of A&D Loans to
land dealers and resort developers, of which $8.1 million, or 53.6%, were
secured by land and $7.0 million, or 46.4%, were secured by resorts under
development.
The Company makes A&D Loans to land dealers and resort developers based on
loan to value ratios of 60% to 80% at variable rates based on the prime rate
plus 2% to 4%. As of June 30, 1997, the Company had $36.0 million of A&D Loans
outstanding, none of which were 90 days or more past due. A&D Loans are secured
by timeshare resort developments and rural land subdivisions in 19 states. A&D
Loans range in size from $10,000 to $4.7 million with an average principal
balance of $742,000. The five largest A&D Loans represent 5.6% of the Serviced
Portfolio.
28
<PAGE> 30
(4) Other Loans
Other Loans consist primarily of consumer home improvement loans, consumer
construction loans and other secured commercial loans. Throughout its history
the Company has made or acquired certain other secured and unsecured loans to
identify additional lending opportunities or lines of business for possible
future expansion as it did with VOI Loans and Hypothecation Loans. As of June
30, 1997, the Company had $8.9 million of such loans, 0.04% of which were 90
days or more past due. Commercial Other Loans range in size from $50,000 to
$900,000 with an average principal balance of $445,000. The five largest Other
Loans represent 1.1% of the Serviced Portfolio.
LOAN UNDERWRITING
Litchfield has established loan underwriting criteria and procedures
designed to reduce credit losses on its portfolio. The loan underwriting process
includes reviewing each borrower's credit history. In addition, Litchfield's
underwriting staff routinely conducts telephone interviews with a selected
sample of borrowers. The primary focus of the Company's underwriting is to
assess the likelihood that the borrower will repay the loan as agreed by
examining the borrower's credit history through standard credit reporting
bureaus.
Litchfield's loan policy is to purchase Land and VOI Loans from $3,000 to
$50,000. On a case by case basis, the Company will also consider purchasing such
loans in excess of $50,000. As of June 30, 1997, the Company had 160 Loans
exceeding $50,000 representing 4.0% of the number of such loans in the Serviced
Portfolio, for a total of $11.5 million. There were no VOI Loans exceeding
$50,000 as of June 30, 1997. The Company will originate Hypothecation Loans up
to $15 million and A&D Loans up to $10 million. From time to time the Company
may have the opportunity to originate larger Hypothecation Loans or A&D Loans in
which case the Company would seek to participate such loans with other financial
institutions. All loans greater than $100,000 must be approved by the Credit
Committee which is comprised of the Chief Executive Officer, Executive Vice
President, Chief Financial Officer and two Senior Vice Presidents.
COLLECTIONS AND DELINQUENCIES
Management believes that the relatively low delinquency rate for the
Serviced Portfolio is attributable primarily to the application of its
underwriting criteria, as well as to dealer guarantees and reserves received. No
assurance can be given that these delinquency rates can be maintained in the
future.
Collection efforts are managed and delinquency information is analyzed at
the corporate headquarters. Unless circumstances otherwise dictate, collection
efforts are generally made by mail and telephone. Collection efforts begin when
an account is four days past due when the Company sends out a late notice. When
an account is sixteen days past due the Company attempts to contact the borrower
to determine the reason for the delinquency and to attempt to cause the account
to become current. If the status of the account continues to deteriorate, an
analysis of that delinquency is undertaken by the collection supervisor to
determine the appropriate action. When the loan is 90 days past due in
accordance with its original terms and it is determined that the amounts cannot
be collected from the dealer or developer guarantees or reserves, the loan is
generally placed on a nonaccrual status and the collection supervisor determines
the action to be taken. The determination of how to work out a delinquent loan
is based upon many factors, including the borrower's payment history and the
reason for the current inability to make timely payments. The Company has not
restructured a material number of problem loans. When a dealer program loan
becomes 60 days past due, in addition to the Company's collection procedures,
the Company also has the assistance of the dealer or developer in collecting the
loan.
The Company extends a limited number of its loans for reasons the Company
considers acceptable such as temporary loss of employment or serious illness. In
order to qualify for a one to three month extension, the customer must make
three timely payments without any intervention from the Company. For extensions
of four to six months, the customer must make four to six timely payments,
respectively, without any intervention from the Company. The Company will not
extend a loan more than two times for an aggregate six months over the life of
the loan. The Company has extended approximately one percent of its loans
through June 30,
29
<PAGE> 31
1997. The Company does not generally modify any other loan terms such as
interest rates or payment amounts.
Regulations and practices regarding the rights of the mortgagor in default
vary greatly from state to state. To the extent permitted by applicable law, the
Company collects late charges and return-check fees and records these items as
additional revenue. Only if a delinquency cannot otherwise be cured will the
Company decide that foreclosure is the appropriate course of action. If the
Company determines that purchasing a property securing a mortgage loan will
minimize the loss associated with such defaulted loan, the Company may accept a
deed in lieu of foreclosure, take legal action to collect on the underlying note
or bid at the foreclosure sale for such property.
Land Loans
The following table shows the Company's historic delinquency rate, net of
dealer/developer reserves and guarantees for Land Loans in the Serviced
Portfolio:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
-------------------------------------------------------------------- JUNE 30,
1992 1993 1994 1995 1996 1997
----------- ----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Land Loans in
Serviced
Portfolio....... $58,968,000 $77,258,000 $90,502,000 $97,266,000 $119,370,000 $136,698,000
Delinquent Land
Loans(1)........ 553,000 511,000 981,000 1,059,000 1,920,000 1,771,000
Delinquency as a
percentage of
Land Loans in
Serviced
Portfolio....... .94% .66% 1.08% 1.09% 1.61% 1.30%
</TABLE>
- ---------------
(1) Delinquent loans are those which are 30 days or more past due which are not
covered by dealer/developer reserves or guarantees and not included in other
real estate owned.
VOI Loans
The following table shows the Company's historic delinquency rate, net of
dealer/developer reserves and guarantees for VOI Loans in the Serviced
Portfolio:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
--------------------------------------------------------------- JUNE 30,
1992 1993 1994 1995 1996 1997
-------- ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
VOI Loans in Serviced
Portfolio............ $300,000 $1,434,000 $ 2,851,000 $46,700,000 $43,284,000 $34,598,000
Delinquent VOI
Loans(1)............. -- -- -- 1,958,000 1,316,000 860,000
Delinquency as a
percentage of VOI
Loans in Serviced
Portfolio............ -- -- -- 4.19% 3.04% 2.49%
</TABLE>
- ---------------
(1) Delinquent loans are those which are 30 days or more past due which are not
covered by dealer/developer reserves or guarantees and not included in other
real estate owned.
Hypothecation, A&D and Other Loans
The Company did not have any delinquent Hypothecation Loans or A&D Loans
for the years ended December 31, 1992 through December 31, 1996 or for the six
months ended June 30, 1997. The Company did not have significant amounts of
Other Loans during these periods and the delinquency rates did not exceed .25%
at the end of any period.
30
<PAGE> 32
ALLOWANCE FOR LOAN LOSSES, NET CHARGE-OFFS AND DEALER RESERVES
The following is an analysis of the total allowances for all loan losses:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
-------------------------------------------------------------- JUNE 30,
1992 1993 1994 1995 1996 1997
--------- ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Allowance, beginning of
year................... $ 299,000 $ 498,000 $1,064,000 $1,264,000 $ 3,715,000 $4,528,000
Provision for loan
losses................. 270,000 620,000 559,000 890,000 1,954,000 735,000
Net charge-offs of
uncollectible
accounts(1)............ (179,000) (493,000) (359,000) (946,000) (1,965,000) (904,000)
Allocation of purchase
adjustment(2).......... 108,000 439,000 -- 2,507,000 824,000 1,182,000
-------- -------- ---------- ---------- ---------- ----------
Allowance, end of year... $ 498,000 $1,064,000 $1,264,000 $3,715,000 $ 4,528,000 $5,541,000
======== ======== ========== ========== ========== ==========
</TABLE>
- ---------------
(1) Net of recoveries of $20,000, $10,000, $47,000, $11,000, $310,000 and
$182,000 in 1992, 1993, 1994, 1995, 1996 and 1997, respectively.
(2) Represents allocation of purchase adjustment related to purchase of certain
nonguaranteed loans.
The following is an analysis of net charge-offs by major loan and
collateral types experienced by the Company:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------------------------------------ JUNE 30,
1992 1993 1994 1995 1996 1997
-------- -------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Land Loans....................... $179,000 $493,000 $359,000 $546,000 $ 669,000 $411,000
VOI Loans........................ -- -- -- 45,000 1,284,000 498,000
Hypothecation Loans.............. -- -- -- -- -- --
A&D Loans........................ -- -- -- 352,000 (8,000) (2,000)
Other Loans...................... -- -- -- 3,000 20,000 (3,000)
-------- -------- -------- -------- ---------- --------
$179,000.. $493,000 $359,000 $946,000 $1,965,000 $904,000
======== ======== ======== ======== ========== ========
Net charge-offs as a percentage
of the average Serviced
Portfolio...................... .37% .69% .38% .67% .94% .69%
</TABLE>
As part of the Company's financing of Land Loans and VOI Loans,
arrangements are entered into with most land dealers and resort developers,
whereby reserves are established to protect the Company from
potential losses associated with such loans. As part of the Company's agreement
with the land dealers and resort developers, a portion of the amount payable to
them for a Land Loan or a VOI Loan is retained by the Company and is available
to the Company to absorb loan losses for those loans. The Company negotiates the
amount of the reserves with the land dealers and resort developers based upon
various criteria, two of which are the financial strength of the land dealers
and resort developers and the credit risk associated with the loans being
purchased. Dealer reserves for Land Loans amounted to $6,112,000, $6,420,000 and
$7,555,000 at December 31, 1994, 1995 and 1996, respectively, and $7,909,000 at
June 30, 1997. Developer reserves for VOI Loans amounted to $463,000, $3,224,000
and $3,072,000 at December 31, 1994, 1995 and 1996, respectively, and $2,664,244
at June 30, 1997. Historically, most dealers and developers have provided
personal and, when relevant, corporate guarantees to further protect the Company
from loss.
LOAN SERVICING AND SALES
The Company retains the right to service all the loans it originates.
Servicing includes collecting payments from borrowers, remitting payments to
investors who have purchased the loans, accounting for principal and interest,
contacting delinquent borrowers and supervising foreclosure and bankruptcies in
the event of unremedied defaults. Substantially all servicing results from the
origination and purchase of loans by
31
<PAGE> 33
the Company, and the Company has not historically purchased loan servicing
rights except in connection with the purchase of loans. Servicing rates
generally approximate .5% to 2% of the principal balance of a loan.
In connection with the Company's continuing growth, the Company decided to
subcontract its servicing rights in order to avoid incurring additional fixed
overhead costs associated with such servicing. Accordingly, the Company
subcontracted to an unaffiliated third party the servicing of VOI Loans in 1995
and the remaining loans in April 1996. The Company retains responsibility for
servicing all loans as master servicer.
In 1990, the Company began privately placing issues of pass-through
certificates evidencing an undivided beneficial ownership interest in pools of
mortgage loans which have been transferred to trusts. The principal and part of
the interest payments on the loans transferred to the trust are collected by the
Company, as the servicer of the loan pool, remitted to the trust for the benefit
of the investors, and then distributed by the trust to the investors in the
pass-through certificates.
As of June 30, 1997, the Company had sold or securitized a total of
approximately $289.0 million in loans. In certain of the Company's issues of
pass-through certificates, credit enhancement was achieved by dividing the issue
into a senior portion which was sold to the investors and a subordinated portion
which was retained by the Company. In certain other of the Company's private
placements, credit enhancement was achieved through cash collateral. If
borrowers default in the payment of principal or interest on the mortgage loans
underlying these issues of pass-through certificates, losses would be absorbed
first by the subordinated portion or cash collateral account retained by the
Company and might, therefore, have to be charged against the allowance for loan
losses to the extent dealer guarantees and reserves are not available.
The Company also has a $100.0 million revolving line of credit and sale
facility as part of an asset backed commercial paper facility with a
multi-seller commercial paper conduit. The facility expires in June 1998. As of
June 30, 1997, the outstanding balance of the sold or pledged loans securing
this facility was $83.4 million. The Company has an additional revolving line of
credit and sale facility of $25.0 million with another multi-seller commercial
paper conduit. The facility expires in March 2000. As of June 30, 1997, the
outstanding aggregate balance of the sold or pledged loans under the facility
was $13.8 million.
MARKETING AND ADVERTISING
The Company markets its program to rural land dealers and resort developers
through brokers, referrals, dealer and developer solicitation, and targeted
direct mail. The Company employs three marketing executives based in Denver,
Colorado and five marketing executives based in Stamford, Vermont. In the last 5
years the Company has closed loans with over 250 different dealers and
developers.
Management believes that the Company benefits from name recognition as a
result of its referral, advertising and other marketing efforts. Referrals have
been the strongest source of new business for the Company and are generated in
the states in which the Company operates by dealers, brokers, attorneys and
financial institutions. Management and marketing representatives also conduct
seminars for dealers and brokers and attend trade shows to improve awareness and
understanding of the Company's programs.
REGULATION
The Company is licensed as a mortgage banker in 15 of the states in which
it operates, and in those states its operations are subject to supervision by
state authorities (typically state banking or consumer credit authorities).
Expansion into other states may be dependent upon a finding of financial
responsibility, character and fitness of the Company and various other matters.
The Company is generally subject to state regulations, examination and reporting
requirements, and licenses are revocable for cause. The Company is subject to
state usury laws in all of the states in which it operates.
The Company's consumer finance activities are subject to the
Truth-in-Lending Act. The Truth-in-Lending Act contains 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. Failure to comply with the
requirements of the Truth-in-Lending Act may
32
<PAGE> 34
give rise to a limited right of rescission on the part of the borrower. The
Company believes that it is in substantial compliance in all material respects
with the Truth-in-Lending Act.
The Company is also required to comply with the Equal Credit Opportunity
Act of 1974, as amended ("ECOA"), which prohibits creditors from discriminating
against applicants on the basis of race, color, sex, age or marital status.
Regulation B promulgated under ECOA restricts creditors 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 interest rate charged increases as a result of
information obtained from a consumer credit agency, another statute, the Fair
Credit Reporting Act of 1970, as amended, requires the lenders to supply the
applicant with a name and address of the reporting agency.
COMPETITION
The consumer finance business is highly competitive, with competition
occurring primarily on the basis of customer service and the term and interest
rate of the loans. Traditional competitors in the consumer finance business
include commercial banks, credit unions, thrift institutions, industrial banks
and finance companies, many of which have considerably greater financial,
technical and marketing resources than the Company. As a result of consolidation
and the failure of certain financial institutions, the number of financial
institutions is being reduced. There can be no assurance that the Company will
not face increased competition from remaining institutions or new financial
institutions.
The Company believes that it competes on the basis of providing competitive
rates and prompt, efficient and complete service, and by emphasizing customer
service on a timely basis to attract borrowers whose needs are not met by
traditional financial institutions.
EMPLOYEES
As of June 30, 1997, the Company had 66 full-time equivalent employees.
None of the Company's employees is covered by a collective bargaining agreement.
The Company considers its relations with its employees to be good.
FACILITIES
The Company owns an aggregate of approximately 13,000 square feet of office
space in Stamford, Vermont, which is used as the Company's headquarters. The
Company also occupies an aggregate of approximately 5,100 square feet of office
space in Lakewood, Colorado, pursuant to a lease expiring in January 1998, with
an option to renew until 2001, providing for an annual rental of approximately
$40,000, including utilities and exterior maintenance expenses. The Company has
acquired a leasehold interest in approximately 26,000 square feet of office
space in Williamstown, Massachusetts for its planned headquarters which it is
currently renovating for occupancy in early 1998. The initial ten year lease
term expires in May 2007 and is renewable at the Company's option for two
additional ten year periods. The initial lease provides for an annual rental of
$20,000.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
33
<PAGE> 35
MANAGEMENT
The following table sets forth the name, age and position with the Company
of each person who is an executive officer or director of the Company as of
September 30, 1997:
<TABLE>
<S> <C> <C>
Richard A. Stratton................ 47 Chief Executive Officer
Heather A. Sica.................... 35 Executive Vice President
Ronald E. Rabidou.................. 46 Chief Financial Officer
Wayne M. Greenholtz................ 56 Senior Vice President
James H. Shippee................... 36 Senior Vice President
Michael A. Spadacino............... 36 Senior Vice President
Joseph S. Weingarten............... 32 Senior Vice President
James A. Yearwood.................. 49 First Vice President
John A. Costa(2)................... 41 Director
Donald R. Dion, Jr................. 42 Director
David J. Ferrari(1), (2)........... 61 Director
Gerald Segel(1), (2)............... 76 Director
James Westra(2).................... 45 Director
</TABLE>
- ---------------
(1) Member of Audit Committee and Compensation Committee
(2) Member of Stock Option Committee
EXECUTIVE OFFICERS
Richard A. Stratton, 47 years old, has been a director of the Company since
1988. Mr. Stratton was a cofounder of the Company and has been the Chief
Executive Officer of the Company since 1996 and President of the Company since
1988. Prior to joining the Company, Mr. Stratton served as Vice President of
Finance for Patten Corporation and Vice President of Marketing for Summit
Software Technology, Inc. and held senior marketing and management positions
with the Gillette Company and the American Appraisal Company in Boston,
Massachusetts. Mr. Stratton is a graduate of The College of The Holy Cross.
Heather A. Sica, 35 years old, has been a director of the Company since
1995. Ms. Sica has been the Executive Vice President and Treasurer of the
Company since 1991. She served as Chief Financial Officer of the Company from
1991 to 1995. She served as a Vice President of the Company from 1989 to 1991.
Prior to joining the Company, Ms. Sica was an associate with the Real Estate
Group of General Electric Investment Corporation and a certified public
accountant with KPMG Peat Marwick. Ms. Sica received her B.S. in Business
Administration from the University of Vermont and her MBA from the Wharton
School of the University of Pennsylvania.
Ronald E. Rabidou, 46 years old, has been Chief Financial Officer of the
Company since May 1995. Prior to joining the Company, Mr. Rabidou was a
certified public accountant with Ernst & Young LLP from 1987 to May 1995. Mr.
Rabidou received his MBA and BA from the University of Massachusetts.
Wayne M. Greenholtz, 56 years old, has been a Senior Vice President of the
Company since April 1995. Prior to joining the Company, Mr. Greenholtz was the
Senior Vice President of Operations for Government Employees Financial
Corporation, a subsidiary of GEICO Corporation, from 1989 to 1995. Mr.
Greenholtz is a graduate of the University of Maryland.
Jim Shippee, 36 years old, has been Senior Vice President of Mortgage
Operations since 1989. Prior to joining the Company, Mr. Shippee was Vice
President of Patten Financial Services from 1987 to 1989.
Michael A. Spadacino, 36 years old, has been a Senior Vice President of the
Company since January 1994 after joining the Company in 1992 as a Vice President
in charge of land portfolio acquisitions. Prior to joining the Company, Mr.
Spadacino attended law school from 1989 to 1992 at the Albany Law School of
34
<PAGE> 36
Union University where he received a JD. Mr. Spadacino received a BBA in
Accounting from St. Bonaventure University and MS in Taxation from Georgetown
University and is also a CPA.
Joseph S. Weingarten, 32 years old, has been a Senior Vice President of the
Company since 1997. Prior to joining the Company, Mr. Weingarten served from
1993 to 1997 in the Structured Finance Group of ING Capital, most recently as a
Vice President, originating and managing structured lending and asset-backed
securitization transactions, with an emphasis on specialty finance companies.
Previously, he served as the Manager of Portfolio Administration for US West
Financial Services, Inc., and as a CPA with Arthur Andersen & Co. Mr. Weingarten
received his B.A. from New York University.
James A. Yearwood, 49 years old, has been a First Vice President of the
Company since 1996 after joining the Company in 1992 as a Vice President in
charge of vacation ownership receivable funding. Prior to joining the Company,
Mr. Yearwood was a Vice President with Del-Val Capital Corporation from 1989 to
1991 where he specialized in vacation ownership receivable lending. Mr. Yearwood
graduated from Southern Connecticut State University.
DIRECTORS
John A. Costa, 41 years old, has been a director of the Company since 1995.
Mr. Costa has been at Cardholder Management Services, L.P., a credit card
servicing business since 1995, serving first as Managing Director of Planning
and Business Development, and presently as Senior Vice President. Mr. Costa
served as a consultant to corporate clients from 1992 to 1995 in areas that
include mergers and acquisitions, financial modeling, asset securitization and
lending facility development. Previously, he served as Director of Consumer
Finance with US West Financial Services, Inc. in 1992 and as Director of
Structured Finance for Arsht & Company, Inc. from 1990 to 1992. Mr. Costa
received his B.A. from New York University.
Donald R. Dion, Jr., 42 years old, has been a director of the Company since
1988. Mr. Dion is Chairman and Chief Executive Officer of Dion Money Management
Advisors, Inc.. Mr. Dion served as Chief Executive Officer of the Company until
1995 and Treasurer of the Company until 1991. Prior to joining the Company, Mr.
Dion served as an Executive Vice President of Finance, Treasurer and Director of
Patten Corporation, an attorney with Warner & Stackpole in Boston, Massachusetts
and a certified public accountant with Ernst & Young. He is a graduate of Saint
Michaels College, holds a J.D. from the University of Maine Law School, and an
LL.M. from Boston University School of Law.
David J. Ferrari, 61 years old, has been a director of the Company since
1988. Mr. Ferrari is President and a founder of Argus Management Corporation of
Natick, Massachusetts. Argus Management Corporation provides consulting and
management services to underperforming and troubled companies. Mr. Ferrari is a
Director of several companies, including Malden Mills Industries, Inc., and
Printed Circuit Corp. Prior to founding Argus, Mr. Ferrari was a certified
public accountant with Arthur Andersen & Co. He received a B.A. from Johns
Hopkins University and an MBA from Babson College.
Gerald Segel, 76 years old, has been a director of the Company since 1989.
Prior to his retirement in May 1990, Mr. Segel was chairman of Tucker Anthony
Incorporated from January 1987 to May 1990. From 1983 to January 1987 he served
as President of Tucker Anthony Incorporated. Mr. Segel is also a director of
Hologic, Inc., Vivid Technologies, Inc. and Boston Communications Group, Inc.
Mr. Segel received his A.B. from Harvard College.
James Westra, 45 years old, has been a director of the Company since 1995.
Mr. Westra is a stockholder of the law firm of Hutchins, Wheeler & Dittmar, A
Professional Corporation, where he has practiced law since 1977. Mr. Westra
serves as a Director of several companies, including Bertucci's, Inc. Mr. Westra
graduated from Harvard College in 1973 and from Boston University Law School in
1977.
35
<PAGE> 37
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of shares of Common Stock of the Company, as of September 30, 1997, by
all stockholders of the Company known to be beneficial owners of more than 5% of
the outstanding Common Stock of the Company, by each director, each of the Named
Executive Officers (as defined herein) and all directors and officers of the
Company as a group:
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL Percentage
NAME OWNERSHIP(a) of Class
- ---------------------------------------------------------------- ----------------- ----------
<S> <C> <C>
Nicholas Company, Inc. ......................................... 643,459 11.4%
700 North Water Street
Milwaukee, WI 53202
Arthur D. Charpentier........................................... 582,229 10.3%
660 White Plains Road, Suite 400
Tarrytown, NY 10591
Wellington Management Co. ...................................... 457,902 8.1%
75 State Street
Boston, MA 02109
J.P. Morgan Inv. Mgt., Inc. .................................... 451,060 8.0%
522 Fifth Ave.
New York, NY 10036
Richard A. Stratton(b).......................................... 420,055(c) 7.2%
Chief Executive Officer, President and Director
Heather A. Sica(b).............................................. 110,098(d) 1.9%
Executive Vice President, Treasurer and Director\
Michael A. Spadacino(b)......................................... 39,407(e) *
Senior Vice President
Gerald Segel.................................................... 23,137(f) *
Director
Tucker Anthony Incorporated
One Beacon Street
Boston, MA 02108
Donald R. Dion, Jr. ............................................ 17,181(g) *
Director
Dion Money Management, Inc.
279 Main Street
Williamstown, MA 01267
Ronald E. Rabidou(b)............................................ 15,531(h) *
Chief Financial Officer
Wayne M. Greenholtz(b).......................................... 7,263(i) *
Senior Vice President
James Westra.................................................... 5,411(j) *
Director
Hutchins, Wheeler & Dittmar, A Professional Corporation
101 Federal Street
Boston, MA 02110
David J. Ferrari................................................ 5,123(k) *
Director
Argus Management
207 Union Street
South Natick, MA 01760
John Costa...................................................... 4,116(j) *
Director
Cardholder Management Services
55 E. Ames Ct.
Plainview, NY 11803
All directors and executive officers as a group (13 persons).... 687,078(l) 11.3%
</TABLE>
36
<PAGE> 38
- ---------------
* Less than one percent.
(a) Beneficial ownership is determined in accordance with rules of the
Securities and Exchange Commission and includes general voting power and/or
investment power with respect to securities. Shares of common stock subject
to options and warrants currently exercisable or exercisable within 60 days
of September 30, 1997 are deemed outstanding for computing the percentage of
stock owned by a person holding such options but are not deemed outstanding
for computing the percentage of stock owned by any other person. Except as
otherwise specified below, the persons named in the table above have sole
voting and investment power with respect to all shares of common stock shown
as beneficially owned by them.
(b) Address: 789 Main Road, Stamford, VT 05352.
(c) Includes 194,892 shares of Common Stock issuable upon exercise of options.
Such options are exercisable within 60 days.
(d) Includes 107,783 shares of Common Stock issuable upon exercise of options.
Such options are exercisable within 60 days.
(e) Includes 39,407 shares of Common Stock issuable upon exercise of options.
Such options are exercisable within 60 days.
(f) Includes 18,812 shares of Common Stock issuable upon exercise of options.
Such options are exercisable within 60 days.
(g) Includes 9,181 shares of Common Stock issuable upon exercise of options.
Such options are exercisable within 60 days.
(h) Includes 15,531 shares of Common Stock issuable upon exercise of options.
Such options are exercisable within 60 days.
(i) Includes 7,263 shares of Common Stock issuable upon exercise of options.
Such options are exercisable within 60 days.
(j) Includes 3,675 shares of Common Stock issuable upon exercise of options.
Such options are exercisable within 60 days.
(k) Includes 5,123 shares of Common Stock issuable upon exercise of options.
Such options are exercisable within 60 days.
(l) In addition to the shares of Common Stock and options to purchase Common
Stock deemed to be beneficially owned by the directors and officers, as set
forth above, includes options to purchase Common Stock held by the following
executive officers in the following amounts: James Shippee -- 30,112 shares;
and James Yearwood -- 9,645 shares. Such options are exercisable currently
or within 60 days.
37
<PAGE> 39
DESCRIPTION OF NOTES
GENERAL
The Notes are to be issued under the Indenture, a copy of which is filed as
an exhibit to the Registration Statement of which this Prospectus is a part. The
following statements, unless the context otherwise requires, are summaries of
the substance or general effect of certain provisions of the Indenture and are
qualified in their entirety by reference to the Indenture. Unless otherwise
defined herein, capitalized terms used in this Prospectus have the same meaning
as defined in the Indenture.
The Notes will be limited in aggregate principal amount to $51,750,000
(including Notes issuable upon exercise of the Underwriters' over-allotment
option) and will be issued as fully-registered Notes only in integral multiples
of $1,000. The Notes will bear interest at the rate of % per annum from and
after the date of delivery, and payments of interest will be made monthly in
arrears beginning December 1, 1997 to Noteholders of record as of the close of
business on the 15th day of the preceding month. At the option of the Company,
interest may be paid by Company checks mailed to registered holders of the
Notes.
The Notes will mature on November 1, and payments of the principal of
the Notes will be made at the main office of the Trustee in New York, New York.
The Notes are also exchangeable and transferable at such office, without charge
therefor, except for any tax or other governmental charge connected therewith.
The Notes are direct unsecured obligations of the Company.
The Company intends to furnish to holders of the Notes annual reports
containing audited financial information.
NOTEHOLDERS' RIGHTS TO PREPAYMENT
If requested by a Noteholder, the Company will prepay, during the period
from the date of issuance through December 1, 1998, and thereafter in any
subsequent twelve-month period ending December 1 (in either case, a "Prepayment
Period") an aggregate maximum per Prepayment Period of 5% of the original
aggregate principal amount of the Notes issued under the Indenture, subject to
certain limitations. Any such prepayment shall be at a price of 100% of the
principal amount plus accrued interest to the date of prepayment. In the case of
deceased Noteholders (including tenants by the entirety, joint tenants and
tenants in common) or beneficial owners, commencing immediately upon issuance of
the Notes, such prepayment will take place within 60 days of the Trustee's
receipt of a prepayment request from the personal representative or surviving
tenant of any such deceased Noteholder or beneficial owner. In the case of other
Noteholders, the prepayment of those Notes tendered on or prior to September 30
in any Prepayment Period will take place on the immediately succeeding December
1, commencing December 1, 1998.
The Company is not obligated to prepay more than $25,000 of the Notes
tendered by any single Noteholder or the personal representative or surviving
tenant of a deceased Noteholder or beneficial owner in any Prepayment Period,
except that in the case of Notes registered in the name of banks, trust
companies or broker-dealers who are members of a national securities exchange or
the National Association of Securities Dealers, Inc. ("Qualified Institutions"),
the $25,000 limitation applies to each beneficial owner of Notes held by any
Qualified Institution.
A Note held in tenancy by the entirety, joint tenancy or tenancy in common
will be deemed to be held by a single holder, and the death of a tenant by the
entirety, joint tenant or tenant in common will be deemed the death of a holder.
The death of a person who, during his lifetime, was entitled to substantially
all of the beneficial ownership interest of a Note, will be deemed the death of
a holder, regardless of the registered holder, if such beneficial interest can
be established to the satisfaction of the Trustee. Such beneficial interest will
be deemed to exist in typical cases of street name or nominee ownership,
ownership by a custodian for the benefit of a minor under the Uniform Gifts to
Minors Act, community property or other joint ownership arrangements between a
husband and wife (including individual retirement accounts or Keogh plans
maintained solely by or for the decedent, or by or for the decedent and spouse)
and trusts and certain other arrangements whereby a person has substantially all
of the beneficial ownership interests in the Notes during
38
<PAGE> 40
his lifetime. Beneficial interests shall include the power to sell, transfer or
otherwise dispose of a Note and the right to receive the proceeds therefrom, as
well as interest and principal payable with respect thereto. Prepayments to the
personal representatives or surviving tenants of deceased Noteholders or
beneficial owners on or prior to December 1 of any Prepayment Period will be
subject to the aggregate limit applicable to such Prepayment Period of 5% of the
original aggregate principal amount of the Notes issued under the Indenture.
Except in the case of Qualified Institutions and the personal
representative or surviving tenant of a deceased Noteholder, no particular form
of request for prepayment or authority to request payment is necessary. However,
in order for Notes to be validly tendered for prepayment, the Trustee must have
received: (1) a written request for prepayment signed by the Noteholder or his
authorized representative, (2) the Notes to be prepaid, and (3) in the case of a
surviving tenant or personal representative of a deceased Noteholder or
beneficial owner, appropriate evidence of death and such other additional
documents as the Trustee shall require, including, but not limited to,
inheritance or estate tax waivers and evidence of authority of the personal
representative. Any Notes tendered or any request for prepayment may be
withdrawn by written request received by the Trustee on or prior to the last day
of September in the Prepayment Period or, in the case of Notes presented by
reason of death of a Noteholder or beneficial owner, prior to the issuance of a
check in payment thereof. Except in the case of a deceased Noteholder or
beneficial owner, Notes not prepaid because they are not validly presented on or
prior to the last day of September in a Prepayment Period or because of the
foregoing dollar limitations, will be held for prepayment during the following
Prepayment Period, subject to the $25,000 of 5% of original aggregate principal
amount limitations, in order of receipt until prepaid, unless sooner withdrawn
by the Noteholder. In the case of a deceased Noteholder or beneficial owner and
the personal representative or surviving tenant of a deceased Noteholder, Notes
tendered for prepayment in accordance with the preceding paragraph and not
prepaid because of the $25,000 or 5% of original aggregate principal amount
limitations, will be held for prepayment in order of receipt, subject to such
$25,000 or 5% of original aggregate principal amount limitations, within 60 days
following the commencement of the next succeeding Prepayment Period until paid,
unless sooner withdrawn by the personal representative or surviving tenant of
such deceased Noteholder or beneficial owner. Requests for prepayment covering
Notes not paid will remain in effect unless withdrawn. A Noteholder who has
tendered a Note for prepayment shall continue to receive all monthly interest
payments prior to the date of prepayment.
Notes tendered in the manner described in the preceding paragraph will be
prepaid, up to the $25,000 per Noteholder or beneficial owner or 5% of original
aggregate principal amount limitations, in the following order: (i) Notes
tendered by the personal representative or surviving tenant of a deceased
Noteholder or beneficial owner shall be prepaid first, and (ii) other Notes will
be prepaid in the order of the Trustee's receipt of a written request for
prepayment executed by the Noteholder or his duly authorized representative.
Notes that are properly tendered but not prepaid during any Prepayment Period
because of the $25,000 or 5% of original aggregate principal amount limitations
will be held for prepayment in the next Prepayment Period in order of receipt
(except in the case of a deceased Noteholder or beneficial owner, whose tenders
will be given priority as discussed above) unless withdrawn by the Noteholder.
If the $25,000 per holder limitation has been reached and the 5% aggregate
limitation has not been reached, if Notes have been properly presented for
payment on behalf of beneficial holders who are natural persons, each in an
aggregate principal amount exceeding $25,000, the Company will redeem such Notes
in order of their receipt (except Notes presented for payment in the event of
death of a holder, which will be given priority in order of their receipt), up
to the aggregate limitation of 5% notwithstanding the $25,000 limitation.
In the case of Notes held by Qualified Institutions on behalf of beneficial
owners, the $25,000 per Prepayment Period limitation shall apply to each such
beneficial owner. Such Qualified Institutions in their request for prepayment on
behalf of such a beneficial owner must submit evidence, satisfactory to the
Trustee, that they hold Notes on behalf of such beneficial owner and that the
aggregate requests for prepayment tendered by such Qualified Institution on
behalf of such beneficial owner per Prepayment Period do not exceed $25,000.
The Company's obligation to prepay Notes properly tendered for prepayment
is not cumulative. Although the Company is obligated to prepay in any Prepayment
Period up to 5% of the original aggregate principal amount of the Notes issued
under the Indenture, it is not required to establish a sinking fund or otherwise
set
39
<PAGE> 41
aside funds for that purpose, and the Company has no present intention of
setting aside funds for prepayment of Notes prior to maturity. The Company
intends to prepay Notes tendered out of its internally-generated funds or, if
necessary, short-term or other long-term borrowings. The obligation to prepay
the Notes, however, is an unsecured obligation of the Company.
Nothing in the Indenture prohibits the Company from purchasing any Notes on
the open market. However, the Company may not use any Notes purchased on the
open market as a credit against amounts the Company is otherwise obligated under
the Indenture to repay.
NOTEHOLDERS' RIGHTS TO PREPAYMENT AFTER FUNDAMENTAL STRUCTURAL CHANGE OR
SIGNIFICANT SUBSIDIARY DISPOSITION
In the event of any Fundamental Structural Change of the Company (as
defined herein below) or a Significant Subsidiary Disposition (as defined herein
below), each holder of Notes will have the right, at the holder's option and
subject to the terms and conditions of the Indenture, to require the Company to
purchase for cash all or any part (provided the principal amount of such part is
$1,000 or an integral multiple thereof) of the holder's Notes on the date that
is 75 days after the occurrence of the Fundamental Structural Change or
Significant Subsidiary Disposition (the "Repurchase Date") at a price equal to
100% of the principal amount thereof plus accrued interest to the Repurchase
Date, unless on or before the date that is 40 days after the occurrence of the
Fundamental Structural Change or Significant Subsidiary Disposition, the Notes
have received a rating of Baa3 or better by Moody's Investors Service, Inc., or
BBB- or better by either Standard & Poor's Corporation or Duff & Phelps Credit
Rating Co. Neither the Board of Directors of the Company nor the Trustee has the
ability to waive the Company's obligation to redeem a holder's Notes upon
request in the event of a Fundamental Structural Change or Significant
Subsidiary Disposition. Exercise of this redemption option by a holder is
irrevocable.
If within 40 days after the Fundamental Structural Change or Significant
Subsidiary Disposition the Notes have not received a rating as described in the
immediately preceding paragraph, the Company is obligated to provide promptly,
but in any event within three business days after expiration of such 40 day
period, notice to the Trustee, who shall promptly (and in all events within five
days after receipt of notice from the Company) notify all holders of the Notes,
of the Fundamental Structural Change or Significant Subsidiary Disposition,
which notice shall state, among other things (i) the availability of the
redemption option, (ii) the date before which a holder must notify the Trustee
of such holder's intention to exercise the redemption option (which date shall
be no more than three business days prior to the Repurchase Date), and (iii) the
procedure such holder must follow to exercise such right. To exercise this
right, the holder must deliver to the Trustee on or before the close of business
on the Repurchase Date, written notice of such holder's redemption election
signed by such holder or its authorized representative and the Note or Notes to
be redeemed free of liens or encumbrances.
Under the Indenture, a "Fundamental Structural Change" in the Company is
deemed to have occurred at such time as (i) the Company shall consolidate with
or merge into any other corporation or partnership, or convey, transfer or lease
all or substantially all of its assets to any person other than as part of a
loan securitization or sale entered into in the ordinary course of business,
(ii) any person shall consolidate with or merge into the Company pursuant to a
transaction in which at least a majority of the common stock of the Company then
outstanding is changed or exchanged or in which the number of shares of common
stock issued by the Company in the transaction to persons who were not
stockholders of the Company immediately prior to such transaction is greater
than the number of shares outstanding immediately prior to the transaction,
(iii) any person shall purchase or otherwise acquire in one or more transactions
beneficial ownership of 50% or more of the common stock of the Company
outstanding on the date immediately prior to the last purchase or other
acquisition, (iv) the Company or any subsidiary shall purchase or otherwise
acquire in one or more transactions during the twelve month period preceding the
date of the last such purchase or other acquisition an aggregate of 25% or more
of the common stock of the Company outstanding on the date immediately prior to
the last such purchase or acquisition, or (v) the Company shall make a
distribution of cash, property or securities to holders of common stock in their
capacity as such (including by means of dividend, reclassification or
recapitalization) which, together with all other distributions during such 12
month period preceding the
40
<PAGE> 42
date of such distribution, has an aggregate fair market value in excess of an
amount equal to 25% of the fair market value of common stock of the Company
outstanding on the date immediately prior to such distribution.
Under the Indenture, a "Significant Subsidiary Disposition" shall be deemed
to have occurred upon (i) the merger, consolidation, or conveyance or transfer
of all or substantially all of the assets of a Significant Subsidiary, or (ii)
the issuance, sale, transfer, assignment, pledge or other disposition of the
capital stock of a Significant Subsidiary or securities convertible or
exchangeable into shares of capital stock of such Significant Subsidiary. A
Significant Subsidiary is any subsidiary of the Company the consolidated assets
of which constitute 20% or more of the Company's consolidated assets. The
Company does not currently have any Significant Subsidiaries.
Although there is a developing body of case law interpreting the phrase
"substantially all," there is no precise established definition of the phrase
under applicable law. Accordingly, the ability of a holder of Notes to require
the Company to repurchase such Notes as a result of conveyance, transfer or
lease of less than all of the assets of the Company or a Significant Subsidiary
to another person may be uncertain.
Except as described above with respect to a Fundamental Structural Change
or Significant Subsidiary Disposition, the Indenture does not contain any other
provisions that permit the holders of the Notes to require that the Company
repurchase the Notes in the event of a takeover or similar transaction.
Moreover, a recapitalization of the Company or a transaction entered into by the
Company with management or their affiliates would not necessarily be included
within the definition of a "Fundamental Structural Change" or a "Significant
Subsidiary Disposition." Accordingly, while such definitions cover a wide
variety of arrangements which have traditionally been used to effect
highly-leveraged transactions, the Indenture does not afford the holders of
Notes protection in all circumstances from highly leveraged transactions,
reorganizations, restructurings, mergers or similar transactions involving the
Company and its Significant Subsidiaries that may adversely affect holders of
Notes.
The indentures pursuant to which the 1992 Notes, the 1993 Notes and the
1995 Notes in the aggregate principal amounts of $15,065,000, $17,570,000 and
$18,400,000, respectively, were issued permit the holders thereof to require the
Company to repurchase such 1992 Notes, 1993 Notes and 1995 Notes upon the
occurrence of events which are substantially identical to those described in the
definitions of "Fundamental Structural Change" and "Significant Subsidiary
Disposition" above. The 1992 Notes, 1993 Notes and 1995 Notes rank on a parity
with the Notes. No assurance can be given that if a Fundamental Structural
Change or Significant Subsidiary Disposition were to occur, there would be
sufficient funds available to the Company to pay the amounts outstanding under
the Notes, the 1992 Notes, the 1993 Notes, the 1995 Notes and any other
instruments or facilities then outstanding which are senior to or on a parity
with the Notes.
The Fundamental Structural Change purchase feature of the Notes may, in
certain circumstances, make more difficult or discourage a takeover of the
Company and thus removal of incumbent management. The Fundamental Structural
Change purchase feature, however, is not the result of management's knowledge of
any specific effort to obtain control of the Company or part of a plan by
management to adopt a series of anti-takeover provisions. Rather, the terms of
the Fundamental Structural Change purchase feature is a result of negotiations
between the Company and the Underwriters.
To the extent that the right of redemption by a holder in the event of a
Fundamental Structural Change constitutes a tender offer under Section 14(e) of
the Exchange Act and the rules thereunder, the Company will comply with all
applicable tender offer rules.
OPTIONAL REDEMPTION BY THE COMPANY
Beginning November 1, , the Company shall have the option to redeem,
upon not less than 30 and not more than 60 days' notice, all or any portion of
the Notes.
41
<PAGE> 43
If the Company redeems the Notes prior to maturity, it will pay in cash a
redemption price equal to the following percentages of the principal amount of
the Notes redeemed, plus interest to the date fixed for redemption:
<TABLE>
<CAPTION>
IF REDEEMED DURING REDEMPTION
THE 12 MONTHS BEGINNING PRICE
-------------------------- ----------
<S> <C>
November 1, .................................................. %
November 1, .................................................. %
November 1, and thereafter.................................... %
</TABLE>
If less than all the Notes are redeemed, the particular Notes to be
redeemed will be selected by lot by the Trustee. Notice of redemption will be
mailed to each holder of Notes to be redeemed at the address appearing in the
registry books for the Notes maintained by the Company.
EVENTS OF DEFAULT; NOTICE AND WAIVER
The following will be Events of Default: (a) default in the payment of
principal, or premium, if any, when due; (b) default in the payment of any
interest when due, continued for five days; (c) default in the meeting of any
redemption payment when due, continued for five days; (d) default in the
performance of any other covenant or warranty of the Company, continued for 30
days (or, in certain circumstances, 60 days) after written notice to the Company
by the Trustee or to the Company and the Trustee by the holders of 10% in
principal amount of the outstanding Notes; (e) any default by the Company under
the terms of any instrument under which Indebtedness in an aggregate principal
amount in excess of $1,000,000 outstanding is accelerated and such acceleration
is not rescinded or annulled within 10 days after written notice to the Company
from the Trustee or to the Trustee and the Company from the holders of not less
than 25% in principal amount of the outstanding Notes; or (f) certain events of
bankruptcy, insolvency or reorganization. If any Event of Default shall occur
and be continuing, the Trustee or the holders of not less than 25% in principal
amount of outstanding Notes may declare the Notes immediately due and payable.
The Company is required to deliver annually to the Trustee an officers'
certificate as to the absence or existence of any default in the performance of
any covenant contained in the Indenture during the preceding year.
The Indenture provides that the Trustee will, within 60 days after
obtaining notice of the occurrence of a default, give the holders of Notes (and
to certain other persons and former noteholders) notice of all uncured defaults
known to it; but, except in the case of a default in the payment of principal,
or premium, if any, or interest on any of the Notes, the Trustee shall be
protected in withholding such notice if it in good faith determines that the
withholding of such notice is in the interest of such holders.
The holders of a majority of the aggregate principal amount of outstanding
Notes may on behalf of the holders of all Notes waive certain past defaults, not
including a default in payment of principal, or premium, if any, or interest on
any Note.
RESTRICTIONS ON ADDITIONAL INDEBTEDNESS
In the Indenture, the Company has covenanted that on each of June 30,
December 31 and any day on which the Company directly or indirectly incurs any
Indebtedness (as defined in the Indenture), the Company will maintain a Ratio
equal to or in excess of 2:1. The term "Ratio" means the ratio of (A) the
Company's earnings before deduction of taxes, depreciation, amortization and
interest expense (but after deduction for any extraordinary item) for the twelve
month period immediately preceding the date such Ratio is calculated (as shown
by a pro forma consolidated income statement of the Company) to (B) the
aggregate dollar amount of interest paid by the Company on the Notes and all
other Indebtedness of the Company or its subsidiaries during such twelve month
period, in each case, after giving effect to the incurrence of such Indebtedness
and, if applicable, the application of the proceeds therefrom. The Company is
required to deliver to the Trustee, within 30 days after each June 30 and
December 31, and each incurrence of Indebtedness, an
42
<PAGE> 44
officer's certificate containing appropriate calculations of the Ratio and the
compliance of the Company with this covenant. At June 30, 1997, the Company's
Ratio was 2.68.
LIQUIDITY MAINTENANCE REQUIREMENT
The Company is not required to establish a sinking fund for the purpose of
redeeming the Notes. The Company has, however, covenanted to maintain on or
before ten days prior to and until the next Interest Payment Date, Permitted
Investments the fair market value of which is equal to or in excess of the
product of the aggregate amount of interest payable with respect to the Notes
for the next succeeding Interest Payment Date multiplied by three. The Company
is required to deliver to the Trustee, within 30 days after the end of each
fiscal quarter, an officer's certificate as to compliance with this covenant.
LIMITATION ON DIVIDENDS AND OTHER PAYMENTS
The Company has agreed pursuant to the Indenture that it will not make, pay
or declare any of the following (each a "Restricted Payment"): (i) any dividend
or other distribution of property or assets other than dividends paid solely in
the Company's stock, (ii) a repayment or defeasance of any indebtedness which is
subordinate to the Notes (except, so long as the Notes are not in default,
scheduled payments of principal and interest thereon), (iii) an exchange of
equity for debt issued subsequent to April 30, 1994, or (iv) any stock
repurchase, unless such Restricted Payment is less than the sum of (A)
$2,000,000 plus (B) 45% of the Company's and its subsidiaries' cumulative net
income earned during the period commencing October 31, 1997 and ending on the
date of such Restricted Payment, plus (C) the cumulative cash and non-cash
proceeds to the Company of all public or private equity offerings during such
time. In addition, the Company is prohibited by the Indenture from making any
Restricted Payment if, by so doing, the Company will be in violation of any
other provisions of the Indenture or any other loan agreement or indenture to
which the Company is a party.
MERGER, CONSOLIDATION OR SALE OF ASSETS; SUCCESSOR CORPORATION
The Company has covenanted that it will not merge or consolidate with, or
sell all or substantially all of its assets to, any person, firm or corporation
unless the Company is the continuing corporation in such transaction and,
immediately thereafter, is not in default under the Indenture or, if it is not
the continuing corporation, the successor corporation expressly assumes the
Company's obligations under the Indenture and, immediately after such
transaction, the successor corporation is not in default under the Indenture.
Any successor corporation shall succeed to and be substituted for the Company as
if such successor corporation has been named as the Company in the Indenture.
MODIFICATION OF THE INDENTURE
Modifications and amendments of the Indenture may be made by the Company
and the Trustee with the consent of the holders of 66 2/3% in principal amount
of outstanding Notes, provided that no such modification or amendment may (i)
reduce the principal amount of or interest on any Note or change the stated
maturity of the principal or the interest payment dates or change the currency
in which the Notes are to be paid, without the consent of each holder of any
Note affected thereby, or (ii) reduce the percentage of holders of Notes
necessary to modify or alter the Indenture, without the consent of the holders
of all Notes then outstanding.
THE TRUSTEE
The Bank of New York is the Trustee under the Indenture. Its mailing
address is 101 Barclay Street, New York, NY 10286.
The Indenture contains a provision pursuant to which the Company will
indemnify the Trustee against any and all losses or liabilities incurred by the
Trustee in connection with its execution and performance of the Indenture;
provided, however, that such indemnification will not extend to losses resulting
from a breach of the Trustee's duties under the Indenture. The Indenture
provides that the holders of a majority in principal
43
<PAGE> 45
amount of the outstanding Notes may direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or exercising
any trust or power conferred upon the Trustee, subject to certain limitations
set forth in the Indenture. The Trustee is not required to take any action at
the direction of the holders of the Notes unless such holders have provided the
Trustee with a reasonable indemnity.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
Set forth below is a discussion of certain federal income tax consequences
to persons purchasing the Notes. The discussion relates only to the material
federal income tax consequences regarding the purchase of the Notes and is not
necessarily inclusive of all matters which may be of interest to an individual
investor. EACH PROSPECTIVE INVESTOR IS ADVISED TO CONSULT WITH HIS OR HER OWN
TAX ADVISOR AS TO PARTICULAR FACTS AND CIRCUMSTANCES THAT MAY BE UNIQUE TO SUCH
INVESTOR AND NOT COMMON TO INVESTORS AS A WHOLE, AND ALSO AS TO ANY ESTATE,
GIFT, STATE, LOCAL OR FOREIGN TAX CONSEQUENCES REGARDING HOLDING AND DISPOSING
OF THE NOTES.
SALE OR REDEMPTION
The difference between the holder's tax basis in a Note and the amount
realized upon the sale of a Note that is held as a capital asset (including the
redemption of such a Note or the payment of its principal amount at maturity),
will be recognized as capital gain or loss.
MARKET DISCOUNT
Prospective purchasers of the Notes should be aware that a holder's sale of
the Notes may be affected by the "market discount" rules of the Code. If a Note
is purchased by a subsequent holder for less than the original issue price, the
Note will have been acquired at a "market discount" (except that the "market
discount" will be considered to be zero if it is less than 0.25% of stated
redemption price of the Notes multiplied by the number of complete years to
maturity from the date of the subsequent purchase). Upon the later disposition
of a Note (including payment by the issuer at or before maturity) acquired at a
"market discount," the holder must treat any gain, to the extent of the accrued
"market discount," as ordinary income. "Market discount" will accrue ratably
from the date following the date the holder acquired the Note to the date of its
maturity. The holder may elect, however, to accrue "market discount" at a
constant interest rate in lieu of ratable accrual, which will result in smaller
accruals of "market discount" in the earlier years and larger accruals in the
later years.
Under the "market discount" rules, a portion of the deduction for interest
expense on indebtedness incurred or continued to purchase or carry the Notes may
have to be deferred to the extent of any "market discount" accruing on the
Notes. A holder may avoid such a deferral of interest expense deductions,
however, if the holder elects to include "market discount" on all "market
discount" instruments held by such holder in income as it accrues, rather than
when the instruments are sold or redeemed.
BACKUP WITHHOLDING
The Company is required to comply with information reporting requirements
imposed by the Code and will be required to withhold 31% of the interest payable
to holders of the Notes who are subject to the backup withholding rules and who
(i) fail to provide to the Company their correct taxpayer identification number
under penalty of perjury, (ii) fail to comply with federal income tax reporting
obligations, or (iii) under certain circumstances, fail to provide the Company
with a certified statement, under penalty of perjury, that the holder is not
subject to backup withholding. Any amounts so withheld from payments on the
Notes will be paid over to the Internal Revenue Service and will be allowed as a
credit against the Noteholder's federal income tax.
44
<PAGE> 46
UNDERWRITING
Pursuant to the Underwriting Agreement, and subject to the terms and
conditions thereof, the Underwriters named below have agreed, severally, to
purchase from the Company the principal amount of Notes set forth below opposite
their respective names.
<TABLE>
<CAPTION>
AMOUNT
NAME OF UNDERWRITERS OF NOTES
----------------------------------------------------------------- ----------
<S> <C>
McDonald & Company Securities, Inc............................... $
J.C. Bradford & Co. Inc..........................................
Tucker Anthony Incorporated......................................
-----------
Total.................................................. $
===========
</TABLE>
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions therein set forth, to purchase all the principal amount of
Notes offered hereby if any of such Notes are purchased.
The Company has granted to the Underwriters an option, exercisable during
the 30 days after the date of this Prospectus, to purchase up to $6,750,000 in
aggregate principal amount of the Notes at the Price to Public set forth on the
cover page hereof less an underwriting discount. The Underwriters may exercise
such option to purchase solely for the purpose of covering over-allotments, if
any, incurred in the sale of Notes offered hereby.
The Underwriters have advised the Company that they propose initially to
offer the Notes to the public at the public offering price set forth on the
cover page of this Prospectus and to certain dealers at such a price less a
concession not in excess of % of the principal amount. The Underwriters may
allow and such dealers may reallow a concession not in excess of % of the
principal amount to certain other dealers. After the initial public offering,
the public offering price and such concessions may be changed.
The offering of the Notes is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offer without notice. The Underwriters reserve the right to
reject any order for the purchase of Notes.
There is no public market for the Notes, and the Company does not intend to
apply for listing of the Notes on the Nasdaq National Market or any Securities
exchange. The Company has been advised by the Underwriters that, following the
public offering of the Notes, the Underwriters presently intend to make a market
in the Notes; however, the Underwriters are not obligated to do so, and any
market-making activity with respect to the Notes may be discontinued at any time
without notice. There can be no assurances as to the liquidity of the public
market for the Notes or that an active public market for the Notes will develop.
If an active market does not develop, the market price and liquidity of the
Notes may be adversely affected.
The Underwriting Agreement provides that the Company will indemnify the
Underwriters, and controlling persons, if any, against certain liabilities,
including liabilities under the Securities Act of 1933, as amended, or to
contribute to payments which the Underwriters or any such controlling persons
may be required to make in respect thereof.
45
<PAGE> 47
LEGAL MATTERS
Hutchins, Wheeler & Dittmar, A Professional Corporation, 101 Federal
Street, Boston, Massachusetts, will render an opinion on the legality of the
Notes being offered hereby. Bass, Berry & Sims, 2700 First American Center,
Nashville, Tennessee, will pass upon certain legal matters for the Underwriters.
James Westra, a shareholder of Hutchins, Wheeler & Dittmar, is a Director of the
Company. Mr. Westra owns 1,735 shares of the Company's Common Stock, and has
options to acquire another 5,512 shares.
EXPERTS
The consolidated financial statements of Litchfield Financial Corporation
incorporated by reference in Litchfield Financial Corporation's Annual Report
(Form 10-K) for the year ended December 31, 1996, have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report thereon
incorporated by reference therein and incorporated herein by reference. Such
financial statements are, and audited financial statements to be included in
subsequently filed documents will be, incorporated herein in reliance upon the
reports of Ernst & Young LLP pertaining to such financial statements (to the
extent covered by consents filed with the Securities and Exchange Commission)
given upon the authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-3 (herein, with all amendments
and exhibits thereto, referred to as the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"). This Prospectus,
which is part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement or the exhibits and
schedules thereto, certain portions having been omitted pursuant to the rules
and regulations of the Commission. Statements made in this Prospectus as to the
contents of any contract or other document are not necessarily complete; with
respect to each such contract or other document filed with the Commission as an
exhibit to the Registration Statement, or incorporated by reference to exhibits
previously filed, reference is made to the exhibit for a more complete
description of the matter involved, and each such statement shall be deemed
qualified in its entirety by such reference.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and in accordance
therewith files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information can be
inspected and copied at the Public Reference Section of the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following
Regional Offices of the Commission: New York Regional Office, Seven World Trade
Center, New York, New York 10048 and Chicago Regional Office, Northwestern
Atrium Center, 500 West Madison, Room 3190, Chicago, Illinois 60661. Copies of
such material can also be obtained at prescribed rates by writing to the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
The Commission maintains a World Wide Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission at http://www.sec.gov. The Company's Common
Stock is listed on The Nasdaq Stock Market's National Market, and such reports,
proxy statements and other information can also be inspected at the Offices of
Nasdaq Operations, 1735 K Street, N.W., Washington D.C. 20006.
No person is authorized to give any information or to make any
representations other than those contained or incorporated by reference in this
Prospectus in connection with the offer made by this Prospectus, and, if given
or made, such information or representations must not be relied upon as having
been authorized. This Prospectus does not constitute an offer or solicitation by
anyone in any jurisdiction to any person to whom it is unlawful to make such
offer or solicitation. The delivery of this Prospectus at any time shall not
under any circumstances create an implication that there has been no change in
the affairs of the Company since the date hereof.
46
<PAGE> 48
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.........................................................
Financial Statements at December 31, 1996
Consolidated Balance Sheets..........................................................
Consolidated Statements of Income....................................................
Consolidated Statements of Stockholders' Equity......................................
Consolidated Statements of Cash Flows................................................
Notes to Consolidated Financial Statements...........................................
Financial Statements at June 30, 1997
Consolidated Balance Sheets..........................................................
Consolidated Statements of Income....................................................
Consolidated Statements of Stockholders' Equity......................................
Consolidated Statements of Cash Flows................................................
Notes to Consolidated Financial Statements...........................................
</TABLE>
F-1
<PAGE> 49
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
LITCHFIELD FINANCIAL CORPORATION
We have audited the accompanying consolidated balance sheets of Litchfield
Financial Corporation as of December 31, 1996 and 1995, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Litchfield
Financial Corporation at December 31, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Boston, Massachusetts
January 31, 1997
F-2
<PAGE> 50
LITCHFIELD FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents....................................... $ 5,557,000 $ 18,508,000
Restricted cash................................................. 18,923,000 16,345,000
Loans held for sale, net of allowance for loan losses of
$817,000 and $1,100,000 in 1996 and 1995, respectively........ 12,260,000 14,380,000
Loans held for investment, net of allowance for loan losses of
$1,200,000 and $413,000 in 1996 and 1995, respectively........ 79,996,000 33,613,000
Subordinated pass-through certificates held to maturity, net of
allowance for loan losses of $1,400,000 and $1,270,000 in 1996
and 1995, respectively........................................ 18,004,000 13,468,000
Excess servicing asset.......................................... 12,019,000 10,058,000
Other........................................................... 7,041,000 7,019,000
------------ ------------
Total assets.......................................... $153,800,000 $113,391,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Lines of credit............................................... $ 36,299,000 $ --
Term note payable............................................. 7,428,000 9,836,000
Accounts payable and accrued liabilities...................... 3,811,000 4,442,000
Dealer/developer reserves..................................... 10,628,000 9,644,000
Allowance for loans sold...................................... 1,111,000 932,000
Deferred income taxes......................................... 5,080,000 3,740,000
------------ ------------
64,357,000 28,594,000
------------ ------------
10% Notes due 2002............................................ 12,785,000 12,888,000
8 7/8% Notes due 2003......................................... 15,930,000 16,113,000
10% Notes due 2004............................................ 18,280,000 18,400,000
------------ ------------
46,995,000 47,401,000
------------ ------------
Stockholders' equity:
Preferred stock, $.01 par value; authorized 1,000,000 shares,
none issued and outstanding................................ -- --
Common stock, $.01 par value; authorized 8,000,000 shares,
5,444,399 shares issued and outstanding in 1996; 5,223,715
shares issued and 5,174,715 shares outstanding in 1995..... 54,000 52,000
Additional paid in capital.................................... 34,633,000 31,873,000
Retained earnings............................................. 7,761,000 6,065,000
Less 49,000 common shares held in treasury, at cost, in
1995....................................................... -- (594,000)
------------ ------------
Total stockholders' equity............................ 42,448,000 37,396,000
------------ ------------
Total liabilities and stockholders' equity............ $153,800,000 $113,391,000
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 51
LITCHFIELD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Interest and fees on loans........................ $15,396,000 $11,392,000 $ 5,669,000
Gain on sale of loans............................. 7,331,000 5,161,000 4,847,000
Servicing and other fee income.................... 1,456,000 908,000 459,000
----------- ----------- -----------
24,183,000 17,461,000 10,975,000
----------- ----------- -----------
Expenses:
Interest expense.................................. 7,197,000 6,138,000 3,158,000
Salaries and employee benefits.................... 3,233,000 2,798,000 1,776,000
Other operating expenses.......................... 3,225,000 2,120,000 1,164,000
Provision for loan losses......................... 1,954,000 890,000 559,000
----------- ----------- -----------
15,609,000 11,946,000 6,657,000
----------- ----------- -----------
Income before income taxes and extraordinary item... 8,574,000 5,515,000 4,318,000
Provision for income taxes.......................... 3,301,000 2,066,000 1,619,000
Income before extraordinary item.................... 5,273,000 3,449,000 2,699,000
Extraordinary item (net of applicable tax benefit of
$76,0000)......................................... -- -- (126,000)
----------- ----------- -----------
Net income.......................................... $ 5,273,000 $ 3,449,000 $ 2,573,000
=========== =========== ===========
Primary per common share amounts:
Income before extraordinary item.................. $ .93 $ .76 $ .63
Extraordinary item................................ -- -- (.03)
----------- ----------- -----------
Net income........................................ $ .93 $ .76 $ .60
=========== =========== ===========
Primary weighted average number of shares........... 5,674,264 4,522,983 4,280,006
Fully-diluted per common share amounts:
Income before extraordinary item.................. $ .92 $ .76 $ .63
Extraordinary item................................ -- -- (.03)
----------- ----------- -----------
Net income........................................ $ .92 $ .76 $ .60
=========== =========== ===========
Fully-diluted weighted average number of shares..... 5,736,467 4,543,009 4,280,006
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 52
LITCHFIELD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID IN RETAINED TREASURY
STOCK CAPITAL EARNINGS STOCK TOTAL
------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993....... $36,000 $ 9,662,000 $ 5,024,000 $ -- $14,722,000
Issuance of 178,313 shares in
connection with 5% stock
dividend.................... 2,000 2,183,000 (2,185,000) -- --
Issuance of 12,995 shares...... -- 23,000 -- -- 23,000
Repurchase of 49,100 shares.... -- -- -- (595,000) (595,000)
Dividends ($.03 per share)..... -- -- (113,000) -- (113,000)
Net income..................... -- -- 2,573,000 -- 2,573,000
------- ----------- ----------- -------- -----------
Balance, December 31, 1994....... 38,000 11,868,000 5,299,000 (595,000) 16,610,000
Issuance of 186,819 shares in
connection with 5% stock
dividend.................... 2,000 2,473,000 (2,475,000) -- --
Issuance of 1,282,551 shares
(including reissuance of 100
shares held in treasury).... 12,000 17,532,000 -- 1,000 17,545,000
Dividends ($.04 per share)..... -- -- (208,000) -- (208,000)
Net income..................... -- -- 3,449,000 -- 3,449,000
------- ----------- ----------- -------- -----------
Balance, December 31, 1995....... 52,000 31,873,000 6,065,000 (594,000) 37,396,000
Issuance of 259,124 shares in
connection with 5% stock
dividend.................... 3,000 3,301,000 (3,304,000) -- --
Issuance of 10,560 shares
(including reissuance of ten
shares held in treasury).... -- 52,000 -- -- 52,000
Retirement of 48,990 shares
held in treasury............ (1,000) (593,000) -- 594,000 --
Dividends ($.05 per share)..... -- -- (273,000) -- (273,000)
Net income..................... -- -- 5,273,000 -- 5,273,000
------- ----------- ----------- -------- -----------
Balance, December 31, 1996....... $54,000 $34,633,000 $ 7,761,000 $ -- $42,448,000
======= =========== =========== ======== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 53
LITCHFIELD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1996 1995 1994
------------ ------------ -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 5,273,000 $ 3,449,000 $ 2,573,000
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Gain on sale of loans................................... (7,331,000) (5,161,000) (4,847,000)
Loss on retirement of 10% Notes due 2002................ -- -- 88,000
Amortization and depreciation........................... 520,000 511,000 490,000
Amortization of excess servicing asset.................. 3,444,000 2,267,000 1,996,000
Provision for loan losses............................... 1,954,000 890,000 559,000
Provision for deferred income taxes..................... 1,340,000 1,209,000 1,101,000
Net changes in operating assets and liabilities:
Restricted cash....................................... (2,578,000) (4,957,000) (6,791,000)
Loans held for sale................................... (532,000) (11,978,000) 2,220,000
Dealer/developer reserves............................. 984,000 3,069,000 1,649,000
Net change in other assets and liabilities............ (2,701,000) 881,000 (3,549,000)
------------ ------------ -----------
Net cash provided by (used in) operating activities..... 373,000 (9,820,000) (4,511,000)
------------ ------------ -----------
Cash flows from investing activities:
Purchase of investments held to maturity.................. -- (5,595,000) (2,011,000)
Redemption of investments held to maturity................ 118,000 9,232,000 7,890,000
Net originations and principal payments on loans held for
investment.............................................. (47,170,000) (18,022,000) (7,051,000)
Sale of loans originally held for investment.............. -- -- 1,011,000
Collections on subordinated pass-through certificates..... 590,000 -- --
Capital expenditures and other assets..................... (126,000) (1,676,000) (1,697,000)
------------ ------------ -----------
Net cash used in investing activities................... (46,588,000) (16,061,000) (1,858,000)
------------ ------------ -----------
Cash flows from financing activities:
Net borrowings (repayments) on lines of credit............ 36,299,000 (5,823,000) 5,823,000
Proceeds from issuance of long-term notes................. -- 18,400,000 --
Redemption of long-term notes............................. (406,000) (895,000) (2,406,000)
Proceeds from term note................................... -- 12,500,000 --
Payments of term note..................................... (2,408,000) (2,664,000) --
Net proceeds from issuance of common stock................ 52,000 17,544,000 23,000
Reissuance (purchase) of treasury stock................... -- 1,000 (595,000)
Dividends paid............................................ (273,000) (208,000) (113,000)
------------ ------------ -----------
Net cash provided by financing activities............... 33,264,000 38,855,000 2,732,000
------------ ------------ -----------
Net (decrease) increase in cash and cash equivalents........ (12,951,000) 12,974,000 (3,637,000)
Cash and cash equivalents, beginning of period.............. 18,508,000 5,534,000 9,171,000
------------ ------------ -----------
Cash and cash equivalents, end of period.................... $ 5,557,000 $ 18,508,000 $ 5,534,000
============ ============ ===========
Supplemental Schedule of Noncash Financing and Investing
Activities:
Exchange of loans for subordinated pass-through
certificates............................................ $ 3,540,000 $ 8,842,000 $ --
============ ============ ===========
Exchange of loans for investments held to maturity........ $ -- $ 358,000 $ --
============ ============ ===========
Transfers from loans to real estate acquired through
foreclosure............................................. $ 1,654,000 $ 1,991,000 $ 843,000
============ ============ ===========
Supplemental Cash Flow Information:
Interest paid............................................. $ 6,674,000 $ 5,766,000 $ 2,972,000
============ ============ ===========
Income taxes paid......................................... $ 1,411,000 $ 1,151,000 $ 448,000
============ ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 54
LITCHFIELD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Litchfield Financial Corporation (the "Company") is a specialty consumer
finance company which provides financing for the purchase of rural and vacation
properties ("Land Loans") and financing of vacation ownership interests ("VOI
Loans"), popularly known as timeshare interests. In addition, the Company makes
loans to rural land dealers and resort developers secured by consumer
receivables and other secured loans (collectively, "Dealer/Other Loans".)
Basis of Presentation
The consolidated financial statements include the accounts of Litchfield
Financial Corporation and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
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 revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Interest income
Interest income from loans and subordinated pass-through certificates held
to maturity is recognized using the interest method. Accrual of interest is
suspended when collection is doubtful and, in any event, when a loan is
contractually delinquent for ninety days and it is determined that amounts
cannot be recovered from dealer/developer reserves or guarantees. The accrual is
resumed when the loan becomes contractually current as to principal and interest
and past-due interest is recognized at that time.
Gain on sale of loans
Loans are typically sold to investors with the Company retaining a
participation in cash flows derived
from the loans sold. Gain on sales of loans are recorded on the settlement date
based upon the difference between the selling price and the carrying value of
the loans sold using the specific identification method. The gain is increased
by the present value of the differential between the interest to be collected
from the borrower and the interest to be passed on to the purchaser of the loan
during the estimated average life of the loans, less fees for normal servicing
of the loans (referred to as excess servicing asset). The excess servicing asset
is calculated using prepayment, default, and interest rate assumptions prevalent
in the marketplace at the time of sale for similar instruments. The Company
provides an allowance for expected losses under the recourse provisions at the
time of the loan sale. The excess servicing asset is amortized over the
estimated life of the loans using the interest method. Because a significant
portion of the Company's revenues is comprised of gains realized upon sales of
loans, the timing of such sales has a significant effect on the Company's
results of operations.
On a quarterly basis, the Company assesses the carrying value of the excess
servicing asset by comparing actual versus assumed prepayment rates on a
disaggregated basis reflecting factors such as origination dates of the loans
and the types of loans. The Company will adjust the carrying value of the excess
servicing asset for any unfavorable changes.
Loans
Loans held for sale are carried at the lower of aggregate cost or market
value. Market value is determined by outstanding commitments from investors or
current investor yield requirements.
F-7
<PAGE> 55
LITCHFIELD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Provisions for loan losses and impairment of loans
Provisions for loan losses are charged to income in amounts sufficient to
maintain the allowances at levels considered adequate to cover anticipated
losses on outstanding loans, including loans sold and subordinated pass-through
certificates. Management evaluates allowance requirements on a quarterly basis
by examining current delinquencies, historical loan losses, the value of the
underlying collateral and general economic conditions and trends. Management
also evaluates the availability of dealer/developer reserves to absorb loan
losses. The Company determines those loans that are uncollectible based upon
detailed review of all loans and any charge-offs are charged to the allowance
for loan losses.
Land Loans and VOI Loans which consist of large groups of smaller balance
loans are evaluated collectively for impairment and are stated at the lower of
cost or fair value.
Dealer/Other Loans are evaluated individually for impairment based on the
factors described above. No such loans were impaired at December 31, 1996 or
1995.
Loan origination fees and related costs
The Company defers the excess of loan origination fees over related direct
costs and recognizes such amount as interest income over the estimated life of
the related loans using the interest method.
Real estate acquired through foreclosure
Real estate acquired through foreclosure is carried at the lower of fair
value less estimated costs to sell or cost. On a quarterly basis, the Company
evaluates the carrying value of the real estate and establishes a valuation
allowance if the fair value of the asset less the estimated costs to sell the
asset is less than the carrying value of the asset. Subsequent increases in the
fair market value less the estimated cost to sell the asset would reduce the
valuation allowance, but not below zero. There was no such valuation allowance
at December 31, 1996 or 1995. Other real estate owned of $1,775,000 and
$1,288,000 is included in other assets at December 31, 1996 and 1995,
respectively.
Dealer/developer reserves
As part of the Company's financing of loans through dealer/developers, the
Company retains a portion of the proceeds from the purchased loans as a reserve
to offset potential losses on those loans. The Company negotiates the amount of
reserves with the dealer/developers based upon various criteria, including the
credit risk associated with the dealer/developer and the loans being purchased.
The Company generally returns any excess reserves to the dealer/developer on a
quarterly basis as the related loans are repaid by borrowers.
Income taxes
The Company uses the liability method of accounting for income taxes in its
financial statements.
Net income per common share
Primary and fully diluted earnings per share were computed by dividing net
income by the weighted average number of shares of common stock and common stock
equivalents outstanding for each period.
Cash and cash equivalents
The Company considers all highly liquid instruments purchased with an
original maturity of three months or less to be cash equivalents.
Restricted cash
Restricted cash and cash equivalents represent accounts established as
credit enhancements for certain loan sales and escrow deposits held for
customers.
F-8
<PAGE> 56
LITCHFIELD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Investments held to maturity and Subordinated pass-through certificates held
to maturity
Management determines the appropriate classification of debt securities at
the time of purchase. Debt securities are classified as held to maturity when
the Company has the intent and ability to hold the investments to maturity.
Investments held to maturity are carried at amortized cost and are included in
other assets.
The Company classifies its subordinated pass-through certificates as held
to maturity based on its ability and expressed intent to hold the certificates
of maturity. Historically, the Company has not sold its subordinated
pass-through certificates and cannot sell such certificates without the consent
of the senior certificate holders. In addition, the Company has pledged certain
pass-through certificates as collateral for certain liabilities and cannot sell
such certificates without the further consent of the lenders.
Subordinated pass-through certificates held to maturity are carried at
amortized cost less an allowance for loan losses. On a quarterly basis, the
Company assesses the carrying value of the subordinated pass-through
certificates for impairment. The Company considers the affect of changes in
prepayment, default and interest rates on the cash flows underlying the
subordinated pass-through certificates. The Company will adjust the carrying
value for any impairment of carrying value that it considers to be other
than-temporary.
Deferred debt issuance costs
Deferred debt issuance costs are amortized over the life of the related
debt. The unamortized balance of $1,820,000 and $2,211,000 is included in other
assets at December 31, 1996 and 1995, respectively. The amount of the
accumulated amortization was $1,051,000 and $675,000 at December 31, 1996 and
1995 respectively.
Mortgage servicing rights
In May 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 122 "Accounting for Mortgage Servicing
Rights, an Amendment of FASB Statement No. 65." The Company adopted the
provisions of the standard in 1996. The standard requires the Company to
allocate the cost of purchasing or originating mortgage loans to the mortgage
servicing rights and the loans (without the servicing rights) based on their
relative fair values if the Company sells or securitizes the loans and retains
the servicing rights. Any cost allocated to mortgage servicing rights is
recognized as a separate asset. Mortgage servicing rights are amortized in
proportion to and over the period of estimated net servicing income and are
evaluated for impairment based on their fair value.
In the absence of fair market values for the servicing of Land and VOI
Loans, the Company uses fair values derived from cash flows to estimate fair
value. Such estimates consider assumptions about prepayments, defaults and
interest rates consistent with those used in the Company's gain on sale of loan
models described above.
Because estimated future cash flows from servicing approximate the cost of
servicing the related Land and VOI Loans, the Company did not allocate any cost
to mortgage servicing rights in 1996.
Reclassification
Certain amounts in the 1994 and 1995 financial statements have been
reclassified to conform to the 1996 presentation.
New accounting standards
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125 "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities." In general, the
provisions of this standard are effective for financial statements for transfers
and servicing of financial assets and extinguishments of liabilities occurring
after December 31, 1996, and shall be
F-9
<PAGE> 57
LITCHFIELD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
applied prospectively. In future periods, the Company's excess servicing asset
will be reclassified as interest only strips and will be accounted for under the
provisions of the Statement of Financial Accounting Standards No. 115
"Accounting For Certain Investments in Debt and Equity Securities."
2. INVESTMENTS HELD TO MATURITY AND SUBORDINATED PASS-THROUGH CERTIFICATES HELD
TO MATURITY
The following is a summary of investments and subordinated pass-through
certificates held to maturity:
<TABLE>
<CAPTION>
GROSS UNREALIZED
--------------------
DECEMBER 31, 1996 COST GAINS LOSSES FAIR VALUE
------------------------------------ ----------- -------- ------- -----------
<S> <C> <C> <C> <C>
Mortgage-backed securities.......... $ 142,000 $ -- $ -- $ 142,000
Subordinated pass-through
certificates...................... 18,004,000 185,000 -- 18,189,000
----------- -------- ------- -----------
Total debt securities..... $18,146,000 $185,000 $ -- $18,331,000
========== ======== ======= ==========
</TABLE>
<TABLE>
<CAPTION>
GROSS UNREALIZED
--------------------
DECEMBER 31, 1995 COST GAINS LOSSES FAIR VALUE
------------------------------------ ----------- -------- ------- -----------
<S> <C> <C> <C> <C>
Mortgage-backed securities.......... $ 260,000 $ -- $ -- $ 260,000
Subordinated pass-through
certificates...................... 13,468,000 15,000 -- 13,483,000
----------- -------- ------- -----------
Total debt securities..... $13,728,000 $ 15,000 $ -- $13,743,000
========== ======== ======= ==========
</TABLE>
The amortized cost and estimated fair value of debt securities at December
31, 1996, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because the issuers of the securities may
have the right to prepay obligations without prepayment penalties.
Mortgage-backed securities are included in other assets.
<TABLE>
<CAPTION>
ESTIMATED
COST FAIR VALUE
----------- -----------
<S> <C> <C>
Due in one year or less........................... $ -- $ --
Due after one year through five years............. 18,146,000 18,331,000
----------- -----------
Total debt securities................... $18,146,000 $18,331,000
=========== ===========
</TABLE>
In 1990, the Company began privately placing issues of pass-through
certificates evidencing an undivided beneficial ownership interest in pools of
loans held by a trust. The principal and part of the interest payments on the
loans transferred to the trust are collected by the Company, as the servicer of
the loan pool, remitted to the trust for the benefit of the investors, and then
distributed by the trust to the investors in the pass-through certificates.
In certain of the Company's issues of pass-through certificates, credit
enhancement was achieved by dividing the issue into a senior portion which was
sold to the investors and a subordinated portion which was retained by the
Company. The Company had investments in pass-through certificates of $18,004,000
and $13,468,000 at December 31, 1996 and 1995, respectively. In certain other of
the Company's private placements, credit enhancement was achieved through cash
collateral. The Company had $18,647,000 and $16,179,000 of restricted cash at
December 31, 1996 and 1995 representing credit enhancements.
If borrowers default in the payment of principal or interest on the loans
underlying these issues of pass-through certificates, losses would be absorbed
first by the subordinated portion or cash collateral retained by the Company and
might, therefore, have to be charged against the allowance for the loan losses
to the extent dealer/developer guarantees and reserves are not available.
F-10
<PAGE> 58
LITCHFIELD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. LOANS
Loans at December 31, 1996 and 1995 consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
LOANS HELD FOR SALE 1996 1995
-------------------------------------------------- ----------- -----------
<S> <C> <C>
Land.............................................. $11,833,000 $ 9,125,000
VOI............................................... 2,194,000 7,546,000
Discount, net of accretion........................ (950,000) (1,191,000)
Allowance for loan losses......................... (817,000) (1,100,000)
----------- -----------
Loans, net........................................ $12,260,000 $14,380,000
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
LOANS HELD FOR INVESTMENT 1996 1995
-------------------------------------------------- ----------- -----------
<S> <C> <C>
Land.............................................. $ 1,861,000 $ 1,429,000
VOI............................................... 1,313,000 3,698,000
Dealer/Other...................................... 79,374,000 30,140,000
Discount, net of accretion........................ (1,352,000) (1,241,000)
Allowance for loan losses......................... (1,200,000) (413,000)
----------- -----------
Loans, net........................................ $79,996,000 $33,613,000
=========== ===========
</TABLE>
Contractual maturities of loans as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
1996............................................................ $ 13,654,000
1997............................................................ 14,669,000
1998............................................................ 10,517,000
1999............................................................ 3,690,000
2000............................................................ 4,613,000
Thereafter...................................................... 45,113,000
-----------
$ 92,256,000
===========
</TABLE>
It is the Company's experience that a substantial portion of the loans will
be repaid before contractual maturity dates. Consequently, the above tabulation
is not to be regarded as a forecast of future cash collections.
4. ALLOWANCES FOR LOAN LOSSES
An analysis of the allowances for loan losses follows:
<TABLE>
<CAPTION>
LOANS OWNED AND YEAR ENDED DECEMBER 31,
SUBORDINATED ----------------------------------------
PASS-THROUGH CERTIFICATES 1996 1995 1994
- ---------------------------------------------------- ----------- ---------- ---------
<S> <C> <C> <C>
Allowance at beginning of period.................... $ 2,783,000 $ 384,000 $ 464,000
Net charge-offs of uncollectible accounts(1)........ (1,395,000) (539,000) (80,000)
Provision for loan losses........................... 1,735,000 761,000 --
Allocation of purchase adjustment(2)................ 294,000 2,177,000 --
----------- ---------- ---------
Allowance at end of period.......................... $ 3,417,000 $2,783,000 $ 384,000
=========== ========== =========
</TABLE>
F-11
<PAGE> 59
LITCHFIELD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
LOANS SOLD 1996 1995 1994
- ---------------------------------------------------- ----------- ---------- ---------
<S> <C> <C> <C>
Allowance at beginning of period.................... $ 932,000 $ 880,000 $ 600,000
Net charge-offs of uncollectible accounts(3)........ (570,000) (407,000) (279,000)
Provision for loan losses........................... 219,000 129,000 559,000
Allocation of purchase adjustment(2)................ 530,000 330,000 --
----------- ---------- ---------
Allowance at end of period.......................... $ 1,111,000 $ 932,000 $ 880,000
=========== ========== =========
</TABLE>
- ---------------
(1) Net of recoveries of $240,000 in 1996 and $42,000 in 1994. There were no
recoveries in 1995.
(2) Represents allocation of purchase adjustment related to the purchase of
pools of certain loans including the GEFCO portfolio in 1995. (See Note 12.)
(3) Net of recoveries of $70,000, $11,000 and $5,000 in 1996, 1995 and 1994,
respectively.
Net charge-offs by major loan and collateral types experienced by the
Company are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
---------- -------- --------
<S> <C> <C> <C>
Land...................................... $ 669,000 $546,000 $359,000
VOI....................................... 1,284,000 45,000 --
Dealer/Other.............................. 12,000 355,000 --
---------- -------- --------
Total..................................... $1,965,000 $946,000 $359,000
========== ======== ========
</TABLE>
5. EXCESS SERVICING ASSET
The activity in the excess servicing asset is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Balance, beginning of period........ $10,058,000 $ 8,925,000 $ 4,931,000
Gain on sale of loans............... 4,641,000 3,232,000 5,971,000
Recapture on repurchase of loans.... (70,000) (52,000) (366,000)
Amortization........................ (2,610,000) (2,047,000) (1,611,000)
----------- ----------- ----------
Balance, end of period.............. $12,019,000 $10,058,000 $ 8,925,000
=========== =========== ==========
</TABLE>
6. DERIVATIVE FINANCIAL INSTRUMENT HELD FOR PURPOSES OTHER THAN TRADING
In June, 1994, the Company entered into an interest rate cap agreement with
a bank in order to manage its exposure to certain interest rate increases. The
Company's objective in managing interest rate exposure is to match its
proportion of fixed versus variable rate assets, liabilities and loan sale
facilities. The interest rate cap entitles the Company to receive an amount,
based upon an amortizing notional amount, when commercial paper rates exceed 8%.
The notional amount was $5.4 million at December 31, 1996.
The premium paid for this interest rate cap agreement is amortized ratably
in the interest expense during the life of the agreement of seven years.
Payments to be received as a result of the cap agreement are accrued as a
reduction of interest expense. The unamortized cost of the premium is included
in other assets. The Company is exposed to credit loss in the event of
nonperformance by the cap provider. The balance of the unamortized premium at
December 31, 1996 was $196,000.
F-12
<PAGE> 60
LITCHFIELD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. DEBT
Financial data relating to the Company's lines of credit is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995
----------- -----------
<S> <C> <C>
Lines of credit available:
Unsecured lines of credit...................... $ -- $ --
Secured lines of credit(1)..................... 51,799,000 15,000,000
----------- -----------
Total lines of credit available........ $51,799,000 $15,000,000
=========== ===========
Borrowings outstanding at end of period:
Unsecured lines of credit...................... $--......... $ --
Secured lines of credit(1)..................... 36,299,000.. --
----------- -----------
Total borrowings outstanding at end of
period............................... $36,299,000 $ --
=========== ===========
Weighted average interest rate at end of period:
Unsecured lines of credit...................... --% --%
Secured lines of credit........................ 7.9% 9.5%
Total weighted average interest rate........... 7.9% 9.5%
Maximum borrowings outstanding at any month end:
Unsecured lines of credit...................... $ -- $ 3,000,000
=========== ===========
Secured lines of credit........................ $36,299,000 $ 5,000,000
=========== ===========
Average amount outstanding during period:
Unsecured lines of credit...................... $ -- $ 231,000
=========== ===========
Secured lines of credit........................ $15,948,000 $ 2,306,000
=========== ===========
Weighted average interest rate during the period
(determined by dividing interest expense by
average borrowings):
Unsecured lines of credit...................... --% 13.0%
Secured lines of credit........................ 7.6% 9.8%
Total weighted average interest rate
during the period.................... 7.6% 10.1%
</TABLE>
- ---------------
(1) Amount includes $1,799,000 of outstanding borrowings at December 31, 1996 on
the revolving line of credit with Holland Limited Securities, Inc. (See Note
11.)
The Company had a secured line of credit of $30,000,000 from the Bank of
Boston as lead agent, and Fleet Bank. The Company can elect to borrow all or
part of the outstanding balance on the line of credit at either the Bank's prime
interest rate or the Eurodollar rate plus 2%. Outstanding borrowings under this
line of credit at December 31, 1996 were $26,200,000. The line of credit matures
in April 1997, with renewal at the lender's discretion.
The Company also entered into an additional secured line of credit of
$5,000,000 with another financial institution at that institution's prime rate
of interest plus 1.25%. This line of credit matures in July 1997. There were no
outstanding borrowings on this line of credit at December 31, 1996. In January
1997, the secured line of credit was increased to $8,000,000 and the maturity
was extended to January 1998. The above lines of credit are secured by consumer
receivables and other secured loans.
The Company also entered into a $15,000,000 line of credit facility with
the Bank of Scotland. The outstanding borrowings under this facility at December
31, 1996 were $8,300,000. This facility is secured by certain subordinated
pass-through certificates, excess servicing assets, cash collateral accounts and
certain
F-13
<PAGE> 61
LITCHFIELD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
other loans and matures in September 1999. Interest is payable quarterly in
arrears at the Bank's prime interest rate plus 1%. In January 1997, this
facility was increased to $20,000,000.
The Company is not required to maintain compensating balances or forward
sales commitments under the terms of these lines of credit. As described in Note
11, the Company also has line of credit as part of an asset backed commercial
paper facility.
At December 31, 1995 the secured line of credit from the Bank of Boston as
lead agent was $15,000,000 at the Bank's prime interest rate plus 1%. There were
no outstanding borrowings at December 31, 1995.
During the first quarter of 1995, the Company entered into a 10.43%,
$12,500,000 debt placement with an insurance company. Principal is payable
monthly based on collection of the underlying collateral. The note is redeemable
only with the approval of the noteholder. The note is collateralized by certain
of the Company's investments in subordinated pass-through certificates, excess
servicing assets, and cash. At December 31, 1996 and 1995, the balance
outstanding on the note was $7,428,000 and $9,836,000 and the approximate value
of the underlying collateral was $13,772,000 and $17,700,000, respectively.
On March 15, 1995, the Company completed a public offering of $18,400,000
of 10% Notes due 2004 ("1995 Notes"). The 1995 Notes allow for a maximum annual
redemption at the election of the noteholders of $920,000 and contain certain
restrictions regarding the payment of cash dividends and require the maintenance
of certain financial ratios. On April 1, 1996 the noteholders redeemed, and the
Company paid $120,000 of the 1995 Notes.
Previously, the Company completed public offerings of $15,065,000 in
November 1992 ("1992 Notes") and $17,570,000 in May 1993 ("1993 Notes"). The
1992 Notes and the 1993 Notes bear interest at 10% and 8 7/8%, respectively, and
are due 2002 and 2003, respectively. The 1992 Notes and the 1993 Notes are
unsecured obligations of the Company and each such issuance allows for a maximum
annual redemption by noteholders of 5% of the original principal amount thereof.
On November 1, 1996, the Company repaid $103,000 of the 1992 Notes due 2002
pursuant to the noteholders' annual redemption rights. On August 1, 1996 and
June 1, 1996, the Company repaid $20,000 and $163,000, respectively of the 1993
Notes due 2003 pursuant to the noteholders' annual redemption rights.
8. RETIREMENT PLANS
Effective January 1, 1996, the Company implemented the Litchfield Financial
Corporation Employee 401(k) Plan ("the Plan"), a defined contribution plan for
all eligible employees at least 21 years of age and who have been employed by
the Company for at least six months. Participating employees may elect to defer
up to fifteen percent of their annual gross earnings. The Company will match an
amount equal to one hundred percent of the employee's pretax contributions up to
five percent of the employee's eligible compensation contributed into the Plan.
Contributions made by the Company in 1996 were $101,000.
The Company established a Simplified Employee Pension (SEP) Plan in 1992.
The SEP is a defined contribution plan for all eligible employees at least 21
years of age and who have worked for the Company in at least three of the
immediately preceding five years. Contributions to the SEP were made entirely at
the discretion of the Company. Contributions to the SEP in 1994 were $92,000.
There were no contributions in 1995 and the plan was discontinued in 1996.
F-14
<PAGE> 62
LITCHFIELD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1995
---------- ----------
<S> <C> <C>
Deferred Tax Assets:
Loan loss allowance............................... $ 350,000 $ 348,000
Other............................................. 282,000 109,000
---------- ----------
Total deferred tax assets...................... 632,000 457,000
Valuation allowance....................... -- --
---------- ----------
Net deferred tax assets................... 632,000 457,000
---------- ----------
Deferred Tax Liabilities:
Depreciation...................................... 50,000 28,000
Mortgage loan income recognition.................. 3,696,000 2,746,000
Accretion income.................................. 1,662,000 1,423,000
Other............................................. 304,000 --
---------- ----------
Total deferred tax liabilities................. 5,712,000 4,197,000
---------- ----------
Net deferred tax liabilities.............. $5,080,000 $3,740,000
========== ==========
</TABLE>
Significant components of the provision for income taxes attributable to
continuing operations are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal.............................. $1,911,000 $ 819,000 $ 462,000
State................................ 50,000 38,000 56,000
---------- ---------- ----------
Total Current................ 1,961,000 857,000 518,000
---------- ---------- ----------
Deferred:
Federal.............................. 1,288,000 1,191,000 1,098,000
State................................ 52,000 18,000 3,000
---------- ---------- ----------
Total Deferred............... 1,340,000 1,209,000 1,101,000
---------- ---------- ----------
$3,301,000 $2,066,000 $1,619,000
========== ========== ==========
</TABLE>
The reconciliation of income tax attributable to continuing operations
computed at the U.S. federal statutory tax rates to income tax expense is:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Tax at U.S. statutory rates.......................... 35.0% 34.0% 34.0%
State income taxes, net of federal tax benefit....... 3.4 3.4 3.5
Other -- net......................................... 0.1 0.1 --
---- ---- ----
38.5% 37.5% 37.5%
==== ==== ====
</TABLE>
F-15
<PAGE> 63
LITCHFIELD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. STOCKHOLDERS' EQUITY AND STOCK OPTION PLANS
Stockholders' Equity
In July 1996, the Board of Directors declared a five percent stock dividend
of the Company's Common Stock paid August 9, 1996 to stockholders of record on
July 23, 1996. Accordingly, weighted average share and per share amounts have
been restated for periods presented. The Company also declared 5% stock
dividends in 1995 and 1994.
Stock Option Plans
The Company has reserved 1,122,319 shares of common stock for issuance to
officers, directors and employees on exercise of options granted under a stock
option plan established in 1990. Options were granted at prices equal to or in
excess of the fair market value of the stock on the date of the grant. There
were 615,000 and 384,000 shares exercisable at December 31, 1996 and 1995,
respectively.
Information with respect to options granted is as follows:
<TABLE>
<CAPTION>
NUMBER EXERCISE
OF PRICE
SHARES PER SHARE
------- ---------------
<S> <C> <C>
Outstanding at December 31, 1993.................. 503,644
Granted......................................... 200,656 $11.11 - $11.67
Canceled or exercised........................... (26,831) $1.15 - $11.23
-------
Outstanding at December 31, 1994.................. 677,469
Granted......................................... 81,588 $9.98 - $11.56
Canceled or exercised........................... (43,385) $1.44 - $11.67
-------
Outstanding at December 31, 1995.................. 715,672
Granted......................................... 204,311 $11.55 - $14.05
Canceled or exercised........................... (13,175) $1.15 - $11.55
-------
Outstanding at December 31, 1996.................. 906,808
=======
</TABLE>
In April 1995, the Company established the Stock Option Plan for
Non-Employee Directors which provides for the grant of options to purchase 5,513
shares of common stock to each non-employee director serving on the Board at the
time the plan was approved and to each new non-employee director elected in the
five year period commencing April 1995. The maximum number of shares for which
options may be granted under the plan is 66,150 shares. Options for 22,052
shares were granted at an exercise price of $12.02 per share in 1995 which was
the fair market value on the date of grant. There were 22,052 options
outstanding at December 31, 1996 and 1995. There were 7,352 options that were
exercisable at December 31, 1996. There were no options exercisable at December
31, 1995.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation." The Company has elected to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by Statement 123, which also requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using the Black-Scholes option pricing model with
F-16
<PAGE> 64
LITCHFIELD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the following weighted-average assumptions for 1996 and 1995, respectively:
risk-free interest rates of 6.23% and 6.31%; a dividend yield of .35%,
volatility factors of the expected market price of the Company's common stock of
.24; and a weighted-average expected life of the option of 7.5 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Pro forma net income................................ $4,983,000 $3,363,000
Pro forma earnings per share
Primary........................................... $ .88 $ .74
Fully-diluted..................................... $ .87 $ .74
</TABLE>
Because Statement 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until 1997.
11. SALE OF LOANS
The Company has sold $249,451,000 and $194,515,000 of loans at face value
through December 31, 1996 and 1995, respectively. The principal amount remaining
on the loans sold was $129,619,000 and $111,117,000 at December 31, 1996 and
1995, respectively. The Company guarantees, through replacement or repayment,
loans in default up to a specified percentage of loans sold. Dealer/developer
guaranteed loans are secured by repurchase or replacement guarantees in addition
to, in most instances, dealer/developer reserves.
The Company's exposure to loss on loans sold in the event of nonperformance
by the consumer, the dealer/developer on its guarantee, and the determination
that the collateral is of no value was $8,780,000, $10,259,000, and $12,456,000
at December 31, 1996, 1995 and 1994, respectively. Such amounts have not been
discounted. The Company repurchased $991,000, $448,000 and $259,000 of loans
under the recourse provisions of loan sales in 1996, 1995, and 1994,
respectively. Net charge-offs on loans repurchased under recourse provisions
were $570,000, $407,000, and $279,000 in 1996, 1995, and 1994, respectively. In
addition, when the Company sells loans through securitization programs, the
Company commits either to replace or repurchase any loans that do not conform to
the requirements thereof in the operative loan sale document.
The Company's Serviced Portfolio is geographically diversified with
collateral and consumers located in 41 and 50 states, respectively. At December
31, 1996, 14.3% of the collateral by principal balance was located in Texas and
14.4% and 12.2% of the borrowers by collateral location were located in Texas
and Florida, respectively. No other state accounted for more than 10.0% of the
total.
The Company has a revolving line of credit and sale facility as part of an
asset backed commercial paper facility with Holland Limited Securitization, Inc.
("HLS") a multi-seller commercial paper issuer sponsored by Internationale
Nederlanden (U.S.) Capital Markets, Inc. ("ING"). In October 1996, the Company
amended the facility to increase the facility to $100,000,000, subject to
certain terms and conditions, reduce credit enhancement requirements and expand
certain loan eligibility criteria. The facility expires in June 1998.
In connection with the facility, the Company formed a wholly owned
subsidiary, Litchfield Mortgage Securities Corporation 1994 ("LMSC"), to
purchase loans from the Company. LMSC either pledges the loans on a revolving
line of credit with HLS or sells the loans to HLS. HLS issues commercial paper
or other
F-17
<PAGE> 65
LITCHFIELD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
indebtedness to fund the purchase or pledge of loans from LMSC. HLS is not
affiliated with the Company or its affiliates. As of December 31, 1996, the
outstanding balance of the loans sold under this facility was $77,521,000 and
outstanding borrowings under the line of credit were $1,799,000. Interest is
payable on the line of credit at an interest rate based on certain commercial
paper rates.
12. PORTFOLIO ACQUISITION
On April 27, 1995, the Company purchased a portfolio of VOI Loans, loans to
developers secured by VOI Loans, other performing and non performing loans, and
other related assets from GEFCO. The purchase price and allocation of the
purchase price was as follows:
<TABLE>
<S> <C>
Purchase Price:
Cash paid to GEFCO............................................ $37,985,000
Net liabilities assumed from GEFCO............................ 1,688,000
Other direct costs of acquisition............................. 1,263,000
-----------
Total................................................. $40,936,000
===========
Allocation of purchase price:
VOI Loans..................................................... $34,138,000
Loans secured by VOI Loans.................................... 2,799,000
Other loans and assets........................................ 3,999,000
-----------
Total................................................. $40,936,000
===========
</TABLE>
13. MARKET FOR COMMON STOCK (UNAUDITED)
The Company's Common Stock is traded on The Nasdaq Stock Market's National
Market under the symbol "LTCH." The following table sets forth, for the periods
indicated, the high and low stock prices of the Company's Common Stock. All
share prices have been adjusted for a 5% stock dividend in each of 1996, 1995
and 1994.
<TABLE>
<CAPTION>
HIGH LOW DIVIDENDS
---- --- ---------
<S> <C> <C> <C>
1994
1st Quarter.................................................. $12 3/8 $ 9 1/4 --
2nd Quarter.................................................. 11 7/8 10 3/8 --
3rd Quarter.................................................. 13 3/8 10 3/8 --
4th Quarter.................................................. 11 3/8 9 1/2 $ .03
1995
1st Quarter.................................................. $10 7/8 $ 9 5/8 --
2nd Quarter.................................................. 12 7/8 10 --
3rd Quarter.................................................. 16 12 3/8 --
4th Quarter.................................................. 15 1/4 12 3/8 $ .04
1996
1st Quarter.................................................. $13 5/8 $11 --
2nd Quarter.................................................. 14 1/4 12 7/8 --
3rd Quarter.................................................. 15 11 1/2 --
4th Quarter.................................................. 15 12 1/2 $ .05
</TABLE>
F-18
<PAGE> 66
LITCHFIELD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH TOTAL
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
1994
Total revenues...................... $1,952,000 $2,979,000 $3,672,000 $2,372,000 $10,975,000
Total expenses...................... 1,435,000 1,670,000 1,579,000 1,973,000 6,657,000
Income before extraordinary item.... 318,000 805,000 1,346,000 230,000 2,699,000
Extraordinary item (net of
applicable taxes)................. -- (125,000) (2,000) 1,000 (126,000)
Net income.......................... 318,000 680,000 1,344,000 231,000 2,573,000
Income before extraordinary item per
common share...................... .07 .19 .31 .05 .63
Extraordinary item per common
share............................. -- (.03) -- -- (.03)
Net income per common share......... .07 .16 .31 .05 .60
Weighted average number of shares
outstanding....................... 4,293,753 4,308,684 4,287,744 4,236,444 4,280,006
1995
Total revenues...................... $2,750,000 $4,574,000 $5,464,000 $4,673,000 $17,461,000
Total expenses...................... 2,157,000 3,013,000 3,137,000 3,639,000 11,946,000
Net income.......................... 370,000 975,000 1,454,000 650,000 3,449,000
Net income per common share......... .09 .22 .33 .13 .76
Weighted average number of shares
outstanding....................... 4,233,442 4,345,396 4,412,366 5,198,700 4,543,009
1996
Total revenues...................... $4,715,000 $6,261,000 $7,136,000 $6,071,000 $24,183,000
Total expenses...................... 3,420,000 3,720,000 3,967,000 4,502,000 15,609,000
Net income.......................... 798,000 1,564,000 1,946,000 965,000 5,273,000
Primary net income per common
share............................. .14 .27 .34 .17 .93
Primary weighted average number of
shares outstanding................ 5,637,643 5,708,160 5,697,094 5,706,037 5,674,264
Fully-diluted net income per common
share............................. .14 .27 34 .17 .92
Fully-diluted weighted average
number of shares outstanding...... 5,700,891 5,708,191 5,720,924 5,754,250 5,736,467
</TABLE>
A significant portion of the Company's revenues consists of gains on sales
of loans. Thus, the timing of loan sales has a significant effect on the
Company's results of operations. Accruals of approximately $510,000 and $285,000
for salary compensation as the result of the realization of performance criteria
by certain executive and management personnel were recorded in the fourth
quarter of 1995 and 1994. In 1996, such amounts were accrued throughout the year
including $128,000 in the fourth quarter.
F-19
<PAGE> 67
LITCHFIELD FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN 000'S EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
-------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents............................................ $ 7,061 $ 5,557
Restricted cash...................................................... 21,364 18,923
Loans held for sale, net of allowance for loan losses of $1,406 in
1997 and $817 in 1996.............................................. 20,475 12,260
Other loans, net of allowance for loan losses of $1,500 in 1997 and
$1,200 in 1996..................................................... 91,750 79,996
Retained interests in loan sales..................................... 27,759 28,912
Other................................................................ 6,901 7,041
-------- ------------
Total assets............................................... $175,310 $152,689
======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Lines of credit.................................................... $ 34,287 $ 36,299
Term note payable.................................................. 6,396 7,428
Accounts payable and accrued liabilities........................... 3,981 3,811
Dealer/developer reserves.......................................... 10,626 10,628
Deferred income taxes.............................................. 6,035 5,080
-------- ------------
61,325 63,246
-------- ------------
9.3% Notes......................................................... 20,000 --
10% Notes due 2002................................................. 12,785 12,785
8 7/8% Notes due 2003.............................................. 15,317 15,930
10% Notes due 2004................................................. 18,280 18,280
-------- ------------
66,382 46,995
-------- ------------
Stockholders' equity:
Preferred stock, $.01 par value; authorized 1,000,000 shares,
none issued and outstanding.................................... -- --
Common stock, $.01 par value; authorized 8,000,000 shares,
5,616,372 shares issued and outstanding in 1997 and 5,444,399
shares issued and outstanding in 1996.......................... 56 54
Additional paid in capital...................................... 36,238 34,633
Net unrealized gain on retained interests in loan sales......... 523 --
Retained earnings............................................... 10,786 7,761
-------- ------------
Total stockholders' equity................................. 47,603 42,448
-------- ------------
Total liabilities and stockholders' equity................. $175,310 $152,689
======== ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-20
<PAGE> 68
LITCHFIELD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN 000'S EXCEPT SHARE AND PER SHARE AMOUNTS)
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------
1997 1996
---------- ----------
<S> <C> <C>
Revenues:
Interest and fees on loans...................................... $ 4,783 $ 3,348
Gain on sale of loans........................................... 2,563 2,474
Servicing and other fee income.................................. 345 279
---------- ----------
7,691 6,101
---------- ----------
Expenses:
Interest expense................................................ 2,648 1,768
Salaries and employee benefits.................................. 833 645
Other operating expenses........................................ 853 618
Provision for loan losses....................................... 300 529
---------- ----------
4,634 3,560
---------- ----------
Income before income taxes........................................ 3,057 2,541
Provision for income taxes........................................ 1,177 977
---------- ----------
Net income........................................................ $ 1,880 $ 1,564
========== ==========
Primary and fully-diluted net income per common share............. $ .32 $ .27
========== ==========
Fully-diluted weighted average number of shares................... 5,917,911 5,708,191
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-21
<PAGE> 69
LITCHFIELD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN 000'S EXCEPT SHARE AND PER SHARE AMOUNTS)
UNAUDITED
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1997 1996
--------- ---------
<S> <C> <C>
Revenues:
Interest and fees on loans........................................ $ 9,329 $ 6,640
Gain on sale of loans............................................. 4,067 3,354
Servicing and other fee income.................................... 702 757
--------- ---------
14,098 10,751
--------- ---------
Expenses:
Interest expense.................................................. 5,042 3,297
Salaries and employee benefits.................................... 1,646 1,382
Other operating expenses.......................................... 1,756 1,282
Provision for loan losses......................................... 735 954
--------- ---------
9,179 6,915
--------- ---------
Income before income taxes.......................................... 4,919 3,836
Provision for income taxes.......................................... 1,894 1,474
--------- ---------
Net income.......................................................... $ 3,025 $ 2,362
======== ========
Primary and fully-diluted net income per common share............... $ .52 $ .41
======== ========
Fully-diluted weighted average number of shares..................... 5,861,180 5,698,866
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-22
<PAGE> 70
LITCHFIELD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN 000'S)
UNAUDITED
<TABLE>
<CAPTION>
NET UNREALIZED
GAIN ON
ADDITIONAL RETAINED
COMMON PAID IN INTERESTS IN RETAINED
STOCK CAPITAL LOAN SALES EARNINGS TOTAL
------ ---------- -------------- --------- -------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996.......... $ 54 $ 34,633 $ -- $ 7,761 $42,448
Issuance of 171,973 shares of
common stock................... 2 1,605 -- -- 1,607
Net unrealized gain on retained
interests in loan sales........ -- -- 523 -- 523
Net income........................ -- -- -- 3,025 3,025
------ ---------- ------ --------- -------
Balance, June 30, 1997.............. $ 56 $ 36,238 $523 $10,786 $47,603
====== ======= =========== ======= =======
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-23
<PAGE> 71
LITCHFIELD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN 000'S)
UNAUDITED
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income......................................................... $ 3,025 $ 2,362
Adjustments to reconcile net income to net cash used in operating
activities:
Gain on sale of loans........................................... (4,067) (3,354)
Amortization and depreciation................................... 332 296
Amortization of retained interests in loan sales................ 2,061 1,364
Provision for loan losses....................................... 735 954
Deferred income taxes........................................... 955 130
Net changes in operating assets and liabilities:
Restricted cash............................................... (2,441) 133
Loans held for sale........................................... (8,300) 1,327
Retained interests in loan sales.............................. 470 (3,071)
Dealer/developer reserves..................................... (2) (414)
Net change in other assets and liabilities.................... 753 (2,891)
-------- --------
Net cash used in operating activities........................... (6,479) (3,164)
-------- --------
Cash flows from investing activities:
Redemption of investments held to maturity......................... 32 71
Net originations and principal payments on other loans............. (27,379) (19,834)
Other loans sold................................................... 15,325 --
Collections on retained interests in loan sales.................... 2,534 142
Capital expenditures and other assets.............................. (479) (72)
-------- --------
Net cash used in investing activities........................... (9,967) (19,693)
-------- --------
Cash flows from financing activities:
Net borrowings (payments) on lines of credit....................... (2,012) 11,145
Proceeds from issuance of 9.3% Notes............................... 20,000 --
Retirement of long-term Notes...................................... (613) (283)
Payments on term note.............................................. (1,032) (1,067)
Net proceeds from issuance of common stock......................... 1,607 42
-------- --------
Net cash provided by financing activities....................... 17,950 9,837
-------- --------
Net increase (decrease) in cash and cash equivalents................. 1,504 (13,020)
Cash and cash equivalents, beginning of period....................... 5,557 18,508
-------- --------
Cash and cash equivalents, end of period............................. $ 7,061 $ 5,488
======== ========
Supplemental Schedule of Noncash Financing and Investing Activities:
Exchange of loans for retained interests in loan sales............. $ 364 $ 2,785
======== ========
Transfers from loans to real estate acquired through foreclosure... $ 516 $ 170
======== ========
Supplemental Cash Flow Information:
Interest paid...................................................... $ 4,339 $ 3,059
======== ========
Income taxes paid.................................................. $ 937 $ 840
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-24
<PAGE> 72
A. BASIS OF PRESENTATION
The accompanying unaudited consolidated interim financial statements as of
June 30, 1997 and for the three and six month periods ended June 30, 1997 and
1996 have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal accruals) considered necessary for a fair
presentation have been included. Operating results for the three and six month
periods ended June 30, 1997, are not necessarily indicative of the results
expected for the year ended December 31, 1997. For further information, refer to
the consolidated financial statements and footnotes thereto included in
Litchfield Financial Corporation's annual report on Form 10-K for the year ended
December 31, 1996.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share," which is
required to be adopted on December 31, 1997. At that time, the Company will be
required to change the method currently used to compute earnings per share and
to restate all prior periods. Primary earnings per share will be replaced by
basic earnings per share. Under the new requirements for calculating basic
earnings per share, the dilutive effect of stock options will be excluded. Under
the new standard, basic earnings per share would have been $.02 per share higher
for each of the quarters ended June 30, 1997 and 1996 and $.03 and $.02 per
share higher for the six months ended June 30, 1997 and 1996, respectively.
There would be no impact on the calculation of diluted earnings per share for
these periods.
B. GAIN ON SALE OF LOANS AND RETAINED INTERESTS IN LOAN SALES
As of January 1, 1997, the Company adopted the requirements of Statement of
Financial Accounting Standards No. 125 "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities" for transfers of
receivables. This standard had no effect on net income for the three or six
months ended June 30, 1997. The Company has reclassified certain subordinated
pass-through certificates, interest only strips and recourse obligations as
retained interests in loan sales to conform with this standard.
Gains on sales of loans are based on the difference between the allocated
cost basis of the assets sold and the proceeds received, which includes the fair
value of any assets or liabilities that are newly created as a result of the
transaction. Newly created interests which consist primarily of interest only
strips and recourse obligations are initially recorded at fair value. The
previous carrying amount is allocated between the assets sold and any retained
interests based on their relative fair values at the date of transfer. Retained
interests in transferred assets consist primarily of subordinate portions of the
principal balance of transferred assets.
The Company estimates fair value using discounted cash flow analysis (using
a discount rate commensurate with the risks involved), because quoted market
prices are not available. The Company's analysis incorporates assumptions that
market participants would be expected to use in their estimates of future cash
flows including assumptions about interest, defaults and prepayment rates. The
Company considers retained interests in loan sales, such as subordinated
pass-through certificates and interest only strips, as available for sale
because such assets are subject to prepayment.
There is generally no servicing asset or liability because the Company
estimates that the benefits of servicing are just adequate to compensate it for
its servicing responsibilities.
Since its inception, the Company has sold $288,952,000 of loans at face
value ($249,451,000 through December 31, 1996). In June 1997, the Company
completed its first securitization of $15,325,000 of dealer hypothecation loans
in a private placement with a bank. Dealer hypothecation loans are loans to
rural land dealers and VOI resort developers secured by consumer receivables.
The principal amount remaining on the loans sold was $138,771,000 at June 30,
1997 and $129,619,000 at December 31, 1996. In connection with certain loan
sales, the Company guarantees, through replacement or repayment, loans in
default up to a specified percentage of loans sold. Dealer/developer guaranteed
loans are secured by repurchase or replacement guarantees in addition to, in
most instances, dealer/developer reserves.
F-25
<PAGE> 73
The Company's undiscounted exposure to loss on loans sold in the event of
nonperformance by the borrower, default by the dealer/developer on its
guarantee, and the determination that the collateral is of no value was
$8,936,000 at June 30, 1997 ($8,780,000 at December 31, 1996). The Company
repurchased $119,000 and $359,000 of loans under the recourse provisions of loan
sales during the three months ended June 30, 1997 and 1996. Loans repurchased
during the six months ended June 30, 1997 and 1996 were $454,000 and $514,000,
respectively, and $991,000 during the year ended December 31, 1996. In addition,
when the Company sells loans through securitization programs, the Company
commits either to replace or repurchase any loans that do not conform to the
requirements thereof in the operative loan sale documents. As of June 30, 1997,
$20,136,000 of the Company's cash was restricted as credit enhancements in
connection with certain securitization programs.
The Company's Serviced Portfolio is geographically diversified with
collateral and consumers located in 43 and 50 states, respectively. The Serviced
Portfolio consists of the current principal balance of Land, VOI and
Dealer/Other Loans serviced by or on behalf of the Company. At June 30, 1997,
15.4% of the portfolio by collateral location was located in Texas, and 17.7%
and 12.4% of the portfolio by borrower location was located in Texas and
Florida, respectively. No other state accounted for more than 9.0% of the total
by either collateral or borrower location.
C. ALLOWANCE FOR LOAN LOSSES
The total allowance for loan losses consists of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
---------- ------------
<S> <C> <C>
Allowance for losses on loans held for sale........ $1,406,000 $ 817,000
Allowance for losses on other loans................ 1,500,000 1,200,000
Recourse obligation on retained interests in loan
sales............................................ 2,635,000 2,511,000
---------- ------------
$5,541,000 $4,528,000
========= ==========
</TABLE>
D. DEBT
In May 1997, a secured line of credit was renewed and amended to include an
increase in the amount of the line from $30,000,000 to $50,000,000 and an
extension of the maturity to April 2000. Outstanding borrowings under the line
of credit were $28,000,000 and $26,200,000 at June 30, 1997 and December 31,
1996, respectively. This line of credit is secured by consumer receivables and
other secured loans.
In January 1997, an additional secured line of credit was increased from
$5,000,000 to $8,000,000 with another financial institution. This line of credit
matures in January 1998. There were no outstanding borrowings on this line of
credit at June 30, 1997 and December 31, 1996. This line of credit is secured by
consumer receivables and other secured loans.
In January 1997, an additional secured line of credit was increased from
$15,000,000 to $20,000,000. There were no outstanding borrowings under this
facility at June 30, 1997. At December 31, 1996, the outstanding borrowings were
$8,300,000. This facility is secured by certain retained interests in loan
sales, cash collateral accounts and certain other loans and matures in September
1999.
On March 5, 1997, the Company entered into an additional $25,000,000
secured line of credit. The outstanding borrowings at June 30, 1997 were
$6,058,000. The facility is secured by loans to developers of VOI resorts for
the acquisition and development of VOI resorts ("Facility A") and the related
financing of consumer purchases of VOIs ("Facility B"). Although the maximum
amount that can be borrowed on each facility is $15,000,000, the aggregate
outstanding borrowings cannot exceed $25,000,000. This facility expires in March
2000.
On March 21, 1997, the Company entered into a $3,000,000 secured line of
credit with an additional financial institution. This line of credit is secured
by consumer receivables and other secured loans and matures in March 1998. There
were no outstanding borrowings at June 30, 1997.
F-26
<PAGE> 74
Interest rates on the above lines of credit range from the Eurodollar or
LIBOR rates plus 2% to the prime rate plus 1.25%. The Company is not required to
maintain compensating balances or forward sales commitments under the terms of
these lines of credit.
The Company also has a revolving line of credit and sale facility as part
of an asset backed commercial paper facility with a multi-seller commercial
paper issuer ("Conduit A"). In October 1996 the Company amended the facility to
increase the facility from $75,000,000 to $100,000,000, subject to certain terms
and conditions, reduce certain credit enhancement requirements and expand
certain loan eligibility criteria. The outstanding aggregate balance of the
loans pledged and sold under the facility at any time cannot exceed
$100,000,000. The facility expires in June 1998.
In connection with the facility, the Company formed a wholly owned
subsidiary, Litchfield Mortgage Securities Corporation 1994 ("LMSC"), to
purchase loans from the Company. LMSC either pledges the loans on a revolving
line of credit with Conduit A or sells the loans to Conduit A. Conduit A issues
commercial paper or other indebtedness to fund the purchase or pledge of loans
from LMSC. Conduit A is not affiliated with the Company or its affiliates. As of
June 30, 1997, the outstanding balance of eligible loans sold under the facility
was $83,200,000. Outstanding borrowings under the line of credit at June 30,
1997 and December 31, 1996 were $229,000 and $1,799,000, respectively. Interest
is payable on the line of credit at an interest rate based on certain commercial
paper rates.
On March 21, 1997, the Company closed an additional revolving line of
credit and sale facility of $25,000,000 with another multi-seller of commercial
paper conduit ("Conduit B"). The facility, which expires in March 2000, is
subject to certain terms and conditions, credit enhancement requirements and
loan eligibility criteria. The outstanding aggregate balance of the loans
pledged and sold under the facility at any time cannot exceed $25,000,000.
In connection with the facility, the Company formed a wholly owned
subsidiary, Litchfield Capital Corporation 1995 ("LCC"), to purchase loans from
the Company. LCC either pledges the loans on a revolving line of credit with
Conduit B or sells the loans to Conduit B. Conduit B issues commercial paper or
other indebtedness to fund the purchase or pledge of loans from LCC. Conduit B
is not affiliated with the Company or its affiliates. As of June 30, 1997, the
outstanding balance of the eligible loans previously sold under the facility was
$13,767,000. There were no outstanding borrowings under the line of credit as of
June 30, 1997. Interest is payable on the line of credit at an interest rate
based on certain commercial paper rates.
During the first quarter of 1995, the Company issued a 10.43% promissory
note with an initial balance of $12,500,000 to an insurance company. Principal
is payable monthly based on collection of the underlying collateral. The note is
redeemable only with the approval of the noteholder. The note is collateralized
by certain of the Company's retained interests in loan sales and cash. The
balance outstanding on the note was $6,396,000 and $7,428,000 at June 30, 1997
and December 31, 1996, respectively. As of June 30, 1997 the approximate value
of the underlying collateral was $14,231,000.
In April 1997, the Company issued unsecured notes with an initial principal
balance of $20,000,000. Interest is payable at 9.3% semiannually in arrears. The
notes require principal reductions of $7,500,000, $6,000,000, $6,000,000 and
$500,000 in March 2001, 2002, 2003 and 2004, respectively. The proceeds were
used to repay the outstanding balance on certain of the Company's the lines of
credit.
In June 1997, the Company entered into interest rate swap agreements
whereby it pays the counterparty interest at the prime rate on a notional amount
of $110,000,000 and it receives from the counterparty interest at the commercial
paper rate plus a spread on a notional amount of $80,000,000 and interest at the
LIBOR rate plus a spread on a notional amount of $30,000,000. The swap
agreements expire in June 2000.
F-27
<PAGE> 75
======================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD
BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
The Company........................... 9
Risk Factors.......................... 10
Incorporation by Reference............ 14
Forward-Looking Statements............ 14
Use of Proceeds....................... 15
Capitalization........................ 15
Selected Consolidated Financial
Information......................... 16
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 18
Business.............................. 25
Management............................ 34
Principal Stockholders................ 36
Description of Notes.................. 38
Certain Federal Income Tax
Considerations...................... 44
Underwriting.......................... 45
Legal Matters......................... 46
Experts............................... 46
Additional Information................ 46
Index to Financial Statements......... F-1
</TABLE>
======================================================
======================================================
$45,000,000
% NOTES DUE
[LITCHFIELD FINANCIAL CORPORATION LOGO]
-----------------
PROSPECTUS
-----------------
MCDONALD & COMPANY
SECURITIES, INC.
J.C. BRADFORD & CO.
TUCKER ANTHONY
INCORPORATED
, 1997
======================================================
<PAGE> 76
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION*
The expenses in connection with the issuance and distribution of the
securities being registered hereby are estimated as follows:
<TABLE>
<S> <C>
Registration fee under Securities Act.............................. $
NASD filing fee.................................................... $
Nasdaq fee......................................................... $
Legal fees and expenses............................................ $
Accounting fees and expenses....................................... $
Blue Sky fees and expenses (including legal fees).................. $
Printing and engraving............................................. $
Miscellaneous...................................................... $
Total.................................................... $
</TABLE>
- ---------------
* All amounts are estimated.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 67 of Chapter 156B of the General Laws of the Commonwealth of
Massachusetts provides as follows:
"Section 67. Indemnification of directors, officers, employees and other
agents of a corporation, and persons who serve at its request as directors,
officers, employees or other agents of another organization, or who serve at its
request in any capacity with respect to any employee benefit plan, may be
provided by it to whatever extent shall be specified in or authorized by (i) the
articles of organization or (ii) a by-law adopted by the stockholders or (iii) a
vote adopted by the holders of a majority of the shares of stock entitled to
vote on the election of directors. Except as the articles of organization or
by-laws otherwise require, indemnification of any persons referred to in the
preceding sentence who are not directors of the corporation may be provided by
it to the extent authorized by the directors. Such indemnification may include
payment by the corporation of expenses incurred in defending a civil or criminal
action or proceeding in advance of the final disposition of such action or
proceeding, upon receipt of an undertaking by the person indemnified to repay
such payment if he shall be adjudicated to be not entitled to indemnification
under this section which undertaking may be accepted without reference to the
financial ability of such person to make repayment. Any such indemnification may
be provided although the person to be indemnified is no longer an officer,
director, employee or agent of the corporation or of such other organization or
no longer serves with respect to any such employee benefit plan.
No indemnification shall be provided for any person with respect to any
matter as to which he shall have been adjudicated in any proceeding not to have
acted in good faith in the reasonable belief that his action was in the best
interest of the corporation or to the extent that such matter relates to service
with respect to an employee benefit plan, in the best interests of the
participants or beneficiaries of such employee benefit plan.
The absence of any express provision for indemnification shall not limit
any right of indemnification existing independently of this section.
A corporation shall have power to purchase and maintain insurance on behalf
of any person who is or was a director, officer, employee or other agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or other agent of another organization or with
respect to any employee benefit plan, against any liability incurred by him in
any such capacity, or arising out of his status as such, whether or not the
corporation would have the power to indemnify him against such liability."
II-1
<PAGE> 77
Article 7 of the Amended and Restated By-Laws of the Company provides that:
Each director and officer (and his heirs and personal representatives)
shall be indemnified by the Company against any Expenses incurred by him in
connection with any action, suit or proceeding, civil or criminal, brought or
threatened in or before any court, tribunal, administrative or legislative body
or agency in which he is involved as a result of his serving or having served as
a director or officer, except as limited by law or with respect to a proceeding
as to which it shall have been adjudicated that he did not act in good faith in
the reasonable belief that his action was in the best interests of the Company.
"Expense" means any fine or penalty, and any liability fixed by a judgment,
order, decree or award in such a proceeding and any professional fees and other
disbursements reasonably incurred in connection with such a proceeding.
Article Sixth of the Restated Articles of Organization of the Company
provides that:
No Director of the Corporation shall be liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a Director
notwithstanding any statutory provision or other law imposing such liability,
except for liability of a Director (i) for any breach of the Director's duty of
loyalty to the Corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section sixty-one or sixty-two of Chapter 156B of the
Massachusetts General Laws, or (iv) for any transaction from which the Director
derived an improper personal benefit.
The directors and officers of the Company are insured against liabilities
which they incur in their capacity as such under policies of insurance carried
by the Company.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.
4.7 Form of Indenture pursuant to which the Company's % Notes are to be issued.
4.8 Form of % Note (included in Exhibit 4.7)
5.1* Opinion of Hutchins, Wheeler & Dittmar, A Professional Corporation.
12.1 Statement Re: Computation of Ratios.
23.1 Consent of Independent Accountants.
23.2* Consent of Hutchins, Wheeler & Dittmar, A Professional Corporation (included in
Exhibit 5.1).
24.1 Power of Attorney (included in signature page).
25.1 Form T-1, Statement of Eligibility of and Qualification under the Trust Indenture
Act of 1939 of The Bank of New York as Trustee.
27.1 Financial Data Schedule
</TABLE>
- ---------------
* To be filed by amendment.
II-2
<PAGE> 78
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, as amended (the
"Securities Act"), each filing of the registrant's annual report pursuant to
Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and,
where applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement 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.
Insofar as indemnification for liabilities arising under the Securities Act
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 Securities Act
and is, 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 the 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 Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant further undertakes that:
(1) For purposes of determining any liability under the Securities Act, 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,
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 the initial bona fide offering thereof.
The undersigned registrant further undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be represented by
Article 3 of Regulation S-X are not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
II-3
<PAGE> 79
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereto duly
authorized, in the City of Boston, Commonwealth of Massachusetts, on the 15th
day of October, 1997.
LITCHFIELD FINANCIAL CORPORATION
By: /s/ RICHARD A. STRATTON
------------------------------------
Richard A. Stratton, President,
Chief Executive Officer and
Director
POWER OF ATTORNEY
Each person whose individual signature appears below hereby authorizes
Richard A. Stratton and Heather A. Sica, and each of them, with full power of
substitution and full power to act without the other, his or her true and lawful
attorney-in-fact and agent in his or her name, place and stead, to execute in
the name and on behalf of each person, individually and in each capacity stated
below, and to file, any and all amendments to this Registration Statement,
including any and all post-effective amendments, and any related Rule 462(b)
Registration Statement and any amendments thereto.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
TITLE DATE
------------------------ -----------------
<C> <S> <C>
/s/ RICHARD A. STRATTON President, Chief October 15, 1997
- --------------------------------------------- Executive Officer, and
Richard A. Stratton Director
/s/ HEATHER A. SICA Executive Vice October 15, 1997
- --------------------------------------------- President, Clerk,
Heather A. Sica Treasurer, and Director
/s/ RONALD E. RABIDOU Chief Financial Officer October 15, 1997
- ---------------------------------------------
Ronald E. Rabidou
/s/ DONALD R. DION, JR. Director October 15, 1997
- ---------------------------------------------
Donald R. Dion, Jr.
/s/ DAVID J. FERRARI Director October 15, 1997
- ---------------------------------------------
David J. Ferrari
/s/ GERALD SEGEL Director October 15, 1997
- ---------------------------------------------
Gerald Segel
/s/ JOHN A. COSTA Director October 15, 1997
- ---------------------------------------------
John A. Costa
/s/ JAMES WESTRA Director October 15, 1997
- ---------------------------------------------
James Westra
</TABLE>
II-4
<PAGE> 80
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.
4.7 Form of Indenture pursuant to which the Company's % Notes are to be issued.
4.8 Form of % Note (included in Exhibit 4.7)
5.1* Opinion of Hutchins, Wheeler & Dittmar, A Professional Corporation.
12.1 Statement Re: Computation of Ratios.
23.1 Consent of Independent Accountants.
23.2* Consent of Hutchins, Wheeler & Dittmar, A Professional Corporation (included in
Exhibit 5.1).
24.1 Power of Attorney (included in signature page).
25.1 Form T-1, Statement of Eligibility of and Qualification under the Trust Indenture
Act of 1939 of The Bank of New York as Trustee.
27.1 Financial Data Schedule
</TABLE>
- ---------------
* To be filed by amendment.
<PAGE> 1
EXHIBIT 1.1
LITCHFIELD FINANCIAL CORPORATION
$50,000,000
% NOTES DUE
---
UNDERWRITING AGREEMENT
_______________, 1997
MCDONALD & COMPANY SECURITIES, INC.
J.C. BRADFORD & CO.
TUCKER ANTHONY INCORPORATED
c/o McDonald & Company Securities, Inc.
800 Superior Avenue
Cleveland, OH 44114
Ladies and Gentlemen:
Litchfield Financial Corporation, a Massachusetts corporation (the
"Company"), proposes to sell to the underwriters named in Schedule I hereto (the
"Underwriters") for whom you are acting as the representative (the
"Representatives") an aggregate $45,000,000 principal amount of its ___% Notes
Due ___ (the "Firm Notes"). The Firm Notes are to be sold to the Underwriters,
acting severally and not jointly, in such amounts as are set forth in Schedule I
hereto opposite the name of such Underwriter. In addition, for the sole purpose
of covering overallotments in connection with the Firm Notes, the Company also
proposes to grant to the Underwriters an option to purchase up to an additional
$6,750,000 in principal amount of the % Notes Due (the "Option
Notes"). The Firm Notes and the Option Notes to be purchased pursuant to this
Underwriting Agreement are herein called "the Notes." The Notes are to be issued
pursuant to an Indenture, to be dated as of November ___, 1997, between the
Company and The Bank of New York, New York, New York as trustee (the "Trustee").
Such Indenture, as amended and supplemented, is herein referred to as the
"Indenture."
<PAGE> 2
1. Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with, each of the Underwriters that:
(a) The Company has filed with the Securities and
Exchange Commission (the "Commission") under the Securities Act of
1933, as amended (the "Securities Act"), a registration statement on
Form S-3 (Registration No. 333-__________, including the related
preliminary prospectus and a Form T-1 (File No. 22-_____) pursuant to
the Trust Indenture Act of 1939, as amended (the "Trust Indenture
Act"), has filed such amendments thereto, if any, and such amended
preliminary prospectuses as may have been required to the date hereof,
and will file such additional amendments thereto and such amended
prospectuses as may hereafter be required, relating to the Notes.
Copies of such registration statement and any amendments, including any
post-effective amendments, and all forms of the related prospectuses
contained therein and any supplements thereto, have been delivered to
you. Such registration statement, including the prospectus, Part II,
all financial schedules and exhibits thereto, all information
incorporated by reference thereto, and all information deemed to be a
part of such Registration Statement pursuant to Rule 430A under the
Securities Act, as amended at the time when it shall become effective,
is herein referred to as the "Registration Statement," and the
prospectus included as part of the Registration Statement on file with
the Commission that discloses all the information that was omitted from
the prospectus on the effective date pursuant to Rule 430A of the Rules
and Regulations (as defined below) and in the form filed pursuant to
Rule 424(b) under the Securities Act is herein referred to as the
"Final Prospectus." The prospectus included as part of the Registration
Statement on the date when the Registration Statement became effective
is referred to herein as the "Effective Prospectus." Any prospectus
included in the Registration Statement and in any amendment thereto
prior to the effective date of the Registration Statement is referred
to herein as a "Preliminary Prospectus." For purposes of this
Agreement, "Rules and Regulations" mean the rules and regulations
promulgated by the Commission under either the Securities Act, the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), or
the Trust Indenture Act, as applicable.
(b) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus, and each Preliminary
Prospectus, at the time of filing thereof, complied with the
requirements of the Securities Act and the Rules and Regulations, and
did not include any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under
which they were made, not misleading; except that the foregoing does
not apply to statements or omissions made in reliance upon and in
conformity with written information furnished to the Company by any
Underwriter specifically for use therein (it being understood that the
only information so provided is the information included in the first
sentence of the last paragraph on the cover page and in the fourth and
fifth paragraphs under the caption "Underwriting" in the Final
Prospectus). When the Registration Statement becomes effective and at
all times subsequent thereto up to and including the First Closing Date
(as hereinafter defined), (i) the Registration Statement, the Effective
Prospectus and
2
<PAGE> 3
Final Prospectus and any amendments or supplements thereto will contain
all statements which are required to be stated therein in accordance
with the Securities Act, the Exchange Act, the Trust Indenture Act and
the Rules and Regulations and will comply with the requirements of the
Securities Act, the Exchange Act, the Trust Indenture Act and the Rules
and Regulations, and (ii) neither the Registration Statement, the
Effective Prospectus nor the Final Prospectus nor any amendment or
supplement thereto will include any untrue statement of a material fact
or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
in which they are made, not misleading; except that the foregoing does
not apply to statements or omissions made in reliance upon and in
conformity with written information furnished to the Company by any
Underwriter specifically for use therein (it being understood that the
only information so provided is the information included in the first
sentence of the last paragraph on the cover page and in the fourth and
fifth paragraphs under the caption "Underwriting" in the Final
Prospectus).
(c) The Company and each subsidiary of the Company (as
used herein, the term "subsidiary" includes any corporation, joint
venture or partnership in which the Company or any subsidiary of the
Company has an ownership interest) is duly organized and validly
existing and in good standing under the laws of the respective
jurisdictions of their organization or incorporation, as the case may
be, with full power and authority (corporate, partnership and other, as
the case may be) to own their properties and conduct their businesses
as now conducted and are duly qualified or authorized to do business
and are in good standing in all jurisdictions wherein the nature of
their business or the character of property owned or leased may require
them to be qualified or authorized to do business, except for
jurisdictions in which the failure to so qualify would not have a
material adverse effect on the Company and its subsidiaries taken as a
whole. The Company and its subsidiaries hold all licenses, consents and
approvals, and have satisfied all eligibility and other similar
requirements imposed by federal and state regulatory bodies,
administrative agencies or other governmental bodies, agencies or
officials, in each case as material to the conduct of the respective
businesses in which they are engaged in the Effective Prospectus and
the Final Prospectus.
(d) The outstanding stock of each of the Company's
corporate subsidiaries is duly authorized, validly issued, fully paid
and nonassessable. All of the outstanding stock of each of the
Company's corporate subsidiaries is owned by the Company, clear of any
lien, encumbrance, pledge, equity or claim of any kind. Neither the
Company nor any of its subsidiaries is a partner or joint venturer in
any partnership or joint venture.
(e) The Notes have been duly and validly authorized and,
when executed and authenticated in accordance with the Indenture and
delivered and paid for by the Underwriters pursuant to this Agreement,
will constitute legal, valid and binding obligations of the Company,
entitled to the benefits of the Indenture, and will conform in all
material
3
<PAGE> 4
respects to the description thereof contained in the Effective
Prospectus and the Final Prospectus.
(f) The Company has full legal right, power and authority
to enter into this Agreement and the Indenture and to sell and deliver
the Notes to the Underwriters as provided herein, and this Agreement
and the Indenture have been duly authorized, executed and delivered by
the Company and constitute valid and binding agreements of the Company
enforceable against the Company in accordance with their terms. The
Indenture conforms in all material respects to the requirements of and
has been qualified under the Trust Indenture Act. No consent, approval,
authorization or order of any court or governmental agency or body or
third party is required for the performance of this Agreement or the
Indenture by the Company or the consummation by the Company of the
transactions contemplated hereby or thereby, except such as have been
obtained and such as may be required by the National Association of
Securities Dealers, Inc. or under the Securities Act, the Trust
Indenture Act or state securities or Blue Sky laws in connection with
the purchase and distribution of the Notes by the Underwriters. The
issue and sale of the Notes by the Company, the Company's performance
of this Agreement and the Indenture and the consummation of the
transactions contemplated hereby or thereby will not result in a breach
or violation of, or conflict with, any of the terms and provisions of,
or constitute a default by the Company or any of its subsidiaries
under, any indenture, mortgage, deed of trust, loan agreement, lease or
other agreement or instrument to which the Company or any of its
subsidiaries is a party or to which the Company or any of its
subsidiaries or any of their respective properties is subject, the
Articles of Organization or bylaws of the Company or any of its
subsidiaries or any statute or any judgment, decree, order, rule or
regulation of any court or governmental agency or body applicable to
the Company, or any subsidiary or any of their respective properties.
Neither the Company nor any subsidiary is in violation of its Articles
of Organization, partnership agreement or joint venture agreement, as
the case may be, or bylaws or any law, administrative rule or
regulation or arbitrators' or administrative or court decree, judgment
or order or in violation or default (there being no existing state of
facts which with notice or lapse of time or both would constitute a
default) in the performance or observance of any obligation, agreement,
covenant or condition contained in any contract, indenture, deed of
trust, mortgage, loan agreement, note, lease, agreement or other
instrument or permit to which it is a party or by which it or any of
its properties is or may be bound.
(g) The consolidated financial statements and the related
notes of the Company included in the Registration Statement, the
Effective Prospectus and the Final Prospectus present fairly the
financial position, results of operations and changes in financial
position and cash flow of the Company and its subsidiaries, at the
dates and for the periods to which they relate and have been prepared
in accordance with generally accepted accounting principles applied on
a consistent basis throughout the periods indicated. The other
financial statements and schedules included in or as schedules to the
Registration Statement conform to the requirements of the Securities
Act, the Exchange Act and the Rules and Regulations
4
<PAGE> 5
and present fairly the information presented therein for the periods
shown. The financial and statistical data set forth in the Effective
Prospectus and the Final Prospectus under the captions "Prospectus
Summary," "Use of Proceeds," "Capitalization," "Selected Consolidated
Financial Information," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business" and
"Principal Stockholders" fairly presents the information set forth
therein on the basis stated in the Effective Prospectus and the Final
Prospectus. Ernst & Young, whose reports appear or are incorporated by
reference in the Effective Prospectus and the Final Prospectus, are
independent accountants as required by the Securities Act and the Rules
and Regulations.
(h) The Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996, and its Quarterly Reports filed on
Form 10-Q for the quarters ended March 31, 1997, June 30, 1997 and
September 30, 1997, and its current reports filed on Form 8-K dated
July 7, 1997 and July 22, 1997, respectively, at the time of filing
with the Commission, conformed in all material respects to the
requirements of the Securities Act or the Exchange Act, as applicable
and the Rules and Regulations and none of such documents or statements
contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading.
(i) Subsequent to December 31, 1996, neither the Company
nor any subsidiary has sustained any material loss or interference with
its business or properties from fire, flood, hurricane, accident or
other calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree, which is not
disclosed or incorporated by reference in the Effective Prospectus and
the Final Prospectus; and subsequent to the respective dates as of
which information is given in the Registration Statement, the Effective
Prospectus and the Final Prospectus, (i) neither the Company nor any of
its subsidiaries has incurred any material liabilities or obligations,
direct or contingent, or entered into any material transactions not in
the ordinary course of business, and (ii) there has not been any change
in the capital stock, partnership interests, joint venture interests,
long-term debt, obligations under capital leases or short-term
borrowings of the Company and its subsidiaries or any issuance of
options, warrants or rights to purchase the capital stock of the
Company, or any adverse change, or any development involving a
prospective adverse change, in the general affairs, management,
business, prospects, financial position, net worth or results of
operations of the Company or its subsidiaries, except in each case as
described or incorporated by reference in or contemplated by the
Effective Prospectus and the Final Prospectus.
(j) Except as described or incorporated by reference in
the Effective Prospectus and the Final Prospectus, there is not
pending, or to the knowledge of the Company threatened, any action,
suit, proceeding, inquiry or investigation, to which the Company, any
of its subsidiaries or any of their officers or directors is a party,
or to which the property of the Company or any subsidiary is subject,
before or brought by any court or governmental
5
<PAGE> 6
agency or body, wherein an unfavorable decision, ruling or finding
could prevent or materially hinder the consummation of this Agreement
or result in a material adverse change in the business condition
(financial or other), prospects, financial position, net worth or
results of operations of the Company or its subsidiaries.
(k) There are no contracts or other documents required by
the Securities Act or by the Rules and Regulations to be described or
incorporated by reference in the Registration Statement, the Effective
Prospectus or the Final Prospectus or to be filed as exhibits to the
Registration Statement which have not been described, incorporated by
reference, or filed as required.
(l) Except as described or incorporated by reference in
the Effective Prospectus and the Final Prospectus, the Company and each
of its subsidiaries have good and marketable title to all real and
material personal property owned by them, free and clear of all liens,
charges, encumbrances or defects except those reflected in the
financial statements hereinabove described. The real and personal
property and buildings referred to in the Effective Prospectus and the
Final Prospectus which are leased from others by the Company are held
under valid, subsisting and enforceable leases. The Company or its
subsidiaries owns or leases all such properties as are necessary to its
operations as now conducted.
(m) The Company's system of internal accounting controls
taken as a whole is sufficient to meet the broad objectives of internal
accounting control insofar as those objectives pertain to the
prevention or detection of errors or irregularities in amounts that
would be material in relation to the Company's financial statements;
and, except as disclosed in the Effective Prospectus and the Final
Prospectus, neither the Company nor any of its subsidiaries nor any
employee or agent of the Company or any subsidiary has made any payment
of funds of the Company or any subsidiary or received or retained any
funds in violation of any law, rule or regulation.
(n) The Company and its subsidiaries have filed all
federal, state and local income and franchise tax returns required to
be filed through the date hereof and have paid all taxes shown as due
therefrom; and there is no tax deficiency that has been, nor does the
Company or any subsidiary have knowledge of any tax deficiency which is
likely to be, asserted against the Company or its subsidiaries, which
if determined adversely could materially and adversely affect the
earnings, assets, affairs, business prospects or condition (financial
or other) of the Company or its subsidiaries.
(o) The Company and its subsidiaries operate their
business in conformity in all material respects with all applicable
statutes, common laws, ordinances, decrees, orders, rules and
regulations of governmental bodies. The Company and its subsidiaries
have all licenses, approvals or consents to operate their respective
business in all locations in which such businesses are currently being
operated, and the Company and its subsidiaries are not aware of any
existing or imminent matter which may adversely impact their operations
or
6
<PAGE> 7
business prospects other than as specifically disclosed in the
Effective Prospectus and the Final Prospectus. The Company has not
engaged in any activity, whether alone or in concert with one of its
customers, creating the potential for exposure to material civil or
criminal monetary liability or other material sanctions under federal
or state laws regulating consumer credit transactions, debt collection
practices or land sales practices.
(p) Neither the Company nor any of its subsidiaries have
failed to file with the applicable regulatory authorities any
statement, report, information or form required by any applicable law,
regulation or order where the failure to file the same would have a
material adverse effect on the Company and its subsidiaries, taken as a
whole; all such filings or submissions were in material compliance with
applicable laws when filed and no deficiencies have been asserted by
any regulatory commission, agency or authority with respect to such
filings or submissions. Neither the Company nor any of its subsidiaries
have failed to maintain in full force and effect any license or permit
necessary or proper for the conduct of its business, or received any
notification that any revocation or limitation thereof is threatened or
pending, and, except as disclosed in the Effective Prospectus and the
Final Prospectus, there is not pending any change under any law,
regulation, license or permit which could materially adversely affect
its business, operations, property or business prospects. Neither the
Company nor any of its subsidiaries have received any notice of
violation of or been threatened with a charge of violating and are not
under investigation with respect to a possible violation of any
provision of any law, regulation or order.
(q) No labor dispute exists with the Company's employees
or with employees of its subsidiaries or is imminent which could
materially adversely affect the Company or any of its subsidiaries. The
Company is not aware of any existing or imminent labor disturbance by
its employees or by any employees of its subsidiaries which could be
expected to materially adversely effect the condition (financial or
otherwise), results of operations, properties, affairs, management,
business affairs or business prospects of the Company or any of its
subsidiaries.
(r) Except as disclosed in the Effective Prospectus and
the Final Prospectus, the Company and its subsidiaries own or possess,
or can acquire on reasonable terms, the licenses, copyrights,
trademarks, service marks and trade names presently employed by them in
connection with the businesses now operated by them, and neither the
Company nor any of its subsidiaries have received any notice of
infringement of or conflict with asserted rights of others with respect
to any of the foregoing which, alone or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would result in
any material adverse change in the condition, financial or otherwise,
or in the earnings, business affairs or business prospects of the
Company or its subsidiaries.
(s) The Company has not taken, directly or indirectly,
any action designed, or which might reasonably be expected to cause or
result in, or which will constitute, stabilization or manipulation of
the price of the Notes to facilitate the sale of the Notes, and
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<PAGE> 8
the Company is not aware of any such action taken or to be taken by any
affiliates of the Company.
2. Purchase, Sale and Delivery of the Notes.
(a) On the basis of the representations, warranties,
agreements and covenants herein contained and subject to the terms and
conditions herein set forth, the Company agrees to sell to each of the
Underwriters, and each of the Underwriters, severally and not jointly,
agrees to purchase at a purchase price of $_______ per each $1,000
principal amount, the number of Firm Notes set forth opposite such
Underwriter's name in Schedule I hereto.
(b) The Company also grants to the Underwriters an
option to purchase, solely for the purpose of covering overallotments
in the sale of Firm Notes, all or any portion of the Option Notes
at the purchase price set forth above. The option granted hereby may
be exercised as to all or any part of the Option Notes at any time
(but only once) within 30 days after the date the Registration
Statement becomes effective. The Underwriters shall not be under any
obligation to purchase any Option Notes prior to the exercise of such
option. The option granted hereby may be exercised by the Underwriters
by the Representatives giving written notice to the Company setting
forth the amount of Option Notes to be purchased and the date and time
for delivery of an payment for such Option Notes and stating that the
Option Notes referred to therein are to be used for the purpose of
covering overallotments in connection with the distribution and sale
of the Firm Notes. If such notice is given prior to the First Closing
Date (as defined herein), the date set forth therein for such delivery
and payment shall not be earlier than two full business days
thereafter or the First Closing Date, whichever occurs later. If such
notice is given on or after the First Closing Date, whichever occurs
later. If such notice is given on or after the First Closing Date, the
date set forth therein for such delivery and payment shall not be
earlier than two full business days thereafter. In either event, the
date so set forth shall not be more than 10 full business days after
the date of such notice. The date and time set forth in such notice is
herein called the "Option Closing Date." Upon exercise of the option,
the Company shall become obligated to sell to the Underwriters, and,
subject to the terms and conditions herein set forth, the Underwriters
shall become obligated to purchase, for the account of each
Underwriter, from the Company, severally and not jointly, the amount
of Option Notes specified in such notice. Option Notes shall be
purchased for the accounts of the Underwriters in proportion to the
number of Firm Notes set forth opposite such Underwriter's name in
Schedule I hereto, except that the respective purchase obligations of
each Underwriter shall be adjusted so that no Underwriter shall be
obligated to purchase fractional Option Notes.
(c) Certificates in definitive form for the Notes
which each Underwriter has agreed to purchase hereunder shall be
delivered by or on behalf of the Company to the Underwriters for the
account of such Underwriter against payment by such Underwriter or on
its behalf of the purchase price therefor by certified or official bank
check payable in next day funds to the order of the Company, at the
offices of McDonald & Company Securities, Inc. ("McDonald"), 800
Superior Avenue, Cleveland, Ohio 44114, or at such
8
<PAGE> 9
other place as may be agreed upon by McDonald and the Company, at 10:00
A.M., Nashville time, on the third full business day after this
Agreement becomes effective, or at such other time not later than the
seventh full business day thereafter as the Representatives and the
Company may determine, such time of delivery against payment being
herein referred to as the "First Closing Date." The First Closing Date
and the Option Closing Date are herein individually referred to as the
"Closing Date" and collectively referred to as the "Closing Dates."
Certificates in definitive form for the Option Notes which each
Underwriter shall have agreed to purchase hereunder shall be similarly
delivered by or on behalf of the Company on the Option Closing Date.
The certificates in definitive form for the Notes to be delivered will
be in good delivery form and in such denominations and registered in
such names as McDonald may request not less than 48 hours prior to the
First Closing Date or the Option Closing Date, as the case may be. Such
certificates will be made available for checking and packaging at a
location in New York, New York as may be designated by you, at least 24
hours prior to the First Closing Date or the Option Closing Date, as
the case may be. It is understood that you may (but shall not be
obligated to) make payment on behalf of any Underwriter or Underwriters
for the Notes to be purchased by such Underwriter or Underwriters. No
such payment shall relieve such Underwriter or Underwriters from any of
its or their obligations hereunder.
3. Offering by the Underwriters. After the Registration Statement
becomes effective, the several Underwriters propose to offer for sale to the
public the Firm Notes and any Option Notes which may be sold at the price and
upon the terms set forth in the Final Prospectus.
4. Covenants of the Company. The Company covenants and agrees
with each of the Underwriters that:
(a) The Company shall comply with the provisions of and
make all requisite filings with the Commission pursuant to Rules 424
and 430A of the Rules and Regulations and to notify you promptly (in
writing, if requested) of all such filings. The Company shall notify
you promptly of any request by the Commission for any amendment of or
supplement to the Registration Statement, the Effective Prospectus or
the Final Prospectus or for additional information; the Company shall
prepare and file with the Commission, promptly upon your request, any
amendments of or supplements to the Registration Statement, the
Effective Prospectus or the Final Prospectus which, in your opinion,
may be necessary or advisable in connection with the distribution of
the Notes; and the Company shall not file any amendment of or
supplement to the Registration Statement, the Effective Prospectus or
the Final Prospectus which is not approved by you after reasonable
notice thereof. The Company shall advise you promptly of the issuance
by the Commission or any jurisdiction or other regulatory body of any
stop order or other order suspending the effectiveness of the
Registration Statement, suspending or preventing the use of any
Preliminary Prospectus, the Effective Prospectus or the Final
Prospectus or suspending the qualification of the Notes for offering or
sale in any jurisdiction, or of the institution of any proceedings for
any such purpose; and the Company shall use its best efforts to prevent
the issuance of any stop order
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<PAGE> 10
or other such order and, should a stop order or other such order be
issued, to obtain as soon as possible the lifting thereof.
(b) The Company will take or cause to be taken all
necessary action and furnish to whomever you direct such information as
may be reasonably required in qualifying the Notes for offer and sale
under the securities or Blue Sky laws of such jurisdictions as the
Underwriters may designate (which shall not include the State of New
York unless the Company otherwise requests) and will continue such
qualifications in effect for as long as may be reasonably necessary to
complete the distribution. The Company shall not be required to qualify
as a foreign corporation or to file a general consent to service of
process in any jurisdiction where it is not presently qualified or
where it would be subject to taxation as a foreign corporation.
(c) Within the time during which a Final Prospectus
relating to the Notes is required to be delivered under the Securities
Act, the Company shall comply with all requirements imposed upon it by
the Securities Act, as now and hereafter amended, and by the Rules and
Regulations, as from time to time in force, so far as is necessary to
permit the continuance of sales of or dealings in the Notes as
contemplated by the provisions hereof and the Final Prospectus. If
during such period any event occurs as a result of which the Final
Prospectus as then amended or supplemented would include an untrue
statement of a material fact or omit to state a material fact necessary
to make the statements therein, in the light of the circumstances then
existing, not misleading, or if during such period it is necessary to
amend the Registration Statement or supplement the Final Prospectus to
comply with the Securities Act, the Company shall promptly notify you
and shall amend the Registration Statement or supplement the Final
Prospectus (at the expense of the Company) so as to correct such
statement or omission or effect such compliance.
(d) The Company will furnish without charge to the
Representatives and make available to the Underwriters copies of the
Registration Statement (four of which shall be signed and shall be
accompanied by all exhibits, including any which are incorporated by
reference, which have not previously been furnished), each Preliminary
Prospectus, the Effective Prospectus and the Final Prospectus, and all
amendments and supplements thereto, including any prospectus or
supplement prepared after the effective date of the Registration
Statement, in each case as soon as available and in such quantities as
the Underwriters may reasonably request. The Company will deliver to
each Underwriter a copy of each document incorporated by reference in
the effective Prospectus and the Final Prospectus which has not
previously been furnished.
(e) The Company will (i) deliver to you at such office or
offices as you may designate as many copies of the Preliminary
Prospectus and Final Prospectus as you may reasonably request, and (ii)
for a period of not more than nine months after the Registration
Statement becomes effective, send to the Underwriters as many
additional copies of the Final Prospectus and any supplement thereto as
you may reasonably request.
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<PAGE> 11
(f) The Company shall make generally available to its
security holders, in the manner contemplated by Rule 158(b) under the
Securities Act as promptly as practicable and in any event no later
than 90 days after the end of its fiscal quarter in which the first
anniversary of the effective date of the Registration Statement occurs,
an earning statement satisfying the provisions of Section 11(a) of the
Securities Act covering a period of at least 12 consecutive months
beginning after the effective date of the Registration Statement.
(g) The Company will apply the net proceeds from the sale
of the Notes as set forth under the caption "Use of Proceeds" in the
Final Prospectus.
(h) During a period of five years from the effective date
of the Registration Statement, the Company will furnish to the
Representatives copies of all reports and other communications
(financial or other) furnished by the Company to its shareholders and,
as soon as available, copies of any reports or financial statements
furnished or filed by the Company to or with the Commission or any
national securities exchange on which any class of securities of the
Company may be listed.
(i) The Company will not at any time, directly or
indirectly, take any action designed, or which might reasonably be
expected to cause or result in, or which will constitute, stabilization
or manipulation of the price of the Notes to facilitate the sale or
resale of any of the Notes. The Company will not make bids for or
purchases of or induce bids for or purchases of, directly or
indirectly, any Notes until the distribution of all Notes has been
completed.
5. Expenses. The Company agrees with the Underwriters that (a)
whether or not the transactions contemplated by this Agreement are consummated
or this Agreement becomes effective or is terminated, the Company will pay all
fees and expenses incident to the performance of the obligations of the Company
hereunder, including, but not limited to, (i) the Commission's registration fee,
(ii) the expenses of printing (or reproduction) and distributing the
Registration Statement (including the financial statements therein and all
amendments and exhibits thereto), each Preliminary Prospectus, the Effective
Prospectus, the Final Prospectus, any amendments or supplements thereto, and
this Agreement and other underwriting documents, including Underwriter's
Questionnaires, Underwriter's Powers of Attorney, Blue Sky Memoranda and
Agreements Among Underwriters, (iii) fees and expenses of accountants and
counsel for the Company, (iv) expenses of registration or qualification of the
Notes under state Blue Sky and securities laws, including the fees and
disbursements of counsel to the Underwriters in connection therewith, (v) filing
fees paid or incurred by the Underwriters and related fees and expenses of
counsel to the Underwriters in connection with filings with the National
Association of Securities Dealers, Inc. ("NASD"), (vi) all travel, lodging and
reasonable living expenses incurred by the Company in connection with marketing,
dealer and other meetings attended by the Company and the Underwriters in
marketing the Notes, (vii) the costs and charges of the Company's transfer
agent, registrar, paying agent, and redemption agent, and the cost of preparing
the certificates for the Notes, (viii) the fees and expenses of the Trustee in
connection with the Indenture and the Notes, and (ix) all other costs and
expenses
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<PAGE> 12
incident to the performance of their obligations hereunder not otherwise
provided for in this Section; and (b) all out-of-pocket expenses, including
counsel fees, disbursements and expenses, incurred by the Underwriters in
connection with investigating, preparing to market and marketing the Notes and
proposing to purchase and purchasing the Notes under this Agreement, will be
borne and paid by the Company if the sale of the Notes provided for herein is
not consummated by reason of the termination of this Agreement by the Company
pursuant to Section 12(a)(i), or because of any failure or refusal on the part
of the Company to comply with the terms or fulfill any of the conditions of this
Agreement. Except as provided in this Section 5, the Underwriters shall pay all
of their own expenses.
6. Conditions of the Underwriters' Obligations. The respective
obligations of the Underwriters to purchase and pay for the Firm Notes shall be
subject, in their discretion, to the accuracy of the representations and
warranties of the Company herein as of the date hereof and as of the Closing
Date as if made on and as of the Closing Date, to the accuracy of the statements
of the Company's officers made pursuant to the provisions hereof, to the
performance by the Company of all of their covenants and agreements hereunder
and to the following additional conditions:
(a) The Registration Statement and all post-effective
amendments thereto shall have become effective not later than 5:30
P.M., Washington, D.C. time, on the day following the date of this
Agreement, or such later time and date as shall have been consented to
by the Representative and all filings required by Rule 424, Rule 430A
and Rule 462 of the Rules and Regulations shall have been made; no stop
order suspending the effectiveness of the Registration Statement shall
have been issued and no proceedings for that purpose shall have been
instituted or threatened or, to the knowledge of the Company or the
Underwriters, shall be contemplated by the Commission; any request of
the Commission for additional information (to be included in the
Registration Statement or the Final Prospectus or otherwise) shall have
been complied with to your satisfaction; and the NASD, upon review of
the terms of the public offering of the Notes, shall not have objected
to such offering, such terms or the Underwriters' participation in the
same.
(b) No Underwriter shall have advised the Company that
the Registration Statement, Preliminary Prospectus, the Effective
Prospectus or Final Prospectus, or any amendment or any supplement
thereto, contains an untrue statement of fact which, in your judgment,
is material, or omits to state a fact which, in your judgment, is
material and is required to be stated therein or necessary to make the
statements therein not misleading and the Company shall not have cured
such untrue statement of fact or stated a statement of fact required to
be stated therein.
(c) The Representatives shall have received an opinion,
dated the Closing Date, from Hutchins, Wheeler & Dittmar, counsel for
the Company, to the effect that:
(i) The Company has been duly organized and is
validly existing in good standing as a corporation under the
laws of the Commonwealth of
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<PAGE> 13
Massachusetts, with corporate power and authority to own its
properties and conduct its business as now conducted, and is
duly qualified to do business as a foreign corporation in good
standing in all other jurisdictions where the failure to so
qualify would have a material adverse effect upon the Company
and its subsidiaries taken as a whole. The Company holds all
licenses, certificates, permits, franchises and authorizations
from governmental authorities which are material to the
conduct of its business in all locations in which such
business is currently being conducted.
(ii) Each of the Company's subsidiaries is
validly existing and in good standing under the laws of the
state of its incorporation or organization, as the case may
be, with power and authority to own its properties and conduct
its business as now conducted, and is duly qualified or
authorized to do business and is in good standing in all other
jurisdictions where the failure to so qualify would have a
material adverse effect upon the business of the Company and
its subsidiaries taken as a whole. The outstanding stock of
each of the Company's subsidiaries is duly authorized, validly
issued, fully paid and nonassessable. All of the outstanding
stock of each of the corporate subsidiaries is owned
beneficially and of record by the Company, free and clear of
all liens, encumbrances, equities and claims. No options or
warrants or other rights to purchase, agreements or other
obligations to issue or other rights to convert any
obligations into any shares of capital stock or of ownership
interests in any of the Company's subsidiaries are
outstanding. Each of the Company's subsidiaries holds all
licenses, certificates, permits, franchises and authorizations
from governmental authorities which are material to the
conduct of its business in all locations in which such
business is currently being conducted.
(iii) The Indenture has been duly authorized,
executed and delivered, and constitutes a legal, valid and
binding instrument enforceable against the Company in
accordance with its terms, except as enforceability may be
limited by general equitable principles, bankruptcy,
insolvency, reorganization, moratorium, fraudulent transfer,
fraudulent conveyance or other laws affecting creditors'
rights generally. The Indenture has been qualified under the
Trust Indenture Act. The Notes have been duly and validly
authorized and when executed and authenticated in accordance
with the provisions of the Indenture and delivered to and paid
for by the Underwriters as provided herein will constitute
legal, valid and binding obligations of the Company, entitled
to the benefits of the Indenture, and conformed to the
description thereof contained in the Effective Prospectus and
the Final Prospectus.
(iv) No consent, approval, authorization or order
of any court or governmental agency or body or third party is
required for the performance of this Agreement by the Company
or the consummation by the Company of the transactions
contemplated hereby, except such as have been obtained under
the Securities Act and such as may be required by the NASD and
under state securities
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<PAGE> 14
or Blue Sky laws in connection with the purchase and
distribution of the Notes by the several Underwriters. The
performance of this Agreement by the Company and the
consummation by the Company of the transactions contemplated
hereby will not conflict with or result in a breach or
violation by the Company of any of the terms or provisions of,
or constitute a default by the Company under, any indenture,
mortgage, deed of trust, loan agreement, lease or other
agreement or instrument known to such counsel to which the
Company is a party or to which the Company or its properties
is subject, the Articles of Organization or bylaws of the
Company, any statute, or any judgment, decree, order, rule or
regulation known to such counsel of any court or governmental
agency or body applicable to the Company or any of its
subsidiaries or their properties.
(v) The Company has full legal right, power and
authority to enter into this Agreement and the Indenture and
to issue, sell and deliver the Notes to be sold by it to the
Underwriters as provided herein, and this Agreement has been
duly authorized, executed and delivered by the Company and
constitutes the valid and legally binding obligation of the
Company enforceable against the Company in accordance with its
terms, except as enforceability may be limited by general
equitable principles, bankruptcy, insolvency, reorganization,
moratorium, fraudulent transfer, fraudulent conveyance or
other laws affecting creditors' rights generally.
(vi) Except as described in the Final Prospectus,
there is not pending, or to the best knowledge of such counsel
threatened, any action, suit, proceeding, inquiry or
investigation, to which the Company or any of its subsidiaries
is a party, or to which the property of the Company or any of
its subsidiaries is subject, before or brought by any court or
governmental agency or body, which, if determined adversely to
the Company or any of its subsidiaries, could result in any
material adverse change in the business, financial position,
net worth or results of operations, or could materially
adversely affect the properties or assets, of the Company or
any of its subsidiaries.
(vii) To the best knowledge of such counsel, no
default exists, and no event has occurred which with notice or
after the lapse of time to cure or both, would constitute a
default, in the due performance and observance of any term,
covenant or condition of any indenture, mortgage, deed of
trust, loan agreement, lease or other agreement or instrument
to which the Company or any of its subsidiaries is a party or
to which they or their properties are subject, or of the
Articles of Organization or bylaws of the Company or any of
its subsidiaries.
(viii) To the best knowledge of such counsel after
reasonable inquiry, neither the Company nor any of its
subsidiaries is in violation of any law, ordinance,
administrative or governmental rule or regulation applicable
to the Company or any of its subsidiaries and material to the
Company and its subsidiaries taken as a whole
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<PAGE> 15
or any decree of any court or governmental agency or body
having jurisdiction over the Company or any of its
subsidiaries.
(ix) The Registration Statement and all post
effective amendments thereto have become effective under the
Securities Act, and, to the best knowledge of such counsel, no
stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose
have been instituted or are threatened, pending or
contemplated by the Commission. All filings required by Rule
424, Rule 430A and Rule 462 of the Rules and Regulations have
been made; the Registration Statement, the Effective
Prospectus and Final Prospectus, and any amendments or
supplements thereto (except for the financial statements and
schedules included therein as to which such counsel need
express no opinion), as of their respective effective or issue
dates, complied as to form in all material respects with the
requirements of the Securities Act and the Rules and
Regulations; the descriptions in the Registration Statement,
the Effective Prospectus and the Final Prospectus of statutes,
regulations, legal and governmental proceedings, and contracts
and other documents are accurate in all material respects and
present fairly the information required to be stated; and such
counsel does not know of any pending or threatened legal or
governmental proceedings, statutes or regulations required to
be described in the Final Prospectus which are not described
as required nor of any contracts or documents of a character
required to be described in the Registration Statement or the
Final Prospectus or to be filed as exhibits to the
Registration Statement which are not described and filed as
required.
(x) The information in the Effective Prospectus
and the Final Prospectus under the caption "Description of the
Notes," insofar as it purports to summarize the provisions of
the Notes, is correct in all material respects.
In addition to the matters set forth above, such opinion shall also
include a statement to the effect that nothing has come to the attention of such
counsel which leads them to believe that the Registration Statement, the
Effective Prospectus and the Final Prospectus or any amendment or supplement
thereto contains an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading (except that such counsel need express no view as to
financial statements, schedules and other financial information included
therein).
(d) The Underwriters shall have received an opinion or
opinions, dated the Closing Date, of Bass, Berry & Sims, counsel for
the Underwriters, with respect to the Registration Statement and the
Final Prospectus, and such other related matters as the Underwriters
may require, and the Company shall have furnished to such counsel such
documents as they may reasonably request for the purpose of enabling
them to pass upon such matters. Such counsel may rely on Hutchins,
Wheeler & Dittmar as to matters of Massachusetts law.
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(e) The Representatives shall have received from Ernst &
Young, a letter dated the date hereof and, at the Closing Date, a
second letter dated the Closing Date, in form and substance
satisfactory to the Representatives, stating that they are independent
public accountants with respect to the Company and its subsidiaries
within the meaning of the Securities Act and the applicable Rules and
Regulations, and to the effect that:
(i) In their opinion, the financial statements
and schedules examined by them and included or incorporated by
reference in the Registration Statement comply as to form in
all material respects with the applicable accounting
requirements of the Securities Act and the published Rules and
Regulations and are presented in accordance with generally
accepted accounting principles; and they have made a review in
accordance with standards established by the American
Institute of Certified Public Accountants of the consolidated
interim financial statements, selected financial data, and/or
condensed financial statements derived from audited financial
statements of the Company;
(ii) On the basis of a reading of the latest
available interim consolidated financial statements
(unaudited) of the Company and its subsidiaries, a reading of
the minute books of the Company and its subsidiaries,
inquiries of officials of the Company responsible for
financial and accounting matters and other specified
procedures, all of which have been agreed to by the
Representative, nothing came to their attention that caused
them to believe that:
(A) the unaudited financial statements
included in the Registration Statement do not comply
as to form in all material respects with the
accounting requirements of the federal securities
laws and the related published rules and regulations
thereunder or are not in conformity with generally
accepted accounting principles applied on a basis
substantially consistent with the basis for the
audited financial statements contained in the
Registration Statement;
(B) any other unaudited financial
statement data included or incorporated by reference
in the Final Prospectus do not agree with the
corresponding items in the unaudited consolidated
financial statements from which data was derived and
any such unaudited data were not determined on a
basis substantially consistent with the basis for the
corresponding amounts in the audited financial
statements included in the Prospectus;
(C) at a specified date not more than
five days prior to the date of delivery of such
respective letter, there was any change in the
consolidated capital stock, decline in stockholders'
equity or increase in long-term debt of the Company
and its subsidiaries, or other items specified by the
Underwriters in each case as compared with amounts
shown in the latest
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<PAGE> 17
balance sheets included in the Final Prospectus,
except in each case for changes, decreases or
increases which the Final Prospectus discloses have
occurred or may occur or which are described in such
letters; and
(D) for the period from the closing
date of the latest consolidated statements of income
included in the Effective Prospectus and the Final
Prospectus to a specified date not more than five
days prior to the date of delivery of such respective
letter, there were any decreases in total revenues or
net income of the Company, or other items specified
by the Underwriters, or any increases in any items
specified by the Underwriters, in each case as
compared with the corresponding period of the
preceding year, except in each case for decreases
which the Final Prospectus discloses have occurred or
may occur or which are described in such letter.
(iii) They have carried out certain specified
procedures, not constituting an audit, with respect to certain
amounts, percentages and financial information specified by
you which are derived from the general accounting records of
the Company and its subsidiaries, which appear in the
Effective Prospectus and the Final Prospectus and have
compared and agreed such amounts, percentages and financial
information with the accounting records of the Company and its
subsidiaries or to analyses and schedules prepared by the
Company and its subsidiaries from its detailed accounting
records.
In the event that the letters to be delivered referred to above set
forth any such changes, decreases or increases, it shall be a further
condition to the obligations of the Underwriters that the Underwriters
shall have determined, after discussions with officers of the Company
responsible for financial and accounting matters and with Ernst &
Young, that such changes, decreases or increases as are set forth in
such letters do not reflect a material adverse change in the
stockholders' equity or long-term debt of the Company as compared with
the amounts shown in the latest consolidated balance sheets of the
Company included in the Final Prospectus, or a material adverse change
in total revenues or net income, of the Company, in each case as
compared with the corresponding period of the prior year.
(f) There shall have been furnished to you a certificate,
dated the Closing Date and addressed to you, signed by the Chief
Executive Officer and by the Chief Financial Officer of the Company to
the effect that:
(i) the representations and warranties of the
Company in Section 1 of this Agreement are true and correct,
as if made at and as of the Closing Date, and the Company has
complied with all the agreements and satisfied all the
conditions on its part to be performed or satisfied at or
prior to the Closing Date;
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<PAGE> 18
(ii) no stop order suspending the effectiveness
of the Registration Statement has been issued, and no
proceedings for that purpose have been initiated or are
pending, or to their knowledge, threatened under the
Securities Act;
(iii) all filings required by Rule 424, Rule 430A
and Rule 462 of the Rules and Regulations have been made;
(iv) they have carefully examined the
Registration Statement, the Effective Prospectus and the Final
Prospectus, and any amendments or supplements thereto, and
such documents do not include any untrue statement of a
material fact or omit to state any material fact required to
be stated therein or necessary to make the statements therein
not misleading; and
(v) since the effective date of the Registration
Statement, there has occurred no event required to be set
forth in an amendment or supplement to the Registration
Statement, the Effective Prospectus or the Final Prospectus
which has not been so set forth.
(g) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Final
Prospectus, and except as stated therein, the Company and its
subsidiaries have not sustained any material loss or interference with
their respective businesses or properties from fire, flood, hurricane,
accident or other calamity, whether or not covered by insurance, or
from any labor dispute or any court or governmental action, order or
decree, or become a party to or the subject of any litigation which is
material to the Company and its subsidiaries taken as a whole, nor
shall there have been any material adverse change, or any development
involving a prospective material adverse change, in the business,
properties, key personnel, capitalization, net worth results of
operations or condition (financial or other) of the Company and its
subsidiaries taken as a whole, which loss, interference, litigation or
change, in your judgment shall render it unadvisable to commence or
continue the offering of the Notes at the offering price to the public
set forth on the cover page of the Prospectus or to proceed with the
delivery of the Notes.
All such opinions, certificates, letters and documents delivered
pursuant to this Agreement will comply with the provisions hereof only if they
are reasonably satisfactory to the Representative and its counsel. The Company
shall furnish to the Representative such conformed copies of such opinions,
certificates, letters and documents in such quantities as the Representative
shall reasonably request.
The respective obligations of the Underwriters to purchase and pay for
the Option Notes shall be subject, in their discretion, to each of the foregoing
conditions to purchase the Firm Notes, except that all references to the
"Closing Date" shall be deemed to refer to the Option Closing Date, if it shall
be a date other than the Closing Date.
18
<PAGE> 19
7. Condition of the Company's Obligations. The obligations
hereunder of the Company are subject to the condition set forth in Section 6(a)
hereof.
8. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless
each Underwriter, and each person, if any, who controls any Underwriter
within the meaning of the Securities Act, against any losses, claims,
damages or liabilities, joint or several, to which such Underwriter or
controlling person may become subject under the Securities Act or
otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based in whole or in
part upon (i) any inaccuracy in the representations and warranties of
the Company contained herein, (ii) any failure of the Company to
perform its obligations hereunder or under law or (iii) any untrue
statement or alleged untrue statement of any material fact contained in
the Registration Statement, any Preliminary Prospectus, the Effective
Prospectus or Final Prospectus, or any amendment or supplement thereto,
or in any Blue Sky application or other written information furnished
by the Company filed in any state or other jurisdiction in order to
qualify any or all of the Notes under the securities laws thereof (a
"Blue Sky Application"), or arise out of or are based upon the omission
or alleged omission to state in the Registration Statement, any
Preliminary Prospectus, the Effective Prospectus or Final Prospectus or
any amendment or supplement thereto or any Blue Sky Application a
material fact required to be stated therein or necessary to make the
statements therein not misleading, and will reimburse each Underwriter
and each such controlling person for any legal or other expenses
reasonably incurred by such Underwriter or such controlling person in
connection with investigating or defending any such loss, claim,
damage, liability or action as such expenses are incurred; provided,
however, that the Company will not be liable in any such case to the
extent that any such loss, claim, damage, or liability arises out of or
is based upon any untrue statement or alleged untrue statement or
omission or alleged omission made in the Registration Statement, the
Preliminary Prospectus, the Effective Prospectus or Final Prospectus or
such amendment or such supplement or any Blue Sky Application in
reliance upon and in conformity with written information furnished to
the Company by any Underwriter specifically for use therein (it being
understood that the only information so provided is the information
included in the last sentence of the first paragraph on the cover page
and in the fourth and fifth paragraphs under the caption "Underwriting"
in any Preliminary Prospectus and the Final Prospectus and the
Effective Prospectus).
(b) Each Underwriter will indemnify and hold harmless the
Company, each of its directors, each of its officers who signed the
Registration Statement and each person, if any, who controls the
Company within the meaning of the Securities Act against any losses,
claims, damages or liabilities to which the Company or any such
director, officer or controlling person may become subject, under the
Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of any material
fact contained
19
<PAGE> 20
in the Registration Statement, any Preliminary Prospectus, the
Effective Prospectus or Final Prospectus, or any amendment or
supplement thereto, or any Blue Sky Application, or arise out of or are
based upon the omission or the alleged omission to state in the
Registration Statement, any Preliminary Prospectus, the Effective
Prospectus or Final Prospectus or any amendment or supplement thereto
or any Blue Sky Application a material fact required to be stated
therein or necessary to make the statements therein not misleading, in
each case to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission
was made in reliance upon and in conformity with written information
furnished to the Company by any Underwriter specifically for use
therein (it being understood that the only information so provided is
the information included in the last sentence of the first paragraph on
the cover page and in the fourth and fifth paragraphs under the caption
"Underwriting" in any Preliminary Prospectus and in the Effective
Prospectus and the Final Prospectus);
(c) Promptly after receipt by an indemnified party under
this Section 8 of notice of the commencement of any action, including
governmental proceedings, such indemnified party will, if a claim in
respect thereof is to be made against the indemnifying party under this
Section 8 notify the indemnifying party of the commencement thereof;
but the omission so to notify the indemnifying party will not relieve
it from any liability which it may have to any indemnified party
otherwise than under this Section 8. In case any such action is brought
against any indemnified party, and it notifies the indemnifying party
of the commencement thereof, the indemnifying party will be entitled to
participate therein, and to the extent that it may wish, jointly with
any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party; and after
notice from the indemnifying party to such indemnified party of its
election to so assume the defense thereof, the indemnifying party will
not be liable to such indemnified party under this Section 8 for any
legal or other expenses subsequently incurred by such indemnified party
in connection with the defense thereof other than reasonable costs of
investigation except that the indemnified party shall have the right to
employ separate counsel if, in its reasonable judgment, it is advisable
for the indemnified party and any other Underwriter to be represented
by separate counsel, and in that event the fees and expenses of
separate counsel shall be paid by the indemnifying party. The Company
shall not, without the prior written consent of each Underwriter,
settle or compromise or consent to the entry of any judgment in any
pending or threatened action or claim or related cause of action or
portion of such cause of action in respect of which the Company
reasonably believes any Underwriter may seek indemnification hereunder
(whether or not such Underwriter is a party of such action or claim),
unless such settlement, compromise or consent includes an unconditional
release of such Underwriter from all liability arising out of such
action or claim (or related cause of action or portion thereof).
(d) In order to provide for just and equitable
contribution in circumstances in which the indemnity agreement provided
for in the preceding part of this Section 8 is for any reason held to
be unavailable to the Underwriters or the Company or is insufficient to
hold
20
<PAGE> 21
harmless an indemnified party, then the Company shall contribute to the
damages paid by the Underwriters, and the Underwriters shall contribute
to the damages paid by the Company provided, however, that no person
guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. In
determining the amount of contribution to which the respective parties
are entitled, there shall be considered the relative benefits received
by each party from the offering of the Notes (taking into account the
portion of the proceeds of the offering realized by each), the parties'
relative knowledge and access to information concerning the matter with
respect to which the claim was asserted, the opportunity to correct and
prevent any statement or omission, and any other equitable
considerations appropriate under the circumstances. The Company and the
Underwriters agree that it would not be equitable if the amount of such
contribution were determined by pro rata or per capita allocation (even
if the Underwriters were treated as one entity for such purpose). No
Underwriter or person controlling such Underwriter shall be obligated
to make contribution hereunder which in the aggregate exceeds the
underwriting discount applicable to the Notes purchased by such
Underwriter under this Agreement, less the aggregate amount of any
damages which such Underwriter and its controlling persons have
otherwise been required to pay in respect of the same or any similar
claim. The Underwriters' obligations to contribute hereunder are
several in proportion to their respective underwriting obligations and
not joint. For purposes of this Section, each person, if any, who
controls an Underwriter within the meaning of Section 15 of the
Securities Act shall have the same rights to contribution as such
Underwriter, and each director of the Company, each officer of the
Company who signed the Registration Statement, and each person, if any,
who controls the Company within the meaning of Section 15 of the
Securities Act, shall have the same rights to contribution as the
Company.
9. Default of Underwriters. If any Underwriter defaults in its
obligation to purchase Notes hereunder and if the total amount of Notes which
such defaulting Underwriter agreed but failed to purchase is ten percent or less
of the total amount of Notes to be sold hereunder, the non-defaulting
Underwriters shall be obligated severally to purchase (in the respective
proportions which the amount of Notes set forth opposite the name of each
non-defaulting Underwriter in Schedule I hereto bears to the total amount of
Notes set forth opposite the names of all the non-defaulting Underwriters), the
Notes which such defaulting Underwriter or Underwriters agreed but failed to
purchase. If any Underwriter so defaults and the total amount of Notes with
respect to which such default or defaults occur is more than ten percent of the
total amount of Notes to be sold hereunder, and arrangements satisfactory to the
other Underwriters and the Company for the purchase of such Notes by other
persons (who may include the non-defaulting Underwriters) are not made within 36
hours after such default, this Agreement, insofar as it relates to the sale of
the Notes, will terminate without liability on the part of the non-defaulting
Underwriters or the Company except for (i) the provisions of Section 8 hereof,
and (ii) the expenses to be paid or reimbursed by the Company pursuant to
Section 5. As used in this Agreement, the term "Underwriter" includes any person
substituted for an Underwriter under this Section 9. Nothing herein shall
relieve a defaulting Underwriter from liability for its default.
21
<PAGE> 22
10. Survival Clause. The respective representations, warranties,
agreements, covenants, indemnities and other statements of the Company, its
officers and the Underwriters set forth in this Agreement or made by or on
behalf of them, respectively, pursuant to this Agreement shall remain in full
force and effect, regardless of (i) any investigation made by or on behalf of
the Company, any of its officers or directors, any Underwriter or any
controlling person, (ii) any termination of this Agreement and (iii) delivery of
and payment for the Notes.
11. Effective Date. This Agreement shall become effective at
whichever of the following times shall first occur after execution of this
Agreement: (i) at 11:30 A.M., Washington, D.C. time, on the next full business
day following the date on which the Registration Statement becomes effective or
(ii) at such time after the Registration Statement has become effective as the
Representative shall release the Firm Notes for sale to the public; provided,
however, that the provisions of Sections 5, 8, 10 and 11 hereof shall at all
times be effective. For purposes of this Section 11, the Firm Notes shall be
deemed to have been so released upon the release by the Representative for
publication, at any time after the Registration Statement has become effective,
of any newspaper advertisement relating to the Firm Notes or upon the release by
the Representatives of telegrams offering the Firm Notes for sale to securities
dealers, whichever may occur first.
12. Termination.
(a) The Company's obligations under this Agreement may be
terminated by the Company by notice to the Representatives (i) at any
time before it becomes effective in accordance with Section 11 hereof,
or (ii) in the event that the condition set forth in Section 7 shall
not have been satisfied at or prior to the first Closing Date.
(b) This Agreement may be terminated by the
Representatives by notice to the Company (i) at any time before it
becomes effective in accordance with Section 11 hereof; (ii) in the
event that at or prior to the first Closing Date the Company shall have
failed, refused or been unable to perform any agreement on the part of
the Company to be performed hereunder or any other condition to the
obligations of the Underwriters hereunder is not fulfilled; (iii) if at
or prior to the Closing Date trading in securities on the New York
Stock Exchange, the American Stock Exchange or the over-the-counter
market shall have been suspended or materially limited or minimum or
maximum prices shall have been established on either of such Exchanges
or such market, or a banking moratorium shall have been declared by
Federal or state authorities; (iv) if at or prior to the Closing Date
trading in securities of the Company shall have been suspended; or (v)
if there shall have been such a material change in general economic,
political or financial conditions or if the effect of international
conditions on the financial markets in the United States shall be such
as, in your reasonable judgment, makes it inadvisable to commence or
continue the offering of the Notes to the public.
22
<PAGE> 23
(c) This Agreement shall automatically terminate upon
satisfaction and discharge of the Notes by the Company in accordance
with the Indenture.
(d) Termination of this Agreement pursuant to this
Section 12 shall be without liability of any party to any other party
other than as provided in Sections 5 and 8 hereof.
13. Notices. All communications hereunder shall be in writing and,
if sent to any of the Underwriters, shall be mailed or delivered or telegraphed
and confirmed in writing to the Representatives, McDonald & Company Securities,
Inc., 800 Superior Avenue, Cleveland, Ohio 44114, Attention: Mark W. Biche or if
sent to the Company shall be mailed, delivered or telegraphed and confirmed in
writing to the Company at 789 Main Road, Stamford, Vermont 05352, Attention:
Richard A. Stratton.
14. Miscellaneous. This Agreement shall inure to the benefit of
and be binding upon the several Underwriters, the Company and their respective
successors and legal representatives. Nothing expressed or mentioned in this
Agreement is intended or shall be construed to give any other person any legal
or equitable right, remedy or claim under or in respect of this Agreement. This
Agreement and all conditions and provisions hereof are intended to be for the
sole and exclusive benefit of the Company and the several Underwriters and for
the benefit of no other person except that (i) the representations and
warranties of the Company and contained in this Agreement shall also be for the
benefit of any person or persons who control any Underwriter within the meaning
of Section 15 of the Securities Act, and (ii) the indemnities by the
Underwriters shall also be for the benefit of the directors of the Company,
officers of the Company who have signed the Registration Statement and any
person or persons who control the Company within the meaning of Section 15 of
the Securities Act. No purchaser of Notes from any Underwriter will be deemed a
successor because of such purchase. The validity and interpretation of this
Agreement shall be governed by the laws of the State of Ohio. 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. You hereby represent and warrant to the Company that you have
authority to act hereunder on behalf of the several Underwriters, and any action
hereunder taken by you will be binding upon all the Underwriters.
23
<PAGE> 24
If the foregoing is in accordance with your understanding of
our agreement, please indicate your acceptance thereof in the space provided
below for that purpose, whereupon this letter shall constitute a binding
agreement between the Company and each of the several Underwriters.
Very truly yours,
LITCHFIELD FINANCIAL CORPORATION
By:
-------------------------------
Title:
-----------------------------
Confirmed and accepted as of the
date first above written.
MCDONALD & COMPANY SECURITIES, INC.
J.C. BRADFORD & CO.
TUCKER ANTHONY INCORPORATED
For themselves and as
Representative of the Several
Underwriters
By:
----------------------------------
Title:
-------------------------------
24
<PAGE> 25
SCHEDULE I
UNDERWRITERS
<TABLE>
<CAPTION>
Principal Amount
of Firm Notes to Be
Underwriter Purchased
- ------------------------------------------------- ---------------------------
<S> <C>
McDonald & Company Securities, Inc...............
---------------------------
J.C. Bradford & Co...............................
---------------------------
Tucker Anthony Incorporated......................
---------------------------
TOTAL............................. $
===========================
</TABLE>
25
<PAGE> 1
EXHIBIT 4.7
==================================
LITCHFIELD FINANCIAL CORPORATION
AND
THE BANK OF NEW YORK
--------------------
TRUSTEE
------------------------------
INDENTURE
Dated as of November __, 1997
------------------------------
$50,000,000
____ % NOTES
DUE NOVEMBER 1,
==================================
<PAGE> 2
Litchfield Financial Corporation
____% Notes due November 1, ____
TIE-SHEET
of provisions of Trust Indenture Act of 1939 and the Indenture
dated as of November ____, 1997, between Litchfield Financial
Corporation and The Bank of New York, Trustee.
<TABLE>
<CAPTION>
TRUST INDENTURE
ACT OF 1939
SECTION INDENTURE SECTION
- ----------------------------------------------- ---------------------------------------------------------
<S> <C>
310(a)(1)(2)(3)................................ 10.1 and 10.12
(a)(4)...................................... Not applicable
(b)......................................... 10.8 and 10.9
(c)......................................... Not applicable
311(c)......................................... Not applicable
312(a)......................................... 4.1(A) and (B)
(b)......................................... 4.1(C)
(c)......................................... 4.1(D)
313(a)......................................... 4.3
(b)......................................... Not applicable
(c)......................................... 4.3
(d)......................................... 4.3
314(a)......................................... 4.2(A) and (B)
(b)......................................... Not applicable
(c)......................................... 15.3
(d)......................................... Not applicable
(e)......................................... 15.3
315(a)......................................... 10.2(A)
(b)......................................... 7.2
(c)......................................... 10.2(B)
(d)......................................... 10.2(C)
(e)......................................... 7.13
316(a)(1)...................................... 7.6 and 7.16
(a)(2)...................................... Not applicable
(b)......................................... 7.12
317(a)......................................... 7.8 and 7.10
(b)......................................... 3.2(B) and (C)
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
318(a)......................................... 15.6
</TABLE>
- ---------------
This tie-sheet does not constitute a part of the Indenture.
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ARTICLE 1
<S> <C>
DEFINITIONS
SECTION 1.1..............................................................................................9
Act.............................................................................................9
affected .......................................................................................9
Affiliate.......................................................................................9
Authenticating Agent...........................................................................10
Board of Directors" or "Board..................................................................10
business day...................................................................................10
capital stock..................................................................................10
Certified Resolution...........................................................................10
common stock...................................................................................10
Company........................................................................................10
Company Order" and "Company Request............................................................10
corporation....................................................................................10
Daily Newspaper................................................................................10
date of this Indenture.........................................................................10
day............................................................................................10
Default........................................................................................11
Defaulted Interest.............................................................................11
Event of Default...............................................................................11
Executive Officer..............................................................................11
Federal Bankruptcy Act.........................................................................11
Fundamental Structural Change..................................................................11
Indebtedness...................................................................................11
Indenture......................................................................................12
Interest Payment Date..........................................................................12
Lien ..........................................................................................12
main office....................................................................................12
maturity" or "mature...........................................................................12
Note" or "Notes................................................................................12
Note Co-Registrar..............................................................................12
Note Register" and "Note Registrar.............................................................12
Noteholder," "holder of the Notes," "Holder" or "holder........................................12
Officers' Certificate..........................................................................12
Original Issue Date............................................................................12
Original Purchasers............................................................................12
Outstanding....................................................................................13
Overallotment Option...........................................................................13
</TABLE>
i
<PAGE> 5
<TABLE>
<S> <C>
paying agent...................................................................................13
Permitted Investments..........................................................................13
person.........................................................................................13
place of payment...............................................................................13
predecessor Note...............................................................................13
Proceeding.....................................................................................14
Redemption Date................................................................................14
Regular Record Date............................................................................14
Responsible Officers...........................................................................14
Significant Subsidiary.........................................................................14
Significant Subsidiary Disposition.............................................................14
Special Record Date............................................................................14
Stated Maturity................................................................................14
Subsidiary.....................................................................................14
supplemental indenture or indenture supplemental hereto........................................14
Trustee ......................................................................................15
Trust Indenture Act or "TIA"...................................................................15
ARTICLE 2
ISSUE, DESCRIPTION, EXECUTION, REGISTRATION
AND EXCHANGE OF NOTES
SECTION 2.1 Designation, Amount and Issue of Notes.....................................................15
SECTION 2.2 Form of Notes..............................................................................15
SECTION 2.3 Denominations, Dates, Interest Payment and Record Dates....................................15
SECTION 2.4 Numbers and Legends on Notes...............................................................17
SECTION 2.5 Execution of Notes.........................................................................17
SECTION 2.6 Registration of Transfer of Notes..........................................................18
SECTION 2.7 Exchange and Registration of Transfer of Notes.............................................18
SECTION 2.8 Temporary Notes............................................................................19
SECTION 2.9 Recognition of Registered Holders of Definitive Notes and Temporary
Notes..........................................................................................19
SECTION 2.10 Mutilated, Destroyed, Lost or Stolen Notes................................................19
SECTION 2.11 Form and Authentication of Notes..........................................................20
SECTION 2.12 Surrender and Cancellation of Notes.......................................................20
ARTICLE 3
PARTICULAR COVENANTS OF THE COMPANY
SECTION 3.1 Will Punctually Pay Principal, Premiums and Interest on the Notes..........................20
SECTION 3.2.............................................................................................21
(A) Office or Agency..........................................................................21
</TABLE>
ii
<PAGE> 6
<TABLE>
<S> <C>
(B) Appointment of Trustee as Paying Agent; Duty of Paying Agent Other
Than Trustee..........................................................................21
(C) Duty of Company Acting as Paying Agent................................................21
(D) Delivery to Trustee...................................................................22
(E) All Sums to be Held Subject to Section 15.2...........................................22
SECTION 3.3 Will Pay Indebtedness......................................................................22
SECTION 3.4 Will Maintain Office.......................................................................22
SECTION 3.5 Will Keep, and Permit Examination of, Records and Books of Account
and Will Permit Visitation of Property.........................................................22
SECTION 3.6 Corporate Existance........................................................................23
SECTION 3.7 Maintenance of Properties..................................................................23
SECTION 3.8 Payment of Taxes and Other Claims..........................................................23
SECTION 3.9 Will Furnish Annual Certificates...........................................................24
SECTION 3.10 Restrictions on Indebtedness..............................................................24
SECTION 3.11 Liquidity Maintenance Requirement.........................................................24
SECTION 3.12 Limitation on Dividends and Other Payments................................................25
ARTICLE 4
NOTEHOLDER LISTS AND REPORTS BY THE COMPANY
AND THE TRUSTEE
SECTION 4.1 Noteholder lists, etc......................................................................25
SECTION 4.2 Reports by Company.........................................................................27
SECTION 4.3 Reports by Trustee.........................................................................28
ARTICLE 5
REDEMPTION OF NOTES AT COMPANY'S OPTION
SECTION 5.1 Election by Company to Redeem Notes........................................................28
SECTION 5.2 Redemption of Part of Notes................................................................28
SECTION 5.3 Notice of Redemption.......................................................................29
SECTION 5.4 Deposit of Redemption Price................................................................29
SECTION 5.5 Date on Which Notes Cease to Bear Interest, Etc............................................29
SECTION 5.6 All Notes Delivered........................................................................30
ARTICLE 6
REDEMPTION OF NOTES AT HOLDER'S OPTION
SECTION 6.1 Redemption Right at Holder's Option........................................................30
SECTION 6.2 Redemption Procedure.......................................................................31
SECTION 6.3 Withdrawal.................................................................................32
SECTION 6.4 Redemption Register........................................................................32
</TABLE>
iii
<PAGE> 7
<TABLE>
<S> <C>
SECTION 6.5 Redemption Upon Fundamental Structural Change or Significant
Subsidiary Disposition.............................................................................33
SECTION 6.6 Redemption of Notes Subject to Article 5...................................................33
ARTICLE 7
REMEDIES OF TRUSTEE AND NOTEHOLDERS UPON DEFAULT
SECTION 7.1 Definition of Default and Event of Default.................................................34
SECTION 7.2 Trustee to Give Noteholders Notice of Defaults.............................................35
SECTION 7.3 Declaration of Principal and Accrued Interest Due Upon Default; Holders
of Specified Percentage of Notes May Waive Default Declaration.................................36
SECTION 7.4 Power of Trustee to Protect and Enforce Rights.............................................36
SECTION 7.5 Remedies Cumulative........................................................................36
(A) Delay, Etc. Not a Waiver of Rights........................................................37
(B) Waiver of Default Not to Extend to Subsequent Defaults....................................37
SECTION 7.6 Holders of Specified Percentage of Notes May Direct Judicial Proceedings
by Trustee.....................................................................................37
SECTION 7.7 Disposition of Proceeds of Sale............................................................37
SECTION 7.8.............................................................................................38
(A) Payment of Principal and Interest to Trustee Upon Occurrence of Certain
Defaults; Judgment May be Taken by Trustee................................................38
(B) Enforcement of Rights by Trustee During Continuance of an Event of
Default...................................................................................38
(C) Application of Moneys Collected by Trustee................................................38
SECTION 7.9 Possession of Notes Unnecessary in Action by Trustee......................................39
SECTION 7.10 Trustee May File Necessary Proofs.........................................................39
SECTION 7.11 Limitation Upon Right of Noteholders to Institute Certain Legal
Proceedings....................................................................................40
SECTION 7.12 Right of Noteholder to Receive and Enforce Payment Not Impaired...........................40
SECTION 7.13 Court May Require Undertaking to Pay Costs................................................41
SECTION 7.14 Unenforceable Provision Inoperative.......................................................41
SECTION 7.15 If Enforcement Proceedings Abandoned, Status Quo is Established...........................41
SECTION 7.16 Noteholders May Waive Certain Defaults....................................................41
ARTICLE 8
EVIDENCE OF RIGHTS OF NOTEHOLDERS
AND OWNERSHIP OF NOTES
SECTION 8.1 Evidence of Ownership of Definitive Notes and Temporary Notes Issued
Hereunder in Registered Form...................................................................42
</TABLE>
iv
<PAGE> 8
<TABLE>
<S> <C>
ARTICLE 9
CONSOLIDATION, MERGER AND SALE
SECTION 9.1 Company May Merge, Consolidate, Etc., Upon Certain Terms...................................42
SECTION 9.2 Successor Corporation to be Substituted....................................................42
SECTION 9.3. Opinion of Counsel........................................................................43
SECTION 9.4 Article 9 Subject to Provision of Section 6.5..............................................43
ARTICLE 10
CONCERNING THE TRUSTEE
SECTION 10.1 Requirement of Corporate Trustee, Eligibility.............................................43
SECTION 10.2 Acceptance of Trust.......................................................................43
SECTION 10.3 Disclaimer................................................................................45
SECTION 10.4 Trustee May Own Notes.....................................................................45
SECTION 10.5 Trustee May Rely on Certificates, Etc.....................................................45
SECTION 10.6 Money Held in Trust Not Required to be Segregated.........................................46
SECTION 10.7 Compensation, Reimbursement, Indemnity, Security..........................................47
SECTION 10.8 Conflict of Interest......................................................................47
SECTION 10.9 Resignation, Removal, Appointment of Successor Trustee....................................52
SECTION 10.10 Acceptance by Successor Trustee..........................................................54
SECTION 10.11...........................................................................................54
(A) Notice, Etc. on Behalf of Company Delivered to Trustee............................................54
(B) Cash, Securities, Etc. to be Held by Trustee......................................................54
SECTION 10.12 Merger or Consolidation of Trustee.......................................................54
SECTION 10.13 Authenticating Agent.....................................................................55
ARTICLE 11
DISCHARGE OF INDENTURE
SECTION 11.1 Acknowledgement of Discharge..............................................................56
SECTION 11.2 Money Held in Trust.......................................................................57
ARTICLE 12
MEETING OF NOTEHOLDERS
SECTION 12.1 Purposes for Which Meetings May be Called.................................................57
SECTION 12.2 Call of Meetings by Trustee; Generally....................................................58
SECTION 12.3 Call of Meetings by Trustee; Notice.......................................................58
SECTION 12.4 Meetings, Notice and Entitlement to be Present............................................59
SECTION 12.5 Regulations May be Made by Trustee........................................................59
SECTION 12.6 Manner of Voting at Meetings and Record to be Kept........................................60
SECTION 12.7 Evidence of Action by Holders of Specified Percentage of Notes............................61
</TABLE>
v
<PAGE> 9
<TABLE>
<S> <C>
SECTION 12.8 Exercise of Right of Trustee or Noteholders May Not be Hindered or
Delayed by Call of Meeting of Noteholders......................................................60
ARTICLE 13
SUPPLEMENTAL INDENTURES
SECTION 13.1 Purposes for Which Supplemental Indentures May be Executed by
Company and Trustee............................................................................61
SECTION 13.2 Modification of Indenture by Written Consent of Noteholders...............................62
SECTION 13.3 Requirements for Execution; Duties and Immunities of Trustee..............................63
SECTION 13.4 Supplemental Indentures Part of Indenture.................................................63
SECTION 13.5 Notes Executed After Supplemental Indenture to be Approved by
Trustee........................................................................................63
SECTION 13.6 Supplemental Indentures Required to Comply with Trust Indenture Act
of 1939........................................................................................64
ARTICLE 14
IMMUNITY OF INCORPORATORS, STOCKHOLDERS,
OFFICERS AND DIRECTORS
SECTION 14.1 Immunity of Certain Persons...............................................................64
ARTICLE 15
MISCELLANEOUS
SECTION 15.1 Benefits Restricted to Parties and to Holders of Notes....................................64
SECTION 15.2 Deposits for Notes Not Claimed for Specified Period to be Returned to
Company on Demand..............................................................................64
SECTION 15.3 Formal Requirements of Certificates and Opinions Hereunder................................65
SECTION 15.4 Evidence of Act of the Noteholders........................................................66
SECTION 15.5 Parties to Include Successors and Assigns.................................................66
SECTION 15.6 In Event of Conflict with Trust Indenture Act of 1939, Provisions
Therein to Control.............................................................................66
SECTION 15.7 Request, Notices, Etc. to Trustee.........................................................67
SECTION 15.8 Manner of Notice..........................................................................67
SECTION 15.9 Severability..............................................................................67
SECTION 15.10 Payments Due on Days When Banks Closed...................................................67
SECTION 15.11 Backup Withholding Forms.................................................................68
SECTION 15.12 Titles of Articles of This Indenture Not Part Thereof....................................68
SECTION 15.13 Execution in Counterparts................................................................68
SECTION 15.14 Governing Law............................................................................68
</TABLE>
vi
<PAGE> 10
TESTIMONIUM
SIGNATURES AND SEALS
ACKNOWLEDGEMENTS
vii
<PAGE> 11
This INDENTURE, dated as of November ___, 1997, between LITCHFIELD
FINANCIAL CORPORATION, a Massachusetts corporation (herein called the "Company")
and THE BANK OF NEW YORK, a trust company organized under the laws of the State
of New York the mailing address of which is 101 Barclay Street, New York, New
York 10286, (herein, together with each successor as such trustee hereunder,
called the "Trustee").
WITNESSETH:
WHEREAS, for its lawful corporate purposes, the Company has duly
authorized the issue of its _____% Notes due November 1, _____ (hereinafter
sometimes called the "Notes") in the aggregate principal amount of up to
$50,000,000 and, to provide the terms and conditions upon which the Notes are to
be authenticated, issued and delivered, the Company has duly authorized the
execution of this Indenture;
WHEREAS, the Notes and the Trustee's certificate of authentication to
be borne by the Notes are to be substantially in the following forms,
respectively:
[FORM OF FACE OF NOTES]
No. Litchfield Financial Corporation $
__% NOTE DUE NOVEMBER 1, ______
Litchfield Financial Corporation, a corporation organized and existing
under the laws of the Commonwealth of Massachusetts (hereinafter called the
"Company," which term shall include any successor corporation as defined in the
Indenture referred to on the reverse side hereof), for value received, hereby
promises to pay to __________________, or registered assigns, the sum of
____________________ Dollars on or before November 1, ______, in such coin or
currency of the United States of America as at the time of payment is legal
tender for public and private debts, and to pay interest (calculated on the
basis of a 360-day year of twelve 30-day months) on the unpaid principal amount
hereof in like coin or currency from the Interest Payment Date to which interest
hereon has been paid immediately preceding the date hereof (unless the date
hereof is an Interest Payment Date to which interest has been paid, in which
case from the date hereof) or, if no interest has been paid on this Note since
the Original Issue Date hereof, as defined in the Indenture referred to on the
reverse side hereof, from such Original Issue Date, at the rate of __% per
annum, payable monthly on the first day of each month, commencing December 1,
1997, until the principal hereof shall have been paid or duly provided for. The
interest so payable on any Interest Payment Date will be paid to the person in
whose name this Note is registered at the close of business on the fifteenth day
of the month immediately preceding such Interest Payment Date (whether or not
such fifteenth day shall be a regular business day), unless the Company shall
default in the payment of interest due on such Interest Payment Date, in which
case such defaulted interest shall be paid to the person in whose name this Note
is registered at the close of business on a Special Record Date for the payment
1
<PAGE> 12
of such defaulted interest established by notice to the registered holders of
Notes given by mail to said holders as their names and addresses appear in the
Note Register (as defined in the Indenture referred to on the reverse side
hereof) not less than 10 days preceding such Special Record Date. The principal
hereof and the interest hereon shall be payable at the main office of The Bank
of New York, Trustee under the Indenture referred to on the reverse side hereof,
in New York, New York; provided, however, that the interest on this Note may be
payable, at the option of the Company, by check mailed to the person entitled
thereto as such person's address shall appear on the Note Register (including
the records of any Note Co-Registrar).
Reference is hereby made to the further provisions of this Note set
forth on the reverse side hereof, and such further provisions shall for all
purposes have the same effect as though fully set forth at this place.
This Note shall not be entitled to any benefit under the Indenture
referred to on the reverse side hereof, or be or become valid or obligatory for
any purpose, until the authentication certificate endorsed hereon shall have
been signed by The Bank of New York, Trustee under such Indenture, or a
successor trustee thereto under such Indenture.
IN WITNESS WHEREOF, LITCHFIELD FINANCIAL CORPORATION has caused this
Note to be signed in its name by its President and Chief Executive Officer or
its Executive Vice President or one of its Vice Presidents by his signature or a
facsimile thereof, and its corporate seal to be affixed or printed or engraved
hereon, or a facsimile thereof, and attested by its Clerk or one of its
Assistant Clerks by his signature or a facsimile thereof.
Dated: LITCHFIELD FINANCIAL CORPORATION
By:
---------------------
Title:
------------------
[CORPORATE SEAL]
Attest:
- -------------------------
Title:
-------------------
2
<PAGE> 13
[FORM OF TRUSTEE'S AUTHENTICATION CERTIFICATE]
TRUSTEE'S AUTHENTICATION CERTIFICATE
This Note is one of the Notes described or provided for in the
Indenture referred to on the reverse side hereof.
The Bank of New York
as Trustee
By:_________________
Authorized Officer
[FORM OF REVERSE OF NOTE]
Litchfield Financial Corporation
__% NOTE DUE NOVEMBER 1, ____
This Note is one of a duly authorized issue of Notes of the Company
designated as its __% Notes due November 1, ____ (herein called the "Notes"),
limited in aggregate principal amount of $45,000,000 (except for Notes
authenticated and delivered upon transfer of, or in exchange for or in lieu of
other Notes), all issued and to be issued only in fully registered form without
coupons under an indenture (herein, together with any indenture supplemental
thereto, called the "Indenture"), dated as of November __, 1997, duly executed
and delivered by Litchfield Financial Corporation to The Bank of New York, New
York, New York, Trustee (the Trustee, together with its successors being herein
called the "Trustee"), to which Indenture (which is hereby made a part hereof
and to all of which the holder by acceptance hereof assents) reference is hereby
made for a description of the respective rights of and restrictions upon the
Company and the holders of the Notes, and the rights, limitations of rights,
duties and immunities of the Trustee in respect thereof.
The Notes are redeemable at the option of the Company as a whole at any
time, or in part from time to time, prior to maturity, commencing November 1,
____, on not less than 30 nor more than 60 days' notice given as provided in the
Indenture, upon payment of the then applicable redemption price (expressed in
percentages of the principal amount) set forth below under the heading "General
Redemption Prices," together in each case with accrued and unpaid interest to
the date fixed for redemption, all subject to the conditions more fully set
forth in the Indenture. The General Redemption Prices (expressed in percentages
of the principal amount) applicable during the 12-month period beginning
November 1 in the years indicated below are as follows:
3
<PAGE> 14
General Redemption Prices
If redeemed during the 12 month period beginning November 1,
____ ..................... ___%
____ ..................... ___%
____ and thereafter .......... ___%
Unless the Notes have been declared due and payable prior to maturity
by reason of an Event of Default, the holder of this Note has the right to
present it for payment prior to maturity, and the Company will redeem the same
(or any portion of the principal amount thereof which is $1,000 or an integral
multiple thereof, as the holder shall specify), subject to the limitations that
the Company will not be obligated to redeem, during the period beginning with
the original issuance of the Notes and ending December 1, 1998, or during any
12-month period ending December 1 thereafter, (i) the portion of a Note or Notes
of a holder exceeding an aggregate principal amount of $25,000 or (ii) Notes in
an aggregate principal amount exceeding $2,250,000, plus, to the extent that the
Original Purchasers exercise the Overallotment Option, up to 5% of the principal
amount of the Notes purchased upon exercise of such Option; provided that, in no
event, shall the maximum aggregate principal amount of Notes which the Company
may be obligated to redeem in any such 12-month period exceed 2,508,750;
(further references herein to the 2,250,000 aggregate principal amount
limitation shall be deemed to include such higher figure, not exceeding
$2,508,750, to the extent the Original Purchasers exercise the Overallotment
Option). Such $25,000 and $2,250,000 limitations are non-cumulative. If the
$25,000 per holder limitation has been reached and the aggregate $2,250,000
limitation has not been reached, and if Notes have been properly presented for
payment on behalf of beneficial holders who are natural persons, each in an
aggregate principal amount exceeding $25,000, the Company will redeem such Notes
in order of their receipt (except Notes presented for payment in the event of
death of a holder, which will be given priority in order of their receipt over
Notes presented by other holders), up to the aggregate limitation of $2,250,000,
notwithstanding the $25,000 limitation.
Redemption of the Notes presented for payment on or prior to the
September 30 immediately preceding the last day of the period beginning with the
original issuance of the Notes and ending December 1, 1998, and of each 12 month
period thereafter, will be made on the last day of such period, beginning
December 1, 1998. Notes not redeemed in any such period because they have not
been presented on or prior to the September 30 immediately preceding the last
day (December 1) of that period or because of the $25,000 or $2,250,000
limitations will be held in order of their receipt for redemption during the
following 12 month period(s) until redeemed, unless sooner withdrawn by the
holder. Holders of Notes presented for redemption shall be entitled to and shall
receive scheduled monthly payments of interest thereon on Interest Payment Dates
until their Notes are redeemed. Subject to the $25,000 and $2,250,000
limitations, the Company will at any time upon the death of any holder redeem
Notes within 60 days following receipt by the Trustee of a written request
therefor from such holder's personal representative, or surviving joint
tenant(s), tenant by
4
<PAGE> 15
the entirety or tenant(s) in common. Notes will be redeemed in order of their
receipt by the Trustee, except Notes presented for payment in the event of death
of the holder, which will be given priority in order of their receipt.
In the event that there shall occur a Fundamental Structural Change (as
defined in the Indenture) or Significant Subsidiary Disposition (as defined in
the Indenture), the holder of this Note shall have the right, subject to certain
conditions stated in the Indenture, to present it for payment prior to maturity,
and the Company will redeem the same (or any portion of the principal amount
thereof which is $1,000 or an integral multiple thereof, as the holder shall
specify). The $25,000 individual and $2,250,000 aggregate redemption limitations
shall not apply to any such redemption.
Notes may be presented for redemption by delivering to the Trustee: (i)
a written request for redemption, in form satisfactory to the Trustee, signed by
the registered holder(s) or his duly authorized representative, (ii) the Note to
be redeemed and (iii) in the case of a request made by reason of the death of a
holder, appropriate evidence of death and, if made by a representative or
surviving joint tenant, tenant by the entirety or tenant in common of a deceased
holder, appropriate evidence of authority to make such request. No particular
forms of request for redemption or authority to request redemption are
necessary. The price to be paid by the Company for all Notes or portions thereof
presented to it for redemption is 100% of the principal amount or respective
portions thereof plus accrued but unpaid interest to the date of payment. Any
acquisition of Notes by the Company other than by redemption at the option of
any holder shall not be included in the computation of either the $25,000 or
$2,250,000 limitation for any period.
For purposes of a holder's request for redemption, a Note held in
tenancy by the entirety, joint tenancy or tenancy in common will be deemed to be
held by a single holder and the death of a tenant by the entirety, joint tenant
or tenant in common will be deemed the death of a holder. The death of a person,
who, during his lifetime, was entitled to substantially all of the beneficial
ownership interests of a Note will be deemed the death of the holder, regardless
of the registered holder, if such beneficial interest can be established to the
satisfaction of the Trustee. For purposes of a holder's request for redemption
and a request for redemption on behalf of a deceased holder, a beneficial
interest shall be deemed to exist in cases of street name or nominee ownership,
ownership under the Uniform Gifts to Minors Act, community property or other
joint ownership arrangements between a husband and wife (including individual
retirement accounts or Keogh [H.R. 10] plans maintained solely by or for the
holder or decedent or by or for the holder or decedent and his spouse), and
trusts and certain other arrangements where a person has substantially all of
the beneficial ownership interests in the Notes during his lifetime. Beneficial
ownership interests shall include the power to sell, transfer or otherwise
dispose of a Note and the right to receive the proceeds therefrom, as well as
interest and principal payable with respect thereto.
In the case of Notes registered in the names of banks, trust companies
or broker-dealers who are members of a national securities exchange or the
National Association of Securities Dealers, Inc. ("Qualified Institutions"), the
$25,000 limitation shall apply to each beneficial owner of Notes held by a
Qualified Institution and the death of such beneficial owner shall entitle a
Qualified Institution
5
<PAGE> 16
to seek redemption of such Notes as if the deceased beneficial owner were the
record holder. Such Qualified Institution, in its request for redemption on
behalf of beneficial owners, must submit evidence, satisfactory to the Trustee,
that it holds Notes on behalf of such beneficial owners and must certify that
the aggregate amount of requests for redemption tendered by such Qualified
Institution on behalf of such beneficial owner in the initial period or in any
subsequent 12 month period does not exceed $25,000.
In the case of any Notes which are presented for redemption in part
only, upon redemption the Company shall execute and the Trustee shall
authenticate and deliver to or on the order of the holder of such Notes, without
service charge, a new Note(s), of any authorized denomination or denominations
as requested by such holder, in aggregate principal amount equal to the
unredeemed portion of the principal of the Notes so presented.
In the case of any Notes or portion thereof which are presented for
redemption by a holder and which have not been redeemed at the time the Company
gives notice of its election to redeem Notes at its option, such Notes or
portion thereof shall first be subject to redemption by the Company at its
option as described above and if any such Notes or portion thereof are not
redeemed by the Company they shall remain subject to redemption pursuant to
presentment by the holder.
Any Notes presented for redemption by the holder may be withdrawn by
the person(s) presenting the same upon delivery of a written request for such
withdrawal to the Trustee (a) in cases other than by reason of death of a
holder, on or prior to September 30, 1998, in the case of the initial 12 month
period, or on or prior to September 30 in the case of any subsequent 12 month
period, or (b) prior to the issuance of a check in payment thereof in the case
of Notes presented by reason of the death of a holder.
If the Company shall deposit with the Trustee in trust funds sufficient
to pay the principal of all of the Notes, or such of the Notes as have been or
are to be called for redemption, any premium, if any, thereon, and all interest
payable on such Notes to the date on which they become due and payable, at
maturity or upon redemption or otherwise, and shall comply with the other
provisions of the Indenture in respect thereof, then from and after said date
(or prior thereto as provided in the Indenture), such Notes shall no longer be
entitled to any benefit under the Indenture and, as respects the Company's
liability thereon, such Notes shall be deemed to have been paid.
To the extent permitted by, and as provided in, the Indenture, the
Company may, by entering into an indenture or indentures supplemental to the
Indenture, modify, alter, add to or eliminate in any manner any provisions of
the Indenture, or the rights of the Noteholders or the rights and obligations of
the Company, upon the consent, as in the Indenture provided, of the holders of
not less than sixty-six and two-thirds percent (66-2/3%) in principal amount of
the Notes then Outstanding. Notwithstanding the foregoing, no supplemental
indenture shall, without the consent of the holder of each Outstanding Note
affected thereby, change the Stated Maturity of the principal of, or any
installment of interest on any Note, or reduce the principal amount thereof or
the rate of interest thereon, reduce the percentage of the aggregate principal
amount of Outstanding Notes the consent
6
<PAGE> 17
of the holders of which is required for any supplemental indenture or for any
waiver of compliance with certain provisions of the Indenture, or modify any of
the provisions of the Indenture relating to the foregoing, all except as
provided in the Indenture.
If an Event of Default, as defined in the Indenture, shall have
occurred and be continuing, the principal of and all interest accrued on all the
Notes at any such time Outstanding under the Indenture may be declared, and upon
such declaration shall become, immediately due and payable, in the manner, with
the effect and subject to the conditions provided in the Indenture. The
Indenture provides that such declaration and its consequence may be waived by
the holders of a majority in principal amount of the Notes then Outstanding.
The Notes are issuable as registered Notes without coupons in
denominations of integral multiples of $1,000. Subject to the provisions of the
Indenture, the transfer of this Note is registrable by the registered holder
hereof, in person or by his attorney duly authorized in writing, at the main
office of The Bank of New York, in New York, New York, on books of the Company
to be kept for that purpose at said office, upon surrender and cancellation of
this Note duly endorsed by, or accompanied by a written instrument of transfer
in form satisfactory to the Company and the Trustee, and thereupon a new fully
registered Note of the same series, of the same aggregate principal amount and
in authorized denominations, will be issued to the transferee or transferees in
exchange therefor; and this Note, with or without others of the same series, may
in like manner be exchanged for one or more new fully registered Notes of the
same series of other authorized denominations but of the same aggregate
principal amount; all as provided in the Indenture. No service charge shall be
made for any such transfer, but the Company may require payment of a sum
sufficient to cover any tax or other governmental charge or expense that may be
imposed in relation thereto.
Prior to due presentment for registration of transfer, the Company, the
Trustee or any agent of the Company or the Trustee may deem and treat the person
in whose name this Note shall be registered at any given time upon the Note
Register as the absolute owner of this Note for the purpose of receiving any
payment of, or on account of, the principal and interest on this Note and for
all other purposes whether or not this Note be overdue; and neither the Company
nor the Trustee, nor any agent of the Company or the Trustee shall be bound by
any notice to the contrary.
No recourse under any obligation, covenant or agreement contained in
the Indenture or in any Note, or because of the creation of the indebtedness
represented hereby, shall be had against any incorporator, any past, present or
future stockholder, or any officer or director of the Company or any successor
corporation, as such under any rule of law, statute or constitution.
In any case where the date fixed for the payment of principal or
interest on any of the Notes or the date fixed for redemption thereof shall not
be a business day, then payment of such principal or interest need not be made
on such date, but may be made on the next succeeding business day with the same
force and effect as if made on the date fixed for such payment or redemption,
and no interest shall accrue for the period from or after such date.
7
<PAGE> 18
All terms used in this Note which are defined in the Indenture shall
have the meanings assigned to them in the Indenture.
[END OF FORM OF NOTES]
8
<PAGE> 19
WHEREAS, this Indenture is subject to the provisions of the Trust
Indenture Act of 1939, as amended, that are required to be part of this
Indenture and shall, to the extent applicable, be governed by such provisions;
WHEREAS, all acts and things necessary to make the Notes, when executed
by the Company and authenticated and delivered by the Trustee, as in this
Indenture provided, and issued, the valid, binding and legal obligations of the
Company, and to constitute these presents a valid agreement according to its
terms, have been done and performed, and the execution of this Indenture and the
issue hereunder of the Notes have in all respects been duly authorized;
NOW THEREFORE, THIS INDENTURE WITNESSETH:
That in order to declare the terms and conditions upon which the Notes
are, and are to be, authenticated, issued and delivered, and in consideration of
the premises, of the purchase and acceptance of the Notes by the holders thereof
and of the sum of one dollar duly paid to it by the Trustee at the execution of
these presents, the receipt whereof is hereby acknowledged, the Company
covenants and agrees with the Trustee for the equal and proportionate benefit of
the respective holders from time to time of the Notes, as follows:
ARTICLE 1
DEFINITIONS
SECTION 1.1. The terms defined in this Article 1 shall (except as
herein otherwise expressly provided) for all purposes of this Indenture, have
the respective meanings specified in this Article and include the plural as well
as the singular. Any term defined in the Trust Indenture Act of 1939, either
directly or by reference therein, and not defined in this Indenture, unless the
context otherwise specifies or requires, shall have the meaning assigned to such
term therein as in force on the date of this Indenture.
"Act" when used with respect to any Noteholder has the meaning
specified in Section 15.4.
"affected" has the meaning specified in Section 13.2.
"Affiliate" means any person which directly or indirectly controls, is
controlled by, or is under direct or indirect common control with, the Company.
A person shall be deemed to control a corporation, partnership or other entity,
for the purpose of this definition, if such person possesses, directly or
indirectly, the power to direct or cause the direction of the management and
policies of such corporation, partnership or other entity, whether through the
ownership of voting securities, by contract, or otherwise.
9
<PAGE> 20
"Authenticating Agent" means the agent of the Trustee which at the time
shall be appointed and acting pursuant to Section 10.13.
"Board of Directors" or "Board" means the Board of Directors of the
Company or any committee of such Board of Directors, however designated,
authorized to exercise the powers of such Board of Directors in respect of the
matters in question.
"business day" means any day which is not a Saturday, Sunday or other
day on which banking institutions in the State in which the Trustee shall
maintain its principal office are authorized or obligated by law or required by
executive order to close.
"capital stock" includes any and all shares, interests, participations
or other equivalents (however designated) of corporate stock of any corporation.
"Certified Resolution" means a copy of a resolution or resolutions
certified, by the Secretary or an Assistant Secretary of the corporation
referred to, as having been duly adopted by the Board of Directors of such
corporation or any committee of such Board of Directors, however designated,
authorized to exercise the powers of such Board of Directors in respect of the
matters in question and to be in full force and effect on the date of such
certification.
"common stock" means any capital stock of a corporation which is not
preferred as to the payment of dividends or the distribution of assets on any
voluntary or involuntary liquidation over shares of any other class of capital
stock of such corporation.
"Company" shall mean and include Litchfield Financial Corporation until
any successor corporation shall have become such pursuant to the applicable
provisions of this Indenture, and thereafter "Company" shall mean such successor
corporation.
"Company Order" and "Company Request" mean, respectively, a written
order or request signed in the name of the Company by its Chairman of the Board,
Vice-Chairman of the Board, President or any Vice President and its Treasurer,
Assistant Treasurer, Secretary or Assistant Secretary and delivered to the
Trustee.
"corporation" shall mean and include corporations, associations,
companies and business trusts.
"Daily Newspaper" shall mean a newspaper in the English language of
general circulation in New York, New York and customarily published on each
business day of the year, whether or not such newspaper is published on
Saturdays, Sundays and legal holidays.
"date of this Indenture" means the date set forth on the cover page of
this Indenture.
"day" means a calendar day.
10
<PAGE> 21
"Default" means any act or occurrence of the character specified in
Section 7.1, but excluding any notice or lapse of time, or both, specified
therein.
"Defaulted Interest" has the meaning specified in Section 2.3.
"Event of Default" means any act or occurrence of the character
specified in Section 7.1.
"Executive Officer" means, with respect to any corporation, the
Chairman of the Board, the Vice Chairman of the Board, the President, the
Executive Vice President, any other Vice President or the Treasurer of such
corporation.
"Federal Bankruptcy Act" means Title I of the Bankruptcy Reform Act of
1978, as amended, and codified at Title 11 of the United States Code and the
Federal Rules of Bankruptcy Procedure as in effect as of the date hereof or as
hereafter amended.
"Fundamental Structural Change" means the occurrence of any one or more
of the following: (A) the Company shall consolidate with or merge into any other
corporation or partnership, or convey, transfer or lease all or substantially
all of its assets to any person, other than as part of a loan securitization or
sale entered into in the ordinary course of its business; (B) any person shall
consolidate with or merge into the Company pursuant to a transaction in which at
least a majority of the common stock of the Company then outstanding is changed
or exchanged or in which the number of shares of common stock issued by the
Company in the transaction to persons who were not stockholders of the Company
immediately prior to the transaction is greater than the number of shares
outstanding immediately prior to the transaction; (C) any person shall purchase
or otherwise acquire in one or more transactions beneficial ownership of fifty
percent (50%) or more of the common stock of the Company outstanding on the date
immediately prior to the last such purchase or other acquisition; (D) the
Company or any Subsidiary shall purchase or otherwise acquire in one or more
transactions during the 12 month period preceding the date of the last such
purchase or other acquisition an aggregate of twenty-five percent (25%) or more
of the common stock of the Company outstanding on the date immediately prior to
the last such purchase or acquisition; or (E) the Company shall make a
distribution of cash, property or securities to holders of common stock (in
their capacity as such) (including by means of dividend, reclassification or
recapitalization) which, together with all other such distributions during such
12 month period preceding the date of such distribution, has an aggregate fair
market value in excess of an amount equal to twenty-five percent (25%) of the
fair market value of the common stock of the Company outstanding on the date
immediately prior to such distribution.
"Indebtedness" means (i) any liability of any person (a) for borrowed
money, (b) evidenced by a note, debenture or similar instrument (including a
purchase money obligation) given in connection with the acquisition of any
property or assets (other than inventory or similar property acquired in the
ordinary course of business), including securities, or (c) for the payment of
money relating to a capitalized loan obligation; (ii) any guarantee by any
person of, or any commitment
11
<PAGE> 22
relating to, any liability of others described in the preceding clause (i); and
(iii) any amendment, renewal, extension or refunding of any liability referred
to in clause (i) and (ii) above.
"Indenture" means this instrument as originally executed or as it may
from time to time be supplemented or amended by one or more indentures
supplemental hereto entered into pursuant to the applicable provisions hereof.
"Interest Payment Date" means the Stated Maturity of an installment of
interest on the Notes.
"Lien" means any mortgage, lien, pledge, charge or other security
interest or encumbrance of any kind.
"main office" with reference to the Trustee shall mean the principal
corporate trust office of the Trustee, which office is, on the date of this
Indenture, located at 101 Barclay Street, New York, New York 10286.
"maturity" or "mature," when used with respect to any Note, means the
date on which the principal of such Note becomes due and payable as therein or
herein provided, whether at Stated Maturity or by declaration of acceleration,
call for redemption at the option of the Company pursuant to Article 5 or
presentment for repayment as provided in Article 6 hereof, or otherwise.
"Note" or "Notes" mean one or more of the notes comprising the
Company's issue of Notes issued, authenticated and delivered under this
Indenture.
"Note Co-Registrar" has the meaning specified in Section 2.5.
"Note Register" and "Note Registrar" have the respective meanings
specified in Section 2.6.
"Noteholder," "holder of the Notes," "Holder" or "holder" or other
similar terms mean any person in whose name, as of any particular date, a Note
is registered on the Note Register.
"Officers' Certificate" means a certificate signed by the Chairman of
the Board, President or a Vice President and the Treasurer or an Assistant
Treasurer or the Secretary or an Assistant Secretary of the Company, and
delivered to the Trustee. Each such certificate, to the extent required, shall
comply with the provisions of Section 15.3 hereof.
"Original Issue Date" with respect to any Note (or portion thereof)
means the earlier of (A) the date of such Note or (B) the date of any Note (or
portion thereof) for which such Note was issued (directly or indirectly) on
registration of transfer, exchange or substitution.
"Original Purchasers" means the original purchasers of the Notes
pursuant to that certain Underwriting Agreement by and among those parties and
the Company.
12
<PAGE> 23
"Outstanding" means, as of the date of determination, all Notes which
theretofore shall have been authenticated and delivered by the Trustee under
this Indenture, except (A) Notes theretofore canceled by the Trustee or
delivered to the Trustee for cancellation, (B) Notes or portions thereof for the
payment or redemption of which money in the necessary amount shall have been
deposited with the Trustee or any paying agent in trust for the holders of the
Notes; provided, however, that in the case of redemption, any notice required
shall have been given or have been provided for to the satisfaction of the
Trustee, and (C) Notes in exchange or substitution for or in lieu of which other
Notes have been authenticated and delivered under any of the provisions of this
Indenture. Notwithstanding the foregoing provision of this paragraph, Notes in
exchange or substitution for or in lieu of which other Notes have been
authenticated and delivered under Section 2.10 hereof and which have not been
surrendered to the Trustee for cancellation or the payment of which shall not
have been duly provided for, shall be deemed to be Outstanding. In determining
whether the Noteholders of the requisite principal amount of Notes Outstanding
have given any request, demand, authorization, direction, notice, consent or
waiver hereunder, Notes owned by the Company or any other obligor upon the Notes
or any Affiliate of the Company, including any Subsidiary, or such other obligor
shall be disregarded and deemed not Outstanding, except that, in determining
whether the Trustee shall be protected in relying upon any such request, demand,
authorization, direction, notice, consent or waiver, only Notes which the
Trustee knows to be so owned shall be disregarded. Notes so owned which have
been pledged in good faith may be regarded as Outstanding if the pledgee
establishes to the satisfaction of the Trustee the pledgee's right so to act
with respect to such Notes and that the pledgee is not the Company or any other
obligor upon the Notes or any Affiliate of the Company or a Subsidiary or such
other obligor.
"Overallotment Option" means the option granted by the Company to the
Original Purchasers to purchase up to $6,750,000 aggregate principal amount of
the Notes to cover overallotments pursuant to the Underwriting Agreement by and
among the Company and such parties dated as of the date of this Indenture.
"paying agent" means any person authorized by the Company to pay the
principal of, premium, if any, and interest on any Notes on behalf of the
Company.
"Permitted Investments" means the investments described on Exhibit A
hereto.
"person" means any individual, partnership, corporation, trust,
unincorporated association, joint venture, government or any department or
agency thereof, or any other entity.
"place of payment" means such place as designated in Section 2.3
hereof.
"predecessor Note" of any particular Note means every previous Note
evidencing all or a portion of the same debt as that evidenced by such
particular Note; and, for the purposes of this definition, any Note
authenticated and delivered under Section 2.10 in lieu of a lost, destroyed or
stolen Note shall be deemed to evidence the same debt as the lost, destroyed or
stolen Note.
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"Proceeding" means any suit in equity, action at law or other legal,
equitable, administrative or similar proceeding.
"Redemption Date," when used with respect to any Note to be redeemed,
means the date fixed for such redemption by or pursuant to this Indenture.
"Regular Record Date" has the meaning specified in Section 2.3.
"Responsible Officers" of the Trustee means the Chairman of the Board
of Directors, every Vice Chairman of the Board of Directors, the President, the
Chairman or any Vice Chairman of the Executive Committee of the Board, the
Chairman of the Trust Committee, every Vice President, every Assistant Vice
President, the Cashier, every Assistant Cashier, the Secretary, every Assistant
Secretary, the Treasurer, every Assistant Treasurer, every Trust Officer, every
Assistant Trust Officer, the Controller, every Assistant Controller, and every
other officer and assistant officer of the Trustee customarily performing
functions similar to those performed by the persons who at the time shall be any
such officers and also means, with respect to a particular corporate trust
matter, any other officer to whom such corporate trust matter is referred
because of his knowledge and familiarity with a particular subject.
"Significant Subsidiary" means any Subsidiary of the Company the
consolidated assets of which constitute twenty percent (20%) or more of the
consolidated assets of the Company.
"Significant Subsidiary Disposition" means (A) the merger,
consolidation, or conveyance or transfer of all or substantially all of the
assets of a Significant Subsidiary, or (B) the issuance, sale, transfer,
assignment, pledge or other disposition of the capital stock of a Significant
Subsidiary or securities convertible or exchangeable into shares of capital
stock of such Significant Subsidiary.
"Special Record Date" for the payment of any Defaulted Interest means a
date fixed by the Trustee pursuant to Section 2.3.
"Stated Maturity," when used with respect to any Note or any
installment of interest thereon, means the date specified in such Note as the
fixed date on which the principal of such Note or such installment of interest
is due and payable.
"Subsidiary" means any corporation more than fifty percent (50%) of
whose shares of stock having general voting power under ordinary circumstances
to elect a majority of the board of directors of such corporation irrespective
of whether or not at the time stock of any other class or classes shall or might
have voting power by reason of the happening of any contingency, is owned or
controlled directly or indirectly by the Company.
"supplemental indenture" or "indenture supplemental hereto" mean any
indenture hereafter duly authorized and entered into in accordance with the
provisions of this Indenture.
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"Trustee" means The Bank of New York, New York, New York, and, subject
to the provisions of the Indenture, shall also include any successor trustee.
"Trust Indenture Act" or "TIA" means the Trust Indenture Act of 1939,
as in force at the date as of which this instrument was executed.
All accounting terms used in this Indenture shall have the meanings
assigned to them in accordance with generally accepted accounting principles and
practices employed at the time by the Company.
ARTICLE 2
ISSUE, DESCRIPTION, EXECUTION, REGISTRATION
AND EXCHANGE OF NOTES
SECTION 2.1 Designation, Amount and Issue of Notes. The Notes shall be
designated as set forth in the form of Note hereinabove recited. Notes in the
aggregate principal amount of up to $50,000,000 (and as otherwise provided in
Section 2.10), upon the execution of this Indenture, or from time to time within
30 days thereafter, may be executed by the Company and delivered to the Trustee
for authentication, and the Trustee shall thereupon authenticate and deliver
said Notes to or upon the written order of the Company, signed by its Chairman
of the Board, the President or an Executive Vice President or any Vice
President, without any further action by the Company hereunder.
SECTION 2.2 Form of Notes. The Notes and the Trustee's certificate of
authentication to be borne by the Notes shall be substantially in the form as in
this Indenture hereinabove recited. Any of the Notes may have imprinted thereon
such legends or endorsements as the officers executing the same may approve
(execution thereof to be conclusive evidence of such approval) and as are not
inconsistent with the provisions of this Indenture, or as may be required to
comply with any law or with any rule or regulation made pursuant thereto or with
any rule or regulation of any stock exchange on which the Notes may be listed,
or to conform to usage.
SECTION 2.3 Denominations, Dates, Interest Payment and Record Dates.
The Notes shall be issuable as registered Notes without coupons in the
denominations of $1,000 and any integral multiple of $1,000, and shall be
numbered, lettered, or otherwise distinguished in such manner or in accordance
with such plan as the officers of the Company executing the same may determine
with the approval of the Trustee.
The Notes shall be dated the date of authentication thereof by the
Trustee. The Stated Maturity of the Notes is November 1, ____. The Notes shall
bear interest annually (calculated on the basis of a 360-day year of twelve
30-day months) at the rate set forth in their titles, payable monthly in each
year, from the Interest Payment Date immediately preceding the date of such Note
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to which interest on the Notes has been paid (unless the date of such Note is
the date to which interest on the Notes has been paid, in which case from the
date of such Note), or, if no interest has been paid on the Notes since the
Original Issue Date of such Note, from such Original Issue Date, which interest
shall be paid on the first day of each month, commencing December 1, 1997, until
payment of the principal thereof becomes due, and at the same rate per annum on
any overdue principal and (to the extent legally enforceable) on any overdue
installment of interest; and shall be payable as to principal and interest at
the main office of the Trustee and at such other office or agency as provided in
this Indenture.
Notwithstanding the foregoing, so long as there is no existing default
in the payment of interest on the Notes, all Notes authenticated by the Trustee
between the Regular Record Date (as hereinafter defined) for any Interest
Payment Date and such Interest Payment Date shall bear interest from such
Interest Payment Date; provided, however, that if and to the extent that the
Company shall default in the payment of the interest due on such Interest
Payment Date, then any such Note shall bear interest from the Interest Payment
Date immediately preceding the date of such Note to which interest on the Notes
has been paid, or if no interest has been paid on such Notes since the Original
Issue Date of such Notes from such Original Issue Date or from such other date
as shall have been fixed by this Indenture or any supplemental indenture hereto.
Interest on any Note which is payable, and is punctually paid or duly
provided for, on any Interest Payment Date shall be paid to the person in whose
name that Note (or one or more predecessor Notes) is registered at the close of
business on the Regular Record Date for such interest as specified in this
Section 2.3. The term "Regular Record Date" with respect to a regular monthly
Interest Payment Date for the Notes shall mean the close of business on the
fifteenth day of the month (whether or not a business day) next preceding such
Interest Payment Date.
Any interest on any Note which is payable, but is not punctually paid
or duly provided for, on any Interest Payment Date (herein called "Defaulted
Interest") shall forthwith cease to be payable to the registered holder on the
relevant Regular Record Date by virtue of having been such holder; and such
Defaulted Interest may be paid by the Company, at its election in each case, as
provided in clause (A) or clause (B) below:
(A) The Company may elect to make payment of any Defaulted
Interest to the persons in whose names the Notes (or their respective
predecessor Notes) are registered at the close of business on a special
record date (the "Special Record Date") for the payment of such
Defaulted Interest, which shall be fixed in the following manner. The
Company shall notify the Trustee in writing of the amount of Defaulted
Interest proposed to be paid on each Note and the date of the proposed
payment, and at the same time the Company shall deposit with the
Trustee an amount of money equal to the aggregate amount proposed to be
paid in respect of such Defaulted Interest or shall make arrangements
satisfactory to the Trustee for such deposit prior to the date of the
proposed payment, such money when deposited to be held in trust for the
benefit of the persons entitled to such Defaulted Interest as in this
clause provided. Thereupon the Trustee shall fix a Special Record Date
for the payment of such Defaulted Interest which shall be not more than
twenty (20) nor less than ten (10) days prior to the date of the
proposed payment and not less than thirty-five (35) days after the
receipt by the Trustee of the notice of the proposed payment. The
Trustee shall promptly notify the Company of such Special Record Date
and, in the name and at the expense of the Company, shall cause notice
of the proposed payment of such
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Defaulted Interest and the Special Record Date therefor to be mailed,
first class postage prepaid, to each Noteholder at his address as it
appears in the Note Register, not less than ten (10) days prior to such
Special Record Date. The Trustee may, in its discretion, in the name
and at the expense of the Company, cause a similar notice to be
published at least once in a Daily Newspaper in each place of payment,
but such publication shall not be a condition precedent to the
establishment of such Special Record Date. Notice of the proposed
payment of such Defaulted Interest and the Special Record Date therefor
having been mailed as aforesaid, such Defaulted Interest shall be paid
to the persons in whose names the Notes (or their respective
predecessor Notes) are registered on such Special Record Date and shall
no longer be payable pursuant to the following clause (B).
(B) The Company may make payment of any Defaulted Interest in
any other lawful manner if, after notice given by the Company to the
Trustee of the proposed payment pursuant to this clause, such payment
shall be deemed practicable by the Trustee.
Subject to the foregoing provisions of this Section, each Note
delivered under this Indenture upon transfer of or in exchange for or in lieu of
any other Note shall carry the rights to interest accrued and unpaid, and to
accrue, which were carried by such other Note.
The principal of and the premium, if any, and the interest on the Notes
shall be paid at the office or agency of the Company which shall be located at
the main office of the Trustee (the "place of payment") in such coin or currency
of the United States of America as at the time of payment shall be legal tender
for the payment of public and private debts; provided, however, that interest on
any Notes may be payable, at the option of the Company, by check mailed to the
person entitled thereto as such person's address shall appear on the Note
Register.
SECTION 2.4 Numbers and Legends on Notes. Notes may bear such numbers,
letters or other marks of identification or designation, may be endorsed with or
have incorporated in the text thereof such legends or recitals with respect to
transferability or in respect of the Note or Notes for which they are
exchangeable, and may contain such provisions, specifications and descriptive
words, not inconsistent with the provisions of this Indenture, as may be
determined by the Company or as may be required to comply with any law or with
any rule or regulation made pursuant thereto.
SECTION 2.5 Execution of Notes. Each Note shall be signed in the name
and on behalf of the Company by one of its officers. The signature of an officer
of the Company may, if permitted by law, be in the form of a facsimile signature
and may be imprinted or otherwise reproduced on the Notes. In case any officer
of the Company who shall have signed, or whose facsimile signature shall be
borne by, any of the Notes shall cease to be such officer of the Company before
the Notes so
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executed shall be actually authenticated and delivered by the Trustee, such
Notes shall nevertheless bind the Company and may be authenticated and delivered
as though the person whose signature appears on such Notes had not ceased to be
such officer of the Company.
SECTION 2.6 Registration of Transfer of Notes. The Company shall keep
or cause to be kept at the main office of the Trustee books for the registration
of transfer of Notes issued hereunder (herein sometimes referred to as the "Note
Register") and upon presentation for such purpose at such office the Company
will register or cause to be registered the transfer therein, under such
reasonable regulations as it may prescribe, of such Notes. The Trustee is hereby
appointed "Note Registrar" for the purpose of registering Notes and transfers of
Notes as herein provided. The Company may appoint one or more "Note
Co-Registrars" for such purpose as the Board of Directors may determine where
Notes may be presented or surrendered for registration, registration of transfer
or exchange and such books, at all reasonable times, shall be open for
inspection by the Trustee.
SECTION 2.7 Exchange and Registration of Transfer of Notes. Whenever
any Note shall be surrendered to the Company at an office or agency referred to
in Section 3.2 hereof, for registration of transfer or exchange, duly endorsed
or accompanied by a proper written instrument or instruments of assignment and
transfer thereof or for exchange in form satisfactory to the Company and the
Trustee, or any Note Registrar or Note Co-Registrar, duly executed by the holder
thereof or his attorney duly authorized in writing, the Company shall execute,
and the Trustee shall authenticate and deliver, in exchange therefor, a Note or
Notes in the name of the designated transferee, as the case may require, for a
like aggregate principal amount and of such authorized denomination or
denominations as may be requested. All Notes issued upon any registration of
transfer or exchange of Notes shall be the valid obligations of the Company,
evidencing the same debt, and entitled to the same benefits under this
Indenture, as the Notes surrendered upon such registration of transfer or
exchange.
The Company, at its option, may require the payment of a sum sufficient
to reimburse it for any stamp tax or other governmental charge or expense that
may be imposed in connection with any exchange or transfer of Notes other than
exchanges pursuant to Section 2.8 or 13.5 not involving any transfer. No service
charge will be made for any such transaction.
The Company shall not be required to issue or to make registrations of
transfer or exchanges of Notes for a period of fifteen (15) days immediately
preceding the date of any selection of Notes to be redeemed. The Company shall
not be required to issue or to make registrations of transfer or exchanges of
any Notes which have been selected for redemption in whole or in part, except in
the case of any Note to be redeemed in part, for which the Company shall
register transfers and make exchanges of the portion thereof not so to be
redeemed.
Upon delivery by any Note Co-Registrar of a Note in exchange for a Note
surrendered to it in accordance with the provisions of this Indenture, the Note
so delivered shall for all purposes of this Indenture be deemed to be duly
registered in the Note Register; provided, however, that in making any
determination as to the identity of persons who are holders, the Trustee shall,
subject
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to the provisions of Section 10.2, be fully protected in relying on the Note
Register kept at the main office of the Trustee.
SECTION 2.8 Temporary Notes. Pending the preparation of definitive
Notes the Company may execute and, upon Company Order, the Trustee shall
authenticate and deliver temporary Notes which may be printed, lithographed,
typewritten, mimeographed or otherwise reproduced. Temporary Notes shall be
issuable in any authorized denomination, and substantially of the tenor of the
definitive Notes in lieu of which they are issued, but with such omissions,
insertions and variations as may be appropriate for temporary Notes, all as may
be determined by the officers of the Company executing such Notes as evidenced
by their execution of such Notes. Every such temporary Note shall be
authenticated by the Trustee upon the same conditions and in substantially the
same manner, and with the same effect, as the definitive Notes. If temporary
Notes are issued, without unreasonable delay, the Company will execute and
deliver to the Trustee definitive Notes and thereupon any and all temporary
Notes may be surrendered in exchange therefor, at the offices referred to in
Section 3.2, and the Trustee shall authenticate and deliver in exchange for such
temporary Notes an equal aggregate principal amount of definitive Notes of
authorized denominations. Such exchange shall be made by the Company at its own
expense and without any charge therefor. Until so exchanged, the temporary Notes
shall in all respects be entitled to the same benefits under this Indenture as
definitive Notes authenticated and delivered hereunder.
SECTION 2.9 Recognition of Registered Holders of Definitive Notes and
Temporary Notes. The Company, the Trustee or any agent of the Company or the
Trustee may deem and treat (A) the registered holder of any temporary Note, and
(B) the registered holder of any definitive Note, as the absolute owner of such
Note in accordance with Section 8.1.
SECTION 2.10 Mutilated, Destroyed, Lost or Stolen Notes. In case any
Note shall become mutilated or be destroyed, lost or stolen, then upon the
satisfaction of the conditions hereinafter set forth in this Section 2.10 the
Company (A) shall, in the case of any mutilated Note, and (B) shall, in the case
of any destroyed, lost or stolen Note, in the absence of notice to the Company
or the Trustee that such Note has been acquired by a bona fide purchaser,
execute, and upon the written request of the Company, the Trustee shall
authenticate and deliver, a new Note of like principal amount bearing a number
not contemporaneously outstanding, in exchange and substitution for and upon
surrender and cancellation of the mutilated Note or in lieu of and substitution
for the Note so destroyed, lost or stolen; provided, however, that if any such
mutilated, destroyed, lost or stolen Note shall have become or shall be about to
become due and payable, or shall have been selected or called for redemption,
the Company may instead of issuing a substituted Note, pay such Note without
requiring the surrender thereof, except that such mutilated Note shall be
surrendered. The applicant for such substituted Note shall furnish to the
Company and to the Trustee evidence satisfactory to them, in their discretion,
of the ownership of and the destruction, loss or theft of such Note and shall
furnish to the Company and to the Trustee and any Note Registrar such security
or indemnity as may be required by them to save each of them harmless, and, if
required, shall reimburse the Company for all expenses (including any tax or
other governmental charge and the fees and expenses of the Trustee) in
connection with the preparation, authentication and delivery of such substituted
Note,
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and shall comply with such other reasonable regulations as the Company, the
Trustee, or either of them, may prescribe.
Every new Note issued pursuant to this Section 2.10 in lieu of any
destroyed, lost or stolen Note shall constitute an original additional
contractual obligation of the Company, whether or not the destroyed, lost or
stolen Note shall be at any time enforceable by anyone, and shall be entitled to
all the benefits of this Indenture equally and proportionally with any and all
other Notes duly issued hereunder.
The provisions of this Section 2.10 are exclusive and shall preclude
(to the extent lawful) all other rights and remedies with respect to the
replacement or payment of mutilated, destroyed, lost or stolen Notes.
SECTION 2.11 Form and Authentication of Notes. Subject to the
qualifications hereinbefore set forth, the Notes to be secured hereby shall be
substantially of the tenor and effect set forth in the recitals hereto, and no
Notes shall be secured hereby or entitled to the benefit hereof, or shall be or
become valid or obligatory for any purpose unless there shall be endorsed
thereon an authentication certificate, substantially in the form set forth in
the recitals hereto, executed by the Trustee; and such certificate on any Note
issued by the Company shall be conclusive evidence and the only competent
evidence that it has been duly authenticated and delivered hereunder.
SECTION 2.12 Surrender and Cancellation of Notes. All Notes surrendered
for payment, redemption, transfer, exchange or conversion shall, if surrendered
to any person other than the Trustee, be delivered to the Trustee and, if not
already canceled, shall be promptly canceled by it. The Company may at any time
deliver to the Trustee for cancellation any Notes previously authenticated and
delivered hereunder, which the Company may have acquired in any manner
whatsoever, and all Notes so delivered shall be promptly canceled by the
Trustee. No Notes shall be authenticated in lieu of or in exchange for any Notes
canceled as provided in this Section 2.12, except as expressly permitted by this
Indenture. The Trustee shall deliver all canceled Notes held by it to the
Company at least annually.
ARTICLE 3
PARTICULAR COVENANTS OF THE COMPANY
Anything in this Indenture or in any Note to the contrary
notwithstanding, the Company, expressly for the equal and ratable benefit of the
original and future holders of the Notes, covenants and agrees as follows:
SECTION 3.1 Will Punctually Pay Principal, Premiums and Interest on the
Notes. The Company will duly and punctually pay, or cause to be paid, the
principal, premium, if any, and interest to become due in respect of the Notes
Outstanding according to the provisions hereof and thereof.
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SECTION 3.2.
(A) Office or Agency. The Company will maintain an office or
agency in the place of payment where Notes may be presented or
surrendered for payment, where Notes may be surrendered for
registration of transfer or exchange and where notices and demands to
or upon the Company in respect of the Notes and this Indenture may be
served. The Company will give prompt written notice to the Trustee of
the location, and of any change in the location, of such office or
agency. If at any time the Company shall fail to maintain such office
or agency or shall fail to furnish the Trustee with the address
thereof, such presentations, surrenders, notices and demands may be
made or served at the main office of the Trustee, and the Company
hereby appoints the Trustee its agent to receive all such
presentations, surrenders, notices and demands.
The Company may also from time to time designate one or more
other offices or agencies where the Notes may be presented or
surrendered for any or all of the purposes specified above in this
Section 3.2(A) and may from time to time rescind such designations, as
the Company may deem desirable or expedient; provided, however, that no
such designation or rescission shall in any manner relieve the Company
of its obligation to maintain an office or agency in each place of
payment for such purposes. The Company will give prompt written notice
to the Trustee of any such designation and any change in the location
of any such other office or agency.
(B) Appointment of Trustee as Paying Agent; Duty of Paying
Agent Other Than Trustee. The Company hereby appoints the Trustee as
paying agent and the Company covenants that, if it shall appoint a
paying agent other than the Trustee, it will cause such paying agent to
execute and deliver to the Trustee an instrument in which such paying
agent shall agree with the Trustee, subject to the provisions of this
Section 3.2,
(1) that such paying agent shall hold all sums held
by it as such agent for the payment of the principal of and
the premium, if any, or the interest on any of the Notes in
trust for the benefit of the holders of such Notes or the
Trustee;
(2) that such paying agent shall give the Trustee
notice of any Default of the Company in making any payment of
the principal of and the premium, if any, or the interest on
the Notes when the same shall be due and payable; and
(3) at any time during the continuance of any such
Default, upon the written request of the Trustee, forthwith to
pay to the Trustee all sums so held in trust by such paying
agent.
(C) Duty of Company Acting as Paying Agent. The Company
covenants and agrees that, if it should at any time act as its own
paying agent, it will, on or before each due date of the principal of
and the premium if any, or the interest on the Notes set aside and
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segregate and hold in trust for the benefit of the holders of the Notes
a sum sufficient to pay such principal and premium, if any, or interest
so becoming due until such sums shall be paid to such holders or
otherwise disposed of as herein provided and will notify the Trustee of
its action or of any failure to take such action.
Whenever the Company shall have one or more paying agents, it
will, prior to each due date of the principal of, and premium, if any,
or interest on, any Notes, deposit with one or more paying agents a sum
sufficient to pay the principal, and premium, if any, or interest, so
becoming due, such sum to be held in trust for the benefit of the
holders of Notes entitled to such principal, premium or interest, and
(unless such paying agent is the Trustee) the Company will promptly
notify the Trustee of its action or failure so to act.
(D) Delivery to Trustee. Anything in this Section 3.2 to the
contrary notwithstanding, the Company may at any time, for the purposes
of obtaining the satisfaction and discharge of this Indenture or for
any other reason, pay, or by Company Order direct any paying agent to
pay, to the Trustee all sums held in trust by the Company or any paying
agent as required by this Section 3.2, such sums to be held by the
Trustee upon the trusts contained in this Indenture. Upon such payment
by any paying agent to the Trustee, such paying agent shall be released
from all further liability with respect to such money.
(E) All Sums to be Held Subject to Section 15.2. Anything in
this Section 3.2 to the contrary notwithstanding, the holding of sums
in trust as provided in this Section 3.2 is subject to the provisions
of Section 15.2 hereof.
SECTION 3.3 Will Pay Indebtedness. The Company will pay or cause to be
paid all Indebtedness of the Company and of each Subsidiary (but, in the case of
Indebtedness of a Subsidiary on which the Company is not liable, the Company
shall be obligated so to do only to the extent that such Subsidiary's assets
shall be insufficient for the purpose), as and when same shall become due and
payable, and will observe, perform and discharge in accordance with their terms
all of the covenants, conditions and obligations which are imposed on it by any
and all mortgages, indentures and other agreements evidencing or securing
Indebtedness of the Company or pursuant to which such Indebtedness is issued, so
as to prevent the occurrence of any act or omission which is a default
thereunder, and which remains uncured or is not waived for a period of thirty
(30) days. The Company will notify the Trustee of any breach of the covenants
contained in this Section 3.3 within ten (10) days after the Company has
knowledge of such breach.
SECTION 3.4 Will Maintain Office. The Company will maintain an office
of the Company, which shall be and remain the principal place of business of the
Company, in Stamford, Vermont; provided, however, that upon at least thirty (30)
days' prior written notice to the Trustee, the Company may move such office and
records to any other address as set forth in such notice.
SECTION 3.5 Will Keep, and Permit Examination of, Records and Books of
Account and Will Permit Visitation of Property. The Company will (A) keep proper
records and books of account
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in accordance with generally accepted accounting principles consistently
applied, reflecting all financial transactions of the Company and each
Subsidiary, and (B) permit or cause to permit the Trustee, personally or by its
agents, accountants and attorneys, to visit or inspect any of the properties,
examine the records and books of account and discuss the affairs, finances and
accounts, of the Company and each Subsidiary, with the officers of the Company
and Subsidiaries at such reasonable times as may be requested by the Trustee.
The Trustee shall be under no duty to make any such visit, inspection or
examination.
The Company covenants that books of record and account will be kept in
which full, true and correct entries will be made of all dealings or
transactions of, or in relation to, the properties, business and affairs of the
Company.
SECTION 3.6 Corporate Existence. The Company will do or cause to be
done all things necessary to preserve and keep in full force and effect its
corporate existence, and that of each Subsidiary and the rights (charter and
statutory) and franchises of the Company and its Subsidiaries; provided,
however, that the Company shall not be required to preserve any such right or
franchise if the Company shall determine that the preservation thereof is no
longer desirable in the conduct of the business of the Company and its
Subsidiaries considered as a whole and that the loss thereof is not
disadvantageous in any material respect to the holders of the Notes.
SECTION 3.7 Maintenance of Properties. The Company will cause all
properties used or useful in the conduct of its business or the business of any
Subsidiary to be maintained and kept in good condition, repair and working order
and supplied with all necessary equipment and will cause to be made all
necessary repairs, renewals, replacements, betterments and improvements thereof,
all as in the judgment of the Company may be necessary so that the business
carried on in the connection therewith may be properly and advantageously
conducted at all times; provided, however, that nothing in this Section shall
prevent the Company or any Subsidiary from discontinuing the operation and
maintenance of any such properties, or disposing of any of them, if such
discontinuance or disposal is, in the judgment of the Company or of the
Subsidiary concerned, desirable in the conduct of its business or the business
of any Subsidiary and not disadvantageous in any material respect to the holders
of the Notes.
SECTION 3.8 Payment of Taxes and Other Claims. The Company will pay or
discharge or cause to be paid or discharged, before the same shall become
delinquent, (i) all taxes, assessments and governmental charges levied or
imposed upon the Company or any Subsidiary or upon the income, profits or
property of the Company or any Subsidiary, and (ii) all lawful claims for labor,
materials and supplies which, if unpaid, might by law become a lien upon the
property of the Company or any Subsidiary; provided, however, that the Company
shall not be required to pay or discharge or cause to be paid or discharged any
such tax, assessment, charge or claim whose amount, applicability or validity is
being contested in good faith by appropriate proceedings and the Company shall
have set aside on its books adequate reserves with respect thereto (segregated
to the extent required by generally accepted accounting principles).
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SECTION 3.9 Will Furnish Annual Certificates. The Company will file
with the Trustee, within one hundred twenty (120) days after the end of each
fiscal year of the Company commencing with the fiscal year ending December 31,
1997, an Officers' Certificate stating, as to each signer thereof, that:
(A) a review of the activities of the Company during such year
and of performance under this Indenture has been made under his
supervision; and
(B) to the best of his knowledge, based on such review, the
Company has fulfilled all of its obligations under this Indenture
throughout such year, or, if there has been a Default in the
fulfillment of any such obligation, specifying each such Default known
to him and the nature and status thereof.
SECTION 3.10 Restrictions on Indebtedness. The Company covenants that
it will not, nor will it permit any Subsidiary to, incur, create, assume or
otherwise become liable with respect to (collectively, an "incurrence") any
Indebtedness unless as of and for the twelve (12) month period (each, a
"Calculation Period") ending on the date of the proposed incurrence of such
Indebtedness (a "Calculation Date"), and after giving effect to the proposed
incurrence and the application of the proceeds therefrom, (i) the Company is in
compliance with all the terms, conditions and provisions of the Indenture, and
(ii) the ratio (the "Ratio") of (A) the Company's earnings before deduction of
taxes, depreciation, amortization and interest expense (as shown by a pro forma
consolidated income statement of the Company and its consolidated Subsidiaries)
to (B) the aggregate amount of interest paid on the Notes and all other
Indebtedness of the Company or its Subsidiaries during the relevant Calculation
Period is equal to or exceeds 2:1 (the "Minimum Level"). The Company further
covenants that it will on such dates maintain the Ratio at the Minimum Level for
each twelve (12) month period ending on each June 30 and December 31 subsequent
to the date of original issuance of the Notes (and any such twelve (12) month
period shall also be considered a Calculation Period), whether or not there is
an incurrence of Indebtedness, and any failure to so maintain the Ratio at or
above the Minimum Level shall constitute a default hereunder. The Company will
deliver to the Trustee, within 30 days after the end of each Calculation Period,
an Officer's Certificate, which shall set forth the relevant calculations,
stating that the Company is, as of the relevant Calculation Date, in compliance
with the provisions of this Section 3.10.
SECTION 3.11 Liquidity Maintenance Requirement. On or before ten days
prior to and until the next succeeding Interest Payment Date, the Company shall
maintain, at the parent company level, Permitted Investments the fair market
value of which are equal to or in excess of the product of (a) the aggregate
amount of interest payable with respect to the Notes for the next succeeding
Interest Payment Date (b) multiplied by six (6). The Company will deliver to the
Trustee, within 30 days after the end of each fiscal quarter, an Officer's
Certificate stating that the Company is, and at all times during the prior
fiscal quarter has been, in compliance with the provisions of this Section 3.11.
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SECTION 3.12 Limitation on Dividends and Other Payments. The Company
will not declare or pay any of the following (each, a "Restricted Payment"): (i)
any dividend or other distribution of property or assets other than a dividend
payable solely in shares of capital stock of the Company; (ii) a repayment or
defeasance of any Indebtedness subordinate in right of payment of interest or
principal to the Notes (except so long as the Notes are not in default,
scheduled payments of principal and interest may be made in accordance with the
terms of such subordinated Indebtedness); (iii) an exchange of capital stock of
the Company for an instrument(s) evidencing Indebtedness of the Company incurred
after November __, 1997 or (iv) any repurchase by the Company of its capital
stock. Notwithstanding the foregoing, the Company (and any of its Subsidiaries)
may declare or pay a Restricted Payment, if such Restricted Payment when
aggregated with all other Restricted Payment made by the Company or any
Subsidiary after October 31, 1997, is less than the sum of (A) $2,000,000; (B)
forty-five percent (45%) of the Company's (and its Subsidiaries') cumulative net
income earned during the period commencing on October 31, 1997 and ending on the
date on which the Restricted Payment is to be made and (C) the cumulative cash
and non-cash proceeds to the Company of all public or private offerings of its
capital stock during such period; provided that, notwithstanding the foregoing,
the Company shall make no Restricted Payment if the making of the Restricted
Payment would cause the Company not to be in compliance with the terms,
conditions and provisions of the Indenture or any other indenture or loan
agreement to which the Company is a party.
ARTICLE 4
NOTEHOLDER LISTS AND REPORTS BY THE COMPANY
AND THE TRUSTEE
SECTION 4.1 Noteholder lists, etc.
(A) The Company will furnish or cause to be furnished to the
Trustee, monthly, not more than fifteen (15) days after each Regular
Record Date a list, in such form as the Trustee may reasonably require,
of the names and addresses of the holders of Notes as of such Regular
Record Date, and at such other times, as the Trustee may request in
writing, within thirty (30) days after receipt by the Company of any
such request, a list of similar form and content as of a date not more
than fifteen (15) days prior to the time such list is furnished;
provided, however, that so long as the Trustee is the sole Note
Registrar, no such list shall be required to be furnished.
(B) The Trustee shall preserve, in as current a form as is
reasonably practicable, the names and addresses of the holders of Notes
received by the Trustee in its capacity as Note Registrar contained in
the most recent list furnished to it as provided in subdivision (A) of
this Section 4.1. The Trustee may destroy any list furnished to it as
provided in subdivision (A) of this Section 4.1, upon receipt of a new
list so furnished.
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(C) In case three (3) or more holders of Notes (hereinafter
called "Applicants") apply in writing to the Trustee, and furnish to
the Trustee reasonable proof that each such Applicant has owned a Note
for a period of at least six (6) months preceding the date of such
application, and such application states that the Applicants desire to
communicate with other holders of Notes with respect to their rights
under this Indenture or under the Notes, and is accompanied by a copy
of the form of proxy or other communication which such Applicants
propose to transmit, then the Trustee shall, within five (5) business
days after the receipt of such application, at its election, either
(1) afford to such Applicants access to the information
preserved at the time by the Trustee in accordance with the
provisions of subdivision (B) of this Section 4.1; or
(2) inform such Applicants as to the approximate number of
holders of Notes whose names and addresses appear in the
information preserved at the time by the Trustee, in
accordance with the provisions of subdivision (B) of this
Section 4.1, and as to the approximate cost of mailing to
such Noteholders the form of proxy or other communication, if
any, specified in such application.
If the Trustee shall elect not to afford to such Applicants access to
such information, the Trustee shall, upon the written request of such
Applicants, mail to each Noteholder whose name and address appears in
the information preserved at the time by the Trustee in accordance with
the provisions of subdivision (B) of this Section 4.1, a copy of the
form of proxy or other communication which is specified in such
request, with reasonable promptness after a tender to the Trustee of
the material to be mailed and of payment or provision for the payment
of the reasonable expenses of mailing, unless within five (5) days
after such tender the Trustee shall mail to such Applicants and file
with the Securities and Exchange Commission together with a copy of the
material to be mailed, a written statement to the effect that, in the
opinion of the Trustee, such mailing would be contrary to the best
interests of the holders of Notes, or would be in violation of
applicable law. Such written statement shall specify the basis of such
opinion. If said Commission, after opportunity for a hearing upon the
objections specified in the written statement so filed, shall enter an
order refusing to sustain any of such objections or if, after the entry
of an order sustaining one (1) or more of such objections, said
Commission shall find, after notice and opportunity for a hearing, that
all the objections so sustained have been met and shall enter an order
so declaring, the Trustee shall mail copies of such material to all
such Noteholders with reasonable promptness after the entry of such
order and the renewal of such tender; otherwise the Trustee shall be
relieved of any obligation or duty to such Applicants respecting their
application.
(D) Every holder of the Notes, by receiving and holding the
same, agrees with the Company and the Trustee that neither the Company
nor the Trustee, nor any paying agent shall be held accountable by
reason of the disclosure of any such information as to the names
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and addresses of the holders of Notes in accordance with the provisions
of subdivision (C) of this Section 4.1, regardless of the source from
which such information was derived, and that the Trustee shall not be
held accountable by reason of mailing any material pursuant to a
request made under said subdivision (C).
SECTION 4.2 Reports by Company. The Company covenants and agrees:
(A) To file with the Trustee within fifteen (15) days after
the Company is required to file the same with the Securities and
Exchange Commission, copies of the annual reports and of the
information, documents, and other reports (or copies of such portions
of any of the foregoing as such Commission may from time to time by
rules and regulations prescribe) which the Company may be required to
file with such Commission pursuant to Section 13 or Section 15(d) of
the Securities Exchange Act of 1934; or, if the Company is not required
to file information, documents, or reports pursuant to either of such
Sections, then the Company will file with the Trustee and the
Securities and Exchange Commission, in accordance with rules and
regulations prescribed from time to time by said Commission, such of
the supplementary and periodic information, documents, and reports
which may be required pursuant to Section 13 of the Securities Exchange
Act of 1934 in respect of a security listed and registered on a
national securities exchange as may be prescribed from time to time in
such rules and regulations;
(B) To file with the Trustee and the Securities and Exchange
Commission, in accordance with the rules and regulations prescribed
from time to time by said Commission, such additional information,
documents and reports with respect to compliance by the Company with
the conditions and covenants provided for in this Indenture as may be
required from time to time by such rules and regulations, including, in
the case of annual reports, if required by such rules and regulations,
certificates or opinions of independent public accountants, conforming
to the requirements, if any, of Section 15.3 hereof, as to compliance
with conditions or covenants, compliance with which is subject to
verification by accountants;
(C) To transmit to the holders of the Notes, in the manner and
to the extent provided in subsection (c) Section 313 of the TIA, such
summaries of any information, documents, and reports required to be
filed by the Company pursuant to subdivision (A) or subdivision (B) as
may be required by the rules and regulations promulgated by the
Securities and Exchange Commission; and
(D) To furnish to the Trustee with or as a part of each annual
report and each other document or report filed with the Trustee
pursuant to subdivision (A), (B) or (C) of this Section 4.2, an
Officers' Certificate stating that in the opinion of each of the
signers such annual report or other document or report complies with
the requirements of such subdivision (A), (B) or (C).
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Each certificate furnished to the Trustee pursuant to the provisions of
this Section 4.2 shall conform to the requirements of Section 15.3 hereof.
SECTION 4.3 Reports by Trustee. The Trustee shall transmit to the
Noteholders as provided in TIA Section 313(c), if required thereunder, within
sixty (60) days after January 1, 1998 and each January 1 thereafter, a brief
report as provided in TIA Section 313(a). A copy of each such report shall, at
the time of such transmission to the Noteholders, be filed by the Trustee with
each stock exchange upon which the Notes are listed and also with the Securities
and Exchange Commission.
ARTICLE 5
REDEMPTION OF NOTES AT COMPANY'S OPTION
SECTION 5.1 Election by Company to Redeem Notes. The Notes shall be
redeemable at any time prior to the Stated Maturity thereof, upon notice as
provided in this Article 5, as a whole at any time, or in part from time to time
(but only in principal amounts of $1,000 or any integral multiple thereof), at
the option of the Company; provided, however, that the Company may not redeem
any Notes pursuant to such option prior to November 1, ____. Any such redemption
shall be at the applicable redemption prices (expressed in percentages of the
principal amount) set forth in the Notes together with accrued and unpaid
interest on the principal amount to be redeemed to the Redemption Date.
The election of the Company to redeem any Notes shall be evidenced by a
Certified Resolution. Whenever any of the Notes Outstanding are to be redeemed
pursuant to this Section 5.1, the Company shall give the Trustee at least sixty
(60) days' written notice (or such shorter period of time as is acceptable to
the Trustee) prior to the Redemption Date of such Redemption Date and of the
principal amount of Notes to be redeemed.
SECTION 5.2 Redemption of Part of Notes. In case of the redemption of
less than all of the Outstanding Notes, the Notes to be redeemed shall be
selected by the Trustee by lot, not more than sixty (60) days prior to the
Redemption Date, from the Outstanding Notes not previously called for
redemption, which method may provide for the selection for redemption of
portions (equal to $1,000 or any integral multiple thereof) of the principal
amount of Notes of a principal amount larger than $1,000.
In the case of any partial redemption, the Trustee shall promptly
notify the Company in writing of the serial numbers (and, in the case of any
Note which is to be redeemed in part only, the portion of the principal amount
thereof to be redeemed) of the Notes selected for redemption.
For all purposes of this Indenture, unless the context otherwise
requires, all provisions relating to the redemption of Notes shall relate, in
the case of any Note redeemed or to be redeemed only in part, to the portion of
the principal of such Note which has been or is to be redeemed.
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SECTION 5.3 Notice of Redemption. Notice of redemption shall be given
by first-class mail, postage prepaid, mailed not less than thirty (30) nor more
than sixty (60) days prior to the Redemption Date, to each holder of Notes to be
redeemed, at his last address appearing in the Note Register.
All notices of redemption shall state:
(A) The Redemption Date;
(B) The redemption price;
(C) If less than all Outstanding Notes are to be redeemed, the
serial numbers (and, in the case of any Note which is to be redeemed in
part only, the portion of the principal amount thereof to be redeemed)
of the Notes to be redeemed;
(D) That on the Redemption Date the redemption price of each
of the Notes to be redeemed will become due and payable, and that
interest thereon shall cease to accrue from and after said date; and
(E) The place where such Notes are to be surrendered for
payment of the redemption price, which shall be the office or agency of
the Company in the place of payment.
Notice of redemption of Notes to be redeemed shall be given by the
Company or, at the Company's request, by the Trustee in the name and at the
expense of the Company.
Failure to give notice of redemption, or any defect therein, to any
holder of any Note selected for redemption shall not impair or affect the
validity of the redemption of any other Note.
SECTION 5.4 Deposit of Redemption Price. On or before the business day
immediately preceding any Redemption Date, the Company shall deposit with the
Trustee or with a paying agent (or, if the Company is acting as its own paying
agent, segregate and hold in trust as provided in Section 3.2(C) hereof) an
amount of money sufficient to pay the redemption price of all principal of, and
(unless such Redemption Date is an Interest Payment Date) accrued interest on,
the Notes which are to be redeemed on that date.
SECTION 5.5 Date on Which Notes Cease to Bear Interest, Etc. Notice of
redemption having been given as aforesaid, the Notes so to be redeemed shall, on
the Redemption Date, become due and payable at the redemption price therein
specified and from and after such date (unless the Company shall default in the
payment of the redemption price) such Notes shall cease to bear interest. Upon
surrender of any such Note for redemption in accordance with said notice, such
Note shall be paid by the Company at the redemption price together with accrued
interest thereon to the Redemption Date; provided, however, that installments of
interest whose Stated Maturity is on or
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prior to the Redemption Date shall be payable to the holders of such Notes, or
one or more predecessor Notes, registered as such on the relevant Regular Record
Dates according to the terms and provisions of Section 2.3 hereof.
If any Note called for redemption shall not be so paid upon surrender
thereof for redemption, the principal, and premium, if any, shall, until paid,
bear interest from the Redemption Date at the rate borne by the Note.
Any Note which is to be redeemed only in part shall be surrendered at
the office or agency designated pursuant to Section 3.2(A) hereof (with, if the
Company or the Trustee so requires, due endorsement by, or a written instrument
of transfer in form satisfactory to the Company and the Trustee duly executed
by, the holder thereof or his attorney duly authorized in writing) and the
Company shall execute and the Trustee shall authenticate and deliver to the
holder of such Note, without service charge, a new Note or Notes of any
authorized denomination or denominations as requested by such holder in an
aggregate principal amount equal to and in exchange for the unredeemed portion
of the principal of the Note so surrendered.
SECTION 5.6 All Notes Delivered. All Notes redeemed pursuant to Section
5.1 hereof shall be canceled and destroyed by the Trustee in accordance with the
existing regulations of (or those hereafter promulgated by) the Securities
Exchange Commission, and the Trustee shall deliver its certificate thereof to
the Company.
ARTICLE 6
REDEMPTION OF NOTES AT HOLDER'S OPTION
SECTION 6.1 Redemption Right at Holder's Option. Unless pursuant to the
terms of Section 7.1 the Notes have been declared due and payable prior to their
maturity by reason of an Event of Default and such Event of Default has not been
waived and such declaration has not been rescinded or annulled, a holder has the
right to present Notes for payment prior to their maturity, and the Company will
redeem the same (or any portion of the principal amount thereof which is $1,000
or an integral multiple thereof, as the holder may specify) subject to the
limitations that the Company will not be obligated to redeem, during an initial
period beginning with the original issuance of the Notes and ending December 1,
1998, or during any twelve (12) month period ending December 1 thereafter, (A)
the portion of a Note or Notes presented by a holder exceeding an aggregate
principal amount of $25,000 per holder or (B) Notes in an aggregate principal
amount exceeding $2,250,000 (plus, to the extent that the Original Purchasers
exercise the Overallotment Option, five percent (5%) of the principal amount of
the Notes purchased upon exercise of the Overallotment Option; provided that,
in no event, shall the maximum aggregate principal amount of Notes which the
Company may be obligated to redeem in any such twelve (12) month period exceed
$2,508,750); further references herein to the $2,250,000 aggregate principal
amount limitation shall be deemed to include such higher figure, not exceeding
$2,508,750, to the extent the Original Purchasers exercise the Overallotment
Option.
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If the $25,000 per holder limitation has been reached and the $2,250,000 in the
aggregate limitation has not been reached, if Notes have been properly presented
for payment on behalf of beneficial holders who are natural persons, each in an
aggregate principal amount exceeding $25,000, the Company will redeem such Notes
in order of their receipt (except Notes presented for payment in the event of
death of a holder, which will be given priority in order of their receipt), up
to the aggregate limitation of $2,250,000 notwithstanding the $25,000
limitation.
SECTION 6.2 Redemption Procedure. Redemption of Notes presented for
payment on or prior to the September 30 immediately preceding the last day of
the initial period and of each twelve (12) month period thereafter will be made
on the last day (December 1) of such period, beginning December 1, 1998. Notes
not redeemed in any such period because they have not been presented on or prior
to the September 30 immediately preceding the last day (December 1) of that
period or because of the $25,000 or $2,250,000 limitations will be held in order
of their receipt for redemption during the following twelve (12) month period(s)
until redeemed, unless sooner withdrawn by the holder. Holders of Notes
presented for redemption shall be entitled to and shall receive scheduled
monthly payments of interest thereon on scheduled Interest Payment Dates until
their Notes are redeemed. Subject to the $25,000 and $2,250,000 limitations, the
Company will, at any time upon the death of any holder, redeem Notes within
sixty (60) days following receipt by the Trustee of a written request therefor
from such holder's personal representative, or surviving joint tenant(s), tenant
by the entirety or tenant(s) in common. Notes will be redeemed in order of their
receipt by the Trustee, except Notes presented for payment in the event of death
of the holder, which will be given priority in order of their receipt.
Notes may be presented for redemption by delivering to the Trustee: (A)
a written request for redemption, in form satisfactory to the Trustee, signed by
the registered holder(s) or his duly authorized representative, (B) the Note to
be redeemed, free and clear of any liens or encumbrances of any kind, and (C) in
the case of a request made by reason of the death of a holder, appropriate
evidence of death and, if made by a representative of a deceased holder,
appropriate evidence of authority to make such request. No particular forms of
request for redemption or authority to request redemption are necessary (other
than those required of a representative of a deceased holder). The price to be
paid by the Company for all Notes or portions thereof presented to it pursuant
to the provisions described in this Article 6 is 100% of the principal amount
thereof or portion thereof plus accrued but unpaid interest to the date of
payment. Any acquisition of Notes by the Company other than by redemption at the
option of any holder pursuant to this Section shall not be included in the
computation of either the $25,000 or $2,250,000 limitation for any period.
For purposes of this Section 6.2, a Note held in tenancy by the
entirety, joint tenancy or tenancy in common will be deemed to be held by a
single holder and the death of a tenant by the entirety, joint tenant or tenant
in common will be deemed the death of a holder. The death of a person, who,
during his lifetime, was entitled to substantially all of the beneficial
interests of ownership of a Note will be deemed the death of the holder,
regardless of the registered holder, if such beneficial interest can be
established to the satisfaction of the Trustee. For purposes of a
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holder's request for redemption and a request for redemption on behalf of a
deceased holder, such beneficial interest shall be deemed to exist in cases of
street name or nominee ownership, ownership under the Uniform Gifts to Minors
Act, community property or other joint ownership arrangements between a husband
and wife (including individual retirement accounts or Keogh [H.R. 10] plans
maintained solely by or for the holder or decedent or by or for the holder or
decedent and his spouse), and trusts and certain other arrangements where a
person has substantially all of the beneficial ownership interests in the Notes
during his lifetime. Beneficial interests shall include the power to sell,
transfer or otherwise dispose of a Note and the right to receive the proceeds
therefrom, as well as interest and principal payable with respect thereto.
In the case of Notes registered in the names of banks, trust companies
or broker-dealers who are members of a national securities exchange or the
National Association of Securities Dealers, Inc. ("Qualified Institutions"), the
$25,000 limitation shall apply to each beneficial owner of Notes held by a
Qualified Institution and the death of such beneficial owner shall entitle a
Qualified Institution to seek redemption of such Notes as if the deceased
beneficial owner were the record holder. Such Qualified Institution, in its
request for redemption on behalf of such beneficial owners, must submit
evidence, satisfactory to the Trustee, that it holds Notes on behalf of such
beneficial owner and must certify that the aggregate amount of requests for
redemption tendered by such Qualified Institution on behalf of such beneficial
owner in the initial period or in any subsequent twelve (12) month period does
not exceed $25,000.
In the case of any Notes which are presented for redemption in part
only, upon such redemption the Company shall execute and the Trustee shall
authenticate and deliver to or on the order of the holder of such Notes, without
service charge, a new Note(s), of any authorized denomination or denominations
as requested by such holder, in aggregate principal amount equal to the
unredeemed portion of the principal of the Notes so presented.
Nothing herein shall prohibit the Company from redeeming, in acceptance
of tenders made pursuant hereto, Notes in excess of the principal amount that
the Company is obligated to redeem, nor from purchasing any Notes in the open
market. However, the Company may not use any Notes purchased in the open market
as a credit against its redemption obligations hereunder.
SECTION 6.3 Withdrawal. Any Notes presented for redemption at the
option of the holder may be withdrawn by the person(s) presenting the same upon
delivery of a written request for such withdrawal to the Trustee (A) in cases
other than by reason of death of a holder on or prior to September 30, 1998, in
the case of the initial period, or on or prior to September 30 in the case of
any subsequent twelve (12) month period, or (B) prior to the issuance of a check
in payment thereof in the case of Notes presented by reason of the death of a
holder.
SECTION 6.4 Redemption Register. The Trustee shall maintain at its main
office a register (the "Redemption Register") in which it shall record, in order
of receipt, all requests for redemption received by the Trustee under Section
6.2. Unless withdrawn, all such requests shall remain in effect
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during the period in which they are received and thereafter from period to
period, until the Notes which are the subject of such request have been
redeemed.
SECTION 6.5 Redemption Upon Fundamental Structural Change or
Significant Subsidiary Disposition. In the event that there shall occur a
Fundamental Structural Change with respect to the Company, or in the event of an
occurrence of a Significant Subsidiary Disposition, then each holder shall have
the right, at the holder's option, to require the Company to redeem such
holder's Notes, including any portion thereof which is $1,000 or any integral
multiple thereof on the date (the "Repurchase Date") that is seventy-five (75)
days after the occurrence of the Fundamental Structural Change or Significant
Subsidiary Disposition at the redemption price in cash of 100% of the principal
amount thereof or portion thereof plus accrued but unpaid interest to the date
of payment, unless on or before the date that is forty (40) days after the
occurrence of the Fundamental Structural Change or Significant Subsidiary
Disposition, the Notes have received a rating of BBB- or better by Standard &
Poor's Corporation or Duff & Phelps Credit Rating Co., Inc. or Baa3 or better by
Moody's Investors Service, Inc. (either, a "Required Rating"). Exercise of this
redemption option by a holder is irrevocable. The Company's obligation to redeem
the Notes pursuant to this Section 6.5 shall not be subject to the $25,000
individual or $2,250,000 aggregate redemption limitations.
Forty (40) days after the occurrence of a Fundamental Structural Change
or Significant Subsidiary Disposition, unless the Notes have received a Required
Rating, the Company promptly, but in any event within three (3) business days
after expiration of such forty (40) day period, shall give notice to the
Trustee, who shall promptly, but in any event within five (5) days of receipt of
notice from the Company, notify the Noteholders, of the occurrence of such
Fundamental Structural Change or Significant Subsidiary Disposition, of the date
before which a holder must notify the Trustee of such holder's intention to
exercise the redemption option, which date shall be not more than three (3)
business days prior to the Repurchase Date and of the procedure which such
holder must follow to exercise such right. To exercise the redemption, the
holder of a Note or Notes must deliver to the Trustee on or before the
Repurchase Date: (A) written notice of such holder's election to redeem pursuant
to this Section 6.5; in form satisfactory to the Trustee, signed by the
registered holder(s) or his duly authorized representative and (B) the Note or
Notes to be redeemed, free and clear of any liens or encumbrances of any kind.
In the case of any Notes which are presented for redemption in part
only, upon such redemption the Company shall execute and the Trustee shall
authenticate and deliver to or on the order of the holder of such Notes, without
service charge, a new Note(s), of any authorized denomination or denominations
as requested by such holder, in aggregate principal amount equal to the
unredeemed portion of the principal of the Notes so presented.
SECTION 6.6 Redemption of Notes Subject to Article 5. In the case of
any Notes or portion thereof which are presented for redemption pursuant to this
Article 6 and which have not been redeemed at the time the Company gives notice
of its election to redeem Notes pursuant to Article 5, such Notes or portion
thereof shall first be subject to redemption pursuant to Article 5 and if any
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such Notes or portion thereof are not redeemed pursuant to Article 5 they shall
remain subject to redemption pursuant to Article 6.
ARTICLE 7
REMEDIES OF TRUSTEE AND NOTEHOLDERS UPON DEFAULT
SECTION 7.1 Definition of Default and Event of Default. The following
events are hereby defined for all purposes of this Indenture (except where the
term is otherwise defined for specific purposes) as "Events of Default"
(whatever the reason for such Event of Default and whether it shall be voluntary
or involuntary or be effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body):
(A) Failure to pay the principal of or the premium, if any, on
any Note as and when the same shall become due and payable at maturity;
or
(B) Failure to pay any installment of interest upon any Note
as and when the same shall have become due and payable, and continuance
of such default for a period of five (5) days; or
(C) Default in the meeting or satisfaction of any redemption
payment with respect to any of the Notes as and when the same shall
become due and payable, and continuance of such default for a period of
five (5) days; or
(D) The entry of a decree or order by a court or regulatory
authority having jurisdiction in the premises adjudging the Company or
any Subsidiary a bankrupt or insolvent, or approving as properly filed
a petition seeking reorganization, arrangement, adjustment or
composition of or in respect of the Company or any Subsidiary under the
Federal Bankruptcy Act or any other applicable Federal or State law, or
appointing a receiver, liquidator, assignee, trustee or sequestrator
(or other similar official) of the Company or any Subsidiary, or
ordering the winding-up or liquidation of its affairs, and the
continuance of any such decree or order unstayed and in effect for a
period of sixty (60) consecutive days; or
(E) The institution by the Company or any Subsidiary of
proceedings to be adjudicated a bankrupt or insolvent, or the consent
by it to the institution of bankruptcy or insolvency proceedings
against it, or the filing by it of a petition or answer or consent
seeking reorganization or relief under the Federal Bankruptcy Act or
any other applicable Federal or State law, or the consent by it to the
filing of any such petition or to the appointment of a receiver,
liquidator, assignee, trustee or sequestrator (or other similar
official) of the Company or any Subsidiary, or the making by it of an
assignment for the benefit of creditors, or the admission by it in
writing of its inability to pay its debts generally
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as they become due, or the taking of action by the Company or any
Subsidiary in furtherance of any such action; or
(F) Default in the performance, or breach, of any covenant or
warranty of the Company in this Indenture (other than a covenant or
warranty a default in whose performance or whose breach is elsewhere
specifically dealt with in this Section 7.1), and continuance of such
default or breach for a period of thirty (30) days (or, in the case of
a default or breach relating to Section 3.11, sixty (60) days) after
there has been given, by registered or certified mail, to the Company
by the Trustee, or to the Trustee and the Company by the holders of at
least ten percent (10%) in principal amount of the Outstanding Notes
affected (as such term is defined in Section 13.2), a written notice
specifying such default or breach and requiring it to be remedied and
stating that such notice is a "Notice of Default" hereunder; or
(G) An event of default as defined in any mortgage, indenture
or instrument, under which there may be issued, or by which there may
be secured or evidenced, any Indebtedness of the Company, whether such
Indebtedness now exists or shall hereafter be created, shall happen and
shall result in such Indebtedness in an aggregate principal amount in
excess of $1,000,000 becoming or being declared due and payable prior
to the date on which it would otherwise become due and payable, and
such acceleration shall not be rescinded or annulled within ten (10)
days after written notice to the Company from the Trustee, or to the
Trustee and the Company from the holders of not less than twenty-five
percent (25%) in aggregate principal amount of the Notes then
Outstanding.
SECTION 7.2 Trustee to Give Noteholders Notice of Defaults. The Trustee
shall, within sixty (60) days after the occurrence thereof, give to (i) the
Noteholders, as their names and addresses appear in the Note Register, (ii) such
holders of the Notes who have, within the last two (2) years preceding the
mailing of such notice, filed their names and addresses with the Trustee for
that purpose and (iii) such holders of the Notes whose names and address are
provided to the Trustee in accordance with Section 312 of the TIA, notice, by
first-class mail, of all defaults known to the Trustee, unless such defaults
shall have been cured or waived before the giving of such notice (the term
"Defaults" for the purposes of this Section 7.2 being hereby defined to be the
events specified in subdivisions (A), (B), (C), (D), (E), (F) and (G) of Section
7.1 hereof, not including any periods of grace provided for in said subdivisions
and irrespective of the mailing of any written demand specified in subdivisions
(F) and (G) but in the case of any default as specified in subdivisions (B) and
(C) of Section 7.1 hereof, no such notice shall be given until at least ten (10)
days after the occurrence thereof, and in the case of any default as specified
in subdivisions (F) and (G) of Section 7.1 hereof, no such notice shall be given
until at least thirty (30) days after the occurrence thereof); provided,
however, that except in the case of default in the payment of the principal of
or the premium, if any, or the interest on any of the Notes, the Trustee shall
be protected in withholding such notice if and so long as the board of
directors, board of trustees, executive committee, or a trust committee of
directors, trustees or Responsible Officers, of the Trustee in good faith
determines that the withholding of such notice is in the interests of the
Noteholders.
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SECTION 7.3 Declaration of Principal and Accrued Interest Due Upon
Default; Holders of Specified Percentage of Notes May Waive Default Declaration.
If an Event of Default occurs and is continuing as defined in Section 7.1
hereof, the Trustee may, and the holders of not less than twenty-five percent
(25%) in principal amount of the Notes at the time Outstanding hereunder may, by
notice in writing given to the Company (and to the Trustee if such notice be
given by Noteholders) declare the principal of all of the Notes hereby secured
and the interest accrued thereon immediately due and payable, and such principal
and interest shall thereupon become and be immediately due and payable; subject,
however, to the right of the holders of a majority in principal amount of all
Outstanding Notes, by written notice to the Company and to the Trustee
thereafter to consent to a waiver of such past Default before any final judgment
or decree for the payment of the moneys due shall have been obtained or entered
as hereinafter provided and if before such judgment or decree all covenants with
respect to which Default shall have been made shall be fully performed or made
good to the reasonable satisfaction of the Trustee, and all arrears of interest
with interest upon overdue installments of interest (to the extent that payment
of such interest is enforceable under applicable law) at the interest rate per
annum applicable to the Notes and the principal and premium, if any, of all
Outstanding Notes which shall have become due otherwise than by acceleration
under this Section 7.3 and all sums paid or advanced by the Trustee hereunder
and the reasonable compensation, disbursements, expenses and advances of the
Trustee, its agents and attorneys, and all other indebtedness secured hereby,
except the principal of any Notes not then due by their terms and except
interest accrued on such Notes since the last Interest Payment Date, shall be
paid, or the amount thereof shall be paid to the Trustee for the benefit of
those entitled thereto. Such Default and its consequences shall thereupon be
deemed to have been cured and such declaration of the maturity of the Notes
shall be void and of no further effect, but no such cure shall extend to or
affect any subsequent Default or impair any right consequent thereon.
SECTION 7.4 Power of Trustee to Protect and Enforce Rights. Upon the
occurrence of one or more Events of Default, the Trustee by such officer or
agent as it may appoint in its discretion, with or without entry, may proceed to
protect and enforce its rights and the rights of holders of the Outstanding
Notes by a suit or suits in equity or at law, whether for the specific
performance of any covenant or agreement contained herein, or in aid of the
execution of any power herein granted, or for the enforcement of any other
appropriate legal or equitable remedy, as the Trustee shall deem most effectual
to protect and enforce any of its rights or duties and the rights of holders of
the Outstanding Notes.
Upon the written request of the holders of a majority in principal
amount of the then Outstanding Notes, in case an Event of Default shall have
occurred and be continuing as aforesaid, subject to Sections 10.2 and 10.5, it
shall be the duty of the Trustee upon being indemnified as provided in Section
7.11, to exercise such one or more of the remedies available for the protection
and enforcement of its rights and the rights of the Noteholders (including the
taking of appropriate judicial proceedings by action, suit or otherwise) as the
Trustee shall deem best.
SECTION 7.5 Remedies Cumulative. No remedy herein conferred upon or
reserved to the Trustee or the Noteholders is intended to be exclusive of any
other right or remedy, but each and
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every such right or remedy shall be cumulative, and shall be in addition to
every other remedy given hereunder as now or hereafter existing at law or in
equity or otherwise. The assertion or employment of any right or remedy
hereunder, or otherwise, shall not prevent the concurrent assertion or
employment of any other appropriate right or remedy.
(A) Delay, Etc. Not a Waiver of Rights. No delay or omission
to exercise any right or power accruing upon any Event of Default shall
impair any such right or power or shall be construed to be a waiver of
any such Event of Default or an acquiescence therein; and every such
right and power may be exercised from time to time and as often as may
be deemed expedient.
(B) Waiver of Default Not to Extend to Subsequent Defaults. No
waiver of any Event of Default whether by the Trustee or by the
Noteholders, shall extend to or shall affect any subsequent Event of
Default or shall impair any rights or remedies consequent thereon.
SECTION 7.6 Holders of Specified Percentage of Notes May Direct
Judicial Proceedings by Trustee. The holders of not less than a majority in
principal amount of the Notes at the time Outstanding hereunder may direct the
time, method and place of conducting any proceeding for any remedy available to
the Trustee or exercising any power conferred upon the Trustee; provided,
however, that such direction shall not be otherwise than in accordance with the
provisions of law and this Indenture and the Trustee may take any other action
deemed proper by them, or either of them, which is not inconsistent with such
direction.
SECTION 7.7 Disposition of Proceeds of Sale. The purchase money or
proceeds of any sale made pursuant to judicial proceedings for the enforcement
of this Indenture, shall be applied, as follows:
First. To the payment of all sums payable to the Trustee
hereunder by reason of any expenses or liability incurred or advances
made in connection with the management or administration of the trusts
hereby created;
Second. To the payment in full of the amounts then due and
unpaid for the principal of and the premium, if any, and the interest
on the Outstanding Notes, with interest on the overdue principal and
(to the extent that payment of such interest is enforceable under
applicable law) on overdue installments of interest at the interest
rate per annum applicable to the Notes; and in case such proceeds shall
be insufficient to pay in full the amounts so due and unpaid, then to
the payment thereof ratably, according to the aggregate of such
principal, premium and interest, without preference or priority as to
any Outstanding Note over any other Outstanding Note or of principal,
premium, if any, or interest over principal, premium, if any, or
interest, or of any installment of interest over any other installment
of interest, upon presentation of such Notes and their surrender if
fully paid, or for proper notation if only partially paid; and
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Third. Any surplus thereof remaining to the Company, its
successors or assigns or to whosoever may be lawfully entitled to
receive the same, or as a court of competent jurisdiction may direct.
SECTION 7.8.
(A) Payment of Principal and Interest to Trustee Upon
Occurrence of Certain Defaults; Judgment May be Taken by Trustee. The
Company covenants that (1) in case default shall be made in the payment
of any installment of interest upon any of the Notes as and when the
same shall become due and payable, and such default shall have
continued for a period of two (2) business days, or (2) in case default
shall be made in the payment of the principal of, and premium, if any,
on, any of the Notes as and when the same shall have become due and
payable at maturity, then upon demand of the Trustee, the Company will
pay to the Trustee, for the benefit of the holders of the Notes, the
whole amount that then shall have become due and payable on all such
Notes for principal, and premium, if any, and interest, with interest
upon the overdue principal, and premium, if any, and (to the extent
that payment of such interest is enforceable under applicable law) upon
the overdue installments of interest at the respective applicable rates
borne by the Notes; and, in addition thereto, such further amount as
shall be sufficient to cover the costs and expenses of collection,
including the reasonable compensation, expenses, disbursements, and
advances of the Trustee, its agents and counsel.
In case the Company shall fail to pay the same forthwith upon
such demand, the Trustee, in its name and as trustee of an express
trust, may institute a judicial proceeding for the collection of the
sums so due and unpaid, and may prosecute such proceeding to judgment
or final decree, and may enforce the same against the Company or any
other obligor upon the Notes and collect the moneys adjudged or decreed
to be payable in the manner provided by law out of the property of the
Company or any other obligor upon the Notes, wherever situated.
(B) Enforcement of Rights by Trustee During Continuance of an
Event of Default. If an Event of Default occurs and is continuing, the
Trustee, may in the exercise of discretion proceed to protect and
enforce its rights and the rights of the Noteholders by such
appropriate judicial proceedings as deemed most effectual to protect
and enforce any such rights, whether for the specific enforcement of
any covenant or agreement in this Indenture or in aid of the exercise
of any power granted herein, or to enforce any other proper remedy.
(C) Application of Moneys Collected by Trustee. Any moneys
collected by the Trustee, or either of them, under this Section 7.8
shall be applied by the Trustee:
First. To the payment of the costs and expenses reasonably
incurred (including any sums due the Trustee) in the proceedings
resulting in the collection of such moneys.
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Second. To the payment of the amounts then due and unpaid upon
the Outstanding Notes for principal of and the premium, if any, and the
interest on the Outstanding Notes, with interest on the overdue
principal and (to the extent that payment of such interest is
enforceable under applicable law) on overdue installments of interest
at the interest rate per annum applicable to the particular series of
Notes; and in case such proceeds shall be insufficient to pay in full
the amounts so due and unpaid, then to the payment thereof ratably,
according to the aggregate of such principal, premium and interest,
without preference or priority as to any Outstanding Note over any
other Outstanding Note or of principal, premium, if any, or interest
over principal, premium, if any, or interest, or of any installment of
interest over any other installment of interest, upon presentation of
such Notes and their surrender if fully paid, or for proper notation if
only partially paid.
SECTION 7.9 Possession of Notes Unnecessary in Action by Trustee. All
rights of action and claims under this Indenture or the Notes may be prosecuted
and enforced by the Trustee, without the possession of any of the Notes or the
production thereof in any proceeding relating thereto, and any such proceeding
instituted by the Trustee, shall be brought in its name as trustee of an express
trust, and any recovery of judgment shall, after provision for the payment of
the reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel, be for the ratable benefit of the holders of
the Outstanding Notes in respect of which such judgment has been recovered.
SECTION 7.10 Trustee May File Necessary Proofs. The Trustee,
(irrespective of whether the principal of the Notes shall then be due and
payable as therein expressed and irrespective of whether the Trustee, shall have
made any demand for such payment), may file such proofs of claim and other
papers or documents as may be necessary or advisable in order to have the claims
of the Trustee, and of the Noteholders allowed in any judicial proceedings
relative to the Company or its creditors or property. In case of any
receivership, insolvency, bankruptcy, reorganization or other similar
proceedings affecting the Company or its property, the Trustee, (irrespective of
whether the principal of the Notes shall then be due and payable and
irrespective of whether the Trustee, shall have made any demand for such
payment) shall be entitled and empowered either in its name or as trustee of an
express trust or as attorney in fact for the holders of the Notes, or in any one
or more of such capacities, to file a proof of claim for the whole amount of
principal and interest (with interest upon such overdue principal and, to the
extent that payment of such interest is enforceable under applicable law, upon
overdue installments of interest at the interest rate per annum applicable to
the particular series of Notes) and any premium which may be or become owing and
unpaid in respect of the Notes and to file such other papers or documents as may
be necessary or advisable in order to have the claims of the Trustee, (including
any claim for the reasonable compensation, expenses, disbursements and advances
of the Trustee, its agents and counsel) and of the Noteholders allowed in any
such proceedings and to collect and receive any moneys or other property payable
or deliverable on any such claims and to distribute the same; and any receiver,
assignee, trustee, liquidator, sequestrator (or other similar official) in any
such judicial proceeding is hereby authorized by each Noteholder to make such
payments to the Trustee, and in the event that the Trustee shall consent to the
making of such payments directly to the Noteholders, to pay to the Trustee, any
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amount due the Trustee, for the reasonable compensation, expenses, disbursements
and advances of the Trustee, its agents and counsel, and any other amounts due
the Trustee, under Section 10.7.
Nothing herein contained shall be deemed to authorize the Trustee, to
authorize or consent to or accept or adopt on behalf of any Noteholder any plan
of reorganization, arrangement, adjustment or composition affecting the Notes or
the rights of any holder thereof, or to authorize the Trustee, to vote in
respect of the claim of any Noteholder in any such proceeding.
SECTION 7.11 Limitation Upon Right of Noteholders to Institute Certain
Legal Proceedings. No Noteholder shall have any right to institute any suit,
action or proceeding in equity or at law for the foreclosure of this Indenture,
or for the execution of any trust hereunder, including the appointment of a
receiver or trustee, or for any other remedy hereunder, including without
limitation the institution of nonjudicial foreclosure proceedings, unless (A)
such holder previously shall have delivered to the Trustee written notice that
one or more Events of Default, which Events of Default shall be specified in
such notice, has occurred and is continuing, and (B) the holders of not less
than twenty-five percent (25%) in principal amount of the then Outstanding Notes
shall have requested the Trustee in writing and shall have afforded to it
reasonable opportunity either to proceed to exercise the powers hereinbefore
granted, or to institute such action, suit or proceeding in its own name, and
(C) one or more Noteholders shall have offered to the Trustee adequate security
and indemnity, satisfactory to it, against the costs, expenses and liabilities
to be incurred therein or thereby and the Trustee, shall have refused or
neglected to act on such notification, request and offer of indemnity for at
least sixty (60) days and no direction inconsistent with such notification shall
have been given to the Trustee by holders of not less than a majority in
principal amount of the Outstanding Notes; and such notification, request and
offer of indemnity are hereby declared, in every such case, at the option of the
Trustee, to be conditions precedent to the exercise of the powers and trusts of
this Indenture and to any action or cause of action for foreclosure, including
the appointment of a receiver or trustee, or for any other remedy hereunder; it
being understood and intended that no Noteholder shall have any right in any
manner whatsoever by his action to affect, disturb or prejudice the rights of
any other holder, or obtain or seek to obtain priority or preference over any
other holder, or to enforce any right hereunder, except in the manner herein
provided to the extent permitted by law, and that all proceedings at law or in
equity shall be instituted, had or maintained in the manner herein provided, and
for the equal and ratable benefit of all holders of the Outstanding Notes.
SECTION 7.12 Right of Noteholder to Receive and Enforce Payment Not
Impaired. Notwithstanding any other provision of this Indenture, the right of
any holder of any Note to receive payment of the principal of, premium, if any,
and interest on such Note, on or after the respective Stated Maturities
expressed in such Note, or to institute suit for the enforcement of any such
payment on or after such respective Stated Maturities, shall not be impaired or
affected without the consent of such holder, except that no Noteholder may
institute any such suit if and to the extent that the institution or prosecution
thereof or the entry of judgment therein would, under applicable law, result in
the surrender, impairment, waiver, or loss under this Indenture upon any
property subject hereto.
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SECTION 7.13 Court May Require Undertaking to Pay Costs. All parties to
this Indenture agree, and each holder of any Note by his acceptance thereof
shall be deemed to have agreed, that any court may in its discretion require, in
any suit for the enforcement of any right or remedy under this Indenture or in
any suit against the Trustee, for any action taken or omitted by it, the filing
by any party litigant in such suit of an undertaking to pay the costs of such
suit, and that such court may in its discretion assess reasonable costs,
including reasonable attorneys' fees, against any party litigant in such suit,
having due regard to the merits and good faith of the claims or defenses made by
such party litigant; but to the extent permitted by law the provisions of this
Section 7.13 shall not apply to any suit instituted by the Trustee, to any suit
instituted by any Noteholder or group of Noteholders holding in the aggregate
more than ten percent (10%) in aggregate principal amount of the Outstanding
Notes, or to any suit instituted by any Noteholder for the enforcement of the
payment of the principal of, premium, if any, or interest on any Note on or
after the respective Stated Maturities expressed in such Note (or, in the case
of redemption, on or after the Redemption Date).
SECTION 7.14 Unenforceable Provision Inoperative. To the extent that
any provision of this Article 7 may be invalid or unenforceable under any
applicable law, such provision shall be deemed inoperative and inapplicable and
shall not be included in the terms of this Indenture.
SECTION 7.15 If Enforcement Proceedings Abandoned, Status Quo is
Established. In case the Trustee or any Noteholder shall have proceeded to
enforce any right or remedy under this Indenture, and such proceedings shall
have been discontinued or abandoned for any reason, or shall have been
determined adversely to the Trustee or to such Noteholder, then and in every
such case the Company, the Trustee and the Noteholders, subject to any
determination in such proceedings, shall be restored severally and respectively
to their former positions and rights hereunder, and thereafter all rights,
remedies and powers of the Trustee and Noteholders shall continue as if no such
proceedings had been instituted.
SECTION 7.16 Noteholders May Waive Certain Defaults. The holders of not
less than the required percentage in principal amount of the Outstanding Notes
specified in Section 7.3 may on behalf of the holders of all the Notes waive any
past Default hereunder and its consequences, except a Default:
(A) in the payment of the principal of (or premium, if any) or
interest on any Note, or
(B) in respect of a covenant or provision hereof which under
Article 13 cannot be modified or amended without the consent of the
holder of each Outstanding Note affected.
Upon any such waiver, such Default shall cease to exist, and any Event
of Default arising therefrom shall be deemed to have been cured, for every
purpose of this Indenture; but no such waiver shall extend to any subsequent or
other Default or impair any right consequent thereon.
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ARTICLE 8
EVIDENCE OF RIGHTS OF NOTEHOLDERS
AND OWNERSHIP OF NOTES
SECTION 8.1 Evidence of Ownership of Definitive Notes and Temporary
Notes Issued Hereunder in Registered Form. Prior to due presentment for
registration of transfer of any Note, the Company, the Trustee, any Note
Registrar, or any agent of the Company or the Trustee may deem and treat the
person in whose name any Note shall be registered at any given time upon the
Note Register as the absolute owner of such Note for the purpose of receiving
any payment of, or on account of, the principal, premium, if any, and interest
on such Note and for all other purposes whether or not such Note be overdue; and
neither the Company nor the Trustee, nor any agent of the Company or the Trustee
shall be bound by any notice to the contrary. All such payments made in
accordance with the provisions of this Section 8.1 shall be valid, and, to the
extent of the sum or sums so paid, effectual to satisfy and discharge the
liability for moneys payable upon any such Note.
ARTICLE 9
CONSOLIDATION, MERGER AND SALE
SECTION 9.1 Company May Merge, Consolidate, Etc., Upon Certain Terms.
The Company covenants that it will not merge or consolidate with any other
corporation or sell or convey all or substantially all of its assets to any
person, firm or corporation, unless (i) either the Company shall be the
continuing corporation, or the successor corporation (if other than the Company)
shall be a corporation organized under the laws of the United States of America
or any State thereof and shall expressly assume the due and punctual payment of
the principal of and premium, if any, and interest on all the Notes, according
to their tenor, and the due and punctual performance and observance of all of
the covenants and conditions of this Indenture to be performed by the Company,
by supplemental indenture satisfactory to the Trustee, executed and delivered to
the Trustee by such corporation, and (ii) the Company or such successor
corporation, as the case may be, shall not, immediately after such merger or
consolidation, or such sale or conveyance, be in default in the performance of
any such covenant or condition.
SECTION 9.2 Successor Corporation to be Substituted. In case of any
such consolidation, merger, sale or conveyance, and upon any such assumption by
the successor corporation, such successor corporation shall succeed to and be
substituted for the Company, with the same effect as if it had been named herein
as the Company, and the Company shall thereupon be released from all obligations
hereunder and under the Notes and the Company as the predecessor corporation may
thereupon or at any time thereafter be dissolved, wound up or liquidated. Such
successor corporation thereupon may cause to be signed, and may issue either in
its own name or in the name of Litchfield Financial Corporation any or all of
the Notes issuable hereunder which theretofore shall not have been signed by the
Company and delivered to the Trustee; and, upon the order of such successor
corporation instead of the Company and subject to all the terms, conditions and
limitations in this
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Indenture prescribed, the Trustee shall authenticate and shall deliver any Notes
which previously shall have been signed and delivered by the officers of the
Company to the Trustee for authentication, and any Notes which such successor
corporation thereafter shall cause to be signed and delivered to the Trustee for
that purpose.
In case of any such consolidation, merger, sale or conveyance such
changes in phraseology and form (but not in substance) may be made in the Notes
thereafter to be issued as may be appropriate.
SECTION 9.3. Opinion of Counsel. The Trustee, subject to TIA Section
315(a), (c) and (d) and to Section 10.5, may receive an Opinion of Counsel as
conclusive evidence that any such consolidation, merger, sale or conveyance and
any such assumption complies with the provisions of this Article 9.
SECTION 9.4 Article 9 Subject to Provision of Section 6.5.
Notwithstanding the foregoing, the transactions contemplated by Article 9 are
subject to the redemption provisions of Section 6.5, if applicable.
ARTICLE 10
CONCERNING THE TRUSTEE
SECTION 10.1 Requirement of Corporate Trustee, Eligibility. There shall
at all times be a Trustee hereunder which shall be a banking corporation
organized and doing business under the laws of the United States of America or
of any State, authorized under such laws to exercise corporate trust powers,
having a combined capital and surplus of at least $60,000,000 subject to
supervision or examination by Federal or State authority, or any affiliate of
such a banking corporation, which also is a corporation organized and doing
business under the laws of the United States of America or of any State,
authorized under such laws to exercise corporate trust powers, having a combined
capital and surplus of at least $10,000,000 subject to supervision or
examination by Federal or State authority. If such corporation publishes reports
of condition at least annually, pursuant to law or to the requirements of the
aforesaid supervising or examining authority, then for the purposes of this
Section 10.1 the combined capital and surplus of the Trustee shall be deemed to
be its combined capital and surplus as set forth in its most recent report of
condition so published. If at any time the Trustee shall cease to be eligible in
accordance with the provisions of this Section 10.1, it shall resign immediately
in the manner and with the effect hereinafter specified in this Article 10.
SECTION 10.2 Acceptance of Trust. The Trustee accepts the trusts hereby
created upon the terms and conditions in this Indenture specified, to all of
which the Company and the holders of Outstanding Notes by their acceptance
thereof agree:
(A) Except during the continuance of an Event of Default,
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(1) the Trustee undertakes to perform such duties and
only such duties as are specifically set forth in this
Indenture, and no implied covenants or obligations shall be
read into this Indenture against the Trustee, and;
(2) in the absence of bad faith on its part, the
Trustee may conclusively rely, as to the truth of the
statements and the correctness of the opinions expressed
therein, upon certificates or opinions furnished to it, and
conforming to the requirements of this Indenture; but in the
case of any such certificates or opinions which by any
provision hereof are specifically required to be furnished to
the Trustee, the Trustee shall be under a duty to examine the
same to determine whether or not they conform to the
requirements of this Indenture.
(B) In case an Event of Default has occurred and is
continuing, the Trustee shall exercise such of the rights and powers
vested in it by this Indenture, and use the same degree of care and
skill in their exercise, as a prudent man would exercise or use under
the circumstances in the conduct of his own affairs.
(C) No provision of this Indenture shall be construed to
relieve the Trustee from liability for its own negligent action, its
own negligent failure to act, or its own willful misconduct, except
that
(1) this subdivision shall not be construed to limit
the effect of subdivision (A) of this Section;
(2) the Trustee shall not be liable for any error of
judgment made in good faith by a Responsible Officer unless it
shall be proved that the Trustee was negligent in ascertaining
pertinent facts;
(3) the Trustee shall not be liable with respect to
any action taken or omitted to be taken by it in good faith in
accordance with the direction of the holders of not less than
a majority in principal amount of the Notes at the time
Outstanding relating to the time, method, and place of
conducting any proceeding for any remedy available to the
Trustee, or exercising any trust or power conferred upon the
Trustee under this Indenture;
(4) none of the provisions contained in this
Indenture shall require the Trustee to expend or risk its own
funds or otherwise incur any financial liability in the
performance of any of its duties hereunder or in the exercise
of any of its rights or powers, if there is reasonable ground
for believing that the repayment of such funds or adequate
indemnity against such risk or liability is not reasonably
assured to it; and
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(5) the permissive right of the Trustee to do things
enumerated in this Indenture shall not be construed as a
duty, and the Trustee shall not be answerable for other than
its negligence or willful default.
(D) Whether or not therein expressly so provided, every
provision of this Indenture relating to the conduct or affecting the
liability of or affording protection to the Trustee shall be subject to
the provisions of this Section.
(E) The Trustee shall not be required to take notice or be
deemed to have notice of any Event of Default hereunder except failure
by the Company to cause to be made any of the payments to the Trustee
required to be made to the Trustee by any provision hereof or failure
by the Company to file with the Trustee any document required by this
Indenture to be so filed subsequent to the issuance of the Notes,
unless the Trustee shall be specifically notified in writing of such
Default by the Company or by the holders of at least twenty-five
percent (25%) in aggregate principal amount of Outstanding Notes, and
all notices or other instruments required by this Indenture to be
delivered to the Trustee must, in order to be effective, be delivered
at the main office of the Trustee, and in the absence of such notice so
delivered the Trustee may conclusively assume there is no Event of
Default except as aforesaid.
SECTION 10.3 Disclaimer. The recitals contained herein and in the Notes
(except as contained in the Trustee's certificate of authentication) shall be
taken as the statements of the Company, and the Trustee assumes no
responsibility for the correctness of the same. The Trustee makes no
representations as to the validity or sufficiency of this Indenture or of the
Notes issued hereunder. The Trustee shall be under no responsibility or duty
with respect to the disposition of any Notes authenticated and delivered
hereunder or the application or use of the proceeds thereof or the application
or use of any moneys paid to the Company under any of the provisions hereof.
SECTION 10.4 Trustee May Own Notes. The Trustee, the paying agent, the
Note Registrar or any Note Co-Registrar or other agent of the Company or of the
Trustee may become the owner or pledgee of Notes and, subject to Sections 10.9
and 10.10, if operative, may otherwise deal with the Company with the same
rights it would have if it were not a Trustee, paying agent, Note Registrar,
Note Co-Registrar or other agent of the Company or of the Trustee.
SECTION 10.5 Trustee May Rely on Certificates, Etc. To the extent
permitted by Section 10.2 hereof:
(A) The Trustee may rely and shall be protected in acting upon
any resolution, certificate, opinion, notice, request, consent, order,
appraisal, report, Note or other paper or document believed by it to be
genuine and to have been signed or presented by the proper party or
parties;
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(B) The Trustee may consult with counsel, who may be of
counsel to the Company, and the written advice of such counsel or any
Opinion of Counsel shall be full and complete authorization and
protection in respect of any action taken or suffered by it hereunder
in good faith and in reliance thereon;
(C) Any request or direction of the Company mentioned herein
shall be sufficiently evidenced by a Company Request or Company Order
and any resolution of the Board of Directors may be sufficiently
evidenced by a Certified Resolution;
(D) Whenever in the administration of this Indenture the
Trustee shall deem it desirable that a matter be proved or established
prior to taking, suffering or omitting any action hereunder, the
Trustee (unless other evidence be herein specifically prescribed) may,
in the absence of bad faith, rely upon an Officers' Certificate;
(E) The Trustee shall be under no obligation to exercise any
of the rights or powers vested in it by this Indenture at the request
or direction of any of the holders pursuant to this Indenture, unless
such holders shall have offered to the Trustee reasonable security or
indemnity against the costs, expenses and liabilities which might be
incurred, as the case may be, in compliance with such request or
direction;
(F) The Trustee shall not be bound to make any investigation
into the facts or matters stated in any such document set forth in
Section 10.5(A), but the Trustee, in its exercise of discretion, may
make such further inquiry or investigation into such facts or matters
as may seem necessary, and, if the Trustee shall determine to make such
further inquiry or investigation, the Trustee shall be entitled to
examine the books, records and premises of the Company, personally or
by agent or attorney;
(G) The Trustee may execute any of the trusts or powers
hereunder or perform any duties hereunder either directly or by or
through agents or attorneys and the Trustee shall not be responsible
for any misconduct or negligence on the part of any agent or attorney
appointed with due care hereunder; and
(H) The Trustee shall not be required to give any debenture or
surety in respect of the execution of the said trusts and powers or
otherwise in respect of the premises.
SECTION 10.6 Money Held in Trust Not Required to be Segregated. Subject
to the provisions of Section 15.2 hereof, all moneys received by the Trustee
hereunder or in respect of the Notes shall, until used or applied as herein
provided, be held in trust for the purposes for which they were received, but
need not be segregated from other funds except to the extent required by law.
Any interest allowed on or income or other return arising from any such
moneys shall be paid from time to time to the Company upon Company Order in
accordance with the provisions hereof; provided, however, that the Trustee shall
not be required to pay to the Company any interest earned
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by the Trustee on funds received by the Trustee too late in the Trustee's
banking day to permit the Trustee to invest such funds overnight for the account
of the Company and provided, further, that no such interest, income or return
shall be paid to the Company during any period during which an Event of Default
has occurred and is continuing.
SECTION 10.7 Compensation, Reimbursement, Indemnity, Security. The
Company covenants and agrees to pay to the Trustee from time to time, and the
Trustee shall be entitled to receive, reasonable compensation for all services
rendered by it in the execution of the trusts hereby created and in the exercise
and performance of all services rendered hereunder, which compensation shall not
be limited by any provision of law in regard to the compensation of a trustee of
an express trust, and except as otherwise expressly provided herein, the Company
will upon request of the Trustee reimburse the Trustee for all reasonable
advances made or incurred by the Trustee in accordance with any provision of
this Indenture (including the reasonable compensation and the expenses and
disbursements of its agents and counsel, except any such expense or disbursement
as may be attributable to negligence or bad faith). The Company also covenants
to indemnify the Trustee for, and to hold it harmless against, any loss,
liability or expense incurred without negligence or bad faith on the part of the
Trustee arising out of or in connection with the acceptance or administration of
this trust, including the costs and expenses of defending against any claim or
liability in connection with the exercise or performance of any of the powers or
duties hereunder.
If, and to the extent that the Trustee and its counsel and other agents
do not receive compensation for services rendered, reimbursements of its
advances, expenses and disbursements, or indemnity, as herein provided, as the
result of allowances made in any reorganization, bankruptcy, receivership,
liquidation or other proceeding or by any plan of reorganization or readjustment
of obligations of the Company or the Trustee shall be entitled, in priority to
the holders of the Notes, to receive any distributions of any securities,
dividends or other disbursements which would otherwise be made to the holders of
Notes in any such proceeding or proceedings and the Trustee is hereby
constituted and appointed, irrevocably, the attorney in fact for the holders of
the Notes and each of them to collect and receive, in their name, place and
stead, such distributions, dividends or other disbursements, to deduct therefrom
the amounts due to the Trustee its counsel and other agents on account of
services rendered, advances, expenses, and disbursements made or incurred, or
indemnity, and to pay and distribute the balance, pro rata, to the holders of
the Notes.
SECTION 10.8 Conflict of Interest.
(A) If the Trustee has or shall acquire any conflicting
interest, as defined in this Section 10.8, the Trustee shall within
ninety (90) days after ascertaining that there is such conflicting
interest, either eliminate such conflicting interest or resign in the
manner and with the effect hereinafter specified in this Article 10.
(B) In the event that the Trustee shall fail to comply with
the provisions of the preceding subdivision (A) of this Section 10.8,
the Trustee shall within ten (10) days after
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the expiration of such ninety (90) day period transmit notice of such
failure to the Noteholders, in the manner and to the extent provided in
Section 4.3.
(C) For the purposes of this Section, the Trustee shall
be deemed to have a conflicting interest if there is an Event of
Default (as defined in Section 7.1 but exclusive of any grace period or
notice requirement) and:
(1) the Trustee is trustee under another indenture
under which any other securities, or certificates of interest
or participation in any other securities, of the Company, are
outstanding unless such other indenture is a collateral trust
indenture under which the only collateral consists of Notes
issued under this Indenture; provided, however, that there
shall be excluded from the operation of this clause (1) any
indenture under which other securities, or certificates of
interest or participation in other securities, of the Company
are outstanding, if the Company shall have sustained the
burden of proving, on application to the Securities and
Exchange Commission and after opportunity for hearing thereon,
that trusteeship under this Indenture and such other indenture
is not so likely to involve a material conflict of interest as
to make it necessary in the public interest or for the
protection of investors to disqualify the Trustee from acting
as such under this Indenture or such other indenture or
indentures;
(2) the Trustee or any of the directors or executive
officers of the Trustee is an obligor upon the Notes or an
underwriter for the Company;
(3) the Trustee directly or indirectly controls or is
directly or indirectly controlled by or is under direct or
indirect common control with the Company or an underwriter for
the Company;
(4) the Trustee or any of the directors or executive
officers of the Trustee is a director, officer, employee,
appointee or representative of the Company, or of an
underwriter (other than the Trustee) for the Company who is
currently engaged in the business of underwriting, except that
(a) one (1) individual may be a director or an executive
officer, or both, of the Trustee and a director or an
executive officer, or both, of the Company, but may not be at
the same time an executive officer of the Trustee and the
Company; (b) if and so long as the number of directors of any
Trustee in office is more than nine (9), one (1) additional
individual may be a director or an executive officer, or both,
of such Trustee and a director of the Company; and (c) the
Trustee may be designated by the Company or by an underwriter
for the Company to act in the capacity of transfer agent,
registrar, custodian, paying agent, fiscal agent, escrow agent
or depositary or in any other similar capacity or, subject to
the provisions of paragraph (1) of this subdivision (C), to
act as trustee, whether under an indenture or otherwise;
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(5) ten percent (10%) or more of the voting
securities of the Trustee is beneficially owned either by the
Company or by any director, or executive officer thereof, or
twenty percent (20%) or more of such voting securities is
beneficially owned, collectively, by any two (2) or more of
such persons; or ten percent (10%) or more of the voting
securities of the Trustee is beneficially owned either by an
underwriter for the Company or by any director or executive
officer thereof, or is beneficially owned, collectively, by
any two (2) or more such persons;
(6) the Trustee is the beneficial owner of or holds
as collateral security for an obligation which is in default
(as hereinafter in this subdivision (C) of this Section 10.8
defined), (a) five percent (5%) or more of the voting
securities or ten percent (10%) or more of any other class of
security of the Company, not including the Notes issued under
this Indenture and securities issued under any other indenture
under which the Trustee is also trustee, or (b) ten percent
(10%) or more of any class of security of an underwriter for
the Company;
(7) the Trustee is the beneficial owner of, or holds
as collateral security for an obligation which is in default
(as hereinafter in this subdivision (C) of this Section 10.8
defined), five percent (5%) or more of the voting securities
of any person who, to the knowledge of the Trustee owns ten
percent (10%) or more of the voting securities of, or controls
directly or indirectly or is under direct or indirect common
control with, the Company;
(8) the Trustee is the beneficial owner of or holds
as collateral security for an obligation which is in default
(as hereinafter in this subdivision (C) of this Section 10.8
defined), ten percent (10%) or more of any class of security
of any person who, to the knowledge of the Trustee owns fifty
percent (50%) or more of the voting securities of the Company;
(9) the Trustee owns on January 1 in any calendar
year in the capacity of executor, administrator, testamentary
or inter vivos trustee, guardian, committee or conservator, or
in any other similar capacity, an aggregate of twenty-five
percent (25%) or more of the voting securities or of any class
of security, of any person, the beneficial ownership of a
specified percentage of which would have constituted a
conflicting interest under clause (6), (7) or (8) of this
subdivision (C). As to any such securities of which the
Trustee acquired ownership through becoming executor,
administrator or testamentary trustee of an estate which
included it, the provisions of the preceding sentence shall
not apply for a period of two (2) years from the date of such
acquisition, to the extent that such securities included in
such estate do not exceed twenty-five percent (25%) of such
voting securities or twenty-five percent (25%) of any such
class of security. Promptly after January 1, in each calendar
year, the Trustee shall make a check of its or his holdings of
such securities in any of the above-mentioned capacities as of
January 1. If the Company fails to make payment
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in full of principal or interest upon the Notes when and as
the same becomes due and payable, and such failure continues
for thirty (30) days thereafter, the Trustee shall make a
prompt check of its holdings of such securities in any of the
above-mentioned capacities as of the date of the expiration of
such thirty-day period and after such date, notwithstanding
the foregoing provisions of this clause (9), all such
securities so held by the Trustee with sole or joint control
over such securities vested in it or him, shall, but only so
long as such failure shall continue, be considered as though
beneficially owned by the Trustee for the purposes of clauses
(6), (7) and (8) of this subdivision (C); or
(10) the Trustee shall be or become a creditor of the
Company (except under the circumstances described under paragraphs (1),
(3), (4), (5) or (6) of Section 311(b) of the TIA.
The specifications of percentages in clauses (5) to (9), inclusive, of
this subdivision (C) shall not be construed as indicating that the ownership of
such percentages of the securities of a person is or is not necessary or
sufficient to constitute direct or indirect control for the purposes of clause
(3) or (7) of this subdivision (C).
For the purposes of clauses (6), (7), (8) and (9) of this subdivision
(C) only, (a) the terms "security" and "securities" shall include only such
securities as are generally known as corporate securities, but shall not include
any note or other evidence of indebtedness issued to evidence an obligation to
repay moneys lent to a person by one or more banks, trust companies or banking
firms or any certificate of interest or participation in any such note or
evidence of indebtedness, (b) an obligation shall be deemed to be in default
when a default in payment of principal shall have continued for thirty (30) days
or more and shall not have been cured; and (c) the Trustee shall not be deemed
to be the owner or holder of (i) any security which it holds as collateral
security (as trustee or otherwise) for an obligation which is not in default as
above defined, or (ii) any security which it holds as collateral security under
this Indenture, irrespective of any Default hereunder, or (iii) any security
which it holds as agent for collection, or as custodian, escrow agent or
depositary, or in any similar representative capacity.
(D) The percentages of voting securities and other securities
specified in this Section 10.8 shall be calculated in accordance with
the following provisions:
(1) A specified percentage of the voting securities
of the Trustee, the Company or any other person referred to in
this Section 10.8 (each of whom is referred to as a "person"
in this subdivision (D)) means such amount of the outstanding
voting securities of such person as entitles the holder or
holders thereof to cast such specified percentage of the
aggregate votes which the holders of all the outstanding
voting securities of such person are entitled to cast in the
direction or management of the affairs of such person.
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(2) A specified percentage of a class of securities
of a person means such percentage of the aggregate amount of
securities of the class outstanding.
(3) The term "amount," when used in regard to
securities, means the principal amount if relating to
evidences of indebtedness, the number of shares if relating to
capital shares, and the number of units if relating to any
other kind of security.
(4) The term "outstanding" means issued and not held
by or for the account of the issuer. The following securities
shall not be deemed outstanding within the meaning of this
definition:
(a) securities of an issuer held in a sinking
fund relating to securities of the issuer of the same
class;
(b) securities of an issuer held in a sinking
fund relating to another class of securities of the
issuer, if the obligation evidenced by such other
class of securities is not in default as to
principal or interest or otherwise;
(c) securities pledged by the issuer thereof as
security for an obligation of the issuer not in
default as to principal or interest or otherwise; or
(d) securities held in escrow if placed in escrow
by the issuer thereof;
provided, however, that any voting securities of an issuer shall be
deemed outstanding if any person other than the issuer is entitled to
exercise the voting rights thereof.
(5) A security shall be deemed to be of the same
class as another security if both securities confer upon the
holder or holders thereof substantially the same rights and
privileges; provided, however, that, in the case of secured
evidences of indebtedness, all of which are issued under a
single indenture, differences in the interest rates or
maturity dates of various series thereof shall not be deemed
sufficient to constitute such series different classes; and
provided, further, that, in the case of unsecured evidences of
indebtedness, differences in the interest rates or maturity
dates thereof shall not be deemed sufficient to constitute
them securities of different classes, whether or not they are
issued under a single indenture.
(E) For the purposes of this Section 10.8, unless otherwise
provided:
(1) The term "underwriter" when used with reference
to the Company means every person, who, within three (3) years
prior to the time as of which the
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determination is made, has purchased from the Company with a
view to, or has offered or has sold for the Company in
connection with, the distribution of any security of the
Company outstanding at such time, or has participated or has
had a direct or indirect participation in any such
undertaking, or has participated or has had a participation in
the direct or indirect underwriting of any such undertaking,
but such term shall not include a person whose interest was
limited to a commission from an underwriter or dealer not in
excess of the usual and customary distributors' or sellers'
commission.
(2) The term "director" means any director of a
corporation, or any individual performing similar functions
with respect to any organization whether incorporated or
unincorporated.
(3) The term "person" means an individual, a
corporation, a partnership, an association, a joint-stock
company, a trust, an unincorporated organization, or a
government or political subdivision thereof. As used in this
clause, the term "trust" shall include only a trust where the
interest or interests of the beneficiary or beneficiaries are
evidenced by a security.
(4) The term "voting security" means any security
presently entitling the owner or holder thereof to vote in the
direction or management of the affairs of a person, or any
security issued under or pursuant to any trust, agreement or
arrangement whereby a trustee or trustees or agent or agents
for the owner or holder of such security are presently
entitled to vote in the direction or management of the affairs
of a person.
(5) The term "Company" means any obligor upon the
Notes.
(6) The term "executive officer" means the president,
every vice president, every trust officer, the cashier, the
secretary, and the treasurer of a corporation, and any
individual customarily performing similar functions with
respect to any organization whether incorporated or
unincorporated, but shall not include the chairman of the
board of directors.
SECTION 10.9 Resignation, Removal, Appointment of Successor Trustee.
(A) No resignation or removal of the Trustee, and no
appointment of a successor Trustee pursuant to this Article 10 shall
become effective until the acceptance of appointment by the successor
Trustee under this Section 10.9 and Section 10.10.
(B) The Trustee may resign at any time by giving written
notice thereof to the Company. If an instrument of acceptance by a
successor Trustee shall not have been delivered to the Trustee within
thirty (30) days after the giving of such notice of resignation,
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the resigning Trustee may petition any court of competent jurisdiction
for the appointment of a successor Trustee.
(C) The Trustee may be removed at any time by Act of the
holders of a majority in principal amount of the Outstanding Notes,
delivered to the Trustee and to the Company.
(D) If at any time:
(1) the Trustee shall fail to comply with Section
10.8 after written request therefor by the Company or by any
Noteholder who has been a bona fide holder of a Note for at
least six (6) months, or
(2) the Trustee shall cease to be eligible under
Section 10.1 and shall fail to resign after written request
therefor by the Company or by any such Noteholder, or
(3) the Trustee shall become incapable of acting or
shall be adjudged a bankrupt or insolvent or a receiver of the
Trustee or of its property shall be appointed or any public
officer shall take charge or control of the Trustee or of its
property or affairs for the purpose of rehabilitation,
conservation or liquidation,
then, in any such case, (a) the Company by a Certified Resolution may remove the
Trustee or (b) subject to Section 7.13, any Noteholder who has been a bona fide
holder of a Note for at least six (6) months may, on behalf of himself and all
others similarly situated, petition any court of competent jurisdiction for the
removal of the Trustee and the appointment of a successor Trustee.
(E) If the Trustee shall resign, be removed or become
incapable of acting, or if a vacancy shall occur in the office of the
Trustee for any cause, the Company, by a Certified Resolution, shall
promptly appoint a successor Trustee. If, within one (1) year after
such resignation, removal or incapability, or the occurrence of such
vacancy, a successor Trustee shall be appointed by Act of the holders
of a majority in principal amount of the Outstanding Notes delivered to
the Company and the retiring Trustee, the successor Trustee so
appointed shall, forthwith upon its acceptance of such appointment,
become the successor Trustee and supersede the successor Trustee
appointed by the Company. If no successor Trustee shall have been so
appointed by the Company or the Noteholders and accepted appointment in
the manner hereinafter provided, any Noteholder who has been a bona
fide holder of a Note for at least six months may, on behalf of himself
and all others similarly situated, petition any court of competent
jurisdiction for the appointment of a successor Trustee.
(F) The Company shall give notice of each resignation and
each removal of a Trustee and each appointment of a successor Trustee
by mailing written notice of such event by first-class mail, postage
prepaid, to the holders of Notes in the manner and to the extent
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provided in of Section 4.3. Each notice shall include the name of the
successor Trustee and address of the main office of the successor
Trustee.
SECTION 10.10 Acceptance by Successor Trustee. Every successor Trustee
appointed hereunder shall execute, acknowledge and deliver to the Company and to
the retiring Trustee an instrument accepting such appointment, and thereupon the
resignation or removal of the retiring Trustee shall become effective and such
successor Trustee, without any further act, deed or conveyance, shall become
vested with all the rights, powers, trusts and duties of the retiring Trustee;
but, on request of the Company or the respective successor Trustee, the
respective retiring Trustee shall, upon payment of its charges, execute and
deliver an instrument transferring to such respective successor Trustee all the
rights, powers and trusts of the retiring respective Trustee, and shall duly
assign, transfer and deliver to such respective successor Trustee all property
and money held by such respective retiring Trustee hereunder, subject
nevertheless to its lien, if any, provided for in Section 10.7. Upon request of
any such respective successor Trustee, the Company shall execute any and all
instruments for more fully and certainly vesting in and confirming to such
successor Trustee all such rights, powers and trusts.
No successor Trustee shall accept its appointment unless at the time of
such acceptance such successor Trustee shall be qualified and eligible under
this Article 10 to the extent operative.
SECTION 10.11.
(A) Notice, Etc. on Behalf of Company Delivered to Trustee.
Except as herein expressly provided to the contrary, any notice,
request, or other writing by or on behalf of the Company delivered to
the Trustee shall be deemed to have been delivered to the Trustee
hereunder as effectually as if delivered to each of them.
(B) Cash, Securities, Etc. to be Held by Trustee.
Notwithstanding anything herein contained to the contrary, all cash
collected by, or payable to, the Trustee pursuant to this Indenture
shall be paid to and deposited with, and all stocks, debentures and
other obligations or securities shall be held by, the Trustee, except
as otherwise required by law.
Whenever any moneys, debentures, shares of stock or other
obligations are, under any provisions of this Indenture, paid or
delivered to or deposited with the Trustee, the same shall be deemed
for all purposes hereunder to be part of the security for the Notes
issued hereunder, but nothing contained in this Section 10.11 shall be
deemed to affect or impair any power or right conferred by any
provision of this Indenture upon the Trustee to apply, disburse or
otherwise act or deal with respect to any moneys, debentures, shares of
stock or other obligations received or held by it as aforesaid.
SECTION 10.12 Merger or Consolidation of Trustee. Any corporation into
which the Trustee may be merged or with which it may be consolidated or any
corporation resulting from any merger, conversion, or consolidation to which the
Trustee shall be a party, or any corporation
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succeeding to all or substantially all the corporate trust business of the
Trustee shall be the successor of the Trustee hereunder provided such
corporation shall be otherwise qualified and eligible under this Article 10, to
the extent operative, without the execution or filing of any paper or the
performance of any further act on the part of any other parties hereto, anything
herein to the contrary notwithstanding. In case any of the Notes shall have been
authenticated, but not delivered, by the Trustee then in office, any such
successor to the Trustee by merger, conversion or consolidation may adopt such
authentication and deliver the said Notes so authenticated with the same effect
as if such successor Trustee had itself authenticated such Notes.
SECTION 10.13 Authenticating Agent. As long as any of the Notes remain
Outstanding, upon a Company Order there shall be an authenticating agent
appointed by the Trustee for such period as the Company shall elect, to act on
behalf of the Trustee and subject to its direction in connection with the
authentication of the Notes as set forth in this Indenture. Such authenticating
agent shall at all times be a banking corporation organized and doing business
under the laws of the United States or any State, authorized under such laws to
exercise corporate trust powers, having a combined capital and surplus of at
least $60,000,000 subject to supervision or examination by Federal or State
authority, or an affiliate of such banking corporation, which is also a
corporation organized and doing business under the laws of the United States or
of any State, authorized under such laws to exercise corporate trust powers,
having a combined capital and surplus of at least $10,000,000 subject to
supervision or examination by Federal or State authority. If such corporation
publishes reports of condition at least annually, pursuant to law or to the
requirements of the aforesaid supervising or examining authority, then for the
purposes of this Section 10.13 the combined capital and surplus of such
corporation shall be deemed to be its combined capital and surplus as set forth
in its most recent report of condition so published.
Whenever reference is made in this Indenture to the authentication and
delivery of Notes by the Trustee or the Trustee's certificate of authentication,
such reference shall be deemed to include authentication and delivery on behalf
of the Trustee by an authenticating agent and a certificate of authentication
executed on behalf of the Trustee by an authenticating agent.
Any corporation in which any authenticating agent may be merged or
converted or with which it may be consolidated, or any corporation resulting
from any merger, conversion or consolidation to which any authenticating agent
shall be a party, or any corporation succeeding to the corporate agency business
of any authenticating agent, shall continue to be the authenticating agent
without the execution or filing of any paper or any further act on the part of
the Trustee or the authenticating agent.
Any authenticating agent may at any time resign by giving written
notice of resignation to the Trustee and to the Company. The Trustee may at any
time terminate the agency of any authenticating agent by giving written notice
of termination to such authenticating agent and to the Company. Upon receiving
such a notice of resignation or upon such a termination, or in case at any time
any authenticating agent shall cease to be eligible in accordance with the
provisions of this Section 10.13, the Trustee promptly shall appoint a successor
authenticating agent, shall give written
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notice of such appointment to the Company and shall mail notice of such
appointment to all holders of Notes as the names and addresses of such holders
appear on the Note Register. Any successor authenticating agent upon acceptance
of its appointment hereunder shall become vested with all the rights, powers,
duties and responsibilities of its predecessor hereunder. No successor
authenticating agent shall be appointed unless eligible under the provisions of
this Section 10.13.
The Trustee agrees to pay to the authenticating agent from time to time
reasonable compensation for its services, and the Trustee shall be entitled to
be reimbursed for such payments from the Company subject to the provisions of
Section 10.7. The provisions of Section 8.1, 10.3 and 10.4 shall be applicable
to any authenticating agent.
ARTICLE 11
DISCHARGE OF INDENTURE
SECTION 11.1 Acknowledgement of Discharge. This Indenture shall
cease to be of further effect (except as to any surviving rights of registration
of transfer or exchange of Notes herein expressly provided for and rights to
receive payments of interest thereon), and the Trustee, on demand of and at the
expense of the Company, shall execute proper instruments acknowledging
satisfaction, cancellation and discharge of this Indenture, when
(A) either
(1) all Notes theretofore authenticated and delivered
other than (a) Notes which have been destroyed, lost or stolen
and which have been replaced or paid as provided in Section
2.10, and (b) Notes for whose payment money has theretofore
been deposited in trust or segregated and held in trust by the
Company and thereafter repaid to the Company or discharged
from such trust, as provided in Section 15.2 have been
delivered to the Trustee for cancellation; or
(2) all such Notes not theretofore delivered to the
Trustee for cancellation
(a) have become due and payable, or
(b) will become due and payable at their Stated
Maturity within one (1) year, or
(c) are to be called for redemption within one
(1) year under arrangements satisfactory to the
Trustee for the giving of notice of redemption by the
Trustee in the name, and at the expense, of the
Company,
and the Company, in the case of (a), (b) or (c) above, has
deposited or caused to be deposited with the Trustee, as trust
funds in trust for the purpose, an amount
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sufficient to pay and discharge the entire indebtedness on
such Notes not theretofore delivered to the Trustee for
cancellation, for principal, and premium, if any, and interest
to the date of such deposit (in the case of Notes which have
become due and payable), or to the Stated Maturity or
Redemption Date, as the case may be;
(B) the Company has paid or caused to be paid all other sums
payable hereunder by the Company; and
(C) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel each stating that all conditions
precedent herein provided for relating to the satisfaction and
discharge of this Indenture have been complied with.
Notwithstanding the satisfaction and discharge of this Indenture the
obligations of the Company to the Trustee under Section 10.7 shall survive.
SECTION 11.2 Money Held in Trust. All money deposited with the Trustee
pursuant to Section 11.1 shall be held in trust and applied by it, in accordance
with the provisions of the Notes and this Indenture, to the payment, either
directly or through any paying agent (including the Company acting as its own
paying agent), as the Trustee may determine, to the persons entitled thereto, of
the principal, and premium, if any, and interest for whose payment such money
has been deposited with the Trustee; but such money need not be segregated from
other funds except to the extent required by law. The Trustee shall give notice
in the name and at the expense of the Company of the immediate availability of
the money deposited with the Trustee pursuant to Section 11.1 to the persons
entitled to such money.
ARTICLE 12
MEETING OF NOTEHOLDERS
SECTION 12.1 Purposes for Which Meetings May be Called. A meeting of
the Noteholders may be called at any time and from time to time pursuant to the
provisions of this Article 12 for any of the following purposes:
(A) To give any notice to the Company or to the Trustee, or to
give any directions to the Trustee, or to consent to the waiving of any
Event of Default hereunder and its consequences, or to take any other
action authorized to be taken by the Noteholders pursuant to any of the
provisions of Article 2;
(B) To remove the Trustee and appoint a successor trustee
pursuant to any of the provisions of Article 10;
(C) To consent to the execution of an indenture or indentures
supplemental hereto pursuant to the provisions of Article 13; or
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(D) To take any other action authorized to be taken by or on
behalf of Noteholders of any specified aggregate principal amount of
the Notes under any other provisions of this Indenture, or authorized
or permitted by law.
SECTION 12.2 Call of Meetings by Trustee; Generally. Meetings of
Noteholders may be held at such place or places and at such time or times in any
place of payment as the Trustee or, in case of its failure to act, the Company
or the Noteholders calling the meeting, shall from time to time determine.
SECTION 12.3 Call of Meetings by Trustee; Notice. The Trustee may at
any time call a meeting of the Noteholders to take any action specified in
Section 12.1, to be held at such time and at such place designated in Section
12.2 as the Trustee shall determine. Notice of every meeting of the Noteholders,
setting forth the time and place of such meeting and in general terms the action
proposed to be taken at such meeting, and specifying each series of Notes which
would be affected by the proposed action, shall be mailed by the Trustee at the
expense of the Company, first class postage prepaid, to the Noteholders at their
last addresses as they shall appear upon the Note Register, not less than twenty
(20) nor more than one hundred twenty (120) days prior to the date fixed for the
meeting. Any defect in said notice shall not, however, in any way impair or
affect the validity of any such meeting.
The Trustee may in its discretion determine, subject to the meaning of
the term "affected" as set forth in Section 13.2, whether or not Notes of any
particular series would be affected by action proposed to be taken at a meeting
and any such determination shall be conclusive upon the holders of Notes of such
series and all other series. Subject to the provisions of Section 10.2, the
Trustee shall not be liable for any such determination made in good faith.
Any meeting of the Noteholders shall be valid without notice if
Noteholders, holding all Notes then Outstanding, which would be affected by the
action proposed to be undertaken, are present in person or by proxy or have
waived notice before or after the meeting by Noteholders, and if the Company and
the Trustee are either present by duly authorized representatives or have,
before or after the meeting, waived notice.
In case at any time the Company, pursuant to a Certified Resolution, or
Noteholders holding at least ten percent (10%) in aggregate principal amount of
the Notes then Outstanding, which would be affected by the action proposed to be
undertaken, shall have requested the Trustee to call a meeting of the
Noteholders to take any action authorized by Section 12.1, by written request
setting forth in reasonable detail the action proposed to be taken at the
meeting, and the Trustee shall not have mailed the notice of such meeting within
twenty (20) days after receipt of such request, then the Company or Noteholders
holding the amount above specified may determine the time and the place for such
meeting and may call such meeting for such purpose by giving notice thereof in
the manner provided in this Section 12.3.
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SECTION 12.4 Meetings, Notice and Entitlement to be Present. Only
Noteholders holding Notes, which would be affected by the action proposed to be
undertaken, and persons appointed by an instrument in writing as proxy for such
a Noteholder by such a Noteholder are entitled to notice of and to vote at any
meeting of the Noteholders. The only persons who shall be entitled to be present
or to speak at any meeting of the Noteholders shall be the persons entitled to
vote at such meeting and their counsel, any representatives of the Trustee and
its counsel, and any representatives of the Company and its counsel.
SECTION 12.5 Regulations May be Made by Trustee. Notwithstanding any
other provisions of this Indenture, the Trustee may make such reasonable
regulations as it may deem advisable for any meeting of the Noteholders, in
regard to proof of the holding of Notes and of the appointment of proxies, and
in regard to the appointment and duties of inspectors of votes, the submission
and examination of proxies, certificates and other evidence of the right to
vote, and such other matters concerning the conduct of the meeting as it shall
deem appropriate.
Such regulations (A) may provide for the closing of the Note Register
for such period as the Trustee may deem necessary or (B) may fix a record and
time for determining the record Noteholders of the Notes entitled to vote at
such meeting. All Noteholders seeking to attend or vote at a meeting in person
or by proxy must, if required by any authorized representative of the Trustee or
the Company or by any other Noteholder, produce the Notes claimed to be owned or
represented at such meeting, and every one seeking to attend or vote shall, if
required as aforesaid, produce such further proof of Note ownership or personal
identity as shall be satisfactory to the authorized representative of the
Trustee, or if none be present then to the inspectors of votes hereinafter
provided for.
The Trustee shall, by an instrument in writing, appoint a temporary
chairman of the meeting, unless the meeting shall have been called by the
Company or by the Noteholders as provided in Section 12.3, in which case the
Company or the Noteholders calling the meeting, as the case may be, shall in
like manner appoint a temporary chairman. A permanent chairman and a permanent
secretary of the meeting may be elected by vote of Noteholders holding a
majority in principal amount of the Notes represented at the meeting and
entitled to vote.
At any meeting each Noteholder or proxy shall be entitled to one vote
for each $1,000 principal amount of Notes then Outstanding owned by such
Noteholder or represented by such proxy; provided, however, that no vote shall
be cast or counted at any meeting in respect of any Notes challenged as not
Outstanding and ruled by the temporary or permanent chairman of the meeting to
be not Outstanding. The temporary or permanent chairman of the meeting shall
have no right to vote other than by virtue of Notes held by him or instruments
in writing as aforesaid duly designating him as the person to vote on behalf of
other Noteholders.
At any meeting of Noteholders, the presence of persons holding or
representing Notes in an aggregate principal amount sufficient under the
appropriate provision of this Indenture to take action upon the business for the
transaction of which such meeting was called shall constitute a quorum.
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Any meeting of holders duly called pursuant to Section 12.3 may be adjourned
from time to time by vote of the holders (or proxies for the holders) of a
majority in aggregate principal amount of the Notes represented at the meeting
and entitled to vote, whether or not a quorum shall be present; and the meeting
may be held as so adjourned without further notice.
SECTION 12.6 Manner of Voting at Meetings and Record to be Kept. The
vote upon any resolution submitted to any meeting of the Noteholders shall be by
written ballots on which shall be subscribed the signatures of the Noteholders
or of their representatives by proxy and the principal amount of the Notes voted
by the ballot. The temporary or permanent chairman of the meeting shall appoint
two (2) inspectors of votes, who shall count all votes cast at the meeting for
or against any resolution and who shall make and file with the secretary of the
meeting their verified written reports in duplicate of all votes cast at the
meeting. A record at least in duplicate of the proceedings of each meeting of
the Noteholders shall be prepared by the secretary of the meeting and there
shall be attached to said record the original reports of the inspectors of votes
on any vote by ballot taken thereat and affidavits by one (1) or more persons
having knowledge of the facts setting forth a copy of the notice of the meeting
and showing that said notice was mailed as provided in Section 12.3. The record
shall be signed and verified by the affidavits of the permanent chairman and
secretary of the meeting and one copy thereof shall be delivered to the Company
and another to the Trustee to be preserved by the Trustee, the latter to have
attached thereto the ballots voted at the meeting.
Any record so signed and verified shall be conclusive evidence of the
matters therein stated.
SECTION 12.7 Evidence of Action by Holders of Specified Percentage of
Notes. Whenever in this Indenture it is provided that the holders of a specified
percentage in aggregate principal amount of the Notes of any series may take any
action (including the making of any demand or request, the giving of any notice,
consent, or waiver or the taking of any other action) the fact that at the time
of taking any such action the holders of such specified percentage have joined
therein may be evidenced (A) by any instrument or any number of instruments of
similar tenor executed by holders in person or by agent or proxy appointed in
writing, or (B) by the record of the holders of Notes voting in favor thereof at
any meeting of holders duly called and held in accordance with the provisions of
this Article 12, or (C) by a combination of such instrument or instruments and
any such record of such a meeting of holders.
SECTION 12.8 Exercise of Right of Trustee or Noteholders May Not be
Hindered or Delayed by Call of Meeting of Noteholders. Nothing in this Article
12 contained shall be deemed or construed to authorize or permit, by reason of
any call of a meeting of the Noteholders or any rights expressly or impliedly
conferred hereunder to make such call, any hindrance or delay in the exercise of
any right or rights conferred upon or reserved to the Trustee or to the
Noteholders under any of the provisions of this Indenture or of the Notes.
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ARTICLE 13
SUPPLEMENTAL INDENTURES
SECTION 13.1 Purposes for Which Supplemental Indentures May be Executed
by Company and Trustee. Without the consent of the holders of any Notes, the
Company, when authorized by a Certified Resolution of its Board of Directors,
and the Trustee may at any time and from time to time, enter into an indenture
or indentures supplemental hereto, in form satisfactory to the Trustee, for one
or more of the following purposes:
(A) To evidence the succession of another corporation to the
Company, or successive successions, and the assumption by the successor
corporation of the covenants, agreements and obligations of the Company
pursuant to Article 9 hereof;
(B) To add to the covenants of the Company such further
covenants for the protection of the Noteholders, to insure the
enforcement of the remedies of the Trustee and Noteholders upon an
Event of Default by the Company, or to surrender any right or power
herein conferred upon the Company as the Board of Directors shall
consider to be necessary for the protection of the Noteholders, and to
make the occurrence and continuance of a default under any of such
additional covenants a Default permitting the enforcement of all or any
of the several remedies provided in this Indenture; provided, however,
that in respect of any such additional covenant, such supplemental
indenture may provide for a particular period of grace after default
(which period may be shorter or longer than that allowed in the case of
other Defaults) or may provide for an immediate enforcement of said
remedy or remedies upon such default or may limit the remedies
available to the Trustee upon such default or may authorize the holders
of not less than a majority in aggregate principal amount of the
Outstanding Notes to waive such default and prescribe limitations on
such rights of waiver; or
(C) To cure any ambiguity or to correct or supplement any
provision contained in this Indenture which may be inconsistent with
any other provision contained herein or in any supplemental indenture,
or to make such other provisions in regard to matters or questions
arising under this Indenture as shall not be inconsistent with the
provisions and purposes of this Indenture, provided any such action
shall not adversely affect the interest of the Noteholders.
Nothing contained in this Article 13 shall affect or limit the right or
obligation of the Company to execute and deliver to the Trustee any instrument
of further assurance or other instrument which elsewhere in this Indenture it is
provided shall be delivered to the Trustee.
The Trustee is hereby authorized and directed to join with the Company
in the execution of any such supplemental indenture, to make any further
appropriate agreements and stipulations which may be herein contained and to
accept the conveyance, transfer and assignment of any property
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thereunder, but the Trustee shall not be obligated to enter into any such
supplemental indenture which, in its opinion, does not afford adequate
protection to the Trustee or adversely affects the Trustee's own rights, duties
or immunities under this Indenture or otherwise or adversely affects the
interests of the Noteholders.
SECTION 13.2 Modification of Indenture by Written Consent of
Noteholders. With the consent (evidenced as provided in Article 12) of the
holders of not less than sixty-six and two-thirds percent (66-2/3%) in aggregate
principal amount of the Notes then Outstanding, by Act of said holders delivered
to the Company and the Trustee, the Company (when authorized by a Certified
Resolution) and the Trustee at any time and from time to time, by entering into
an indenture or indentures supplemental hereto, may modify, alter, add to or
eliminate in any manner (with the approval of any governmental agency if
required by law) any provisions of this Indenture or the rights of the
Noteholders or the rights and obligations of the Company; provided, however,
that no such supplemental indenture shall, without the consent of the holder of
each Outstanding Note affected thereby:
(A) change the Stated Maturity of the principal of, or any
installment of interest on, any Note, or reduce the principal amount
thereof or the rate of interest thereon or any premium payable upon
redemption thereof, or the coin or currency in which, any Note or the
interest thereon is payable, or impair the right to institute suit for
the enforcement of any such payment on or after the Stated Maturity
thereof (or, in the case of redemption, on or after the Redemption
Date), or impair the right to require redemption as set forth in
Section 6.5, or
(B) reduce the percentage(s) of the aggregate principal amount
of Outstanding Notes, the consent of the holders of which is required
for any such supplemental indenture, or the consent of whose holders is
required for any waiver (of compliance with certain provisions of this
Indenture or certain Defaults hereunder and their consequences)
provided for in this Indenture, or
(C) modify any of the provisions of this Section 13.2 or
Section 7.16, except to increase any such percentage or to provide that
certain other provisions of this Indenture cannot be modified or waived
without the consent of the holder of each Note affected thereby.
Notes shall be deemed to be "affected" by a supplemental indenture, if
such supplemental indenture adversely affects or diminishes the rights of
holders thereof against the Company or against the property of the Company. The
Trustee may in the exercise of its discretion, subject to Section 10.2,
determine whether or not any Notes would be affected by any supplemental
indenture and any such determination shall be conclusive upon the holders of all
Notes, whether theretofore or thereafter authenticated and delivered hereunder.
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It shall not be necessary for any Act of Noteholders under this Section
13.2 to approve the particular form of any proposed supplemental indenture, but
it shall be sufficient if such Act shall approve the substance thereof.
Any supplemental indenture authorized by the provisions of this Section
13.2 shall be executed by the Company and the Trustee in accordance with the
terms of Section 13.3.
Promptly after the execution by the Company and the Trustee of any
supplemental indenture pursuant to the provisions of Section 13.3, the Company
shall mail to the holders of the Notes at their last addresses as they shall
appear on the Note Register of the Company a notice setting forth in general
terms the substance of such supplemental indenture. Any failure of the Company
to mail such notice, or any defect therein, shall not, however, in any way
impair or affect the validity of any such supplemental indenture.
SECTION 13.3 Requirements for Execution; Duties and Immunities of
Trustee. Prior to the execution of any supplemental indenture, the Trustee shall
receive a Company Request, accompanied by a Certified Resolution authorizing the
execution of any supplemental indenture pursuant to Section 13.1 or Section
13.2, and, if pursuant to Section 13.2, evidence filed with the Trustee of the
Act of Noteholders as aforesaid.
In executing, or accepting the additional trusts created by, any
supplemental indenture permitted by this Article or the modifications thereby of
the trusts created by this Indenture, the Trustee shall be entitled to receive,
and subject to Section 10.2 shall be fully protected in relying upon, an Opinion
of Counsel stating that the execution of such supplemental indenture is
authorized or permitted by this Indenture and stating such other matters as the
Trustee may reasonably request. The Trustee may, but shall not be obligated to,
enter into any such supplemental indenture which affects the Trustee's rights,
duties or immunities under this Indenture or otherwise.
SECTION 13.4 Supplemental Indentures Part of Indenture. Upon the
execution of any supplemental indenture pursuant to the provisions of this
Article 13, this Indenture shall be, and shall be deemed to be, modified and
amended in accordance therewith and the respective rights, limitations, duties
and obligations under this Indenture of the Company, the Trustee and the
Noteholders, and each of them, shall thereafter be determined, exercised and
enforced hereunder, subject in all respects to such modifications and
amendments, and all the terms and conditions of any such supplemental indenture
shall be, and shall be deemed to be, part of the terms and conditions of this
Indenture for any and all purposes, as if originally contained herein.
SECTION 13.5 Notes Executed After Supplemental Indenture to be Approved
by Trustee. Notes authenticated and delivered after the execution of any
supplemental indenture pursuant to the provisions of this Article 13 may, and
shall if required by the Trustee, bear a notation in form approved by the
Trustee, as to any matter provided for in such supplemental indenture. If the
Company and the Trustee shall so determine, new Notes modified so as to conform,
in the opinion of the Trustee and the Board of Directors of the Company, to any
modification of this Indenture
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contained in any such supplemental indenture, may be prepared by the Company,
authenticated by the Trustee and delivered without expense to the holders of the
Outstanding Notes, upon surrender of such Notes, the new Notes so issued to be
in an aggregate principal amount equal to the aggregate principal amount of
those so surrendered.
SECTION 13.6 Supplemental Indentures Required to Comply with Trust
Indenture Act of 1939. No supplemental indenture shall be entered into pursuant
to any authorization contained in this Indenture which shall not comply with the
provisions of the Trust Indenture Act of 1939 as then in effect.
ARTICLE 14
IMMUNITY OF INCORPORATORS, STOCKHOLDERS,
OFFICERS AND DIRECTORS
SECTION 14.1 Immunity of Certain Persons. No recourse for the payment
of the principal of or premium, if any, or interest on any Note, or for any
claim based thereon or otherwise in respect thereof, and no recourse under or
upon any obligation, covenant or agreement of the Company, contained in this
Indenture or in any supplemental indenture, or in any Note, or because of the
creation of any indebtedness represented thereby, shall be had against any
incorporator, stockholder, officer or director, as such, past, present or
future, of the Company or any successor corporation, either directly or through
the Company or any successor corporation, whether by virtue of any constitution,
statute or rule of law, or by the enforcement of any assessment or penalty or
otherwise; it being expressly understood that all such liability is hereby
expressly waived and released as a condition of, and as a consideration for, the
execution of this Indenture and the issue of the Notes.
ARTICLE 15
MISCELLANEOUS
SECTION 15.1 Benefits Restricted to Parties and to Holders of Notes.
Except as provided herein, nothing in this Indenture, expressed or implied, is
intended, or shall be construed, to confer upon, or to give to, any person other
than the parties hereto and the holders of the Notes Outstanding hereunder any
right, remedy, or claim under or by reason of this Indenture or any covenant,
condition, stipulation, promise or agreement hereof, and all the covenants,
conditions, stipulations, promises and agreements contained in this Indenture by
and on behalf of the Company shall be for the sole and exclusive benefit of the
parties hereto, and of the holders of the Notes Outstanding hereunder.
SECTION 15.2 Deposits for Notes Not Claimed for Specified Period to be
Returned to Company on Demand. Any moneys deposited with the Trustee or any
paying agent, or then held by the Company, in trust for the payment of the
principal of, and premium, if any, or interest on any
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Note and remaining unclaimed for six (6) years after the date upon which the
principal of and premium, if any, or interest on such Notes shall have become
due and payable, shall be paid to the Company upon Company Request, or, if then
held by the Company, shall be discharged from such trust; and the holder shall
thereafter, as an unsecured general creditor, be entitled to look only to the
Company for payment thereof, and all liability of the Trustee or any paying
agent with respect to such trust money, and all liability of the Company as
trustee thereof, shall thereupon cease; provided, however, that, before being
required to make any such payment to the Company, the Trustee, or any paying
agent, may, at the expense of the Company, cause to be published once in a Daily
Newspaper in such areas as the Trustee, or any paying agent, as the case may be,
may deem necessary a notice that such moneys remain unclaimed and that, after a
date named in said notice, the balance of such moneys then unclaimed will be
returned to the Company.
SECTION 15.3 Formal Requirements of Certificates and Opinions
Hereunder.
(A) Each certificate or opinion which is specifically required
by the provisions of this Indenture to be delivered to the Trustee with
respect to compliance with a condition or covenant herein contained
shall include (1) a statement that each person signing such certificate
or opinion has read such covenant or condition; (2) a brief statement
as to the nature and scope of the examination or investigation upon
which the statements or opinions contained in such certificate or
opinions are based; (3) a statement that, in the opinion of each such
person, he has made such examination or investigation as is necessary
to enable him to express an informed opinion as to whether or not such
covenant or condition has been complied with; and (4) a statement as to
whether or not in the opinion of each such person such condition or
covenant has been complied with.
(B) Every request or Application by the Company for action by
the Trustee shall be accompanied by an Officers' Certificate stating
that all conditions precedent, if any, to such action, provided for in
this Indenture (including any covenants compliance with which
constitutes a condition precedent) have been complied with and an
Opinion of Counsel stating that in the opinion of such counsel all
conditions precedent, if any, to such action, provided for in this
Indenture (including any covenants compliance with which constitutes a
condition precedent) have been complied with, except that in the case
of any such request or Application as to which the furnishing of such
documents is specifically required by any provision of this Indenture
relating to such particular request or Application, no additional
certificate or opinion need be furnished.
(C) In any case where several matters are required to be
certified by, or covered by an opinion of, any specified person, it is
not necessary that all such matters be certified by, or covered by the
opinion of, only one such person, or that they be so certified or
covered by only one document, but one such person may certify or give
an opinion with respect to some matters and one or more other such
persons as to other matters, and any such person may certify or give an
opinion as to such matters in one or several documents.
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SECTION 15.4 Evidence of Act of the Noteholders. Any request, demand,
authorization, direction, notice, consent, waiver or other action provided by
this Indenture to be given or taken by Noteholders may be embodied in and
evidenced by one or more instruments of substantially similar tenor signed by
such Noteholders in person or by agent duly appointed in writing; and, except as
herein otherwise expressly provided, such action shall become effective when
such instrument or instruments are delivered to the Trustee, and, where it is
hereby expressly required, to the Company. Such instrument or instruments (and
the action embodied therein and evidenced thereby) are herein sometimes referred
to as the "Act" of the Noteholders signing such instrument or instruments. Proof
of execution of any such instrument or of a writing appointing any such agent,
shall be sufficient for any purpose of this Indenture and (subject to Section
10.2) conclusive in favor of the Trustee and the Company, if made in the manner
provided in this Section.
The fact and date of the execution by any person of any such instrument
or writing may be proved by the affidavit of a witness of such execution or by
the certificate of any notary public or other officer authorized by law to take
acknowledgments of deeds, certifying that the individual signing such instrument
or writing acknowledged to him the execution thereof. Where such execution is by
an officer of a corporation or a member of a partnership, on behalf of such
corporation or partnership, or by a fiduciary, such certificate or affidavit
shall also constitute sufficient proof of his authority. The fact and date of
the execution of any such instrument or writing, or the authority of the person
executing the same, may also be proved in any other manner which the Trustee
deems sufficient.
Any request, demand, authorization, direction, notice, consent, waiver
or other action by the holder of any Note shall bind every future holder to the
same Note and the holder of every Note issued upon the transfer thereof or in
exchange therefor or in lieu thereof, in respect of anything done or suffered to
be done by the Trustee or the Company in reliance thereon, whether or not
notation of such action is made upon such Note.
SECTION 15.5 Parties to Include Successors and Assigns. Subject to the
provisions of Articles 9 and 10 hereof, whenever in this Indenture any of the
parties hereto is named or referred to, such name or reference shall be deemed
to include the successors or assigns of such party, and all the covenants and
agreements in this Indenture contained by or on behalf of the Company or by or
on behalf of the Trustee shall bind and inure to the benefit of the respective
successors and assigns of such parties whether so expressed or not.
SECTION 15.6 In Event of Conflict with Trust Indenture Act of 1939,
Provisions Therein to Control. If any provision of this Indenture limits,
qualifies, or conflicts with another provision of this Indenture required to be
included herein by any of the provisions of the Trust Indenture Act of 1939 such
required provision shall control. Provisions required by said Trust Indenture
Act to be included herein which are not included herein are hereby incorporated
herein by reference to said Trust Indenture Act.
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SECTION 15.7 Request, Notices, Etc. to Trustee. Any request, demand,
authorization, direction, notice, consent, waiver or Act of the Noteholders or
other document provided or permitted by this Indenture to be made upon, given or
furnished to, or filed with:
(A) the Trustee by any Noteholder or by the Company shall be
sufficient for every purpose hereunder if made, given, furnished or
filed in writing to or with the Trustee at its main office, or
(B) the Company by the Trustee or by any Noteholders shall be
sufficient for every purpose hereunder (except as herein otherwise
provided) if in writing and mailed, first-class, postage prepaid, to
the Company addressed to it at 789 Main Road, Stamford, Vermont 05352,
or at any other address previously furnished in writing to the Trustee
by the Company.
SECTION 15.8 Manner of Notice. Where this Indenture provides for
notice to Noteholders of any event, such notice shall be sufficiently given
(unless otherwise herein expressly provided) if in writing and mailed,
first-class, postage prepaid, to each Noteholder affected by such event, at his
address as it appears on the Note Register, not later than the latest date, and
not earlier than the earliest date, prescribed for the giving of such notice. In
any case where notice to Noteholders is given by mail, neither the failure to
mail such notice, nor any defect in any notice so mailed, to any particular
Noteholder shall affect the sufficiency of such notice with respect to other
Noteholders, and any notice which is mailed in the manner herein provided shall
be conclusively presumed to have been duly given.
Where this Indenture provides for notice in any manner, such notice may
be waived in writing by the person entitled to receive such notice, either
before or after the event, and such waiver shall be the equivalent of such
notice. Waivers of notice by Noteholders shall be filed with the Trustee, but
such filing shall not be condition precedent to the validity of any action taken
in reliance upon such waiver.
In case, by reason of the suspension of regular mail service as a
result of a strike, work stoppage or similar activity, it shall be impractical
to mail notice of any event to Noteholders when such notice is required to be
given pursuant to any provision of this Indenture, then any manner of giving
such notice as shall be satisfactory to the Trustee shall be deemed to be a
sufficient giving of such notice.
SECTION 15.9 Severability. In case any provision in this Indenture or
in the Notes shall be invalid, illegal or unenforceable, the validity, legality
and enforceability of the remaining provisions shall not in any way be affected
or impaired thereby.
SECTION 15.10 Payments Due on Days When Banks Closed. In any case where
the date of any Interest Payment Date or Redemption Date, or the Stated Maturity
of any Note, or any date on which any Defaulted Interest is proposed to be paid
or any date on which any other payment is
67
<PAGE> 78
to be made or any action is to be taken shall not be a business day, then
(notwithstanding any other provision of the Notes or this Indenture) payment of
the principal of, and premium, if any, or interest on, any Notes or other
payment or action need not be made or taken on such date, but may be made or
taken on the next succeeding business day with the same force and effect as if
made on the nominal date of any such Interest Payment Date or Redemption Date or
Stated Maturity or date for the payment of Defaulted Interest or date for any
other payment or action, as the case may be, and no interest shall accrue for
the period from and after any such nominal date.
SECTION 15.11 Backup Withholding Forms. The Company shall provide the
Trustee with Backup Withholding Forms prescribed by the Internal Revenue Service
and shall indemnify the Trustee for any penalties, expenses, costs and
liabilities assessed against the Trustee for using improper forms.
SECTION 15.12 Titles of Articles of This Indenture Not Part Thereof.
The titles of the several Articles of this Indenture and the table of contents
shall not be deemed to be any part hereof.
SECTION 15.13 Execution in Counterparts. This Indenture is being
executed in several counterparts, each of which shall for all purposes be deemed
to be an original, and all such counterparts shall together constitute but one
and the same instrument.
SECTION 15.14 Governing Law. This Indenture and each Note issued
hereunder shall be governed by the laws of the Commonwealth of Massachusetts as
to all matters affecting the duties, liabilities, privileges, rights and
obligations of the Noteholders, the Company and the Trustee and any agents of
the foregoing, including but not limited to, matters of validity, construction,
effect and performance.
IN WITNESS WHEREOF, LITCHFIELD FINANCIAL CORPORATION has caused its
name to be hereunto affixed, and this instrument to be signed by its Chairman of
the Board, President or any Vice President and its corporate seal to be affixed
hereto, and the same to be attested by its Clerk or an Assistant Clerk; and
THE BANK OF NEW YORK, in token of its acceptance of the trust hereby
68
<PAGE> 79
created, has caused its corporate name to be hereunto affixed, and this
instrument to be signed and sealed by one of its Vice Presidents and its
corporate seal to be attested by one of its Assistant Secretaries, as of the day
and year first written above.
LITCHFIELD FINANCIAL CORPORATION
ATTEST: By:
-------------------------------------
Chairman of the Board, President
or Vice President
- -------------------------
Assistant Clerk
[Seal]
THE BANK OF NEW YORK
ATTEST: By:
-------------------------------------
Authorized Officer
- -------------------------
Attesting Officer
[Seal]
<PAGE> 1
EXHIBIT 12.1
Litchfield Financial Corporation
Ratio of Earnings to Fixed Charges
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------- -----------
1992 1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Income before income taxes
and extraordinary item 2,448 3,677 4,318 5,515 8,574 3,836 4,919
Interest Expense 629 2,717 3,158 6,138 7,197 3,297 5,042
----------------------------------- ------------
Total 3,077 6,394 7,476 11,653 15,771 7,133 9,961
=================================== ============
Total 3,077 6,394 7,476 11,653 15,771 7,133 9,961
----- ----- ----- ------ ------ ----- -----
Interest Expense 629 2,717 3,158 6,138 7,197 3,297 5,042
Ratio of earnings to fixed
charges 4.89 2.35 2.37 1.90 2.19 2.16 1.98
=================================== ============
</TABLE>
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in
the Registration Statement (Form S-3 No. 333- ) and related Prospectus of
Litchfield Financial Corporation for the registration of $45,000,000 Notes, and
to the incorporation by reference therein of our report dated January 31, 1997,
with respect to the consolidated financial statements of Litchfield Financial
Corporation incorporated by reference in its Annual Report (Form 10-K) for the
year ended December 31, 1996, filed with the Securities and Exchange Commission.
ERNST & YOUNG LLP
Boston, Massachusetts
October 15, 1997
<PAGE> 1
EXHIBIT 25.1
================================================================================
FORM T-1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2) [ ]
--------------------------
THE BANK OF NEW YORK
(Exact name of trustee as specified in its charter)
New York 13-5160382
(State of incorporation (I.R.S. employer
if not a U.S. national bank) identification no.)
48 Wall Street, New York, N.Y. 10286
(Address of principal executive offices) (Zip code)
--------------------------
LITCHFIELD FINANCIAL CORPORATION
(Exact name of obligor as specified in its charter)
Massachusetts 04-3023928
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
789 Main Road
Stamford, Vermont 05352
(Address of principal executive offices) (Zip code)
--------------------------
[ ]% Notes due [2004]
(Title of the indenture securities)
================================================================================
<PAGE> 2
1. General information. Furnish the following information as to the
Trustee:
(a) Name and address of each examining or supervising authority to
which it is subject.
- --------------------------------------------------------------------------------
Name Address
- --------------------------------------------------------------------------------
Superintendent of Banks of the 2 Rector Street, New York,
State of New York N.Y. 10006, and Albany, N.Y.
12203
Federal Reserve Bank of New York 33 Liberty Plaza, New York,
N.Y. 10045
Federal Deposit Insurance Corporation Washington, D.C. 20429
New York Clearing House Association New York, New York 10005
(b) Whether it is authorized to exercise corporate trust powers.
Yes.
2. Affiliations with Obligor.
If the obligor is an affiliate of the trustee, describe each such
affiliation.
None.
16. List of Exhibits.
Exhibits identified in parentheses below, on file with the Commission,
are incorporated herein by reference as an exhibit hereto, pursuant to
Rule 7a-29 under the Trust Indenture Act of 1939 (the "Act") and 17
C.F.R. 229.10(d).
1. A copy of the Organization Certificate of The Bank of New York
(formerly Irving Trust Company) as now in effect, which
contains the authority to commence business and a grant of
powers to exercise corporate trust powers. (Exhibit 1 to
Amendment No. 1 to Form T-1 filed with Registration Statement
No. 33-6215, Exhibits 1a and 1b to Form T-1 filed with
Registration Statement No. 33-21672 and Exhibit 1 to Form T-1
filed with Registration Statement No. 33-29637.)
4. A copy of the existing By-laws of the Trustee. (Exhibit 4 to
Form T-1 filed with Registration Statement No. 33-31019.)
-2-
<PAGE> 3
6. The consent of the Trustee required by Section 321(b) of the
Act. (Exhibit 6 to Form T-1 filed with Registration Statement
No. 33-44051.)
7. A copy of the latest report of condition of the Trustee
published pursuant to law or to the requirements of its
supervising or examining authority.
-3-
<PAGE> 4
SIGNATURE
Pursuant to the requirements of the Act, the Trustee, The Bank of New
York, a corporation organized and existing under the laws of the State of New
York, has duly caused this statement of eligibility to be signed on its behalf
by the undersigned, thereunto duly authorized, all in The City of New York, and
State of New York, on the 14th day of October, 1997.
THE BANK OF NEW YORK
By: /s/ Mary Jane Morrissey
-------------------------------
Name: Mary Jane Morrissey
Title: Vice President
<PAGE> 5
EXHIBIT 7
---------
Consolidated Report of Condition of
THE BANK OF NEW YORK
of 48 Wall Street, New York, N.Y. 10286 And Foreign and Domestic
Subsidiaries, a member of the Federal Reserve System, at the close of business
June 30, 1997, published in accordance with a call made by the Federal Reserve
Bank of this District pursuant to the provisions of the Federal Reserve Act.
Dollar Amounts
ASSETS in Thousands
Cash and balances due from depository
institutions:
Noninterest-bearing balances and
currency and coin .................................... $ 7,769,502
Interest-bearing balances ............................ 1,472,524
Securities:
Held-to-maturity securities .......................... 1,080,234
Available-for-sale securities ........................ 3,046,199
Federal funds sold and Securities purchased
under agreements to resell ............................. 3,193,800
Loans and lease financing
receivables:
Loans and leases, net of unearned
income ............................................. 35,352,045
LESS: Allowance for loan and
lease losses ....................................... 625,042
LESS: Allocated transfer risk
reserve ............................................ 429
Loans and leases, net of unearned
income, allowance, and reserve ..................... 34,726,574
Assets held in trading accounts ........................ 1,611,096
Premises and fixed assets (including
capitalized leases) .................................. 676,729
Other real estate owned ................................ 22,460
Investments in unconsolidated
subsidiaries and associated
companies ............................................ 209,959
Customers' liability to this bank on
acceptances outstanding .............................. 1,357,731
Intangible assets ...................................... 720,883
Other assets ........................................... 1,627,267
-----------
Total assets ........................................... $57,514,958
===========
LIABILITIES
Deposits:
In domestic offices .................................. $26,875,596
Noninterest-bearing .................................. 11,213,657
Interest-bearing ..................................... 15,661,939
In foreign offices, Edge and
Agreement subsidiaries, and IBFs ..................... 16,334,270
Noninterest-bearing .................................. 596,369
Interest-bearing ..................................... 15,737,901
Federal funds purchased and Securities
sold under agreements to repurchase .................. 1,583,157
Demand notes issued to the U.S. ........................
Treasury ............................................. 303,000
Trading liabilities .................................... 1,308,173
Other borrowed money:
With remaining maturity of one year
or less ............................................ 2,383,570
With remaining maturity of more than
one year through three years ........................... 0
With remaining maturity of more than
three years ........................................ 20,679
Bank's liability on acceptances executed
and outstanding ...................................... 1,377,244
Subordinated notes and debentures ...................... 1,018,940
Other liabilities ...................................... 1,732,792
-----------
Total liabilities ...................................... 52,937,421
-----------
EQUITY CAPITAL
Common stock ........................................... 1,135,284
Surplus ................................................ 731,319
Undivided profits and capital
reserves ............................................. 2,721,258
Net unrealized holding gains
(losses) on available-for-sale
securities ........................................... 1,948
Cumulative foreign currency transla-
tion adjustments ..................................... (12,272)
-----------
Total equity capital ................................... 4,577,537
-----------
Total liabilities and equity
capital .............................................. $57,514,958
===========
I, Robert E. Keilman, Senior Vice President and Comptroller of the
above-named bank do hereby declare that this Report of Condition has been
prepared in conformance with the instructions issued by the Board of Governors
of the Federal Reserve System and is true to the best of my knowledge and
belief.
Robert E. Keilman
We, the undersigned directors, attest to the correctness of this Report
of Condition and declare that it has been examined by us and to the best of our
knowledge and belief has been prepared in conformance with the instructions
issued by the Board of Governors of the Federal Reserve System and is true and
correct.
)
Alan R. Griffith )
J. Carter Bacot )
Thomas A. Renyi ) Directors
----------------------
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1996
<PERIOD-END> JUN-30-1997 JUN-30-1997 DEC-31-1996
<CASH> 28,425 28,425 24,480
<SECURITIES> 27,759 27,759 18,004
<RECEIVABLES> 112,225 112,225 92,256
<ALLOWANCES> 5,541 5,541 4,528
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 0 0 0
<PP&E> 0 0 0
<DEPRECIATION> 0 0 0
<TOTAL-ASSETS> 175,310 175,310 153,800
<CURRENT-LIABILITIES> 0 0 0
<BONDS> 66,382 66,382 46,995
0 0 54
0 0 0
<COMMON> 56 56 0
<OTHER-SE> 47,547 47,547 42,394
<TOTAL-LIABILITY-AND-EQUITY> 175,310 175,310 153,800
<SALES> 0 0 0
<TOTAL-REVENUES> 7,691 14,098 24,183
<CGS> 0 0 0
<TOTAL-COSTS> 0 0 0
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 300 735 1,954
<INTEREST-EXPENSE> 2,648 5,042 7,197
<INCOME-PRETAX> 3,057 4,919 8,574
<INCOME-TAX> 1,177 1,894 3,301
<INCOME-CONTINUING> 1,880 3,025 5,273
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 1,880 3,025 5,273
<EPS-PRIMARY> .32 .52 .93
<EPS-DILUTED> .32 .52 0
</TABLE>
