10-Q 1 a2056956z10-q.txt 10-Q 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, 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 June 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 1 INDEX HAMPSHIRE FUNDING, INC. PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements (Unaudited) Condensed Statements of Financial Condition - June 30, 2001 and December 31, 2000 Condensed Statements of Income - Three months ended June 30, 2001 and 2000; Six months ended June 30, 2001 and 2000 Condensed Statements of Stockholder's equity - Six months ended June 30, 2001 and 2000 Condensed Statements of Cash Flows - Six months ended June 30, 2001 and 2000 Notes to condensed financial statements - June 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 HAMPSHIRE FUNDING, INC. CONDENSED STATEMENTS OF FINANCIAL CONDITION

SEE ACCOMPANYING NOTES. 3 HAMPSHIRE FUNDING, INC. CONDENSED STATEMENTS OF INCOME (Unaudited)

SEE ACCOMPANYING NOTES. 4 HAMPSHIRE FUNDING, INC. STATEMENTS OF STOCKHOLDER'S EQUITY (Unaudited)

SEE ACCOMPANYING NOTES. 5 HAMPSHIRE FUNDING, INC. CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)

SEE ACCOMPANYING NOTES. 6 HAMPSHIRE FUNDING, INC. NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS JUNE 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 six-month period ended June 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. 7 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 six-months ended June 30, 2001 with net income of $200,791 and $403,186, respectively, as compared to net income of $186,522 and $368,143 for the same periods in 2000. Total revenues for the three- and six-months ended June 30, 2001 were $364,479 and $709,030, respectively, versus $345,837 and $682,611 for the three- and six-month periods ended June 30, 2000, respectively. The Company's revenues are derived from sales and servicing of loans, interest and program fees. Although the Company's retained interest and income on its retained interest has grown over the last two 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 $7,893 and $11,175 for the three- and six months ended June 30, 2001 and $19,016 and $36,506 for the three- and six months ended June 30, 2000. The average interest rates of 5.04% and 6.02% were paid on average outstanding loans due to affiliates of $457,381 and $1,200,000 at June 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 $208,171 and $430,756 for the three- and six-month period ended June 30, 2001, respectively, and $242,199 and $488,157 for the three- and six-months ended June 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 June 30, 2001 and December 31, 2000, the number of Programs administered by the Company were 2,794 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 8 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. 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 June 30, 2001, the Company had sold aggregate loans of $46,577,914 and has retained a subordinated interest and servicing rights in the assets transferred aggregating $7,482,005. 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 $5,167,032 for the six months ended June 30, 2001 and $4,287,551 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 $2,640,045 and $3,655,278 for the six months ended June 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 June 30, 2001 the company had borrowed $435,858 compared to $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 9 allocation of common expenses and are commensurate for the performance of the applicable duties. Working capital in the second quarter of 2001 and 2000 was provided by servicing fees from collateral loans sold, loans from Jefferson-Pilot Corporation and interest earned on investments. 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. 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 June 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: AUGUST 13, 2001 John A. Weston Treasurer, Principal Financial and Accounting Officer 10

HAMPSHIRE FUNDING INC 10-Q