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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 September 30, 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.
---------
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
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, 2002: 50,000 shares, all of which are owned by
Jefferson-Pilot Corporation.
DOCUMENTS INCORPORATED BY REFERENCE
The exhibit index appears on page 11
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INDEX
HAMPSHIRE FUNDING, INC.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
Condensed Statements of Financial Condition - September 30, 2002
and December 31, 2001
Condensed Statements of Income - Three months ended September 30,
2002 and 2001; Nine months ended September 30, 2002 and 2001
Condensed Statements of Stockholder's equity - Nine months ended
September 30, 2002 and 2001
Condensed Statements of Cash Flows - Nine months ended
September 30, 2002 and 2001
Notes to condensed financial statements - September 30, 2002
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
ITEM 3. Quantitative and Qualitative Disclosure of Market Risk
ITEM 4. Controls and Procedures
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
CHIEF EXECUTIVE OFFICER CERTIFICATIONS UNDER SECTION 302 OF SARBANES-OXLEY ACT
OF 2002
CHIEF FINANCIAL OFFICER CERTIFICATIONS UNDER SECTION 302 OF SARBANES-OXLEY ACT
OF 2002
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HAMPSHIRE FUNDING, INC.
CONDENSED STATEMENTS OF FINANCIAL CONDITION
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2002 2001
(Unaudited) (Note A)
-----------------------------------
ASSETS
Cash and cash equivalents $ 1,600,190 $ 1,719,904
Interests retained from loan sales, at fair value 9,246,505 8,114,505
Servicing asset, at fair value 282,938 212,879
Other 325,298 322,306
-----------------------------------
Total assets $ 11,454,931 $10,369,594
===================================
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Due to affiliates $ 1,924,923 $ 1,642,394
Due to parent 932,919 845,571
Accounts payable 1,000,087 861,212
Accrued expenses and other liabilities 273,144 510,046
-----------------------------------
Total liabilities 4,131,073 3,859,223
-----------------------------------
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 5,705,378 5,160,127
Accumulated other comprehensive income 778,669 510,433
-----------------------------------
Total stockholder's equity 7,323,858 6,510,371
-----------------------------------
Total liabilities and stockholder's equity $ 11,454,931 $ 10,369,594
===================================
</Table>
SEE ACCOMPANYING NOTES.
3
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HAMPSHIRE FUNDING, INC.
CONDENSED STATEMENTS OF INCOME
(Unaudited)
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
---------------------------- ----------------------------
Revenues:
Loan sales and servicing $ 188,841 $ 208,326 $ 707,204 $ 649,412
Interest 39,286 72,100 126,104 240,114
Program participant fees 27,540 42,581 93,504 142,511
---------------------------- ----------------------------
255,667 323,007 926,812 1,032,037
Operating expenses:
Interest on affiliate borrowings 2,790 4,932 9,547 16,107
---------------------------- ----------------------------
Income before income taxes 252,877 318,075 917,265 1,015,930
Income tax expense 112,557 147,247 372,014 441,916
---------------------------- ----------------------------
Net income $ 140,320 $ 170,828 $ 545,251 $ 574,014
============================ ============================
</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, 2001 $ 50,000 $ 789,811 $ 5,160,127 $ 510,433 $ 6,510,371
Net income 545,251 545,251
Change in unrealized gain on
securities available for
sale, net of tax of $144,436 268,236 268,236
---------------- ------------------- ----------------
Comprehensive income 545,251 268,236 813,487
--------------- --------------- ---------------- ------------------- ----------------
Balance at September 30, 2002 $ 50,000 $ 789,811 $ 5,705,378 $ 778,669 $ 7,323,858
=============== =============== ================ =================== ================
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
=============== =============== ================ =================== ================
</Table>
SEE ACCOMPANYING NOTES.
5
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HAMPSHIRE FUNDING, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<Table>
<Caption>
NINE MONTHS ENDED SEPTEMBER 30,
2002 2001
---------------------------------------
CASH AND CASH EQUIVALENTS (USED) PROVIDED BY OPERATIONS $ (77,406) $ 1,653,315
FINANCING ACTIVITIES
Proceeds from sale of collateral notes receivable 2,463,465 3,587,530
Loans originated (2,593,121) (3,758,308)
Proceeds from (repayments of) affiliated loan agreements, net 87,348 (826,961)
---------------------------------------
Net cash used in financing activities (42,308) (997,739)
---------------------------------------
(Decrease) increase in cash and cash equivalents (119,714) 655,576
Cash and cash equivalents at beginning of period 1,719,904 1,737,684
---------------------------------------
Cash and cash equivalents at end of period $ 1,600,190 $ 2,393,260
=======================================
</Table>
SEE ACCOMPANYING NOTES.
6
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HAMPSHIRE FUNDING, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 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 and nine month periods ended September
30, 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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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 7.75% through September 30, 2002, but subsequently decreased
to 7.25% on November 7, 2002. 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.
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.
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 24, 2002 the Agreement was amended to extend the
termination date to July 23, 2003. 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 1.5% and eliminating the restriction on the percentage of Collateral
Deficient Receivables. On August 9, 2002 the Company received a Waiver for
exceeding this percentage of Under Collateralized Receivables occurrence during
the period July 25, 2002 through July 29, 2002. 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).
When the Company sells loans, it retains interest-only strips, servicing rights,
and 5% of each loan sold, all of which are the retained interest in the
securitized receivables. Interest-only strips represent the Company's right to
interest in excess of the sum paid to PREFCO. As of September 30, 2002, the
Company had sold aggregate loans of $29,364,097 and has retained a subordinated
interest and servicing rights in the assets transferred aggregating $9,529,443
compared to $8,327,384 at December 31, 2001. The increase is due to increased
spreads in interest only strip and servicing asset. 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 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 $410,551 and $624,543 in service fees for the period ended
September 30, 2002 and 2001, respectively.
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As servicing agent for the loans sold, the Company collected loan prepayments of
$7,228,135 for the nine-months ended September 30, 2002 and $8,509,597 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 $2,593,121 and $3,758,308 for the nine-months ended September 30, 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 September 30, 2002 the Company had
borrowed $932,919 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.
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 third 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- and nine-months ended September 30, 2002 with
net income of $140,320 and $545,251, respectively, as compared to net income of
$170,828 and $574,014 for the same periods in 2001.
Total revenues for the three- and nine-months ended September 30, 2002 were
$255,667 and $926,812, respectively, versus $323,007 and $1,032,037 for the same
periods in 2001. The Company's revenues are derived from program
9
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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 $2,790 and $9,547 for the three- and nine-months ended
September 30, 2002, respectively, and $4,932 and $16,107 for the three- and
nine-months ended September 30, 2001. The average interest rates of 1.76% and
4.58% were paid on average outstanding loans due to affiliates of $717,104 and
$480,952 for the nine-months ended September 30, 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 September 30, 2002 and 2001 the number of Programs
administered by the Company were 1,587 and 2,546, 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
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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, 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
/s/ John A. Weston
DATE: NOVEMBER 13, 2002
John A. Weston
Treasurer, Principal Financial and
Accounting Officer
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CHIEF EXECUTIVE OFFICER CERTIFICATIONS UNDER SECTION 302 OF
SARBANES-OXLEY ACT OF 2002
I, Ronald R. Angarella, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hampshire
Funding, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 13, 2002 /s/ Ronald R. Angarella
Ronald R. Angarella
Chairman and President
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CHIEF FINANCIAL OFFICER CERTIFICATIONS UNDER SECTION 302 OF SARBANES-OXLEY ACT
OF 2002
I, Russell C. Simpson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hampshire
Funding, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
d) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
e) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 13, 2002 /s/ Russell C. Simpson
Russell C. Simpson
Chief Financial Officer
13