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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, 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 July 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)
Statements of Financial Condition - June 30, 2004 and December 31, 2003 3
Statements of Income - Three-months ended June 30, 2004 and 2003 4
Six-months ended June 30, 2004 and 2003
Statements of Stockholder's equity - Six-months ended June 30, 2004 and 2003 5
Condensed Statements of Cash Flows - Six-months ended June 30, 2004 and 2003 6
Notes to unaudited condensed financial statements - June 30, 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.
STATEMENTS OF FINANCIAL CONDITION
JUNE 30, DECEMBER 31,
2004 2003
(Unaudited) (Note A)
-----------------------------
ASSETS
Cash and cash equivalents $ 1,852,139 $ 1,010,347
Interests retained from loan sales, at fair value 11,938,701 11,711,462
Servicing asset (fair value approximates carrying value) 484,432 418,173
Other 87,500 21,916
-----------------------------
Total assets $ 14,362,772 $ 13,161,898
=============================
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Due to parent $ 2,415,616 $ 2,154,020
Due to affiliates 2,060,470 1,783,837
Accounts payable 763,252 224,875
Accrued expenses and other liabilities 67,375 53,871
-----------------------------
Total liabilities 5,306,713 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 7,276,538 6,818,516
Accumulated other comprehensive income 939,710 1,286,968
-----------------------------
Total stockholder's equity 9,056,059 8,945,295
-----------------------------
Total liabilities and stockholder's equity $ 14,362,772 $ 13,161,898
=============================
SEE ACCOMPANYING NOTES.
3
HAMPSHIRE FUNDING, INC.
STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2004 2003 2004 2003
--------------------- ---------------------
Revenues:
Loan sales and servicing $ 365,226 $ 279,550 $ 702,050 $ 604,857
Interest 17,606 26,701 36,205 51,741
Program participant fees 15,168 19,262 30,819 41,692
--------------------- ---------------------
398,000 325,513 769,074 698,290
Operating expenses:
Interest on affiliate
borrowings 5,642 7,648 11,386 10,899
--------------------- ---------------------
Income before income taxes 392,358 317,865 757,688 687,391
Income tax expense 160,182 129,778 299,666 277,637
--------------------- ---------------------
Net income $ 232,176 $ 188,087 $ 458,022 $ 409,754
===================== =====================
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 458,022 458,022
Change in unrealized loss on
securities available for
sale, net of tax of $186,985 (347,258) (347,258)
------------- ------------- -------------
Total comprehensive income 458,022 (347,258) 110,764
---------- ---------- ------------- ------------- -------------
Balance at June 30, 2004 $ 50,000 $ 789,811 $ 7,276,538 $ 939,710 $ 9,056,059
========== ========== ============= ============= =============
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
========== ========== ============= ============= =============
SEE ACCOMPANYING NOTES.
5
HAMPSHIRE FUNDING, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED JUNE 30,
2004 2003
-----------------------------
CASH AND CASH EQUIVALENTS PROVIDED BY OPERATING ACTIVITIES $ 620,518 $ (491,929)
FINANCING ACTIVITIES
Proceeds from sale of collateral notes receivable 766,118 940,362
Loans originated (806,440) (987,612)
Proceeds from affiliated loan agreements 261,596 172,677
-----------------------------
Net cash provided by financing activities 221,274 125,427
-----------------------------
Increase (decrease) in cash and cash equivalents 841,792 (366,502)
Cash and cash equivalents at beginning of period 1,010,347 1,803,512
-----------------------------
Cash and cash equivalents at end of period $ 1,852,139 $ 1,437,010
=============================
SEE ACCOMPANYING NOTES.
6
HAMPSHIRE FUNDING, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 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- and six-month periods ended June 30,
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.
NOTE B. TERMINATION OF FINANCING AGREEMENT
On December 31, 1997, the Hampshire Funding, Inc. (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"). This Agreement provided for an
initial purchase of the Company's collateral loans receivable by PREFCO in the
amount of $52,994,767 and for ongoing periodic purchases. The Agreement renewed
annually and was scheduled to renew again on July 21, 2004.
Over the life of the Agreement, cash flows related to the repayment of loans
were used to satisfy the collateral loan receivables due to PREFCO. Since the
collateral loan receivable due to PREFCO had declined to $3,686,674 as of June
30, 2004, the Company decided not to renew the Receivables Purchase Agreement.
On July 9, 2004, the Company borrowed funds through its existing inter-company
loan agreement with its parent, Jefferson-Pilot Corporation, paid PREFCO its
outstanding collateral loan receivable balance, and terminated its Agreement.
The Company will continue to borrow funds from Jefferson-Pilot Corporation as
needed for the purpose of funding future premium loans to participants until
their stated maturity or termination date.
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 was 7.00% on June 30, 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 U.S. generally accepted
accounting principles. 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 Hampshire Funding, Inc. (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"). This Agreement provided for an
initial purchase of the Company's collateral loans receivable by PREFCO in the
amount of $52,994,767 and for ongoing periodic purchases. The Agreement renewed
annually and was scheduled to renew again on July 21, 2004.
Over the life of the Agreement, cash flows related to the repayment of loans
were used to satisfy the collateral loan receivables due to PREFCO. Since the
collateral loan receivable due to PREFCO had declined to $3,686,674 as of June
30, 2004, the Company decided not to renew the Receivables Purchase Agreement.
On July 9, 2004, the Company borrowed funds through its existing inter-company
loan agreement with its parent, Jefferson-Pilot Corporation, paid PREFCO its
outstanding collateral loan receivable balance, and terminated its Agreement.
The Company will continue to borrow funds from Jefferson-Pilot Corporation as
needed for the purpose of funding future premium loans to participants until
their stated maturity or termination date.
8
As of June 30, 2004, the Company had sold aggregate loans of $15,845,889 and has
retained a subordinated interest and servicing rights in the assets transferred
aggregating $12,423,133 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.
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 $60,920 and $140,882 in service fees for the six-months ended
June 30, 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 $190,320 and $232,557 during the six-months ended June 30,
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
$2,454,285 for the six-months ended June 30, 2004 and $2,726,946 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 $806,440 and $987,612 for the six-months ended June 30, 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 June 30, 2004 the Company had borrowed
$2,415,616 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.
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 second 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- and six-months ended June 30, 2004 with net
income of $232,176 and $458,022, as compared to net income of $188,087 and
$409,754 for the same period in 2003.
9
Total revenues for the three- and six-months ended June 30, 2004 were $398,000
and $769,074, versus $325,513 and $698,290 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 $5,642 and $11,386 for the three- and six-months ended June
30, 2004, and $7,648 and $10,899 for the three- and six-months ended June 30,
2003. The average interest rates of 1.03% and 1.23% were paid on average
outstanding loans due to affiliates of $2,191,554 and $1,762,153 for the
six-months ended June 30, 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 June 30, 2004 and 2003 the number of Programs
administered by the Company were 703 and 1,120, respectively.
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, 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
August 5, 2004
11