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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934 For the quarterly period ended JUNE 30, 2002
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.
-----------------------
(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
---------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(603) 226-5000
--------------------------
Registrant's telephone number, including area code
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 June 30, 2002: 50,000 shares, all of which are owned by
Jefferson-Pilot Corporation.
DOCUMENTS INCORPORATED BY REFERENCE
The exhibit index appears on page 11
1
INDEX
HAMPSHIRE FUNDING, INC.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
Condensed Statements of Financial Condition - June 30, 2002
and December 31, 2001
Condensed Statements of Income - Three months ended June 30,
2002 and 2001; Six months ended June 30, 2002 and 2001
Condensed Statements of Stockholder's equity - Six months
ended June 30, 2002 and 2001
Condensed Statements of Cash Flows - Six months ended June
30, 2002 and 2001
Notes to condensed financial statements - June 30, 2002
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
ITEM 3. Quantitative and Qualitative Disclosure of Market Risk
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
ITEM 2. Changes in Securities and Use of Proceeds
ITEM 3. Defaults upon Senior Securities
ITEM 4. Submission of Matters to a Vote of Security Holders
ITEM 5. Other Information
ITEM 6. Exhibits and Reports on Form 8-K
SIGNATURES
2
HAMPSHIRE FUNDING, INC.
CONDENSED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, DECEMBER 31,
2002 2001
(UNAUDITED) (NOTE A)
--------------------------------
ASSETS
Cash and cash equivalents $ 1,864,830 $ 1,719,904
Interests retained from loan sales, at fair value 8,995,771 8,114,505
Servicing asset (fair value of $179,900 at June 30, 2002 and $275,558
at December 31, 2001) 286,817 212,879
Other 335,177 322,306
--------------------------------
Total assets $ 11,482,595 $10,369,594
================================
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Due to affiliates $ 1,761,373 $ 1,642,394
Due to parent 1,154,695 845,571
Accounts payable 1,032,717 861,212
Accrued expenses and other liabilities 331,056 510,046
--------------------------------
Total liabilities 4,279,841 3,859,223
--------------------------------
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 5,565,058 5,160,127
Accumulated other comprehensive income 797,885 510,433
--------------------------------
Total stockholder's equity 7,202,754 6,510,371
--------------------------------
Total liabilities and stockholder's equity $ 11,482,595 $ 10,369,594
================================
SEE ACCOMPANYING NOTES.
3
HAMPSHIRE FUNDING, INC.
CONDENSED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2002 2001 2002 2001
---------------------------- ----------------------------
Revenues:
Loan sales and servicing $ 274,738 $ 235,083 $ 518,363 $ 441,086
Interest 42,057 83,551 86,818 168,014
Program participant fees 28,952 45,845 65,964 99,930
---------------------------- ----------------------------
345,747 364,479 671,145 709,030
Operating expenses:
Interest on affiliate borrowings 3,740 7,893 6,757 11,175
---------------------------- ----------------------------
Income before income taxes 342,007 356,586 664,388 697,855
Income tax expense 111,330 155,795 259,457 294,669
---------------------------- ----------------------------
Net income $ 230,677 $ 200,791 $ 404,931 $ 403,186
============================ ============================
SEE ACCOMPANYING NOTES.
4
HAMPSHIRE FUNDING, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
(UNAUDITED)
ACCUMULATED
OTHER
ADDITIONAL COMPREHENSIVE
COMMON PAID-IN RETAINED INCOME
STOCK CAPITAL EARNINGS (LOSS) TOTAL
---------- ---------- ---------- -------------- ----------
Balance at December 31, 2001 $ 50,000 $ 789,811 $5,160,127 $ 510,433 $6,510,371
Net income 404,931 404,931
Change in unrealized gain on
securities available for
sale, net of tax of $154,783 287,452 287,452
---------- -------------- ----------
Comprehensive income 404,931 287,452 692,383
---------- ---------- ---------- -------------- ----------
Balance at June 30, 2002 $ 50,000 $ 789,811 $5,565,058 $ 797,885 $7,202,754
========== ========== ========== ============== ==========
Balance at December 31, 2000 $ 50,000 $ 789,811 $4,405,257 $ (68,109) $5,176,959
Net income 403,186 403,186
Change in unrealized loss on
securities available for
sale, net of tax of $153,913 285,838 285,838
---------- -------------- ----------
Comprehensive income 403,186 285,838 689,024
---------- ---------- ---------- -------------- ----------
Balance at June 30, 2001 $ 50,000 $ 789,811 $4,808,443 $ 217,729 $5,865,983
========== ========== ========== ============== ==========
SEE ACCOMPANYING NOTES.
5
HAMPSHIRE FUNDING, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED JUNE 30,
2002 2001
-----------------------------
CASH AND CASH EQUIVALENTS (USED) PROVIDED BY OPERATIONS $ (66,714) $ 47,304
FINANCING ACTIVITIES
Proceeds from sale of collateral notes receivable 1,852,190 2,508,043
Loans originated (1,949,674) (2,640,045)
Repayment of proceeds from affiliated loan agreements, net 309,124 (2,403)
-----------------------------
Net cash provided (used) by financing activities 211,640 (134,405)
-----------------------------
Increase (decrease) in cash and cash equivalents 144,926 (87,101)
Cash and cash equivalents at beginning of period 1,719,904 1,737,684
-----------------------------
Cash and cash equivalents at end of period $ 1,864,830 $ 1,650,583
=============================
SEE ACCOMPANYING NOTES.
6
HAMPSHIRE FUNDING, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2002
NOTE A. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three and six month periods ended June 30,
2002 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2002.
The balance sheet at December 31, 2001 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
For further information, refer to the financial statements and footnotes thereto
included in the Hampshire Funding, Inc. annual report on Form 10-K for the year
ended December 31, 2001.
7
PART I - FINANCIAL INFORMATION (continued)
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
COMPANY PROFILE
Hampshire Funding, Inc. (the "Company") administers investment programs
("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. The Program loan percentage rate charged
to Participants is currently 7.75%. 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 180%. 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.
LIQUIDITY AND CAPITAL RESOURCES
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 Bank One, formerly 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). On July 24, 2002 the Agreement was amended to extend the
termination date to July 23, 2003. On October 21, 2001 the Agreement was
amended, increasing the Purchase Fee Percentage paid by the Company from 0.225%
to 0.26%. Additionally, the Events of Default were amended, increasing the
number of consecutive business days that Under Collateralized Receivables may
exceed 1% and eliminating the restriction on the percentage of Collateral
Deficient Receivables. 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
(variable interest obligations).
When the Company sells loans, it retains interest-only strips, servicing rights,
and 5% of each loan sold, all of which are the retained interest in the
securitized receivables. Interest-only strips represent the Company's right to
interest in excess of the sum paid to PREFCO. As of June 30, 2002, the Company
had sold aggregate loans of $34,505,902 and has retained a subordinated interest
and servicing rights in the assets transferred aggregating $9,175,671. 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
$8,390,063 at December 31, 2001.
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 $295,565
8
and $430,756 in service fees for the period ended June 30, 2002 and 2001,
respectively.
As servicing agent for the loans sold, the Company collected loan prepayments of
$3,058,346 for the six-months ended June 30, 2002 and $5,167,032 for the same
period in 2001, which were paid to PREFCO (one month in arrears) to satisfy
principal and variable interest obligation due. The Company originated new loans
of $1,949,674 and $2,640,045 for the six-months ended June 30, 2002 and 2001,
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 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 June 30, 2002 the company had borrowed
$1,154,695 compared to $845,571 at December 31, 2001.
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 premium loans,
due to parent, due to JP Life for expense reimbursements and pay downs due to
PREFCO.
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 second quarter of 2002 and 2001 was provided by servicing
fees from collateral loans sold, loans from Jefferson-Pilot Corporation and
interest earned on investments.
The Company changed certain of its assumptions supporting the valuation of its
interests retained from loan sales. Effective January 1, 2002, the Company has
increased its estimate of early terminations from 26% to 30% to better reflect
the Company's actual experience. In 1999, the Company 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. Management
continually evaluates the appropriateness of these assumptions in the light of
current economic conditions and actual termination rates.
RESULTS OF OPERATIONS
The Company concluded the three- and six-months ended June 30, 2002 with net
income of $230,677 and $404,931, respectively, as compared to net income of
$200,791 and $403,186 for the same periods in 2001.
9
Total revenues for the three- and six-months ended June 30, 2002 were $345,747
and $671,145, respectively, versus $364,479 and $709,030 for the same periods in
2001. The Company's revenues are derived from program fees; 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
over the last four years, this increase has been partially 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.
Interest expense was $3,740 and $6,757 for the three- and six-months ended June
30, 2002, respectively, and $7,893 and $11,175 for the three- and six-months
ended June 30, 2001. The average interest rates of 1.77% and 5.04% were paid on
average outstanding loans due to affiliates of $759,717 and $457,381 for the
six-months ended June 30, 2002 and 2001, respectively.
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.
Program fees include placement, administrative and termination fees as well as
charges for special services. Program fees continue to decline as programs
terminate and mature. As of June 30, 2002 and 2001 the number of Programs
administered by the Company were 1,924 and 2,794, 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.
10
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
Not required because Hampshire Funding, Inc. qualifies as a small business
issuer under Regulation S-B.
PART II - OTHER INFORMATION
Item 1 - LEGAL PROCEEDINGS - None
Item 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS - None
Item 3 - DEFAULTS UPON SENIOR SECURITIES - Not Applicable
Item 4 - SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS - None
Item 5 - OTHER INFORMATION - None
Item 6 - EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits - None
(b) Reports on Form 8-K
No Reports on Form 8-K were filed by the Company during the
quarter ended June 30, 2002.
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: AUGUST 14, 2002
John A. Weston
Treasurer, Principal Financial and
Accounting Officer
11