<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 March 31, 1998
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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.
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HAMPSHIRE FUNDING, INC.
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(Exact name of registrant as specified in its charter)
NEW HAMPSHIRE 02-0277842
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(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
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Not Applicable
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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 April 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
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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
- -------------------------------
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 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 30, 1998. The Company
anticipates the termination date will be extended under the provisions of the
Agreement. 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
<PAGE>
As servicing agent for the loans sold, the Company collected loan repayments of
$5,082,543 during the quarter ended March 31, 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 $4,155,742 during the
quarter ended March 31, 1998, and retained a subordinated interest and servicing
rights in the assets transferred aggregating $326,887.
Additionally, the Company earned $264,791 in service fees ($179,591 collected
during the quarter) 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 to the Service Company.
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 first 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 first quarter of 1997 was provided by
Participant's loan repayments, program administrative fees and interest earned
on investments.
Results of Operations
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The Company concluded the quarter ended March 31, 1998 with net income of
$190,663 as compared to net income of $96,482 for the same period in 1997.
Total revenues through March 31, 1998 were $519,666 versus $1,290,012 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 three months ended March 31, 1997.
Likewise, the Company's operating expenses declined for the first quarter of
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 during the first
quarter of 1998. The Company's average cost of borrowing to finance outstanding
loans was 5.76% for the first 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 state maturity or termination date.
Program fees include placement, administrative and termination fees as well as
charges for special services. At March 31, 1998 and 1997 the number of Programs
administered by the Company were 5,284 and 5,950, respectively.
3
<PAGE>
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
Program s 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
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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.
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(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
Exhibit
Table No. Document Reference Source
--------- -------- ----------------
(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
year ended December 31,
1996, pp. 24-26
4
<PAGE>
Reg. S-K
Item 601
Exhibit
Table No. Document Reference Source
--------- -------- ----------------
(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
(b) Reports on Form 8-K
No Reports on Form 8-K were filed by the Company during the
quarter ended March 31, 1998.
5
<PAGE>
Hampshire Funding, Inc.
Statements of Financial Condition
<TABLE>
<CAPTION>
March 31 December 31
1998 1997
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<S> <C> <C>
Assets
Cash and cash equivalents $ 2,940,425 $ 297,934
Accounts receivable from customers 22,997 37,715
-----------------------------------
Total current assets 2,963,422 335,649
Accrued interest receivable 1,350,688 1,525,023
Due and deferred from the sale of collateral notes portfolio 3,116,085 2,789,198
Deferred asset 314,045 329,000
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Total assets $ 7,744,240 $ 4,978,870
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Liabilities and stockholder's equity
Liabilities:
Due to affiliates $ 2,662,587 $ 1,694,196
Due to investors 1,408,781
Accrued expenses 129,000
Miscellaneous liabilities 326,651 258,116
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Total liabilities 4,527,019 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 2,377,410 2,186,747
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Total stockholder's equity 3,217,221 3,026,558
-----------------------------------
Total liabilities and stockholder's equity $ 7,744,240 $ 4,978,870
===================================
</TABLE>
6
<PAGE>
Hampshire Funding, Inc.
Statements of Income
Three months ending March 31
1998 1997
-----------------------------------
Revenues:
Interest on collateral notes receivable $ 0 $ 1,150,187
Securitization fees 383,331 0
Program participant fees 123,000 114,031
Interest on investments 13,335 25,794
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519,666 1,290,012
Operating expenses:
Interest on loan agreements 0 726,720
General and administrative 226,338 386,297
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226,338 1,113,017
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Income before income taxes 293,328 176,995
Income tax expense 102,665 80,513
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Net income $ 190,663 $ 96,482
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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
Three months ending March 31,
1998 1997
--------------------------------
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
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Balance, end of period 789,811 550,000
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Retained earnings:
Balance, beginning of period 2,186,747 1,589,123
Net income 190,663 96,482
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Balance end of period 2,377,410 1,685,605
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Total stockholder's equity $3,217,221 $2,285,605
================================
8
<PAGE>
Hampshire Funding, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Three months ending March 31,
1998 1997
-------------------------------
<S> <C> <C>
Operating activities
Net income $ 190,663 $ 96,482
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Decrease (increase) in accounts receivable from
customers 14,718 (5,078)
Increase in accrued expenses and other liabilities 197,535 103,771
Increase (decrease) in due to affiliates 968,391 (44,423)
Net (originations) paydowns of collateral notes receivable (326,887) (513,297)
Decrease in accrued interest receivable 174,335
Decrease in deferred asset 14,955
Increase in prepaid interest and interest accrued on loan
agreements 6,641
Increase in amounts due to investors 1,408,781
-------------------------------
Net cash used by operating activities 2,642,491 (355,904)
Financing activities
Proceeds from non-affiliated loan agreement 40,000,000
Principal payments on non-affiliated
loan agreements (40,000,000)
-------------------------------
Net cash used (provided) by financing activities 0 0
-------------------------------
Increase (decrease) in cash and cash equivalents 2,642,491 (355,904)
Cash and cash equivalents at beginning of year 297,934 1,557,210
-------------------------------
Cash and cash equivalents at end of period $ 2,940,425 $ 1,201,306
===============================
</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
/s/ John A. Weston
Date: May 15, 1998
- -------------------
John A. Weston
Treasurer, Principal Financial and Accounting Officer
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1997
<CASH> 2,940,425
<SECURITIES> 0
<RECEIVABLES> 4,803,815
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,963,422
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 7,744,240
<CURRENT-LIABILITIES> 4,527,019
<BONDS> 0
0
0
<COMMON> 50,000
<OTHER-SE> 3,267,221
<TOTAL-LIABILITY-AND-EQUITY> 7,744,240
<SALES> 0
<TOTAL-REVENUES> 519,666
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 226,338
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 293,328
<INCOME-TAX> 102,665
<INCOME-CONTINUING> 190,663
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 190,633
<EPS-PRIMARY> 3.81
<EPS-DILUTED> 0
</TABLE>
