UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT to SECTION 13 or 15(d) of THE SECURITIES
EXCHANGE ACT of 1934
For the fiscal year ended DECEMBER 31, 1998
Commission File Number: 0-19822
LITCHFIELD FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
MASSACHUSETTS
04-3023928
(State or other jurisdiction
(I.R.S. Employer Identification No.)
of incorporation or organization)
430 MAIN STREET, WILLIAMSTOWN, MA 01267
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (413) 458-1000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock ($.01 par value)
(Title of class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulations S-K is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this form 10-K. [ X ]
The aggregate market value of the voting stock held by nonaffiliates
of the registrant as of March 15, 1999 was $117,571,000 (based on
the closing price of the Company's common stock on The Nasdaq Stock
Market's National Market.)
The number of outstanding shares of common stock as of March 15,
1999 was 6,886,873 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual stockholders report for the year ended
December 31, 1998 are incorporated by reference into Parts I and II.
Portions of the proxy statement for the Annual Meeting of
Stockholders to be held April 23, 1999 are incorporated by reference
into Part III.
LITCHFIELD FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-K
FISCAL YEAR ENDED DECEMBER 31, 1998
INDEX
PART I PAGE
Item 1. Business.............................................. 3
Item 2. Properties............................................ 19
Item 3. Legal Proceedings..................................... 19
Item 4. Submission of Matters to a Vote of Security Holders... 19
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters .................................................. 20
Item 6. Selected Financial Data............................... 20
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ...................... 20
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk ..................................................... 20
Item 8. Financial Statements and Supplementary Data........... 20
Item 9. Changes in and Disagreements with Accountants on
Accounting
and Financial Disclosure............................. 20
PART III
Item 10. Directors and Executive Officers of the Registrant .. 21
Item 11. Executive Compensation .............................. 21
Item 12. Security Ownership of Certain Beneficial Owners and
Management ............................................... 21
Item 13. Certain Relationships and Related Transactions ...... 21
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K .............................................. 22
FORWARD-LOOKING STATEMENTS
Except for the historical information contained or incorporated
by reference in this Form 10-K, 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.
PART I
Form 10-K
Item 1. BUSINESS
Overview
Litchfield Financial Corporation (the "Company") 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 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, mortgages and construction loans and
tax lien certificates, 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 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.
Business Strategy
The Company was founded in November 1988. The Company's strategy
has been to build its serviced portfolio (the "Serviced Portfolio")
consisting of the principal amount of loans serviced by or on behalf
of the Company (except loans participated without recourse to the
Company) by acquiring loan portfolios from rural land dealers, resort
developers and financial institutions and by providing loans to such
dealers and developers and other businesses secured by consumer
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 VOI Loans 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, the Company expanded its financing
of Hypothecation Loans to other finance companies ("Finanical
Services Loans") secured by other types of collateral. The Company
expects to continue to expand its Financial Services 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.
Management believes that the marketing and operating strategies
implemented by the Company have enabled it to provide financing to
parties whose needs have been historically underserved in a highly
fragmented and inefficient market. In doing so, the Company has
increased its earnings per share during each of its full years 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>
<S> <C> <C> <C> <C> <C>
December 31,
1998 1997 1996 1995 1994
Purchased Loans.......... 38.4% 56.6% 67.1% 81.6% 85.3%
Hypothecation Loans...... 35.2 26.9 20.7 12.5 9.0
A&D Loans................ 11.2 13.7 8.7 3.1 3.3
Other Loans.............. 15.2 2.8 3.5 2.8 2.4
------ ------ ------ ------ ------
Total......... 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>
<S> <C> <C> <C> <C> <C>
December 31,
1998 1997 1996 1995 1994
Purchased Loans............. 14.9% 30.3% 49.9% 71.4% 67.6%
Hypothecation Loans......... 48.6 37.1 29.6 20.9 22.2
A&D Loans................... 10.2 24.0 14.4 3.1 6.0
Other Loans................. 26.3 8.6 6.1 4.6 4.2
------- ------ ------ ------ ------
Total............. 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 and VOI Loans. The land 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 dealer
or resort developer 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 or 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 the 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 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 generally guarantee the loans sold and the Company
generally 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
estimated loan losses are considered in establishing the purchase
price.
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 39 states.
<TABLE>
<S> <C> <C> <C> <C> <C>
Principal Amount of Loans
December 31,
1998 1997 1996 1995 1994
Southwest................. 32% 30% 26% 16% 19%
South..................... 30 31 31 31 37
West...................... 19 17 20 20 3
Mid-Atlantic.............. 8 10 10 16 16
Northeast................. 11 12 13 17 25
Total................ 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. During the year ended December 31, 1998, the Company
aquired approximately $53.7 million of Land Loans. The aggregate
principal amount of Land Loans purchased from individual dealers
during the year ended December 31, 1998 varied from a low of
approximately $9,000 to a high of approximately $4.7 million. As of
December 31, 1998, the five largest dealers accounted for
approximately 20.6% of the principal amount of the Land Loans in the
Serviced Portfolio, and no single dealer accounted for more than
5.4%.
As of December 31, 1998, 34.3% of the Serviced Portfolio
consisted of Land Loans with an average principal balance of
approximately $13,100. The following table sets forth as of
December 31, 1998, the distribution of Land Loans in the Company's
Serviced Portfolio:
<TABLE>
<S> <C> <C> <C> <C>
Percentage of Percentage of
Principal Principal Number of Number of
Principal Balance Amount Amount Loans Loans
Less than $10,000......... $ 28,936,000 18.1% 5,581 45.7%
$10,000-$19,999............ 61,138,000 38.2 4,287 35.1
$20,000 and greater........ 70,024,000 43.7 2,343 19.2
Total............... $160,098,000 100.0% 12,211 100.0%
</TABLE>
As of December 31, 1998, the weighted average interest rate of
the Land Loans included in the Company's Serviced Portfolio was
12.0% and the weighted average remaining maturity was 12.0 years.
The following table sets forth as of December 31, 1998 the
distribution of interest rates payable on the Land Loans:
<TABLE>
<S> <C> <C>
Percentage
of
Principal Principal
Interest Rate Amount Amount
Less than 12.0%........................... $ 55,332,000 34.6%
12.0%-13.9%............................... 81,256,000 50.7
14.0% and greater......................... 23,510,000 14.7
Total................................ $160,098,000 100.0%
</TABLE>
As of December 31, 1998, the Company's Land Loan borrowers
resided in 50 states, the District of Columbia and ten 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 year ended December 31,
1998, the Company acquired approximately $2.4 million of VOI Loans.
As of December 31, 1998, the five largest developers accounted for
approximately 35.1% of the principal amount of the VOI Loans in the
Serviced Portfolio, and no single developer accounted for more than
9.4%.
As of December 31, 1998, 4.1% of the Serviced
Portfolio consisted of VOI Loans, with an average principal balance
of approximately $3,400. The following table sets forth as of
December 31, 1998 the distribution of VOI Loans:
<TABLE>
<S> <C> <C> <C> <C>
Percentage of Percentage of
Principal Principal Number of Number of
Principal Balance Amount Amount Loans Loans
Less than $4,000....... $ 7,519,000 39.3% 3,615 64.8%
$4,000-$5,999.......... 6,530,000 34.2 1,316 23.6
$6,000 and greater..... 5,070,000 26.5 649 11.6
Total............. $19,119,000 100.0% 5,580 100.0%
</TABLE>
As of December 31, 1998, 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 December 31, 1998 the distribution
of interest rates payable on the VOI Loans:
<TABLE>
<S> <C> <C>
Percentage
of
Principal Principal
Interest Rate Amount Amount
Less than 14.0%..................... $ 8,147,000 42.6%
14.0%-15.9%......................... 4,482,000 23.4
16.0% and greater................... 6,490,000 34.0
Total.......................... $19,119,000 100.0%
</TABLE>
As of December 31, 1998, 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 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 year ended
December 31, 1998, the Company extended or acquired approximately
$182.2 million of Hypothecation Loans, of which $26.5 million, or
14.5%, were secured by Land Loans, $84.2 million, or 46.2%, were
secured by VOI Loans and $71.5 million, or 39.3%, 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 December 31, 1998, the Company had $164.5 million of
Hypothecation Loans outstanding, none of which were 31 days or more
past due. During the three months ended March 31, 1998, the Company
acquired a $17.0 million participation interest in a Hypothecation
Loan from another financial institutuion. As planned, in May of
1998, the Company purchased the underlying receivables, which the
Company reclassified as Other Loans. The proceeds of the
receivables purchased were applied to pay off the Company's
participation interest. At December 31, 1998, Hypothecation Loans
ranged in size from less than $500 to $21.5 million with an average
principal balance of $1,678,000. The five largest Hypothecation
Loans represented 15.5% of the Serviced Portfolio.
(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 year ended December 31, 1998, the Company made $38.2
million of A&D Loans to land dealers and resort developers, of which
$13.3 million, or 34.9%, were secured by land and $24.9 million, or
65.1%, 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 December 31,
1998, the Company had $52.3 million of A&D Loans outstanding, none
of which were 31 days or more past due. A&D Loans are secured by
timeshare resort developments and rural land subdivisions in 16
states and one territory. A&D Loans range in size from $1,700 to
$9.5 million with an average principal balance of $780,000. The
five largest A&D Loans represent 4.7% of the Serviced Portfolio.
(4) Other Loans
At December 31, 1998, Other Loans consisted primarily of consumer
home equity loans, mortgage and construction loans, other secured
commercial loans and tax lien certificates. 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 totaling $32.7 million, a portion of
which had previously been collateral for the Hypothecation Loan in
which the Company owned a participation interest. As of December
31, 1998, the Company had 176 of the builder construction loans
totaling $33.9 million. In October 1998, the Company began
purchasing tax lien certificates and held $21.2 million of such
certificates at December 31, 1998. The Company had $71.0 million of
Other Loans, 1.94% of which were 91 days or more past due. Other
Loans range in size from less than $500 to $875,000 with an average
principal balance of $23,200. The five largest Other Loans
represent 0.8% of the Serviced Portfolio.
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 conduct 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 December
31, 1998, the Company had 154 Land Loans exceeding $50,000
representing 2.3% of the number of such loans in the Serviced
Portfolio, for a total of $10.9 million. There were no VOI Loans
exceeding $50,000 as of December 31, 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, three Executive Vice Presidents and a Senior Vice President.
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, collections are generally made by mail and
telephone. Collection efforts begin when an account is seven days
past due, at which time the Company sends out a late notice. When
an account is fifteen 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 the account is
performed by the collection manager 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 non-accrual status and the collection
manager determines the action to be taken. The determination of how
to work out a delinquent loan is based upon many factors, including
the borrower's payment history and the reason for the current
inability to make timely payments. 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
of six months over the life of the loan. The Company has extended
approximately 0.9% of its loans through December 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>
<S> <C> <C> <C> <C> <C>
Year Ended December 31,
1998 1997 1996 1995 1994
Serviced Portfolio... $466,912,000 $304,102,000 $242,445,000 $176,650,000 $105,013,000
Delinquent loans (1). 4,456,000 3,642,000 3,255,000 3,062,000 981,000
Delinquency as a
Percentage of
Serviced Portfolio. 0.95% 1.20% 1.34% 1.73% .93%
</TABLE>
(1) Delinquent loans are those which are 31 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>
<S> <C> <C> <C> <C> <C>
Year Ended December 31,
1998 1997 1996 1995 1994
Land Loans in
Serviced Portfolio... $160,098,000 $142,828,000 $119,370,000 $97,266,000 $90,502,000
Delinquent Land
Loans (1)............ 2,728,000 2,453,000 1,920,000 1,059,000 981,000
Delinquency as a
Percentage of
Land Loans in
Serviced Portfolio... 1.70% 1.72% 1.61% 1.09% 1.08%
</TABLE>
(1) Delinquent loans are those which are 31 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>
<S> <C> <C> <C> <C> <C>
Year Ended December 31,
1998 1997 1996 1995 1994
VOI Loans in Serviced
Portfolio......... $19,119,000 $29,232,000 $43,284,000 $46,700,000 $2,851,000
Delinquent VOI
Loans (1)......... 350,000 739,000 1,316,000 1,958,000 ---
Delinquency as a
Percentage of VOI
Loans in Serviced
Portfolio......... 1.83% 2.53% 3.04% 4.19% ---
</TABLE>
(1) Delinquent loans are those which are 31 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,
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 31 days or more past due and not
covered by dealer/developer reserves or guarantees and not included
in other real estate owned. At December 31, 1998, there were $71.0
million of Other Loans of which $1,378,000 or 1.94% were 31 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 and Estimated Recourse Obligations, Net
Charge-offs and Dealer Reserves
The following is an analysis of the total allowances for all loan
losses:
<TABLE>
<S> <C> <C> <C> <C> <C>
Year Ended December 31,
1998 1997 1996 1995 1994
Allowance, beginning
of year .......... $5,877,000 $4,528,000 $3,715,000 $1,264,000 $1,064,000
Net charge-offs of
Uncollectible
accounts ............ (2,239,000) (2,010,000) (1,965,000) (946,000) (359,000)
Provision for loan
losses ............ 1,532,000 1,400,000 1,954,000 890,000 559,000
Allocation of purchase
Adjustment (1) .... 1,537,000 1,959,000 824,000 2,507,000 ---
Allowance, end of
year .............. $6,707,000 $5,877,000 $4,528,000 $3,715,000 $1,264,000
</TABLE>
(1) Represents allocation of purchase adjustment related to
purchase of certain non-guaranteed loans.
The following is an analysis of net charge-offs by major loan and
collateral types experienced by the Company:
<TABLE>
<S> <C> <C> <C> <C> <C>
Year Ended December 31,
1998 1997 1996 1995 1994
Land Loans................ $1,358,000 $ 986,000 $ 669,000 $546,000 $359,000
VOI Loans................. 556,000 939,000 1,284,000 45,000 ---
Hypothecation Loans....... --- --- --- --- ---
A&D Loans................. --- (2,000) (8,000) 352,000 ---
Other Loans............... 325,000 87,000 20,000 3,000 ---
Total net charge-offs..... $2,239,000 $2,010,000 $1,965,000 $946,000 $359,000
Net charge-offs as a percentage
of the average Serviced
Portfolio................. .58% .74% .94% .67% .38%
</TABLE>
As part of the Company's financing of Land and VOI Loans, the
Company enters into arrangements with most land dealers and resort
developers whereby the Company retains a portion of the amount
payable to a dealer when purchasing a Land or a VOI Loan to protect
the Company from potential losses assocciated with such loans 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 $8,219,000, $8,321,000 and $7,555,000
at December 31, 1998, 1997 and 1996, respectively. Developer
reserves for VOI Loans were $1,760,000, $2,299,000 and $3,072,000 at
December 31, 1998, 1997 and 1996, respectively. 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 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.
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 continues 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 a portion of the interest
payments on the loans transferred to the trust are collected by the
Company as the servicer of the loans 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 December 31, 1998, the Company sold or securitized a total
of approximately $493.0 million of loans at face value. 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 estimated recorse obligations 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 December 31,
1998, the outstanding balance of the sold or pledged loans securing
this facility was $137.5 million. The Company has an additional
revolving line of credit and sale facility for its VOI Loans of
$25.0 million with another multi-seller commercial paper conduit.
The facility expires in March 2000. As of December 31, 1998, the
outstanding aggregate balance of the sold loans under the facility
was $10.6 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, five 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 325 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 23 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
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 December 31, 1998, the Company had 102 full-time equivalent
employees. None of the Company's employees are covered by a
collective bargaining agreement. The Company considers its
relations with its employees to be good.
Risk Factors
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 $116.0 million with
five financial institutions as of December 31, 1998. To date, the
Company has issued $152.8 million of long-term debt and has publicly
issued $46.3 million of equity securities.
The Company also has a $150.0 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, 2001. As of December 31, 1998, the outstanding
balance of the sold or pledged loans securing this facility was
$137.5 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 December 31, 1998, the outstanding aggregate balance of the sold
or pledged loans under the facility was $10.6 million.
There can be no assurance that the Company will continue to be
able to obtain financing or raise capital on terms satisfactory to
the Company. To the extent the company cannot raise additional
funds, it could have a material adverse impact on its operations and
its ability to repay the Notes.
Impact of Economic Cycles. The business risks associated with
the Company's business become more acute in an economic slowdown.
Such an environment is generally characterized by decreased demand
for rural and vacation real estate and VOIs and declining real
estate values in many areas of the country. Delinquencies,
foreclosures and loan losses generally increase during economic
slowdowns or recessions, and any such future slowdowns could
adversely affect future operations of the Company.
Interest Rate Risk. The Company's interest and fees on loans,
gain on sale of loans and interest expense are affected by changes
in interest rates. The Company could be adversely affected by
interest rate increases if its variable rate liabilities exceed its
variable rate assets or if the rates on its variable rate
liabilities increase sooner or to a greater extent than the rates on
its variable rate assets.
The Company seeks to mitigate a portion of its interest rate risk
by attempting to match fixed and variable rate assets and
liabilities, instituting interest rate floors and by entering into
interest rate swaps on certain of its variable rate assets, and
purchasing interest rate caps on certain of its variable rate
liabilities.
There can be no assurance that the Company's attempts to mitigate
its interest rate risk will be effective.
Competition. The financing of VOIs is highly competitive and
many of the Company's competitors have greater financial resources.
In addition, the Company may enter new lines of business that may be
highly competitive and may have competitors with greater financial
resources than the Company.
Credit Risks. The Company's loans are subject to delinquency
and default risk. General downturns in the economy and other
factors beyond the Company's control may have an adverse 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,
in the case of A&D Loans, their development and marketing risk.
The Company's VOI business is subject to certain risks associated
with VOI ownership. Although individual VOI owners are obligated to
make payments under their notes irrespective of any defect in,
damage to, or change in conditions of the vacation resort (such as
erosion, construction of adjacent or nearby properties, or
environmental problems) or of any breach of contract by the property
owners association to provide certain services to the VOI borrowers
(including any such breach resulting from a destruction of the
resort) or of any other loss of benefits of ownership of their unit
week(s) (including cessation of the ability of the borrowers to
exchange their time intervals in the resort for time intervals in
other unaffiliated resorts), any such material defect, damage,
change, breach of contract, or loss of benefits is likely to result
in a delay in payment or default by a substantial number of the
borrowers whose VOIs are affected. The costs of foreclosure and
resale of unit weeks securing defaulted loans are likely to be
substantially higher than such costs for traditional mortgage loans,
and this may materially affect the amounts realized by the Company
on defaulted loans.
Estimates of Future Prepayment and Default Rates. A significant
portion of the Company's revenues historically has been comprised of
gains on sales of loans. The gains are recorded in the Company's
revenues and on its balance sheet (as retained interests on loan
sales) at the time of sale, and the amount of gains recorded is
based in part on management's estimates of future prepayment and
default rates and other considerations in light of then-current
conditions. If actual prepayments with respect to loans occur more
quickly than was projected at the time such loans were sold, as can
occur when interest rates decline, interest would be less than
expected and earnings would be charged in the current period. If
actual defaults with respect to loans sold are greater than
estimated, charge-offs would exceed previously estimated amounts and
earnings would be charged in the current period.
Expansion of Business. The Company has increased the number and
average principal amount of its Hypothecation and A&D Loans. A&D
Loans are larger commercial loans to land dealers and resort
developers and, consequently, have a greater concentration of credit
risk than the Company's Purchased Loans. A&D Loans for timeshare
resorts are also subject to greater risk because their repayment
depends on the successful completion of the development of the
resort and the subsequent successful sale of a substantial portion
of the resort's timeshare interests. The Company may seek to limit
its exposure to any one developer by participating a portion of an
A&D Loan with another lender.
The Company has historically made Hypothecation Loans to land
dealers and resort developers secured by Land Loans and VOI Loans,
respectively. Hypothecation Loans are commercial loans that have
significantly larger balances than the Company's Purchased Loans
and, consequently, have a greater concentration of credit risk which
is only partially offset by the lesser concentration of credit risk
of the underlying collateral.
In addition, the Company has recently expanded its marketing of
Hypothecation Loans to include loans to other finance companies
secured by other types of collateral. These loans may be subject to
additional risk because the Company has relatively less experience
with these other types of collateral than with Land Loans or VOI
Loans. In addition, these loans may be larger than the Company's
average Hypothecation Loans and may provide the Company with an
option to take an equity position in the borrower.
Fluctuations in Quarterly Results of Operations. Since gains on
sales of loans are a significant portion of the Company's revenues,
the timing of loan sales has a significant effect on the Company's
quarterly results of operations, and the results of one quarter are
not necessarily indicative of results for the next quarter.
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 December 31, 1998, the Company had outstanding contingent
repurchase obligations in the aggregate amount of approximately
$10.3 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.
Regulation. The operations of the Company are subject to
extensive regulation by federal, state and local government
authorities and are subject to various laws and judicial and
administrative decisions imposing various requirements and
restrictions, including among other things, regulating credit
granting activities, establishing maximum interest rates and finance
charges, requiring disclosures to customers, governing secured
transactions and setting collection, repossession and claims
handling procedures and other trade practices. In addition, certain
states have enacted legislation which restricts the subdivision of
rural land and numerous states have enacted regulations in
connection with VOIs. Although the Company believes that it is in
compliance in all material respects with applicable federal, state
and local laws, rules and regulations, there can be no assurance
that more restrictive laws, rules and regulations or interpretations
thereof will not be adopted in the future which could make
compliance much more difficult or expensive, restrict the Company's
ability to originate or sell loans, further limit or restrict the
amount of interest and other charges earned under loans originated
or purchased by the Company, or otherwise adversely affect the
business or prospects of the Company.
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 one member of its senior
management, Chief Executive Officer and President, Richard A.
Stratton.
Item 2. PROPERTIES
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 $88,000.
Item 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on The Nasdaq Stock Market's
National Market under the symbol "LTCH." At March 15, 1999, there
were approximately 1,084 holders of record of the Company's common
stock. Common Stock Market Prices and Dividends on page 12 of the
Annual Report to Stockholders for the year ended December 31, 1998
are incorporated herein by reference.
Item 6. SELECTED FINANCIAL DATA
The Selected Consolidated Financial Information on pages 3 and 4
of the Annual Report to Stockholders for the year ended December 31,
1998 is incorporated herein by reference.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Management's Discussion and Analysis of Financial Condition
and Results of Operations on pages 5 through 13 of the Annual Report
to Stockholders for the year ended December 31, 1998 is incorporated
herein by reference.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
The Quantitative and Qualitative Disclosures about Market Risk
are included on pages 16 through 19 of this Form 10-K Report to
Stockholders for the year ended December 31, 1998.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and Report of Independent
Auditors included on pages 14 through 31 of the Annual Report to
Stockholders for the year ended December 31, 1998 are incorporated
herein by reference.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained on pages 4 through 7 of Litchfield
Financial Corporation's Proxy Statement dated March 23, 1999, with
respect to directors and executive officers of the Company, is
incorporated herein by reference in response to this item.
Item 11. EXECUTIVE COMPENSATION
The information contained on pages 8 through 16 of Litchfield
Financial Corporation's Proxy Statement dated March 23, 1999, with
respect to executive compensation and transactions, is incorporated
herein by reference in response to this item.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The information contained on pages 2 through 4 of Litchfield
Financial Corporation's Proxy Statement dated March 23, 1999, with
respect to security ownership of certain beneficial owners and
management, is incorporated herein by reference in response to this
item.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained on page 5 and 7 of Litchfield Financial
Corporation's Proxy Statement dated March 23, 1999, with respect to
certain relationships and transactions, is incorporated herein by
reference in response to this item.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
(a)(1) Financial Statements
The following consolidated financial statements of Litchfield
Financial Corporation and subsidiaries, included in the annual
report of the registrant to its stockholders for the year ended
December 31, 1998 are incorporated by reference in Item 8:
Consolidated balance sheets - December 31, 1998 and 1997
Consolidated statements of income - Years ended December 31,
1998, 1997 and 1996
Consolidated statements of stockholders' equity - Years ended
December 31, 1998, 1997 and 1996
Consolidated statements of comprehensive income - Years ended
December 31, 1998, 1997 and 1996
Consolidated statements of cash flows - Years ended December
31, 1998, 1997 and 1996
Notes to consolidated financial statements - December 31,
1998
(2) Financial statement schedules
All schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable and
therefore have been omitted.
(3) Listing of Exhibits
A. Exhibits Incorporated by Reference.
(i) The following exhibits are incorporated herein by
reference to the Company's Registration Statement on Form
S-1 (No. 33-44915), as amended, filed with the Securities
and Exchange Commission (exhibit numbers indicated below
correspond to those used for exhibits originally filed with
such Registration Statement) (No. 33-44915):
3.1 Restated Articles of Organization of the Company.
3.2 Restated By-Laws of the Company.
10.1 1990 Stock Option Plan adopted and approved on May 30, 1990
and form of Stock Option Agreement
10.2 Securities Purchase Agreement dated as of November
21, 1988.
10.Amendment to the 1990 Stock Option Plan dated February 18, 1992.
(ii) The following exhibits are incorporated by reference to the
Company's annual report on Form 10-K for the year ended
December 31, 1992 as filed with the Securities and Exchange
Commission (exhibit numbers indicated below correspond to
those used for exhibits originally filed with such annual
report on Form 10-K):
10.59Second Amendment to the 1990 Stock Option Plan.
(iii) The following exhibits are incorporated by reference to
the Company's Registration Statement No. 33-60788, as
amended, filed with the Securities and Exchange Commission
(exhibit numbers indicated below correspond to those
exhibits originally filed with such Registration Statement
No. 33- 60788):
4.3 Form of Indenture pursuant to which the Company's 8 7/8%
Notes due 2003 were issued.
4.4 Form of 8 7/8% Note due 2003.
(iv) The following exhibits are incorporated by reference to
the Company's annual report on Form 10-K for the year ended
December 31, 1993 as filed with the Securities and Exchange
Commission (exhibit numbers indicated below correspond to
those used for exhibits originally filed with such annual
report on Form 10-K)
10.64 Pooling and Servicing Agreement, dated as of August 27,
1993, among the Company, Litchfield Mortgage Securities
Corporation and Harris Trust and Savings Bank, as Trustee
of the Litchfield Financial Mortgage Trust 1993-2.
10.65 Mortgage Purchase Agreement, dated as of September 28,
1993, between the Company and Litchfield Mortgage
Securities Corporation.
10.66 Pooling and Servicing Agreement, dated as of November 30,
1993, among the Company, Litchfield Mortgage Securities
Corporation and Harris Trust and Savings Bank, as Trustee
of the Litchfield Financial Mortgage Trust 1993-3.
10.Mortgage Purchase Agreement, dated as of December 21, 1993,
between the Company and Litchfield Mortgage Securities
Corporation.
(v) The following exhibits are incorporated by reference to the
Company's Registration Statement No. 33-89488, as amended,
filed with the Securities and Exchange Commission (exhibit
numbers indicated below correspond to those exhibits
originally filed with such Registration Statement No. 33-
89488):
4.5 Form of Indenture pursuant to which the Company's 10% Notes
due 2004 were issued.
4.6 Form of 10% Notes due 2004.
10.68 Pooling and Servicing Agreement, dated as of June 1, 1994,
among the Company, Litchfield Mortgage Securities
Corporation 1994, and The Chase Manhattan Bank, N.A., as
trustee.
10.69 Series Trust Agreement, dated as of June 16, 1994, between
the Company, Litchfield Mortgage Securities Corporation
1994, and The Chase Manhattan Bank, N.A., as trustee.
10.70 Mortgage Purchase Agreement, dated as of June 16, 1994,
between the Company and Litchfield Mortgage Securities
Corporation 1994.
10.71 Pledge and Collateral Agency Agreement, dated as of June
16, 1994, among the Company, Litchfield Mortgage Securities
Corporation 1994, Internationale Nederlanden (U.S.)
Finance Corporation and The Chase Manhattan Bank, N.A., as
collateral agent.
10.72 Sinking Fund Account Agreement, dated as of June 16, 1994,
among the Company, Internationale Nederlanden (U.S.)
Finance Corporation, The Chase Manhattan Bank, N.A. and
Internationale Nederlanden (U.S.) Capital Markets.
10.73 Rate Stabilization Agreement, dated as of June 16, 1994,
between the Company and Internationale Nederlanden (U.S.)
Finance Corporation.
10.74 Series Trust Agreement, dated as September 27, 1994, among
the Company Litchfield Mortgage Securities Corporation
1994, and The Chase Manhattan Bank, N.A., as trustee.
10.75 Mortgage Purchase Agreement, dated as of September 27,
1994, between the Company and Litchfield Mortgage
Securities Corporation 1994.
10.76 Pledge and Collateral Agency Agreement, dated as of
September 27, 1994, among the Company, Litchfield Mortgage
Securities Corporation 1994, Internationale Nederlanden
(U.S.) Finance Corporation and The Chase Manhattan Bank,
N.A., as collateral agent.
10.77 Sinking Fund Account Agreement, dated as of September 27,
1994, among the Company, Internationale Nederlanden (U.S.)
Finance Corporation, The Chase Manhattan Bank, N.A. and
Internationale Nederlanden (U.S.) Capital Markets.
10.78 Rate Stabilization Agreement, dated as of September 27,
1994, between the Company and Internationale Nederlanden
(U.S.) Finance Corporation.
10.79 Pooling and Servicing Agreement, dated as of August 31,
1994, among the Company, Litchfield Mortgage Securities
Corporation and Thomas P. McHugh, Esquire, as trustee.
10.80 Mortgage Purchase Agreement, dated as of September 12, 1994
between the Company and Litchfield Mortgage Securities
Corporation.
10.81 Lease, dated as of February 1, 1995, between the Company
and Fox Point Property L.L.C.
10.84 Employment Agreement, date as of December 23, 1994, between
the Company and Wayne M. Greenholtz.
10.85 Third Amendment to the 1990 Stock Option Plan.
(vi) The following exhibits are incorporated by reference to
the Company's annual report on Form 10-K for the year ended
December 31, 1994 as filed with the Securities and Exchange
Commission (exhibit numbers indicated below correspond to
those used for exhibits originally filed with such annual
report on Form 10-K)
10.91 Series Trust Agreement, dated as of December 28, 1994,
among the Company, Litchfield Mortgage Securities
Corporation 1994, and The Chase Manhattan Bank, N.A., as
trustee.
10.92 Mortgage Purchase Agreement, dated as of December 28, 1994,
between the Company and Litchfield Mortgage Securities
Corporation 1994.
10.93 Certificate Purchase Agreement, dated as of December 28,
1994, among Litchfield Mortgage Securities Corporation
1994, the Company, Holland Limited Securitizations, Inc.,
and Internationale Nederlanden (U.S.) Capital Markets.
10.94 Pledge and Collateral Agency Agreement, dated as of
December 28, 1994, among the Company, Litchfield Mortgage
Securities Corporation 1994, Holland Limited
Securitization, Inc. and The Chase Manhattan Bank, N.A., as
collateral agent.
10.95 Sinking Fund Account Agreement, dated as of December 28,
1994, among the Company, Holland Limited Securitization,
Inc., The Chase Manhattan Bank, N.A. and Internationale
Nederlanden (U.S.) Capital Markets.
10.97 Amendment No. 1 to Pooling and Servicing Agreement, dated
as of December 1, 1994, among the Company, Litchfield
Mortgage Securities Corporation 1994, and The Chase
Manhattan Bank, N.A., as trustee.
10.98 Amendment No. 1 to Series Trust Agreement Dated June 16,
1994, dated as of December 28, 1994, among the Company,
Litchfield Mortgage Securities Corporation 1994, and The
Chase Manhattan Bank, N.A., as trustee.
10.99 Amendment to Sinking Fund Account Agreement (Litchfield
Mortgage Trust 1994-1), dated as of December 28, 1994,
among the Company, Internationale Nederlanden (U.S.)
Finance Corporation, The Chase Manhattan Bank, N.A.,
Internationale Nederlanden (U.S.) Capital Markets.
10.100 Amendment No. 1 to Series Trust Agreement Dated
September 27, 1994, dated as of December 28, 1994, among
the Company, Litchfield Mortgage Securities Corporation
1994, and The Chase Manhattan Bank, N.A., as trustee.
10.101 Amendment to Sinking Fund Account Agreement (Litchfield
Mortgage Trust 1994-2), dated as of December 28, 1994,
among the Company, Internationale Nederlanden (U.S.)
Finance Corporation, The Chase Manhattan Bank, N.A.,
Internationale Nederlanden (U.S.) Capital Markets.
10.119 Amended and Restated Pledge and Collateral Agency
Agreement Dated June 16, 1994, dated as of January 26,
1995, among the Company, Litchfield Mortgage Securities
Corporation 1994, Holland Limited Securitization, Inc., and
The Chase Manhattan Bank, N.A., as collateral agent.
10.121 Amendment No. 2 to Pooling and Servicing Agreement,
dated as of January 26, 1995, among the Company, Litchfield
Mortgage Securities Corporation 1994, and The Chase
Manhattan Bank, N.A., as trustee.
10.122 Amendment No. 2 to Series Trust Agreement Dated June 16,
1994, dated as of January 26, 1995, among the Company,
Litchfield Mortgage Securities Corporation 1994, and The
Chase Manhattan Bank, N.A., as trustee.
10.123 Amended and Restated Pledge and Collateral Agency
Agreement Dated September 27, 1994, dated as of January
26, 1995, among the Company, Litchfield Mortgage Securities
Corporation 1994, Holland Limited Securitization, Inc., and
The Chase Manhattan Bank, N.A., as collateral agent.
10.125 Amendment No. 2 to Series Trust Agreement Dated
September 27, 1994, dated as of January 26, 1995, among the
Company, Litchfield Mortgage Securities Corporation 1994,
and The Chase Manhattan Bank, N.A., as trustee.
(vii)The following exhibits are incorporated by reference to the
Company's quarterly report on Form 10-Q for the quarter
ended June 30, 1995 as filed with the Securities and
Exchange Commission (exhibit numbers indicated below
correspond to those used for exhibits originally filed with
such quarterly report on Form 10-Q)
10.126 Asset Purchase Agreement dated as of March 30, 1995
between GEICO Corporation, Government Employees Financial
Corporation, GEICO Financial Services, Inc., GEICO Financial
Company, Willow Valley Associates, LTD., Variproperties,
Inc. as sellers and Litchfield Financial Corporation as
purchaser (excluding exhibits and schedules).
10.127 Litchfield Financial Corporation 1995 Stock Option Plan
for Non-Employee Directors.
10.128 Sale and Servicing Agreement dated as of March 22, 1995
between Litchfield Timeshare Securities Corporation as
depositor and Litchfield Financial Corporation as servicer
and Litchfield Timeshare Trust 1995-1.
10.129 Amended and Restated Sale and Servicing Agreement dated
as of March 22, 1995 between Litchfield Timeshare Securities
Corporation as depositor and Litchfield Financial
Corporation as servicer and Litchfield Timeshare Trust
1995-1.
10.130 Litchfield Timeshare Trust 1995-1 Trust Agreement dated
as of March 22, 1995 between Litchfield Timeshare Securities
Corporation 1995-1 and the Chase Manhattan Bank, N.A. as
trustee.
10.131 Amended and Restated Litchfield Timeshare Trust 1995-1
Trust Agreement dated as of March 22, 1995 between
Litchfield Timeshare Securities Corporation 1995-1 and the
Chase Manhattan Bank, N.A. as trustee.
10.133 Litchfield Timeshare Trust 1995-1 Class A Certificates
Purchase Agreement dated April 27, 1995 between Litchfield
Timeshare Securities Corporation 1995-1 as depositor,
Litchfield Financial Corporation as initial servicer, and
Teachers Insurance and Annuity Association of America as
purchaser.
10.134 Litchfield Timeshare Trust 1995-1 Class A Certificates
Purchase Agreement dated June 22, 1995 between Litchfield
Timeshare Securities Corporation 1995-1 as depositor,
Litchfield Financial Corporation as initial servicer, and
Teachers Insurance and Annuity Association of America as
purchaser.
10.135 Subservicing Agreement between Concord Servicing
Corporation, Litchfield Financial Corporation, and
Litchfield Timeshare Trust 1995-1, as amended.
(viii) The following exhibits are incorporated by reference to
the Company's quarterly report on Form 10-Q for the quarter
ended September 30, 1995 as filed with the Securities and
Exchange Commission (exhibit numbers indicated below
correspond to those used for exhibits originally filed with
such quarterly report on Form 10-Q)
10.136 Receivables Financing facility extended by Holland
Limited Securitization, Inc. and Internationale Nederlanden
(U.S.) capital Markets, Inc., to Litchfield Financial
Corporation and Litchfield Mortgage Securities Corporation
1994 dated September 29, 1995.
(ix) The following exhibits are incorporated by reference to the
Company's annual report on Form 10-K for the year ended
December 31, 1996, as filed with the Securities and
Exchange Commission. (exhibit numbers indicated below
correspond to those used for exhibits originally filed with
such annual report on Form 10-K):
10.137 Amended and Restated Employment Agreement, dated as of
July 19, 1996, between the Company and Richard A. Stratton.
10.138 Amended and Restated Employment Agreement, dated as of
July 19, 1996, between the Company and Heather A. Sica.
10.139 Employment Agreement, dated as of July 19, 1996, between
the Company and Ronald E. Rabidou.
10.140 Commercial Security Agreement dated as of July 23, 1996,
in the principal amount of $5,000,000 between the Company
and BSB Bank and Trust Co.
10.142 Loan Agreement, dated as of September 13, 1996, in the
principal amount of $15,000,000 between the Company and Bank
of Scotland.
10.143 Pledge Agreement, dated as of September 13, 1996 between
the Company and Bank of Scotland.
10.144 Security Agreement, dated as of September 13, 1996
between the Company and Bank of Scotland.
10.145 Amendment No. 1 to Receivable Purchase Agreement dated
September 29, 1995, dated as of December 18, 1995 among the
Company, Litchfield Mortgage Securities Corporation 1994,
Holland Limited Securities, Inc. and Internationale
Nederlanden (U.S.) Capital Markets, Inc.
10.146 Amendment No. 1 to Receivable Loan and Security Agreement
dated September 29, 1995, dated as of December 18, 1995
among the Company, Litchfield Mortgage Securities
Corporation 1994, Holland Limited Securities, Inc. and
Internationale Nederlanden (U.S.) Capital Markets, Inc.
10.147 Amendment No. 2 to Receivable Purchase Agreement dated
September 29, 1995, dated as of September 27, 1996 among the
Company, Litchfield Mortgage Securities Corporation 1994,
Holland Limited Securities, Inc. and Internationale
Nederlanden (U.S.) Capital Markets, Inc.
10.148 Amendment No. 2 to Receivable Loan and Security Agreement
dated September 29, 1995, dated as of September 27, 1996
among the Company, Litchfield Mortgage Securities
Corporation 1994, Holland Limited Securities, Inc. and
Internationale Nederlanden (U.S.) Capital Markets, Inc.
10.149 Revolving Credit Note, dated as of April 26, 1996, in the
principal amount of $20,000,000 between the Company and the
First National Bank of Boston.
10.150 Revolving Credit Note, dated as of October 26, 1996, in
the principal amount of $10,000,000 between the Company and
Fleet Bank-NH.
10.151 Promissory Note, dated as of January 23, 1997, in the
principal amount of $8,000,000 between the Company and BSB
Bank and Trust Co.
(x) The following exhibits are incorporated by reference to the
Company's quarterly report on Form 10-Q for the quarter
ended March 31, 1997 as filed with the Securities and
Exchange Commission (exhibit numbers indicated below
correspond to those used for exhibits originally filed with
such quarterly report on Form 10-Q):
10.152 Master revolving credit promissory note dated as of March
21, 1997 between Litchfield Financial Corporation and
Republic Bank in the principal amount of $3,000,000.
10.153 Wholesale warehouse loan and mortgage security agreement
dated as of March 21, 1997 between Litchfield Financial
Corporation and Republic Bank in the principal amount of
$3,000,000.
(xi) The following exhibits are incorporated by reference to the
Company's quarterly report on Form 10-Q for the quarter
ended June 30, 1997 as filed with the Securities and
Exchange Commission (exhibit numbers indicated below
correspond to those used for exhibits originally filed with
such quarterly report on Form 10-Q):
10.154 Loan and security agreement dated March 6, 1997 between
Litchfield Financial Corporation and Green Tree Financial
Servicing Corporation in the principal amount of
$25,000,000.
10.155 Second amended and restated loan and security agreement
among Litchfield Financial Corporation, BankBoston, N.A.,
and Fleet Bank-NH in the principal amount of $50,000,000.
10.156 9.3% Note purchase agreement dated April 7, 1997 between
Litchfield Financial Corporation and Teachers Insurance and
Annuity Association of America in the principal amount of
$20,000,000.
(xii)The following exhibits are incorporated by reference to the
Company's quarterly report on Form 10-Q for the quarter
ended September 30, 1997 as filed with the Securities and
Exchange Commission (exhibit numbers indicated below
correspond to those used for exhibits originally filed with
such quarterly report on Form 10-Q):
10.157 Employment agreement, dated as of March 17, 1997 between
the Company and Joseph S. Weingarten.
10.158 Asset Purchase Agreement, dated March 21, 1997 among the
Company, Litchfield Capital Corporation, EagleFunding
Capital Corporation and The First National Bank of Boston,
as deal agent.
(xiii) The following exhibits are incorporated by reference to
the Company's Registration Statement No. 333-37963, as
amended, filed with the Securities and Exchange Commission
(exhibit numbers indicated below correspond to those
exhibits originally filed with such Registration Statement
No. 333-37963):
4.7 Form of Indenture pursuant to which the Company's 8.45%
Notes were issued.
4.8 Form of 8.45% Note due 2002
(xiv) The following exhibits are incorporated by reference to
the Company's annual report on Form 10-K for the year ended
December 31, 1997, as filed with the Securities and
Exchange Commission. (exhibit numbers indicated below
correspond to those used for exhibits originally filed with
such annual report on Form 10-K):
10.159 Ground and building lease, dated May 28, 1997,
between the Company and David Mandelbaum,
as Trustee, for Williamstown Property
Trust.
10.160 Indenture of Trust dated as of June 1, 1997, between
Litchfield Hypothecation Corporation and The Chase
Manhattan Bank.
10.161 Servicing agreement dated as of June 1, 1997 among the
Company, Litchfield Hypothecation Corporation and The Chase
Manhattan Bank.
10.162 Indenture of Trust dated as of August 1, 1997 between
Litchfield Hypothecation Corporation 1997-B and
The Chase Manhattan Bank.
10.163 Servicing agreement dated as of August 1, 1997, among
the Company, Litchfield Hypothecation Corporation 1997-B
and The Chase Manhattan Bank.
10.164 Amendment No. 4 to Receivables Purchase Agreement dated
September 29, 1995, dated as of November 27, 1997 among
the Company, Litchfield Mortgage Securities Corporation
1994, Holland Limited Securities, Inc. and ING Barings
(U.S.) Capital Markets, Inc.
10.165 Amendment No. 4 to Receivables Loan Agreement dated
September 29, 1995, dated as of November 27, 1997 among the
Company, Litchfield Mortgage Securities Corporation 1994,
Holland Limited Securities, Inc. and ING Barings (U.S.)
Capital Markets, Inc.
10. Employment agreement, dated as of January 1, 1998, between the
Company and John J. Malloy.
(xv) The following exhibits are incorporated by reference
to the Company's quarterly report on Form 10-Q for the
quarter ended March 31, 1998 as filed with the Securities
and Exchange Commission (exhibit numbers indicated below
correspond to tho7se used for exhibits originally filed with
such quarterly report on Form 10-Q):
10.167 Amendment No. 4 to Loan Agreement dated September 13,
1996, dated December 16, 1997, between the
Company and Bank of Scotland.
10.168 Amendment No. 3 to Security Agreement dated September 13,
1996, dated December 16, 1997, between the Company and
Bank of Scotland.
10.Loan and Security Agreement, dated December 12, 1997, between the
Company and Berkshire Bank.
10.Promissory Note, dated December 12, 1997, from the Company to
Berkshire Bank
10.Loan Modification Agreement to Loan and Security Agreement dated
December 12, 1997, dated March
23, 1998 between the Company and Berkshire Bank.
(xvi) The following exhibits are incorporated by reference to the
Company's quarterly report on Form 10-Q for the quarter
ended June 30, 1998 as filed with the Securities and
Exchange Commission (exhibit numbers indicated below
correspond to those used for exhibits originally filed with
such quarterly report on Form 10-Q):
10.172 Indenture of Trust dated as of June 1, 1998, between
Litchfield Hypothecation Corp. 1998-A and
The Chase Manhattan Bank.
10.173 Servicing agreement dated as of June 1, 1998 among the
Company, Litchfield Hypothecation Corp. 1998-A and The Chase
Manhattan Bank.
10.174 Indenture of Trust dated as of June 1, 1998, between
Litchfield Hypothecation Corp. 1998-B and The
Chase Manhattan Bank.
10.Servicing agreement dated as of June 1, 1998 among the Company,
Litchfield Hypothecation Corp. 1998-B and the Chase
Manhattan Bank.
10.Amendment No. 5 to Receivable Purchase Agreement dated September
29, 1995, dated as of May 27,
1998 among the Company, Litchfield Mortgage Securities
Corporation 1994, Holland Limited Securities,
Inc. and Internationale Nederlanden (U.S.) Capital Markets,
Inc.
10.Amendment No. 5 to Receivable Loan and Security Agreement dated
September 29, 1995, dated as of May 27, 1998 among
the Company, Litchfield Mortgage Securities Corporation 1994,
Holland Limited Securities, Inc. and
Internationale Nederlanden (U.S.) Capital Markets, Inc.
(xvii) The following exhibits are incorporated by reference
to the Company's quarterly report on Form 10-Q for
the quarter ended September 30, 1998 as filed with the
Securities and Exchange Commission (exhibit numbers
indicated below correspond to those used for exhibits
originally filed with such quarterly report on Form
10-Q):
10.178 Amendment No. 1 to Indenture of Trust dated September
1, 1998, dated as of June 1, 1998, between
Litchfield Hypothecation Corp. 1998-A and The Chase Manhattan
Bank.
10.179 Participation Agreement dated as of September 9, 1998,
between the Company and The Brattleboro
Savings & Loan.
10.Note Purchase Agreement dated as of September 17, 1998 among the
Company, Litchfield Hypothecation
Corporation and BankBoston.
10.181 Limited Guarantee dated as of September 17, 1998,
between the Company and BankBoston.
(xviii) The following exhibits are incorporated by reference to
the Company's Registration Statement No. 333-
59173, as amended, filed with the Securities and Exchange
Commission (exhibit numbers indicated below
correspond to those exhibits originally filed with such
Registration Statement No. 333-59173):
4.9 Form of Indenture, dated as of July 15, 1998, between the
Company and The Bank of New York, Trustee.
4.1Form of 8.25% Note due 2003.
4.1Form of 9.25% Note due 2003.
B. Exhibits filed with this Report on Form 10-K.
The following exhibits are filed herewith:
10.182 Amendment No. 2 to Indenture of Trust dated June 1,
1998, dated as of November 1, 1998, between
Litchfield Hypothecation Corp. 1998-A and The Chase
Manhattan Bank.
10.183 Note Purchase Agreement dated as of November 20, 1998
among the Company, Litchfield Hypothecation
Corporation, 1998-Aand BankBoston.
10.184 Note Purchase Agreement dated as of December 29, 1998
among the Company, Litchfield Hypothecation
Corporation, 1998-Aand Metrowest Bank.
11.1 Statement Re: Computation of Earnings per Share.
13.1 Annual Report to Stockholders for the Year Ended
December 31, 1998.
21.1 List of Subsidiaries.
23.1 Consent of Independent Auditors.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
None
(c) Exhibits required by Item 601 of Regulation S-K
Such exhibits are either filed herewith or incorporated by
reference, as described above.
(d) Financial Statement Schedules.
All schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission
are not required under the related instructions or are
inapplicable and therefore have been omitted.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
LITCHFIELD FINANCIAL CORPORATION
/s/ Richard A. Stratton
RICHARD A. STRATTON
Chief Executive Officer, President and Director
March 26, 1999
/s/ Ronald E. Rabidou
RONALD E. RABIDOU
Chief Financial Officer, Executive Vice President and Treasurer
March 26, 1999
/s/ David M. Pascale
DAVID M. PASCALE
Chief Accounting Officer, Vice President and Controller
March 26, 1999
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated.
/s/ John Costa /s/ Heather Sica
JOHN COSTA HEATHER A. SICA
Executive Vice President and Director Executive Vice President and Director
March 26, 1999 March 26, 1999
/s/ Gerald Segel /s/ Richard A. Stratton
GERALD SEGEL RICHARD A. STRATTON
Director Chief Executive Officer, President and Director
March 26, 1999 March 26, 1999
/s/ James Westra
JAMES WESTRA
Director
March 26, 1999
Exhibit 10.182
AMENDMENT NO. 2 TO INDENTURE OF TRUST (this "Amendment"),
dated as of November 1, 1998, by and between LITCHFIELD
HYPOTHECATION CORP. 1998-A, a corporation organized under the
laws of the State of Delaware (the "Issuer"), and THE CHASE
MANHATTAN BANK, a New York banking corporation, as trustee
(together with its permitted successors in the trusts hereunder,
the "Trustee").
W I T N E S S E T H:
WHEREAS, the Issuer and the Trustee are parties to an
Indenture of Trust, dated as of June 1, 1998 and amended by
Amendment No. 1 thereto dated as of September 1, 1998 (the
"Indenture"), providing for the issuance by the Issuer from time
to time of its Hypothecation Loan Collateralized Notes in an
aggregate outstanding principal amount not to exceed $30,000,000
(collectively, the "Notes");
WHEREAS, pursuant to the Indenture, the Issuer has
pledged and assigned all of the Issuer's right, title and
interest in and to the Trust Estate to the Trustee as security
for the Notes;
WHEREAS, on the Closing Date, the Issuer issued Series
A Notes in an initial aggregate principal amount of
$10,027,636.73 which Series A Notes were authenticated and
delivered by the Trustee to the Purchaser;
WHEREAS, on the Second Closing Date, the Issuer issued
Series A Notes in an initial aggregate principal amount of
$$2,121,981.93, which Series A Notes were authenticated and
delivered by the Trustee to the Purchaser;
WHEREAS, the Issuer desires to issue additional Series A Notes in
an initial aggregate principal amount of $7,792,239.88 (the
"Additional Series A Notes"), to authorize the Trustee to
authenticate and deliver $5,000,000 original principal amount of
the Additional Series A Notes to the Purchaser and $2,792,239.88
original principal amount of the Additional Series A Notes to
Litchfield Financial Corporation ("Litchfield") and to increase
the aggregate principal amount of Notes that may be issued
pursuant to the Indenture to $55,000,000;
WHEREAS, as security for the Additional Series A Notes
and all other Notes now or from time to time hereafter
outstanding, the Issuer desires to pledge and assign the
additional loans specified on Schedule A hereto (the "Additional
Loans") and the Loan Collateral and related assets (but excluding
Unassigned Rights) relating to the Additional Loans to the
Trustee as additional assets comprising the Trust Estate;
WHEREAS, the Purchaser and Litchfield, as the Holders
of 100% of the aggregate outstanding principal amount of the
Notes on the date hereof have consented to the execution and
delivery of this Amendment by the parties hereto;
NOW, THEREFORE, in consideration of the premises and
mutual agreements set forth herein, and for other good and
valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the Issuer and the Trustee agree as follows;
1. Amendments. (a) Schedule 1 to the Indenture is hereby
amended and restated in its entirety by the revised
Schedule 1 attached hereto as Exhibit A, and all
references to Schedule 1 in the Indenture and Appendix A
incorporated by reference therein shall refer to Schedule
1 as so amended and restated.
(b) The Indenture is further amended to provide that each
and every Additional Loan shall be deemed a "Loan" for
all purposes of the Indenture and Appendix A incorporated
by reference therein and all references to a "Loan" and
the "Loans" in the Indenture and Appendix A incorporated
by reference therein shall include each Additional Loan.
(c) Appendix A as incorporated by reference into the
Indenture is hereby amended by the addition of the term
"Third Closing Date" as follows: "Third Closing Date"
shall mean November 20, 1998."
(d) Clause (iii) of the definition of "List of Loans" in
Appendix A as incorporated by reference into the Indenture
is hereby amended by the addition of the following at the
end thereof: "(or, with respect to Loans contributed to
the Trust Estate after the Closing Date, the first day of
the month in which such Loans are contributed to the Trust
Estate)..
(e) The definition of "Note Limit" in Appendix A as
incorporated by reference into the
Indenture is hereby amendedto read as follows:
"'Note Limit' shall mean $55,000,000."
(f) Section 2.1 of the Indenture is hereby amended by the
addition of the following sentence at the end thereof:
"The Trustee is hereby authorized on the Third Closing
Date to authenticate and deliver (i) to the Purchaser
Series A Notes in the initial principal amount of
$5,000,000 and (ii) to Litchfield Series A Notes in the
initial principal amount of $2,792,239.88.
(f) The first recital and Section 2.3 of the Indenture are
hereby amended by deleting
the references to
"$30,000,000" contained therein and replacing the same
with "$55,000,000."
(g) Section 2.4(i) of the Indenture is hereby amended by
deleting the reference to "$750,000" contained therein and
replacing the same with "$100,000."
(h) Clause (b) (i) of Section 2.9 of the Indenture is
hereby amended to read as follows: "June 29, 1998 in the
case of the Series A Notes issued and authenticated on the
Closing Date, September 13, 1998 in the case of the Series
A Notes issued and authenticated on the Second Closing
Date and November 20, 1998 in the case of the Series A
Notes issued and authenticated on the Third Closing Date."
Clause (b) of Section 2.9 of the Indenture is hereby
further amended by the deleting the fifth sentence thereof
and substituting in lieu thereof the following: "The LIBOR
Rate for each day of a Payment Period shall be the rate so
published two Business Days before the first day of such
Payment Period."
2. Further Agreements. The parties each agree to execute
and deliver to the other such reasonable and appropriate
additional documents, instruments or agreements as may be
necessary or appropriate to effectuate the purposes of
this Amendment.
3. Costs and Expenses. The Issuer shall reimburse the
Trustee for the reasonable costs and expenses, including
costs and expenses of counsel, incurred by Trustee in
connection with this Amendment.
4. Indenture in Full Force and Effect. The amendments set
forth herein are limited precisely as written and shall
not be deemed to (i) modify any other term or condition of
the Indenture or (ii) prejudice any right the Noteholders
may have now or in the future under or in connection with
the Notes, the Indenture or any related document or
agreement. Except as expressly amended hereby, the
Indenture shall remain unchanged and in full force and
effect.
5. Effect of Headings. The section headings herein are for
convenience only and shall not affect the construction
hereof.
6. Successors and Assigns. All covenants and agreements in
this Amendment by the Issuer shall bind its successors and
assigns, whether so expressed or not.
7. Severability. In case any provision in this Amendment
shall be invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining provisions
shall not in any way be affected or impaired thereby.
8. Governing Law. This Amendment shall be construed in
accordance with and governed by the laws of the State of
New York, without regard to the conflict-of-law provisions
thereof.
9. Counterparts. This Amendment may be executed in any
number of counterparts, each of which so executed shall be
deemed to be an original, but all such counterparts shall
together constitute but one and the same instrument.
IN WITNESS WHEREOF, the Issuer and the Trustee have caused
this Amendment to be duly executed by their duly authorized
officers all as of the day and year first above written.
THE CHASE MANHATTAN BANK
as Trustee
By: /s/ Cynthia Kerpen_____________________
Title: Assistant Vice President________________
LITCHFIELD HYPOTHECATION CORP.
1998-A
By: /s/ Heather A. Sica____________________
Title: Executive Vice President_______________
Exhibit 10.183
- - --------------------------------------------------------------------
LITCHFIELD HYPOTHECATION CORP. 1998-A,
LITCHFIELD FINANCIAL CORPORATION
AND
BANKBOSTON, N.A.
NOTE PURCHASE AGREEMENT
Dated: November 20, 1998
- - --------------------------------------------------------------------
- - -------------------------------------------------------------------
TABLE OF CONTENTS
- - -------------------------------------------------------------------
The Notes.......................................................-1-
Purchase and Sale...............................................-1-
The Closing; Delivery of the Notes..............................-1-
Conditions of the Purchaser's Obligation........................-2-
Representations and Warranties..................................-2-
The Purchaser's Representations.................................-5-
Notices.........................................................-7-
Miscellaneous...................................................-7-
No Recourse.....................................................-8-
Schedule I Purchaser's Remittance Instructions
- - -------------------------------------------------------------------
57
- - -------------------------------------------------------------------
LITCHFIELD HYPOTHECATION CORP. 1998-A
NOTE PURCHASE AGREEMENT
November 20, 1998
LITCHFIELD HYPOTHECATION CORP., a Delaware corporation,
and its successors and assigns (the "Issuer"), and LITCHFIELD
FINANCIAL CORPORATION, a Massachusetts corporation (the
"Seller"), hereby agree with BANKBOSTON, N.A. (the "Purchaser"),
as follows:
1. The Notes. The Issuer has authorized the
execution and delivery to The Chase Manhattan Bank, as trustee
(the "Trustee"), of an Indenture of Trust, dated as of June 1,
1998, as amended by Amendment No 1. thereto dated as of September
1, 1998 and Amendment No. 2 thereto dated as of November 1, 1998
(collectively, the "Indenture"), providing for the issuance and
sale by the Issuer of its Hypothecation Loan Collateralized
Notes, in one or more series, secured by the Trust Estate granted
to the Trustee by the Issuer pursuant to the Indenture, which
includes, among other assets, a pool of certain hypothecation
Loans owned by the Issuer and serviced by Litchfield Financial
Corporation, a Massachusetts corporation (in such capacity, the
"Servicer"). Unless otherwise specifically defined herein, all
capitalized terms shall have the meanings ascribed to them in the
Indenture.
2. Purchase and Sale. In reliance upon the
representations and warranties contained herein and subject to
the terms and conditions set forth herein, the Issuer agrees to
sell to the Purchaser, and the Purchaser agrees to purchase from
the Issuer, $5,000,000 principal amount of Hypothecation Loan
Collateralized Notes, Series A (the "Notes") at an aggregate
price (the "Purchase Price") equal to the aggregate outstanding
principal amount of the Notes on the Closing Date (as hereinafter
defined). The Purchase Price shall be allocated among the Seller
and the Issuer in proportion to the principal amount of Notes
sold by each. The Purchase Price shall be payable to or upon the
instructions of the Issuer and the Seller on the Closing Date by
wire transfer in immediately available Federal funds.
3. The Closing; Delivery of the Notes. The
closing of the purchase and sale of the Notes pursuant hereto
(the "Closing") shall be held on November 20, 1998 (the "Closing
Date"). The Closing shall take place by mail or at such place as
the parties hereto shall designate. At the Closing, the Issuer
and the Seller, respectively, will deliver to the Purchaser,
against payment of the Purchase Price therefor, one Series A Note
in the denomination of $5,000,000 registered in the Purchaser's
name, or in the name of its nominee; provided however, that if
the Purchaser requests the Issuer or the Seller in writing not
less than one Business Day prior to the Closing Date to deliver
to the Purchaser Notes in other denominations (authorized
pursuant to the Indenture) that equal in the aggregate the
denominations specified above, the Seller and the Issuer shall
comply with such request.
4. Conditions of the Purchaser's Obligation. The
obligation of the Purchaser set forth in Section 2 to purchase
the Notes on the Closing Date shall be subject to the accuracy as
of the date hereof and as of the Closing Date of (i) the
representations and warranties of the Issuer set forth in Section
5 hereof, (ii) the representations and warranties of the Seller
in the Purchase and Sale Agreement and in Section 5 hereof, and
(iii) the representations and warranties of the Servicer in the
Servicing Agreement, and shall also be subject to the following
additional conditions:
(a) Each of this Purchase Agreement, the Notes, the
Indenture, the Servicing Agreement, and the Purchase and
Sale Agreement (collectively, the "Agreements") shall have
been duly authorized, executed and delivered by each of the
parties thereto and be in full force and effect; and
(b) The Purchaser shall have received copies of all
documents and other information as it may reasonably
request, in form and substance reasonably satisfactory to
it, with respect to such transactions and the taking of all
proceedings in connection therewith.
5. Representations and Warranties. (a) The Issuer
represents and warrants to the Purchaser as of the date hereof as
follows:
(i) Each of the Agreements to which the Issuer is a
party has been duly authorized, executed and delivered by
the Issuer and, assuming due execution and delivery by the
other parties thereto, constitutes a legal, valid and
binding agreement of the Issuer enforceable against the
Issuer in accordance with its terms, subject to applicable
bankruptcy, insolvency and similar laws affecting creditors'
rights generally, and subject, as to enforceability, to
general principles of equity (regardless of whether
enforcement is sought in a proceeding in equity or at law).
The Notes have been validly issued and are entitled to the
benefits of the Indenture and constitute valid instruments
enforceable in accordance with their terms subject to
applicable bankruptcy, insolvency and similar laws affecting
creditors' rights generally, and subject, as to
enforceability, to general principles of equity (regardless
of whether enforcement is sought in a proceeding in equity
or at law).
(ii) Neither the issuance or sale of the Notes, nor
the consummation of any other of the transactions
contemplated in any of the Agreements to which the Issuer is
a party, nor the execution, delivery or performance of the
terms of any of the Agreements to which the Issuer is a
party, has or will result in the breach of any term or
provision of the certificate of incorporation or by-laws of
the Issuer, or conflict with, result in a breach or
violation on the part of the Issuer of or the acceleration
of indebtedness under or constitute a default under, the
terms of any indenture or other agreement or instrument to
which the Issuer is a party or by which it is bound, or any
statute or regulation applicable to the Issuer or any order
applicable to the Issuer of any court, regulatory body,
administrative agency or governmental body having
jurisdiction over the Issuer.
(iii) No consent, approval, authorization of,
registration or filing with, or notice to, any governmental
or regulatory authority, agency, department, commission,
board, bureau, body or instrumentality is required on the
part of the Issuer for the execution and delivery or by the
Issuer with any of the Agreements to which the Issuer is a
party or the Notes, or the issuance of the Notes, or the
consummation by the Issuer of any transaction contemplated
under any of the Agreements to which the Issuer is a party,
or such consent, approval or authorization has been obtained
or such registration, filing or notice has been made (or,
with respect to assignments of mortgages and financing
statements, will be made by the Issuer as contemplated by
the Indenture).
(iv) There is no action, suit or proceeding against,
or investigation of, the Issuer pending or, to the best of
its knowledge, threatened, before any court, administrative
agency or other tribunal which, either individually or in
the aggregate, (A) may result in any material adverse change
in the financial condition, properties, or assets of the
Issuer or in any material and adverse impairment of the
right or ability of the Issuer to perform its obligations
under the Agreements, or (B) asserts the invalidity of any
of the Agreements to which either the Issuer is a party or
the Notes or (C) seeks to prevent the consummation of any of
the transactions contemplated by any of the Agreements to
which the Issuer is a party.
(v) Based in part on the representations and
warranties contained in Section 6 hereof, the Issuer is not,
and the sale of the Notes in the manner contemplated by this
Purchase Agreement will not cause the Issuer to be, subject
to registration or regulation as an investment company or
affiliate of any investment company under the Investment
Company Act of 1940, as amended.
(vi) Each Loan included in the Trust Estate securing
the Notes has been delivered to the Trustee or its
collateral agent, together with an assignment thereof by the
Issuer, which immediately prior to such assignment will own
full legal and equitable title to each Loan, free and clear
of any lien, charge, encumbrance or participation or
ownership interest in favor of any other Person. Upon
endorsement and delivery to the Trustee or its collateral
agent of the executed original promissory notes and
execution and delivery of the Indenture, all of the Issuer's
right, title and interest in and to the Loans will be
validly and effectively transferred to the Indenture Trustee
as collateral security for the benefit of the Holders of the
Notes.
(vii) On the Closing Date
after giving effect to the sale of the Notes to the
Purchaser hereunder, the aggregate principal amount of all
Hypothecation Loan Collateralized Notes outstanding shall be
$23,555,665.90, of which $15,687,080.36 aggregate principal
amount shall be Series A Notes owned of record by the
Purchaser, $ 2,792,239.88 aggregate principal amount shall
be Series A Notes owned of record by the Seller,
$1,567,242.97 aggregate principal amount shall be Series B
Variable Funding Notes owned of record by the Seller and
$3,509,102.69 aggregate principal amount shall be Series C
Notes owned of record by the Purchaser.
(b) The Seller represents and warrants to the Purchaser
as of the date hereof as follows:
(i) Each of the Agreements to which the Seller is a
party has been duly authorized, executed and delivered by
the Seller and, assuming due execution and delivery by the
other parties thereto, constitutes a legal, valid and
binding agreement of the Seller enforceable against the
Seller in accordance with its terms, subject to applicable
bankruptcy, insolvency and similar laws affecting creditors'
rights generally, and subject, as to enforceability, to
general principles of equity (regardless of whether
enforcement is sought in a proceeding in equity or at law).
(ii) Neither the sale of the Notes, nor the
consummation of any other of the transactions contemplated
in any of the Agreements to which the Seller is a party, nor
the execution, delivery or performance of the terms of any
of the Agreements to which the Seller is a party, has or
will result in the breach of any term or provision of the
certificate of incorporation or by-laws of the Seller, or
conflict with, result in a breach or violation on the part
of the Seller of or the acceleration of indebtedness under
or constitute a default under, the terms of any indenture or
other agreement or instrument to which the Seller is a party
or by which it is bound, or any statute or regulation
applicable to the Seller or any order applicable to the
Seller of any court, regulatory body, administrative agency
or governmental body having jurisdiction over the Seller.
(iii)No consent, approval, authorization of,
registration or filing with, or notice to, any governmental
or regulatory authority, agency, department, commission,
board, bureau, body or instrumentality is required on the
part of the Seller for the execution and delivery or by the
Seller with any of the Agreements to which the Seller is a
party, or the sale of the Notes, or the consummation by the
Seller of any transaction contemplated under any of the
Agreements to which the Seller is a party, or such consent,
approval or authorization has been obtained or such
registration, filing or notice has been made (or, with
respect to assignments of mortgages and financing
statements, will be made by the Seller as contemplated by
the Indenture).
(iv) There is no action, suit or proceeding against, or
investigation of, the Seller pending or, to the best of its
knowledge, threatened, before any court, administrative
agency or other tribunal which, either individually or in
the aggregate, (A) may result in any material adverse change
in the financial condition, properties, or assets of the
Seller or in any material and adverse impairment of the
right or ability of the Seller to perform its obligations
under the Agreements, or (B) asserts the invalidity of any
of the Agreements to which either the Seller is a party or
the Notes or (C) seeks to prevent the consummation of any of
the transactions contemplated by any of the Agreements to
which either the Seller is a party.
(v) Neither the Seller nor any Affiliate of the Seller
nor any Person authorized or employed by the Seller will,
directly or indirectly, offer or sell any Note or similar
security in a manner which would render the sale of the
Notes pursuant to this Purchase Agreement a violation of
Section 5 of the 1933 Act, or require registration pursuant
thereto. Based in part on the representations and
warranties contained in Section 6 hereof, the offering and
sale of the Notes by the Seller to Purchaser at closing are
exempt from the registration requirements of the 1933 Act
and the Indenture is not required to be qualified under the
Trust Indenture Act of 1939, as amended.
The Issuer and the Seller agree that the representations and
warranties set forth in this Section 5 shall be fully assignable
to the initial party to whom the Purchaser may sell the Notes.
6. The Purchaser's Representations. The Purchaser
represents to the Issuer as follows:
(a) The Purchaser is acquiring the Notes for its own
account. The Purchaser understands that the Notes are not
being registered under the Securities Act of 1933, as
amended (the "1933 Act"), or any State securities or "Blue
Sky" law and are being sold to the Purchaser in reliance
upon the Purchaser's representations contained herein in a
transaction that is exempt from the registration
requirements of the 1933 Act and any applicable State law.
The Purchaser agrees that the Notes may not be Transferred
unless subsequently registered under the 1933 Act and any
applicable State securities or "Blue Sky" law or unless
exemptions from the registration requirements of the 1933
Act and applicable State laws are available. Subject to the
express provisions of this Purchase Agreement and the
Indenture, the disposition of the Notes shall at all times
be within the control of the owner thereof. Notwithstanding
anything to the contrary, express or implied, in this
Agreement, the Indenture or otherwise, the Purchaser
understands that none of the Trust, the Note Registrar or
the Indenture Trustee is obligated to register the Notes
under the 1933 Act or any other securities law and that any
Transfer in violation of the provisions of the Indenture
shall be void ab initio. The foregoing shall in no way limit
the ability or the right of the Purchaser to sell
participation interests in any Notes owned by the Purchaser.
(b) The Purchaser is either (i) an "accredited
investor" as defined in rule 501(a) under the 1933 Act or
(ii) a Qualified Institutional Buyer as defined in Rule 144A
under the 1933 Act.
(c) The Purchaser is authorized to enter into this
Purchase Agreement and to purchase the Notes. This Purchase
Agreement has been duly authorized executed and delivered by
the Purchaser and constitutes the Purchaser's legal, valid
and binding agreement enforceable against the Purchaser in
accordance with its terms, subject to applicable bankruptcy,
insolvency, and similar laws affecting creditors' rights
generally, and subject, as to enforceability, to general
principles of equity (regardless of whether enforcement is
sought in a proceeding in equity or at law).
(d) The Purchaser has sufficient knowledge and
experience in financial and business matters as to be
capable of evaluating the merits and risks of an investment
in the Notes and the Purchaser is able to bear the economic
risk of investment in the Notes. The Purchaser acknowledges
that in connection with the making of its investment
decision, the Purchaser has been afforded the opportunity to
ask questions of, and receive answers regarding, and to
conduct its investigation of, the Issuer, the Loans and the
Loan Collateral, the Trust Estate, the Notes and the
Servicer as is sufficient and necessary for the Purchaser to
make an informed investment decision with respect to the
Notes.
(e) No placement agent, broker, finder or investment
banker has been employed by or has acted for the Seller or
the Purchaser in connection with the transactions with the
Purchaser contemplated in this Purchase Agreement or
otherwise in connection with the Notes; and the Purchaser is
solely responsible for, and the Purchaser shall indemnify
the Seller for the fees, expenses or commissions of any
placement agent, broker, finder or investment banker and any
other person or entity claiming to have acted in such
capacity for or under the authority of the Purchaser.
(f) The Purchaser agrees to treat, and to take no
action inconsistent with the treatment of, the Notes as debt
of the Issuer for tax purposes.
7. Notices. All notices and other communications
hereunder shall be in writing and shall be sent by first class
registered or certified mail, return receipt requested, or by
facsimile transmission, provided such transmission is confirmed
by overnight mail delivered by a nationally recognized overnight
delivery service, addressed (a) if to the Purchaser, BankBoston,
N.A.,15 Westminster Street, Providence, Rhode Island 02903,
Attention: Thomas Morris, and (b) if to the Issuer or the Seller,
c/o Litchfield Financial Corporation, 430 Main Street,
Williamstown, Massachusetts 01267, Attention: Executive Vice
President, or to such other address as the Issuer or the Seller
shall have furnished to the Purchaser in writing. Any notice so
given by registered or certified mail shall be deemed to have
been given five days after being deposited in a depository of the
United States mails. Any notice given by means of a nationally
recognized overnight delivery service shall be deemed to have
been given upon receipt thereof.
8. Miscellaneous. (a) This Purchase Agreement shall
be construed and enforced in accordance with and governed by the
law of the State of New York.
(b) Any action or proceeding relating in any way to
this Purchase Agreement may be brought and enforced in the courts
of the State of New York or of the United States for the Southern
District of New York and each of the Issuer, the Seller and the
Purchaser irrevocably submits to the jurisdiction of each such
court (and any appellate court from any thereof) in respect of
any such action or proceeding.
Each of the Issuer, the Seller and the Purchaser
irrevocably waives, to the fullest extent permitted by applicable
law, any objection that it may now or hereafter have to the
laying of venue of any such action or proceeding in any state
court of the State of New York or the United States District
Court for the Southern District of New York, and any claim that
any such action or proceeding brought in any such court has been
brought in an inconvenient forum.
(c) This Agreement supersedes all prior agreements and
understandings relating to the subject matter hereof.
(d) The headings in this Purchase Agreement are for
the purposes of reference only and shall not limit or define the
meaning hereof.
(e) This Purchase Agreement shall be binding upon the
respective successors and assigns of the parties hereto and shall
inure to the benefit of and be enforceable by any registered
owner or owners at the time of each Note then issued, or any part
thereof. This Purchase Agreement may be assigned by the
Purchaser to an eligible purchaser of the Notes in connection
with a permitted transfer of the Notes in accordance with the
Indenture.
(f) This Purchase Agreement may be amended, waived,
discharged or terminated only by an instrument in writing signed
by the party against which enforcement of such amendment, waiver,
discharge or termination is sought.
(g) This Purchase Agreement may be executed
simultaneously in several counterparts, or by different parties
in separate counterparts, each of which counterparts shall be an
original, but all of which shall constitute one instrument.
9. No Recourse. It is expressly understood and
agreed by the parties hereto that (a) the representations,
undertakings and agreements herein made on the part of the Issuer
are made and intended not as personal representations,
undertakings and agreements by the Seller but are made and
intended for the purpose of binding only the Issuer, (b) nothing
herein contained shall be construed as creating any liability on
the Seller to perform any covenant either expressed or implied
contained herein, all such liability, if any, being expressly
waived by the parties hereto, and (c) under no circumstances
shall the Seller be personally liable for the payment of any
indebtedness or expenses of the Issuer or be liable for the
breach or failure of any obligation, representation, warranty or
covenant made or undertaken by the Issuer under this Agreement;
it being understood that the foregoing shall in no way limit the
obligations of the Seller under the Guarantee or the Purchase and
Sale Agreement.
10. Right of First Refusal. The Issuer and the
Originator, respectively, hereby grant to the Purchaser an
exclusive right of first refusal to purchase, on equal or better
terms as proposed by any prospective third party purchaser, (i)
any Series A notes issued by the Issuer on and after the date
hereof and (ii) any Series B Variable Funding Notes (or any
Series C Notes issued in conversion thereof) issued to the
Originator on and after the date hereof. In the event the
Purchaser shall decline to exercise its right of first refusal
with respect to any Notes within 10 days after notice of the
proposed sale and the terms thereof is given to the Purchaser,
the Issuer or the Originator, as the case may be, shall be
entitled to sell such Notes to the third party purchaser on the
terms disclosed to the Purchaser.
IN WITNESS WHEREOF, the parties hereto have caused this
Purchase Agreement to be duly executed on the date first written
above.
LITCHFIELD HYPOTHECATION CORP. 1998-A
By: /s/ Heather A. Sica
Name: HEATHER A. SICA
Title: Executive Vice President
LITCHFIELD FINANCIAL CORPORATION
By: /s/ Heather A. Sica
Name: HEATHER A. SICA
Title: Executive Vice President
BANKBOSTON, N.A.
By: Thomas J. Morris
Name: THOMAS J. MORRIS
Title: Vice President
- - -------------------------------------------------------------------
Exhibit 10.183
- - -------------------------------------------------------------------
SCHEDULE I
Principal Amount
Name, Address and Payment Amount of Notes
Provisions of Purchaser To Be Purchased
BankBoston, N.A. $5,000,000 Series A
(a) All payments on account of the Notes shall be made in
immediately available funds at the opening of business
on the due date by electronic funds
transfer, properly identified, to the following account:
Bank: BankBoston, N.A.
ABA #:011-000-390
Account #:26815897
Attn: Litchfield Hypothecation Corp. 1998-A
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Exhibit 10.184
- - -------------------------------------------------------------------
- - --------------------------------------------------------------------
LITCHFIELD HYPOTHECATION CORP. 1998-A,
LITCHFIELD FINANCIAL CORPORATION
AND
METROWEST BANK
NOTE PURCHASE AGREEMENT
Dated: December 29, 1998
- - --------------------------------------------------------------------
- - -------------------------------------------------------------------
TABLE OF CONTENTS
- - -------------------------------------------------------------------
The Notes.......................................................-1-
Purchase and Sale...............................................-1-
The Closing; Delivery of the Notes..............................-1-
Conditions of the Purchaser's Obligation........................-2-
Representations and Warranties..................................-2-
The Purchaser's Representations.................................-5-
Notices.........................................................-7-
Miscellaneous...................................................-7-
No Recourse.....................................................-8-
Schedule I Purchaser's Remittance Instructions
- - -------------------------------------------------------------------
LITCHFIELD HYPOTHECATION CORP. 1998-A
- - -------------------------------------------------------------------
NOTE PURCHASE AGREEMENT
December 29, 1998
LITCHFIELD HYPOTHECATION CORP. 1998-A, a Delaware
corporation, and its successors and assigns (the "Issuer"), and
LITCHFIELD FINANCIAL CORPORATION, a Massachusetts corporation
(the "Seller"), hereby agree with METROWEST BANK (the
"Purchaser"), as follows:
1. The Notes. The Issuer has authorized the
execution and delivery to The Chase Manhattan Bank, as trustee
(the "Trustee"), of an Indenture of Trust, dated as of June 1,
1998, as amended (collectively, the "Indenture"), providing for
the issuance and sale by the Issuer of its Hypothecation Loan
Collateralized Notes, in one or more series, secured by the Trust
Estate granted to the Trustee by the Issuer pursuant to the
Indenture, which includes, among other assets, a pool of certain
hypothecation Loans owned by the Issuer and serviced by
Litchfield Financial Corporation, a Massachusetts corporation (in
such capacity, the "Servicer"). The Seller is the owner of the
Notes (as defined below), which Notes have been issued by the
Issuer pursuant to the Indenture. Unless otherwise specifically
defined herein, all capitalized terms shall have the meanings
ascribed to them in the Indenture.
2. Purchase and Sale. In reliance upon the
representations and warranties contained herein and subject to
the terms and conditions set forth herein, the Seller agrees to
sell to the Purchaser, and the Purchaser agrees to purchase from
the Seller, $2,625,786.95 principal amount of Hypothecation Loan
Collateralized Notes, Series A and $ 2,374,213.05 principal
amount of Hypothecation Loan Collateralized Notes, Series C (the
foregoing notes are referred to herein collectively as the
"Notes") at an aggregate price (the "Purchase Price") equal to
the aggregate outstanding principal amount of the Notes on the
Closing Date (as hereinafter defined). The Purchase Price shall
be payable to or upon the instructions of the Seller on the
Closing Date by wire transfer in immediately available Federal
funds.
- - ---------------------------------------------------------------------
3. The Closing; Delivery of the Notes. The closing
of the purchase and sale of the Notes pursuant hereto (the
"Closing") shall be held on December 29, 1998 (the "Closing
Date"). The Closing shall take place by mail or at such place as
the parties hereto shall designate. At the Closing, the Seller
will deliver to the Purchaser, against payment of the Purchase
Price therefor, one Series A Note in the original denomination of $
2,792,239.88, of which $2,625,786.95 shall be outstanding on the
Closing Date, and one Series C Note in the denomination of
$2,374,213.05 registered in the Purchaser's name, or in the name of
its nominee; provided however, that if the Purchaser requests the
Seller in writing not less than one Business Day prior to the
Closing Date to deliver to the Purchaser Notes in other
denominations (authorized pursuant to the Indenture) that equal in
the aggregate the denominations specified above, the Seller shall
comply with such request.
- - ---------------------------------------------------------------------
4. Conditions of the Purchaser's Obligation. The
obligation of the Purchaser set forth in Section 2 to purchase the
Notes on the Closing Date shall be subject to the accuracy as of the
date hereof and as of the Closing Date of (i) the representations and
warranties of the Issuer set forth in Section 5 hereof, (ii) the
representations and warranties of the Seller in the Purchase and Sale
Agreement and in Section 5 hereof, and (iii) the representations and
warranties of the Servicer in the Servicing Agreement, and shall also
be subject to the following additional conditions:
(a) Each of this Purchase Agreement, the Notes, the
Indenture, the Servicing Agreement, and the Purchase and
Sale Agreement (collectively, the "Agreements") shall have
been duly authorized, executed and delivered by each of the
parties thereto and be in full force and effect; and
(b) The Purchaser shall have received copies of all
documents and other information as it may reasonably
request, in form and substance reasonably satisfactory to
it, with respect to such transactions and the taking of all
proceedings in connection therewith.
5. Representations and Warranties. (a) The Issuer
represents and warrants to the Purchaser as of the date hereof as
follows:
- - -------------------------------------------------------------------
(i) Each of the Agreements to which the Issuer is a
party has been duly authorized, executed and delivered by
the Issuer and, assuming due execution and delivery by the
other parties thereto, constitutes a legal, valid and
binding agreement of the Issuer enforceable against the
Issuer in accordance with its terms, subject to applicable
bankruptcy, insolvency and similar laws affecting creditors'
rights generally, and subject, as to enforceability, to
general principles of equity (regardless of whether
enforcement is sought in a proceeding in equity or at law).
The Notes have been validly issued and are entitled to the
benefits of the Indenture and constitute valid instruments
enforceable in accordance with their terms subject to
applicable bankruptcy, insolvency and similar laws affecting
creditors' rights generally, and subject, as to
enforceability, to general principles of equity (regardless
of whether enforcement is sought in a proceeding in equity
or at law).
- - -------------------------------------------------------------------
(ii) Neither the issuance or sale of the Notes, nor
the consummation of any other of the transactions
contemplated in any of the Agreements to which the Issuer is
a party, nor the execution, delivery or performance of the
terms of any of the Agreements to which the Issuer is a
party, has or will result in the breach of any term or
provision of the certificate of incorporation or by-laws of
the Issuer, or conflict with, result in a breach or
violation on the part of the Issuer of or the acceleration
of indebtedness under or constitute a default under, the
terms of any indenture or other agreement or instrument to
which the Issuer is a party or by which it is bound, or any
statute or regulation applicable to the Issuer or any order
applicable to the Issuer of any court, regulatory body,
administrative agency or governmental body having
jurisdiction over the Issuer.
(iii) No consent, approval, authorization of,
registration or filing with, or notice to, any governmental
or regulatory authority, agency, department, commission,
board, bureau, body or instrumentality is required on the
part of the Issuer for the execution and delivery or by the
Issuer with any of the Agreements to which the Issuer is a
party or the Notes, or the issuance of the Notes, or the
consummation by the Issuer of any transaction contemplated
under any of the Agreements to which the Issuer is a party,
or such consent, approval or authorization has been obtained
or such registration, filing or notice has been made (or,
with respect to assignments of mortgages and financing
statements, will be made by the Issuer as contemplated by
the Indenture).
(iv) There is no action, suit or proceeding against,
or investigation of, the Issuer pending or, to the best of
its knowledge, threatened, before any court, administrative
agency or other tribunal which, either individually or in
the aggregate, (A) may result in any material adverse change
in the financial condition, properties, or assets of the
Issuer or in any material and adverse impairment of the
right or ability of the Issuer to perform its obligations
under the Agreements, or (B) asserts the invalidity of any
of the Agreements to which either the Issuer is a party or
the Notes or (C) seeks to prevent the consummation of any of
the transactions contemplated by any of the Agreements to
which the Issuer is a party.
- - -------------------------------------------------------------------
(v) Based in part on the representations and
warranties contained in Section 6 hereof, the Issuer is not,
and the sale of the Notes in the manner contemplated by this
Purchase Agreement will not cause the Issuer to be, subject
to registration or regulation as an investment company or
affiliate of any investment company under the Investment
Company Act of 1940, as amended.
- - -------------------------------------------------------------------
(vi) Each Loan included in the Trust Estate securing
the Notes has been delivered to the Trustee or its
collateral agent, together with an assignment thereof by the
Issuer, which immediately prior to such assignment will own
full legal and equitable title to each Loan, free and clear
of any lien, charge, encumbrance or participation or
ownership interest in favor of any other Person. All of the
Issuer's right, title and interest in and to the Loans have
been validly and effectively transferred to the Indenture
Trustee as collateral security for the benefit of the
Holders of the Notes.
(vii) On the Closing Date after giving effect
to the sale of the Notes to the Purchaser hereunder, the
aggregate principal amount of all Litchfield Hypothecation
Corp. 1998-A, Hypothecation Loan Collateralized Notes
outstanding shall be $25,163,962.17, of which $2,625,786.95
aggregate principal amount shall be Series A Notes owned of
record by the Purchaser, $14,433,784.65 aggregate principal
amount shall be Series A Notes owned of record by
BankBoston, N.A., $ 2,535,058.04 aggregate principal amount
shall be Series B Variable Funding Notes owned of record by
the Seller, $2,374,213.05 aggregate principal amount shall
be Series C Notes owned of record by the Purchaser and
$3,195,119.48 aggregate principal amount shall be Series C
Notes owned of record by BankBoston, N.A.
(b) The Seller represents and warrants to the Purchaser
as of the date hereof as follows:
(i) Each of the Agreements to which the Seller is a
party has been duly authorized, executed and delivered by
the Seller and, assuming due execution and delivery by the
other parties thereto, constitutes a legal, valid and
binding agreement of the Seller enforceable against the
Seller in accordance with its terms, subject to applicable
bankruptcy, insolvency and similar laws affecting creditors'
rights generally, and subject, as to enforceability, to
general principles of equity (regardless of whether
enforcement is sought in a proceeding in equity or at law).
(ii) Neither the sale of the Notes, nor the
consummation of any other of the transactions contemplated
in any of the Agreements to which the Seller is a party, nor
the execution, delivery or performance of the terms of any
of the Agreements to which the Seller is a party, has or
will result in the breach of any term or provision of the
certificate of incorporation or by-laws of the Seller, or
conflict with, result in a breach or violation on the part
of the Seller of or the acceleration of indebtedness under
or constitute a default under, the terms of any indenture or
other agreement or instrument to which the Seller is a party
or by which it is bound, or any statute or regulation
applicable to the Seller or any order applicable to the
Seller of any court, regulatory body, administrative agency
or governmental body having jurisdiction over the Seller.
(iii)No consent, approval, authorization of,
registration or filing with, or notice to, any governmental
or regulatory authority, agency, department, commission,
board, bureau, body or instrumentality is required on the
part of the Seller for the execution and delivery or by the
Seller with any of the Agreements to which the Seller is a
party, or the sale of the Notes, or the consummation by the
Seller of any transaction contemplated under any of the
Agreements to which the Seller is a party, or such consent,
approval or authorization has been obtained or such
registration, filing or notice has been made (or, with
respect to assignments of mortgages and financing
statements, will be made by the Seller as contemplated by
the Indenture).
(iv) There is no action, suit or proceeding against, or
investigation of, the Seller pending or, to the best of its
knowledge, threatened, before any court, administrative
agency or other tribunal which, either individually or in
the aggregate, (A) may result in any material adverse change
in the financial condition, properties, or assets of the
Seller or in any material and adverse impairment of the
right or ability of the Seller to perform its obligations
under the Agreements, or (B) asserts the invalidity of any
of the Agreements to which either the Seller is a party or
the Notes or (C) seeks to prevent the consummation of any of
the transactions contemplated by any of the Agreements to
which either the Seller is a party.
- - -------------------------------------------------------------------
(v) Neither the Seller nor any Affiliate of the Seller
nor any Person authorized or employed by the Seller will,
directly or indirectly, offer or sell any Note or similar
security in a manner which would render the sale of the
Notes pursuant to this Purchase Agreement a violation of
Section 5 of the 1933 Act, or require registration pursuant
thereto. Based in part on the representations and
warranties contained in Section 6 hereof, the offering and
sale of the Notes by the Seller to Purchaser at closing are
exempt from the registration requirements of the 1933 Act
and the Indenture is not required to be qualified under the
Trust Indenture Act of 1939, as amended.
- - -------------------------------------------------------------------
The Issuer and the Seller agree that the representations and
warranties set forth in this Section 5 shall be fully assignable
to the initial party to whom the Purchaser may sell the Notes.
6. The Purchaser's Representations. The Purchaser
represents to the Issuer as follows:
- - -------------------------------------------------------------------
(a) The Purchaser is acquiring the Notes for its own
account. The Purchaser understands that the Notes are not
being registered under the Securities Act of 1933, as
amended (the "1933 Act"), or any State securities or "Blue
Sky" law and are being sold to the Purchaser in reliance
upon the Purchaser's representations contained herein in a
transaction that is exempt from the registration
requirements of the 1933 Act and any applicable State law.
The Purchaser agrees that the Notes may not be transferred
unless subsequently registered under the 1933 Act and any
applicable State securities or "Blue Sky" law or unless
exemptions from the registration requirements of the 1933
Act and applicable State laws are available. Subject to the
express provisions of this Purchase Agreement and the
Indenture, the disposition of the Notes shall at all times
be within the control of the owner thereof. Notwithstanding
anything to the contrary, express or implied, in this
Agreement, the Indenture or otherwise, the Purchaser
understands that none of the Trust, the Note Registrar or
the Indenture Trustee is obligated to register the Notes
under the 1933 Act or any other securities law and that any
transfer in violation of the provisions of the Indenture
shall be void ab initio. The foregoing shall in no way limit
the ability or the right of the Purchaser to sell
participation interests in any Notes owned by the Purchaser.
- - -------------------------------------------------------------------
(b) The Purchaser is either (i) an "accredited
investor" as defined in rule 501(a) under the 1933 Act or
(ii) a Qualified Institutional Buyer as defined in Rule 144A
under the 1933 Act.
(c) The Purchaser is authorized to enter into this
Purchase Agreement and to purchase the Notes. This Purchase
Agreement has been duly authorized executed and delivered by
the Purchaser and constitutes the Purchaser's legal, valid
and binding agreement enforceable against the Purchaser in
accordance with its terms, subject to applicable bankruptcy,
insolvency, and similar laws affecting creditors' rights
generally, and subject, as to enforceability, to general
principles of equity (regardless of whether enforcement is
sought in a proceeding in equity or at law).
(d) The Purchaser has sufficient knowledge and
experience in financial and business matters as to be
capable of evaluating the merits and risks of an investment
in the Notes and the Purchaser is able to bear the economic
risk of investment in the Notes. The Purchaser acknowledges
that in connection with the making of its investment
decision, the Purchaser has been afforded the opportunity to
ask questions of, and receive answers regarding, and to
conduct its investigation of, the Issuer, the Loans and the
Loan Collateral, the Trust Estate, the Notes and the
Servicer as is sufficient and necessary for the Purchaser to
make an informed investment decision with respect to the
Notes.
(e) No placement agent, broker, finder or investment
banker has been employed by or has acted for the Seller or
the Purchaser in connection with the transactions with the
Purchaser contemplated in this Purchase Agreement or
otherwise in connection with the Notes; and the Purchaser is
solely responsible for, and the Purchaser shall indemnify
the Seller for the fees, expenses or commissions of any
placement agent, broker, finder or investment banker and any
other person or entity claiming to have acted in such
capacity for or under the authority of the Purchaser.
- - -------------------------------------------------------------------
(f) The Purchaser agrees to treat, and to take no
action inconsistent with the treatment of, the Notes as debt
of the Issuer for tax purposes.
- - -------------------------------------------------------------------
7. Notices. All notices and other communications
hereunder shall be in writing and shall be sent by first class
registered or certified mail, return receipt requested, or by
facsimile transmission, provided such transmission is confirmed
by overnight mail delivered by a nationally recognized overnight
delivery service, addressed (a) if to the Purchaser, MetroWest
Bank, 15 Park Avenue, Framingham, Massachusetts 01710-9111,
Attention: Irene A. Schmitt, and (b) if to the Issuer or the
Seller, c/o Litchfield Financial Corporation, 430 Main Street,
Williamstown, Massachusetts 01267, Attention: Executive Vice
President, or to such other address as the Issuer or the Seller
shall have furnished to the Purchaser in writing. Any notice so
given by registered or certified mail shall be deemed to have
been given five days after being deposited in a depository of the
United States mails. Any notice given by means of a nationally
recognized overnight delivery service shall be deemed to have
been given upon receipt thereof.
8. Miscellaneous. (a) This Purchase Agreement shall
be construed and enforced in accordance with and governed by the
law of the Commonwealth of Massachusetts and is executed as a
sealed instrument.
(b) Any action or proceeding relating in any way to
this Purchase Agreement may be brought and enforced in the courts
of the Commonwealth of Massachusetts or of the United States for
the Eastern District of Massachusetts and each of the Issuer, the
Seller and the Purchaser irrevocably submits to the jurisdiction
of each such court (and any appellate court from any thereof) in
respect of any such action or proceeding.
Each of the Issuer, the Seller and the Purchaser
irrevocably waives, to the fullest extent permitted by applicable
law, any objection that it may now or hereafter have to the
laying of venue of any such action or proceeding in any state
court of the Commonwealth of Massachusetts or the United States
District Court for the Eastern District of Massachusetts, and any
claim that any such action or proceeding brought in any such
court has been brought in an inconvenient forum.
(c) This Agreement supersedes all prior agreements and
understandings relating to the subject matter hereof.
(d) The headings in this Purchase Agreement are for
the purposes of reference only and shall not limit or define the
meaning hereof.
(e) This Purchase Agreement shall be binding upon the
respective successors and assigns of the parties hereto and shall
inure to the benefit of and be enforceable by any registered
owner or owners at the time of each Note then issued, or any part
thereof. This Purchase Agreement may be assigned by the
Purchaser to an eligible purchaser of the Notes in connection
with a permitted transfer of the Notes in accordance with the
Indenture.
- - -------------------------------------------------------------------
- - -------------------------------------------------------------------
(f) This Purchase Agreement may be amended, waived,
discharged or terminated only by an instrument in writing signed
by the party against which enforcement of such amendment, waiver,
discharge or termination is sought.
(g) This Purchase Agreement may be executed
simultaneously in several counterparts, or by different parties
in separate counterparts, each of which counterparts shall be an
original, but all of which shall constitute one instrument.
9. No Recourse. It is expressly understood and
agreed by the parties hereto that (a) the representations,
undertakings and agreements herein made on the part of the Issuer
are made and intended not as personal representations,
undertakings and agreements by the Seller but are made and
intended for the purpose of binding only the Issuer, (b) nothing
herein contained shall be construed as creating any liability on
the Seller to perform any covenant either expressed or implied
contained herein, all such liability, if any, being expressly
waived by the parties hereto, and (c) under no circumstances
shall the Seller be personally liable for the payment of any
indebtedness or expenses of the Issuer or be liable for the
breach or failure of any obligation, representation, warranty or
covenant made or undertaken by the Issuer under this Agreement;
it being understood that the foregoing shall in no way limit the
obligations of the Seller under the Guarantee or the Purchase and
Sale Agreement or with respect to its representations and
warranties under this agreement.
- - -------------------------------------------------------------------
IN WITNESS WHEREOF, the parties hereto have caused this
Purchase Agreement to be duly executed on the date first written
above.
- - -------------------------------------------------------------------
LITCHFIELD HYPOTHECATION CORP. 1998-A
By: /s/ Heather A. Sica
Name: HEATHER A. SICA
Title: Executive Vice President
LITCHFIELD FINANCIAL CORPORATION
By: /s/ Heather A. Sica
Name: HEATHER A. SICA
Title: Executive Vice President
METROWEST BANK
By: /s/ Irene A. Schmitt
Name: IRENE A SCHMITT
Title: President
- - -------------------------------------------------------------------
Exhibit 10.182
- - -------------------------------------------------------------------
Exhibit 10.184
93
SCHEDULE I
Principal Amount
Name, Address and Payment Amount of Notes
Provisions of Purchaser To Be Purchased
MetroWest Bank $2,625,786.95 Series A
$2,374,213.05 Series C
(a) All payments on account of the Notes shall be made in
immediately available funds at the opening of business
on the due date by electronic funds
transfer, properly identified, to the following account:
Bank: MetroWest Bank
ABA #:
Account #:
Attn:
- - --------------------------------------------------------------------------
Exhibit 13.1
- - --------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Exhibit 11.1
Litchfield Financial Corporation
Computation of Earnings Per Share
Year Ended December 31,
1998 1997 1996
Basic:
Weighted average number of
common shares outstanding....... 6,273,638 5,572,465 5,441,636
Income before extraordinary
item ........................... $8,832,000 $6,603,000 $5,273,000
Extraordinary item (net of
tax benefit of $48,000 and
$138,000 for 1998 and 1997,
respectively)...... (77,000) (220,000) ---
Net income.................. $8,755,000 $6,383,000 $5,273,000
Income before extraordinary
item per common share......... $ 1.41 $ 1.19 $ .97
Extraordinary item (net of
tax benefit of $48,000 and
$138,000 for 1998 and
1997, respectively)...... (.01) (.04) ---
Net income per common share. $ 1.40 1.15 .97
Diluted:
Weighted average number of
common shares outstanding....... 6,273,638 5,572,465 5,441,636
Weighted average number of
common stock equivalents
outstanding:
Stock options............ 330,729 336,967 240,516
Weighted average common and
common equivalent shares
outstanding.............. 6,604,367 5,909,432 5,682,152
Income before extraordinary $8,832,000 $6,603,000 $5,273,000
item
Extraordinary item (net of
tax benefit of $48,000 and
$138,000 for 1998 and
1997, respectively)...... (77,000) (220,000)
Net income.................. $8,755,000 $6,383,000 $5,273,000
Income before extraordinary
item per common share......... $ 1.34 $ 1.12 $ .93
Extraordinary item (net of
tax benefit of $48,000 and
$138,000 for 1998 and
1997, respectively)...... (.01) (.04) ---
Net income per common share. $ 1.33 1.08 .93
</TABLE>
(ANNUAL REPORT)
1998 ANNUAL REPORT
10 Year Anniversary
[graph showing eps]
Income Per Share Before Extraordinary Item
- - --------------------------------------------------------------------------
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 loans and by making loans to businesses secured by
consumer receivables or other assets.
- - --------------------------------------------------------------------------
Through the support of its investors and dedication of its employees,
Litchfield has been able to provide quality service, maintain consistent
growth and be among the top performers in the financial services
industry. Litchfield's common stock trades on The Nasdaq Stock Market's
National Market under the symbol "LTCH" and is listed in some newspapers
as "LITCHFNL".
Revenue Growth
(000's)
[Graph showing Revenue Growth]
Dear Fellow Stockholders:
It is a great privilege to write this letter reviewing our
1998 results on this, the tenth anniversary of our founding
and our tenth consecutive year of at least 20% earnings
growth. Before starting to write this letter, I outlined
key events of 1998, wrote down the fundamentals on which we
base our business and reread our last several annual
reports. In doing so, I was struck by the magnitude of our
achievements, the strength of our fundamentals and the
extraordinary consistency of our growth.
At the risk of repeating myself, 1998 was a record year
for the Company. Our income and earnings per share, before
extraordinary item, were up 34% and 20%, respectively. Our
revenues were up 31%, while the percentage of our revenues
derived from gain on sale of loans declined for the fourth
straight year. Our overhead expenses as a percent of the
serviced portfolio decreased to less than 2% of the
portfolio for the first time. And while we managed dramatic
growth in loan
originations and the serviced portfolio, we decreased our
delinquencies and charge-off rates as well. As we did in
1995, in 1998 we doubled our originations over the previous
year. The corresponding growth in our loan portfolio, and
the resulting increase in interest income, allowed us to
offset the dilutive effect on earnings per share of our
mid-year equity offering while we increased our cash
revenues. The equity offering also added to the strength of
our balance sheet and laid the groundwork for future growth.
These results reflect the strength of our team and our
business model. We recruit, train, and retain outstanding
people with intelligence, integrity and strong work ethics.
It is gratifying to work with the talented people who make
this company successful. A substantial part of the
employee's net worth resides in the Company's continued
success. Important elements in that success are our
obsession with our business plan and our focus on consistent
growth. We continue to concentrate on under-served niche
markets like our land and timeshare businesses. We also
apply our successful formula to new businesses such as our
financial services business which experienced extraordinary
growth in 1998.
- - ---------------------------------------------------------------
In the same way, we look to expand into other niche markets
with similar characteristics to propel our future growth.
And, as always, we continue to tightly control the growth in
our expenses.
- - ---------------------------------------------------------------
We believe our Company is unique in the financial services
business. Because we are frequently measured against many
of the other public companies in the financial sector, it
may be helpful to point out how we are different. First is
our ten-year track record of consistent growth and
profitability which demonstrates the strength of our
management team and our focus on the fundamentals of our
business. Second is our committed loan sale facilities at
fixed spreads over commercial paper rates. These facilities
enable us to continue to sell loans at a time when many
finance companies face widening spreads and a lack of
liquidity in the asset-backed lending market. Third is the
cash positive nature of our loan sales. We generally buy our
loans at a discount and derive proceeds not only from the
sale of the loans, but also from pledging our retained
interests in the loan sales. Fourth is our lower
origination cost compared to many retail finance companies.
We don't have to pay competitive premiums to brokers to
channel loans to us. In fact, in many cases we are the
exclusive source of financing to our dealer and developer
network. Fifth, because we focus on under-served market
niches, we can be selective in our underwriting. We lend
money to customers who are good credit risks and, in most
cases, these loans are supported by dealer reserves,
guarantees or with conservative loan to value ratios and
advance rates. Finally, we believe we are under- leveraged
compared with our peers, so we have room to further increase
our debt and improve our return on equity. We feel that all
of these factors contribute to our achievements.
I would like to thank all of our shareholders as well as
our employees, bondholders, lenders, customers and other
partners for their continued support. We appreciate your
enthusiasm for our business and we look forward to another
rewarding year in 1999.
RANDY STRATTON
Chief Executive Officer and President
January 30, 1999
<TABLE>
<S> <C> <C> <C> <C> <C>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
(Dollars in thousands, except per share data)
Year Ended December 31,
Statement of Income Data (1): 1998 1997 1996 1995 1994
Revenues:
Interest and fees on
loans....................... $25,736 $19,374 $14,789 $ 11,392 $5,669
Gain on sale of loans..... 10,691 8,564 7,331 5,161 4,847
Servicing and other
income...................... 2,379 1,753 1,576 908 459
Total revenues.......... 38,806 29,691 23,696 17,461 10,975
Expenses:
Interest expense.......... 14,265 10,675 7,197 6,138 3,158
Salaries and employee
benefits.................... 4,806 3,399 2,824 2,798 1,776
Other operating
expenses.................... 3,834 3,480 3,147 2,120 1,164
Provision for loan
losses...................... 1,532 1,400 1,954 890 559
Total expenses.......... 24,437 18,954 15,122 11,946 6,657
Income before income
taxes and
extraordinary item........ 14,369 10,737 8,574 5,515 4,318
Provision for income
taxes....................... 5,537 4,134 3,301 2,066 1,619
Income before
extraordinary item.......... 8,832 6,603 5,273 3,449 2,699
Extraordinary item (2)...... (77) (220) --- --- (126)
Net income.............. $8,755 $6,383 $5,273 $3,449 $2,573
Basic per common share
amounts:
Income before
extraordinary item........ $ 1.41 $ 1.19 $ .97 $ .80 $ .66
Extraordinary item........ (.01) (.04) -- -- (.03)
Net income per share...... $ 1.40 $ 1.15 $ .97 $ .80 $ .63
Basic weighted average
number of shares
outstanding..... 6,273,638 5,572,465 5,441,636 4,315,469 4,116,684
Diluted per common share
amounts:
Income before
extraordinary item........ $ 1.34 $ 1.12 $ .93 $ .76 $ .63
Extraordinary item........ (.01) (.04) -- -- (.03)
Net income per share...... $ 1.33 $ 1.08 $ .93 $ .76 $ .60
Diluted weighted average
number
of shares outstanding..... 6,604,367 5,909,432 5,682,152 4,524,607 4,282,884
Cash dividends declared
per common share........... $ .07 $ .06 $ .05 $ .04 $ .03
Other Statement of
Income Data:
Income before
extraordinary item as
a percentage of
revenues................... 22.8% 22.3% 22.3% 19.8% 24.6%
Ratio of EBITDA to
interest expense (3)...... 2.13 2.17 2.90 2.44 3.31
Ratio of earnings to
fixed charges (4)........... 2.01 2.01 2.19 1.90 2.37
Return on average assets
(5)......................... 3.7% 3.8% 4.0% 3.7% 4.6%
Return on average equity
(5)......................... 13.2% 14.1% 13.3% 16.6% 17.2%
</TABLE>
(1) Certain amounts in the 1994 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 (as defined herein), net of applicable tax benefit of $76,000,
for 1994, of the remainder of the 1992 Notes, net of applicable tax
benefit of $138,000, for 1997, and of the term note payable, net of
applicable tax benefit of $48,000, for 1998.
(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) Calculations are based on income before extraordinary item.
SELECTED CONSOLIDATED FINANCIAL INFORMATION - (Continued)
(Dollars in thousands, except per share data)
<TABLE>
<S> <C> <C> <C> <C> <C>
December 31,
Balance Sheet Data (6): 1998 1997 1996 1995 1994
Total assets............ $293,882 $186,790 $152,689 $112,459 $63,487
Loans held for sale
(7)..................... 19,750 16,366 12,260 14,380 11,094
Other loans (7)......... 191,292 86,307 79,996 33,613 15,790
Retained interests in
loan sales (7).......... 28,883 30,299 28,912 22,594 11,996
Secured debt............ 50,521 5,387 43,727 9,836 5,823
Unsecured debt.......... 134,588 105,347 46,995 47,401 29,896
Stockholders' equity.... 82,094 52,071 42,448 37,396 16,610
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Year Ended December 31,
Other Financial Data: 1998 1997 1996 1995 1994
Loans purchased and
originated (8)............ $375,292 $184,660 $133,750 $121,046 $ 59,798
Loans sold (8)............ 144,762 98,747 54,936 65,115 40,116
Loans participated (8).... 3,569 6,936 --- --- ---
Serviced Portfolio (9).... 466,912 304,102 242,445 176,650 105,013
Loans serviced for
others.................... 238,132 179,790 129,619 111,117 72,731
Dealer/developer
reserves.................. 9,979 10,655 10,628 9,644 6,575
Allowance for loan
losses (10)............... 6,707 5,877 4,528 3,715 1,264
Allowance ratio (11)...... 1.44% 1.93% 1.87% 2.10% 1.20%
Delinquency ratio (12).... 0.95% 1.20% 1.34% 1.73% .93%
Net charge-off ratio
(8)(13)................... .58% .74% .94% .67% .38%
Non-performing asset
ratio (14)................ 0.84% 1.03% 1.57% 1.35% 1.02%
</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 1994 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 estimated recourse
obligations for 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 31 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.
(14) The non-performing asset ratio is determined by dividing the sum
of the amount of those loans which are 91 days or more past due and
other real estate owned by the amount of the Serviced Portfolio.
- - --------------------------------------------------------------------------
- - --------------------------------------------------------------------------
95
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
Litchfield Financial Corporation (the "Company") 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 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, mortgages and
construction loans and tax lien certificates, 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 36 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 18 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 2.0% to 4.0%.
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 2.0% to 4.0%.
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 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, unless otherwise indicated, of certain items included in the
Company's statements of income.
<TABLE>
<S> <C> <C> <C>
Year ended December 31,
1998 1997 1996
Revenues
Interest and fees on loans........ 66.3% 65.3% 62.4%
Gain on sale of loans............. 27.6 28.8 30.9
Servicing and other income........ 6.1 5.9 6.7
100.0 100.0 100.0
Expenses
Interest expense.................. 36.8 36.0 30.4
Salaries and employee benefits.... 12.4 11.4 11.9
Other operating expenses.......... 9.9 11.7 13.3
Provision for loan losses......... 3.9 4.7 8.2
63.0 63.8 63.8
Income before income taxes and 37.0 36.2 36.2
extraordinary item....................
Provision for income taxes............ 14.2 13.9 13.9
Income before extraordinary item...... 22.8 22.3 22.3
Extraordinary item, net............... (0.2) (0.8) --
Net income............................ 22.6% 21.5% 22.3%
</TABLE>
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenues increased 30.7% to $38,806,000 for the year ended December
31, 1998, from $29,691,000 for the year ended December 31, 1997. Net
income for the year ended December 31, 1998 increased 37.2% to
$8,755,000 compared to $6,383,000 in 1997. Net income as a percentage
of revenues was 22.6% for the year ended December 31, 1998 compared to
21.5% for the year ended December 31, 1997. Loan purchases and
originations grew 103.2% to $375,292,000 in 1998 from $184,660,000 in
1997. The Serviced Portfolio increased 53.5% to $466,912,000 at
December 31, 1998 from $304,102,000 at December 31, 1997.
Interest and fees on loans increased 32.8% to $25,736,000 in 1998
from $19,374,000 in 1997, primarily as the result of the higher average
balance of other loans during the 1998 period. The average rate earned
on the Serviced Portfolio decreased to 11.7% at December 31, 1998 from
12.2% at December 31, 1997, primarily due to the effect of the growth in
Hypothecation Loans as a percentage of the portfolio and a decline in
interest rates. Hypothecation 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 24.8% to $10,691,000 in 1998 from
$8,564,000 in 1997. The volume of loans sold increased 46.6% to
$144,762,000 for the year ended December 31, 1998 from $98,747,000 for
the same period in 1997. Gain on sale of loans increased less than the
volume of loans sold for the year ended December 31, 1998 primarily due
to the increase in Hypothecation 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 income increased 35.7% to $2,379,000 for the year
ended December 31, 1998, from $1,753,000 for the year ended December 31,
1997 largely due to the increase in the other fee income including
certain processing fees, prepayment penalties and income from an
affiliate. Loans serviced for others increased 32.5% to $238,132,000 as
of December 31, 1998 from $179,790,000 at December 31, 1997.
Interest expense increased 33.6% to $14,265,000 in 1998 from
$10,675,000 in 1997. The increase in interest expense primarily
reflects an increase in average borrowings which was only partially
offset by lower rates. During the year ended December 31, 1998, the
weighted average borrowings were $150,483,000 at an average rate of 8.7%
compared to $107,900,000 at an average rate of 9.1% during the year
ended December 31, 1997. Interest expense includes the amortization of
deferred debt issuance costs.
Salaries and employee benefits increased 41.4% to $4,806,000 for the
year ended December 31, 1998 from $3,399,000 for the year ended December
31, 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 slightly to 12.4% in 1998 compared to
11.4% in 1997. However, as a percentage of the Serviced Portfolio,
personnel costs decreased to 1.0% for the year ended December 31, 1998
from 1.1% for the year ended December 31, 1997. The increase in
salaries and employee benefits was due in part to bringing customer
service and collections in-house during 1998. This resulted in a
decrease in third party servicing expenses included in other operating
expenses. Total salaries and employee benefits plus other operating
expenses as a percentage of revenues decreased in 1998 to 22.3% from
23.2% in 1997.
Other operating expenses increased 10.2% to $3,834,000 for the year
ended December 31, 1998 from $3,480,000 for the year ended December 31,
1997. Other operating expenses increased due to the growth in the
Serviced Portfolio that was only partially offset by the decrease in
third party servicing expenses related to bringing customer service and
collections in-house. As a percentage of revenues, other operating
expenses decreased to 9.9% in 1998 from 11.7% in 1997. As a percentage
of the Serviced Portfolio, other operating expenses decreased to 0.8%
for the year ended December 31, 1998 compared to 1.1% for the year ended
December 31, 1997.
During the year ended December 31, 1998, the provision for loan
losses increased 9.4% to $1,532,000 from $1,400,000 for the year ended
December 31, 1997 primarily due to the growth of the Serviced Portfolio.
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 $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.
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. 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.
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 and payments of operating and interest expenses. The
Company's primary sources of liquidity are loan sales, short-term
borrowings under secured lines of credit and long-term debt and equity
offerings.
Since its inception, the Company has sold $492,960,000 of loans at
face value ($348,198,000 through December 31, 1997). The principal
amount remaining on the loans sold was $238,132,000 at December 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 $12,750,000 of loans at December 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 $491,000,
$740,000 and $991,000 of such loans under the recourse provisions of
loan sales 1998, 1997 and 1996, respectively. As of December 31, 1998,
$25,685,000 of the Company's cash was restricted as credit enhancement
for certain securitization programs. To date, the Company has
participated $10,505,000 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 December 31,
1998 and December 31, 1997. Outstanding borrowings on these lines of
credit were $49,021,000 at December 31, 1998. 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 $175,000,000 at December 31, 1998 and $150,000,000 at December
31, 1997. As of December 31, 1998 and December 31, 1997, the
outstanding balances of loans sold or pledged under these facilities
were $148,164,000 and $121,142,000, respectively. There were no
outstanding borrowings under these lines of credit at December 31,
1998. Outstanding borrowings under these lines of credit were $169,000
at December 31, 1997. Interest is payable on these lines of credit
based on certain commercial paper rates.
In June 1998, the Company issued 1,000,000 shares of common stock at
$19 per share. The net proceeds of the offering were $17,717,000 and
were used to pay down certain lines of credit. In connection with the
underwriters' option to purchase additional shares to cover
over-allotments, the Company issued an additional 166,500 shares in July
1998. Net proceeds of these shares totaled $2,990,000 and were also used
to pay down certain lines of credit.
The Company also finances its liquidity needs with long-term debt.
Long-term debt totaled $134,588,000 at December 31, 1998 and
$105,347,000 at December 31, 1997.
In September of 1998, the Company redeemed a term note of $3,265,000
resulting in an extraordinary loss of $77,000, net of applicable tax
benefit of $48,000. The note was collateralized by certain of the
Company's retained interests in loan sales and cash. The balance
outstanding on the note was $5,210,000 at December 31, 1997.
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.
In June, 1994, the Company entered into an interest rate cap
agreement with a bank in order to manage its exposure to certain
increases in interest rates. The interest rate cap entitles the Company
to receive an amount, based on an amortizing notional amount, which at
December 31, 1998 was $3,670,000, when commercial paper rates exceed
8%. If payments were to be received as a result of the cap agreement,
they would be accrued as a reduction of interest expense. This
agreement expires in July 2003.
Historically, the Company has not required major capital expenditures
to support its operations.
Credit Quality and Allowances for Loan Losses
- - --------------------------------------------------------------------------
- - --------------------------------------------------------------------------
The Company maintains allowances for loan losses and recourse
obligations on retained interests in loan sales at levels which, in the
opinion of management, provide adequately for current and estimated
future losses on such assets. Past-due loans (loans 31 days or more past
due which are not covered by dealer/developer reserves and guarantees)
as a percentage of the Serviced Portfolio as of December 31, 1998,
decreased to 0.95% from 1.20% at December 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 $6,707,000 at December 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 December 31, 1998
decreased to 1.44% from 1.93% at December 31, 1997 primarily as a result
of the increase in Hypothecation Loans as a percentage of the Serviced
Portfolio.
- - --------------------------------------------------------------------------
- - --------------------------------------------------------------------------
- - --------------------------------------------------------------------------
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 $9,979,000
and $10,655,000 at December 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.
Year 2000 Compliance
Many currently installed computer systems and software products are
coded to accept only two-digit entries in the date code field and cannot
distinguish 21st century dates from 20th century dates. As a result,
many companies' software and computer systems may need to be upgraded or
replaced in order to comply with "Year 2000" requirements.
State of Readiness. The year 2000 readiness process consists of the
following phases: (i) identification of all IT Systems and non-IT
Systems; (ii) assessment of repair or replacement requirements; (iii)
repair or replacement; (iv) testing; (v) implementation; and (vi)
creation of contingency plans in the event of year 2000 failures. The
Company has evaluated the year 2000 readiness of the information
technology systems used in its operations ("IT Systems") and its non-IT
Systems, such as building security, voice mail and other systems.
Non-compliant IT Systems and non-IT Systems are expected to be
remediated by the end of the second quarter of 1999.
The Company's current financial and accounting software was installed
in October 1998, and the supplier has informed the Company that such
software is year 2000 compliant. The Company uses a third party
servicer to perform certain functions, such as receipt and posting of
loan payments and other loan related activity. The third party servicer
has represented to the Company that its systems are year 2000 compliant.
In addition, the Company relies upon various vendors, governmental
agencies, utility companies, telecommunication service companies,
delivery service companies and other service providers who are outside
of its control. There is no assurance that such parties will not suffer
a year 2000 business disruption, which could have a material adverse
effect on the Company's financial condition and results of operations.
During 1998, the Company circulated a questionnaire to vendors and
customers with whom the Company has material relationships to obtain
information about year 2000 compliance. The Company is still receiving
and evaluating this information to identify any significant risks. We
plan to require all our business partners to address any significant
risks by July 1, 1999. We plan to replace any material non-compliant
business partners by October 1, 1999.
Costs. To date, the Company has not incurred any material
expenditures in connection with identifying or evaluating year 2000
compliance issues. Most of its expenses have related to the opportunity
cost of time spent by employees of the Company evaluating year 2000
compliance matters generally. The Company believes that internally
generated funds or available cash should be sufficient to cover the
projected costs associated with any modifications to existing software
to make it year 2000 compliant. However, no assurances can be given
that such modifications can be made in a timely and cost effective
manner. Failure to make timely modifications could, in a worse case
scenario, result in the inability to process loans and loan related data
and could have a material adverse effect on the Company. At this time,
the Company does not possess the information necessary to estimate the
potential impact of year 2000 compliance issues relating to its other
IT-Systems, non-IT Systems, its vendors, its customers, and other
parties. Such impact, including the effect of a year 2000 business
disruption, could have a material adverse effect on the Company's
financial condition and results of operations.
Contingency Plan. The Company has not yet developed a year
2000-specific contingency plan. If further year 2000 compliance issues
are discovered, the Company then will evaluate the need for one or more
contingency plans relating to such issues.
Market for Common Stock
The Company's Common Stock is traded on The Nasdaq Stock Market's
National Market under the symbol "LTCH." The following table sets
forth, for the periods indicated, the high and low stock prices of the
Company's Common Stock. All share prices have been adjusted for a 5%
stock dividend in 1996.
<TABLE>
<S> <C> <C> <C>
High Low Dividends
1998
4th Quarter.......... 19 5/8 9 1/4 $.07
3rd Quarter.......... 22 3/4 15 --
2nd Quarter.......... 24 18 1/4 --
1st Quarter.......... 24 17 1/2 --
1997
4th Quarter.......... 21 1/2 16 1/2 $.06
3rd Quarter.......... 21 3/4 16 3/8 --
2nd Quarter.......... 17 13 7/8 --
1st Quarter.......... 16 3/4 14 --
1996
4th Quarter.......... 15 12 1/2 $.05
3rd Quarter.......... 15 11 1/2 --
2nd Quarter.......... 14 1/4 12 7/8 --
1st Quarter.......... 13 5/8 11 --
</TABLE>
Inflation
Inflation has not had a significant effect on the Company's operating
results to date.
Exposure to Market Risk
The Company performs an interest rate sensitivity analysis to
identify the potential interest rate exposures. Specific interest rate
risks analyzed include asset/liability mismatches, basis risk, risk
caused by floors and caps, duration mismatches and re-pricing lag in
response to changes in a base index.
A simulated earnings model is used to identify the impact of specific
interest rate movements on earnings per share for the next 12 months.
The model incorporates management's expectations about future
origination levels, origination mix, amortization rates, prepayment
speeds, timing of loan sales, timing of capital issues, extensions
and/or increases in lines of credit, pricing of originations and cost of
debt and lines of credit.
The Company's objective in managing the interest rate exposures is to
maintain, at a reasonable level, the impact on earnings per share of an
immediate and sustained change of 100 basis points in interest rates in
either direction. The Company periodically reviews the interest rate
risk and various options such as capital structuring, product pricing,
hedging and spread analysis to manage the interest rate risk at
reasonable levels.
As of December 31, 1998, the Company had the following estimated
sensitivity profile:
<TABLE>
<S> <C> <C>
Interest rate changes (in basis points) 100 (100)
Impact on earnings per share ($0.02) $0.06
Impact on interest income and
pre-tax earnings ($136,000) $425,000
</TABLE>
Forward-looking Statements
Except for the historical information contained or incorporated by
reference in this annual report, 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 listed in the 1998 Form 10-K, 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.
<TABLE>
<S> <C> <C>
LITCHFIELD FINANCIAL CORPORATION
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
December 31,
1998 1997
ASSETS
Cash and cash equivalents...................... $ 10,537 $ 19,295
Restricted cash................................ 27,898 23,496
Loans held for sale, net of allowance for loan
losses of
$549 in 1998 and $1,388 in 1997............. 19,750 16,366
Other loans, net of allowance for loan losses of
$2,477 in 1998 and $2,044 in 1997........... 191,292 86,307
Retained interests in loan sales, net of
estimated recourse obligations
$3,681 in 1998 and $2,445 in 1997........... 28,883 30,299
Other.......................................... 15,522 11,027
Total assets............................. $293,882 $186,790
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Lines of credit............................. $ 49,021 $ 177
Term note payable and mortgage payable...... 1,500 5,210
Accounts payable and accrued liabilities.... 8,312 6,479
Dealer/developer reserves................... 9,979 10,655
Deferred income taxes....................... 8,388 6,851
Long-term notes............................. 134,588 105,347
211,788 134,719
Stockholders' equity
Preferred stock, $.01 par value; authorized
1,000,000 shares, none issued and outstanding.. --- ---
Common stock, $.01 par value; authorized
12,000,000 shares, 6,886,329 shares issued and
outstanding in 1998 and 5,656,609 shares issued
and outstanding in 1997 ..................... 69 56
Additional paid in capital..................... 58,040 36,681
Accumulated other comprehensive income......... 1,250 1,071
Retained earnings ............................. 22,735 14,263
Total stockholders' equity.................. 82,094 52,071
Total liabilities and stockholders' equity.. $293,882 $186,790
</TABLE>
See accompanying notes to consolidated financial statements.
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<TABLE>
<S> <C> <C> <C>
LITCHFIELD FINANCIAL CORPORATION
Consolidated Statements of Income
(In thousands, except share and per share amounts)
Year Ended December 31,
1998 1997 1996
Revenues:
Interest and fees on loans............ $25,736 $19,374 $14,789
Gain on sale of loans................. 10,691 8,564 7,331
Servicing and other income............ 2,379 1,753 1,576
38,806 29,691 23,696
Expenses:
Interest Expense...................... 14,265 10,675 7,197
Salaries and employee benefits........ 4,806 3,399 2,824
Other operating expenses.............. 3,834 3,480 3,147
Provision for loan losses............. 1,532 1,400 1,954
24,437 18,954 15,122
Income before income taxes and
extraordinary item.................... 14,369 10,737 8,574
Provision for income taxes............... 5,537 4,134 3,301
Income before extraordinary item......... 8,832 6,603 5,273
Extraordinary item (net of tax benefit
of $48 and $138 for 1998 and 1997,
respectively)......................... (77) (220) ---
Net Income............................... $ 8,755 $ 6,383 $ 5,273
Basic per common share amounts:
Income before extraordinary item...... $ 1.41 $ 1.19 $ .97
Extraordinary item.................... (.01) (.04) --
Net income............................ $ 1.40 $ 1.15 $ .97
Basic weighted average number of shares.. 6,273,638 5,572,465 5,441,636
Diluted per common share amounts:
Income before extraordinary item...... $ 1.34 $ 1.12 $ .93
Extraordinary item.................... (.01) (.04) --
Net income............................ $ 1.33 $ 1.08 $ .93
Diluted weighted average number of shares 6,604,367 5,909,432 5,682,152
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
LITCHFIELD FINANCIAL CORPORATION
Consolidated Statement of Stockholders' Equity
(In thousands, except share and per share amounts)
Accumulated
Additional Other
Common Paid In Comprehensive Retained Treasury
Stock Capital Income Earnings Stock Total
Balance, December 31, 1995.... $52 $31,873 $ -- $6,065 $(594) $37,396
Issuance of 259,124 shares in
connection with 5% stock
dividend.................. 3 3,301 -- (3,304) -- --
Issuance of 10,560 shares
(including reissuance of
10 shares held in
treasury)................. -- 52 -- -- -- 52
Retirement of 48,990 shares
held in treasury.......... (1) (593) -- -- 594 --
Dividends ($.05 per share).. -- -- -- (273) -- (273)
Net income.................. -- -- -- 5,273 -- 5,273
Balance, December 31, 1996.... 54 34,633 -- 7,761 -- 42,448
Issuance of 212,210 shares.. 2 2,048 -- -- -- 2,050
Other comprehensive income.. -- -- 1,071 -- -- 1,071
Tax benefit from stock
options exercised......... -- -- -- 458 -- 458
Dividends ($.06 per share).. -- -- -- (339) -- (339)
Net income.................. -- -- -- 6,383 -- 6,383
Balance, December 31, 1997.... 56 36,681 1,071 14,263 -- 52,071
Issuance of 1,229,720 shares 13 21,359 -- -- -- 21,372
Other comprehensive income.. -- -- 179 -- -- 179
Tax benefit from stock
options exercised......... -- -- -- 196 -- 196
Dividends ($.07 per share).. -- -- -- (479) -- (479)
Net income.................. -- -- -- 8,755 -- 8,755
Balance, December 31, 1998.... $69 $58,040 $1,250 $22,735 $ -- $82,094
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
<S> <C> <C> <C>
LITCHFIELD FINANCIAL CORPORATION
Consolidated Statements of Comprehensive Income
(In thousands)
Year ended December 31,
1998 1997 1996
Net income................................ $8,755 $6,383 $5,273
Other comprehensive income, net of tax:
Unrealized gains on retained interests in
loan sales (net of taxes of $112 and $670
for 1998 and 1997, respectively)......... 179 1,071 --
Comprehensive income....................... $8,934 $7,454 $5,273
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
<S> <C> <C> <C>
LITCHFIELD FINANCIAL CORPORATION
Consolidated Statements of Cash Flows
(In thousands)
Year Ended December 31,
1998 1997 1996
Cash flows from operating activities:
Net income....................................... $ 8,755 $ 6,383 $ 5,273
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Gain on sale of loans.......................... (10,691) (8,564) (7,331)
Amortization and depreciation.................. 1,015 954 520
Amortization of retained interests in loan
sales.......................................... 6,549 4,945 3,444
Provision for loan losses...................... 1,532 1,400 1,954
Deferred income taxes.......................... 1,537 1,771 1,340
Net changes in operating assets and liabilities:
Restricted cash.............................. (4,402) (4,573) (2,578)
Loans held for sale.......................... (1,546) (3,644) 3,008
Retained interests in loan sales............. (3,081) (2,264) (4,868)
Dealer/developer reserves.................... (676) 27 984
Net change in other assets and liabilities (1,192) 1,456 (1,373)
Net cash (used in) provided by operating
activities..................................... (2,200) (2,109) 373
Cash flows from investing activities:
Net originations, purchases and principal
payments on other loans.......................... (188,544) (54,882) (47,170)
Other loans sold................................. 83,126 47,727 --
Collections on retained interests in loan sales.. 6,505 4,620 590
Capital expenditures and other assets............ (2,913) (3,341) (8)
Net cash used in investing activities........ (101,826) (5,876) (46,588)
Cash flows from financing activities:
Net borrowings (payments) on lines of credit..... 48,844 (36,122) 36,299
Net payments on term note........................ (3,710) (2,218) (2,408)
Net proceeds from long term debt................. 29,241 58,352 (406)
Net proceeds from issuance of common stock....... 21,372 2,050 52
Dividends paid................................... (479) (339) (273)
Net cash provided by financing activities.... 95,268 21,273 33,264
Net (decrease) increase in cash and cash equivalents (8,758) 13,738 (12,951)
Cash and cash equivalents, beginning of year....... 19,295 5,557 18,508
Cash and cash equivalents, end of year............. $10,537 $19,295 $ 5,557
Supplemental Schedule on Noncash Financing and
Investing Activities:
Exchange of loans for retained interests in
loan sales....................................... $ 837 $ 577 $ 3,540
Transfers from loans to real estate acquired
through foreclosure.............................. $ 1,817 $ 1,425 $ 1,654
Supplemental Cash Flow Information:
Interest paid..................................... $13,419 $ 9,841 $ 6,674
Income taxes paid................................. $ 2,639 $ 2,656 $ 1,411
</TABLE>
See accompanying notes to consolidated financial statements.
- - --------------------------------------------------------------------------
Exhibit 13.1
- - --------------------------------------------------------------------------
LITCHFIELD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
1. Summary of Significant Accounting
Policies
Business
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 loans and by making loans to businesses secured by
consumer receivables or other assets. The Company considers its
activities to be one operating segment.
Basis of Presentation
The consolidated financial statements include the accounts of
Litchfield Financial Corporation and its majority and wholly-owned
subsidiaries. All significant intercompany accounts and transactions
have been eliminated upon consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
Interest income
Interest income from loans and retained interests in loan sales is
recognized using the interest method. Accrual of interest is suspended
when collection is doubtful and, in any event, when a loan is
contractually delinquent for ninety days. The accrual is resumed when
the loan becomes contractually current as to principal and interest and
past-due interest is recognized at that time.
Gain on sale of loans and retained interests in loan sales
As of January 1, 1997, the Company adopted the requirements of
Statement of Financial Accounting Standards No. 125 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" for transfers of receivables. In December, 1998, the
Financial Accounting Standards Board issued a Special Report "A Guide
to Implementation of Statement 125 on Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities -
Questions and Answers". As a result, the Company modified its
gain-on-sale accounting in the fourth quarter to include, among other
things, adoption of a "cash-out" method of accounting. In evaluating
the gain-on-sale of prior transactions, the Company determined that the
impact of the modifications, including the adoption of the "cash out"
method of accounting, to be immaterial.
Gains on sales of loans are based on the difference between the
allocated cost basis of the assets sold and the proceeds received, which
includes the fair value of any assets or liabilities that are newly
created as a result of the transaction. Newly created interests, which
consist primarily of interest only strips and recourse obligations, are
initially recorded at fair value. The previous carrying amount is
allocated between the assets sold and any retained interests based on
their relative fair values at the date of transfer. Retained interests
in transferred assets consists of subordinate portions of the principal
balance of transferred assets and interest only strips.
The Company estimates fair value using discounted cash flow analysis,
since quoted market prices are not readily available. The Company's
analysis incorporates estimates that market participants would be
expected to use in their estimates of future cash flows, including
assumptions about interest rates, defaults and prepayment rates.
Estimates made are based on, among other things, the Company's past
experience with similar types of financial assets. The interest rates
paid to investors range from 6.5% to 9.0%. The prepayment rates were
17.5% for Land Loan sales and 18.0% for VOI Loan sales. For the
Hypothecation Loan sales, the prepayment rates for the underlying
collateral used were 17.5% for Land Loans and 18.0% for VOI Loans. The
Company estimates default rates to be 1.9% on Land Loans, 3.0% on VOI
Loans and 0.5% on Hypothecation Loans. In valuing its retained
interests in loan sales, the Company selects discount rates commensurate
with the duration and risks embedded in the particular assets.
Specifically, the Company uses discount rates ranging from the investor
pass-through rates (for restricted cash) to the Baa corporate bond rate
plus 325 basis points (for interest only strips and retained principal
certificates) to estimate the fair value of its retained interests.
There is no servicing asset or liability arising from loan sales,
because the Company estimates that the benefits of servicing approximate
the costs to meet its servicing responsibilities.
On a quarterly basis, the Company assesses the carrying value of
retained interest in loans sold by comparing actual and assumed
prepayment rates on a disaggregated basis reflecting factors such as
origination dates and types of loans. The Company adjusts the carrying
value of retained interests for unfavorable changes considered other
than temporary.
Loans
Loans held for sale are carried at the lower of aggregate cost or
market value. Market value is determined by outstanding commitments
from investors or current investor yield requirements.
Provisions for loan losses and impairment of loans
Provisions for loan losses are charged to income in amounts
sufficient to maintain the allowances at levels considered adequate to
cover anticipated losses on outstanding loans, including loans sold and
retained interests in loan sales. Management evaluates allowance
requirements on a quarterly basis by examining current delinquencies,
historical loan losses, the value of the underlying collateral and
general economic conditions and trends. Management also evaluates the
availability of dealer/developer reserves to absorb loan losses. The
Company determines those loans that are uncollectible based upon
detailed review of all loans and any charge-offs are charged to the
allowance for loan losses.
Land Loans, VOI Loans and Other Loans which consist of large groups
of smaller balance loans are evaluated collectively for impairment and
are stated at the lower of cost or fair value.
Hypothecation Loans and A&D Loans are evaluated individually for
impairment based on the factors previously described. No such loans
were impaired at December 31, 1998 or 1997.
Loan origination fees and related costs
The Company defers the excess of loan origination fees over related
direct costs and recognizes such amount as interest income over the
estimated life of the related loans using the interest method.
Real estate acquired through foreclosure
Real estate acquired through foreclosure is carried at the lower of
fair value less estimated costs to sell or cost. On a quarterly basis,
the Company evaluates the carrying value of the real estate and
establishes a valuation allowance if the fair value of the asset less
the estimated costs to sell the asset is less than the carrying value of
the asset. Subsequent increases in the fair value less the estimated
cost to sell the asset would reduce the valuation allowance, but not
below zero. There was no such valuation allowance at December 31, 1998
or 1997. Other real estate owned of $757,000 and $910,000 is included
in other assets at December 31, 1998 and 1997, respectively.
Dealer/developer reserves
As part of the Company's financing of loans through
dealer/developers, the Company retains a portion of the proceeds from
the purchased loans as a reserve to offset potential losses on those
loans. The Company negotiates the amount of reserves with the
dealer/developers based upon various criteria, including the credit risk
associated with the dealer/developer and the loans being purchased. The
Company generally returns any excess reserves to the dealer/developer on
a quarterly basis as the related loans are repaid by borrowers.
Income taxes
The Company uses the liability method of accounting for income taxes
in its financial statements.
Net income per common share
Basic earnings per share excludes dilution and is computed by
dividing income available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted earnings
per share reflects the potential dilution that could occur if stock
options and stock award grants were exercised.
Cash and cash equivalents
The Company considers all highly liquid instruments purchased with an
original maturity of three months or less to be cash equivalents.
Restricted cash
Restricted cash represents accounts established as credit
enhancements for certain loan sales and escrow deposits held for
customers.
Deferred debt issuance costs
Deferred debt issuance costs are amortized over the life of the
related debt. The unamortized balance of $3,883,000 and $3,336,000 is
included in other assets at December 31, 1998 and 1997, respectively.
The amount of the accumulated amortization was $2,596,000 and $1,868,000
at December 31, 1998 and 1997, respectively.
Stock-based compensation
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation." The Company has elected to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25) and related Interpretations in accounting for its
employee stock options because, as discussed below, the alternative fair
value accounting provided for under FASB Statement No. 123, "Accounting
for Stock-Based Compensation," requires use of option valuation models
that were not developed for use in valuing employee stock options.
Under APB 25, because the exercise price of the Company's employee stock
options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
Reclassification
Certain amounts in the 1996 financial statements have been
reclassified to conform with the 1997 and 1998 presentations.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130 ("Statement No.
130"), "Reporting Comprehensive Income". Statement No. 130 establishes
new rules for the reporting and display of comprehensive income and its
components.
Statement No. 130 requires unrealized gains or losses on the
Company's available-for-sale securities, previously required to be
reported as a separate component of stockholder's equity, to be included
in other comprehensive income and the disclosure of accumulated
comprehensive income. Statement No. 130 also requires that other
comprehensive income items and comprehensive income be displayed
separately in the financial statements.
New accounting standards
In June, 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 ("Statement No.
133"), "Accounting for Derivative Instruments and Hedging Activities."
Statement No. 133 is effective for all fiscal quarters of all fiscal
years beginning after June 15, 1999, with early adoption permitted as of
the beginning of any quarter after the date of issuance. Statement No.
133 establishes accounting and reporting standards for derivative
instruments, including certain derivatives embedded in other contracts
and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. If
certain conditions are met, a derivative may be specifically designated
as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a
hedge of the exposure to variable cash flows of a forecasted
transaction, or (c) a hedge of the foreign currency exposure of a net
investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated
forecasted transaction. The accounting for changes in the fair value of
a derivative depends on the intended use of the derivative and the
resulting designation. The provisions of Statement No. 133 can not be
applied retroactively to financial statements of prior periods.
The Company plans to adopt Statement No. 133 in the fiscal quarter
beginning January 1, 2000. At the date of initial application, the
Company must recognize any freestanding derivative instruments in the
balance sheet as either assets or liabilities and measure them at fair
value. The Company shall also recognize offsetting gains and losses on
hedged assets, liabilities, and firm commitments by adjusting their
carrying amounts at that date as a cumulative effect of a change in
accounting principal. Whether such transition adjustment is reported in
net income, other comprehensive income, or allocated between both is
based on the hedging relationships, if any, that existed for that
derivative instrument and were the basis for accounting prior to the
application of Statement No. 133. (See Note 5 for disclosure of the
Company's derivative activity).
2. Investments and Retained Interests in Loan Sales
The following is a summary of investments and retained interests in
loan sales:
<TABLE>
<S> <C> <C> <C> <C>
(Dollars in thousands) Gross Unrealized Fair
December 31, 1998 Cost Gains Losses Value
Mortgage-backed securities.. $ 44 $ -- $ -- $ 44
Retained interests in loan
sales....................... 31,314 1,250 -- 32,564
Total..................... $31,358 $1,250 $ -- $32,608
(Dollars in thousands) Gross Unrealized Fair
December 31, 1997 Cost Gains Losses Value
Mortgage-backed securities.. $ 83 $ -- $ -- $ 83
Retained interests in loan
sales....................... 31,673 1,071 -- 32,744
Total...... $31,756 $1,071 $ -- $32,827
</TABLE>
The amortized cost and estimated fair value of investments and
retained interests in loan sales at December 31, 1998, by contractual
maturity, are shown below. Expected maturities will differ from
contractual maturities because the issuers of the securities may have
the right to prepay obligations without prepayment penalties.
Mortgage-backed securities are included in other assets.
<TABLE>
<S> <C> <C>
Estimated
(Dollars in thousands) Cost Fair Value
Due in one year or less......... $ 9,760 $ 9,760
Due after one year through
years........................... 21,598 22,848
Total debt securities......... $31,358 $32,608
</TABLE>
In 1990, the Company began privately placing issues of pass-through
certificates evidencing an undivided beneficial ownership interest in
pools of 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.
In certain of the Company's issues of pass-through certificates,
credit enhancement was achieved by dividing the issue into a senior
portion which was sold to the investors and a subordinated portion which
was retained by the Company. The Company had investments in
pass-through certificates of $12,323,000 and $15,747,000 at December 31,
1998 and 1997, respectively. In certain other of the Company's private
placements, credit enhancement was achieved through cash collateral.
The Company had $25,685,000 and $21,412,000 of restricted cash at
December 31, 1998 and 1997, respectively, representing credit
enhancements.
If borrowers default in the payment of principal or interest on the
mortgage loans underlying these issues of pass-through certificates,
losses would be absorbed first by the subordinated portion or cash
collateral account retained by the Company and might, therefore, have to
be charged against the estimated recourse obligations to the extent
dealer/developer guarantees and reserves are not available.
3. Loans
<TABLE>
<S> <C> <C>
Loans at December 31 consisted of the following:
(Dollars in thousands) December 31,
Loans held for sale 1998 1997
Land............. $ 4,729 $10,333
VOI.............. 1,203 3,134
Other............ 14,531 4,520
Discount, net... (164) (233)
Allowance for
loan losses...... (549) (1,388)
Loans, net...... $19,750 $16,366
(Dollars in thousands) December 31,
Other loans 1998 1997
Land..................... $ 2,307 $ 1,911
VOI...................... 569 793
Hypothecation............ 69,815 36,206
A&D...................... 51,986 41,385
Tax Liens................ 21,228 ---
Builder Construction..... 33,867 ---
Other.................... 14,078 8,631
Discount, net............ (81) (575)
Allowance for loan losses (2,477) (2,044)
Loans, net.............. $191,292 $86,307
</TABLE>
Contractual maturities of loans as of December 31, 1998 are as
follows:
<TABLE>
<S> <C>
December 31,
(Dollars in thousands) 1998
1999.................. 55,726
2000.................. 5,716
2001.................. 16,925
2002.................. 53,035
Thereafter............ 82,911
$214,313
</TABLE>
It is the Company's experience that a substantial portion of the
loans will be repaid before contractual maturity dates. Consequently,
the above tabulation is not to be regarded as a forecast of future cash
collections.
4. Allowances for Loan Losses and Estimated Recourse Obligations
An analysis of the total allowances for all loan losses and recourse
obligations follows:
<TABLE>
<S> <C> <C>
December 31,
(Dollars in thousands) 1998 1997
Allowance for losses on
loans held for sale............ $ 549 $1,388
Allowance for losses on
other loans.................... 2,477 2,044
Estimated recourse obligation on
retained interests in
loan sales..................... 3,681 2,445
$6,707 $5,877
</TABLE>
The total allowance for loan losses consists of the following:
<TABLE>
<S> <C> <C> <C>
Year ended December 31,
(Dollars in thousands) 1998 1997 1996
Allowance at beginning
of period............ $5,877 $4,528 $3,715
Net charge-offs
of uncollectible
accounts.............. (2,239) (2,010) (1,965)
Provision for loan losses 1,532 1,400 1,954
Allocation of purchase
adjustment (1)...... 1,537 1,959 824
Allowance at end
of period........... $6,707 $5,877 $4,528
</TABLE>
(1) Represents allocation of purchase adjustment related to the purchase
of certain nonguaranteed loans.
Net charge-offs by major loan and collateral types experienced by the
Company are summarized as follows:
<TABLE>
<S> <C> <C> <C>
Year ended December 31,
(Dollars in thousands) 1998 1997 1996
Land.................. $ 1,358 $ 986 $ 669
VOI................... 556 939 1,284
Hypothecation......... --- --- ---
A&D................... --- (2) (8)
Other................. 325 87 20
Total................. $2,239 $2,010 $1,965
</TABLE>
5. Derivative Financial Instruments Held for Purposes Other than Trading
In June 1997, the Company entered into two interest rate swap
agreements in order to manage its basis exposures. 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 of 277 basis points on a notional
amount of $80,000,000 and the LIBOR rate plus a spread of 267 basis
points on notional amount of $30,000,000. The swap agreements expire in
June 2000. There is no exchange of the notional amounts upon which the
interest payments are based.
The differential to be paid or received as interest rates change is
accrued and recognized as an adjustment to interest income from the
excess servicing asset. The related amount receivable from or payable
to the counterparty is included in other assets or other liabilities.
The fair values of the swap agreements are not recognized in the
financial statements. The Company intends to keep the contracts in
effect until they mature in June 2000.
In June 1994, the Company entered into an interest rate cap agreement
with a bank in order to manage its exposure to certain increases in
interest rates. The interest rate cap entitles the Company to receive
payments, based on an amortizing notional amount, when commercial paper
rates exceed 8.0%. If payments were to be received as a result of the
cap agreement, they would be accrued as a reduction of interest
expense. The notional amount outstanding at December 31, 1998 was
$3,670,000. This agreement expires in July 2005.
The Company is exposed to credit loss in the event of non-performance
by the swap counterparty or the cap provider.
6. Debt
Financial data relating to the Company's secured lines of credit is
as follows:
<TABLE>
<S> <C> <C>
December 31,
(Dollars in thousands) 1998 1997
Lines of credit available (1).. $116,000 $116,169
Borrowings outstanding at end
of year (1).................. $ 49,021 $ 169
Weighted average interest rate
at end of year............... 7.6% 7.7%
Maximum borrowings outstanding
at any month end............. $ 73,666 $ 50,577
Average amount outstanding
during the year.............. $ 37,485 $ 33,419
Weighted average interest rate
during the year (determined
by dividing interest expense
by average borrowings)........ 7.9% 8.2%
</TABLE>
(1) Amount includes $169 of outstanding borrowings at December 31, 1997
on the revolving line of credit with multi-seller commercial paper
issuer. (See Note 11.) Amount does not include $1,500 construction
mortgage.
In January 1999, the Company amended a secured line of credit to
increase the line from $50,000,000 to $60,000,000. Outstanding
borrowings under the line of credit at December 31, 1998 were
$39,700,000. There were no outstanding borrowings under this line of
credit at December 31, 1997. This line of credit is secured by consumer
receivables and other secured loans and matures in April 2000.
In December 1997, the Company amended a line of credit to increase the line
from $20,000,000 to $30,000,000. There were no outstanding borrowings
under this facility at December 31, 1998 and 1997. This facility is
secured by certain retained interests in loan sales, cash collateral
accounts and certain other loans and matures in September 1999.
In March 1997, the Company entered into a $25,000,000 secured line of
credit. Outstanding borrowings under the line of credit at December 31,
1998 were $9,321,000. There were no outstanding borrowings at December
31, 1997. The facility is secured by loans to developers of VOI resorts,
popularly known as timeshare resorts, for the acquisition and
development of VOI resorts ("Facility A") and the related financing of
consumer purchases of VOIs ("Facility B"). Although the maximum amount
that can be borrowed on each facility is $15,000,000, the aggregate
outstanding borrowings cannot exceed $25,000,000. This facility expires
in March 2000.
In January 1997, the Company amended a line of credit to increase the
line from $5,000,000 to $8,000,000. This line of credit is secured by
consumer receivables and other secured loans and matures in March 1999.
There were no outstanding borrowings on this line of credit at December
31, 1998 and 1997.
In March 1998, the Company renewed an additional $3,000,000 line of
credit, secured by consumer receivables and other secured loans. This
line of credit matures in March 1999. There were no outstanding
borrowings at December 31, 1998 and 1997.
Also in March 1998, the Company amended the $1,500,000 construction
mortgage, secured by certain assets of the Company, extending the
maturity date to March 2009. Outstanding borrowings under this
construction mortgage were $1,500,000 and $8,000 at December 31, 1998
and 1997, respectively.
Interest rates on the above lines of credit range from the Eurodollar
or LIBOR rate plus 2% to the prime rate plus 1.25%. The Company is not required
to maintain compensating balances or forward sales commitments under the
terms of these lines of credit.
In September 1998, the Company redeemed a term note of $3,265,000
resulting in an extraordinary loss of $77,000, net of applicable tax
benefit of $48,000. The note was collateralized by certain of the
Company's retained interests in loan sales and cash. The balance
outstanding on the note was $5,210,000 at December 31, 1997.
As of December 31, 1998 and 1997 the Company had no unsecured lines
of credit.
Financial data relating to the Company's long-term notes is as
follows:
<TABLE>
<S> <C> <C>
December 31,
(Dollars in thousands) 1998 1997
9.3% Notes............. $ 20,000 $ 20,000
8.45% Notes due
2002................... 51,282 51,750
8.875% Notes due
2003................... 15,066 15,317
8.25% Notes due
2003................... 10,000 ---
9.25% Notes due
2004................... 20,000 ---
10% Notes due 2004..... 18,240 18,280
$134,588 $105,347
</TABLE>
The long-term notes are unsecured obligations of the Company and each
issuance, except the 9.3% Notes, allows for a maximum annual redemption
by noteholders of 5% of the original principal amount thereof. Interest
is payable monthly in arrears on each of the issuances, except the 9.3%
Notes.
The 9.3% Notes require principal reductions of $7,500,000,
$6,000,000, $6,000,000 and $500,000 in March 2001, 2002, 2003 and 2004,
respectively. Interest is payable semiannually in arrears.
The Company shall have the option to redeem all or any portion of the
long-term notes at predetermined redemption prices. The earliest call
date of each issuance is as follows:
<TABLE>
<S> <C>
9.3% Notes............... April 1998
8.45% Notes due 2002..... November 1999
8.875% Notes due 2003.... June 1996
8.25% Notes due 2003..... November 2000
9.25% Notes due 2004..... December 2000
10% Notes due 2004....... April 1998
</TABLE>
7. Retirement Plans
The Company has implemented the Litchfield Financial Corporation
Employee 401(k) Plan ("the Plan"), a defined contribution plan for all
eligible employees at least 21 years of age and who have been employed
by the Company for at least six months. Participating employees may
elect to defer up to fifteen percent of their annual gross earnings. The
Company will match an amount equal to one hundred percent of the
employee's pretax contributions up to five percent of the employee's
eligible compensation contributed into the Plan. Contributions made by
the Company in 1998 and 1997 were $157,000 and $125,000, respectively.
8. Income Taxes
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company's deferred tax assets
and liabilities are as follows:
<TABLE>
<S> <C> <C>
December 31,
(Dollars in thousands) 1998 1997
Deferred Tax Assets:
Loan loss allowance.... $ 244 $ 44
Other.................. 656 697
Total deferred tax
assets................... 900 741
Valuation allowance.. --- ---
Net deferred tax
assets.............. 900 741
Deferred Tax Liabilities:
Depreciation........... 42 50
Mortgage loan income
recognition.......... 7,265 6,131
Accretion income....... 1,696 1,360
Other.................. 285 51
Tax deferred tax
liabilities......... 9,288 7,592
Net deferred tax
liabilities....... $8,388 $6,851
</TABLE>
Significant components of the provision for income taxes attributable
to continuing operations are as follow:
<TABLE>
<S> <C> <C> <C>
Year ended December 31,
(Dollars in thousands) 1998 1997 1996
Current:
Federal............. $3,196 $2,313 $1,911
State............... 804 50 50
Total Current..... 4,000 2,363 1,961
Deferred:
Federal............. 1,214 1,630 1,288
State............... 323 141 52
Total Deferred.... 1,537 1,771 1,340
$5,537 $4,134 $3,301
</TABLE>
The reconciliation of income tax attributable to continuing
operations computed at the U.S. federal statutory tax rates to income
tax expense is:
<TABLE>
<S> <C> <C> <C>
1998 1997 1996
Tax at U.S. statutory rates.... 35.0% 35.0% 35.0%
State income taxes, net of
federal tax benefit.......... 3.4 3.4 3.4
Other - net.................... 0.1 0.1 0.1
38.5% 38.5% 38.5%
</TABLE>
9. Earnings per Share
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<S> <C> <C> <C>
1998 1997 1996
Numerator:
Net income........... $8,755,000 $6,383,000 $5,273,000
Denominator:
Denominator for basic
earnings per share
weighted-average share 6,273,638 5,572,465 5,441,636
Effect of dilutive
securities:
Employee stock
options............. 330,729 336,967 240,516
Denominator for diluted
earnings per share-adjusted
weighted-average shares and
assumed conversions....... 6,604,367 5,909,432 5,682,152
Basic earnings per share.. $1.40 $1.15 $ .97
Diluted earnings per share.. $1.33 $1.08 $ .93
</TABLE>
10. Stockholders' Equity and Stock Option Plans
Stockholders' Equity
The Company declared a 5% stock dividend in 1996. Accordingly,
weighted average share and per share amounts have been restated for that
period.
Stock Option Plans
The Company has reserved 1,422,319 shares of common stock for
issuance to officers, directors and employees on exercise of options
granted under a stock option plan established in 1990. Options were
granted at prices equal to or in excess of the fair market value of the
stock on the date of the grant. There were 634,015, 573,346 and 615,000
shares exercisable at December 31, 1998, 1997 and 1996, respectively.
Information with respect to options granted under this plan is as
follows:
Number Exercise
of Price
Shares Per Share
Outstanding at 715,672
December 31, 1995
Granted........... 204,311 $11.55 - $14.05
Canceled or
exercised.......... (13,175) $1.15 - $11.55
Outstanding at
December 31, 1996 906,808
Granted........... 46,250 $14.38 - $21.00
Canceled or
exercised.......... (209,950) $4.61 - $13.33
Outstanding at
December 31, 1997 743,108
Granted........... 159,952 $12.69 - $23.25
Canceled or
exercised.......... (68,074) $4.75 - $21.00
Outstanding at
December 31, 1998 834,986
In 1995, the Company established the Stock Option Plan for
Non-Employee Directors. Options were granted at prices equal to or in
excess of the fair market value of the stock on the date of the grant.
There were 12,864, 11,025 and 7,352 options that were exercisable at
December 31, 1998, 1997 and 1996, respectively.
Information with respect to options granted under this plan is as
follows:
<TABLE>
<S> <C> <C>
Number Exercise
of Price
Shares Per
Share
Outstanding at 22,052 $12.02
December 31, 1995
Granted........... -- --
Canceled or exercised.. -- --
Outstanding at 22,052
December 31, 1996
Granted........... -- --
Canceled or exercised.. (3,675) $12.02
Outstanding at 18,377
December 31, 1997
Granted....... 6,000 $22.00
Canceled or exercised.. (5,513) $12.02
Outstanding at 18,864
December 31, 1998
</TABLE>
Pro forma information regarding net income and earnings per share is
required by Statement of Financial Accounting Standards No. 123
"Accounting for Stock-based Compensation," which also requires that the
information be determined as if the Company had accounted for its
employee stock options granted subsequent to December 31, 1994 under the
fair value method of that Statement. The fair value for these options
was estimated at the date of grant using the Black-Scholes option
pricing model with the following weighted-average assumptions for 1998,
1997 and 1996, respectively: risk-free interest rates of 4.67%, 5.78%
and 6.23%; a dividend yield of .35%, .32% and .35%, volatility factors
of the expected market price of the Company's common stock of .26, .23
and .24; and a weighted-average expected life of the option of 7.5 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion,
the existing models do not necessarily provide a reliable single measure
of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period.
The Company's pro forma information that follows is presented in
thousands, except per share data.
<TABLE>
Year ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Pro forma net income
before extraordinary item.. $8,495 $6,280 $4,983
Extraordinary item ( 77) (220) --
Pro forma net income..... $8,418 $6,060 $4,983
Pro forma basic earnings
per share:
Income before
extraordinary item ... $ 1.35 $1.13 $ .92
Extraordinary item..... (.01) (.04) --
Net income..... $ 1.34 1.09 .92
Pro forma diluted earnings
per share:
Income before
extraordinary item $ 1.29 $1.06 $ .88
Extraordinary item....... (.01) (.04) --
Net income..... $ 1.28 1.02 $ .88
</TABLE>
11.Sale of Loans
The Company has sold $492,960,000 and $348,198,000 of loans at face
value through December 31, 1998 and 1997, respectively. The principal
amount remaining on the loans sold was $238,132,000 and $179,790,000 at
December 31, 1998 and 1997, respectively. The Company guarantees,
through replacement or repayment, loans in default up to a specific
percentage of loans sold. Dealer/Developer guaranteed loans are secured
by repurchase or replacement guarantees in addition to, in most
instances, dealer/developer reserves.
The Company's exposure to loss on loans sold in the event of
nonperformance by the consumer, the dealer/developer on its guarantee,
and the determination that the collateral is of no value was
$12,750,000, $9,238,000, and $8,780,000 at December 31, 1998, 1997 and
1996, respectively. Such amounts have not been discounted. The Company
repurchased $491,000, $740,000 and $991,000 of loans under the recourse
provisions of loan sales in 1998, 1997, and 1996, respectively. In
addition, when the Company sells loans through securitization programs,
the Company commits either to replace or repurchase any loans that do
not conform to the requirements thereof in the operative loan sale
document.
The Company's Serviced Portfolio is geographically diversified with
collateral and consumers located in 46 and 50 states, respectively. At
December 31, 1998, 14.7%, 10.3% and 10.2% of the portfolio by collateral
location was located in Texas, Florida and California, respectively, and
16.1% and 14.4% of the portfolio by borrower location were located in
Florida and Texas, respectively. No other state accounted for more than
7.7% of the total.
The Company has a revolving line of credit and sale facility as part
of an asset backed commercial paper facility with a multi-seller
commercial paper issuer ("Conduit A"). In June 1998, the Company
amended the facility to increase the facility to $150,000,000, subject
to certain terms and conditions. The facility expires in June 2001.
In connection with the facility, the Company formed a wholly owned
subsidiary, Litchfield Mortgage Securities Corporation 1994, to purchase
loans from the Company. In October 1998, Litchfield Mortgage Securities
Corporation 1994 was merged with and into Litchfield Mortgage Securities
Company 1994, LLC ("LMSC"). LMSC either pledges the loans on a
revolving line of credit with Conduit A or sells the loans to Conduit
A. Conduit A issues commercial paper or other indebtedness to fund the
purchase or pledge of loans from LMSC. Conduit A is not affiliated with
the Company or its affiliates. As of December 31, 1998, the outstanding
balance of the sold or pledged loans securing this facility was
$137,532,000. There were no outstanding borrowings under the line of
credit at December 31, 1998. Outstanding borrowings under the line of
credit at December 31, 1997 were $169,000. Interest is payable on the
line of credit at an interest rate based on certain commercial paper
rates.
In March 1997, the Company closed an additional revolving line of
credit and sale facility of $25,000,000 with another multi-seller of
commercial paper conduit ("Conduit B"). The facility, which expires in
March 2000, is subject to certain terms and conditions, credit
enhancement requirements and loan eligibility criteria. The outstanding
aggregate balance of the loans pledged and sold under the facility at
any time cannot exceed $25,000,000.
In connection with the facility, the Company formed a wholly owned
subsidiary, Litchfield Capital Corporation 1996, to purchase loans from
the Company. In October 1998, Litchfield Capital Corporation 1996, was
merged with and into Litchfield Capital Company 1996, LLC ("LCC"). LCC
either pledges the loans on a revolving line of credit with Conduit B or
sells the loans to Conduit B. Conduit B issues commercial paper or
other indebtedness to fund the purchase or pledge of loans from LCC.
Conduit B is not affiliated with the Company or its affiliates. As of
December 31, 1998, the outstanding aggregate balance of the sold loans
under the facility was $10,632,000. There were no outstanding
borrowings under the line of credit as of December 31, 1998 and 1997.
Interest is payable on the line of credit at an interest rate based on
certain commercial paper rates.
- - --------------------------------------------------------------------------
- - --------------------------------------------------------------------------
12. Quarterly Results of Operations (Unaudited)
- - --------------------------------------------------------------------------
<TABLE>
(In thousands, except share and per share) share data)
<S> <C> <C> <C> <C> <C>
First Second Third Fourth Total
1996
Total revenues................ $4,650 $6,101 $6,977 $5,968 $23,696
Total expenses................ 3,355 3,560 3,808 4,399 15,122
Net Income.................... . 798 1,564 1,946 965 5,273
Earnings per common share:
Basic........................ .15 .29 .36 .18 .97
Diluted..................... .14 .27 .34 .17 .93
Weighted average number
of shares:
Basic.......................5,436,149 5,442,768 5,443,319 5,444,399 5,441,636
Diluted.....................5,629,983 5,708,164 5,697,100 5,706,061 5,682,152
1997
Total revenues.................. $6,407 $7,691 $8,263 $7,330 $29,691
Total expenses.................. 4,545 4,634 4,749 5,026 18,954
Income before extraordinary item 1,145 1,880 2,161 1,417 6,603
Extraordinary item.............. -- -- -- (220) (220)
Net Income...................... 1,145 1,880 2,161 1,197 6,383
Earnings per common share:
Basic income before .
extraordinary item........... .21 .34 .38 .25 1.19
Diluted income before
extraordinary item............. .20 .32 .36 .24 1.12
Extraordinary item............. -- -- -- (.04) (.04)
Basic net income............... .21 .34 .38 .21 1.15
Diluted net income............. .20 .32 .36 .20 1.08
Weighted average number of shares:
Basic.......................5,446,679 5,560,167 5,629,644 5,652,424 5,572,465
Diluted.................... 5,792,078 5,857,176 5,980,698 6,014,831 5,909,432
1998
Total revenues.................. $7,953 $9,973 $10,465 $10,415 $38,806
Total expenses.................. 5,433 6,218 5,966 6,820 24,437
Income before extraordinary item 1,550 2,309 2,767 2,206 8,832
Extraordinary item.............. -- -- (77) -- (77)
Net Income...................... 1,550 2,309 2,690 2,206 8,755
Earnings per common share:
Basic income before
extraordinary item.............. .27 .40 .40 .32 1.41
Diluted income before
extraordinary item.............. .26 .38 .39 .31 1.34
Extraordinary item............. -- -- (.01) -- (.01)
Basic net income............... .27 .40 .39 .32 1.40
Diluted net income............. .26 .38 .38 .31 1.33
Weighted average number of shares:
Basic.......................5,659,756 5,754,018 6,835,775 6,845,004 6,273,638
Diluted.................... 6,020,158 6,117,832 7,158,882 7,120,202 6,604,367
</TABLE>
A significant portion of the Company's revenues consists of gains on
sales of loans. Thus, the timing of loan sales has a significant effect
on the Company's results of operations.
- - --------------------------------------------------------------------------
Exhibit 13.1
- - --------------------------------------------------------------------------
REPORT OF MANAGEMENT
- - --------------------------------------------------------------------------
Exhibit 13.1
- - --------------------------------------------------------------------------
To the Stockholders and Noteholders of
LITCHFIELD FINANCIAL CORPORATION
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles. They include amounts
based on informed judgment and estimates. The representations in the
financial statements are the responsibility of management. Financial
information elsewhere in the Annual Report is consistent with that in
the financial statements.
To meet management's responsibility, the Company maintains a system
of internal control designed to provide reasonable assurance that errors
or irregularities that could be material to the financial statements are
prevented or would be detected within a timely period. The system of
internal control includes statements of policies and business practices,
widely communicated to employees, which are designed to require them to
maintain high ethical standards in their conduct of Company affairs.
The internal controls are augmented by organizational arrangements that
provide for appropriate delegation of authority and division of
responsibility and by a program of internal audit with management
follow-up.
The financial statements have been audited by Ernst & Young LLP.
Their audit was conducted in accordance with generally accepted auditing
standards and included a review of internal controls and selective tests
of transactions.
The Audit Committee of the Board of Directors, composed entirely of
outside directors, meets periodically with the independent auditors and
management to review accounting, auditing, internal accounting controls
and financial reporting matters. The independent auditors have free
access to this committee without management present.
RONALD E. RABIDOU
Executive Vice President,
Chief Financial Officer and Treasurer
DAVID M. PASCALE
Chief Accounting Officer,
Vice President and Controller
- - --------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
- - --------------------------------------------------------------------------
- - --------------------------------------------------------------------------
The Board of Directors and Stockholders
- - --------------------------------------------------------------------------
LITCHFIELD FINANCIAL CORPORATION
We have audited the accompanying consolidated balance sheets of
Litchfield Financial Corporation as of December 31, 1998 and 1997, and
the related consolidated statements of income, changes in stockholders'
equity, comprehensive income and cash flows for each of the three years
in the period ended December 31, 1998. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Litchfield Financial Corporation at December 31, 1998 and 1997, and the
consolidated results of its operations and its cash flows for each of
the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
Boston, Massachusetts
January 30, 1999
- - ---------------------------------------------------------------
Exhibit 13.1
- - ---------------------------------------------------------------
Corporate Officers
Richard A. Stratton
Chief Executive Officer and President
Heather A. Sica
Executive Vice President
Ronald E. Rabidou
Executive Vice President,
Chief Financial Officer and Treasurer
Joseph S. Weingarten
Executive Vice President
Wayne M. Greenholtz
Senior Vice President
John J. Malloy
Senior Vice President,
General Counsel and Clerk
James H. Shippee
Senior Vice President
James A. Yearwood
Senior Vice President
David M. Pascale
Chief Accounting Officer,
Vice President and Controller
Counsel
Hutchins, Wheeler & Dittmar,
A Professional Corporation
Boston, MA
Transfer Agent
State Street Bank and Trust Company
c/o Boston EquiServe
Boston, MA
Independent Auditors
Ernst & Young LLP
Boston, MA
Board of Directors
John A. Costa
Managing Director of Planning and Business Development for
Cardholder Management Services
Gerald Segel
Retired Chairman, Tucker, Anthony & R.L. Day, Inc.
Heather A. Sica
Executive Vice President
Richard A. Stratton
Chief Executive Officer and President
James Westra, Esq.
Stockholder of Hutchins, Wheeler & Dittmar, A Professional
Corporation
Nasdaq Symbol
The common stock is traded under the symbol "LTCH".
Copies of the Company's Form 10-K Report, filed with the
Securities and Exchange Commission, may be obtained from the
office of the Treasurer, Litchfield Financial Corporation, 430
Main Street, Williamstown, MA 01267.
As of January 31, 1999, there were 1,084 stockholders of
record.
- - ----------------------------------------------------------------
- - ----------------------------------------------------------------
Corporate Headquarters
- - ----------------------------------------------------------------
Litchfield Financial Corporation
430 Main Street
Williamstown, MA 01267
Tel: (413) 458-1000
Fax: (413) 458-1020
E-mail:[email protected]
Western Regional Office
Litchfield Financial Corporation
13701 West Jewell Avenue
Suite 200
Lakewood, CO 80228
Tel: (303) 985-1030
Fax: (303) 985-5375
- - ----------------------------------------------------------------
- - ----------------------------------------------------------------
- - ---------------------------------------------------------------
- - ---------------------------------------------------------------
Exhibit 21.1
LITCHFIELD FINANCIAL CORPORATION
List of Subsidiaries
Name and Doing Business As Incorporation
D/B/A
Litchfield Mortgage Securities Company, LLC
Delaware None
Litchfield Mortgage Securities Corporation 1992-2
Massachusetts None
Litchfield Mortgage Securities Company 1994, LLC
Delaware None
Stamford Asset Recovery Corporation Delaware
None
Stamford Business Credit Corporation Delaware
None
Litchfield Timeshare Securities Corporation 1995
Delaware None
LTSC Real Estate Asset Corporation Delaware
None
Litchfield Capital Company 1996, LLC Delaware
None
Green Mountain Funding Corporation Delaware
None
Litchfield Hypothecation Corporation Delaware
None
Litchfield Hypothecation Corporation 1997-B
Delaware None
Litchfield Hypothecation Corporation 1998-A
Delaware None
Litchfield Hypothecation Corporation 1998-B
Delaware None
Priority Investment Trust Delaware
None
First Choice Funding, Inc. Delaware
None
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in this Annual
Report (Form 10-K) of Litchfield Financial Corporation of our
report dated January 30, 1999, included in the 1998 Annual
Report to Stockholders of Litchfield Financial Corporation.
We also consent to the incorporation by reference in
Registration Statements (Forms S-8 Nos. 333-11529 and
333-11531) filed with the Securities and Exchange Commission
pertaining to various Litchfield Financial Stock Option Plans
of our report dated January 30, 1999 with respect to the
consolidated financial statements of Litchfield Financial
Corporation incorporated by reference in the Annual Report
(Form 10-K) for the year ended December 31, 1998.
ERNST & YOUNG LLP
Boston, Massachusetts
March 29, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 38,435
<SECURITIES> 28,883
<RECEIVABLES> 211,042
<ALLOWANCES> 6,707
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 293,882
<CURRENT-LIABILITIES> 0
<BONDS> 134,588
<COMMON> 69
0
0
<OTHER-SE> 82,025
<TOTAL-LIABILITY-AND-EQUITY> 293,882
<SALES> 0
<TOTAL-REVENUES> 38,806
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,532
<INTEREST-EXPENSE> 14,265
<INCOME-PRETAX> 14,369
<INCOME-TAX> 5,537
<INCOME-CONTINUING> 8,832
<DISCONTINUED> 0
<EXTRAORDINARY> (77)
<CHANGES> 0
<NET-INCOME> 8,755
<EPS-PRIMARY> 1.40
<EPS-DILUTED> 1.33
</TABLE>
