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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, 2000
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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 .
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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
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Indicate the number of shares outstanding of each of the Registrant's classes of
Common Stock as of September 30, 2000: 50,000 shares, all of which are owned by
Jefferson-Pilot Corporation.
DOCUMENTS INCORPORATED BY REFERENCE
The exhibit index appears on pages 4, 5 and 6
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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 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 Banc One (the Bank), formerly First National Bank of
Chicago.
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). On July 26, 2000, the Agreement was amended to extend the
termination date to July 25, 2001 and to decrease PREFCOs commitment from
$55,000,000 to $50,000,000. 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.
As of September 30, 2000, the Company sold aggregate loans of $52,103,113 and
retained a subordinated interest and servicing rights in the assets transferred
aggregating $6,446,520. 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. The fair value of the Company's retained
interest and servicing rights was $5,509,426 at December 31, 1999.
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
Company received service fees of $725,526 and $756,648 as of September 30, 2000
and 1999, respectively.
As servicing agent for the loans sold, the Company collected loan prepayments of
$7,529,906 at September 30, 2000 and $8,376,629 for the same period in 1999,
which were paid to PREFCO (one month in arrears) to satisfy principal and
variable interest obligation due. The Company originated new loans of $5,294,438
and $6,473,310 as of September 30, 2000 and 1999, respectively, 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
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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, 2000, and 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 to JP Life and other working capital needs.
JP Life, 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 JP Life 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 in the third quarter of 2000 and 1999 was provided by servicing
fees from collateral loans sold, loans from Jefferson-Pilot Corporation and
interest earned on investments.
Effective January 1, 1999, the Company changed certain of its assumptions
supporting the valuation of its interests retained from loan sales. The Company
has increased its estimate of early terminations from 15% to 26% to better
reflect the Company's actual experience. In addition, the Company has reduced
the discount rate used to value its retained interests from 17% to 15%, which
Management believes better reflects the risks associated with the securitized
assets.
RESULTS OF OPERATIONS
The Company concluded the nine months ended September 30, 2000 with net income
of $543,868 as compared to net income of $771,643 for the same period in 1999.
Total revenues through September 30, 2000 were $1,013,593 versus $1,290,586 in
1999. The Company's revenues are derived from income on its retained interest in
the loans sold to investors and realized gains. Although the Company's retained
interest and income on its retained interest has grown year over year, this
increase has been offset by a decline in realized gains in connection with the
sale of loans. Gains (or losses) for each sale of receivables are determined by
allocating the carrying value of the receivables sold between the portion sold
and the interest retained based on their relative fair value. The Company
estimates the fair value of its retained interest based on the present value of
future cash flows expected from the sold receivables.
Program fees include placement, administrative and termination fees as well as
charges for special services. For the nine months ended September 30, 2000 and
1999 the number of Programs administered by the Company were 3,389 and 4,135,
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
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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.
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<CAPTION>
Reg. S-K
Item 601
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
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Reg. S-K
Item 601
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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
(f) Amendment No. 1 to the Form 10-K filed
Receivables Purchase Agreement March 31, 1999, for the
among the Company, Investors, year ended December 31,
Preferred Receivables Funding 1999, pp 31-33
Corporation and First National
Bank of Chicago dated June 29, 1998
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(g) Amendment No. 2 to the Form 10-K filed
Receivables Purchase Agreement March 30, 2000, for the
among the Company, Investors, year ended December 31,
Preferred Receivables Funding 2000, pp. 28-33
Corporation and First National
Bank of Chicago dated June 29, 1999
(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 September 30, 2000.
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HAMPSHIRE FUNDING, INC.
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
2000 1999
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<S> <C> <C>
ASSETS
Cash and cash equivalents $ 2,615,853 $ 1,801,081
Accounts receivable from customers 61,845 5,951
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Total current assets 2,677,698 1,807,032
Interests retained from loan sales 6,446,520 5,509,426
Deferred asset 160,616 204,420
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Total assets $ 9,284,834 $ 7,520,878
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LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Due to affiliates $ 1,974,232 $ 1,531,050
Due to parent 1,206,480 1,200,000
Accrued expenses and other liabilities 1,028,637 518,503
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Total Liabilities 4,209,349 3,249,553
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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
Accumulated other comprehensive loss 1,432 (258,860)
Retained earnings 4,234,242 3,690,374
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Total stockholder's equity 5,075,485 4,271,325
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Total liabilities and stockholder's equity $ 9,284,834 $ 7,520,878
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HAMPSHIRE FUNDING, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDING SEPTEMBER 30,
2000 1999
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<S> <C> <C>
Revenues:
Interest income on securities $ 754,640 $ 677,068
Realized gain on sale of collateral loans 62,582 359,505
Program participant fees 196,371 254,013
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1,013,593 1,290,586
Operating expenses:
Interest on affiliated loan agreements 56,482 41,088
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Income before income taxes 957,111 1,249,498
Income tax expense 413,243 477,855
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Net income $ 543,868 $ 771,643
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HAMPSHIRE FUNDING, INC.
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
NINE MONTHS ENDING SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
ADDITIONAL COMPREHENSIVE TOTAL
COMMON PAID-IN RETAINED INCOME STOCKHOLDER'S
STOCK CAPITAL EARNINGS (LOSS) EQUITY
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<S> <C> <C> <C> <C> <C>
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)
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Balance at September 30, 1999 $ 50,000 $ 789,811 $ 3,738,973 $ (623,469) $ 3,955,315
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Balance at December 31, 1999 50,000 789,811 3,690,374 (258,860) 4,271,325
Comprehensive income
Net income 543,868 543,868
Unrealized gain on securities
available for sale, net of tax
of $160,821 260,292 260,292
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Balance at September 30, 2000 $ 50,000 $ 789,811 $ 4,234,242 $ 1,432 $ 5,075,485
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HAMPSHIRE FUNDING, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDING SEPTEMBER 30,
2000 1999
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<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 543,868 $ 771,643
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Gain on sale (62,582) (359,505)
Net change in other assets and liabilities 265,563 (196,183)
Change in due to affiliates 288,841 257,227
Decrease in deferred asset 43,804 43,804
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Net cash used by operating activities 1,079,494 516,986
FINANCING ACTIVITIES
Proceeds from sale of collateral notes receivable 5,029,716 6,148,615
Loans originated (5,294,438) (6,472,226)
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Net cash used (provided) by financing activities (264,722) (323,611)
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Increase in cash and cash equivalents 814,772 193,375
Cash and cash equivalents at beginning of year 1,801,081 1,284,375
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Cash and cash equivalents at end of period $ 2,615,853 $ 1,477,750
==================================
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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 13, 2000
John A. Weston
Treasurer, Principal Financial and Accounting Officer
