<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended September 30, 1998
- --- Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [no fee required] For the transition period from
___________________ to ____________________.
Commission file number 2-79192 .
HAMPSHIRE FUNDING, INC.
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(Exact name of registrant as specified in its charter)
NEW HAMPSHIRE 02-0277842
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE GRANITE PLACE, CONCORD, NEW HAMPSHIRE 03301
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (603) 226-5000
Not Applicable
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
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 the number of shares outstanding of each of the Registrant's classes of
Common Stock as of September 30, 1998: 50,000 shares, all of which are owned by
Jefferson-Pilot Corporation.
DOCUMENTS INCORPORATED BY REFERENCE
The exhibit index appears on pages 4 and 5
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements. See pages 6 through 9.
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Liquidity and Capital Resources
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The Company offers investment programs (the "Programs") which coordinate the
acquisition of mutual fund shares and insurance over a period of ten years.
Under the Programs, purchasers of a Program ("Participants") purchase life and
health insurance from affiliated insurance companies (the "Insurance Companies")
and finance the premiums through a series of loans secured by mutual fund
shares. Upon issuance of a policy by an Insurance Company, the Company makes a
loan to the Participant in an amount equal to the selected premium mode. As
each premium becomes due, if not paid in cash, a new loan equal to the next
premium and administrative fee is made and added to the Participant's account
indebtedness ("Account Indebtedness"). Thus, interest, as well as principal, is
borrowed and mutual fund shares are pledged as collateral. Each loan made by
the Company must initially be secured by mutual fund shares which have a value
of at least 250% of the loan, except for the initial premium loan of Programs
using certain no-load funds, where the collateral requirement is 1800%. In
addition, the aggregate value of all mutual fund shares pledged as collateral
must be at least 150% of the Participant's total Account Indebtedness. If the
value of the shares pledged to the Company declines below 130% of the Account
Indebtedness, the Company will terminate the Programs and liquidate shares
sufficient to repay the indebtedness.
Effective March 31, 1998, the Company discontinued the sale of Programs. The
Company will, however, continue to make premium loans to current Participants
and administer all Programs until their stated maturity or termination dates.
On December 31, 1997, the Company entered into a Receivables Purchase Agreement
(the Agreement) with Preferred Receivables Funding Corporation (PREFCO), a
wholly-owned subsidiary of First National Bank of Chicago (the Bank).
The Agreement (amended June 30, 1998) provides for the initial and periodic
purchase of the Company's collateral loans receivable by PREFCO or other
investors (for which the Bank serves as agent) up to $60,000,000 and expires on
June 29, 1999. PREFCO finances purchases of the Company's collateral loans
receivables through the issuance of commercial paper.
The Company sold its aggregate loans of $55,783,965 on December 31, 1997. The
Company received proceeds of $52,994,767 and retained a subordinated interest
and servicing rights in the assets transferred aggregating $2,789,198. The cash
flows related to the repayment of loans will be used first to satisfy all
principal and variable interest rate obligations due to PREFCO, investors or the
Bank. The retained interest represents the fair value of the Company's future
cash flows and obligations that it will receive after all investor obligations
are met.
Proceeds from the sale of the receivables were used by the Company to extinguish
its outstanding debt under its Revolving Credit Agreement with SunTrust Bank of
Atlanta, Georgia. Following the repayment of all principal and interest, on
December 31, 1997 the Company's Revolving Credit Agreement with SunTrust was
terminated.
During 1997 the Company's funds for financing the Programs were obtained through
this Revolving Credit Agreement with SunTrust Bank of Atlanta, Georgia
("SunTrust"). The Company entered into this Revolving Credit Agreement on
October 23, 1996 which provided for advances up to $60,000,000.
The Company is responsible for servicing, managing and collecting all
receivables and loan repayments, monitoring the underlying collateral and
reporting all activity to the Bank for which it receives an annual service fee
(collected monthly in arrears) calculated as 2% of outstanding receivables.
The Agreement includes a Performance Guarantee by Jefferson-Pilot Corporation
that the Company will service the receivables sold and administer all aspects of
the Programs in accordance with the terms and conditions of the Agreement. The
Performance Guarantee contains restrictions on the debt of the Guarantor and the
collateral value monitored by the Company.
2
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As servicing agent for the loans sold, the Company collected loan repayments of
$13,165,013 during the nine months ended September 30, 1998, on behalf of
PREFCO. These loan re-payments were paid to PREFCO (one month in arrears) to
satisfy principal and variable interest obligations due.
The Company sold additional loans under the Agreement of $11,696,304 during the
nine months ended September 30, 1998, and retained a subordinated interest and
servicing rights in the assets transferred aggregating $670,636.
Additionally, the Company earned $774,278 in service fees for the nine months
ended September 30, 1998, for servicing all outstanding loans on behalf of
PREFCO.
The continuance of the Program is dependent upon the Company's ability to
provide for the financing of insurance premiums for Participants or arrange for
the sale of collateral notes receivable. Prior to the Company's Agreement with
PREFCO, such financing was provided by its Revolving Credit Agreement with
SunTrust and affiliated loan agreements. The Company expects that it will be
able to continue to sell its collateral notes receivables or arrange for other
financing for the foreseeable future.
If the Company is unable to sell its collateral notes receivable or borrow funds
in the future for the purpose of financing loans to Participants for the payment
of insurance premiums, the Programs may be subject to termination.
If the Company subsequently defaults on its Agreement with PREFCO for which the
Participant's mutual fund shares have been pledged as security, the mutual fund
shares may be redeemed by PREFCO (or its agent) and the Programs will be
terminated on their renewal dates.
The Company's liabilities include amounts due to affiliates for insurance
premium payments and expense reimbursements.
The Service Company, a wholly-owned subsidiary of Jefferson Pilot Financial Life
Insurance Company (formerly Chubb Life Insurance Company), is a management
service company which provides employee services and office facilities to the
Company and its affiliates under a Service Agreement. The Company pays the
Service Company a monthly fee in accordance with mutually agreed upon cost
allocation methods which the Companies believe reflect a proportional allocation
of common expenses and are commensurate for the performance of the applicable
duties.
Working capital for the third quarter of 1998, was provided by loan servicing
fees, administrative fees for the maintenance of Programs and interest earned on
investments. Working capital for the third quarter of 1997 was provided by
Participant's loan repayments, program administrative fees and interest earned
on investments.
Results of Operations
- ---------------------
The Company concluded the nine months ended September 30, 1998 with net income
of $571,226 as compared to net income of $493,456 for the same period in 1997.
Total revenues through September 30, 1998 were $1,529,029 versus $3,934,262 for
the same period in 1997. The decline in revenues resulted from the sale of the
Company's collateral loans on December 31, 1997. The Company no longer earns
interest on its collateral loans sold to investors. The Company's revenues are
now derived from loan servicing fees and accrued income on its retained interest
in the loan assets transferred to investors ("Securitization Fees".) The
average interest charged to each Participant's outstanding loan balance was
8.95% for the nine months ended September 30, 1997.
Likewise, the Company's operating expenses declined for the nine-months ending
September 30, 1998 as compared to the same period in 1997, due to the
elimination of loan interest expense. As a result of the sale of its collateral
loans, the Company no longer requires a loan agreement to finance Participant
outstanding loan receivables and, therefore, did not incur loan interest
expense. The Company's average cost of borrowing to finance outstanding loans
was 5.85% for the third quarter of 1997.
General and administrative expenses have declined due to the Company's decision
to discontinue the sale of new programs effective March 31, 1998. The Company
will continue to incur general and administrative expenses to service existing
programs until their stated maturity or termination date.
3
<PAGE>
Program fees include placement, administrative and termination fees as well as
charges for special services. At September 30, 1998 and 1997 the number of
Programs administered by the Company were 4,987 and 5,626, respectively.
In the future the Company will continue to receive servicing fee income equal to
2% of aggregate loan balances as compensation for services provided on behalf of
Programs and Program Participants in accordance with the Agreement with PREFCO.
The Company will continue to earn other related ongoing income. In addition,
the Company may realize a gain or loss on the securitization of future
collateral notes receivable which may impact future earnings.
Year 2000 Conversion
- --------------------
Jefferson-Pilot Corporation, the Company's parent, has developed a centralized
oversight and project management process to facilitate the conversion of all
information systems to be ready for the Year 2000 and has been converting
critical data processing systems. The Parent Company currently expects the
project to be completed by early 1999 and does not expect this project to have a
significant effect on operations.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings - Not Applicable
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Item 2 - Changes in securities - Not Applicable
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Item 3 - Defaults upon senior securities - Not Applicable
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Item 4 - Submission of matters to vote of security holders - Not Applicable
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Item 5 - Other Information - None
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Item 6 - Exhibits and Reports on Form 8-K.
--------------------------------
(a) Pursuant to Rule 12b-23 and General Instruction G, the following
exhibits required to be filed with this Report incorporated by reference from
the reference source cited in the table below.
Reg. S-K
Item 601
<TABLE>
<CAPTION>
Exhibit
Table No. Document Reference Source
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<S> <C> <C>
(1) Distribution Agreement Form 10-K, filed
between the Company and March 15, 1990, for the
Chubb Securities Corporation year ended December 31,
dated March 1, 1990 1989, pp. 23-24
(3) (i) Articles of Incorporation Form 10-K, filed
of Company March 15, 1990, for the
year ended December 31,
1989, pp. 25-27
(ii) By-Laws of Company Form 10-K filed
March 15, 1990 for the
year ended December 31,
1989, pp. 28-46
(22) Subsidiaries of The Registrant Form 10-K, filed
March 15, 1990, for the
year ended December 31,
1989, p. 66
(4) (i) Agency Agreement and Form 10-K, filed
Limited Power of Attorney March 19, 1997, for the
</TABLE>
4
<PAGE>
Reg. S-K
Item 601
<TABLE>
<CAPTION>
Exhibit
Table No. Document Reference Source
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<S> <C> <C>
year ended December 31,
1996, pp. 24-26
(ii) Change in Participant in Form 10-K filed
Program March 19, 1997, for the
year ended December 31,
1996, pp. 27-28
(iii) Disclosure Statement Form 10-K filed
March 19, 1997, for the
year ended December 31,
1996, p. 29
(10) (a) Revolving Credit Agreement Form 10-K filed
between the Company and March 19, 1997, for the
SunTrust Bank, dated year ended December 31,
October 23, 1996 1996, pp. 30-44
(b) Revolving Credit Note Form 10-K filed
between the Company and March 19, 1997, for the
SunTrust Bank, dated year ended December 31,
October 23, 1996 1996, pp. 45-46
(c) Guaranty between Chubb Life Form 10-K filed
and SunTrust Bank, dated March 19, 1997, for the
October 23, 1996 year ended December 31,
1996, pp. 47-53
(d) Receivables Purchase Agreement Form 10-K filed
among the Company, Investors March 31, 1998, for the
Preferred Receivables Funding year ended December 31,
Bank of Chicago dated 1997, pp. 27-75
December 31, 1997
(e) Performance Guarantee by Form 10-K filed
Jefferson-Pilot Corporation March 31, 1998, for the
year ended December 31,
1997, pp. 76-83
(27) Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
No Reports on Form 8-K were filed by the Company during the
quarter ended September 30, 1998.
5
<PAGE>
HAMPSHIRE FUNDING, INC.
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1998 1997
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<S> <C> <C>
ASSETS
Cash and cash equivalents $2,056,401 $ 297,934
Accounts receivable from customers 19,234 37,715
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Total current assets 2,075,635 335,649
Accrued interest receivable 1,371,813 1,525,023
Due and deferred from the sale of collateral notes portfolio 3,459,834 2,789,198
Deferred asset 277,427 329,000
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Total assets $7,184,709 $4,978,870
======================================
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Due to affiliates $3,189,733 $1,694,196
Due to investors 287,966
Accrued expenses and other liabilities 109,226 258,116
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Total liabilities 3,586,925 1,952,312
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Stockholder's equity:
Common stock, par value $1 per share; authorized
100,000 shares; issued and outstanding 50,000 shares 50,000 50,000
Additional paid-in capital 789,811 789,811
Retained earnings 2,757,973 2,186,747
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Total stockholder's equity 3,597,784 3,026,558
--------------------------------------
Total liabilities and stockholder's equity $7,184,709 $4,978,870
======================================
</TABLE>
6
<PAGE>
HAMPSHIRE FUNDING, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDING SEPTEMBER 30,
1998 1997
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<S> <C> <C>
Revenues:
Interest on collateral notes receivable $ 0 $3,539,767
Securitization fees 1,130,231 0
Program participant fees 326,617 330,729
Interest on investments 72,181 63,766
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1,529,029 3,934,262
Operating expenses:
Interest on loan agreements 0 2,252,595
General and administrative 650,220 922,505
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650,220 3,175,100
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Income before income taxes 878,809 759,162
Income tax expense 307,583 265,706
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Net income $ 571,226 $ 493,456
======================================
</TABLE>
Note: On December 30, 1997, the Company sold its investment in its wholly owned
subsidiary, Hampshire Syndications, Inc. to Jefferson-Pilot Investments, Inc.
The transaction has been accounted for as a reorganization of entities under
common control. Accordingly, the prior period consolidated financial statements
have been restated to exclude Hampshire Syndications and conform to the 1998
presentation.
7
<PAGE>
HAMPSHIRE FUNDING, INC.
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
NINE MONTHS ENDING SEPTEMBER 30,
1998 1997
--------------------------------
<S> <C> <C>
Common stock:
Balance, beginning and end of period $ 50,000 $ 50,000
Additional paid-in capital:
Balance, beginning of period 789,811 550,000
Contributed paid-in capital 0 0
--------------------------------
Balance, end of period 789,811 550,000
--------------------------------
Retained earnings:
Balance, beginning of period 2,186,747 1,589,123
Net income 571,226 493,456
--------------------------------
Balance end of period 2,757,973 2,082,579
--------------------------------
Total stockholder's equity $3,597,784 $ 2,682,579
================================
</TABLE>
8
<PAGE>
HAMPSHIRE FUNDING, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDING SEPTEMBER 30,
1998 1997
-------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 571,226 $ 493,456
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Decrease in accounts receivable from customers 18,481 2,808
(Decrease) in accrued expenses and other liabilities (148,890) (54,449)
Increase (decrease) in due to affiliates 1,495,537 (257,609)
Net (originations) paydowns of collateral notes receivable (670,636) (2,891,335)
Decrease (increase) in accrued interest receivable 153,210 (26,478)
Decrease in deferred asset 51,573
Increase in prepaid interest and interest accrued on loan
agreements 338,387
Increase in amounts due to investors 287,966
-------------------------------------------
Net cash used by operating activities 1,758,467 (2,395,220)
FINANCING ACTIVITIES
Proceeds from non-affiliated loan agreement 93,700,000
Principal payments on non-affiliated
loan agreements (92,000,000)
-------------------------------------------
Net cash used (provided) by financing activities 0 1,700,000
-------------------------------------------
Increase (decrease) in cash and cash equivalents 1,758,467 (695,220)
Cash and cash equivalents at beginning of year 297,934 1,557,210
-------------------------------------------
Cash and cash equivalents at end of period $ 2,056,401 $ 861,990
===========================================
</TABLE>
9
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has fully caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Hampshire Funding, Inc.
-----------------------
Registrant
\\John A. Weston\\
Date: November 2, 1998
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John A. Weston
Treasurer, Principal Financial and Accounting Officer
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000205422
<NAME> HAMPSHIRE FUNDING, INC.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,506,401
<SECURITIES> 0
<RECEIVABLES> 4,850,881
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,075,635
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 7,184,709
<CURRENT-LIABILITIES> 3,586,925
<BONDS> 0
50,000
0
<COMMON> 0
<OTHER-SE> 3,547,784
<TOTAL-LIABILITY-AND-EQUITY> 7,184,709
<SALES> 0
<TOTAL-REVENUES> 1,529,029
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 650,320
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 878,809
<INCOME-TAX> 307,583
<INCOME-CONTINUING> 571,225
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 571,225
<EPS-PRIMARY> 11.42
<EPS-DILUTED> 0
</TABLE>
