<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 21, 1998
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>
430 MAIN STREET, WILLIAMSTOWN, MA 01267, (413)458-1000
(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
430 MAIN STREET, WILLIAMSTOWN, MASSACHUSETTS 01267
(413)458-1000
------------------------
COPIES TO:
<TABLE>
<S> <C>
JAMES WESTRA, ESQ. BOB F. THOMPSON, ESQ.
HUTCHINS, WHEELER & DITTMAR BASS, BERRY & SIMS PLC
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>
=================================================================================================================================
AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES TO BE OFFERING PRICE AGGREGATE AMOUNT OF
TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value......... 1,322,500 $23.00 $30,417,500 $8,974
=================================================================================================================================
</TABLE>
(1) Includes 172,500 shares subject to the Underwriters' over-allotment option.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933 based on the
average of the high and low sales prices of the Common Stock reported in the
consolidated transaction reporting system on May 19, 1998.
------------------------
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 MAY , 1998
PROSPECTUS
1,150,000 SHARES
[LITCHFIELD LOGO]
COMMON STOCK
Of the 1,150,000 shares of Common Stock offered hereby, 1,000,000 shares
are being sold by Litchfield Financial Corporation (the "Company") and 150,000
shares are being sold by certain selling stockholders (the "Selling
Stockholders"). See "Principal and Selling Stockholders." The Company will not
receive any of the proceeds from the sale of shares by the Selling Stockholders.
The Common Stock is quoted on The Nasdaq National Market under the symbol
"LTCH". On May , 1998, the last reported sale price for the Common Stock, as
reported on the Nasdaq National Market, was $ per share. See "Market
Price of and Dividends on Common Stock."
------------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 9.
------------------------
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 PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)(3) SELLING STOCKHOLDERS
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share............ $ $ $ $
- -------------------------------------------------------------------------------------------------------------------------
Total................ $ $ $ $
=========================================================================================================================
</TABLE>
(1) The Company and the Selling Stockholders have 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 $265,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
an aggregate of 172,500 additional shares of Common Stock on the same terms
as set forth above, solely to cover over-allotments, if any. If all these
shares are purchased by the Underwriters, the total Price to Public will be
$ , the total Underwriting Discount will be $ , the total
Proceeds to the Company will be $ and the total Proceeds to the
Selling Stockholders will be $ . See "Underwriting."
------------------------
The shares of Common Stock are being offered by the Underwriters, subject
to prior sale, when, as and if delivered to and accepted by the Underwriters and
subject to their rights to reject orders in whole or in part. It is expected
that delivery of the certificates for the shares of Common Stock will be made in
Boston, Massachusetts on or about , 1998.
------------------------
TUCKER ANTHONY
INCORPORATED
MCDONALD & COMPANY
SECURITIES, INC.
J.C. BRADFORD & CO.
THE DATE OF THIS PROSPECTUS IS MAY , 1998.
<PAGE> 3
Map showing location of collateral securing loans in the Serviced Portfolio
This map shows the percentage distribution by state of the principal amount
of the Serviced Portfolio as of March 31, 1998 based on the location of the
collateral securing the loans. In addition to the locations shown on the map,
approximately 1.0% of the principal amount of the Serviced Portfolio is secured
by collateral located in the Caribbean Islands.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK
OFFERED HEREBY, INCLUDING OVER-ALLOTMENTS, STABILIZING TRANSACTIONS, SYNDICATE
SHORT COVERING TRANSACTIONS AND PENALTY BIDS. SUCH TRANSACTIONS, IF COMMENCED,
MAY BE DISCONTINUED AT ANY TIME. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN
PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY ON THE
NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE
"UNDERWRITING."
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.
Unless otherwise indicated, the information set forth herein does not reflect
the exercise of the Underwriters' over-allotment option and has been adjusted to
reflect a 3-for-2 stock split in 1993 and a 5% stock dividend in each of 1994,
1995 and 1996.
THE COMPANY
Litchfield Financial Corporation (the "Company") is a specialty finance
company that provides financing to creditworthy borrowers for assets not
typically financed by banks. The Company provides such financing by purchasing
consumer loans and by making loans to businesses secured by consumer receivables
or other assets.
The Company purchases consumer loans (the "Purchased Loans") consisting
primarily of loans to purchasers of rural and vacation properties ("Land Loans")
and vacation ownership interests popularly known as timeshare interests ("VOI
Loans"). The Company also provides financing to rural land dealers, timeshare
resort developers and other finance companies secured by receivables
("Hypothecation Loans") and to dealers and developers for the acquisition and
development of rural land and timeshare resorts ("A&D Loans"). In addition, the
Company purchases other loans, such as consumer home equity loans and consumer
construction loans, and provides financing to other businesses secured by
receivables or other assets ("Other Loans").
Land Loans are typically secured by one to twenty acre rural parcels. Land
Loans are secured by property located in 35 states, predominantly in the
southern United States. VOI Loans typically 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
Purchased 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 Purchased Loan is repaid.
The Company extends Hypothecation Loans to land dealers, resort developers
and other finance companies secured by receivables. Hypothecation Loans
typically have advance rates of 75% to 90% of the current balance of the pledged
receivables and variable interest rates based on the prime rate plus 2% to 4%.
The Company also makes A&D Loans to land dealers and resort developers for
the acquisition and development of rural land and timeshare resorts in order to
finance additional receivables generated by the A&D Loans. At the time the
Company makes A&D Loans, it typically receives an exclusive right 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%.
The principal sources of the Company's revenues are (i) interest and fees
on loans, (ii) gains on sales 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 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 March 31, 1998,
the Company had sold $265.0 million of Land Loans, $54.1 million of VOI Loans
and $47.6 million of Hypothecation Loans since its inception.
As of March 31, 1998, the Company serviced loans with a principal balance
of $338.5 million (the "Serviced Portfolio"), of which the Company owned $154.3
million. As of March 31, 1998 the Serviced Portfolio was comprised of 52.5%
Purchased Loans, 32.3% Hypothecation Loans, 12.8% A&D Loans and 2.4% Other
Loans. The average principal balance of the Land Loans in the Serviced Portfolio
was $13,200 with a weighted average remaining maturity of 12.1 years and a
weighted average interest rate of 12.0%. Approximately 82.5% of such loans had
fixed rates of interest. The average principal balance of the VOI Loans in the
Serviced Portfolio was $3,500 with a weighted average remaining maturity of 3.8
years and a weighted average
3
<PAGE> 5
interest rate of 14.6%. Approximately 96.3% of such loans had fixed rates of
interest. The average principal balance of the Hypothecation Loans in the
Serviced Portfolio was $1,401,000 with a weighted average interest rate of 11.5%
and an average advance rate of 84.0%. Approximately 88.5% of such loans had
variable rates of interest. The average principal balance of the A&D Loans in
the Serviced Portfolio was $545,000 with a weighted average interest rate of
11.6% and an average loan to value ratio of 71%. Approximately 86.1% of such
loans had variable rates of interest. As of March 31, 1998, loans 30 days or
more past due which are not covered by dealer/developer reserves or guarantees
and not included in other real estate owned were 1.20% of the Serviced
Portfolio. For the three months ended March 31, 1998, annualized net charge-offs
were .66% of the average Serviced Portfolio.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company..................... 1,000,000 Shares
Common Stock offered by the Selling Stockholders........ 150,000 Shares
Common Stock to be outstanding after the Offering....... 6,707,751 Shares(1)
Use of proceeds......................................... To repay certain amounts outstanding
under the Company's lines of credit
and for general corporate purposes.
See "Use of Proceeds."
Nasdaq National Market symbol........................... LTCH
</TABLE>
- ---------------
(1) Excludes 752,030 shares issuable upon exercise of outstanding stock options
under the Company's 1990 Stock Option Plan at May 4, 1998, of which options
for 553,138 shares were exercisable as of such date, and 12,864 shares
issuable upon exercise of outstanding stock options under the Company's 1995
Stock Option Plan for Non-Employee Directors at May 4, 1998, of which
options for 12,864 shares were exercisable as of such date. See "Principal
and Selling Stockholders."
4
<PAGE> 6
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------------------------- ---------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA(1):
Revenues:
Interest and fees on loans.... $ 4,330 $ 5,669 $ 11,392 $ 14,789 $ 19,374 $ 4,546 $ 5,233
Gain on sale of loans......... 4,550 4,847 5,161 7,331 8,564 1,504 2,227
Servicing and other fee
income...................... 501 459 908 1,576 1,753 357 493
--------- --------- --------- --------- --------- --------- ---------
Total revenues......... 9,381 10,975 17,461 23,696 29,691 6,407 7,953
--------- --------- --------- --------- --------- --------- ---------
Expenses:
Interest expense.............. 2,717 3,158 6,138 7,197 10,675 2,394 2,997
Salaries and employee
benefits.................... 1,350 1,776 2,798 2,824 3,399 813 1,133
Other operating expenses...... 1,017 1,164 2,120 3,147 3,480 903 953
Provision for loan losses..... 620 559 890 1,954 1,400 435 350
--------- --------- --------- --------- --------- --------- ---------
Total expenses......... 5,704 6,657 11,946 15,122 18,954 4,545 5,433
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes and
extraordinary item............ 3,677 4,318 5,515 8,574 10,737 1,862 2,520
Provision for income taxes...... 1,426 1,619 2,066 3,301 4,134 717 970
--------- --------- --------- --------- --------- --------- ---------
Income before extraordinary
item.......................... 2,251 2,699 3,449 5,273 6,603 1,145 1,550
Extraordinary item(2)........... -- (126) -- -- (220) -- --
--------- --------- --------- --------- --------- --------- ---------
Net income............. $ 2,251 $ 2,573 $ 3,449 $ 5,273 $ 6,383 $ 1,145 $ 1,550
========= ========= ========= ========= ========= ========= =========
Basic per common share amounts:
Income before extraordinary
item........................ $ .55 $ .66 $ .80 $ .97 $ 1.19 $ .21 $ .27
Extraordinary item............ -- (.03) -- -- (.04) -- --
--------- --------- --------- --------- --------- --------- ---------
Net income per share... $ .55 $ .63 $ .80 $ .97 $ 1.15 $ .21 $ .27
========= ========= ========= ========= ========= ========= =========
Basic weighted average number of
shares outstanding............ 4,065,688 4,116,684 4,315,469 5,441,636 5,572,465 5,446,679 5,659,756
Diluted per common share
amounts:
Income before extraordinary
item........................ $ .53 $ .63 $ .76 $ .93 $ 1.12 $ .20 $ .26
Extraordinary item............ -- (.03) -- -- (.04) -- --
--------- --------- --------- --------- --------- --------- ---------
Net income per share... $ .53 $ .60 $ .76 $ .93 $ 1.08 $ .20 $ .26
========= ========= ========= ========= ========= ========= =========
Diluted weighted average number
of shares outstanding......... 4,216,151 4,282,884 4,524,607 5,682,152 5,909,432 5,792,078 6,020,158
Cash dividends declared per
common share.................. $ .02 $ .03 $ .04 $ .05 $ .06 $ -- $ --
OTHER STATEMENT OF INCOME DATA:
Income before extraordinary item
as a percentage of revenues... 24.0% 24.6% 19.8% 22.3% 22.3% 17.9% 19.5%
Return on average assets(3)..... 5.0% 4.6% 3.7% 4.0% 3.8% 2.8% 3.1%
Return on average equity(3)..... 17.0% 17.2% 16.6% 13.3% 14.1% 10.6% 11.8%
</TABLE>
- ---------------
(1) Certain amounts in the 1993 through 1996 financial information have been
restated to conform to the 1997 and 1998 presentation.
(2) Reflects loss on early extinguishment of a portion of the Notes issued by
the Company in 1992 (the "1992 Notes"), net of applicable tax benefit of
$76,000, for 1994 and of the remainder of the 1992 Notes, net of applicable
tax benefit of $138,000, for 1997.
(3) The returns on average assets and average equity for the three month
periods are calculated on an annualized basis. Calculations are based on
income before extraordinary item. Historically, the Company's returns
generally have been lower in the first quarter than for the respective
fiscal year as a whole.
5
<PAGE> 7
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------- MARCH 31,
1993 1994 1995 1996 1997 1998
------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA(4):
Total assets............................ $54,444 $ 63,487 $112,459 $152,689 $186,790 $210,176
Loans held for sale(5).................. 5,931 11,094 14,380 12,260 16,366 16,246
Other loans(5).......................... 10,306 15,790 33,613 79,996 86,307 116,816
Retained interests in loan sales(5)..... 11,764 11,996 22,594 28,912 30,299 29,937
Secured debt............................ -- 5,823 9,836 43,727 5,387 27,650
Unsecured debt.......................... 32,302 29,896 47,401 46,995 105,347 105,347
Stockholders' equity.................... 14,722 16,610 37,396 42,448 52,071 53,643
OTHER FINANCIAL DATA:
Loans purchased and originated(6)....... $42,410 $ 59,798 $121,046 $133,750 $184,660 $ 67,493
Loans sold(6)........................... 28,099 40,116 65,115 54,936 98,747 18,502
Loans participated(6)................... -- -- -- -- 6,936 1,452
Serviced Portfolio(7)................... 84,360 105,013 176,650 242,445 304,102 338,502
Loans serviced for others............... 59,720 72,731 111,117 129,619 179,790 184,157
Dealer/developer reserves............... 4,926 6,575 9,644 10,628 10,655 10,616
Allowance for loan losses(8)............ 1,064 1,264 3,715 4,528 5,877 6,164
Allowance ratio(9)...................... 1.26% 1.20% 2.10% 1.87% 1.93% 1.82%
Delinquency ratio(10)................... .61% .93% 1.73% 1.34% 1.20% 1.20%
Net charge-off ratio(6)(11)............. .69% .38% .67% .94% .74% .66%
Non-performing asset ratio(12).......... 1.48% 1.02% 1.35% 1.57% 1.03% .84%
</TABLE>
- ---------------
(4) 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 1993 through 1996 financial statements have been reclassified to
conform with the 1997 and 1998 presentation: "Subordinated passthrough
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."
(5) Amount indicated is net of allowance for loan losses.
(6) During the relevant period.
(7) The Serviced Portfolio consists of the principal amount of loans serviced
by or on behalf of the Company, except loans participated without recourse
to the Company.
(8) The allowance for loan losses includes the recourse obligation on retained
interests in loan sales.
(9) The allowance ratio is the allowance for loan losses divided by the amount
of the Serviced Portfolio.
(10) The delinquency ratio is the amount of delinquent loans divided by the
amount of the Serviced Portfolio. 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.
(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 March 31, 1998 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 which are not
covered by dealer/developer reserves or guarantees and other real estate
owned by the amount of the Serviced Portfolio.
6
<PAGE> 8
THE COMPANY
Litchfield Financial Corporation (the "Company") is a specialty finance
company that provides financing to creditworthy borrowers for assets not
typically financed by banks. The Company provides such financing by purchasing
consumer loans and by making loans to businesses secured by consumer receivables
or other assets.
The Company purchases consumer loans (the "Purchased Loans") consisting
primarily of loans to purchasers of rural and vacation properties ("Land Loans")
and vacation ownership interests popularly known as timeshare interests ("VOI
Loans"). The Company also provides financing to rural land dealers, timeshare
resort developers and other finance companies secured by receivables
("Hypothecation Loans") and to dealers and developers for the acquisition and
development of rural land and timeshare resorts ("A&D Loans"). In addition, the
Company purchases other loans, such as consumer home equity loans and consumer
construction loans, and provides financing to other businesses secured by
receivables or other assets ("Other Loans").
Land Loans are typically secured by one to twenty acre rural parcels. Land
Loans are secured by property located in 35 states, predominantly in the
southern United States. VOI Loans typically 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 extends Hypothecation Loans to land dealers, resort developers
and other finance companies secured by receivables. Hypothecation Loans
typically have advance rates of 75% to 90% of the current balance of the pledged
receivables and variable interest rates based on the prime rate plus 2% to 4%.
The Company also makes A&D Loans to land dealers and resort developers for
the acquisition and development of rural land and timeshare resorts in order to
finance additional receivables generated by the A&D Loans. At the time the
Company makes A&D Loans, it typically receives an exclusive right 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%.
The principal sources of the Company's revenues are (i) interest and fees
on loans, (ii) gains on sales 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 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 March 31, 1998,
the Company had sold $265.0 million of Land Loans, $54.1 million of VOI Loans
and $47.6 million of Hypothecation Loans since its inception.
As of March 31, 1998, the Company serviced loans with a principal balance
of $338.5 million (the "Serviced Portfolio"), of which the Company owned $154.3
million. As of March 31, 1998 the Serviced Portfolio was comprised of 52.5%
Purchased Loans, 32.3% Hypothecation Loans, 12.8% A&D Loans and 2.4% Other
Loans. The average principal balance of the Land Loans in the Serviced Portfolio
was $13,200 with a weighted average remaining maturity of 12.1 years and a
weighted average interest rate of 12.0%. Approximately 82.5% of such loans had
fixed rates of interest. The average principal balance of the VOI Loans in the
Serviced Portfolio was $3,500 with a weighted average remaining maturity of 3.8
years and a weighted average interest rate of 14.6%. Approximately 96.3% of such
loans had fixed rates of interest. The average principal balance of the
Hypothecation Loans in the Serviced Portfolio was $1,401,000 with a weighted
average interest rate of 11.5% and an average advance rate of 84.0%.
Approximately 88.5% of such loans had variable rates of interest. The average
principal balance of the A&D Loans in the Serviced Portfolio was $545,000 with a
weighted average interest rate of 11.6% and an average loan to value ratio of
71%. Approximately 86.1% of such loans had variable rates of interest. As of
March 31, 1998, loans 30 days or more past due which are not covered by
dealer/developer reserves or guarantees and not included in other real estate
owned were 1.20% of the Serviced Portfolio. For the three months ended March 31,
1998, annualized net charge-offs were .66% of the average Serviced Portfolio.
7
<PAGE> 9
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 finance companies secured by receivables. The
Company also provides A&D Loans in order to have the opportunity 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.
In 1997 and 1998, the Company has expanded its financing of Hypothecation Loans
to other finance companies secured by other types of receivables, which to date
have included construction loans, tax lien certificates and healthcare
receivables. The Company expects to continue to expand its specialty finance
company lending. These loans may be larger than the Company's average
Hypothecation Loans and may provide the Company an option to take an equity
position in the borrower. 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.
8
<PAGE> 10
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the shares
of Common Stock 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 $117.5 million with six financial
institutions as of March 31, 1998. Outstanding borrowings on these lines of
credit were $23,125,000 at March 31, 1998. To date, the Company has issued
$122.8 million of long-term debt and has publicly issued $25.6 million of equity
securities.
The Company also has a $125.0 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. The
Company expects to extend the term of the facility to June 2001 prior to its
expiration and to increase the amount of the facility to $150.0 million subject
to substantially the same terms and conditions. As of March 31, 1998, the
outstanding balance of the sold or pledged loans securing this facility was
$116.6 million. Outstanding borrowings on this facility were $97,000 at March
31, 1998. 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 March 31, 1998, the outstanding
aggregate balance of the sold or pledged loans under the facility was $13.3
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, lack of liquidity could have a
material adverse impact on its operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
Impact of Economic Cycles. The business risks associated with the
Company's business become more acute in an economic slowdown. Asset values
generally decrease and 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."
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 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 finance business include
commercial banks, credit unions, thrift institutions, industrial banks and other
finance companies, many of which have considerably greater financial, technical
and marketing resources than the Company. There can be no assurance that the
Company will not face increased competition from existing or new financial
institutions and finance companies. In addition, the Company may enter new lines
of business
9
<PAGE> 11
that may be highly competitive and may have competitors with greater financial
resources than the Company. See "Business -- Competition."
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 effect 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 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 income 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.
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 receivables. These loans may be subject to additional risk because the
Company has relatively less experience with these other types of receivables
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."
10
<PAGE> 12
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 March 31, 1998, the Company had outstanding contingent repurchase obligations
in the aggregate amount of approximately $9.9 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 effect on the Company's operations and financial condition. The Company
expects to resume certain customer service and collection functions during the
third quarter of 1998.
Year 2000 Compliance. The Company uses and is dependent upon a significant
number of computer software programs and operating systems to conduct its
business. The Company believes that substantially all of its operating systems
are year 2000 compliant. To the extent that the Company relies on outside
software vendors, year 2000 compliance matters will not be within the Company's
direct control. In addition, the Company has relationships with vendors,
customers and other third parties that rely on computer software that may not be
year 2000 compliant. There can be no assurance that year 2000 compliance
failures by such third parties will not have a material adverse effect on the
Company's results of operations.
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 its activities are 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, purchase 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 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
Richard A. Stratton, its Chief Executive Officer and President.
11
<PAGE> 13
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, 1997.
(b) The Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998.
(c) The definitive Proxy Statement dated March 24, 1998 for the Annual
Meeting of the Company's stockholders held on April 24, 1998.
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, Chief Financial Officer and Treasurer, Litchfield Financial
Corporation, 430 Main Street, Williamstown, MA 01267 (telephone number:
413-458-1000).
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.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Stock offered
hereby are estimated to be $ 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 repay certain amounts outstanding
under the Company's lines of credit and for general corporate purposes. The
Company will not receive any proceeds from the sale of Common Stock by the
Selling Stockholders. (It is anticipated that the Company will, however, receive
an aggregate of approximately $110,000 from a Selling Stockholder upon the
exercise of stock options in connection with the sale of shares offered hereby.)
12
<PAGE> 14
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1998, and as adjusted to reflect the sale of 1,000,000 of the shares
of Common Stock offered hereby by the Company and the issuance of 40,000 shares
of Common Stock (being offered hereby by a Selling Stockholder) upon the
exercise of outstanding options by a Selling Stockholder, and the application of
the net proceeds as set forth under "Use of Proceeds."
<TABLE>
<CAPTION>
MARCH 31, 1998
----------------------------
ACTUAL AS ADJUSTED
------------ ------------
<S> <C> <C>
Long-term debt:
Notes..................................................... $105,347,000 $105,347,000
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,
5,660,790 shares issued and outstanding (6,707,751
shares issued and outstanding, as adjusted)(1)(2)...... 56,000
Additional paid in capital................................ 36,727,000
Net unrealized gain on retained interests in loan sales... 1,047,000 1,047,000
Retained earnings......................................... 15,813,000 15,813,000
------------ ------------
Total stockholders' equity............................. 53,643,000
------------ ------------
Total capitalization(3)........................... $158,990,000 $
============ ============
</TABLE>
- ---------------
(1) Excludes 752,030 shares issuable upon exercise of outstanding stock options
under the Company's 1990 Stock Option Plan at May 4, 1998, of which options
for 553,138 shares were exercisable as of such date, and 12,864 shares
issuable upon exercise of outstanding stock options under the Company's 1995
Stock Option Plan for Non-Employee Directors at May 4, 1998, of which
options for 12,864 shares were exercisable as of such date. See "Principal
and Selling Stockholders".
(2) At the Company's Annual Meeting held on April 24, 1998, the stockholders
voted to increase the authorized shares of common stock from 8,000,000 to
12,000,000.
(3) Total capitalization includes total stockholders' equity and total long-term
debt.
13
<PAGE> 15
MARKET PRICE OF AND DIVIDENDS ON COMMON STOCK
The following table sets forth for the periods indicated the high and low
sale prices of the Common Stock as reported by The Nasdaq Stock Market's
National Market under the symbol "LTCH." All share prices have been adjusted for
a 5% stock dividend in each of 1996 and 1995.
On May 20, 1998, the last reported sale price of the Common Stock as
reported by The Nasdaq Stock Market's National Market was $23 3/4 per share. As
of March 12, 1998, the approximate number of holders of record of the Common
Stock was 1,100.
<TABLE>
<CAPTION>
HIGH LOW DIVIDENDS
---- --- ---------
<S> <C> <C> <C>
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
1997
1st Quarter................................................. 16 3/4 14 --
2nd Quarter................................................. 17 13 7/8 --
3rd Quarter................................................. 21 3/4 16 3/8 --
4th Quarter................................................. 21 1/2 16 1/2 $.06
1998
1st Quarter................................................. 24 17 1/2 --
2nd Quarter (through May 20, 1998).......................... 24 21 --
</TABLE>
The Company paid annual cash dividends of $.06 per share in 1997, $.05 per
share in 1996 and $.04 per share in 1995. In addition, the Company paid a 5%
stock dividend in each of 1996 and 1995. Any declaration and payment of future
dividends will be determined at the discretion of the Board of Directors in
light of then current conditions, including the Company's earnings, financial
condition and cash requirements, restrictions in its debt agreements and other
factors the Board of Directors determines relevant. The Company's outstanding
long-term debt agreements contain certain restrictions on its ability to pay
dividends.
14
<PAGE> 16
SELECTED CONSOLIDATED FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------------------------- ---------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA(1):
Revenues:
Interest and fees on loans............... $ 4,330 $ 5,669 $ 11,392 $ 14,789 $ 19,374 $ 4,546 $ 5,233
Gain on sale of loans.................... 4,550 4,847 5,161 7,331 8,564 1,504 2,227
Servicing and other fee income........... 501 459 908 1,576 1,753 357 493
--------- --------- --------- --------- --------- --------- ---------
Total revenues.................... 9,381 10,975 17,461 23,696 29,691 6,407 7,953
--------- --------- --------- --------- --------- --------- ---------
Expenses:
Interest expense......................... 2,717 3,158 6,138 7,197 10,675 2,394 2,997
Salaries and employee benefits........... 1,350 1,776 2,798 2,824 3,399 813 1,133
Other operating expenses................. 1,017 1,164 2,120 3,147 3,480 903 953
Provision for loan losses................ 620 559 890 1,954 1,400 435 350
--------- --------- --------- --------- --------- --------- ---------
Total expenses.................... 5,704 6,657 11,946 15,122 18,954 4,545 5,433
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes and
extraordinary item....................... 3,677 4,318 5,515 8,574 10,737 1,862 2,520
Provision for income taxes................. 1,426 1,619 2,066 3,301 4,134 717 970
--------- --------- --------- --------- --------- --------- ---------
Income before extraordinary item........... 2,251 2,699 3,449 5,273 6,603 1,145 1,550
Extraordinary item(2)...................... -- (126) -- -- (220) -- --
--------- --------- --------- --------- --------- --------- ---------
Net income........................ $ 2,251 $ 2,573 $ 3,449 $ 5,273 $ 6,383 $ 1,145 $ 1,550
========= ========= ========= ========= ========= ========= =========
Basic per common share amounts:
Income before extraordinary item......... $ .55 $ .66 $ .80 $ .97 $ 1.19 $ .21 $ .27
Extraordinary item....................... -- (.03) -- -- (.04) -- --
--------- --------- --------- --------- --------- --------- ---------
Net income per share.............. $ .55 $ .63 $ .80 $ .97 $ 1.15 $ .21 $ .27
========= ========= ========= ========= ========= ========= =========
Basic weighted average number of shares
outstanding.............................. 4,065,688 4,116,684 4,315,469 5,441,636 5,572,465 5,446,679 5,659,756
Diluted per common share amounts:
Income before extraordinary item......... $ .53 $ .63 $ .76 $ .93 $ 1.12 $ .20 $ .26
Extraordinary item....................... -- (.03) -- -- (.04) -- --
--------- --------- --------- --------- --------- --------- ---------
Net income per share.............. $ .53 $ .60 $ .76 $ .93 $ 1.08 $ .20 $ .26
========= ========= ========= ========= ========= ========= =========
Diluted weighted average number of shares
outstanding.............................. 4,216,151 4,282,884 4,524,607 5,682,152 5,909,432 5,792,078 6,020,158
Cash dividends declared per common share... $ .02 $ .03 $ .04 $ .05 $ .06 $ -- $ --
OTHER STATEMENT OF INCOME DATA:
Income before extraordinary item as a
percentage of revenues................... 24.0% 24.6% 19.8% 22.3% 22.3% 17.9% 19.5%
Return on average assets(3)................ 5.0% 4.6% 3.7% 4.0% 3.8% 2.8% 3.1%
Return on average equity(3)................ 17.0% 17.2% 16.6% 13.3% 14.1% 10.6% 11.8%
</TABLE>
- ---------------
(1) Certain amounts in the 1993 through 1996 financial information have been
restated to conform to the 1997 and 1998 presentation.
(2) Reflects loss on early extinguishment of a portion of the 1992 Notes, net
of applicable tax benefit of $76,000, for 1994 and of the remainder of the
1992 Notes, net of applicable tax benefit of $138,000, for 1997.
(3) The returns on average assets and average equity for the three month
periods are calculated on an annualized basis. Calculations are based on
income before extraordinary item. Historically, the Company's returns
generally have been lower in the first quarter than for the respective
fiscal year as a whole.
15
<PAGE> 17
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------- MARCH 31,
1993 1994 1995 1996 1997 1998
------- ------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA(4):
Total assets......................................... $54,444 $63,487 $112,459 $152,689 $186,790 $210,176
Loans held for sale(5)............................... 5,931 11,094 14,380 12,260 16,366 16,246
Other loans(5)....................................... 10,306 15,790 33,613 79,996 86,307 116,816
Retained interests in loan sales(5).................. 11,764 11,996 22,594 28,912 30,299 29,937
Secured debt......................................... -- 5,823 9,836 43,727 5,387 27,650
Unsecured debt....................................... 32,302 29,896 47,401 46,995 105,347 105,347
Stockholders' equity................................. 14,722 16,610 37,396 42,448 52,071 53,643
OTHER FINANCIAL DATA:
Loans purchased and originated(6).................... $42,410 $59,798 $121,046 $133,750 $184,660 $ 67,493
Loans sold(6)........................................ 28,099 40,116 65,115 54,936 98,747 18,502
Loans participated(6)................................ -- -- -- -- 6,936 1,452
Serviced Portfolio(7)................................ 84,360 105,013 176,650 242,445 304,102 338,502
Loans serviced for others............................ 59,720 72,731 111,117 129,619 179,790 184,157
Dealer/developer reserves............................ 4,926 6,575 9,644 10,628 10,655 10,616
Allowance for loan losses(8)......................... 1,064 1,264 3,715 4,528 5,877 6,164
Allowance ratio(9)................................... 1.26% 1.20% 2.10% 1.87% 1.93% 1.82%
Delinquency ratio(10)................................ .61% .93% 1.73% 1.34% 1.20% 1.20%
Net charge-off ratio(6)(11).......................... .69% .38% .67% .94% .74% .66%
Non-performing asset ratio(12)....................... 1.48% 1.02% 1.35% 1.57% 1.03% .84%
</TABLE>
- ---------------
(4) 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 1993 through 1996 financial statements have been reclassified to
conform with the 1997 and 1998 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."
(5) Amount indicated is net of allowance for loan losses.
(6) During the relevant period.
(7) The Serviced Portfolio consists of the principal amount of loans serviced
by or on behalf of the Company, except loans participated without recourse
to the Company.
(8) The allowance for loan losses includes the recourse obligation on retained
interests in loan sales.
(9) The allowance ratio is the allowance for loan losses divided by the amount
of the Serviced Portfolio.
(10) The delinquency ratio is the amount of delinquent loans divided by the
amount of the Serviced Portfolio. 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.
(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 March 31, 1998 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 which are not
covered by dealer/developer reserves or guarantees and other real estate
owned by the amount of the Serviced Portfolio.
16
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Litchfield Financial Corporation (the "Company") is a specialty finance
company that provides financing to creditworthy borrowers for assets not
typically financed by banks. The Company provides such financing by purchasing
consumer loans and by making loans to businesses secured by consumer receivables
or other assets.
The Company purchases consumer loans (the "Purchased Loans") consisting
primarily of loans to purchasers of rural and vacation properties ("Land Loans")
and vacation ownership interests popularly known as timeshare interests ("VOI
Loans"). Land Loans are typically secured by one to twenty acre rural parcels.
VOI Loans typically finance the purchase of ownership interests ("VOIs") in
fully furnished vacation properties.
The Company also provides financing to rural land dealers, timeshare resort
developers and other finance companies secured by receivables ("Hypothecation
Loans") and to dealers and developers for the acquisition and development of
rural land and timeshare resorts ("A&D Loans"). In addition, the Company
purchases other loans, such as consumer home equity loans and consumer
construction loans, and provides financing to other businesses secured by
receivables or other assets ("Other Loans").
The principal sources of the Company's revenues are (i) interest and fees
on loans, (ii) gains on sales 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>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------- --------------
1995 1996 1997 1997 1998
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues:
Interest and fees on loans....................... 65.2% 62.4% 65.3% 70.9% 65.8%
Gain on sale of loans............................ 29.6 30.9 28.8 23.5 28.0
Servicing and other fee income................... 5.2 6.7 5.9 5.6 6.2
----- ----- ----- ----- -----
100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- -----
Expenses:
Interest expense................................. 35.2 30.4 36.0 37.3 37.7
Salaries and employee benefits................... 16.0 11.9 11.4 12.7 14.2
Other operating expenses......................... 12.1 13.3 11.7 14.1 12.0
Provision for loan losses........................ 5.1 8.2 4.7 6.8 4.4
----- ----- ----- ----- -----
68.4 63.8 63.8 70.9 68.3
----- ----- ----- ----- -----
Income before income taxes and extraordinary
item............................................. 31.6 36.2 36.2 29.1 31.7
Provision for income taxes......................... 11.8 13.9 13.9 11.2 12.2
----- ----- ----- ----- -----
Income before extraordinary item................... 19.8 22.3 22.3 17.9 19.5
Extraordinary item................................. -- -- (0.8) -- --
----- ----- ----- ----- -----
Net income......................................... 19.8% 22.3% 21.5% 17.9% 19.5%
===== ===== ===== ===== =====
</TABLE>
17
<PAGE> 19
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
Revenues increased 24.1% to $7,953,000 for the three months ended March 31,
1998, from $6,407,000 for the same period in 1997. Net income for the three
months ended March 31, 1998 increased 35.4% to $1,550,000 compared to $1,145,000
for the same period in 1997. Loan originations grew 87.2% to $67,493,000 for the
three months ended March 31, 1998 from $36,063,000 for the same period in 1997.
Net income as a percentage of revenues increased to 19.5% for the three months
ended March 31, 1998 from 17.9% for the same period in 1997. The Serviced
Portfolio increased 32.1% to $338,502,000 at March 31, 1998 from $256,192,000 at
March 31, 1997.
Interest and fees on loans increased 15.1% to $5,233,000 for the three
months ended March 31, 1998 from $4,546,000 for the same period in 1997,
primarily as the result of the higher average balance of other loans during the
1998 periods. The average rate earned on the Serviced Portfolio decreased to
12.0% at March 31, 1998 from 12.4% at March 31, 1997, primarily due to the
effect of the growth in Hypothecation Loans as a percentage of the portfolio.
Hypothecation Loan yields are usually less than Land Loan or VOI Loan yields,
but Hypothecation Loans servicing costs and loan losses are generally less as
well.
Gain on the sale of loans increased 48.1% to $2,227,000 for the three
months ended March 31, 1998 from $1,504,000 in the same period in 1997. The
volume of loans sold increased 53.6% to $18,502,000 for the three months ended
March 31, 1998 from $12,043,000 during the corresponding period in 1997
primarily due to the growth in originations.
Servicing and other fee income increased 38.1% to $493,000 for the three
months ended March 31, 1998, from $357,000 for the same period in 1997 mostly
due to the increase in the other fee income resulting from the collection of a
significant prepayment penalty from a Hypothecation Loan. Although loans
serviced for others increased 40.4% to $184,157,000 as of March 31, 1998 from
$131,162,000 at March 31, 1997, servicing income remained relatively constant
due to an increase in Hypothecation Loans serviced for others and a decrease in
the average servicing fee per loan.
Interest expense increased 25.2% to $2,997,000 during the three months
ended March 31, 1998 from $2,394,000 for the same period in 1997. The increase
in interest expense primarily reflects an increase in average borrowings. During
the three months ended March 31, 1998, borrowings averaged $119,122,000 at an
average rate of 8.9% as compared to $98,952,000 at an average rate of 8.9%
during the same period in 1997. Interest expense includes the amortization of
deferred debt issuance costs.
Salaries and employee benefits increased 39.4% $1,133,000 for the three
months ended March 31, 1998 from $813,000 for the same period in 1997 because of
an increase in the number of employees in 1998 and, to a lesser extent, an
increase in salaries. Personnel costs as a percentage of revenues increased to
14.2% for the three months ended March 31, 1998 compared to 12.7% for the same
period in 1997. As a percentage of the Serviced Portfolio, personnel costs
increased to 1.34% for the three months ended March 31, 1998 from 1.27% for the
same period in 1997.
Other operating expenses increased 5.5% to $953,000 for the three months
ended March 31, 1998 from $903,000 for the same period in 1997. As a percentage
of revenues, other operating expenses decreased to 12.0% for the three months
ended March 31, 1998 compared to 14.1% for the corresponding period in 1997. As
a percentage of the Serviced Portfolio, other operating expenses decreased to
1.13% for the three months ended March 31, 1998 from 1.41% for the same period
in 1997.
During the three months ended March 31, 1998, the provision for loan losses
decreased 19.5% to $350,000 from $435,000 for the same period in 1997. The
provision for loan losses decreased 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 Purchased Loans.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues increased 25.3% to $29,691,000 for the year ended December 31,
1997, from $23,696,000 for the year ended December 31, 1996. Net income for 1997
increased 21.1% to $6,383,000 compared to
18
<PAGE> 20
$5,273,000 in 1996. Net income as a percentage of revenues was 21.5% for the
year ended December 31, 1997 compared to 22.3% for the year ended December 31,
1996. Loan purchases and originations grew 38.1% to $184,660,000 in 1997 from
$133,750,000 in 1996. The Serviced Portfolio increased 25.4% to $304,102,000 at
December 31, 1997 from $242,445,000 at December 31, 1996.
Interest and fees on loans increased 31.0% to $19,374,000 in 1997 from
$14,789,000 in 1996, primarily as the result of the higher average balance of
loans held for sale and other loans during 1997. The average rate earned on
loans owned and retained interests in loan sales decreased to 12.2% for the year
ended December 31, 1997 from 12.5% for the year ended December 31, 1996,
primarily due to the effect of the growth in Hypothecation Loans and A&D Loans
as a percentage of the Serviced Portfolio. Hypothecation Loan and A&D Loan
yields are usually less than Land Loan or VOI Loan yields, but servicing costs
and loan losses are generally less as well.
Gain on the sale of loans increased 16.8% to $8,564,000 in 1997 from
$7,331,000 in 1996. The volume of loans sold increased 79.7% to $98,747,000 for
the year ended 1997 from $54,936,000 for the same period in 1996. Gain on sale
of loans increased less than the volume of loans sold for the year ended
December 31, 1997 primarily due to the lower yield on the sale of Hypothecation
Loans in 1997 and, to a lesser extent, the lower amount of discount relating to
loans sold. The yield on the sale of Hypothecation Loans is significantly less
than the typical yield on sales of consumer receivables primarily due to shorter
average maturities and the nature of the underlying collateral.
Servicing and other fee income increased 11.2% to $1,753,000 for the year
ended December 31, 1997, from $1,576,000 for the year ended December 31, 1996
mostly due to the increase in other fee income resulting from the collection of
significant prepayment penalties from a Hypothecation Loan and an A&D Loan in
1997. Although loans serviced for others increased 38.7% to $179,790,000 at
December 31, 1997 from $129,619,000 at December 31, 1996, servicing income
remained relatively constant due to a decrease in the average servicing fee per
loan primarily as the result of the decrease in the number of purchased VOI
Loans in the Serviced Portfolio.
Interest expense increased 48.3% to $10,675,000 for 1997, from $7,197,000
in 1996. The increase in interest expense primarily reflects an increase in
average borrowings that were only partially offset by a decrease in average
rates. During the year ended December 31, 1997, borrowings averaged $107,900,000
at an average rate of 9.1% compared to $71,800,000 and 9.3%, respectively,
during 1996. Interest expense includes the amortization of deferred debt
issuance costs.
Salaries and employee benefits increased 20.4% to $3,399,000 for the year
ended December 31, 1997 from $2,824,000 for the year ended December 31, 1996
because of an increase in the number of employees and, to a lesser extent, an
increase in salaries. The number of full time equivalents increased to 71 at
December 31, 1997 compared to 57 at December 31, 1996. Personnel costs as a
percentage of revenues decreased slightly to 11.4% for the year ended December
31, 1997 compared to 11.9% in 1996. As a percentage of the Serviced Portfolio,
personnel costs decreased to 1.12% for the year ended December 31, 1997 from
1.16% for the same period in 1996.
Other operating expenses increased 10.6% to $3,480,000 for the year ended
December 31, 1997 from $3,147,000 for the same period in 1996 primarily as the
result of the growth in the Serviced Portfolio. As a percentage of revenues,
other operating expenses decreased to 11.7% in 1997 compared to 13.3% in 1996.
As a percentage of the Serviced Portfolio, other operating expenses decreased to
1.14% for 1997 from 1.30% for 1996.
During 1997, the provision for loan losses decreased 28.4% to $1,400,000
from $1,954,000 in 1996. The provision for loan losses decreased despite the
increase in loans owned and retained interests in loans sold 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 Purchased Loans.
19
<PAGE> 21
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenues increased 35.7% to $23,696,000 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 22.3% for the
year 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 29.8% to $14,789,000 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.
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 73.6% to $1,576,000 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 remained relatively constant at $2,824,000
for the year ended December 31, 1996 from $2,798,000 in 1995 despite 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 11.9% for the year
ended December 31, 1996 compared to 16.0% in 1995.
Other operating expenses increased 48.4% to $3,147,000 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
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.
Since its inception, the Company has sold $366,700,000 of loans at face
value ($348,198,000 through December 31, 1997). The principal amount remaining
on the loans sold was $184,157,000 at March 31, 1998 and $179,790,000 at
December 31, 1997. 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 $9,940,000 of loans at March 31, 1998
which the Company could be required to repurchase in the future should such
loans become 90 days or more past due. The Company repurchased $118,000 and
$335,000 of loans under the recourse provisions of loan sales during the three
months ended March 31, 1998 and 1997, respectively. As of March 31, 1998,
$22,751,000 of the Company's cash was restricted as credit enhancement for
certain securitization programs. To date, the Company has sold participations in
$8,388,000 of A&D and Other Loans without recourse to the Company ($6,936,000
through December 31, 1997).
The Company funds its loan purchases in part with borrowings under various
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. These lines of credit
totaled $116,000,000 at March 31, 1998 and December 31, 1997. Outstanding
borrowings on these lines of credit were $22,627,000 at March 31, 1998, and none
at December 31, 1997. At March 31, 1998 and December 31, 1997, lines of credit
also included a $1,500,000 construction mortgage loan, under which there were
outstanding borrowings of $498,000 and $8,000, respectively. Interest rates on
these 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 finances its loan purchases with two revolving line of
credit and sale facilities as part of asset backed commercial paper facilities
with multi-seller commercial paper issuers. Such facilities totaled $150,000,000
at March 31, 1998 and December 31, 1997. One of the facilities, totalling
$125,000,000, expires in June 1998. The Company expects to extend the term of
such facility to June 2001 prior to its expiration and to increase the amount of
such facility to $150,000,000 subject to substantially the same terms and
conditions. As of March 31, 1998 and December 31, 1997, the outstanding balances
of loans sold or pledged under these facilities were $129,873,000 and
$121,142,000, respectively. Outstanding borrowings under these lines of credit
were $97,000 at March 31, 1998 and $169,000 at December 31, 1997. Interest is
payable on these lines of credit based on certain commercial paper rates.
The Company also finances its liquidity needs with long-term debt.
Long-term debt totaled $105,347,000 at March 31, 1998 and December 31, 1997.
The Company also has a term note payable monthly based on the collection of
the underlying collateral. The note is currently 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 $4,428,000 and $5,210,000 at March 31, 1998 and December 31, 1997,
respectively.
In June 1997, the Company entered into two interest rate swap agreements.
The swap agreements involve the payment of interest to the counterparty at the
prime rate on a notional amount of $110,000,000 and the receipt of interest at
the commercial paper rate plus a spread and the LIBOR rate plus a spread on
notional amounts of $80,000,000 and $30,000,000, respectively. The swap
agreements expire in June 2000. There is no exchange of the notional amounts
upon which interest payments are based.
Historically, the Company has not required major capital expenditures to
support its operations.
21
<PAGE> 23
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 estimated 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 and not included in other real estate
owned) as a percentage of the Serviced Portfolio remained constant at 1.20% as
of March 31, 1998 compared with December 31, 1997, and decreased compared with
1.34% at March 31, 1997. 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.
When the Company does not receive guarantees on loan portfolios purchased, it
adjusts its purchase price to reflect anticipated losses and its required yield.
This purchase adjustment is recorded as an increase in the allowance for loan
losses and is used only for the respective portfolio. 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 $6,164,000 at March
31, 1998 compared to $5,877,000 at December 31, 1997. The allowance ratio (the
allowances for loan losses divided by the amount of the Serviced Portfolio) at
March 31, 1998 decreased slightly to 1.82% from 1.93% at December 31, 1997.
As part of the Company's financing of Purchased 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 Purchased 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
$10,616,000 and $10,655,000 at March 31, 1998 and December 31, 1997,
respectively. The Company generally returns any excess reserves to the
dealer/developer on a quarterly basis as the related loans are repaid by
borrowers.
IMPACT OF YEAR 2000
As the year 2000 approaches, an issue impacting all companies has emerged
regarding how existing application software programs and operating systems can
accommodate this date value. Substantially all of the Company's operating
systems are already year 2000 compliant. The Company does not expect to incur
any significant additional costs to make its remaining applications year 2000
compliant.
INFLATION
Inflation has not had a significant effect on the Company's operating
results to date.
22
<PAGE> 24
BUSINESS
OVERVIEW
The Company purchases and services Land Loans which are typically secured
by one 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 receivables. 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) gains 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,
----------------------------------------- MARCH 31,
1993 1994 1995 1996 1997 1998
----- ----- ----- ----- ----- ---------
<S> <C> <C> <C> <C> <C> <C>
Purchased Loans......................... 89.0% 85.3% 81.6% 67.1% 56.6% 52.5%
Hypothecation Loans..................... 5.0 9.0 12.5 20.7 26.9 32.3
A&D Loans............................... 4.3 3.3 3.1 8.7 13.7 12.8
Other Loans............................. 1.7 2.4 2.8 3.5 2.8 2.4
----- ----- ----- ----- ----- -----
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>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------- --------------
1993 1994 1995 1996 1997 1997 1998
----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Purchased Loans................... 77.8% 67.6% 71.4% 49.9% 30.3% 34.6% 25.8%
Hypothecation Loans............... 11.8 22.2 20.9 29.6 37.1 46.7 58.2
A&D Loans......................... 7.1 6.0 3.1 14.4 24.0 5.7 11.5
Other Loans....................... 3.3 4.2 4.6 6.1 8.6 13.0 4.5
----- ----- ----- ----- ----- ----- -----
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 land loans and VOI loans. The dealers and resort developers make loans
to consumers generally using the Company's standard forms and subject to the
Company's underwriting criteria. The Company then purchases such 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 the Company purchases loans
is 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.
23
<PAGE> 25
In order to enhance the creditworthiness of loans purchased from land
dealers and resort developers, the Company typically requires land dealers and
resort developers to guarantee payment of the loans and typically 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.
Prior to purchasing land loans or VOI loans, the Company evaluates the
credit and payment history of each borrower in accordance with its underwriting
guidelines, performs borrower interviews on a sample of loans, reviews the
documentation supporting the loans for completeness and obtains an appropriate
opinion from local legal counsel. The Company purchases only those loans which
meet its credit standards.
The Company also purchases portfolios of seasoned loans primarily from land
dealers and resort developers. The land dealers or resort developers typically
guarantee the loans sold and the Company typically withholds a reserve as
described above. 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. The Company also purchases
portfolios of seasoned loans from financial institutions and others. Sellers
generally do not guarantee such loans, but the Company sets aside a portion of
the purchase discount as an allowance for future loan losses.
In evaluating such seasoned portfolios, the Company conducts its normal
review of the borrower's documentation, payment history and underlying
collateral. However, the Company may not always be able to reject individual
loans.
The Company's portfolio of Purchased Loans is secured by property located
in 38 states.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT OF LOANS
-------------------------------------------------
DECEMBER 31,
------------------------------------ MARCH 31,
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---------
<S> <C> <C> <C> <C> <C> <C>
Southwest...................................... 18% 19% 16% 26% 30% 31%
South.......................................... 33 37 31 31 31 30
West........................................... 2 3 20 20 17 19
Mid-Atlantic................................... 17 16 16 10 10 9
Northeast...................................... 30 25 17 13 12 11
--- --- --- --- --- ---
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 one 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
three months ended March 31, 1998 varied significantly from a low of
approximately $9,000 to a high of approximately $2.0 million. As of March 31,
1998 and December 31, 1997, the five largest dealers accounted for approximately
18.0% and 18.4%, respectively, of the principal amount of the Land Loans in the
Serviced Portfolio. No single dealer accounted for more than 5.0% at March 31,
1998 or at December 31, 1997.
As of March 31, 1998 and December 31, 1997, 44.7% and 47.0%, respectively,
of the Serviced Portfolio consisted of Land Loans. The average principal balance
of such Land Loans was approximately $13,200 and
24
<PAGE> 26
$13,000, respectively. The following table sets forth as of March 31, 1998 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........................ $ 27,448,000 18.1% 5,198 45.5%
$10,000-$19,999.......................... 58,650,000 38.7 4,120 36.0
$20,000 and greater...................... 65,325,000 43.2 2,118 18.5
------------ ----- ------ -----
Total.......................... $151,423,000 100.0% 11,436 100.0%
============ ===== ====== =====
</TABLE>
As of March 31, 1998 and December 31, 1997, the weighted average interest
rate of the Land Loans included in the Company's Serviced Portfolio was 12.0%
and 12.1%, respectively. The weighted average remaining maturity was 12.1 years
at March 31, 1998 and December 31, 1997. The following table sets forth as of
March 31, 1998 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%............................................. $ 55,256,000 36.5%
12.0%-13.9%................................................. 70,131,000 46.3
14.0% and greater........................................... 26,036,000 17.2
------------ -----
Total............................................. $151,423,000 100.0%
============ =====
</TABLE>
As of March 31, 1998 and December 31, 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 timeshare intervals for
timeshare intervals in other resorts around the world. During the three months
ended March 31, 1998, the Company acquired approximately $772,000 of VOI Loans.
As of March 31, 1998 and December 31, 1997, the five largest developers
accounted for approximately 37.1% and 36.6%, respectively, of the principal
amount of the VOI Loans in the Serviced Portfolio, and no single developer
accounted for more than 9.2% and 9.0%, respectively.
As of March 31, 1998 and December 31, 1997, 7.8% and 9.6%, respectively, of
the Serviced Portfolio consisted of VOI Loans. The average principal balance of
such VOI Loans was approximately $3,500 and $3,600, respectively. The following
table sets forth as of March 31, 1998 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.......................... $ 9,442,000 35.9% 4,606 61.7%
$4,000-$5,999............................. 8,654,000 32.9 1,754 23.5
$6,000 and greater........................ 8,192,000 31.2 1,100 14.8
----------- ----- ----- -----
Total........................... $26,288,000 100.0% 7,460 100.0%
=========== ===== ===== =====
</TABLE>
As of March 31, 1998 and December 31, 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 3.8
25
<PAGE> 27
years and 3.7 years, respectively. The following table sets forth as of March
31, 1998 the distribution of interest rates payable on the VOI Loans:
<TABLE>
<CAPTION>
PERCENTAGE OF
PRINCIPAL
INTEREST RATE PRINCIPAL AMOUNT AMOUNT
------------- ---------------- -------------
<S> <C> <C>
Less than 14.0%............................................. $10,906,000 41.5%
14.0%-15.9%................................................. 6,862,000 26.1
16.0% and greater........................................... 8,520,000 32.4
----------- -----
Total..................................................... $26,288,000 100.0%
=========== =====
</TABLE>
As of March 31, 1998 and December 31, 1997, the Company's VOI borrowers
resided in 50 states, the District of Columbia and four territories or foreign
countries.
(2) Hypothecation Loans
The Company extends Hypothecation Loans to land dealers and resort
developers and other businesses secured by receivables. 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 larger than
the Company's average Hypothecation Loans and may provide the Company with an
option to take an equity position in the borrower. During the three months ended
March 31, 1998, the Company extended or acquired approximately $39.2 million of
Hypothecation Loans, of which $1.6 million, or 4.1%, were secured by Land Loans,
$14.9 million, or 38.0%, were secured by VOI Loans and $22.7 million, or 57.9%,
were secured by other types of collateral.
The Company typically extends Hypothecation Loans based on advance rates of
75% to 90% of the eligible 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 March 31, 1998 and December 31, 1997, the
Company had $109.3 million and $81.9 million of Hypothecation Loans outstanding,
none of which were 30 days or more past due. During the three months ended March
31, 1998, the Company acquired a $17.0 million participation interest in an
Hypothecation Loan from another financial institution. As planned, subsequent to
March 31, 1998, the Company purchased the underlying receivables, which the
Company will classify as Other Loans in future periods. The proceeds of the
receivables purchased were applied to pay off the Company's participation
interest. At March 31, 1998, Hypothecation Loans, excluding the participation
interest described above, ranged in size from $6,900 to $10.4 million with an
average principal balance of $1,198,000. At December 31, 1997, Hypothecation
Loans ranged in size from $7,800 to $8.7 million with an average balance of
$1,204,000. The five largest Hypothecation Loans, excluding the participation
interest described above, represented 10.3% and 10.7% of the Serviced Portfolio
at March 31, 1998 and December 31, 1997, respectively.
(3) A&D Loans
The Company also makes A&D Loans to dealers and developers for the
acquisition and development of rural and timeshare resorts in order to finance
additional receivables generated by the A&D Loans. During the three months ended
March 31, 1998, the Company made $7.8 million of A&D Loans to land dealers and
resort developers, of which $1.7 million, or 21.8%, were secured by land and
$6.1 million, or 78.2%, were secured by resorts.
The Company generally 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 March 31, 1998 and December 31, 1997, the Company had
$43.1 million and $41.7 million, respectively, of A&D Loans outstanding, none of
which were 30 days or more past due. At March 31, 1998 and December 31, 1997,
A&D Loans were secured by timeshare resort developments and rural land
subdivisions in 20 states and one foreign territory and 18 states and one
foreign territory, respectively. A&D Loans ranged in size from $1,800 to $8.1
million with an average principal balance of $545,000 at March 31, 1998. A&D
Loans ranged in size from
26
<PAGE> 28
$7,800 to $7.3 million with an average principal balance of $622,000 at December
31, 1997. The five largest A&D Loans represented 5.5% and 6.1%, of the Serviced
Portfolio at March 31, 1998 and December 31, 1997, respectively.
(4) Other Loans
At March 31, 1998, Other Loans consisted primarily of consumer home equity
loans, consumer construction loans and other secured commercial loans.
Historically, 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. Subsequent to March 31, 1998, the Company purchased 232
builder construction loans totalling $32.7 million, a portion of which had
previously been collateral for the Hypothecation Loan in which the Company owned
a participation interest as described above. The Company expects to purchase
additional builder construction loans from finance companies from time to time
in the future. The Company had $8.4 million and $8.5 million of such Other
Loans, 0.62% and 1.97% of which were 90 days or more past due at March 31, 1998
and December 31, 1997, respectively. At March 31, 1998, Other Loans ranged in
size from less than $500 to $158,000 with an average principal balance of
$16,000. At December 31, 1997, Other Loans ranged in size from less than $500 to
$151,000 with an average principal balance of $13,800. The five largest Other
Loans represent 0.2% of the Serviced Portfolio at March 31, 1998 and December
31, 1997.
LOAN UNDERWRITING
The Company has established loan underwriting criteria and procedures
designed to reduce credit losses on its Serviced Portfolio. The loan
underwriting process includes reviewing each borrower's credit history. In
addition, the Company's underwriting staff routinely conducts telephone
interviews with a 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 credit reporting
bureaus.
The Company'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 March 31, 1998, the Company had 163 Land Loans
exceeding $50,000 representing 3.5% of the number of such loans in the Serviced
Portfolio, for a total of $11.9 million. There were no VOI Loans exceeding
$50,000 as of March 31, 1998. The Company will originate Hypothecation Loans up
to $20 million and A&D Loans up to $10 million. From time to time the Company
may have an opportunity to originate larger Hypothecation Loans or A&D Loans in
which case the Company may exceed such amounts or may seek to participate such
loans with other financial institutions. Construction Loans greater than
$200,000 and any other 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 withheld
from dealers and developers. 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 Company's 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, at which time 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.
27
<PAGE> 29
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 guaranteed loan becomes 60 days (90 days in some
cases) past due, in addition to the Company's collection procedures, the Company
generally obtains 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 1.1% of its loans through March
31, 1998. 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.
Serviced Portfolio
The following table shows the Company's delinquencies and delinquency
rates, net of dealer/developer reserves and guarantees for the Serviced
Portfolio:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED
----------------------------------------------------------------------- MARCH 31,
1993 1994 1995 1996 1997 1998
----------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Serviced Portfolio....... $84,360,000 $105,013,000 $176,650,000 $242,445,000 $304,102,000 $338,502,000
Delinquent loans(1)...... 511,000 981,000 3,062,000 3,255,000 3,642,000 4,064,000
Delinquency as a
Percentage of Serviced
Portfolio.............. .61% .93% 1.73% 1.34% 1.20% 1.20%
</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.
Land Loans
The following table shows the Company's delinquencies and delinquency
rates, net of dealer/developer reserves and guarantees for Land Loans in the
Serviced Portfolio:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED
--------------------------------------------------------------------- MARCH 31,
1993 1994 1995 1996 1997 1998
----------- ----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Land Loans in Serviced
Portfolio................. $77,258,000 $90,502,000 $97,266,000 $119,370,000 $142,828,000 $151,423,000
Delinquent Land Loans(1).... 511,000 981,000 1,059,000 1,920,000 2,453,000 2,662,000
Delinquency as a Percentage
of Land Loans in Serviced
Portfolio................. .66% 1.08% 1.09% 1.61% 1.72% 1.76%
</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.
28
<PAGE> 30
VOI Loans
The following table shows the Company's delinquencies and delinquency
rates, net of dealer/developer reserves and guarantees for VOI Loans in the
Serviced Portfolio:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED
----------------------------------------------------------------- MARCH 31,
1993 1994 1995 1996 1997 1998
---------- ---------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
VOI Loans in Serviced
Portfolio..................... $1,434,000 $2,851,000 $46,700,000 $43,284,000 $29,232,000 $26,288,000
Delinquent VOI Loans(1)......... -- -- 1,958,000 1,316,000 739,000 724,000
Delinquency as a percentage of
VOI Loans in Serviced
Portfolio..................... -- -- 4.19% 3.04% 2.53% 2.75%
</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, 1993 through December 31, 1997 or for the three
months ended March 31, 1998. The Company did not have significant amounts of
delinquent Other Loans for the years ended December 31, 1993 through December
31, 1996. At December 31, 1997, there were $8.5 million of Other Loans of which
$450,000 or 5.3% were 30 days or more past due and not covered by
dealer/developer reserves or guarantees and not included in other real estate
owned. At March 31, 1998, there were $8.4 million of Other Loans of which
$677,000 or 8.1% were 30 days or more past due and not covered by
dealer/developer reserves or guarantees and not included in other real estate
owned.
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>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED
---------------------------------------------------------------- MARCH 31,
1993 1994 1995 1996 1997 1998
---------- ---------- ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Allowance, beginning of year..... $ 498,000 $1,064,000 $1,264,000 $ 3,715,000 $ 4,528,000 $5,877,000
Provision for loan losses........ 620,000 559,000 890,000 1,954,000 1,400,000 350,000
Net charge-offs of uncollectible
accounts....................... (493,000) (359,000) (946,000) (1,965,000) (2,010,000) (528,000)
Allocation of purchase
adjustment(1).................. 439,000 -- 2,507,000 824,000 1,959,000 465,000
---------- ---------- ---------- ----------- ----------- ----------
Allowance, end of year........... $1,064,000 $1,264,000 $3,715,000 $ 4,528,000 $ 5,877,000 $6,164,000
========== ========== ========== =========== =========== ==========
</TABLE>
- ---------------
(1) Represents allocation of purchase adjustment related to purchase of certain
nonguaranteed loans.
29
<PAGE> 31
The following is an analysis of net charge-offs by major loan and
collateral types experienced by the Company:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED
-------------------------------------------------------- MARCH 31,
1993 1994 1995 1996 1997 1998
-------- -------- -------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Land Loans............................. $493,000 $359,000 $546,000 $ 669,000 $ 986,000 $305,000
VOI Loans.............................. -- -- 45,000 1,284,000 939,000 100,000
Hypothecation Loans.................... -- -- -- -- -- --
A&D Loans.............................. -- -- 352,000 (8,000) (2,000) --
Other Loans............................ -- -- 3,000 20,000 87,000 123,000
-------- -------- -------- ---------- ---------- --------
Total net charge-offs.................. $493,000 $359,000 $946,000 $1,965,000 $2,010,000 $528,000
======== ======== ======== ========== ========== ========
Net charge-offs as a percentage of the
average Serviced Portfolio........... .69% .38% .67% .94% .74% .66%
</TABLE>
As part of the Company's financing of Land Loans and VOI Loans, the Company
enters into arrangements with most land dealers and resort developers whereby
the Company establishes reserves to protect the Company from potential losses
associated with such loans. The Company retains a portion of the amount payable
to a dealer when purchasing a Land Loan or a VOI Loan and uses the amount
retained to absorb loan losses. 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 dealer or resort
developer and the credit risk associated with the loans being purchased. Dealer
reserves for Land Loans were $6,420,000, $7,555,000 and $8,321,000 at December
31, 1995, 1996 and 1997, respectively, and $8,458,000 at March 31, 1998.
Developer reserves for VOI Loans amounted to $3,224,000, $3,072,000 and
$2,299,000 at December 31, 1995, 1996 and 1997, respectively, and $2,134,000 at
March 31, 1998. Most dealers and developers provide 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 purchases or
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 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. The Company expects to resume certain
customer service and collection functions during the third quarter of 1998.
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 March 31, 1998, the Company had sold or securitized a total of
approximately $366.7 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 loans
underlying these issues of pass-through certificates, losses would be absorbed
first by the subordinated portion
30
<PAGE> 32
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 $125.0 million revolving line of credit and sale
facility for its land loans as part of an asset backed commercial paper facility
with a multi-seller commercial paper conduit. The facility expires in June 1998.
The Company expects to extend the term of the facility to June 2001 prior to its
expiration and to increase the amount of the facility to $150.0 million subject
to substantially the same terms and conditions. As of March 31, 1998, the
outstanding balance of the sold or pledged loans securing this facility was
$116.6 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 March 31, 1998, the outstanding
aggregate balance of the sold loans under the facility was $13.3 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 six marketing executives based in Williamstown, Massachusetts. In
the last 5 years the Company has closed loans with over 300 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 consumer loans purchased or financed by the Company 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 give rise to a limited right of
rescission on the part of the borrower. The Company believes that its purchase
or financing activities are in substantial compliance in all material respects
with the Truth-in-Lending Act.
Origination of the loans also requires compliance 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 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 finance business include commercial banks,
credit unions, thrift institutions, industrial banks and other finance
companies, many of
31
<PAGE> 33
which have considerably greater financial, technical and marketing resources
than the Company. There can be no assurance that the Company will not face
increased competition from existing or new financial institutions and finance
companies. 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.
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 March 31, 1998, the Company and its subsidiaries had 84 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 a leasehold interest in approximately 26,000 square feet
of office space in Williamstown, Massachusetts, which is used as the Company's
headquarters. 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 land lease provides for an annual rental of $20,000. 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 2001, with an option
to renew until 2004, providing for an annual rental of approximately $56,000,
including utilities and exterior maintenance expenses. A subsidiary of the
Company occupies an aggregate of approximately 6,100 square feet of office space
in Birmingham, Alabama, pursuant to a lease expiring in December 1999, providing
for an annual rental of approximately $60,000. The Company also owns, in
Stamford, Vermont, an aggregate of approximately 13,000 square feet of office
space, which is currently under contract for sale.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
32
<PAGE> 34
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
April 30, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Richard A. Stratton(1).................... 47 Chief Executive Officer, President and
Director
Heather A. Sica........................... 35 Executive Vice President and Director
Ronald E. Rabidou......................... 46 Chief Financial Officer and Treasurer
Wayne M. Greenholtz....................... 57 Senior Vice President
John J. Malloy............................ 40 Senior Vice President, General Counsel and
Clerk
James H. Shippee.......................... 37 Senior Vice President
Michael A. Spadacino...................... 36 Senior Vice President
Joseph S. Weingarten...................... 32 Senior Vice President
James A. Yearwood......................... 50 First Vice President
John A. Costa(1), (2), (3)................ 42 Director
Gerald Segel(1), (2), (3)................. 77 Director
James Westra.............................. 46 Director
</TABLE>
- ---------------
(1) Member of Compensation Committee
(2) Member of Stock Option Committee
(3) Member of Audit 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 of the Company since 1991.
She served as Chief Financial Officer of the Company from 1991 to 1995 and
Treasurer from 1991 to April 1998. 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 and Treasurer since April 1998. 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, 57 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.
John J. Malloy, 40 years old, has been a Senior Vice President and General
Counsel of the Company since January 1998. Prior to joining the Company, Mr.
Malloy was an attorney in private practice from 1986 to 1997 at Battle Fowler
LLP, New York, New York, where he was a partner in the corporate department. Mr.
Malloy received his BA from Carleton College and his JD from Rutgers University
School of Law.
33
<PAGE> 35
James Shippee, 37 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
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, 50 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, 42 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 1993, 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.
Gerald Segel, 77 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, 46 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.
34
<PAGE> 36
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of shares of Common Stock of the Company, as of April 30, 1998, 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 Selling
Stockholders, each of the Company's executive officers whose total annual salary
and bonus for 1997 exceeded $100,000 and all directors and officers of the
Company as a group:
<TABLE>
<CAPTION>
BENEFICIAL NUMBER OF BENEFICIAL
OWNERSHIP PRIOR SHARES BEING OWNERSHIP AFTER
TO THE OFFERING(A) OFFERED THE OFFERING(A)
-------------------- ------------ --------------------
NUMBER OF NUMBER OF
NAME SHARES PERCENT SHARES PERCENT
---- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C>
Arthur D. Charpentier.................. 588,229 10.4% 588,229 8.8%
660 White Plains Road, Suite 400
Tarrytown, NY 10591
J.P. Morgan Inv. Mgt., Inc............. 581,510 10.3% 581,510 8.7%
522 Fifth Ave.
New York, NY 10036
Richard A. Stratton.................... 449,450(b) 7.6% 110,000 339,450 4.9%
Chief Executive Officer, President
and Director
Wellington Management Co............... 416,802 7.4% 416,802 6.2%
75 State Street
Boston, MA 02109
Nicholas Company, Inc.................. 413,287 7.3% 413,287 6.2%
700 North Water Street
Milwaukee, WI 53202
Munder Capital Management.............. 317,675 5.6% 317,675 4.7%
480 Pierce Street
Birmingham, MI 48009
Citibank Global Asset Management....... 300,967 5.3% 300,967 4.5%
399 Park Ave.
New York, NY 10043
Heather A. Sica........................ 125,847(c) 2.2% 40,000(d) 85,847 1.3%
Executive Vice President and Director
Michael A. Spadacino................... 45,532(e) * 45,532 *
Senior Vice President
Ronald E. Rabidou...................... 24,172(f) * 24,172 *
Chief Financial Officer and Treasurer
Gerald Segel........................... 21,316(g) * 21,316 *
Director
James Westra........................... 7,915(h) * 7,915 *
Director
Joseph S. Weingarten................... 7,500(i) * 7,500 *
Senior Vice President
</TABLE>
35
<PAGE> 37
<TABLE>
<CAPTION>
BENEFICIAL NUMBER OF BENEFICIAL
OWNERSHIP PRIOR SHARES BEING OWNERSHIP AFTER
TO THE OFFERING(A) OFFERED THE OFFERING(A)
-------------------- ------------ --------------------
NUMBER OF NUMBER OF
NAME SHARES PERCENT SHARES PERCENT
---- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C>
John A. Costa.......................... 7,173(h) * 7,173 *
Director
All directors and executive officers as
a group (12 persons)................. 743,143(j) 12.0% 150,000 593,143 8.2%
</TABLE>
- ---------------
* 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 April 30, 1998 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) Includes 226,392 shares of Common Stock issuable upon exercise of options.
Such options are exercisable within 60 days.
(c) Includes 123,532 shares of Common Stock issuable upon exercise of options.
Such options are exercisable within 60 days.
(d) Shares to be issued upon the exercise of options.
(e) Includes 45,532 shares of Common Stock issuable upon exercise of options.
Such options are exercisable within 60 days.
(f) Includes 24,172 shares of Common Stock issuable upon exercise of options.
Such options are exercisable within 60 days.
(g) Includes 21,316 shares of Common Stock issuable upon exercise of options.
Such options are exercisable within 60 days.
(h) Includes 6,180 shares of Common Stock issuable upon exercise of options.
Such options are exercisable within 60 days.
(i) Includes 7,500 shares of Common Stock issuable upon exercise of options.
Such options are exercisable within 60 days.
(j) 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 -- 31,862 shares;
Wayne M. Greenholtz -- 11,769 shares and James Yearwood --10,607. Such
options are exercisable currently or within 60 days.
36
<PAGE> 38
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 12,000,000 shares
of Common Stock, par value $.01 per share, of which 6,707,751 shares will be
outstanding following the Offering, and 1,000,000 shares of Preferred Stock, par
value $.01 per share, none of which are outstanding.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of the stockholders. Voting rights are not
cumulative. Accordingly, holders of a majority of the voting power entitled to
vote in any election of directors may elect all of the directors standing for
election. Holders of Common Stock are entitled to receive ratably such
dividends, if any, as may be declared from time to time by the Board of
Directors out of funds legally available therefor, subject to any preferential
dividend rights of, and sinking fund or redemption or purchase rights with
respect to, outstanding shares of Preferred Stock. In the event of voluntary or
involuntary liquidation, distribution, dissolution, or winding up of the
Company, the holders of Common Stock shall be entitled to receive all of the
remaining assets of the Company, ratably and in proportion to the shares of
Common Stock held by them, available after distribution in full of preferential
amounts, if any, to be distributed to holders of Preferred Stock. Holders of
Common Stock have no preemptive, subscription or redemption rights. The
outstanding shares of Common Stock are. and the shares offered by this offering
will be, when issued and paid for, fully paid and nonassessable. The rights,
preferences and privileges of holders of Common Stock are subject to, and may be
adversely affected by, the rights of holders of shares of any series of
Preferred Stock which the Company may designate and issue in the future.
PREFERRED STOCK
The authorized Preferred Stock of the Company consists of 1,000,000 shares,
par value $.01 per share, none of which will be issued and outstanding upon
completion of this offering. Preferred Stock may be issued from time to time in
one or more series. The Board of Directors, without further approval of the
stockholders, is authorized to fix the dividend rights and terms, conversion
rights, voting rights, redemption rights and terms, liquidation preferences, and
any other rights, preferences, privileges and restrictions applicable to each
series of Preferred Stock. The issuance of Preferred Stock, while providing
flexibility in connection with possible acquisitions and other corporate
purposes, could, among other things, adversely affect the voting power of the
holders of Common Stock, and, under certain circumstances, make it more
difficult for a third party to gain control of the Company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is State Street Bank
and Trust Company.
CERTAIN PROVISIONS AFFECTING STOCKHOLDERS
The Articles of Organization and By-laws of the Company include provisions
which are intended by the Board of Directors to help assure fair and equitable
treatment of the Company's stockholders in the event that a person or group
should seek to gain control of the Company in the future. Such provisions, which
are discussed below, may make a takeover attempt more difficult, whether by
tender offer, proxy contest or otherwise. Accordingly, such provisions might be
viewed as disadvantageous to stockholders inasmuch as they might diminish the
likelihood that a potential acquiror would make an offer for the Company's stock
(perhaps at an attractive premium over the market price), or impede a
transaction favorable to the interests of the stockholders, or increase the
difficulty of removing the incumbent Board of Directors and management, even if
in a particular case removal would be beneficial to the stockholders.
The Company's Board of Directors is divided into three classes, each of
which serves for three years, with one class being elected each year. Removal of
a member of the Board of Directors with or without cause requires a majority
vote of the Board of Directors or of the stockholders. A majority of the
remaining directors then in office, though less than a quorum, or the
stockholders are empowered to fill any vacancy on the Board of Directors.
Advance notice of stockholder nominations and any other matter to be brought
before a meeting
37
<PAGE> 39
of stockholders is required to be given in writing to the Clerk of the Company
within the time periods provided in the By-laws. A majority vote of the
stockholders is required to alter, amend or repeal the foregoing provisions.
The Company is subject to Chapter 110D of the Massachusetts General Laws,
which regulates so-called control share acquisitions. A "control share
acquisition" is the acquisition of shares which, when added to shares already
owned, would (but for the statute) entitle the acquiring person to vote at least
20% of a corporation's stock. Shares acquired in such a transaction would, under
the statute, have no voting rights unless a majority of noninterested
stockholders voted to grant such voting rights. In general, the person acquiring
such shares, officers of the Company and those directors of the Company who are
also employees, are not permitted to vote on whether such voting rights shall be
granted. Pursuant to the statute, the Articles of Organization permit the
Company, at its option, to redeem, without the concurrence of the person making
the control share acquisition, shares acquired in such acquisition at the fair
value of the shares if voting rights are not authorized by the stockholders. So
long as Chapter 110D is applicable, stockholders may act with regard to a
control share acquisition only subsequent to such an event. The stockholders, at
a duly constituted meeting, may, by amendment to the By-laws or the Articles of
Organization, provide that the provisions of Chapter 110D shall not apply to
control share acquisitions of the Company.
The Company is also subject to Chapter 110F of the Massachusetts General
Laws, which prohibits a business combination with a holder of 5% or more of the
voting stock of a corporation (an "interested stockholder") for three years
after the stockholder becomes an interested stockholder, unless the acquiror
receives prior Board approval, acquires 90% or more of the outstanding shares
(excluding stock controlled by management and certain ESOPs), or receives
approval from two-thirds of the stockholders (other than the interested
stockholder). The stockholders are permitted to amend a corporation's by-laws to
opt out of this legislation effective twelve months after such stockholder vote.
The Massachusetts General Laws explicitly permit directors to adopt
stockholder rights plans. The Company has not adopted any such plans. The
Massachusetts General Laws also permit directors to consider the interests of
employees, creditors, suppliers, customers, the community and other long-term
economic and societal effects in determining the best interests of a corporation
and its stockholders. In addition, Massachusetts law requires that, after a
transfer of control (defined as acquisition of beneficial ownership of 50% or
more of a corporation's voting securities), the acquiror must pay two weeks
severance pay for each year of service to any employee whose employment is
terminated (a) in the next two years, or (b) in the shorter of either the
previous year or the period of time it took the acquiror to go from a 5%
interest to the 50% level.
As permitted by the Massachusetts General Laws, the Company's Articles of
Organization limit the personal liability of its directors to the Company or its
stockholders for monetary damages for breach of fiduciary duty. The limitation
applies only with respect to breaches of fiduciary duty constituting violations
of the director's duty to act with such care as an ordinarily prudent person in
a like position would use under similar circumstances. As a result, the
Company's directors would ordinarily not be liable to stockholders for monetary
damages even if they are guilty of negligence or gross negligence in exercising
their business judgment, including the exercise of judgment with respect to a
takeover or other acquisition proposal involving the Company. The limitation
does not affect the ability of the Company or its stockholders to seek equitable
remedies, such as an injunction or rescission, against a director for breach of
his fiduciary duty and would not limit the liability under Federal securities
law.
38
<PAGE> 40
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 and the Selling Stockholders the number of shares of
Common Stock set forth below opposite their respective names.
<TABLE>
<CAPTION>
NUMBER
OF SHARES OF
NAME OF UNDERWRITER COMMON STOCK
------------------- ------------
<S> <C>
Tucker Anthony Incorporated.................................
McDonald & Company Securities, Inc..........................
J.C. Bradford & Co..........................................
---------
Total............................................. 1,150,000
=========
</TABLE>
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions therein set forth, to purchase all the shares of Common
Stock offered hereby if any of such shares are purchased.
The Company and the Selling Stockholders have been advised by the
Underwriters that the Underwriters propose initially to offer the shares of
Common Stock to the public at the offering price set forth on the cover page of
this Prospectus and to certain dealers at such price less a concession not in
excess of $ per share. The Underwriters may allow and such dealers may
reallow a concession not in excess of $ per share to certain other
dealers. After the initial public offering, the public offering price and such
concessions may be changed. The Underwriters have informed the Company and the
Selling Stockholders that they do not intend to confirm sales to accounts over
which they exercise discretionary authority.
The offering of the shares of Common Stock 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 the shares.
The Company has granted to the Underwriters an option, exercisable not
later than 30 days from the date of the Prospectus, to purchase up to an
aggregate of 172,500 additional shares of Common Stock to cover over-allotments.
To the extent the Underwriters exercise this option, each of the Underwriters
will have a firm commitment to purchase approximately the same percentage
thereof which the number of shares of Common Stock to be purchased by it shown
in the table above bears to 1,150,000, and the Company will be obligated,
pursuant to the option, to sell such shares to the Underwriters. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of the 1,150,000 shares of Common Stock offered hereby.
If purchased, the Underwriters will sell these additional shares on the same
terms as those on which the 1,150,000 shares are being offered.
The executive officers and directors of the Company, beneficially owning an
aggregate of approximately 593,143 shares of Common Stock have agreed that they
will not, without the prior written consent of the Underwriters, sell, transfer,
assign or otherwise dispose of any of the Common Stock or options, warrants or
rights to acquire Common Stock owned by them prior to the expiration of 120 days
from the date of this Prospectus.
The Underwriting Agreement provides that the Company and the Selling
Stockholders will indemnify the Underwriters, and controlling persons, if any,
against certain liabilities, including liabilities under the Securities Act of
1933, as amended, or will contribute to payments which the Underwriters or any
such controlling persons may be required to make in respect thereof.
Pursuant to regulations promulgated by the Securities and Exchange
Commission (the "Commission"), market makers in the Common Stock who are
Underwriters or prospective underwriters ("passive market makers") may, subject
to certain limitations, make bids for or purchases of shares of Common Stock
until the earlier of the time of commencement (the "Commencement Date") of
offers or sales of the Common Stock contemplated by this Prospectus or the time
at which a stabilizing bid for such shares is made. In general, on and after the
date two days prior to the Commencement Date (1) each such market maker's net
daily
39
<PAGE> 41
purchases of the Common Stock may not exceed 30% of the average daily trading
volume in such stock for the two full consecutive calendar months immediately
preceding the filing date of the Registration Statement of which this Prospectus
forms a part, (2) such market maker may not effect transactions in, or display
bids for, the Common Stock at a price that exceeds the highest bid for the
Common Stock by persons who are not passive market makers and (3) bids made by
passive market makers must be identified as such.
LEGAL MATTERS
Hutchins, Wheeler & Dittmar, A Professional Corporation, 101 Federal
Street, Boston, Massachusetts, will render an opinion on the legality of the
shares of Common Stock being offered hereby. Bass, Berry & Sims PLC, 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 7,512 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, 1997, 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 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"), with respect to the shares of Common Stock offered hereby.
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 Street, 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.
40
<PAGE> 42
======================================================
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
The Company........................... 7
Risk Factors.......................... 9
Incorporation by Reference............ 12
Forward-Looking Statements............ 12
Use of Proceeds....................... 12
Capitalization........................ 13
Market Price of and Dividends on
Common Stock........................ 14
Selected Consolidated Financial
Information......................... 15
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 17
Business.............................. 23
Management............................ 33
Principal and Selling Stockholders.... 35
Description of Capital Stock.......... 37
Underwriting.......................... 39
Legal Matters......................... 40
Experts............................... 40
Additional Information................ 40
</TABLE>
------------------------
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.
======================================================
======================================================
1,150,000 SHARES
[LITCHFIELD FINANCIAL CORP. LOGO]
COMMON STOCK
---------------------
PROSPECTUS
---------------------
MAY , 1998
TUCKER ANTHONY
INCORPORATED
MCDONALD & COMPANY
SECURITIES, INC.
J.C. BRADFORD & CO.
======================================================
<PAGE> 43
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....................... $ 8,974
NASD filing fee............................................. $ 3,542
Nasdaq fee.................................................. $ 17,500
Legal fees and expenses..................................... $100,000
Accounting fees and expenses................................ $ 35,000
Printing and engraving...................................... $ 90,000
Miscellaneous............................................... $ 9,984
--------
Total............................................. $265,000
========
</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> 44
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.
4.1 Specimen Common Stock Certificate.
5.1 Opinion of Hutchins, Wheeler & Dittmar, A Professional
Corporation.
23.1 Consent of Independent Auditors.
23.2 Consent of Hutchins, Wheeler & Dittmar, A Professional
Corporation (included in Exhibit 5.1).
24.1 Power of Attorney (included in signature page).
</TABLE>
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.
II-2
<PAGE> 45
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> 46
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant 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 21st day of May, 1998.
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>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ RICHARD A. STRATTON President, Chief Executive May 21, 1998
- ----------------------------------------------------- Officer, and Director
Richard A. Stratton
/s/ HEATHER A. SICA Executive Vice President and May 21, 1998
- ----------------------------------------------------- Director
Heather A. Sica
/s/ RONALD E. RABIDOU Chief Financial Officer and May 21, 1998
- ----------------------------------------------------- Treasurer
Ronald E. Rabidou
/s/ JOHN A. COSTA Director May 21, 1998
- -----------------------------------------------------
John A. Costa
/s/ GERALD SEGEL Director May 21, 1998
- -----------------------------------------------------
Gerald Segel
/s/ JAMES WESTRA Director May 21, 1998
- -----------------------------------------------------
James Westra
</TABLE>
II-4
<PAGE> 47
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
<C> <S>
1.1 Form of Underwriting Agreement.
4.1 Specimen Common Stock Certificate.
5.1 Opinion of Hutchins, Wheeler & Dittmar, A Professional
Corporation.
23.1 Consent of Independent Auditors.
23.2 Consent of Hutchins, Wheeler & Dittmar, A Professional
Corporation (included in Exhibit 5.1).
24.1 Power of Attorney (included in signature page).
</TABLE>
<PAGE> 1
EXHIBIT 1.1
LITCHFIELD FINANCIAL CORPORATION
1,150,000 SHARES OF COMMON STOCK
PAR VALUE $.01 PER SHARE
UNDERWRITING AGREEMENT
____________, 1998
TUCKER ANTHONY INCORPORATED
McDONALD & COMPANY SECURITIES, INC.
J.C. BRADFORD & CO.
c/o Tucker Anthony Incorporated
One Beacon Street
Boston, Massachusetts 02108
Ladies and Gentlemen:
Litchfield Financial Corporation, a Massachusetts corporation (the
"Company") proposes to sell to the several underwriters named in Schedule I
hereto (the "Underwriters"), and certain shareholders of the Company (the
"Selling Stockholders") named in Schedule II hereto severally propose to sell to
the several Underwriters, an aggregate of 1,150,000 shares of the Company's
Common Stock, par value $.01 per share (the "Firm Shares"), of which 1,000,000
shares are to be issued and sold by the Company and 150,000 shares are to be
sold by the Selling Stockholders, each Selling Stockholder selling the amount
set forth opposite such Selling Stockholder's name in Schedule II hereto. The
respective amounts of the Firm Shares to be so purchased by the Underwriters are
set forth opposite their names in Schedule I hereto. In addition, the Company
proposes to grant to the Underwriters an option to purchase up to an aggregate
of 172,500 additional shares of the Company's Common Stock solely for the
purpose of covering over-allotments, if any (the "Option Shares"). The Firm
Shares and the Option Shares purchased pursuant to this Agreement are
hereinafter collectively referred to as the "Shares."
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 relating to the Shares, has
filed such amendments thereto as may have been
required as of the date hereof,
<PAGE> 2
and will file such additional amendments as may
hereafter be required. 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 the
Underwriters. Such registration statement, including
the prospectus, Part II, all financial schedules and
exhibits thereto, and all information deemed to be a
part of such Registration Statement pursuant to Rule
430A under the Securities Act, at the time when it
shall become effective, together with any
registration statement filed by the Company pursuant
to Rule 462(b) of the Securities Act, 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 or the Securities Exchange
Act of 1934, as amended (the "Exchange 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 last two paragraphs
on the cover page and in the first, third and fourth
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 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
and the Rules and Regulations and will comply with
the requirements of the Securities Act, the Exchange
Act and the Rules and Regulations, and (ii)
2
<PAGE> 3
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 last paragraph on the cover page and in the
first, third and fourth 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 owned beneficially and of record by the
Company is owned 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 capitalization of the Company as of March 31,
1998 is as set forth under the caption
"Capitalization" in the Effective Prospectus and the
Final Prospectus, and the Company's capital stock
conforms to the description thereof contained under
the caption "Description of Capital Stock" in the
Effective Prospectus and the Final Prospectus. All
the issued shares of capital stock of the Company
(including the Shares to be sold by the Selling
3
<PAGE> 4
Shareholders) have been duly authorized and validly
issued, are fully paid and nonassessable. None of the
issued shares of capital stock of the Company
(including the Shares to be sold by the Selling
Shareholders) have been issued in violation of any
preemptive or similar rights. The Shares to be sold
by the Company have been duly and validly authorized
and, upon issuance and delivery and payment therefor
in the manner herein described, will be validly
issued, fully paid and nonassessable. Upon the
effective date of the offering of the Shares, there
will be no preemptive rights or other rights to
subscribe for or to purchase, or any restriction upon
the transfer of, any shares of Common Stock pursuant
to the Company's Articles of Organization, bylaws or
other governing documents or any agreement or other
instrument to which the Company is a party or by
which it may be bound except as described in the
Effective Prospectus and the Final Prospectus and
except for restrictions on transfer imposed under
applicable securities laws. Neither the filing of the
Registration Statement nor the offer or sale of the
Shares as contemplated by this Agreement gives rise
to any rights, other than those which have been
waived or satisfied, for or relating to the
registration of any shares of Common Stock or any
other securities of the Company. The Underwriters
will receive good and marketable title to the Shares
to be sold by the Company to be issued and delivered
hereunder, free and clear of all liens, encumbrances,
claims, security interests, restrictions,
stockholders' agreements and voting trusts
whatsoever.
f. All offers and sales of the Company's securities
prior to the date hereof were at all relevant times
duly registered or exempt from the registration
requirements of the Securities Act and were duly
registered or the subject of an available exemption
from the registration requirements of the applicable
state securities or Blue Sky laws, or if not
registered in compliance with the applicable federal
and state securities laws, any actions arising from
such failure to register any such securities are
barred by applicable statute of limitations.
g. The Company has full legal right, power and authority
to enter into this Agreement and the Custody
Agreement and Power of Attorney (the "Custody
Agreement and Power of Attorney") signed by each
Selling Stockholder and the Company, as Custodian,
relating to the deposit of the Shares to be sold by
such Selling Stockholder and to appointing a certain
individual as such Selling Stockholder's
attorney-in-fact to the extent set forth therein,
relating to the transactions contemplated thereby and
by the Registration Statement, and to sell and
deliver the Shares to be sold by the Company to the
Underwriters as provided herein, and this Agreement
and the Custody Agreement and Power of Attorney 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. No consent, approval,
authorization or order of any court or governmental
4
<PAGE> 5
agency or body or third party is required for the
performance of this Agreement and the Custody
Agreement and Power of Attorney 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.
("NASD") or under the Securities Act, or state
securities or Blue Sky laws in connection with the
purchase and distribution of the Shares by the
Underwriters. The issue and sale of the Shares to be
sold by the Company, the Company's performance of
this Agreement and the consummation of the
transactions contemplated hereby will not result in a
breach or violation of, or conflict with, any of the
terms and provisions of, or constitute a material
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 (i) in violation of its Articles of
Organization, (ii) in violation of any partnership
agreement or joint venture agreement, as the case may
be, (iii) in violation of its bylaws or any law,
administrative rule or regulation or arbitrators' or
administrative or court decree, judgment or order or
(iv) in violation of 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.
h. The consolidated financial statements and the related
notes of the Company, incorporated by reference 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 incorporated by reference in or as
schedules to the Registration Statement conform to
the requirements of the Securities Act, the Exchange
Act and the Rules and Regulations 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
5
<PAGE> 6
Financial Information," "Management's Discussion and
Analysis of Financial Condition and Results of
Operations," "Business" and "Principal and Selling
Stockholders" fairly presents the information set
forth therein on the basis stated in the Effective
Prospectus and the Final Prospectus. Ernst & Young
LLP, whose reports appear in the Effective Prospectus
and the Final Prospectus, are independent accountants
as required by the Securities Act and the Rules and
Regulations.
i. Subsequent to March 31, 1998, neither the Company nor
any subsidiary has sustained any material loss or
interference with its business or properties from
fire, flood, hurricane, earthquake, 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 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 or obligations under
capital leases 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 management,
business, prospects, financial position, net worth or
results of operations of the Company or its
subsidiaries, taken as a whole, except in each case
as described in or contemplated by the Effective
Prospectus and the Final Prospectus.
j. Except as described 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 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 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 or filed as required.
6
<PAGE> 7
l. Except as described 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, excise 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
respective businesses 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 businesses 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 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.
7
<PAGE> 8
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. Neither the Company nor any of its subsidiaries, nor
any of the directors, officers, employees or agents
of the Company and its subsidiaries have taken and
will not take, directly or indirectly, any action
designed to cause or result in, or which has
constituted or which might be expected to constitute,
stabilization or manipulation of the price of the
Common Stock. The
8
<PAGE> 9
Company acknowledges that the Underwriters may engage
in passive market making transactions in the Shares
on The Nasdaq Stock Market's National Market (the
"Nasdaq National Market").
t. The Company and each of its subsidiaries are insured
by insurers of reorganized financial responsibility
against such losses and risks and in such amounts as
are prudent and customary in the businesses in which
they are engaged; and the Company has no reason to
believe that it or any of its subsidiaries will not
be able to renew their existing insurance coverage as
and when such coverage expires or to obtain similar
coverage from similar insurers as may be necessary to
continue their respective businesses at a comparable
cost.
u. The Company is not an "investment company" within the
meaning of such term under the Investment Company Act
of 1940 and the rules and regulations of the
Commission thereunder.
v. The Company is in compliance in all material respects
with all presently applicable provisions of the
Employee Retirement Income Security Act of 1974, as
amended, including the regulations and published
interpretations thereunder ("ERISA"); no "reportable
event" (as defined in ERISA) has occurred with
respect to any "pension plan" (as defined in ERISA)
for which the Company would have any liability; the
Company has not incurred and does not expect to incur
liability under (i) Title IV of ERISA with respect to
termination of, or withdrawal from, any "pension
plan" or (ii) Sections 412 or 4971 of the Internal
Revenue Code of 1986, as amended, including the
regulations and published interpretations thereunder
(the "Code"), and each "pension plan" for which the
Company would have any liability that is intended to
be qualified under Section 401(a) of the Code is so
qualified in all material respects and nothing has
occurred, whether by action or by failure to act,
which would cause the loss of such qualification.
w. The Shares have been approved for listing on the
Nasdaq National Market subject to notice of issuance.
2. Representations and Warranties of the Selling Stockholders. Each
Selling Stockholder represents and warrants to each Underwriter and agrees as
follows:
a. The Selling Stockholder has valid and marketable
title to the Shares to be sold by the Selling
Stockholder, free and clear of any liens,
encumbrances, equities and claims (other than as
imposed by the Securities Act or this Agreement), and
full right, power and authority to effect the sale
and delivery of such Shares; and upon the delivery of
and payment for the Shares to be sold by the Selling
Stockholder pursuant to this Agreement and the
Custody Agreement and Power of Attorney, valid and
marketable title
9
<PAGE> 10
thereto, free and clear of any stockholders'
agreements, voting trusts, liens, encumbrances,
equities and claims, will be transferred to the
Underwriters.
b. The Selling Stockholder agrees that the shares of
Common Stock represented by the certificates are
subject to the interest of the Underwriters
hereunder, and that the obligations of the Selling
Stockholder hereunder shall not be terminated except
as provided in this Agreement.
c. The Selling Stockholder has duly executed and
delivered this Agreement and the Custody Agreement
and Power of Attorney; this Agreement and the Custody
Agreement and Power of Attorney constitute legal
valid and binding obligations of the Selling
Stockholder, all authorizations and consents
necessary for the execution and delivery of this
Agreement and the Custody Agreement and Power of
Attorney and for the sale and delivery of the Shares
to be sold by the Selling Stockholder hereunder have
been given, except as may be required by the NASD or
under the Securities Act or state securities laws or
Blue Sky laws; and the Selling Stockholder has the
legal capacity and full right, power and authority to
execute this Agreement and the Custody Agreement and
Power of Attorney.
d. The performance of this Agreement and the Custody
Agreement and Power of Attorney and the consummation
of the transactions contemplated hereby and thereby
by the Selling Stockholder will not result in a
material breach or violation of, or material conflict
with, any of the terms or provisions of, or
constitute a material default by the Selling
Stockholder under, any indenture, mortgage, deed of
trust (constructive or other), loan agreement, lease,
franchise, license or other agreement or instrument
to which the Selling Stockholder or any of his or her
properties is bound, any statute, or any judgment,
decree, order, rule or regulation or any court or
governmental agency or body applicable to the Selling
Stockholder or the property of the Selling
Stockholder.
e. The Selling Stockholder has not distributed nor will
distribute any prospectus or other offering material
in connection with the offer and sale of the Shares
other than any Preliminary Prospectus filed with the
Commission or the Final Prospectus or other material
permitted by the Securities Act.
f. For a period of 120 days from the effective date of
the Registration Statement, the Selling Stockholder
will not, directly or indirectly, sell, offer to
sell, grant any option for the sale of, or otherwise
dispose of any shares of Common Stock, other than to
the Underwriters pursuant to this Agreement, without
the prior written consent of the Underwriters.
g. To the best knowledge of the Selling Stockholder, the
representations and warranties of the Company
contained in Section 1 of this Agreement are true
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<PAGE> 11
and correct; the Selling Stockholder has reviewed and
is familiar with the Registration Statement as
originally filed with the Commission and the
Preliminary Prospectus contained therein. The
Preliminary Prospectus does not include an untrue
statement of a material fact, or omit to state a
material fact necessary in order to make the
statements therein, in the light of the circumstances
under which they were made, not misleading; the
Selling Stockholder is not prompted to sell the
Shares to be sold by the Selling Stockholder by any
information concerning the Company that is not set
forth in the Preliminary Prospectus, the Effective
Prospectus, or the Final Prospectus.
h. At the time the Registration Statement becomes
effective (i) such parts of the Registration
Statement and any amendments and supplements thereto
that specifically refer to the Selling Stockholder,
if any, will not contain an untrue statement of a
material fact or omit to state a material fact
required to be stated therein or necessary to make
the statements therein not misleading and (ii) such
parts of the Effective Prospectus and Final
Prospectus that specifically refer to the Selling
Stockholder, if any, will not include an untrue
statement of a material fact or omit to state a
material fact necessary in order to make the
statements therein, in light of the circumstances
under which they were made, not misleading.
i. No approval, consent, order, authorization,
designation, declaration or filing by or with any
regulatory body, administrative or other governmental
body is necessary in connection with the execution
and delivery of this Agreement by or on behalf of the
Selling Stockholder, and the consummation by it of
the transactions herein contemplated (other than as
by the Securities Act, state securities laws and the
NASD).
j. Any certificates signed by or on behalf of the
Selling Stockholder as such and delivered to the
Underwriters or to counsel for the Underwriters shall
be deemed a representation and warranty by the
Selling Stockholder to each Underwriter as to the
matters covered thereby.
k. In order to document the Underwriters' compliance
with the reporting and withholding provisions of the
Tax Equity and Fiscal Responsibility Act of 1982 with
respect to the transactions herein contemplated, the
Selling Stockholder agrees to deliver to the
Underwriters prior to or at the First Closing Date
(as hereinafter defined) a properly completed and
executed United States Treasury Department Form W-9
(or other applicable form or statement specified by
Treasury Department regulations in lieu thereof).
l. The Selling Stockholder will not take, directly or
indirectly, any action designed to cause or result
in, or which might constitute or be expected to
constitute, stabilization or manipulation of the
price of the Common Stock.
11
<PAGE> 12
3. Purchase, Sale and Delivery of the Shares.
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 and the Selling Stockholders agree 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 share,
the number of Firm Shares set forth opposite such
Underwriter's name in Schedule I hereto.
b. The Company grants to the Underwriters an option to
purchase, solely for the purpose of covering
over-allotments in the sale of Firm Shares, all or
any portion of the Option Shares at the purchase
price per share set forth above. The option granted
hereby may be exercised as to all or any part of the
Option Shares at any time within 30 days after the
date the Registration Statement becomes effective.
The Underwriters shall not be under any obligation to
purchase any Option Shares prior to the exercise of
such option. The option granted hereby may be
exercised by the Underwriters giving written notice
to the Company setting forth the number of Option
Shares to be purchased and the date and time for
delivery of and payment for such Option Shares and
stating that the Option Shares referred to therein
are to be used for the purpose of covering
over-allotments in connection with the distribution
and sale of the Firm Shares. 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, the date set forth therein for
such delivery and payment shall not be earlier than
three full business days thereafter. In either event,
the date so set forth shall not be more than 15 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 number of Option Shares specified in
such notice. Option Shares shall be purchased for the
accounts of the Underwriters in proportion to the
number of Firm Shares 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
Shares.
c. Certificates in definitive form for the Firm Shares
which each Underwriter has agreed to purchase
hereunder shall be delivered by or on behalf of the
Company and the Selling Stockholders to the
Underwriters for the account of such Underwriters
against payment by such Underwriters or on their
behalf of the purchase price therefor by same day
funds to the order of the
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<PAGE> 13
Company, at the offices of Tucker Anthony
Incorporated ("Tucker Anthony"), One Beacon Street,
Boston, Massachusetts 02108, or at such other place
as may be agreed upon by Tucker Anthony and the
Company, at 10:00 A.M., Boston time, on the third
full business day after this Agreement becomes
effective, 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 Shares 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 against payment by such
Underwriter or on its behalf of the purchase price in
the manner set forth above. The certificates in
definitive form for the Shares to be delivered will
be in good delivery form and in such denominations
and registered in such names as Tucker Anthony 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 the Underwriters, at
least 24 hours prior to the First Closing Date or the
Option Closing Date, as the case may be. It is
understood that an Underwriter may (but shall not be
obligated to) make payment on behalf of any
Underwriter or Underwriters for the Shares 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.
4. Offering by the Underwriters. After the Registration Statement
becomes effective, the several Underwriters propose to offer for sale to the
public the Firm Shares and any Option Shares which may be sold at the price and
upon the terms set forth in the Final Prospectus.
5. 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(b), 430A and 462(b) of the
Rules and Regulations and to notify the Underwriters
promptly (in writing, if requested) of all such
filings. The Company shall notify the Underwriters
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 the request of the Underwriters, any amendments
of or supplements to the Registration Statement, the
Effective Prospectus or the Final Prospectus which,
in the Underwriters' reasonable opinion, may be
necessary or advisable in connection with the
distribution of the Shares; and the Company shall not
file any amendment of or supplement to the
Registration Statement, the Effective
13
<PAGE> 14
Prospectus or the Final Prospectus which is not
approved by the Underwriters after reasonable notice
thereof. The Company shall advise the Underwriters
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 Shares 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 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 the
Underwriters direct such information as may be
reasonably required in qualifying the Shares for
offer and sale under the securities or Blue Sky laws
of such jurisdictions as the Underwriters may
designate 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
(except for the sole purpose of complying with Blue
Sky filing requirements) 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 Shares 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 Shares 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 the
Underwriters 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
Underwriters 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
14
<PAGE> 15
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 the Underwriters at
such office or offices as the Underwriters may
designate as many copies of the Preliminary
Prospectus and Final Prospectus as the Underwriters
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 the Underwriters may
reasonably request.
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 earnings 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 Shares 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 Underwriters copies of all reports and
other communications (financial or other) furnished
by the Company to its stockholders 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, from time to time, after the
effective date of the Registration Statement file
with the Commission such reports as are required by
the Securities Act, the Exchange Act and the Rules
and Regulations, and shall also file with state
securities commissions in states where the Shares
have been sold by the Underwriters (as the
Underwriters shall have advised the Company in
writing) such reports as are required to be filed by
the securities acts and the regulations of those
states.
j. Except pursuant to this Agreement or with the
Underwriters' written consent, for a period of 120
days from the effective date of the Registration
Statement,
15
<PAGE> 16
the Company will not, and the Company has provided
agreements executed by each of its executive
officers, directors, and the Selling Stockholders of
the Company, providing that for a period of 120 days
from the First Closing Date, such person or entity
will not, offer for sale, sell, grant any options
(other than pursuant to existing employee benefit
plans and agreements, other existing compensation
agreements and existing stock options), rights or
warrants with respect to any shares of Common Stock,
securities convertible into Common Stock or any other
capital stock of the Company, or otherwise dispose
of, directly or indirectly, any shares of Common
Stock or such other securities or capital stock.
k. If at any time during the 25 day period after the
Registration Statement is declared effective, any
rumor, publication or event relating to or affecting
the Company shall occur as a result of which, in the
Underwriters' opinion, the market price for the
Shares has been or is likely to be materially
affected (regardless of whether such rumor,
publication or event necessitates a supplement to or
amendment of the Final Prospectus), the Company will,
after written notice from the Underwriters advising
them as to the effect set forth above, prepare,
consult with the Underwriters concerning the
substance of and disseminate a press release or other
public statement, reasonably satisfactory to the
Underwriters, responding to or commenting on such
rumor, publication or event.
l. The Company will not take, directly or indirectly,
any action designed to cause or result in, or which
might constitute or be expected to constitute,
stabilization or manipulation of the price of the
Common Stock.
m. The Company will not take, directly or indirectly,
any action which would cause or result in the
delisting or the Company's Common Stock on the Nasdaq
National Market prior to the First Closing Date or,
if the Underwriters exercise the option granted by
the Company to cover overallotment, prior to the
Option Closing Date.
6. Expenses. The Company and the Selling Stockholders agree 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 and the Selling Stockholders 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 the Underwriters' Questionnaires and Blue Sky
Memoranda, (iii) fees and expenses of accountants and counsel for the Company
and the Selling Stockholders, (iv) expenses of registration or qualification of
the Shares under state Blue Sky and securities laws, including the fees and
disbursements of counsel to the Underwriters in connection therewith, (v)
16
<PAGE> 17
filing fees paid or incurred by the Underwriters and related fees and expenses
of counsel to the Underwriters in connection with filings with the NASD, (vi)
fees, costs and expenses associated with the registration and listing of the
Shares on the Nasdaq National Market, (vii) the costs and charges of the
Company's transfer agent and registrar and the cost of preparing the
certificates for the Shares, (viii) all other costs and expenses incident to the
performance of their obligations hereunder not otherwise provided for in this
Section 6; and (b) the out-of-pocket expenses, including counsel fees,
disbursements and expenses, incurred by the Underwriters in connection with
investigating, preparing to market and marketing the Shares and proposing to
purchase and purchasing the Shares under this Agreement will be borne and paid
by the Company if the sale of the Shares provided for herein is not consummated
by reason of the termination of this Agreement by the Company pursuant to
Section 14(a)(i), or because of any failure or refusal on the part of the
Company to comply or fulfill any of the conditions of this Agreement. Except as
provided in this Section, the Underwriters shall pay all of their own expenses.
7. Conditions of the Underwriters' Obligations. The respective
obligations of the Underwriters to purchase and pay for the Firm Shares shall be
subject, in their discretion, to the accuracy of the representations and
warranties of the Company and the Selling Stockholders 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 and the Selling
Stockholders 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 Underwriters and all filings required by Rules
424, 430A and 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 the
Underwriters' satisfaction; and the NASD, upon review
of the terms of the public offering of the Shares,
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 the Underwriters'
reasonable judgment, is material, or omits to state a
fact which, in the Underwriters' 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
17
<PAGE> 18
untrue statement of fact or stated a statement of
fact required to be stated therein.
c. The Underwriters shall have received an opinion,
dated the Closing Date, from Hutchins, Wheeler &
Dittmar, a professional corporation ("Hutchins,
Wheeler & Dittmar"), counsel for the Company,
substantially to the effect that:
(1) The Company has been duly organized and is
validly existing in good standing as a
corporation under the laws of the
Commonwealth of 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.
(2) Each of the Company's subsidiaries is
validly existing and in good standing as a
corporation 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 owned
beneficially and of record by the Company is
owned 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.
(3) As of the dates specified therein, the
Company had authorized and issued capital
stock as set forth under the caption
"Capitalization" in the Final Prospectus.
All of the outstanding shares of the capital
stock of the Company (including the Shares
to be sold by the Selling Stockholders) have
been duly authorized and are validly issued,
fully
18
<PAGE> 19
paid and nonassessable, and the Shares to be
sold by the Company have been duly
authorized, and upon issuance thereof and
payment therefor as provided herein, will be
validly issued, fully paid and
nonassessable; none of the issued shares
(including the Shares to be sold by the
Selling Stockholders) have been issued in
violation of or subject to any preemptive
rights provided for by law or by the
Company's Articles of Organization. There
are no preemptive rights or, to the
knowledge of such counsel, other rights to
subscribe for or to purchase, or any
restriction upon the transfer of, the Shares
pursuant to the Company's Articles of
Organization, bylaws or other governing
documents or, to the knowledge of such
counsel, any agreement or other instrument
to which the Company is a party or by which
it may be bound except as described in the
Effective Prospectus and Final Prospectus
and except for restrictions on transfer
imposed under applicable securities laws.
Neither the filing of the Registration
Statement nor the offer or sale of the
Shares as contemplated by this Agreement
gives rise to any rights, other than those
which have been waived or satisfied, for or
relating to the registration of any shares
of Common Stock or any other securities of
the Company. The Underwriters will receive
good and marketable title to the Shares to
be sold by the Company to be issued and
delivered pursuant to this Agreement, free
and clear of all liens, encumbrances,
claims, security interests, restrictions,
stockholders' agreements and voting trusts
whatsoever. The capital stock of the Company
and the Shares conform to the description
thereof contained in the Final Prospectus.
All offers and sales of the Company's
securities (including the Shares to be sold
by the Selling Stockholders) prior to the
date hereof were at all relevant times duly
registered or exempt from the registration
requirements of the Securities Act and were
duly registered or the subject of an
exemption from the registration requirements
of applicable state securities or Blue Sky
laws, or if not registered in compliance
with the applicable federal and state
securities laws, any actions arising from
such failure to register any such securities
are barred by applicable statute of
limitations.
(4) The Company has full legal right, power and
authority to enter into this Agreement and
the Custody Agreement and Power of Attorney
and to issue, sell and deliver the Shares to
be sold by it to the Underwriters as
provided herein, and this Agreement and the
Custody Agreement and Power of Attorney have
been duly authorized, executed and delivered
by the Company and constitute 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,
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<PAGE> 20
reorganization, moratorium, fraudulent
transfer, fraudulent conveyance or other
laws affecting creditors' rights generally.
(5) 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 Custody
Agreement and Power of Attorney by the
Company or the consummation by the Company
of the transactions contemplated hereby and
thereby, except such as have been obtained
under the Securities Act and such as may be
required by the NASD and under state
securities or Blue Sky laws in connection
with the purchase and distribution of the
Shares by the several Underwriters. The
performance of this Agreement and the
Custody Agreement and Power of Attorney by
the Company and the consummation by the
Company of the transactions contemplated
hereby and thereby 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.
(6) 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.
(7) 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.
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<PAGE> 21
(8) 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 or any decree
of any court or governmental agency or body
having jurisdiction over the Company or any
of its subsidiaries.
(9) 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 and Rule 430A 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.
(10) The information in the Effective Prospectus
and the Final Prospectus under the caption
"Description of Capital Stock," insofar as
it purports to summarize the capital stock
of the Company, 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
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<PAGE> 22
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,
dated the Closing Date, of Hutchins, Wheeler and
Dittmar as counsel for the Selling Stockholders,
substantially to the effect that:
(1) This Agreement and the Custody Agreement and
Power of Attorney have been duly executed
and delivered by or on behalf of each of the
Selling Stockholders and constitute valid
and binding agreements of the Selling
Stockholders in accordance with their terms,
except as enforceability may be limited by
applicable equitable principles or by
bankruptcy, insolvency, moratorium,
reorganization or similar laws from time to
time in effect affecting the enforcement of
creditors' rights and except that the
enforceability of the rights to indemnity
and contribution contained herein may be
limited by federal or state laws and public
policy underlying such laws.
(2) To the best knowledge of such counsel, the
sale of the Shares to be sold by the Selling
Stockholders hereunder and the compliance by
the Selling Stockholders with all of the
provisions of this Agreement and the Custody
Agreement and Power of Attorney, and the
consummation of the transactions herein and
therein contemplated will not conflict with
or result in a breach or violation of any
terms or provisions of, or constitute a
default under any material indenture,
mortgage, deed of trust, loan agreement or
other agreement or instrument known to such
counsel to which any of the Selling
Stockholders is a party or by which any of
the Selling Stockholders is bound or to
which any of the property or assets of any
of the Selling Stockholders is subject, or
any statute, order, rule or regulation of
any court or governmental agency or body
known to such counsel to be applicable to
the Selling Stockholders or the property of
the Selling Stockholders.
(3) To the knowledge of such counsel, no
consent, approval, authorization or order of
any court or governmental agency or body is
required for the consummation of the
transactions contemplated by this Agreement
and the Custody Agreement and Power of
Attorney in connection with the Shares to be
sold by the Selling Stockholders hereunder,
except which have been duly obtained and in
full force and effect, such as have been
obtained under the Securities Act and such
as may be required under state securities or
Blue Sky laws in connection with the
purchase and distribution of such Shares by
the Underwriters, as to which such counsel
need express no opinion.
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<PAGE> 23
(4) The Selling Stockholders have full right,
power and authority to sell, transfer and
deliver such Shares pursuant to this
Agreement and the Custody Agreement and
Power of Attorney. Assuming that the
Underwriters will take delivery of the
Shares for value in good faith and without
notice of any adverse claim within the
meaning of the Uniform Commercial Code and
that the Underwriters are not parties
themselves to any fraud or illegality
affecting the Shares, and by delivery of a
certificate or certificates therefor, the
Selling Stockholders will transfer to the
Underwriters good and marketable title to
such shares, free and clear of (i) all
liens, encumbrances, claims, security
interests and (ii) to the knowledge of such
counsel, all restrictions, stockholders'
agreements and voting trusts.
e. The Underwriters shall have received an opinion or
opinions, dated the Closing Date, of Bass, Berry &
Sims PLC, 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.
f. The Underwriters shall have received from Ernst &
Young LLP, 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
Underwriters, 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:
(1) In their opinion, the financial statements
and schedules examined by them and included
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;
(2) The unaudited selected financial information
included in the Preliminary Prospectus and
the Final Prospectus under the captions
"Prospectus Summary" and "Selected
Consolidated Financial Information" for the
years ended December 31, 1997, 1996, 1995,
1994 and 1993 agrees with the corresponding
amounts in the audited
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<PAGE> 24
financial statements incorporated by
reference in the Final Prospectus or
previously reported on by them;
(3) On the basis of a reading of the latest
available unaudited interim consolidated
financial statements of the Company and its
subsidiaries, a reading of the minute books
of the Company and its subsidiaries,
inquiries of management of the Company
responsible for financial and accounting
matters and other specified procedures, all
of which have been agreed to by the
Underwriters, 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 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 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,
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<PAGE> 25
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.
They have carried out certain specified
procedures, not constituting an audit, with
respect to certain amounts, percentages and
financial information specified by the
Underwriters 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 LLP, 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.
g. There shall have been furnished to the Underwriters a
certificate, dated the Closing Date and addressed to
the Underwriters, signed by the Chief Executive
Officer and by the Chief Financial Officer of the
Company to the effect that:
(1) 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;
(2) 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;
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<PAGE> 26
(3) all filings required by Rules 424, 430A and
462 of the Rules and Regulations have been
made;
(4) 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
(5) 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.
h. 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 shall have
not sustained any material loss or interference with
their respective businesses or properties from fire,
flood, hurricane, earthquake, 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 the
Underwriters' judgment shall render it unadvisable to
commence or continue the offering of the Shares at
the offering price to the public set forth on the
cover page of the Prospectus or to proceed with the
delivery of the Shares.
i. The representations and warranties of the Selling
Stockholders shall be true and correct as of the
Closing Date, and the Selling Stockholders shall
deliver to the Underwriters a certificate to that
effect dated the Closing Date and executed by or on
behalf of the Selling Stockholders.
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 Underwriters and their counsel. The Company shall
furnish to the Underwriters such conformed copies of such opinions,
certificates, letters and documents in such quantities as the Underwriters shall
reasonably request.
The respective obligations of the Underwriters to purchase and pay for the
Option Shares shall be subject, in their discretion, to each of the foregoing
conditions to purchase the Firm Shares, except
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<PAGE> 27
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.
8. Condition of the Company's and the Selling Stockholders'
Obligations. The obligations hereunder of the Company and the Selling
Stockholders are subject to the condition set forth in Section 7(a) hereof.
9. 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 or the
Selling Stockholders contained herein, (ii) any
failure of the Company or the Selling Stockholders to
perform its or their 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 or the Selling Stockholders filed in any
state or other jurisdiction in order to qualify any
or all of the Shares 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 neither the Company
nor the Selling Stockholders will 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 paragraph on the
cover page and in the first, third and fourth
paragraphs under the caption "Underwriting" in any
Preliminary
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<PAGE> 28
Prospectus and the Final Prospectus and the Effective
Prospectus). The Company shall be liable for the full
amount of all claims pursuant to this Section and
this Agreement.
b. Each Underwriter will indemnify and hold harmless the
Selling Stockholders and 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 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
paragraph on the cover page and in the first, third
and fourth 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 9 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 9 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 9. 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 9 for any legal
or other expenses subsequently incurred by such
indemnified party in connection with the
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<PAGE> 29
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. Neither the Company
nor any of the Selling Stockholders will, without
prior written consent of each Underwriter, settle or
compromise or consent to the entry of any judgment in
any pending or threatened claim, action, suit or
proceeding (or related cause of action or portion
thereof) in respect of which indemnification may be
sought hereunder (whether or not such Underwriter is
a party to such claim, action, suit or proceeding),
unless such settlement, compromise or consent
includes an unconditional release of such Underwriter
from all liability arising out of such claim, action,
suit or proceeding (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 9 is for any reason held to be unavailable to
the Underwriters, or the Company is insufficient to
hold 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 Shares (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
Shares 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
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<PAGE> 30
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.
e. The obligations of the Company under this Section 9
shall be in addition to any liability which the
Company may otherwise have and shall extend, upon the
same terms and conditions, to each person, if any,
who controls any Underwriter within the meaning of
the Securities Act; and the obligations of the
Underwriters under this Section 9 shall be in
addition to any liability which the respective
Underwriters may otherwise have and shall extend,
upon the same terms and conditions, to each officer
and director of the Company and to each person, if
any, who controls the Company within the meaning of
the Securities Act.
10. Default of Underwriters. If any Underwriter defaults in its
obligation to purchase Shares hereunder and if the total number of Shares which
such defaulting Underwriter agreed but failed to purchase is ten percent or less
of the total number of Shares to be sold hereunder, the non-defaulting
Underwriters shall be obligated severally to purchase (in the respective
proportions which the number of Shares set forth opposite the name of each
non-defaulting Underwriter in Schedule I hereto bears to the total number of
Shares set forth opposite the names of all the non-defaulting Underwriters), the
Shares which such defaulting Underwriter or Underwriters agreed but failed to
purchase. If any Underwriter so defaults and the total number of Shares with
respect to which such default or defaults occur is more than ten percent of the
total number of Shares to be sold hereunder, and arrangements satisfactory to
the other Underwriters and the Company for the purchase of such Shares 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 Shares, will terminate without liability on the part of the non-defaulting
Underwriters or the Company except for (i) the provisions of Section 9 hereof,
and (ii) the expenses to be paid or reimbursed by the Company pursuant to
Section 6. As used in this Agreement, the term "Underwriter" includes any person
substituted for an Underwriter under this Section 10. Nothing herein shall
relieve a defaulting Underwriter from liability for its default.
11. Default by the Selling Stockholders. If any of the Selling
Stockholders fails to sell and deliver the number of Shares that such Selling
Stockholder is obligated to sell, the Underwriters may, at their option, by
notice to the Company, either (a) require the Company to sell and deliver such
number of shares of Common Stock as to which such Selling Stockholder has
defaulted, or (b) terminate this Agreement if the Company shall have refused to
sell and deliver to the Underwriters the shares of Common Stock referred to in
Section 11(a). In the event of a default under this Section 11 that does not
result in the termination of this Agreement, the Underwriters shall have the
right to postpone the First Closing Date for a period not exceeding seven days
in order to effect any required changes in the Registration Statement or
Prospectus or in any other documents or arrangements. No action taken pursuant
to this Section 11 shall relieve the Company or the Selling Stockholder so
defaulting from liability, if any, in respect of such default.
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<PAGE> 31
12. Survival Clause. The respective representations, warranties,
agreements, covenants, indemnities and other statements of the Selling
Stockholders, 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 Selling Stockholders, 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
Shares.
13. Effective Date. This Agreement, after due execution, shall become
effective at whichever of the following times shall first occur: (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 Underwriters shall
release the Firm Shares for sale to the public; provided, however, that the
provisions of Sections 6, 9, 12 and 13 hereof shall at all times be effective.
For purposes of this Section 13, the Firm Shares shall be deemed to have been so
released upon the release by the Underwriters for publication, at any time after
the Registration Statement has become effective, of any newspaper advertisement
relating to the Firm Shares or upon the release by the Underwriters of telegrams
offering the Firm Shares for sale to securities dealers, whichever may occur
first.
14. Termination.
a. The Company's obligations under this Agreement may be
terminated by the Company by notice to the
Underwriters (i) at any time before it becomes
effective in accordance with Section 13 hereof, or
(ii) in the event that the condition set forth in
Section 8 shall not have been satisfied at or prior
to the First Closing Date.
b. This Agreement may be terminated by the Underwriters
by notice to the Company and the Selling Stockholders
(i) at any time before it becomes effective in
accordance with Section 13 hereof; (ii) in the event
that at or prior to the First Closing Date the
Company or the Selling Stockholders shall have
failed, refused or been unable to perform any
agreement on the part of the Company or the Selling
Stockholders 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 the
Underwriters' reasonable judgment, makes it
inadvisable to commence or continue the offering of
the Shares at
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<PAGE> 32
the offering price to the public set forth on the
cover page of the Prospectus or to proceed with the
delivery of the Shares.
c. Termination of this Agreement pursuant to this
Section 14 shall be without liability of any party to
any other party other than as provided in Sections 6
and 9 hereof.
15. 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 Tucker Anthony Incorporated, One Beacon Street, Boston,
Massachusetts 02108, Attn: Gregory W. Benning, or if sent to the Company or the
Selling Stockholders shall be mailed, delivered or telegraphed and confirmed in
writing to the Company at 430 Main Street, Williamstown, Massachusetts 01267,
Attn: Richard A. Stratton.
16. Miscellaneous. This Agreement shall inure to the benefit of and be
binding upon the several Underwriters, the Company and the Selling Stockholders
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, the Selling
Stockholders and the several Underwriters and for the benefit of no other person
except that (i) the representations and warranties of the Company and the
Selling Stockholders 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 Shares 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 Massachusetts. 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.
32
<PAGE> 33
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, the Selling Stockholders and each of the several
Underwriters.
Very truly yours,
LITCHFIELD FINANCIAL CORPORATION
By:
-----------------------------------------------
Name:
Title:
SELLING STOCKHOLDERS, named in Schedule II hereto:
By:
-----------------------------------------------
Richard A. Stratton, Attorney-in-Fact
33
<PAGE> 34
Confirmed and accepted as of the date first above written.
TUCKER ANTHONY INCORPORATED
By:_______________________________
Name:____________________________
Title:_____________________________
McDONALD & COMPANY SECURITIES, INC.
By:_______________________________
Name:____________________________
Title:_____________________________
J.C. BRADFORD & CO.
By:_______________________________
Name:____________________________
Title:_____________________________
34
<PAGE> 35
SCHEDULE I
UNDERWRITERS
<TABLE>
<CAPTION>
NUMBER OF
FIRM SHARES
UNDERWRITER TO BE PURCHASED
- ---------------------------------------------------------------------------- ---------------
<S> <C>
Tucker Anthony Incorporated.................................................
McDonald & Company Securities, Inc..........................................
J.C. Bradford & Co..........................................................
---------
Total Firm Shares to be Purchased...................... 1,150,000
=========
</TABLE>
35
<PAGE> 36
SCHEDULE II
SELLING STOCKHOLDERS
<TABLE>
<CAPTION>
NUMBER OF
FIRM SHARES
NAME TO BE PURCHASED
FROM SELLING
SHAREHOLDERS
- --------------------------------------------------------------------- ----------------
<S> <C>
Richard A. Stratton..................................................
Heather A. Sica......................................................
-------
Total Firm Shares to be Purchased
from the Selling Shareholders................... 150,000
=======
</TABLE>
36
<PAGE> 1
Exhibit 4.1
[LITCHFIELD FINANCIAL CORPORATION LOGO]
LITCHFIELD FINANCIAL CORPORATION
INCORPORATED UNDER THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS
NUMBER SHARES
LFC 3336
SEE REVERSE FOR CERTAIN DEFINITIONS
THIS CERTIFIES THAT CUSIP 536619 10 9
SPECIMEN
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, $.01 PAR VALUE, OF
LITCHFIELD FINANCIAL CORPORATION
TRANSFERABLE ONLY ON THE BOOKS OF THE CORPORATION IN PERSON OR BY DULY
AUTHORIZED ATTORNEY UPON SURRENDER OF THIS CERTIFICATE PROPERLY INDORSED OR
ASSIGNED. THE CERTIFICATE AND THE SHARES REPRESENTED HEREBY ARE ISSUED AND HELD
SUBJECT TO THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS, THE ARTICLES OF
ORGANIZATION OF THE CORPORATION, AS AMENDED, AND THE BYLAWS OF THE CORPORATION
AS AMENDED.
THIS CERTIFICATE IS NOT VALID UNTIL COUNTERSIGNED BY THE TRANSFER AGENT.
IN WITNESS WHEREOF, THE CORPORATION HAS CAUSED THIS CERTIFICATE TO BE
EXECUTED BY THE FACSIMILE SIGNATURES OF ITS DULY AUTHORIZED OFFICERS AND SEALED
WITH THE FACSIMILE SEAL OF THE CORPORATION.
DATED:
COUNTERSIGNED:
STATE STREET BANK AND TRUST COMPANY
OR TRANSFER AGENT LITCHFIELD FINANCIAL
CORPORATION SEAL
AUTHORIZED SIGNATURES
/s/ R.A. STRATTON /s/ JOHN J. MALLOY
PRESIDENT CLERK
<PAGE> 1
EXHIBIT 5.1
May 21, 1998
Litchfield Financial Corporation
430 Main Street
Williamstown, Massachusetts 01267
Ladies and Gentlemen:
In connection with the registration under the Securities Act of 1933, as
amended, of up to 1,322,500 shares (the "Shares") of Common Stock, par value
$.01 per share, of Litchfield Financial Corporation, a Massachusetts corporation
(the "Company"), proposed to be sold by the Company and Selling Stockholders,
pursuant to an Underwriting Agreement (the "Underwriting Agreement") among the
Company, Tucker Anthony Incorporated, McDonald & Company Securities, Inc. and J.
C. Bradford & Co., as underwriters (the "Underwriters"), we have examined such
corporate records and other documents, including the Registration Statement on
Form S-3, of even date herewith, relating to such Shares (the Registration
Statement as declared effective being hereinafter referred to as the
"Registration Statement") and the related prospectus, and have reviewed such
matters of law as we have deemed necessary as a basis for the opinion as
hereinafter expressed.
Based upon the foregoing and having regard for such legal considerations
as we deem relevant, we are of the opinion that:
1. The Company is a corporation validly existing under the laws of
the Commonwealth of Massachusetts;
2. The Company is authorized to issue 12,000,000 shares of Common
Stock, par value $.01 per share, and 1,000,000 Shares of
Preferred Stock, par value $.01 per share; and
3. The Company has duly authorized the issuance of up to 1,172,500
shares being offered by the Company pursuant to the Registration
Statement. The 150,000 shares being offered by the Selling
Stockholders are duly authorized, and 110,000 are validly issued,
fully paid and non-assessable. When issued and sold under the
circumstances contemplated in the Registration Statement, the
1,172,500 shares being offered by the Company and 40,000 shares
issuable upon the exercise of options being offered by the
Selling Stockholders, will be validly issued, fully paid and
non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement on Form S-3 and to the reference to us under the
caption "Legal Matters" in the Registration Statement.
Very truly yours,
/s/ Hutchins, Wheeler & Dittmar
-----------------------------------
HUTCHINS, WHEELER & DITTMAR
A Professional Corporation
<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- ) of Litchfield Financial
Corporation for the registration of 1,322,500 shares of its common stock and to
the incorporation by reference therein of our report dated January 31, 1998,
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, 1997, filed with the Securities and Exchange Commission.
Ernst & Young LLP
Boston, Massachusetts
May 19, 1998
