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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, 2003
- --- 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.
(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)
(603) 226-5000
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Registrant's telephone number, including area code
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 July 1, 2003: 50,000 shares, all of which are owned by
Jefferson-Pilot Corporation.
DOCUMENTS INCORPORATED BY REFERENCE
The exhibit index appears on page 11
INDEX
HAMPSHIRE FUNDING, INC.
PAGE
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
Condensed Statements of Financial Condition - June 30, 2003 and December 31, 2002 3
Condensed Statements of Income - Three-months ended June 30, 2003 and 2002 4
Six-months ended June 30, 2003 and 2002
Condensed Statements of Stockholder's equity - Six-months ended June 30, 2003 and 5
2002
Condensed Statements of Cash Flows - Six-months ended June 30, 2003 and 2002 6
Notes to condensed financial statements - June 30, 2003 7
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8
ITEM 3. Quantitative and Qualitative Disclosure of Market Risk 10
ITEM 4. Controls and Procedures 10
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 11
ITEM 2. Changes in Securities and Use of Proceeds 11
ITEM 3. Defaults upon Senior Securities 11
ITEM 4. Submission of Matters to a Vote of Security Holders 11
ITEM 5. Other Information 11
ITEM 6. Exhibits and Reports on Form 8-K 11-14
SIGNATURE 11
2
HAMPSHIRE FUNDING, INC.
CONDENSED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, DECEMBER 31,
2003 2002
(UNAUDITED) (NOTE A)
-------------- --------------
ASSETS
Cash and cash equivalents $ 1,437,010 $ 1,803,512
Interests retained from loan sales, at fair value 10,914,703 10,157,502
Servicing asset (fair value of approximates carrying value) 351,378 307,530
Other 54,997 112,016
-------------- --------------
Total assets $ 12,758,088 $ 12,380,560
============== ==============
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Due to affiliates $ 1,692,982 $ 1,713,323
Due to parent 1,871,775 1,699,098
Accounts payable 505,881 1,000,260
Accrued expenses and other liabilities 313,210 60,659
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Total liabilities 4,383,848 4,473,340
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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 6,319,087 5,909,333
Accumulated other comprehensive income 1,215,342 1,158,076
-------------- --------------
Total stockholder's equity 8,374,240 7,907,220
-------------- --------------
Total liabilities and stockholder's equity $ 12,758,088 $ 12,380,560
============== ==============
SEE ACCOMPANYING NOTES.
3
HAMPSHIRE FUNDING, INC.
CONDENSED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2003 2002 2003 2002
-------------- -------------- -------------- --------------
Revenues:
Loan sales and servicing $ 279,550 $ 274,738 $ 604,857 $ 518,363
Interest 26,701 42,057 51,741 86,818
Program participant fees 19,262 28,952 41,692 65,964
-------------- -------------- -------------- --------------
325,513 345,747 698,290 671,145
Operating expenses:
Interest on affiliate borrowings 7,648 3,740 10,899 6,757
-------------- -------------- -------------- --------------
Income before income taxes 317,865 342,007 687,391 664,388
Income tax expense 129,778 111,330 277,637 259,457
-------------- -------------- -------------- --------------
Net income $ 188,087 $ 230,677 $ 409,754 $ 404,931
============== ============== ============== ==============
SEE ACCOMPANYING NOTES.
4
HAMPSHIRE FUNDING, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
(Unaudited)
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE
STOCK CAPITAL EARNINGS INCOME TOTAL
-------------- -------------- -------------- -------------- --------------
Balance at December 31, 2002 $ 50,000 $ 789,811 $ 5,909,333 $ 1,158,076 $ 7,907,220
Net income 409,754 409,754
Change in unrealized gain on
securities available for
sale, net of tax of $30,835 57,266 57,266
-------------- -------------- --------------
Total comprehensive income 409,754 57,266 467,020
-------------- -------------- -------------- -------------- --------------
Balance at June 30, 2003 $ 50,000 $ 789,811 $ 6,319,087 $ 1,215,342 $ 8,374,240
============== ============== ============== ============== ==============
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
-------------- -------------- --------------
Total 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
============== ============== ============== ============== ==============
SEE ACCOMPANYING NOTES.
5
HAMPSHIRE FUNDING, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED JUNE 30,
2003 2002
-------------- --------------
CASH AND CASH EQUIVALENTS PROVIDED BY OPERATIONS $ (491,929) $ (66,714)
FINANCING ACTIVITIES
Proceeds from sale of collateral notes receivable 940,362 1,852,190
Loans originated (987,612) (1,949,674)
Proceeds from affiliated loan agreements, net 172,677 309,124
-------------- --------------
Net cash used in financing activities 125,427 211,640
-------------- --------------
Increase in cash and cash equivalents (366,502) 144,926
Cash and cash equivalents at beginning of period 1,803,512 1,719,904
-------------- --------------
Cash and cash equivalents at end of period $ 1,437,010 $ 1,864,830
============== ==============
SEE ACCOMPANYING NOTES.
6
HAMPSHIRE FUNDING, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2003
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,
2003 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2003.
The balance sheet at December 31, 2002 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by accounting principles generally accepted in the United
States 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, 2002.
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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 was 7.00% on June 30, 2003. 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.
CRITICAL ACCOUNTING POLICIES
The financial statements are prepared in accordance with accounting principles
generally accepted in the United States. The majority of assets and liabilities
are financial in nature and the valuations of these assets and liabilities are
critical to the financial position and results of operations. However, certain
accounting policies are particularly important to the portrayal of the Company's
financial position and results of operations, and require the Company's
management to apply significant judgment; as a result are subject to an inherent
degree of uncertainty. The fair value of retained interest on loan sales
includes assumptions related to termination and discount rates. These
assumptions involve a high degree of judgment by management and are subject to
fluctuations based upon current market and economic conditions. On an on-going
basis, management evaluates estimates and judgments based upon historical
experience, which forms the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
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 periodic purchases of the Company's collateral loans
receivable by PREFCO or other investors (for which the Bank serves as agent). On
July 23, 2003 the Agreement was amended to extend the termination date to July
21, 2004. 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).
As of June 30, 2003, the Company had sold aggregate loans of $22,398,573 and has
retained a subordinated interest and servicing rights in the assets transferred
aggregating $11,266,081 at fair value. 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 $10,465,032 at December
31, 2002.
8
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 $140,882 and $295,565 in service fees for the six-months ended
June 30, 2003 and 2002, respectively.
Employee services and office facilities are provided by JP Life under a Service
Agreement with the Company. The Company pays JP Life a monthly fee (in arrears)
for services 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 its duties. The Company paid JP Life
servicing expenses of $232,557 and $206,916 during the six-months ended June 30,
2003 and 2002, respectively.
The Company capitalizes the present value of expected service fee income in
excess of the related costs to service the outstanding receivables.
As servicing agent for the loans sold, the Company collected loan prepayments of
$2,726,946 for the six-months ended June 30, 2003 and $3,058,346 for the same
period in 2002, which were paid to PREFCO (one month in arrears) to satisfy
principal and variable interest obligation due. The Company originated new loans
of $987,612 and $1,949,674 for the six-months ended June 30, 2003 and 2002,
respectively, which were sold to PREFCO.
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, 2003 the Company had borrowed
$1,871,775 compared to $1,699,098 at December 31, 2002.
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.
Working capital in the first quarter of 2003 and 2002 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, 2003, the Company has
increased its estimate of early terminations from 30% to 35% to better reflect
the Company's actual experience.
RESULTS OF OPERATIONS
The Company concluded the three- and six-months ended June 30, 2003 with net
income of $188,087 and $409,754, as compared to net income of $230,677 and
$404,931 for the same period in 2002.
Total revenues for the three- and six-months ended June 30, 2003 were $325,513
and $698,290, versus $345,747 and $671,145 for the same period in 2002. 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 past year, this increase has been largely 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
9
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 $7,648 and $10,899 for the three- and six-months ended June
30, 2003, and $3,740 and $6,757 for the three- and six-months ended June 30,
2002. The average interest rates of 1.23% and 1.77% were paid on average
outstanding loans due to affiliates of $1,762,153 and $759,717 for the
six-months ended June 30, 2003 and 2002, 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, 2003 and 2002 the number of Programs
administered by the Company were 1,120 and 1,924, 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.
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.
ITEM 4 - CONTROLS AND PROCEDURES
Within the 90 days prior to the filing date of this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO),
of the effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Securities Exchange Act of 1934 Rule 13a-15. Based upon
that evaluation, our management, including our CEO and CFO, concluded that our
disclosure controls and procedures were effective. Disclosure controls and
procedures are controls and procedures that are designed to ensure that
information required to be disclosed in our reports filed or submitted under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms.
There have been no significant changes in our internal controls or in other
factors that could significantly affect our internal controls subsequent to the
date we carried out this evaluation.
10
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 - Exhibit 31: Chief Financial Officer Certifications Under
Section 302 of Sarbanes-Oxley Act of 2002
Exhibit 32: Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
No Reports on Form 8-K were filed by the Company during the quarter
ended June 30, 2003.
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: July 31, 2003
John A. Weston
Treasurer
11