<PAGE> 1
Filed Pursuant to Rule 424(b)(2)
File No. 333-59173
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED AUGUST 10, 1998)
$10,000,000
[LITCHFIELD FINANCIAL CORPORATION LOGO]
8.25% SERIES A NOTES DUE 2003
<TABLE>
<S> <C>
PRINCIPAL AMOUNT: $10,000,000
INTEREST RATE: 8.25%
ORIGINAL ISSUE DATE: OCTOBER 16, 1998
STATED MATURITY: NOVEMBER 1, 2003
PRICE TO PUBLIC: 100%
AGENT'S COMMISSION: $350,000
NET PROCEEDS TO COMPANY: $9,650,000
</TABLE>
------------------------
INVESTORS SHOULD CAREFULLY REVIEW "RISK FACTORS" BEGINNING ON PAGE 3 OF
THE ACCOMPANYING PROSPECTUS BEFORE INVESTING IN THE SERIES A NOTES.
------------------------
This prospectus supplement relates to the original issuance and sale by
Litchfield Financial Corporation (the "Company") of the Series A Notes described
herein, through Tucker Anthony Incorporated (the "Underwriter"). The Company may
issue notes under Registration Statement No. 333-59173 in a principal amount of
up to $100,000,000 in gross proceeds. Prior to this offering, the Company has
not issued any notes under that registration statement.
The Series A Notes will not be listed for trading on the Nasdaq stock
market or any exchange, and the Company cannot assure that an active trading
market for the Series A Notes will develop.
The Company has granted the Underwriters an option to purchase up to
$1,500,000 aggregate principal amount of additional Series A Notes to cover
over-allotments, if any.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED THESE
SECURITIES OR DETERMINED THAT THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The Underwriter is offering the Series A Notes subject to receipt and
acceptance of the notes by the Underwriter and subject to its rights to reject
an order in whole or in part and to withdraw, cancel or modify the offer without
notice. The Series A Notes will bear interest from the date of delivery to the
Underwriter.
TUCKER ANTHONY
INCORPORATED
OCTOBER 13, 1998
<PAGE> 2
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus
supplement and the accompanying prospectus. It is not complete and may not
contain all of the information you should consider before investing in the
Series A Notes. You should read the entire prospectus supplement and prospectus
carefully, including "Risk Factors" and the financial statements and notes to
those statements included or incorporated by reference.
THE COMPANY
Litchfield Financial Corporation is a diversified finance company that
provides financing to creditworthy borrowers for assets not typically financed
by banks. The Company provides this financing by purchasing consumer loans and
other loans and by making loans to businesses secured by consumer receivables or
other assets.
TYPES OF LOANS
A. CONSUMER LOANS. The Company purchases consumer loans consisting primarily
of:
(1) LAND LOANS. These loans to purchasers of rural and vacation properties are:
- typically secured by one to twenty acre rural parcels; and
- secured by property located in 35 states, mainly in the southern United
States.
(2) VOI LOANS. These loans:
- are typically used to purchase ownership interests in fully furnished
vacation properties (popularly known as timeshare interests); and
- are secured by property located in 18 states, mainly in California,
Florida and Pennsylvania.
The Company requires most dealers or developers from whom it buys consumer
loans to guarantee repayment or replacement of any loan in default. Ordinarily,
the Company keeps a percentage of the purchase price as a reserve until the loan
is repaid.
B. HYPOTHECATION LOANS. The Company also provides financing to rural land
dealers, timeshare resort developers and other finance companies secured by
receivables. The Company's 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%.
C. A&D LOANS. The Company also makes loans to land dealers and resort
developers for the acquisition and development of rural land and timeshare
resorts. When the Company makes these 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. The Company's A&D Loans:
- typically have loan to value ratios of 60% to 80%; and
- have variable interest rates based on the prime rate plus 2% to 4%.
D. OTHER LOANS. The Company purchases other loans, such as consumer home
equity loans, builder construction loans and consumer construction loans, and
provides financing to other businesses secured by receivables or other assets.
SOURCES OF REVENUE
The principal sources of the Company's revenues are:
- interest and fees on loans;
- gains on sales of loans; and
- servicing and other fee income.
- --------------------------------------------------------------------------------
S-2
<PAGE> 3
- --------------------------------------------------------------------------------
THE OFFERING
Securities Offered......... $10,000,000 principal amount of 8.25% Series A
Notes due 2003. The Series A Notes are unsecured,
general obligations of the Company. See
"Description of Series A Notes" for a more detailed
description of the Series A Notes.
Maturity................... November 1, 2003
Interest Payment Dates..... The Company will make interest payments monthly
beginning December 1, 1998.
Redemption at Noteholder's
Option................... AFTER THE DEATH OF A NOTEHOLDER: If a Noteholder
dies and his Series A Notes are tendered by his
personal representative or surviving joint-tenant
or tenant in common, the Company must redeem (at
par plus accrued interest) the tendered Series A
Notes within 60 days of tender. This redemption
requirement is subject to the amount limitations
specified below. See "Description of Notes --
Redemption at Holder's Option," in the accompanying
prospectus.
BY OTHER NOTEHOLDERS: On December 1 of each year,
starting in 1999, the Company must redeem Series A
Notes tendered by the last day of September of that
year at par plus accrued interest. This redemption
requirement is subject to the amount limitations
specified below.
AMOUNT LIMITATIONS: The Company is only required to
redeem an aggregate of up to 5% of the original
aggregate principal amount of the Series A Notes,
subject to a maximum of $25,000 per beneficial
owner each year. The Company will redeem Series A
Notes tendered by representatives of deceased
beneficial owners before redeeming Series A Notes
tendered by other Noteholders.
Redemption Upon Occurrence
of Certain Events.......... If a Fundamental Structural Change or a Significant
Subsidiary Disposition (as those terms are defined
in the accompanying prospectus) occurs, each holder
of Series A Notes can require the Company to
purchase the holder's Series A Notes at a price
equal to the principal amount of the holder's
Series A Notes plus accrued interest. This right is
not exercisable if within 40 days after the
occurrence of such event the Series A Notes have
received a specified rating from a nationally
recognized statistical rating organization. See
"Description of Notes -- Noteholders' Right to
Prepayment After Fundamental Structural Change or
Significant Subsidiary Disposition" in the
accompanying prospectus.
Redemption at Company's
Option................... The Company has the option to redeem the Series A
Notes on or after November 1, 2000, at the
redemption prices indicated in this prospectus
supplement.
Sinking Fund............... None.
Certain Covenants of the
Company.................. The indenture limits the Company's ability to
declare dividends and to incur additional debt.
Use of Proceeds............ The Company will use the net proceeds from the sale
of the Series A Notes for general corporate
purposes.
Investment
Considerations............. Investors should consider the risk factors
beginning on page 3 of the accompanying prospectus
before purchasing the Series A Notes.
Trustee.................... The Bank of New York, New York, New York.
- --------------------------------------------------------------------------------
S-3
<PAGE> 4
- --------------------------------------------------------------------------------
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------------------------------- -----------------------
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 $ 9,329 $ 11,288
Gain on sale of loans.............. 4,550 4,847 5,161 7,331 8,564 4,067 5,679
Servicing and other fee income..... 501 459 908 1,576 1,753 702 959
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenues................... 9,381 10,975 17,461 23,696 29,691 14,098 17,926
---------- ---------- ---------- ---------- ---------- ---------- ----------
Expenses:
Interest expense................... 2,717 3,158 6,138 7,197 10,675 5,042 6,692
Salaries and employee benefits..... 1,350 1,776 2,798 2,824 3,399 1,646 2,280
Other operating expenses........... 1,017 1,164 2,120 3,147 3,480 1,756 1,869
Provision for loan losses.......... 620 559 890 1,954 1,400 735 810
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total expenses................... 5,704 6,657 11,946 15,122 18,954 9,179 11,651
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes and
extraordinary item................. 3,677 4,318 5,515 8,574 10,737 4,919 6,275
Provision for income taxes........... 1,426 1,619 2,066 3,301 4,134 1,894 2,416
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before extraordinary item..... 2,251 2,699 3,449 5,273 6,603 3,025 3,859
Extraordinary item(2)................ -- (126) -- -- (220) -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income....................... $ 2,251 $ 2,573 $ 3,449 $ 5,273 $ 6,383 $ 3,025 $ 3,859
========== ========== ========== ========== ========== ========== ==========
Basic per common share amounts:
Income before extraordinary item... $ .55 $ .66 $ .80 $ .97 $ 1.19 $ .52 $ .68
Extraordinary item................. -- (.03) -- -- (.04) -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income per share............... $ .55 $ .63 $ .80 $ .97 $ 1.15 $ .52 $ .68
========== ========== ========== ========== ========== ========== ==========
Basic weighted average number of
shares outstanding................. 4,065,688 4,116,684 4,315,469 5,441,636 5,572,465 5,840,526 5,706,887
Diluted per common share amounts:
Income before extraordinary item... $ .53 $ .63 $ .76 $ .93 $ 1.12 $ .52 $ .64
Extraordinary item................. -- (.03) -- -- (.04) -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income per share............... $ .53 $ .60 $ .76 $ .93 $ 1.08 $ .52 $ .64
========== ========== ========== ========== ========== ========== ==========
Diluted weighted average number of
shares outstanding................. 4,216,151 4,282,884 4,524,607 5,682,152 5,909,432 5,861,180 6,069,164
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% 21.5% 21.5%
Ratio of EBITDA to interest
expense(3)......................... 2.81x 3.31x 2.44x 2.90x 2.17x 2.88x 2.13x
Ratio of earnings to fixed
charges(4)......................... 2.35x 2.37x 1.90x 2.19x 2.01x 1.98x 1.94x
Return on average assets(5).......... 5.0% 4.6% 3.7% 4.0% 3.8% 3.7% 3.6%
Return on average equity(5).......... 17.0% 17.2% 16.6% 13.3% 14.1% 13.4% 13.8%
</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 notes issued in 1992,
net of applicable tax benefit of $76,000, for 1994 and of the remainder of
the notes issued in 1992, net of applicable tax benefit of $138,000, for
1997.
(3) The ratio of EBITDA to interest expense is required to be calculated for
the twelve month period immediately preceding each calculation date,
pursuant to the terms of the indentures to which the Company is subject.
EBITDA is defined as earnings before deduction of taxes, depreciation,
amortization, and interest expense (but after deduction for any
extraordinary item).
(4) For purposes of calculating the ratio of earnings to fixed charges,
earnings consist of income before income taxes and extraordinary items and
fixed charges. Fixed charges consist of interest charges and the
amortization of debt expense.
(5) The return on average assets and average equity for the six month periods
are calculated on an annualized basis. Calculations are based on income
before extraordinary item.
- --------------------------------------------------------------------------------
S-4
<PAGE> 5
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------- JUNE 30,
1993 1994 1995 1996 1997 1998
------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA(6):
Total assets.......................................... $54,444 $63,487 $112,459 $152,689 $186,790 $233,681
Loans held for sale(7)................................ 5,931 11,094 14,380 12,260 16,366 13,546
Other loans(7)........................................ 10,306 15,790 33,613 79,996 86,307 137,147
Retained interests in loan sales(7)................... 11,764 11,996 22,594 28,912 30,299 31,007
Secured debt.......................................... -- 5,823 9,836 43,727 5,387 26,318
Unsecured debt........................................ 32,302 29,896 47,401 46,995 105,347 105,056
Stockholders' equity.................................. 14,722 16,610 37,396 42,448 52,071 74,014
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED, DECEMBER 31, ENDED
--------------------------------------------------- JUNE 30,
1993 1994 1995 1996 1997 1998
------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
Loans purchased and originated(8).................. $42,410 $ 59,798 $121,046 $133,750 $184,660 $163,078
Loans sold(8)...................................... 28,099 40,116 65,115 54,936 98,747 68,882
Loans participated(8).............................. -- -- -- -- 6,936 1,631
Serviced Portfolio(9).............................. 84,360 105,013 176,650 242,445 304,102 384,663
Loans serviced for others.......................... 59,720 72,731 111,117 129,619 179,790 219,809
Dealer/developer reserves.......................... 4,926 6,575 9,644 10,628 10,655 10,444
Allowance for loan losses(10)...................... 1,064 1,264 3,715 4,528 5,877 6,463
Allowance ratio(11)................................ 1.26% 1.20% 2.10% 1.87% 1.93% 1.68%
Delinquency ratio(12).............................. .61% .93% 1.73% 1.34% 1.20% 1.10%
Net charge-off ratio(8)(13)........................ .69% .38% .67% .94% .74% .56%
Non-performing asset ratio(14)..................... 1.48% 1.02% 1.35% 1.57% 1.03% .78%
</TABLE>
- ---------------
(6) 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."
(7) Amount indicated is net of allowance for losses and recourse obligation on
retained interests in loan sales.
(8) During the relevant period.
(9) 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.
(10) The allowance for loan losses includes allowance for losses under the
recourse provisions of loans sold.
(11) The allowance ratio is the allowances for loan losses divided by the amount
of the Serviced Portfolio.
(12) 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.
(13) The net charge-off ratio is determined by dividing the amount of net
charge-offs for the period by the average Serviced Portfolio for the
period. The June 30, 1998 amount is calculated on an annualized basis.
(14) The non-performing asset ratio is determined by dividing the sum of the
amount of those loans which are 90 days or more past due and other real
estate owned by the amount of the Serviced Portfolio.
- --------------------------------------------------------------------------------
S-5
<PAGE> 6
BUSINESS
OVERVIEW
Litchfield Financial Corporation is a diversified finance company that
provides financing to creditworthy borrowers for assets not typically financed
by banks. The Company provides such financing by purchasing consumer and other
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, builder
construction 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. See "The Company" in
the accompanying prospectus for additional information.
CHARACTERISTICS OF THE SERVICED PORTFOLIO, LOAN PURCHASES AND ORIGINATIONS
The following table shows the growth in the diversity of the Serviced
Portfolio from primarily Purchased Loans to a mix of Purchased Loans,
Hypothecation Loans, A&D Loans and Other Loans:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------- JUNE 30,
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% 46.8%
Hypothecation Loans.............. 5.0 9.0 12.5 20.7 26.9 29.8
A&D Loans........................ 4.3 3.3 3.1 8.7 13.7 12.6
Other Loans...................... 1.7 2.4 2.8 3.5 2.8 10.8
----- ----- ----- ----- ----- -----
Total.................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== ===== =====
</TABLE>
The following table shows the growth in the diversity of the Company's
originations from primarily Purchased Loans to a mix of Purchased Loans,
Hypothecation Loans, A&D Loans and Other Loans:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------------------------- --------------
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% 39.2% 19.8%
Hypothecation Loans....... 11.8 22.2 20.9 29.6 37.1 35.8 40.7
A&D Loans................. 7.1 6.0 3.1 14.4 24.0 17.6 13.2
Other Loans............... 3.3 4.2 4.6 6.1 8.6 7.4 26.3
----- ----- ----- ----- ----- ----- -----
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
S-6
<PAGE> 7
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 and approved by its credit committee. Management
evaluates each land dealer's and resort developer's experience, financial
statements and credit references and inspects a substantial portion of the land
dealer's and resort developer's inventory of land and VOIs prior to approval of
loan purchases.
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 it's 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,
------------------------------------ JUNE 30,
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 six
months ended June 30, 1998 varied significantly from a low of approximately
$6,300 to a high of approximately $4.7 million. As of June 30, 1998 and December
31, 1997, the five largest dealers accounted for
S-7
<PAGE> 8
approximately 20.7% and 18.4%, respectively, of the principal amount of the Land
Loans in the Serviced Portfolio. No single dealer accounted for more than 5.2%
and 5.0% at June 30, 1998 and at December 31, 1997.
As of June 30, 1998 and December 31, 1997, 40.7% and 47.0%, respectively,
of the Serviced Portfolio consisted of Land Loans. The average principal balance
of such Land Loans was approximately $12,800 and $13,000, respectively, at June
30, 1998 and December 31, 1997. The following table sets forth as of June 30,
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................ $ 29,704,000 19.0% 5,766 47.3%
$10,000-$19,999.................. 60,745,000 38.8 4,256 35.0
$20,000 and greater.............. 66,058,000 42.2 2,157 17.7
------------ ----- ------ -----
Total.................. $156,507,000 100.0% 12,179 100.0%
============ ===== ====== =====
</TABLE>
As of June 30, 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 11.9 and
12.1 years, respectively, at June 30, 1998 and December 31, 1997. The following
table sets forth as of June 30, 1998 the distribution of interest rates payable
on the Land Loans:
<TABLE>
<CAPTION>
PERCENTAGE OF
PRINCIPAL PRINCIPAL
INTEREST RATE AMOUNT AMOUNT
- ------------- ------------ -------------
<S> <C> <C>
Less than 12.0%.......................................... $ 56,444,000 36.0%
12.0%-13.9%.............................................. 74,128,000 47.4
14.0% and greater........................................ 25,935,000 16.6
------------ -----
Total.......................................... $156,507,000 100.0%
============ =====
</TABLE>
As of June 30, 1998 and December 31, 1997, the Company's Land Loan
borrowers resided in 50 states, the District of Columbia and four and two
territories or foreign countries, respectively.
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 six months
ended June 30, 1998, the Company acquired approximately $1,312,000 of VOI Loans.
As of June 30, 1998 and December 31, 1997, the five largest developers accounted
for approximately 36.8% and 36.6%, respectively, of the principal amount of the
VOI Loans in the Serviced Portfolio. No single developer accounted for more than
9.0% at June 30, 1998 or at December 31, 1997.
As of June 30, 1998 and December 31, 1997, 6.1% and 9.6%, respectively, of
the Serviced Portfolio consisted of VOI Loans, and the average principal balance
of such VOI Loans was approximately $3,500 and $3,600, respectively. The
following table sets forth as of June 30, 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.................. $ 8,729,000 37.2% 4,186 62.7%
$4,000-$5,999..................... 7,724,000 32.9 1,562 23.4
$6,000 and greater................ 7,009,000 29.9 926 13.9
----------- ----- ----- -----
Total................... $23,462,000 100.0% 6,674 100.0%
=========== ===== ===== =====
</TABLE>
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<PAGE> 9
As of June 30, 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 3.7 years. The following table sets
forth as of June 30, 1998 the distribution of interest rates payable on the VOI
Loans:
<TABLE>
<CAPTION>
PERCENTAGE OF
PRINCIPAL PRINCIPAL
INTEREST RATE AMOUNT AMOUNT
- ------------- ----------- -------------
<S> <C> <C>
Less than 14.0%........................................... $ 9,941,000 42.4%
14.0%-15.9%............................................... 5,886,000 25.1
16.0% and greater......................................... 7,635,000 32.5
----------- -----
Total........................................... $23,462,000 100.0%
=========== =====
</TABLE>
As of June 30, 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 six months ended
June 30, 1998, the Company extended or acquired approximately $66.4 million of
Hypothecation Loans, of which $9.6 million, or 14.5%, were secured by Land
Loans, $33.2 million, or 50.0%, were secured by VOI Loans and $23.6 million, or
35.5%, were secured by other types of collateral such as tax lien certificates,
accounts receivable and mortgages.
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 June 30, 1998 and December 31, 1997, the
Company had $114.6 million and $81.9 million, respectively, 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, in May of 1998, the Company purchased the underlying receivables, which
the Company has reclassified as Other Loans. The proceeds of the receivables
purchased were applied to pay off the Company's participation interest. At June
30, 1998, Hypothecation Loans ranged in size from $6,000 to $19.0 million with
an average principal balance of $1,381,000. 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 represented 11.7% and 10.7% of
the Serviced Portfolio at June 30, 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 six months ended
June 30, 1998, the Company made $21.4 million of A&D Loans to land dealers and
resort developers, of which $9.1 million, or 42.6%, were secured by land, and
$12.3 million, or 57.4%, were secured by resorts under development.
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 June 30, 1998 and December 31, 1997, the Company had
$48.6 million and $41.7 million, respectively, of A&D Loans outstanding, none of
which were 30 days or more past due. At June 30, 1998 and December 31, 1997, A&D
Loans were secured by timeshare resort developments and rural land subdivisions
in 21 states and one foreign territory and 18 states and one foreign territory,
respectively. A&D Loans ranged in size from $1,700 to $8.4 million with an
average principal balance of $559,000 at June 30, 1998. A&D Loans ranged in size
from
S-9
<PAGE> 10
$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 5.2% and 6.1%, of the Serviced
Portfolio at June 30, 1998 and December 31, 1997, respectively.
(4) Other Loans
At June 30, 1998, Other Loans consisted primarily of consumer home equity
loans, consumer construction loans, builder 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. In May of 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. At June 30, 1998, the Company retained 221 of the
builder construction loans totalling $32.7 million. The Company had $41.4
million and $8.5 million of Other Loans, 0.75% and 1.97% of which were 90 days
or more past due at June 30, 1998 and December 31, 1997, respectively. At June
30, 1998, Other Loans ranged in size from less than $500 to $821,500 with an
average principal balance of $55,900. 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 June 30, 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 June 30, 1998, the Company had 160 Land Loans
exceeding $50,000, representing 1.3% of the number of such loans in the Serviced
Portfolio, for a total of $11.5 million. There were no VOI Loans exceeding
$50,000 as of June 30, 1998. The Company will originate Hypothecation Loans up
to $15 million and A&D Loans up to $10 million. From time to time, the Company
may have an opportunity to originate larger Hypothecation Loans or A&D Loans in
which case the Company would seek to participate such loans with other financial
institutions. 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. The determination of how to work out a
delinquent loan is based upon many
S-10
<PAGE> 11
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 June
30, 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>
YEAR ENDED DECEMBER 31, SIX MONTHS
----------------------------------------------------------------------- ENDED
1993 1994 1995 1996 1997 JUNE 30, 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 $384,663,000
Delinquent
loans(1)........... 511,000 981,000 3,062,000 3,255,000 3,642,000 4,251,000
Delinquency as a
Percentage of
Serviced
Portfolio.......... .61% .93% 1.73% 1.34% 1.20% 1.10%
</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.
S-11
<PAGE> 12
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>
YEAR ENDED DECEMBER 31, SIX MONTHS
--------------------------------------------------------------------- ENDED
1993 1994 1995 1996 1997 JUNE 30, 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 $156,507,000
Delinquent Land
Loans(1)........... 511,000 981,000 1,059,000 1,920,000 2,453,000 2,893,000
Delinquency as a
Percentage of Land
Loans in Serviced
Portfolio.......... .66% 1.08% 1.09% 1.61% 1.72% 1.85%
</TABLE>
- ---------------
(1) Delinquent loans are those which are 30 days or more past due which are not
covered by dealer/developer reserves or guarantees and not included in other
real estate owned.
VOI Loans
The following table shows the Company's delinquencies and delinquency
rates, net of dealer/developer reserves and guarantees for VOI Loans in the
Serviced Portfolio:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS
----------------------------------------------------------------- ENDED
1993 1994 1995 1996 1997 JUNE 30, 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 $23,462,000
Delinquent VOI
Loans(1)............ -- -- 1,958,000 1,316,000 739,000 552,000
Delinquency as a
percentage of VOI
Loans in Serviced
Portfolio........... -- -- 4.19% 3.04% 2.53% 2.35%
</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 six
months ended June 30, 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 June 30, 1998, there were $41.4 million of Other Loans of which
$806,000 or 2.0% were 30 days or more past due and not covered by
dealer/developer reserves or guarantees and not included in other real estate
owned.
S-12
<PAGE> 13
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>
YEAR ENDED DECEMBER 31, SIX MONTHS
----------------------------------------------------------------- ENDED
1993 1994 1995 1996 1997 JUNE 30, 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 1,400,000 810,000
Net charge-offs of
uncollectible
accounts............ (493,000) (359,000) (946,000) (1,965,000) (2,010,000) (968,000)
Allocation of purchase
adjustment(1)....... 439,000 -- 2,507,000 824,000 1,959,000 744,000
---------- ---------- ----------- ----------- ----------- -----------
Allowance, end of
year................ $1,064,000 $1,264,000 $ 3,715,000 $ 4,528,000 $ 5,877,000 $ 6,463,000
========== ========== =========== =========== =========== ===========
</TABLE>
- ---------------
(1) Represents allocation of purchase adjustment related to purchase of certain
nonguaranteed loans.
The following is an analysis of net charge-offs by major loan and
collateral types experienced by the Company:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS
-------------------------------------------------------- ENDED
1993 1994 1995 1996 1997 JUNE 30, 1998
-------- -------- -------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Land Loans.................... $493,000 $359,000 $546,000 $ 669,000 $ 986,000 $525,000
VOI Loans..................... -- -- 45,000 1,284,000 939,000 266,000
Hypothecation Loans........... -- -- -- -- -- --
A&D Loans..................... -- -- 352,000 (8,000) (2,000) --
Other Loans................... -- -- 3,000 20,000 87,000 178,000
-------- -------- -------- ---------- ---------- --------
Total net charge-offs......... $493,000 $359,000 $946,000 $1,965,000 $2,010,000 $969,000
======== ======== ======== ========== ========== ========
Net charge-offs as a
percentage of the average
Serviced Portfolio.......... .69% .38% .67% .94% .74% .56%
</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 $8,488,000 at June 30, 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 $1,931,000 at
June 30, 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
S-13
<PAGE> 14
except in connection with the purchase of loans. Servicing rates generally
approximate .5% to 2% of the principal balance of a loan.
Historically, the Company subcontracted the servicing of its loans to an
unaffiliated third party. In July 1998, the Company resumed certain customer
service and collection functions. The unaffiliated third party will continue to
provide certain data processing and payment processing functions. The Company
retains responsibility for servicing all loans as a master servicer.
In 1990, the Company began privately placing issues of pass-through
certificates evidencing an undivided beneficial ownership interest in pools of
mortgage loans which have been transferred to trusts. The principal and part of
the interest payments on the loans transferred to the trust are collected by the
Company, as the servicer of the loan pool, remitted to the trust for the benefit
of the investors, and then distributed by the trust to the investors in the
pass-through certificates.
As of June 30, 1998, the Company had sold or securitized a total of
approximately $417.1 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 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 $150.0 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 2001.
As of June 30, 1998, the outstanding balance of the sold or pledged loans
securing this facility was $124.4 million. The Company has an additional
revolving line of credit and sale facility of $25.0 million with another
multi-seller commercial paper conduit. The facility expires in March 2000. As of
June 30, 1998, the outstanding aggregate balance of the sold loans under the
facility was $12.3 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 Lakewood,
Colorado, six marketing executives based in Williamstown, Massachusetts and two
marketing executives based in Hoover, Alabama. In the last five 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 lender, mortgage banker or mortgage broker in
21 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-
S-14
<PAGE> 15
Lending Act may give rise to a limited right of rescission on the part of the
borrower and, under certain circumstances, monetary damages. 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 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
or 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 June 30, 1998, the Company had 95 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 Hoover, Alabama, pursuant to a lease expiring in December 1999, providing for
an annual rental of approximately $60,000.
S-15
<PAGE> 16
RATIO OF EARNINGS TO FIXED CHARGES
For the six-month period ended June 30, 1998 and the last five fiscal
years, the ratios of earnings to fixed charges of the Company, computed as set
forth below, were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------- SIX MONTHS ENDED
1993 1994 1995 1996 1997 JUNE 30, 1998
---- ---- ---- ---- ---- ------------------
<S> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges......... 2.35 2.37 1.90 2.19 2.01 1.94
</TABLE>
For purposes of calculating the ratio of earnings to fixed charges,
earnings consist of income before taxes and extraordinary item and fixed
charges. Fixed charges consist of interest charges and the amortization of debt
expense.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Series A Notes offered
hereby are estimated to be $9,400,000, 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 for general corporate purposes. Until
used for the purposes indicated, the Company will invest the net proceeds of
this Offering in short-term investment-grade interest-bearing securities.
DESCRIPTION OF SERIES A NOTES
The Series A Notes are the initial issue of Notes to be issued under an
indenture dated as of July 15, 1998 by and between the Company and the Bank of
New York, as Trustee, as supplemented by a supplemental indenture establishing
the terms of the Series A Notes offered hereby. The Indenture, as so
supplemented, is referred to herein as the "Indenture."
The following description of the Series A Notes offered hereby supplements
the description of the general terms and provisions of the Notes set forth in
the accompanying prospectus, to which description reference is hereby made. The
following summaries of certain provisions of the Series A Notes and the
Indenture do not purport to be complete and are subject to, and are qualified in
their entirety by reference to, all the provisions of the Indenture. Capitalized
terms not otherwise defined in this prospectus supplement and the accompanying
prospectus shall have the meanings given to them in the Indenture.
The Series A Notes will be limited in aggregate principal amount to
$10,000,000, not including the over-allotment option, all of which are being
offered hereby, and will be issued as fully-registered Series A Notes only in
integral multiples of $1,000.
The Series A Notes will mature on November 1, 2003, and payments of the
principal of the Series A Notes will be made at the main office of the Trustee
in New York, New York.
The Series A Notes bear interest at the rate of 8.25% per annum from and
after the date of delivery, and payments of interest will be made monthly in
arrears beginning December 1, 1998 to Noteholders of record as of the close of
business on the 15th day of the preceding month.
On December 1 of each year, commencing in 1999, the Company will redeem
Series A Notes tendered by the last day of September of that year at par plus
accrued interest, subject to the amount limitations set forth in the
accompanying prospectus. See "Description of Notes -- Redemption of Holder's
Options" in the accompanying prospectus.
Beginning November 1, 2000, the Company shall have the option to redeem,
upon not less than 30 and not more than 60 days' notice, all or any portion of
the Series A Notes. If the Company redeems the Series A
S-16
<PAGE> 17
Notes prior to maturity, it will pay in cash a redemption price equal to the
following percentages of the principal amount of the Series A Notes redeemed,
plus interest, to the date fixed for redemption:
<TABLE>
<CAPTION>
IF REDEEMED DURING REDEMPTION
THE 12 MONTHS BEGINNING PRICE
----------------------- ----------
<S> <C>
November 1, 2000.................................. 103.0%
November 1, 2001.................................. 101.5%
November 1, 2002 and thereafter................... 100.0%
</TABLE>
If less than all the Series A Notes are redeemed, the particular Series A
Notes to be redeemed will be selected by lot by the Trustee. Notice of
redemption will be mailed to each holder of Series A Notes to be redeemed at the
address appearing in the registry books for the Series A Notes maintained by the
Company.
UNDERWRITING
Pursuant to the Underwriting Agreement, and subject to the terms and
conditions thereof, the Underwriter named below has agreed to purchase from the
Company the principal amount of Series A Notes set forth below.
<TABLE>
<CAPTION>
AMOUNT
NAME OF UNDERWRITER OF NOTES
------------------- --------
<S> <C>
Tucker Anthony Incorporated................................. $10,000,000
-----------
Total............................................. $10,000,000
===========
</TABLE>
In the Underwriting Agreement, the Underwriter has agreed, subject to the
terms and conditions therein set forth, to purchase all the principal amount of
Series A Notes offered hereby if any of such Series A Notes are purchased.
The Underwriter has advised the Company that it proposes initially to offer
the Series A Notes to the public at the public offering price set forth on the
cover page of this prospectus supplement and to certain dealers at such a price
less a concession not in excess of 1.75% of the principal amount. After the
initial public offering, the public offering price and such concessions may be
changed.
The Company has granted to the Underwriter an option, exercisable during
the 30 days after the date of this prospectus supplement, to purchase up to
$1,500,000 in aggregate principal amount of the Series A Notes at the Price to
Public set forth on the cover page of this prospectus supplement, less an
underwriting discount. The Underwriter may exercise such option to purchase
solely for the purpose of covering over-allotments, if any, incurred in the sale
of the Series A Notes offered hereby.
The offering of the Series A Notes is made for delivery when, as and if
accepted by the Underwriter and subject to prior sale and to withdrawal,
cancellation or modification of the offer without notice. The Underwriter
reserves the right to reject any order for the purchase of Series A Notes.
There is no public market for the Series A Notes, and the Company does not
intend to apply for listing of the Series A Notes on the Nasdaq stock market or
any securities exchange. The Company has been advised by the Underwriter that,
following the public offering of the Series A Notes, the Underwriter presently
intends to make a market in the Series A Notes; however, the Underwriter is not
obligated to do so, and any market-making activity with respect to the Series A
Notes may be discontinued at any time without notice. There can be no assurances
as to the liquidity of the public market for the Series A Notes or that an
active public market for the Series A Notes will develop. If an active market
does not develop, the market price and liquidity of the Series A Notes may be
adversely affected.
The Underwriting Agreement provides that the Company will indemnify the
Underwriter, and controlling persons, if any, against certain liabilities,
including liabilities under the Securities Act of 1933, as amended, or
S-17
<PAGE> 18
to contribute to payments which the Underwriter or any such controlling persons
may be required to make in respect thereof.
The Underwriter participating in this Offering may engage in transactions
that stabilize, maintain or otherwise affect the price of the Series A Notes.
Specifically, the Underwriter may over-allot in connection with the Offering and
may bid for and purchase Series A Notes in the open market.
FORWARD-LOOKING STATEMENTS
Except for the historical information contained or incorporated by
reference in this prospectus supplement and the accompanying 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.
S-18
<PAGE> 19
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TABLE OF CONTENTS
PAGE
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PROSPECTUS SUPPLEMENT
Prospectus Summary...................................................... S-2
Business................................................................ S-6
Ratio of Earnings to Fixed Charges...................................... S-16
Use of Proceeds......................................................... S-16
Description of Series A Notes........................................... S-16
Underwriting............................................................ S-17
Forward-Looking Statements.............................................. S-18
PROSPECTUS
Available Information................................................... 2
Incorporation of Documents by Reference................................. 2
Risk Factors............................................................ 3
The Company............................................................. 6
Use of Proceeds......................................................... 7
Ratio of Earnings to Fixed Charges...................................... 7
Description of Notes.................................................... 8
Plan of Distribution.................................................... 13
Legal Matters........................................................... 14
Experts................................................................. 14
------------------------
PROSPECTIVE INVESTORS MAY RELY ONLY ON THE INFORMATION CONTAINED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS. NEITHER THE COMPANY NOR
THE UNDERWRITER HAS AUTHORIZED ANYONE TO PROVIDE PROSPECTIVE INVESTORS WITH
INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS. THIS PROSPECTUS SUPPLEMENT IS NOT AN OFFER TO SELL NOR
IS IT SEEKING AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE
OFFER OR SALE IS NOT PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS
SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS IS CORRECT ONLY AS OF THE DATE OF THE
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS, RESPECTIVELY, REGARDLESS OF THE TIME
OF THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR ANY SALE OF THESE SECURITIES.
================================================================================
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$10,000,000
[LITCHFIELD FINANCIAL CORP. LOGO]
8.25% NOTES DUE 2003
---------------------
PROSPECTUS SUPPLEMENT
---------------------
OCTOBER 13, 1998
TUCKER ANTHONY
INCORPORATED
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