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, 1999
___ 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.
------------------------------------------------------
(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, 1999: 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
The Company administers investment programs (the "Programs") which coordinate
the acquisition of mutual fund shares and insurance over a period of ten years.
Under the Programs, Participants purchase life and health insurance from
affiliated 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, however, will 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).
Pursuant to the Agreement, the Company sells the Participants' Total Account
indebtedness (Loans Receivable) to PREFCO a third-party bank sponsored
commercial paper conduit. In connection with these sales, the Company retains
interest in the securitized assets that serve to absorb losses related to the
sold receivables and enhance credit to the third-party conduit. Such retained
interests include: (a) 5% of all Loans Receivable sold, which includes
capitalized interest (residual principal); (b) the excess of the weighted
average interest on the Loans Receivable securitized over the interest rate on
the commercial paper sold (interest-only strips receivable); and (c)
compensation for servicing the securitized assets on behalf of the purchaser.
Interest income on residual principal, interest-only strips receivable and
servicing assets is earned over time based on the outstanding balance of
serviced assets. The Company receives servicing fees monthly for managing and
collecting all receivables and loan repayments and monitoring the underlying
collateral. The fee is calculated as 2% of outstanding receivables. Repayments
of residual principal and interest only strips will be received after full
amortization of the assets sold to third-parties.
Gains or losses for each qualifying sale of receivables are determined by
allocating the carrying value of the receivables sold between the portion sold
and the interests retained, based on their relative fair values. The Company
estimates the fair value of retained interests based on the present value of
future cash flows expected from the sold receivables, under management's best
estimates of key assumptions - credit losses, prepayment speeds, forward yield
curves and discount rates commensurate with the risks involved. The Company
estimates that credit losses associated with sold receivables will not be
material, as the loans are more than 100% secured by mutual fund shares. The
interest rate paid to the third-party purchaser represents commercial paper
rates (5.48% and 5.54% at September 30, 1999 and 1998, respectively) plus a
margin of 2.25%. The Company estimates that 15% of Programs will terminate
early. The Company has estimated that a 17% discount rate is commensurate with
the duration and risks embedded in the particular assets retained from its loan
sales.
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 $55,000,000. On June 29, 1999, the Agreement was amended
to extend the termination date to June 27, 2000. 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.
2
<PAGE>
As of September 30, 1999, the Company has sold aggregate loans of $54,590,775
and has retained a subordinated interest and servicing rights in the assets
transferred aggregating $5,114,108. The cash flows related to the repayment of
loans is first used 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.
As servicing agent for the loans sold, the Company collected loan prepayments of
$10,875,457 during the first nine months of 1999 which were paid to PREFCO (one
month in arrears) to satisfy principal and variable interest obligation due. The
Company originated new loans of $7,059,370 during the first nine months of 1999
which were sold to PREFCO.
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.
During 1998, the Company entered into an intercompany loan agreement with
Jefferson-Pilot Corporation whereby it may borrow funds for working capital
needs at short-term interest rates. At September 30, 1999, the Company had
borrowed $1,200,000.
The continuance of the Program is dependent upon the Company's ability to
arrange for the sale of collateral notes receivable or provide for the financing
of insurance premiums for Participants. 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 expense
reimbursements and other working capital needs.
Jefferson Pilot Life Insurance Company, a wholly-owned subsidiary of
Jefferson-Pilot Corporation, provides employee services and office facilities to
the Company and its affiliates under a Service Agreement. The Company pays its
affiliate 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 was provided by servicing fees from collateral loans sold and
interest earned on investments during the third quarter of 1999 and 1998.
Results of Operations
The Company concluded the nine months ended September 30, 1999 with net income
of $771,643 as compared to net income of $571,226 for the same period in 1998.
Total revenues through September 30, 1999 were $1,290,586 versus $1,529,029 in
the same period in 1998. The Company's revenues are derived from income on its
retained interest in the loans transferred to investors ("Interest on
Securities"), gain on the sale of collateral loans and program fees. The average
interest rate charged to each Participant's outstanding loan balance has
remained at 8.95%.
The Company receives fee income for continuing to service sold receivables. The
Company capitalizes the present value of expected servicing fee income in excess
of the related cost of servicing over the estimated life of the sold
receivables.
3
<PAGE>
Program fees include placement, administrative and termination fees as well as
charges for special services. At September 30, 1999 and 1998 the number of
Programs administered by the Company were 4,135 and 4,987, respectively.
In the future, the Company may realize a gain or loss on the securitization of
future collateral notes receivable which may impact future earnings.
Year 2000 Conversion
The Company recognizes the need to ensure that its operations will not be
adversely impacted by the Year 2000 systems failures. Year 2000 issues arise
because some computer software and hardware (systems) were designed to handle
only a two digit year, not a four digit year. By using two digits, they could
fail or make miscalculations due to the inability to distinguish between dates
in the 1900' and in the 2000's.
In order to minimize the impact of the year 2000 on the Company, Jefferson-Pilot
Corporation developed a centralized oversight and project management process to
facilitate the planning and conversion of all information systems on behalf of
the Company and its affiliates. The scope of the project includes an assessment
of the Company's material systems currently in place, modification, testing and
implementation of such systems as required, inquiry to third-party providers
with whom the Company has material business relationships as to the state of
their readiness, and the development of a contingency plan in the event that
material Year 2000 issues arise.
The Company has completed its assessment and modifications of its material
administrative systems to handle the Year 2000. The underlying software, which
includes file structures, on-line access screen formats and the data access
methods for the Company's systems were rewritten, tested, certified and
implemented during 1998. The cost of rewriting, testing, certifying and
implementing these systems was $80,115.
The Company has completed the certification of its PC and Lan Systems. All the
Company's key business partners have responded to the Company's inquiries,
indicated that they are on schedule for Year 2000 compliance.
All Year 2000 projects have been completed. Although management does not
anticipate a material effect on its business operations as a result of the Year
2000 computer systems issues, the Company has developed a contingency plan in
the event that material Year 2000 issues arise in the Company or third-party
computer systems.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings - Not Applicable
Item 2 - Changes in Securities - Not Applicable
Item 3 - Defaults Upon Senior Securities - Not Applicable
Item 4 - Submission of matters to vote of security holders - Not Applicable
Item 5 - Other Information - None
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.
4
<PAGE>
Reg. S-K
Item 601
<TABLE>
<CAPTION>
Exhibit
Table No. Document Reference Source
--------- -------- ----------------
<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
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
</TABLE>
5
<PAGE>
<TABLE>
<S> <C> <C>
(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
(f) Amendment No. 1 to the pp. 31 - 33
Receivables Purchase Agreement
among the Company, Investors,
Preferred Receivables Funding
Preferred Receivables Funding
Corporation and First National
Bank of Chicago dated June 29, 1998
(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, 1999.
6
<PAGE>
Hampshire Funding, Inc.
Statements of Financial Condition
<TABLE>
<CAPTION>
September 30 December 31
1999 1998
-----------------------------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 1,477,750 $ 1,284,375
Accounts receivable from customers 4,563 13,187
-----------------------------------
Total current assets 1,482,313 1,297,562
Interests retained from loan sales 5,114,108 4,301,000
Deferred asset 219,021 262,825
-----------------------------------
Total assets $ 6,815,442 $ 5,861,387
===================================
Liabilities and stockholder's equity
Liabilities:
Due to affiliates $ 2,476,054 $ 2,325,058
Accrued expenses and other liabilities 384,073 155,373
-----------------------------------
Total liabilities 2,860,127 2,480,431
-----------------------------------
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
Accumulated other comprehensive loss (623,469) (426,185)
Retained earnings 3,738,973 2,967,330
-----------------------------------
Total stockholder's equity 3,955,315 3,380,956
-----------------------------------
Total liabilities and stockholder's equity $ 6,815,442 $ 5,861,387
===================================
</TABLE>
7
<PAGE>
Hampshire Funding, Inc.
Statements of Income
<TABLE>
<CAPTION>
Nine months ending September 30,
1999 1998
--------------------------------------
<S> <C> <C>
Revenues:
Interest income on securities $ 677,068 $ 1,202,412
Realized gain on sale of collateral loans 359,505 0
Program participant fees 254,013 326,617
--------------------------------------
1,290,586 1,529,029
Operating expenses:
Interest on affiliated loan agreements 41,088 0
General and administrative 0 650,220
--------------------------------------
41,088 650,220
--------------------------------------
Income before income taxes 1,249,498 878,809
Income tax expense 477,855 307,583
--------------------------------------
Net income $ 771,643 $ 571,226
======================================
</TABLE>
8
<PAGE>
Hampshire Funding, Inc.
Statements of Changes in Stockholder's Equity
Nine months ending September 30, 1998 and 1999
<TABLE>
<CAPTION>
Accumulated
Other
Additional Comprehensive Total
Common Paid-in Retained Income Stockholder's
Stock Capital Earnings (Loss) Equity
--------------- ---------------- ---------------- ------------------ ----------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997 50,000 789,811 2,186,747 3,026,558
Comprehensive income
Net income 571,226 571,226
--------------- ---------------- ---------------- ------------------ ----------------
Balance at September 30, 1998 $ 50,000 $ 789,811 $ 2,757,973 $ 3,597,784
=============== ================ ================ ================== ================
Balance at December 31, 1998 50,000 789,811 2,967,330 (426,185) 3,380,956
Comprehensive income
Net income 771,643 771,643
Unrealized loss on securities
available for sale, net of tax
of $106,231 (197,284) (197,284)
--------------- ---------------- ---------------- ------------------ ----------------
Balance at September 30, 1999 $ 50,000 $ 789,811 $ 3,738,973 (623,469) $ 3,955,315
=============== ================ ================ ================== ================
</TABLE>
9
<PAGE>
Hampshire Funding, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Nine months ending September 30,
1999 1998
---------------------------------------
<S> <C> <C>
Operating activities
Net income $ 771,643 $ 571,226
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Gain on sale (359,505)
Decrease in accounts receivable from customers 8,624 18,481
Net change in other liabilities (204,807) 139,076
Change in due to affiliates 257,227 1,495,537
Net originations of collateral notes receivable (670,636)
Decrease in accrued interest receivable 153,210
Decrease in deferred asset 43,804 51,573
---------------------------------------
Net cash used by operating activities 516,986 1,758,467
Financing activities
Proceeds from sale of collateral notes receivable 6,148,615
Loans originated (6,472,226)
---------------------------------------
Net cash used (provided) by financing activities (323,611)
---------------------------------------
Increase in cash and cash equivalents 193,375 1,758,467
Cash and cash equivalents at beginning of year 1,284,375 297,934
---------------------------------------
Cash and cash equivalents at end of period $ 1,477,750 $ 2,056,401
=======================================
</TABLE>
10
<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: November 12, 1999
John A. Weston
Treasurer, Principal Financial and
Accounting Officer
11
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000205422
<NAME> HAMPSHIRE FUNDING, INC.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1477,750
<SECURITIES> 4,507,972
<RECEIVABLES> 4,563
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,482,313
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 6,815,442
<CURRENT-LIABILITIES> 2,860,127
<BONDS> 0
0
0
<COMMON> 50,000
<OTHER-SE> 3,955,315
<TOTAL-LIABILITY-AND-EQUITY> 6,815,442
<SALES> 0
<TOTAL-REVENUES> 1,290,586
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 41,088
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,249,498
<INCOME-TAX> 477,855
<INCOME-CONTINUING> 771,643
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 771,643
<EPS-BASIC> 15.43
<EPS-DILUTED> 0
</TABLE>
