UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Ammendment No. 1
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 held on April 23, 1999 are incorporated by reference
into Part III.
<PAGE>
EXPLANATORY NOTE
Exhibit 13.1 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1998 is amended to correct the omissions of
the signature lines in the following sections: "Report of
Management" and "Report of Independent Auditors".
<PAGE>
(ANNUAL REPORT)
1998 ANNUAL REPORT
10 Year Anniversary
[graph showing eps]
Income Per Share Before Extraordinary Item
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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.
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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.
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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.
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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
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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.
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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.
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Exhibit 13.1
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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.
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Exhibit 13.1
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REPORT OF MANAGEMENT
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Exhibit 13.1
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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.
/s/ Ronald E. Rabidou
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RONALD E. RABIDOU
Executive Vice President,
Chief Financial Officer and Treasurer
/s/ David M. Pascale
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DAVID M. PASCALE
Chief Accounting Officer,
Vice President and Controller
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REPORT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------
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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.
/s/Ernst & Young LLP
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ERNST & YOUNG LLP
Boston, Massachusetts
January 30, 1999
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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.
- ----------------------------------------------------------------
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Corporate Headquarters
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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
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<PAGE>
SIGNATURES
Pursuant to the requirements of Sections 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/ David M. Pascale
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DAVID M. PASCALE
Chief Accounting Officer, Vice President and Controller
May 4, 1999
