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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION [PRIVATE]
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 SEPTEMBER 30, 2001
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
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 September 30, 2001: 50,000 shares, all of which are owned by
Jefferson-Pilot Corporation.
DOCUMENTS INCORPORATED BY REFERENCE
The exhibit index appears on page 10
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INDEX
HAMPSHIRE FUNDING, INC.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
Condensed Statements of Financial Condition - September 30,
2001 and December 31, 2000
Condensed Statements of Income - Three months ended
September 30, 2001 and 2000; Nine months ended September 30,
2001 and 2000
Condensed Statements of Stockholder's equity - Nine months
ended September 30, 2001 and 2000
Condensed Statements of Cash Flows - Nine months ended
September 30, 2001 and 2000
Notes to condensed financial statements - September 30, 2001
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
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HAMPSHIRE FUNDING, INC.
CONDENSED STATEMENTS OF FINANCIAL CONDITION
<Table>
<Caption>
SEPTEMBER 30 DECEMBER 31
2001 2000
(Unaudited) (Note A)
---------------------------------
ASSETS
Cash and cash equivalents $2,393,260 $1,737,684
Interests retained from loan sales, at fair value 7,623,901 6,269,671
Servicing asset (fair value of $262,458 at September 30, 2001 and
$434,827 at December 31, 2000) 179,039 231,154
Due from parent 388,700
Other 108,466 146,776
---------------------------------
Total assets $10,693,366 $8,385,285
=================================
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Due to affiliates $1,880,775 $1,809,680
Due to parent 438,261
Accounts payable 2,024,980 821,674
Accrued expenses and other liabilities 678,404 138,711
---------------------------------
Total liabilities 4,584,159 3,208,326
---------------------------------
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 4,979,271 4,405,257
Accumulated other comprehensive income (loss) 290,125 (68,109)
---------------------------------
Total stockholder's equity 6,109,207 5,176,959
---------------------------------
Total liabilities and stockholder's equity $10,693,366 $8,385,285
=================================
</Table>
SEE ACCOMPANYING NOTES.
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HAMPSHIRE FUNDING, INC.
CONDENSED STATEMENTS OF INCOME
(Unaudited)
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
---------------------------- ----------------------------
Revenues:
Loan sales and servicing $208,326 $170,078 $649,412 $529,977
Interest 72,100 97,576 240,114 287,246
Program participant fees 42,581 63,328 142,511 196,370
---------------------------- ----------------------------
323,007 330,982 1,032,037 1,013,593
Operating expenses:
Interest on affiliate borrowings 4,932 19,976 16,107 56,482
---------------------------- ----------------------------
Income before income taxes 318,075 311,006 1,015,930 957,111
Income tax expense 147,247 135,280 441,916 413,242
---------------------------- ----------------------------
Net income $170,828 $175,726 $574,014 $543,869
============================ ============================
</Table>
SEE ACCOMPANYING NOTES.
4
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HAMPSHIRE FUNDING, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
(Unaudited)
<Table>
<Caption>
ACCUMULATED
OTHER
ADDITIONAL COMPREHENSIVE
COMMON PAID-IN RETAINED INCOME
STOCK CAPITAL EARNINGS (LOSS) TOTAL
--------------- --------------- ---------------- ------------------- ------------------
Balance at December 31, 2000 $ 50,000 $ 789,811 $ 4,405,257 $ (68,109) $ 5,176,959
Net income 574,014 574,014
Change in unrealized loss on
securities available for
sale, net of tax of $192,895 358,234 358,234
---------------- ------------------- ------------------
Comprehensive income 574,014 358,234 932,248
--------------- --------------- ---------------- ------------------- ------------------
Balance at September 30, 2001 $ 50,000 $ 789,811 $ 4,979,271 $ 290,125 $ 6,109,207
=============== =============== ================ =================== ==================
Balance at December 31, 1999 $ 50,000 $ 789,811 $ 3,690,374 $ (258,860) $ 4,271,325
Net income 543,868 543,868
Change in unrealized loss on
securities available for
sale, net of tax of $160,821 260,292 260,292
---------------- ------------------- ------------------
Comprehensive income 543,868 260,292 804,160
--------------- --------------- ---------------- ------------------- ------------------
Balance at September 30, 2000 $ 50,000 $ 789,811 $ 4,234,242 $ 1,432 $ 5,075,485
=============== =============== ================ =================== ==================
</Table>
SEE ACCOMPANYING NOTES.
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HAMPSHIRE FUNDING, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<Table>
<Caption>
NINE MONTHS ENDED SEPTEMBER 30,
2001 2000
---------------------------------------
CASH AND CASH EQUIVALENTS FROM OPERATIONS $1,653,315 $1,079,494
FINANCING ACTIVITIES
Proceeds from sale of collateral notes receivable 3,587,530 5,029,716
Loans originated (3,758,308) (5,294,438)
Repayment of proceeds from affiliated loan agreements, net (826,961)
---------------------------------------
Net cash used in financing activities (997,739) (264,722)
---------------------------------------
Increase in cash and cash equivalents 655,576 814,772
Cash and cash equivalents at beginning of period 1,737,684 1,801,081
---------------------------------------
Cash and cash equivalents at end of period $2,393,260 $2,615,853
=======================================
</Table>
SEE ACCOMPANYING NOTES.
6
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HAMPSHIRE FUNDING, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
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 nine-month periods ended
September 30, 2001 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2001.
The balance sheet at December 31, 2000 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, 2000.
NOTE B. IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, as
amended, which is required to be adopted in years beginning after June 15, 2000.
Because of the Company's minimal use of derivatives, the adoption of the new
Statement on January 1, 2001 did not have a significant effect on earnings or
the financial position of the Company.
In September 2000, the FASB issued Statement No. 140, ACCOUNTING FOR TRANSFERS
AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES, that
replace, in its entirety, FASB Statement No. 125. Although Statement 140 has
changed many of the rules regarding securitizations, it continues to require an
entity to recognize the financial and servicing assets it controls and the
liabilities it has incurred and to derecognize financial assets when control has
been surrendered in accordance with the criteria provided in the Statement. The
application of the new rules on April 1, 2001 did not have a material impact on
the Company's financial statements.
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PART I - FINANCIAL INFORMATION (continued)
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company concluded the three- and nine-months ended September 30, 2001 with
net income of $170,828 and $574,014, respectively, as compared to net income of
$175,726 and $543,869 for the same periods in 2000.
Total revenues for the three- and nine-months ended September 30, 2001 were
$323,007 and $1,032,037, respectively, versus $330,982 and $1,013,593 for the
three- and nine-month periods ended September 30, 2000, respectively. The
Company's revenues are derived from sales and servicing of loans, interest and
program fees. The annual interest rate charged to borrowers was reduced from
9.5% to 9%, effective September 17, 2001. Although the Company's retained
interest and income on its retained interest has grown over the last three
years, this increase has been partially offset by a decline in interest income
from cash and cash equivalents and program fees. Program fees continue to
decline as the number of programs serviced by the Company decline. Gains (or
losses) for each sale of receivables are determined by allocated 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 $4,932 and $16,107 for the three- and nine months ended
September 30, 2001 and $19,976 and $56,482 for the three- and nine months ended
September 30, 2000. The average interest rates of 4.58% and 6.18% were paid on
average outstanding loans due to affiliates of $480,952 and $1,200,000 at
September 30, 2001 and 2000, 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. 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 $193,787 and $624,543 for the three- and
nine-month period ended September 30, 2001, respectively, and $237,369 and
$725,526 for the three- and nine-months ended September 30, 2000, respectively.
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 September 30, 2001 and December 31, 2000, the number
of Programs administered by the Company were 2,546 and 3,199, 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.
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 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.
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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 First National Bank of Chicago (the Bank), now Bank
One.
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 25, 2001 the Agreement was amended to extend the
termination date to July 24, 2002 and to decrease PREFCO's commitment from
$50,000,000 to an amount not to exceed the aggregate capital of Receivable
interests. 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, 2001, the Company had sold aggregate loans of $43,568,921
and has retained a subordinated interest and servicing rights in the assets
transferred aggregating $7,802,940. 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 $6,500,825 at December
31, 2000.
As servicing agent for the loans sold, the Company collected loan repayments of
$8,509,597 for the nine months ended September 30, 2001 and $7,529,906 for the
same period in 2000, which were paid to PREFCO (one month in arrears) to satisfy
principal and variable interest obligation due. The Company originated new loans
of $3,758,308 and $5,294,438 for the nine months ended September 30, 2001 and
2000, 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 September 30, 2001 the company had loans
extended of $388,700 compared to loans borrowed of $438,261 at December 31,
2000.
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 2001 and 2000 was provided by servicing
fees from collateral loans sold, loans from Jefferson-Pilot Corporation and
interest earned on investments.
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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. Management continually evaluates the appropriateness of these
assumptions in the light of current economic conditions and actual termination
rates.
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 September 30, 2001.
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 12, 2001
John A. Weston
Treasurer, Principal Financial
and Accounting Officer
10