10-Q 1 a2093754z10-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 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 -------------------------------------------------------------------- (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, 2002: 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. 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 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 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. 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 7.75% 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. 8 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 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 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 - 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 11 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 12 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

HAMPSHIRE FUNDING INC 10-Q