<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
----- Exchange Act of 1934 [fee required]
For the quarterly period year ended September 30, 1995
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Transition report pursuant to Section 13 or 15(d) of the Securities
- ------ Exchange Act of 1934
For the transition period from to .
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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)
Registrant's telephone number, including area code (603) 226-5000
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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
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
At September 30, 1995 there were 50,000 shares of the issuers common stock
outstanding, all of which are owned by the Parent Company, Chubb Life Insurance
Company of America.
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements. See pages 6 through 9.
Item 2 - Management's Discussion and Analysis of Financial Conditions
and results of Operations.
Liquidity and Capital Resources
- -------------------------------
The Company offers investment programs (the "Programs") which coordinate the
acquisition of mutual fund shares and insurance over a period of time, usually
ten years. Under the Programs, purchasers of the program ("Participants")
purchase life and health insurance from affiliated insurance companies (the
"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 1800%. 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 Company's indebtedness, the Company will terminate the Programs and
liquidate shares sufficient to repay the indebtedness.
Collateral loans receivable from Participants were $45,199,275 at September 30,
1995. Annual amounts due to the Company were as follows:
1995 1996 1997 1998 1999 2000-2005
---- ---- ---- ---- ---- ---------
Collateral loans receivable $.4 $2.7 $2.9 $2.7 $3.5 $31.0
(in millions)
The Company's funds for financing the Programs are currently obtained through
Loan Agreements with its affiliates, The Colonial Life Insurance Company of
America ("Colonial") and Chubb Life Insurance Company of America ("Chubb Life").
The Loan Agreements provide for revolving credit arrangements under which
advances will be made to the Company in amounts not to exceed $29,000,000 from
Colonial and $20,000,000 from Chubb Life. The advances are currently short term
in nature, as none of the loans outstanding as of September 30, 1995 exceeded
365 days to maturity. The advances are made at short-term lending rates agreed
upon by the Company and its lenders and are subject to change in accordance with
the Loan Agreements and market conditions. However, the interest rate may not
exceed the prime interest rate in effect in New York City plus 2.5%. The
average lending rate on these loans at September 30, 1995 was 6.71% and 3.94%
for the same period in 1994.
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The continuance of the Program is dependent upon the Company's ability to
provide, or arrange for the financing of insurance premiums for Participants.
Since 1989, such financing has been available from its affiliates, Colonial and
Chubb Life. The Company expects that it will be able to obtain this financing
for the foreseeable future.
The Company may also borrow funds from non-affiliated companies. There is no
assurance that the Company may obtain financing from non-affiliated companies
upon terms, conditions and rates as favorable as those from affiliated
companies. If the Company is unable to borrow funds in the future or continue to
borrow funds under its Loan Agreements for the purpose of financing loans to
Participants for the payment of insurance premiums, it may not be able to
continue the sale of the Programs.
Although the Company's present financing arrangements with its lenders do not
include the assignment of a Participant's mutual fund shares to the lender as
security, the Loan Agreements do authorize the Company to assign a Participant's
mutual fund shares to any lender as collateral security for the Company's
indebtedness pursuant to any financing arrangements. If any such assignment
takes place and the Company subsequently defaults on an obligation for which the
participant's mutual fund shares have been pledged as security, the mutual fund
shares may be redeemed by the lender to whom the obligation is owed. A lender
may cease to provide financing if the Company is in default under its Loan
Agreements. In this case, Programs will be terminated on their renewal dates.
The amount of funds borrowed under the Agreements at September 30, 1995 were
$42,500,000 compared to $37,000,000 at September 30, 1994. Funds borrowed at
September 30, 1995 represent $26,000,000 from Colonial and $16,500,000 from
Chubb Life. At September 30, 1994 funds borrowed represented $26,000,000 from
Colonial and $11,000,000 from Chubb Life. The increase in amounts borrowed by
the Company year to year was used to fund increased sales of Programs and for
other working capital needs.
In addition to loans payable, the Company has other short-term amounts due to
affiliates related to insurance premium payments and expense reimbursements to
Chubb America Service Corporation ("Service Company"). The Company has an
arrangement with affiliated Insurance Companies whereby the Company makes
monthly payments in arrears for premiums due. Reimbursements to the Service
Company are also made one month in arrears and are included in amounts due to
affiliates.
The Service Company, a wholly-owned subsidiary of the Parent Corporation, is a
management service company which provides employee services and office
facilities to the Company and its affiliates under a Service Agreement. The
Company pays the Service Company 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 1995 and 1994 was provided by Participants' loan repayments,
administrative fees for the placement and maintenance of Programs and interest
earned on investments.
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Loan schedule as of September 30, 1995:
<TABLE>
<CAPTION>
Loan Face Days to Maturity
Source Date (mils) Rate Maturity Date
- ------ ---- ------ ---- -------- --------
<S> <C> <C> <C> <C> <C>
Chubb Life 07/31/95 $10.0 6.31% 270 04/26/96
09/27/95 0.5 9.25% 277 06/30/96
09/29/95 6.0 9.25% 275 06/30/96
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$16.5
Colonial 01/13/95 $ 2.3 7.00% 270 10/10/95
05/15/95 14.5 6.02% 270 02/09/96
07/21/95 9.2 5.65% 266 04/12/96
-----
$26.0
</TABLE>
RESULTS OF OPERATIONS
The Company concluded the quarter ended September 30, 1995 with net operating
income of $186,883 as compared to net operating income of $427,393 in 1994.
Total revenues through September 30, 1995 were $3,286,126 versus $2,625,784 in
1994. These revenues include interest on collateral loans receivable, program
fees, interest on investments and partnership income. The largest source of
revenue was represented by interest on collateral loans receivable.
The growth in collateral loan interest resulted from the increase in collateral
loans receivable year to year and an increase in the lending interest rate.
Collateral loans receivable as of September 30, 1995 were $45,199,275 as
compared to $38,710,372 in 1994. Comparatively, collateral loan interest was
$2,873,198 and $2,248,776 for the quarters ended September 30, 1995 and 1994.
The average interest rate charged to each Participant's outstanding loan balance
was 9.25% and 8.50% for the first nine months of 1995 and 1994.
The Company's collateral loans receivable, collateral loan interest and average
interest rate charged to each Participant's loan balance at September 30, 1995
and 1995 are summarized as follows:
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Collateral loans receivable $45,199,275 $38,710,372
Collateral loan interest income $ 2,873,198 $ 2,248,776
Average loan Interest rate 9.25% 8.50%
</TABLE>
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Interest expense on the Loan Agreements increased in 1995 as compared to 1994
due to increases in interest rates and amounts borrowed by the Company. The
Company's outstanding loans payable, interest expense and average cost of
borrowings for the nine months ended September 30 are summarized as follows:
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Loans payable $41,897,991 $36,458,641
Interest expense $ 2,010,729 $ 974,602
Average loan interest rate 6.71% 3.94%
</TABLE>
The Company's ability to achieve and maintain a spread between its cost of funds
necessary to finance premium loans and the lending rate charged to Program
Participants may impact its future operating results. The interest rate spread
is intended to provide sufficient revenue to offset the Company's general and
administrative expenses. General and administrative expenses, arising from
normal operating activities through September 30, 1995, were $987,885 as
compared to $993,654 in 1994.
The Company may increase the interest rate charged to Participants to a maximum
of the prime interest rate plus 3% as its cost of borrowing increases. If the
Company's cost of borrowing were to rise significantly above the prime interest
rate, its ability to maintain an adequate interest rate spread would be
difficult and future earnings could be adversely impacted.
Program fees increased year to year as the number of programs administered by
the Company have grown. Program fees include placement, administrative and
termination fees as well as charges for special services. For the nine months
ended September 30, 1995 and 1994 the number of programs administered by the
Company were 6,564 and 6,528, respectively.
Investment income earned by the Company increased in 1995 as compared to 1994
due to changes in the level of cash and investments held year to year and the
increase in short-term interest rates.
The Company has franchise agreements with Chubb Life which provide that the
Company will be paid amounts required for its continued operations as
compensation for its services in providing and making the Programs available for
use. The Company did not receive any franchise fees in 1994 and does not
expect to receive any fees in 1995.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings - Not Applicable
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Item 2 - Changes in securities - Not Applicable
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Item 3 - Defaults upon senior securities - Not Applicable
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Item 4 - Submission of matters to vote of security holders - Not Applicable
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Item 5 - Other Information - Not Applicable
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Item 6 - Exhibits and Reports on Form 8-K. No reports on Form 8-K were filed
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for the quarter ended September 30, 1995.
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Hampshire Funding, Inc. and Subsidiary
Consolidated Balance Sheets
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1994
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<S> <C> <C>
ASSETS
Cash and cash equivalents $ 214,727 $ 1,311,399
Accounts receivable from customers 21,981 47,215
Federal income taxes recoverable 12,345 78,043
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Total current assets 249,053 1,436,657
Collateral notes receivable (including accrued
interest of $1,127,281 in 1995 and $1,027,677 in 1994) 45,199,275 40,805,159
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Total assets $45,448,328 $42,241,816
===========================
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Due to affiliates $ 1,278,883 $ 1,188,275
Accrued expenses and other liabilities 236,815 316,250
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Total current liabilities 1,515,698 1,504,525
Loans payable to affiliate (net of prepaid
interest of $609,009 in 1995 and $610,465 in 1994) 41,897,991 38,889,535
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Total liabilities 43,413,689 40,394,060
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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 550,000 550,000
Retained earnings 1,434,639 1,247,756
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Total stockholder's equity 2,034,639 1,847,756
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Total liabilities and stockholder's equity $45,448,328 $42,241,816
===========================
</TABLE>
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Hampshire Funding, Inc. and Subsidiary
Consolidated Statements of Operations and Retained Earnings
<TABLE>
<CAPTION>
NINE MONTHS ENDING SEPTEMBER 30,
1995 1994
--------------------------------
<S> <C> <C>
Revenues:
Interest on collateral notes receivable $2,873,198 $2,248,776
Program participant fees 348,166 356,306
Interest on investments 64,762 20,702
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3,286,126 2,625,784
Operating expenses:
Interest on loan agreement 2,010,729 974,602
General and administrative 987,885 993,654
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2,998,614 1,968,256
Income before income taxes 287,512 657,528
Federal income tax 100,629 230,135
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Net income 186,883 427,393
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Retained earnings at
beginning of year 1,247,756 789,462
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Retained earnings at end of period $1,434,639 $1,261,855
================================
</TABLE>
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Hampshire Funding, Inc. and Subsidiary
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
NINE MONTHS ENDING SEPTEMBER 30,
1995 1994
--------------------------------
<S> <C> <C>
Operating activities
Net income $ 186,883 $ 427,393
Adjustments to reconcile net income to net
cash used in operating activities:
Increase in accounts receivable from
customers 25,234 13,083
Increase (decrease) in accrued expenses
and other liabilities (79,435) (101,359)
Decrease (decrease) in due to affiliates 90,608 (29,458)
Increase in collateral notes receivable (4,394,116) (5,362,000)
Change in federal income taxes payable
(recoverable) 65,698 (18,865)
(Increase) decrease in prepaid interest
on affiliated loan agreements 8,456 (166,192)
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(Net cash used in operating activities (4,096,672) (5,237,398)
FINANCING ACTIVITIES
Proceeds from affiliated loan agreements 65,000,000 41,700,000
Principal payments on affiliated loan
agreements (62,000,000) (36,000,000)
--------------------------------
Net cash provided by financing activities 3,000,000 5,700,000
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Increase in cash and cash equivalents (1,096,672) 476,602
Cash and cash equivalents at beginning
of year 1,311,399 327,667
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Cash and cash equivalents at end of period $ 214,727 $ 790,269
================================
</TABLE>
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<PAGE>
SIGNATURE
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
Date 12/4/95 /s/ John A. Weston
----------------- ------------------------------
John A. Weston
Treasurer, Principal Financial
and Accounting Officer
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 214,727
<SECURITIES> 0
<RECEIVABLES> 45,233,601<F1>
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 45,448,328
<CURRENT-LIABILITIES> 1,515,698
<BONDS> 41,897,991<F2>
<COMMON> 50,000
0
0
<OTHER-SE> 1,984,639
<TOTAL-LIABILITY-AND-EQUITY> 45,448,328
<SALES> 0
<TOTAL-REVENUES> 3,286,126
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,998,614<F3>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 287,512
<INCOME-TAX> 100,629
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 186,883
<EPS-PRIMARY> 3.74
<EPS-DILUTED> 0
<FN>
<F1>Accounts Receivable 34,326
Collateral Notes Receivable 45,199,275
<F2>Loans payable to affiliate 41,897,991
<F3>Interest on Loan Agreement 2,010,729
General and Administrative Exp. 987,885
</FN>
</TABLE>
