10-Q 1 a2115913z10-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, 2003 --- 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 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 July 1, 2003: 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.

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, 2003 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 periods ended June 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. The balance sheet at December 31, 2002 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States 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, 2002. 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 7.00% on June 30, 2003. 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. CRITICAL ACCOUNTING POLICIES The financial statements are prepared in accordance with accounting principles generally accepted in the United States. The majority of assets and liabilities are financial in nature and the valuations of these assets and liabilities are critical to the financial position and results of operations. However, certain accounting policies are particularly important to the portrayal of the Company's financial position and results of operations, and require the Company's management to apply significant judgment; as a result are subject to an inherent degree of uncertainty. The fair value of retained interest on loan sales includes assumptions related to termination and discount rates. These assumptions involve a high degree of judgment by management and are subject to fluctuations based upon current market and economic conditions. On an on-going basis, management evaluates estimates and judgments based upon historical experience, which forms the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. 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 periodic purchases of the Company's collateral loans receivable by PREFCO or other investors (for which the Bank serves as agent). On July 23, 2003 the Agreement was amended to extend the termination date to July 21, 2004. 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). As of June 30, 2003, the Company had sold aggregate loans of $22,398,573 and has retained a subordinated interest and servicing rights in the assets transferred aggregating $11,266,081 at fair value. 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 $10,465,032 at December 31, 2002. 8 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 $140,882 and $295,565 in service fees for the six-months ended June 30, 2003 and 2002, respectively. Employee services and office facilities are provided by JP Life under a Service Agreement with the Company. The Company pays JP Life a monthly fee (in arrears) for services 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 its duties. The Company paid JP Life servicing expenses of $232,557 and $206,916 during the six-months ended June 30, 2003 and 2002, respectively. The Company capitalizes the present value of expected service fee income in excess of the related costs to service the outstanding receivables. As servicing agent for the loans sold, the Company collected loan prepayments of $2,726,946 for the six-months ended June 30, 2003 and $3,058,346 for the same period in 2002, which were paid to PREFCO (one month in arrears) to satisfy principal and variable interest obligation due. The Company originated new loans of $987,612 and $1,949,674 for the six-months ended June 30, 2003 and 2002, respectively, which were sold to PREFCO. 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, 2003 the Company had borrowed $1,871,775 compared to $1,699,098 at December 31, 2002. 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. Working capital in the first quarter of 2003 and 2002 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, 2003, the Company has increased its estimate of early terminations from 30% to 35% to better reflect the Company's actual experience. RESULTS OF OPERATIONS The Company concluded the three- and six-months ended June 30, 2003 with net income of $188,087 and $409,754, as compared to net income of $230,677 and $404,931 for the same period in 2002. Total revenues for the three- and six-months ended June 30, 2003 were $325,513 and $698,290, versus $345,747 and $671,145 for the same period in 2002. 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 past year, this increase has been largely 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 9 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 $7,648 and $10,899 for the three- and six-months ended June 30, 2003, and $3,740 and $6,757 for the three- and six-months ended June 30, 2002. The average interest rates of 1.23% and 1.77% were paid on average outstanding loans due to affiliates of $1,762,153 and $759,717 for the six-months ended June 30, 2003 and 2002, 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 June 30, 2003 and 2002 the number of Programs administered by the Company were 1,120 and 1,924, 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 - Exhibit 31: Chief Financial Officer Certifications Under Section 302 of Sarbanes-Oxley Act of 2002 Exhibit 32: Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K No Reports on Form 8-K were filed by the Company during the quarter ended June 30, 2003. 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: July 31, 2003 John A. Weston Treasurer 11

HAMPSHIRE FUNDING INC 10-Q