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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, 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.
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(Exact name of registrant as specified in its charter)
NEW HAMPSHIRE 02-0277842
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(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
Not Applicable
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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 / /
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Indicate the number of shares outstanding of each of the Registrant's classes of
Common Stock as of March 31, 2002: 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 - March 31, 2002 and
December 31, 2001
Condensed Statements of Income - Three months ended March 31,
2002 and 2001
Condensed Statements of Stockholder's equity - Three months ended
March 31, 2002 and 2001
Condensed Statements of Cash Flows - Three months ended March 31,
2002 and 2001
Notes to condensed financial statements - March 31, 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
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HAMPSHIRE FUNDING, INC.
CONDENSED STATEMENTS OF FINANCIAL CONDITION
<Table>
<Caption>
MARCH 31, DECEMBER 31,
2002 2001
(UNAUDITED) (NOTE A)
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ASSETS
Cash and cash equivalents $ 2,314,679 $ 1,719,904
Interests retained from loan sales, at fair value 8,688,950 8,114,505
Servicing asset (fair value of $220,306 at March 31, 2002 and $275,558
at December 31, 2001) 302,830 212,879
Other 141,614 322,306
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Total assets $ 11,448,073 $10,369,594
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LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Due to affiliates $ 1,841,684 $ 1,642,394
Due to parent 1,060,282 845,571
Accounts payable 1,307,859 861,212
Accrued expenses and other liabilities 256,270 510,046
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Total liabilities 4,466,095 3,859,223
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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 5,334,381 5,160,127
Accumulated other comprehensive income 807,786 510,433
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Total stockholder's equity 6,981,978 6,510,371
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Total liabilities and stockholder's equity $ 11,448,073 $ 10,369,594
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</Table>
SEE ACCOMPANYING NOTES.
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HAMPSHIRE FUNDING, INC.
CONDENSED STATEMENTS OF INCOME
(Unaudited)
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THREE MONTHS ENDED MARCH 31,
2002 2001
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Revenues:
Loan sales and servicing $ 243,625 $ 206,003
Interest 44,761 84,463
Program participant fees 37,012 54,085
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325,398 344,551
Operating expenses:
Interest on affiliate borrowings 3,017 3,282
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Income before income taxes 322,381 341,269
Income tax expense 148,127 138,874
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Net income $ 174,254 $ 202,395
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SEE ACCOMPANYING NOTES.
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HAMPSHIRE FUNDING, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
(Unaudited)
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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 174,254 174,254
Change in unrealized gain on
securities available for sale,
net of tax of $160,113 297,353 297,353
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Comprehensive income 174,254 297,353 471,607
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Balance at March 31, 2002 $ 50,000 $ 789,811 $5,334,381 $807,786 $6,981,978
======== ========= ========== ======== ==========
Balance at December 31, 2000 $ 50,000 $ 789,811 $4,405,257 $(68,109) $5,176,959
Net income 202,395 202,395
Change in unrealized loss on
securities available for sale,
net of tax of $43,350 80,506 80,506
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Comprehensive income 202,395 80,506 282,901
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Balance at March 31, 2001 $ 50,000 $ 789,811 $4,607,652 $ 12,397 $5,459,860
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</Table>
SEE ACCOMPANYING NOTES.
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HAMPSHIRE FUNDING, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
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<Caption>
THREE MONTHS ENDED MARCH 31,
2002 2001
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CASH AND CASH EQUIVALENTS FROM OPERATIONS $ 434,329 $ 670,733
FINANCING ACTIVITIES
Proceeds from sale of collateral notes receivable 1,031,031 1,289,300
Loans originated (1,085,296) (1,357,158)
Repayment of proceeds from affiliated loan agreements, net 214,711 317,790
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Net cash provided by financing activities 160,446 249,932
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Increase in cash and cash equivalents 594,775 920,665
Cash and cash equivalents at beginning of period 1,719,904 1,737,684
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Cash and cash equivalents at end of period $ 2,314,679 $ 2,658,349
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</Table>
SEE ACCOMPANYING NOTES.
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HAMPSHIRE FUNDING, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 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-month period ended March 31, 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.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 25, 2001 the Agreement was amended to extend the
termination date to July 24, 2002 and decrease PREFCO's commitment from
$50,000,000 to $39,715,230. 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.
As of March 31, 2002, the Company had sold aggregate loans of $37,689,316 and
has retained a subordinated interest and servicing rights in the assets
transferred aggregating $8,991,780. 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 $157,618 and $222,585 in service fees for the period ended
March 31, 2002 and 2001, respectively.
As servicing agent for the loans sold, the Company collected loan prepayments of
$1,351,110 for the three months ended March 31, 2002 and $2,905,709 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 $1,085,296 and $1,357,158 for the three months ended March 31, 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 March 31, 2002 the company had borrowed
$1,060,282 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.
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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 first 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 months ended March 31, 2002 with net income of
$174,254 as compared to net income of $202,395 for the same period in 2001.
Total revenues for the three months ended March 31, 2002 were $325,398 versus
$344,551 for the same period 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 $3,017 and $3,282 for the three months ended March 31, 2002
and 2001, respectively. The average interest rates of 1.79% and 5.66% were paid
on average outstanding loans due to affiliates of $675,302 and $214,100 for the
three months ended March 31, 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 March 31, 2002 and 2001 the number of Programs
administered by the Company were 2,113 and 2,996, 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.
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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 March 31, 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: MAY 14, 2002
John A. Weston
Treasurer, Principal Financial and Accounting Officer
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