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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 March 31, 2004
/ / 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
-----------------------------------------------------
(Address of principal executive offices) (Zip Code)
(603) 226-5000
--------------
(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 April 1, 2004: 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
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
Condensed Statements of Financial Condition - March 31, 2004 and December 31, 2003 3
Condensed Statements of Income - Three-months ended March 31, 2004 and 2003 4
Condensed Statements of Stockholder's equity - Three-months ended March 31, 2004 5
and 2003
Condensed Statements of Cash Flows - Three-months ended March 31, 2004 and 2003 6
Notes to condensed financial statements - March 31, 2004 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
MARCH 31, DECEMBER 31,
2004 2003
(UNAUDITED) (NOTE A)
-----------------------------
ASSETS
Cash and cash equivalents $ 1,348,892 $ 1,010,347
Interests retained from loan sales, at fair value 11,602,545 11,711,462
Servicing asset (fair value approximates carrying value) 448,014 418,173
Other 69,025 21,916
-----------------------------
Total assets $ 13,468,476 $ 13,161,898
=============================
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Due to parent $ 1,905,434 $ 2,154,020
Due to affiliates 1,958,327 1,783,837
Accounts payable 443,826 224,875
Accrued expenses and other liabilities 292,483 53,871
-----------------------------
Total liabilities 4,600,070 4,216,603
-----------------------------
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 7,044,362 6,818,516
Accumulated other comprehensive income 984,233 1,286,968
-----------------------------
Total stockholder's equity 8,868,406 8,945,295
-----------------------------
Total liabilities and stockholder's equity $ 13,468,476 $ 13,161,898
=============================
SEE ACCOMPANYING NOTES.
3
HAMPSHIRE FUNDING, INC.
CONDENSED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED MARCH 31,
2004 2003
-----------------------------
Revenues:
Loan sales and servicing $ 336,824 $ 325,307
Interest 18,599 25,040
Program participant fees 15,651 22,430
-----------------------------
371,074 372,777
Operating expenses:
Interest on affiliate borrowings 5,744 3,251
-----------------------------
Income before income taxes 365,330 369,526
Income tax expense 139,484 147,859
-----------------------------
Net income $ 225,846 $ 221,667
=============================
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, 2003 $ 50,000 $ 789,811 $ 6,818,516 $ 1,286,968 $ 8,945,295
Net income 225,846 225,846
Change in unrealized loss on
securities available for
sale, net of tax of $163,011 (302,735) (302,735)
------------ ------------- ------------
Total comprehensive income 225,846 (302,735) (76,889)
------------ ------------ ------------ ------------- ------------
Balance at March 31, 2004 $ 50,000 $ 789,811 $ 7,044,362 $ 984,233 $ 8,868,406
============ ============ ============ ============= ============
Balance at December 31, 2002 $ 50,000 $ 789,811 $ 5,909,333 $ 1,158,076 $ 7,907,220
Net income 221,667 221,667
Change in unrealized gain on
securities available for
sale, net of tax of $16,940 31,460 31,460
------------ ------------- ------------
Total comprehensive income 221,667 31,460 253,127
------------ ------------ ------------ ------------- ------------
Balance at March 31, 2003 $ 50,000 $ 789,811 $ 6,131,000 $ 1,189,536 $ 8,160,347
============ ============ ============ ============= ============
SEE ACCOMPANYING NOTES.
5
HAMPSHIRE FUNDING, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
THREE MONTHS ENDED MARCH 31,
2004 2003
-----------------------------
CASH AND CASH EQUIVALENTS PROVIDED BY OPERATING ACTIVITIES $ 609,322 $ 324,992
FINANCING ACTIVITIES
Proceeds from sale of collateral notes receivable 421,621 483,284
Loans originated (443,812) (508,720)
(Repayment of) proceeds from affiliated loan agreements (248,586) 40,597
-----------------------------
Net cash (used) provided by financing activities (270,777) 15,161
-----------------------------
Increase in cash and cash equivalents 338,545 340,153
Cash and cash equivalents at beginning of period 1,010,347 1,803,512
-----------------------------
Cash and cash equivalents at end of period $ 1,348,892 $ 2,143,665
=============================
SEE ACCOMPANYING NOTES.
6
HAMPSHIRE FUNDING, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2004
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-month period ended March 31, 2004 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2004.
The balance sheet at December 31, 2003 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, 2003.
7
PART I - FINANCIAL INFORMATION
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 March 31, 2004. 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 March 31, 2004, the Company had sold aggregate loans of $17,896,582 and
has retained a subordinated interest and servicing rights in the assets
transferred aggregating $12,050,559 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 $12,129,635 at December
31, 2003.
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 $34,878 and $76,960 in service fees for the three-months ended
March 31, 2004 and 2003, 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 $75,473 and $108,803 during the three-months ended March
31, 2004 and 2003, 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
$784,598 for the three-months ended March 31, 2004 and $1,513,527 for the same
period in 2003, which were paid to PREFCO (one month in arrears) to satisfy
principal and variable interest obligation due. The Company originated new loans
of $443,812 and $508,721 for the three-months ended March 31, 2004 and 2003,
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 March 31, 2004 the Company had borrowed
$1,905,434 compared to $2,154,020 at December 31, 2003.
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 2004 and 2003 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 December 31, 2003, the Company had
decreased its estimate of early terminations from 35% to 30% to better reflect
the Company's actual experience.
RESULTS OF OPERATIONS
The Company concluded the three-months ended March 31, 2004 with net income of
$225,846, as compared to net income of $221,667 for the same period in 2003.
9
Total revenues for the three-months ended March 31, 2004 were $371,074, versus
$372,777 for the same period in 2003. The Company's revenues are derived from
program fees; income on its retained interest in the loans sold to investors,
and realized gains or losses. Although the Company's retained interest and
income on its retained interest has grown over the past several years, this
increase has been partially offset by realized losses in connection with the
sale of loans and a decrease in program fees as the number of programs decline.
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 $5,744 for the three-months ended March 31, 2004, and
$3,251 for the three-months ended March 31, 2003. The average interest rates of
1.02% and 1.28% were paid on average outstanding loans due to affiliates of
$2,220,342 and $1,628,425 for the three-months ended March 31, 2004 and 2003,
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 March 31, 2004 and 2003 the number of Programs
administered by the Company were 819 and 1,257, 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 March 31, 2004.
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.
/s/ John A. Weston
------------------
John A. Weston
TREASURER
May 5, 2004
11