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Filed pursuant to Rule 424(b)(3)
Registration No. 33-76256
PROSPECTUS
[LOGO OF DISTRIBUTED BY: CHUBB SECURITIES CORPORATION
HAMPSHIRE FUNDING, INC. ONE GRANITE PLACE April 21, 1995
APPEARS HERE] CONCORD, NEW HAMPSHIRE 03301
TELEPHONE: 1-603-226-5000
ONE GRANITE PLACE
CONCORD, NEW HAMPSHIRE 03301
TELEPHONE: 1-603-226-5000
PROGRAMS FOR COORDINATING THE
ACQUISITION OF MUTUAL FUND SHARES AND INSURANCE
The securities offered in this Prospectus are personalized investment
programs which coordinate the acquisition of mutual fund shares and insurance
over a term of years. Hampshire Funding programs (the "Programs") are offered
and administered by Hampshire Funding, Inc. (the "Company"). They involve (1)
initial and periodic purchases of mutual fund shares for cash with automatic
reinvestment of all distributions, (2) use of the mutual fund shares as
collateral to secure loans, and (3) use of the loan proceeds to pay insurance
premiums over the life of a Program.
Appreciation, if any, in the value of mutual fund shares may aid in
offsetting the principal and accumulated interest on the loans which must be
paid upon termination of the Program. However, there can be no assurance that
this objective will be achieved, since the Programs also involve the risk of an
actual decline in the net asset value of the mutual fund shares.
A person who purchases a Program (a "Participant") must pay his outstanding
indebtedness to the Company upon termination of the Program, which is usually
the end of the tenth program year (unless extended at the option of the
Company). Additionally, the Program will automatically terminate and the loans
will become immediately due and payable if the value of the mutual fund shares
purchased in the Program declines below applicable margin and collateral
maintenance requirements.
The Company has offered $30 million worth of Programs for sale to the public
by means of the Prospectus; a total of approximately $22.5 million remains
available for sale under this Prospectus. The total amount of securities
offered hereunder will be determined by aggregating initial insurance premiums
paid and initial mutual fund investments made by all Participants purchasing
after the effective date of this Prospectus.
THE PROGRAMS DESCRIBED IN THIS PROSPECTUS INVOLVE SUBSTANTIAL RISKS WHICH
COULD RESULT IN SIGNIFICANT LOSSES TO PARTICIPANTS. ACCORDINGLY, PERSONS
CONTEMPLATING ENTERING INTO A PROGRAM ARE URGED TO READ AND CONSIDER THE
DISCUSSION OF "RISK FACTORS" IN THIS PROSPECTUS.
This Prospectus does not constitute an offering in any jurisdiction in which
such offering, or an offering of shares of any of the mutual funds described
herein, or an offering of any insurance policies described herein, may not
lawfully be made. Persons should consult this Prospectus and any supplement
thereto for additional information (if any) required by state law.
This offering is made by means of this Prospectus and the current
prospectuses, furnished herewith, of the mutual funds whose shares are proposed
to be purchased by a Participant in a Program and of any variable insurance
product offered in conjunction with a Program.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
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AVAILABLE INFORMATION
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The Company is subject to the periodic reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports and other required information with the
Securities and Exchange Commission (the "Commission"). Such reports and other
information may be inspected and copied at public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the following regional offices: Room 1028,
26 Federal Plaza, New York, New York 10278; and Room 1628, Everett McKinley
Dirksen Building, 219 South Dearborn Street, Chicago, Illinois 60604.
The Company has filed with the Commission a Registration Statement on Form S-
2 (the "Registration Statement") under the Securities Act of 1933, as amended,
with respect to the securities covered by this Prospectus. This Prospectus does
not contain all of the information set forth in the Registration Statement and
the exhibits and schedules thereto. Statements made in this Prospectus as to
the contents of any contract, agreement or other document referred to are not
necessarily complete; with respect to each such contract, agreement or other
document filed as an exhibit to the Registration Statement, reference is made
to such exhibit for a more complete description of the matter involved, and
each such statement shall be deemed qualified in its entirety by such
reference. Copies of the Registration Statement and the exhibits may be
inspected without charge at the Washington, D.C. office of the Commission.
The Company's Annual Report on Form 10-K for the year ended December 31,
1994, which was filed with the Commission pursuant to Section 13(a) of the
Exchange Act, is incorporated herein by reference. All other reports filed
pursuant to Section 13(a) or 15(d) of the Exchange Act since the end of the
fiscal year covered by the Annual Report referred to above and prior to the
date of this Prospectus shall be deemed to be incorporated by reference in this
Prospectus and to be a part hereof.
In addition, copies of these reports (and any other information incorporated
by reference in the Registration Statement covering the Programs) will be
provided without charge to any person, including any beneficial owner,
receiving this Prospectus, on written or oral request to Hampshire Funding,
Inc., One Granite Place, Concord, New Hampshire 03301, Attention: Vice
President--Operations; telephone (603) 226-5000.
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TABLE OF CONTENTS
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<TABLE>
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PAGE
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Available Information..................................................... 2
The Company and Its Affiliates............................................ 4
The Company.............................................................. 4
The Broker-Dealer........................................................ 4
The Insurance Companies.................................................. 5
The Service Company...................................................... 5
The Fund Group........................................................... 6
The Holding Company...................................................... 6
Interest in Mutual Funds................................................. 6
Risk Factors.............................................................. 7
Suitability of Investment................................................ 7
Risk of Decline in Value of Mutual Fund Shares........................... 7
Risk of Termination for Failure to Maintain Collateral and Margin Re-
quirements.............................................................. 7
Risk of Failure to Qualify for Insurance................................. 8
Risk of Loss on Early Termination........................................ 9
Risk That the Company Will Not Be Able to Obtain Financing............... 9
Risk of Adverse Determination Under State Law............................ 9
Disadvantages of Cancelling Existing Insurance........................... 10
Cash Surrender Value of an Insurance Policy Included in a Program........ 10
Tax Considerations....................................................... 10
Summary of Charges........................................................ 11
The Programs.............................................................. 12
General; Distribution of Programs........................................ 12
Hypothetical Illustrations............................................... 13
Determination of Suitability............................................. 13
Investment in Mutual Funds............................................... 14
Acquisition of Insurance................................................. 16
Agency Agreement and Limited Power of Attorney........................... 17
Insurance Premium Loans to Participants.................................. 17
Additional Mutual Fund Share Purchases................................... 20
Status Reports........................................................... 20
Program Modification..................................................... 20
Termination.............................................................. 21
Rights of Participants................................................... 22
Financing of the Programs by the Company................................. 22
Selected Financial Data................................................... 23
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 24
Legal Matters............................................................. 27
Experts................................................................... 27
Index to Financial Statements............................................. F-1
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THE COMPANY AND ITS AFFILIATES
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1. THE COMPANY
The Company is primarily engaged in the issuance of Programs that coordinate
the acquisition of mutual fund shares and insurance. The Company owns 100% of
the stock of Hampshire Syndications, Inc., which acts as a general or co-
general partner in various limited partnerships that are not related to the
Company or the Programs.
The Company was incorporated in the State of New Hampshire on December 8,
1969, as a wholly-owned subsidiary of Chubb Life Insurance Company of America
("Chubb Life"). Its stock was sold to The Chubb Corporation (the "Holding
Company") on December 21, 1971. On April 1, 1981, the Company's stock was
transferred by contribution to a predecessor corporation of Chubb Life. Chubb
Life owns 100% (50,000 shares) of the Company's issued and outstanding common
stock.
The Company's principal executive offices are located at One Granite Place,
Concord, New Hampshire 03301, and its telephone number is (603) 226-5000.
All administrative duties of the Company are performed by personnel employed
by Chubb America Service Corporation (the "Service Company"). The Company pays
the Service Company a fee, determined in accordance with reasonable cost
allocation methods, for the performance of such duties.
The administrative costs of issuing and maintaining the Programs are
partially offset by: a) fees charged to Program Participants, b) interest
charged to Participants for insurance premium loans to the extent that the rate
of interest exceeds the interest paid on the funds borrowed from The Colonial
Life Insurance Company of America ("Colonial"), an affiliate of the Company,
Chubb Life, or any other lender, to finance the Programs, and c) interest
income earned on investments. Costs which exceed these revenues may be
reimbursed in accordance with franchise fee agreements between the Company and
Chubb Life. The franchise fee agreements 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. Such compensation would
result in the Company showing neither a significant profit nor a significant
loss from its operation. No franchise fees were paid pursuant to these
agreements in 1992, 1993 or 1994, and none are expected to be paid in 1995.
The Company is not a registered investment company under the Investment
Company Act of 1940, nor does it directly participate in the management or
supervision of any of the mutual funds sold in the Programs. However, one of
its affiliates, Chubb Investment Funds, Inc. (the "Fund Group"), is a
registered investment company which offers mutual funds that are among those
available to Participants in the Programs.
This Prospectus relates only to the Programs described herein. No offer is
made hereby of any security representing an interest in the Company or any of
its affiliates. Participants will have no voting rights or ownership interests
in, and will not share in the profit and losses of, the Company or any
affiliate, except that Participants who purchase shares of the Fund Group will
have the rights and interests of a shareholder with respect to the Fund Group.
2. THE BROKER-DEALER
Chubb Securities Corporation (the "Broker-Dealer") was incorporated in 1969
and is a member of the National Association of Securities Dealers, Inc. and the
Boston Stock Exchange. The Broker-Dealer's
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common stock (50,000 shares) is wholly owned by Chubb Life. It also is a
registered investment adviser under the Investment Advisers Act of 1940, and
those of its representatives who are also registered independently as
investment advisors perform personal financial planning services.
The Programs and most mutual fund shares offered in conjunction with the
Programs are sold through the Broker-Dealer or other independent securities
dealers. The Broker-Dealer has non-exclusive selling agreements with a number
of mutual fund distributors and is the principal underwriter and distributor
for the Fund Group. It is also the distributor for Chubb America Fund, Inc.,
and Chubb Series Trust, registered investment companies which serve as the
underlying investment vehicles for variable universal life insurance products.
All mutual fund shares available for sale within the Programs are "open-end"
investment companies which permit investors to redeem their shares at any time
at net asset value.
The Broker-Dealer earns concessions from all mutual fund sales except for no-
load funds; in the case of the Fund Group, these concessions range up to 4.50%
of the offering price, and in the case of other mutual funds these concessions
range up to 8.50% of the offering price. Commissions paid to salespersons range
up to 90% of gross concessions earned by the Broker-Dealer.
The Broker-Dealer also makes available for sale stocks and bonds through
limited partnership units, both public and private, unit investment trusts and
variable annuities. These investments are not available in the Company's
Programs.
3. THE INSURANCE COMPANIES
The Programs may include various forms of insurance offered by the Insurance
Companies.
As of December 31, 1994, Chubb Life's admitted assets were $2,084,158,003 and
gross insurance in force was $47,114,103,000. Its stock (600,000 shares) is
wholly owned by the Holding Company. At present Chubb Life provides funds to
the Company for financing the Programs pursuant to the Loan Agreement and the
Company-Lender Agreement. See "The Programs--Financing of the Programs by the
Company."
Colonial was organized as a New Jersey corporation in 1897. As of December
31, 1994, admitted assets were $651,829,703 and gross insurance in force was
$10,579,598,000. Its stock (132,000 shares) is wholly owned by Chubb Life. At
present Colonial provides funds to the Company for financing the Programs,
pursuant to a Loan Agreement and a Company-Lender Agreement. See "The
Programs--Financing of the Programs by the Company."
Chubb Sovereign Life Insurance Company ("Chubb Sovereign") was organized as
Sovereign Life Insurance Company of California in California in 1962. As of
December 31, 1994 admitted assets were $395,329,771 and gross insurance in
force was $14,850,375,000. Its stock (11,000 shares) is wholly owned by Chubb
Life.
Each Insurance Company's policies may be sold with the Programs in those
states where it has agents who are also qualified as registered representatives
of broker-dealers.
4. THE SERVICE COMPANY
The Service Company is a management service company incorporated in New
Hampshire on June 19, 1981. Its stock (1,000 shares) is wholly owned by Chubb
Life. It employs all personnel who perform services for the Company, the
Broker-Dealer, and the Insurance Companies.
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5. THE FUND GROUP
The Fund Group is a registered investment company under the Investment
Company Act of 1940. The Fund Group offers a series of five mutual funds: the
Chubb Money Market Fund, the Chubb Tax-Exempt Fund, the Chubb Government
Securities Fund, the Chubb Total Return Fund and the Chubb Growth and Income
Fund. Shares issued by the Fund Group are available for purchase in conjunction
with the Programs.
As of December 31, 1994, there were 7,495,527 shares of the Chubb Money
Market Fund outstanding, of which approximately 18.70% were owned by the
Holding Company and approximately 1.91% were owned by Chubb Life. There were
1,245,033 shares of the Chubb Tax-Exempt Fund outstanding, of which
approximately 1.23% were owned by Chubb Life and approximately 12.34% were
owned by Federal Insurance Company, a subsidiary of the Holding Company. There
were 1,286,086 shares of the Chubb Government Securities Fund outstanding, of
which approximately 1.43% were owned by Chubb Life and approximately 14.31%
were owned by the Holding Company. There were 1,241,886 shares of the Chubb
Total Return Fund outstanding, of which approximately 1.22% were owned by Chubb
Life. There were 1,264,419 shares of the Chubb Growth and Income Fund
outstanding, of which approximately 1.13% were owned by Chubb Life.
6. THE HOLDING COMPANY
The Chubb Corporation (the "Holding Company") is a holding company, the total
assets of which on December 31, 1994 were $20,723,055,000. The Holding Company
is not a subsidiary of any other corporation, and its stock is traded on the
New York Stock Exchange. Principal subsidiaries of the Holding Company include
Chubb Life Insurance Company of America, Colonial Life Insurance Company of
America, Chubb Sovereign Life Insurance Company, Chubb America Service Corp,
ChubbHealth Holdings, Inc., Federal Insurance Company, Vigilant Insurance
Company, Chubb Insurance Company of Australia, Ltd., Great Northern Insurance
Company, Pacific Indemnity Company, Northwestern Pacific Indemnity Company,
Texas Pacific Indemnity Company, Chubb Custom Insurance Company, Chubb National
Insurance Company, Chubb Indemnity Insurance Company, CC Canada Holdings, Ltd,
Chubb Insurance Company of Canada, Chubb Insurance Company of Europe, S.A.,
Chubb Atlantic Indemnity Ltd., Chubb Insurance Company of New Jersey, Chubb &
Son, Inc., Chubb Capital Corporation, Chubb Investment Company of New Jersey,
Inc., and Bellemead Development Corporation.
7. INTEREST IN MUTUAL FUNDS
The Broker-Dealer has dealer agreements with most of the various mutual funds
(including both the Fund Group and non-affiliated mutual funds offered in the
Programs) whose shares may be purchased in conjunction with the Programs
offered hereby, and will receive commissions for its sales efforts in their
behalf.
None of the non-affiliated mutual funds or their sponsors, managers or
distributors has any interest in the Programs. None of the mutual funds,
including the Fund Group, offered in the Programs assumes any responsibility
for the soundness of the Programs or the operations, policies, representations
or conduct of the Company. No fund available for the Programs is the owner of
record of 10% or more of the outstanding stock of the Holding Company.
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RISK FACTORS
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1. SUITABILITY OF INVESTMENT
The Programs require regular planned investments over a period of several
years. No person should enter into a Program unless his financial circumstances
warrant and he expects to be able to maintain the Program over its entire ten-
year life. Individual financial circumstances may, of course, change from time
to time and, in the event of an adverse change, the ability of a person to
maintain a Program may be impaired. A prospective Participant should also
consider his ability to continue to pay insurance premiums after the ten-year
life of a Program.
Persons who may be in a position to acquire mutual fund shares and to pay
insurance premiums in cash, in amounts equivalent to those provided for in a
Program, should give particular attention to the interest and other costs
involved in a Program. All prospective Participants should consider to what
extent, and on what terms, they may themselves be able to arrange loans
independently to finance insurance premium payments. Participants who are
considering using single premium policies or variable universal life policies
in the Programs should consult their legal, financial, and/or tax advisor
regarding the suitability of such investments.
2. RISK OF DECLINE IN VALUE OF MUTUAL FUND SHARES
One attractive feature of the Programs to potential Participants is the
possibility of using the appreciated value of purchased mutual fund shares (as
well as dividends or capital gains distributions thereon) to help defray, at
the end of the ten-year period, or at an earlier termination, principal and
accumulated interest charges on the loans used to purchase insurance.
Appreciation depends on the actual performance of the particular mutual fund
used in a given Program. Because of the unpredictability of the market
conditions, any given fund may actually decline rather than appreciate in
value. If the value of the fund shares used in a particular Participant's
Program declines below the Company's applicable collateral maintenance
requirements, the Program will automatically terminate and the loans will
become immediately due and payable, unless a Participant chooses to pledge
additional shares, make additional investments or make a cash payment to reduce
account indebtedness. See "The Programs--Insurance Premium Loans to
Participants."
3. RISK OF TERMINATION FOR FAILURE TO MAINTAIN COLLATERAL AND MARGIN
REQUIREMENTS
Failure to maintain the appropriate collateral and margin requirements can
result in an involuntary termination of a Program without prior notice to the
Participant. Certain collateral and margin requirements have been imposed by
the Company in order to comply with Federal regulations and to insure
sufficient collateral for the Company's loans to Participants. These
requirements are more fully described under "The Programs--Insurance Premium
Loans to Participants," and the following summary is qualified in its entirety
by reference to that portion of the Prospectus.
(a) 31-day Holding Period for Qualified Collateral
The mutual fund shares used in a Program must be held for 31 days before a
Participant may use them as collateral to purchase insurance. Further, if
additional collateral is required at any point in order to renew premium loans
or to meet margin requirements, any mutual fund shares to be used as collateral
must have been held by the Participant for the minimum 31 day period required
by Federal regulations. Mutual
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fundshares which are properly available for use as collateral within a Program,
by virtue of having been held at least 31 days by a Participant, will be
referred to throughout this Prospectus as "qualified shares" or "qualified
collateral."
(b) Margin Requirements
In addition to complying with Regulation G of the Federal Reserve Board, the
Company imposes its own more restrictive margin requirements on collateral used
to secure loans to Participants. Regulation G permits borrowing in an amount up
to 50% of the value of the qualified collateral. The Company's requirements,
which are even more restrictive, include the following specific requirements:
(i)(a) For funds (both load and no-load) with which the Broker-Dealer has
a selling agreement:
250% Requirement for New Financing--Initial premium loans, and any
new financing of additional premiums on policy renewal dates, must be
secured by qualified shares having a value of at least 250% of the new
credit extended to a Participant in order to finance a premium. If the
250% renewal requirement is not met, the Company will refuse to renew
the loan and will terminate the Program.
(b) For no-load funds with which the Broker-Dealer does not have a
selling agreement:
1800% Requirement for New Financing--The initial premium loan, which
must be paid annually, must be secured by qualified shares having a
value of at least 1800% of the initial premium loan. Subsequent annual
premium loans must meet the 250% requirement for new financing.
(ii) 150% of Account Indebtedness at Renewal Date--At the time of
renewal, if the value of qualified shares pledged with the Company does not
exceed 150% of the Participant's accumulated debt, interest, and other
charges owed to the Company (the "Account Indebtedness"), the Company will
not renew the loan without additional qualified collateral or a reduction
of the Account Indebtedness. If qualified shares available for pledge are
being held by the Company as custodian for the Participant, it will pledge
such shares with itself, in accordance with the Agency Agreement and
Limited Power of Attorney (the "Agency Agreement"), in order to meet the
150% requirement. If additional shares are needed, the Company may, but is
not obligated to, give notice to a Participant (in order to allow the
Participant to provide additional qualified shares or reduce the Account
Indebtedness) before it refuses to renew the loan and terminates the
Program.
(iii) 130% Requirement Between Renewal Dates--If, at any time during the
term of a Program, the value of a Participant's qualified collateral
declines below 130% of the Account Indebtedness, the Company will, without
notice to the Participant, terminate the Program, redeem the pledged
shares, and return the excess shares over the Account Indebtedness, if any,
to the Participant.
THE COMPANY HAS NO OBLIGATION TO PROVIDE NOTICE TO THE PARTICIPANT THAT THE
APPLICABLE MARGIN REQUIREMENT HAS BEEN VIOLATED AND THAT HIS PROGRAM WILL BE
TERMINATED. IN ADDITION, THE AMOUNT REALIZED BY THE COMPANY UPON REDEMPTION OF
A PARTICIPANT'S SHARES MAY BE SIGNIFICANTLY LESS THAN THE APPLICABLE MARGIN
REQUIREMENT.
4. RISK OF FAILURE TO QUALIFY FOR INSURANCE
The Company cannot give any assurance that the proposed insured, in an
application for a policy to be included in a Program, will qualify for
insurance. Orders for mutual funds will be accepted only from those persons who
desire to make such an investment irrespective of the medical insurability
requirements of the
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Programs. No fees charged at the initiation of a Program apply to insurance,
thus no conditional receipt for insurance coverage will be issued; that is, the
Participant will be without insurance coverage until (i) the application for
insurance is approved and (ii) the expiration of 31 days from the date of
purchase of the mutual fund shares. If, however, a Participant wishes to
conditionally obtain insurance coverage prior to completion of the underwriting
process, he may pay one-twelfth of the scheduled annual premium for his
Program, or $50, whichever is greater, in exchange for a conditional receipt at
the time he completes the application for insurance, with the exception of
Chubb Sovereign policies, where a Participant must make one premium payment in
the applicable mode to conditionally obtain coverage. Such conditional
insurance coverage may not be available in all cases.
5. RISK OF LOSS ON EARLY TERMINATION
Although a Program is voluntary and may be terminated at any time upon
facsimile or written request by a Participant, it should not be concluded that
it necessarily may be terminated without loss. Termination of the Program in
its early stages is more likely to lead to a loss in a Participant's investment
if sales charges are incurred in the acquisition of mutual fund shares.
Furthermore, in the event of an early termination of a Program, the cash value,
if any, of an insurance policy included in the Program would be minimal and
might not be available if the Participant is not the owner of the policy. A
Participant also would pay a termination fee and liquidation charges for early
termination. On the other hand, a termination in the latter stages of the
Program will result in increased interest expense and administrative fees which
the Participant must pay. See "Summary of Charges."
6. RISK THAT THE COMPANY WILL NOT BE ABLE TO OBTAIN FINANCING
The continuance of the Programs is dependent upon the Company's ability to
provide, or arrange for, the financing of insurance premiums for Participants.
At present, Colonial and Chubb Life, affiliates of the Company, provide the
funds necessary to the Company's financing of the Programs. A Participant
should carefully consider the Company's ability to borrow money and the
consequences of its inability to borrow. Moreover, although the Company's
present financing arrangement with its lender does not include the assignment
of a Participant's mutual fund shares to the lender as security, the Agency
Agreement does 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 Participant should
carefully consider the extent to which the rights of a lender who might receive
such an assignment would have priority over his interests in the pledged mutual
fund shares.
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 Company is under no contractual obligation to continue to make loans
on future Program renewal dates; however, it intends to continue making such
loans as long as funds are available to it.
7. RISK OF ADVERSE DETERMINATION UNDER STATE LAW
Several states have passed statutes prohibiting either the sale of life
insurance as an inducement to purchase securities, or the sale of securities as
an inducement to purchase life insurance. The Company cannot predict whether,
or the extent to which, Programs commenced in a state may have to be terminated
as a result of a later determination by that state that the Programs contravene
any such statute.
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8. DISADVANTAGES OF CANCELLING EXISTING INSURANCE
Although the only insurance policies available for purchase by Participants
in the Programs are those issued by the Insurance Companies, the purchase of a
Program does not require the surrender or cancellation of existing life or
health insurance policies. Before an existing life or health insurance policy
is surrendered or cancelled in connection with the purchase of a Program, the
following should be carefully considered:
(a) The amount of the premium for an existing policy may be less than
called for by a policy sold in a Program, having the same or similar
benefits. Any replacement of the same type of policy may result in a higher
premium rate based upon the insured's then attained age.
(b) Since selling costs and other initial costs of life insurance
policies affect the cash value increases, if any, in the earlier policy
years, the replacement of an old policy by a new one results in the
policyholder's sustaining these costs (principally agents' commissions)
twice.
(c) Life insurance policies are contestable by the issuer for periods of
from one to two years and are voided by suicide during those periods. These
provisions would apply for similar periods in any new policy
notwithstanding the fact that they had expired on existing policies.
(d) Many of the policies sold in connection with the Programs are non-
participating, and therefore no dividends will be payable thereon. Existing
policies, on the other hand, may have participating features.
(e) It is unlikely that the cash surrender value of a comparable new
policy will equal the cash value of an existing policy had it remained in
force and effect.
(f) Comparison should be made between settlement options available in the
policies offered under the Programs and those provided in existing
policies.
(g) Comparison should also be made between any riders, such as those
which provide disability income benefits or which guarantee conversion
privileges, contained in policies offered under the Programs and those
provided in existing policies.
(h) Health insurance policies may exclude coverage for pre-existing
health conditions for a certain period of time or restrict rights to renew
policies in future years. These restrictions may not be included in
existing policies or may no longer apply.
(i) A Participant may not be able to procure a new insurance policy at
all if there has been a significant change in his health.
9. CASH SURRENDER VALUE OF AN INSURANCE POLICY INCLUDED IN A PROGRAM
The cash surrender value, if any, of an insurance policy included in a
Program will not provide sufficient proceeds to pay the full amount of a
Participant's Account Indebtedness but may be used to reduce the Account
Indebtedness if available to the Participant by terms of the policy. Cash
values that are available also may be applied to reduce the amount of premiums
due during any period in which a Participant's ability to maintain a Program
might otherwise be impaired. Some insurance policies will have no cash
surrender value at any time, while others, such as whole life policies, may
have minimal or no cash surrender value during their early years. The cash
surrender value of a policy included in the Program will depend upon the age of
the insured at the time the policy is issued and the amount and type of
insurance.
10. TAX CONSIDERATIONS
The following are certain tax considerations which should be considered prior
to the initiation of a Program. These considerations are included for general
information and are not meant to be a description
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of all potential tax matters related to the purchase of a Program or the
underlying mutual funds or insurance. Prospective Participants should consult
their own tax advisors with respect to tax matters, including the effect of
state tax laws.
(a) Loan interest generally is not deductible for the purpose of
determining an individual's taxable income.
(b) Participants will be liable for federal income taxes and state taxes
(if applicable) on dividends and capital gains distributions on their
mutual fund shares even though they are automatically reinvested in
additional shares as required by the Programs, unless the Program was
established as part of a tax qualified retirement plan which allows for tax
deferred accumulations.
(c) A Program established as part of a tax qualified retirement plan may
result in unrelated business taxable income to said plan on the
accumulation value or proceeds of policies used in the Program.
(d) An involuntary termination of a Program may result in the recognition
of ordinary income or capital gains or losses which the Participant might
otherwise have wished to defer.
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SUMMARY OF CHARGES
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1. MINIMUM INVESTMENT--The cost of Programs varies with the mutual funds and
insurance policies included in a particular Program. The minimum investment in
mutual fund shares necessary to begin an annual Program is $1,200, except for
Programs using no-load funds with which the Broker-Dealer does not have a
selling agreement, which minimum investment would be $90,000. On investments in
mutual fund shares by Participants, sales charges may range up to 8.50% of the
offering price of the shares. Prospective Participants are advised that many
funds which do not have a "front-end" sales charge may have a "back-end" sales
charge upon redemption of the shares or an asset-based sales charge.
2. INTEREST--The mutual fund shares are pledged to secure the loan to a
Participant, plus interest accruing thereon. Interest rates on a Participant's
indebtedness are subject to change at any time during the Program at the
discretion of the Company and are always subject to maximum permissible
interest rates under state law. The Agency Agreement provides that the nominal
interest rate on a Program will not be less than 6% per annum, nor exceed three
percentage points above the prime, or base rate, as quoted in The Wall Street
Journal. Such interest increases may occur without prior notice to the
Participants and will become effective immediately.
3. COMMISSIONS--The Insurance Companies pay a commission to the agent for
policies sold in connection with the sale of a Program. All insurance
commissions are included in the annual premiums paid by the Participants. The
first year's sales commissions range from 2% to a maximum 114% of the first
year's premium and 0% to a maximum of 30% of the annual premium for subsequent
years. The maximum first year commission payable on disability insurance
policies is 70%. In addition, agents may earn bonuses of up to 15% of the
annual premium for the first two policy years with declining percentages
thereafter, and ending at the close of the tenth policy year. The Insurance
Companies pay the same commissions to its agents when insurance policies are
purchased independently of the Program.
4. NO UNDERWRITERS' FEES--No underwriting discounts, commissions, or fees are
paid in connection with the sale of the Programs themselves (as distinct from
the mutual fund shares and insurance policies included in the Programs).
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5. PLACEMENT FEE, PROGRAM FEE, ADMINISTRATIVE FEE, AND SPECIAL CHARGES--The
Company charges a one-time placement fee of $25 for each insurance policy
issued in connection with the Programs. The placement fee is due at the time
when the Company determines that a prospective Participant has qualified for
investment in a Program (including the life insurance application). The Company
also charges a one-time Program fee of $200 for Programs using certain no-load
funds with which the Broker-Dealer does not have a selling agreement. This
Program fee is due at the time of application for the Programs. An annual
administrative fee is also charged by the Company for its services under the
Agency Agreement to cover the reasonable cost of administering the Programs.
The annual administrative fee is $50 and may be paid in a lump sum for the
entire ten year period at a reduced rate, currently $360. Unless the
Participant pays the annual administrative fee in cash, the Company, at its
discretion, may pay the fee from proceeds realized from the redemption of
mutual fund shares or by adding the fee to the Participant's indebtedness. In
addition, the Company will charge a fee of $25 for adding a policy to an
existing Program.
Reasonable charges will also be made for certain special services. The
current charges are $25 for each of the following services on a per fund and
per policy basis: (i) return check charge (protested check); (ii) transfer of
registration of shares; (iii) reduction of loan balance; (iv) conversion from
one premium mode to another; (v) transfer of shares from one fund to another;
(vi) policy conversion; (vii) policy change; (viii) redemption of shares; and
(ix) other exceptional transactions requested by the Participant. These charges
are payable by a Participant in cash or from proceeds realized from the
redemption of mutual fund shares. The Company reserves the right to adjust
these charges at any time and from time to time.
The charges, commissions and fees described above do not include certain fees
which are charged by the Insurance Companies and are found in the policies,
mutual funds and are described in the prospectuses of such funds, or which are
charged by any of the variable universal life policies offered and are also
discussed in the prospectuses of those policies.
6. TERMINATION FEE; LIQUIDATION CHARGE--The Company will charge a termination
fee of $100 when a Program is terminated by either the Participant or the
Company, except for termination at the end of ten years. A Participant also
will be charged a $25 liquidation charge per fund whenever a fund is
liquidated, regardless of whether the Program is being terminated, except at
termination at the end of ten years. These fees are based upon the Company's
administrative costs for processing terminations and liquidations.
7. ADDITIONAL INVESTMENTS--In order to offset the interest, service charges
and administrative fees a Participant incurs in a Program, without any
additional investment on his part, his mutual fund shares must yield dividends
or capital gains distributions, or experience growth, to an extent in excess of
such interest, charges and fees. There is no assurance that this result will be
attained. If this result is not attained, the Participant must make additional
investments in mutual fund shares in order to avoid a termination of the
Program pursuant to the requirements set forth in "Margin and Collateral
Requirements."
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THE PROGRAMS
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1. GENERAL; DISTRIBUTION OF PROGRAMS
The securities offered by this Prospectus are personalized investment
programs which coordinate the acquisition of mutual fund shares and insurance
over a period of ten years, commencing with the due date of the initial premium
advanced under the Program.
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The Company does not offer or finance the purchase of equity securities. This
Prospectus relates only to the Programs described herein. No offer is made
hereby of any security representing an interest in the Company or any of its
affiliates. Participants will have no voting rights or ownership interests and
will not share in profits or losses of either the Company or any affiliate,
except that Participants who purchase shares of the Fund Group will have the
rights and interests of a shareholder with respect to the Fund Group.
The Programs are neither distributed through underwriters nor traded in
securities markets. Unlike other securities, Participants may not sell or trade
their Programs, rather the Programs must be held for the ten year period unless
earlier terminated. As personalized investment programs, they are sold only
through registered representatives (the "Representatives") of the Broker-Dealer
or other independent securities dealers with whom the Company, the Broker-
Dealer and one of the Insurance Companies have agreements.
The Representatives are jointly licensed to sell both mutual funds and
insurance. As registered representatives of the Broker-Dealer, they are
authorized to sell mutual fund shares offered in the Programs, as well as the
Programs themselves. As licensed agents of one or more of the Insurance
Companies, they are authorized to sell various forms of life, accident, and
health insurance.
The Representatives sell the Programs on a best-efforts basis. No
underwriting compensation is paid to the Broker-Dealer or any other party in
connection with the sale of the Programs. The Broker-Dealer typically receives
a commission on the sale of mutual fund shares in connection with a Program. A
portion of any commission received by the Broker-Dealer is paid to the
Representative. In his capacity as a licensed insurance agent, the
Representative also receives commissions from one of the Insurance Companies on
insurance sold as part of any Program. See "Summary of Charges."
2. HYPOTHETICAL ILLUSTRATIONS
One feature of the Programs is the possibility of using the appreciated value
of purchased mutual fund shares (as well as dividends or capital gains
distributions thereon) to help defray the amount of Account Indebtedness. This
depends on the actual performance of mutual fund shares purchased, and any
given fund may decline rather than appreciate in value. Hypothetical
illustrations are available from registered representatives, and potential
Participants are strongly advised to obtain these illustrations.
3. DETERMINATION OF SUITABILITY
Prior to the sale of a Program, a registered representative of the Broker-
Dealer will review the prospective Participant's financial circumstances and
may, without obligation, provide him with a written proposal prepared by the
Broker-Dealer setting forth in detail, among other things, the nature and
extent of the prospective obligations, fees, commissions, or other remuneration
to be derived by the Company, the Broker-Dealer and others from the sale of a
Program. Since the interest rate may fluctuate and a Participant may vary his
investment in mutual fund shares in the future, the charges and commissions may
change in the period after a Program is initiated. See "Summary of Charges; The
Programs--Insurance Premium Loans to Participants."
Prior to the sale of a Program, the Broker-Dealer will make an independent
assessment as to whether the entire transaction, including the loan
arrangement, is suitable for the prospective Participant; this in no way
relieves the prospective Participant from the responsibility of making his own
considered determination as to whether a particular Program is suitable for
him.
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At the request of a Participant, a Program will be reviewed by the Broker-
Dealer at any time upon submission of appropriate current data, in order to
permit a Participant to determine its continued suitability. Any suggested
changes will be detailed in a written review, prepared by the Broker-Dealer,
which the Participant is free to adopt or reject. Depending on the changes
adopted, the costs and expenses of a revised Program may be more or less than
those previously applicable.
4. INVESTMENT IN MUTUAL FUNDS
(a) Types of Mutual Funds Available
Mutual fund shares available for purchase in the Programs include the shares
of open-end investment companies registered under the Investment Company Act of
1940 with which the Broker-Dealer has a selling agreement and certain no-load
funds. These shares generally have a sales charge. In general mutual fund
shares purchased are subject to "front-end" sales charges from which the
Broker-Dealer is paid its commissions. Many funds which do not have a "front-
end" sales charge will charge a "back-end" sales charge upon redemption of the
shares, which amount is contingent on the number of years the Participant has
held the shares. Funds may also have asset-based charges, which are taken out
periodically from the average daily net asset value of such funds. "No load"
funds, which do not have any sales charges except for asset-based sales charges
and service fees of no more than .25% of average annual net assets, may be used
if the Broker-Dealer has a selling agreement with the fund. No-load funds with
which the Broker-Dealer does not have a selling agreement may be used only for
Programs that comply with the following requirements: (1) the premium must be
paid annually and be a minimum of $5,000, (2) the initial margin requirements
must be 1800% and no mutual fund shares may be reregistered out of the Program
during its ten year life, (3) a Program fee of $200 must be paid at the
inception of the Program, and (4) the fund must fulfill the Company's
administrative and confirmation requirements. Prospectuses for any mutual fund
available for purchase in a Program should be obtained through sales
representatives. Among the mutual fund shares available for purchase in
conjunction with the Programs are shares issued by the Fund Group. See "The
Company and Its Affiliates--Interest in Mutual Funds."
The mutual funds available for the Programs have portfolio securities which
have been selected by the management of each fund on the basis of its belief as
to either potential dividend income or capital appreciation or both. Certain of
the mutual funds have portfolios which are selected from the common stocks of
large, well-known, publicly held corporations with established records of
dividend payments. The portfolio securities included in certain other mutual
funds generally afford lower yields and pay smaller or no dividends since their
major objective is capital appreciation. Instead, earnings, if any, may be
reinvested by the issuers of such securities for purposes of their expansion,
research and the general development of their operations. The element of risk
connected with such an investment may, therefore, be higher than that
experienced with a more conservative portfolio of securities having higher
yields and lower price-earnings ratios. The investment policy, objectives,
performance history, and the qualifications of the management of each mutual
fund whose shares are sold by the Broker-Dealer, as well as the sales charges
and details as to the automatic reinvestment plans, are set forth in the
prospectuses of the respective funds available for the Programs. Mutual fund
investments are, of course, subject to the market fluctuations and risks
inherent in any investment in securities. There is no assurance that the
objectives of any of the mutual funds offered in the Programs will be realized,
nor may any representations be made as to their performance. The prospectus for
each mutual fund in which a Participant is interested must be furnished to him
with this prospectus. No potential participant in a Program may purchase mutual
fund shares without first obtaining a prospectus for such shares. A prospective
Participant should choose the mutual fund which is most suitable for his
particular
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needs, and reference should be made to the specific fund prospectus for
information on its investment objectives and policies, sales charges, and other
relevant information about such fund.
(b) Minimum Required Initial Investment
If a Participant decides to begin a Program, an investment in the mutual fund
selected by him is made in an amount at least equal to the minimum required
initial investment. Any mutual fund shares which are to be used as collateral
for premium loans must be held by a prospective Participant for at least 31
days. If a prospective Participant already owns sufficient qualified shares of
a mutual fund which permits reinvestment of dividends and capital gains
distributions, these shares may be utilized to initiate and maintain a Program.
The initial investment must be at least 250% of the insurance premium for most
Programs, regardless of the mode of premium payment selected. Programs using
no-load funds with which the Broker-Dealer does not have a selling agreement
require an initial investment of at least 1800% of the initial insurance
premium, which premium must be paid annually. Prospective Participants are
cautioned, however, that the minimum investment required by certain mutual
funds for the purchase of their shares may exceed the minimum investment
required by the Company to initiate a Program ($1,200 for most Programs).
Orders for mutual funds will be accepted only from those persons who desire
to make their mutual fund investment irrespective of the Insurance Companies'
insurability requirements. Accordingly, the purchase of the initial order of
mutual funds shares will be required even though the person may not be a
Participant in the Program because he is uninsurable. Individuals proposed for
insurance who have had medical problems, who have been denied insurance in the
past, or who are in higher risk groups, may bear a much greater risk for the
Insurance Companies and may not be issued an insurance policy or may have to
pay additional premiums.
No fees charged at the initiation of a Program apply to insurance. Thus no
conditional receipt for insurance will be issued; that is, a Participant will
be without insurance coverage until (i) the application for insurance is
approved; and, (ii) the expiration of 31 days from the date of purchase of the
mutual fund shares. If, however, a Participant wishes to conditionally obtain
insurance coverage prior to completion of the underwriting process, he may pay
one-twelfth of the annual premium scheduled for his Program, or $50, whichever
is greater, in exchange for a conditional receipt at the time he completes the
application for insurance, with the exception of Chubb Sovereign policies,
where a Participant must make one premium payment in the applicable mode to
conditionally obtain coverage. Such conditional insurance coverage may not be
available in all cases.
(c) Company Administrative and Confirmation Requirements
The only mutual funds available for sale by the Broker-Dealer in connection
with the Programs are those which agree to use the Company's administrative and
confirmation requirements. Previously purchased mutual fund shares may be used
if the fund agrees to use the Company's administrative and confirmation
requirements. Moreover, the Participant need not use the services offered by
the Broker-Dealer in purchasing mutual funds to be pledged with the Company at
the start of the Program.
Mutual funds available for sale by the Broker-Dealer in connection with the
Programs must provide for the automatic reinvestment of dividends and capital
gains distributions in mutual fund shares. Ordinary income dividends generally
are reinvested either at net asset value or at the public offering price, which
usually includes the sales charge. Capital gains distributions generally are
reinvested at net asset value. If a service charge is applicable, it is made
irrespective of the Program.
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5. ACQUISITION OF INSURANCE
A Program allows a Participant to purchase insurance by financing the
premiums through a loan secured by his mutual fund shares.
Insurance available for purchase in connection with a Program may vary from
state to state, depending on whether Chubb Life, Chubb Sovereign or Colonial is
licensed to sell insurance in a particular jurisdiction, and whether a
jurisdiction in which one of the Insurance Companies is licensed has approved a
particular insurance product.
Whole life, variable universal life, single premium whole life, level term,
renewable or convertible term, decreasing term and various forms of disability
income insurance are available for purchase in a Program on a nonparticipating
basis. Generally, all whole life insurance contracts contain the following
features: (i) incontestability--the policies are incontestable after a period
of two years from the date of issue except as to any additional benefits
covered by a rider in the event of accidental death or disability, or a waiver
of premium (see below); (ii) suicide--if within two years from the date of
issue, or less if so provided by the laws of a particular state, the insured
dies by suicide, the amount payable under the policy is limited to the amount
of the premiums which have been paid; (iii) change of beneficiary--the owner of
the policy may change the beneficiary under the policy at any time by written
notice to the issuing insurance company; (iv) automatic premium loan option--
any premium not paid by the end of the grace period (31 days) is automatically
paid by a policy loan if there is a sufficient cash value; (v) nonforfeiture
options--upon failure to continue the required premium payments, the owner of
the policy may surrender the policy for its cash value, if any, or elect to
receive paid up life insurance of a reduced face amount, or extended term
insurance of the original face amount but for a limited period of time; and
(vi) settlement options--providing for various methods pursuant to which the
owner of the policy may choose to have the proceeds of the policy paid, upon
the insured's death.
Certain whole life policies issued by one or more of the Insurance Companies
provide for interest, based on current interest rate levels, credited to the
cash value element or fund account of the policies. The Insurance Companies may
adjust the interest rate as economic conditions change. Also, the variable
universal life policies issued by the Insurance Companies provide for an
accumulation of cash value based on the investment experience of the underlying
funds in which the premiums are invested. Because the build-up of cash value
within these types of policies may vary, there is a possibility that the policy
may become paid up before the Program's ten year termination. In this case, the
Program may terminate at the Company's option. If the Program is extended,
there may be no further requirement for collateral, although the Participant
may continue investing in mutual fund shares. Also, since there is no guarantee
of accumulation of cash value with a variable universal life policy, it is
possible that the policy would lapse by its terms during the course of the
Program. Please see the prospectus of the variable universal life policy for
further information.
Policyholders of whole life, single premium life, and variable universal life
insurance policies offered in the Programs may borrow against the cash value of
the policies. Such loans outstanding as of the date of this Prospectus may bear
interest at a rate ranging from 4% to 13% per annum. Certain policies provide
for a variable loan interest rate. The Participant should inquire as to the
policy loan interest rate provision of the policy included in the Program.
Participants should also consider that loans taken out of some life insurance
policies may be subject to income and additional taxes and should consult their
tax advisor for further information. Policy loans may be available to a
Participant to reduce the unpaid balance of his Account Indebtedness or to
purchase additional mutual fund shares in the event of an impending involuntary
termination of his Program.
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Maximum limits with respect to the amount of life insurance available under a
Program shall be determined by the Insurance Company. However, the Insurance
Company will not allow any amount greater than that which, in its opinion, is
suitable to the particular needs of the proposed insured and financial
abilities of the prospective Participant.
The amount of the premium which is due on any insurance contract will, of
course, vary with the size and type of the policy, the age of the insured, and
the extent of any additional benefits desired, such as: (i) waiver of premium
in the event of disability so that the policy will remain in force without
payment of premium; (ii) family coverage which extends insurance protection to
include the insured's spouse and children; (iii) double or triple indemnity in
the event of accidental death as the result of bodily injury; (iv) increasing
or decreasing term insurance; or (v) disability income protection.
A Participant may use term insurance in a Program. The basic effect of using
this form of insurance is that for any given premium the death benefit is
substantially increased while the cash value accumulated is either greatly
reduced or eliminated.
6. AGENCY AGREEMENT AND LIMITED POWER OF ATTORNEY
An Agency Agreement and Limited Power of Attorney (the "Agency Agreement") is
executed by a Participant contemporaneously with the signing of the application
for insurance or the purchase or delivery of mutual fund shares to be used in
the Program. It is also signed by the Company and is thereafter effective until
terminated by the Participant or the Company. Upon giving notice in writing or
via facsimile, a Participant may terminate the Agency Agreement at any time,
which automatically results in termination of a Program, but the Company may do
so only for reasons discussed under "The Programs--Termination."
Under the Agency Agreement, the Company, as attorney-in-fact of the
Participant, has the power to:
(a) arrange loans to Participants to pay insurance premiums and
administrative fees, if not paid in cash, as they become due or excess
premiums as agreed to by the Company;
(b) receive pledge as collateral of all mutual fund shares acquired in
the Program, furnished by a Participant or available for pledge, having an
aggregate redemption value of up to the applicable margin requirement of
250% or 1800% of a Participant's Account Indebtedness as security therefor;
and
(c) pledge the Participant's mutual fund shares securing his Account
Indebtedness if necessary for the purpose of obtaining funds to finance the
Programs.
After execution of the Agency Agreement, no further notice is given to a
Participant prior to the loans made by the Company to a Participant to pay
insurance premiums. All mutual fund shares purchased in the Program will be
registered in the name of the Company, as custodian for the Participant, to be
held by the mutual fund companies, subject to instructions of the Company
pursuant to the Agency Agreement. Certificates for mutual fund shares acquired
by the Participants will be issued upon direction of the Company only in those
instances where it is necessary to meet the legal collateral requirements of a
state or governmental agency.
7. INSURANCE PREMIUM LOANS TO PARTICIPANTS
(a) Loans Under the Agency Agreement
Upon issuance of a policy by an Insurance Company and contingent upon
acceptance of the policy by the Participant, the Company makes a loan to the
Participant under the Agency Agreement in an amount equal to the selected
premium mode. Mutual fund shares are then pledged to secure the loan.
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As each premium becomes due, a new loan equal to the next premium and
administrative fee, if not paid in cash, is made and added to the Participant's
Account Indebtedness. It is intended that such loans will recur each premium
due date until the expiration of ten years after the due date of the initial
premium advanced under the Program, unless the Program is sooner terminated.
Thus, interest, as well as principal, is borrowed, and all mutual funds
purchased or otherwise accumulated in the Program having redemption value of up
to 250% of the Participant's Account Indebtedness, or 1800% for the initial
premium loan of Programs using certain no-load funds, are pledged as collateral
for such loans. Shares representing any excess in redemption value over the
applicable margin requirement of 250% or 1800% of the Participant's Account
Indebtedness are not required to be pledged as collateral.
Pursuant to the Agency Agreement, the Company may renew a Participant's
Program at the due date for the insurance premium, in accordance with the same
basic Program terms and conditions (including but not limited to the "Margin
and Collateral Requirements" discussed below) for a period of time ending as of
the due date of the next insurance premium. For example, if the insurance
premium payment mode is annual, the renewal of the Program will be for a period
of one year. Until the Programs are terminated, it is intended that such loans
will recur over the life of the Program.
Assuming that the minimum collateral requirements described hereinafter are
met, the Company will recompute a Participant's Account Indebtedness in advance
of the premium due date so that the loan can be renewed on the premium due date
of the insurance policy during each year of a Program. The new Account
Indebtedness is determined by adding the amount of the Participant's existing
Account Indebtedness to the amount of the next premium due, new fees, plus
interest. See "Summary of Charges."
Since May 29, 1970, the date the Company first offered Programs for sale, the
nominal interest rate charged by the Company pursuant to the Agency Agreement
has ranged from a low of 6% to a high of 13%. An increase in the interest rate
on the loans will serve to increase the cost of the Program and diminish its
value to a Participant upon termination.
(b) Margin and Collateral Requirements
Under SEC Rule 11d1-2, any mutual fund shares used to secure premium loans
must have been owned by the Participant for a minimum holding period of 31 days
before credit secured by such mutual fund shares is extended to the
Participant. The holding period applies to all purchases of mutual fund shares,
whether for initial purchases, renewals, or meeting margin requirements.
The maximum credit allowed by Regulation G (adopted by the Federal Reserve
Board and applicable to loans made under the Programs) against pledged mutual
fund shares is 50% of the value of the shares. The Company's present policy is
to make an initial loan not to exceed 40% of the value of the mutual fund
shares pledged as security. If the Federal Reserve Board should increase margin
requirements beyond the Company's requirement, a Participant would be required
to acquire and pledge more securities to finance the premiums due and to
maintain the ratio required to prevent involuntary termination of the plan. It
is possible that such increased margin requirements might require the Company
to discontinue the sale of its Programs and terminate Programs then
outstanding. It is also possible that periods may exist when the Federal
Reserve Board margin regulations will preclude the financing of additional
premiums.
As a matter of policy, independent of Federal regulations, the Company
presently requires Participants to provide qualified collateral with values
exceeding the amount of their indebtedness by specific margins in three
different situations: at initiation, at renewal, and between renewal dates.
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(i) Initiation Requirement--Each initial loan by the Company to pay
insurance premiums for all Programs except those using certain no-load
funds must be secured by qualified mutual fund shares which have a value of
at least 250% of the premium to be financed. Accordingly, a Participant
must pledge qualified shares having a value of at least $1,200 to initiate
an annual Program which has a life insurance policy with the minimum annual
premium of $480. Programs using no-load funds with which the Broker-Dealer
does not have a selling agreement require an 1800% initiation requirement
and qualified shares having a value of at least $90,000 for a minimum
annual premium of $5,000.
(ii) Maintenance Margin Requirement--The Company requires Participants to
maintain qualified collateral with a value of at least 130% of Account
Indebtedness at all times. Failure to maintain the 130% requirement will
result in termination of a Program. The Company generally will notify a
Participant of a decline in value in his mutual fund shares, although it is
not required and undertakes no obligation to do so. IF THE VALUE OF SHARES
PLEDGED WITH THE COMPANY DECLINES BELOW 130% OF A PARTICIPANT'S ACCOUNT
INDEBTEDNESS, THE ACCOUNT INDEBTEDNESS WILL AUTOMATICALLY BECOME DUE AND
PAYABLE, AND THE COMPANY WILL TERMINATE THE PROGRAM AND SELL OR REDEEM THE
PLEDGED SHARES TO SATISFY THE DEBT, ALL WITHOUT NOTICE TO THE PARTICIPANT.
THE COMPANY WILL ACT PROMPTLY BUT ACCEPTS NO RESPONSIBILITY FOR ANY LOSS
INCURRED BY A PARTICIPANT DUE TO A REDUCTION IN THE VALUE OF MUTUAL FUND
SHARES ARISING FROM DELAYS IN REDEMPTION WHICH ARE BEYOND THE CONTROL OF
THE COMPANY. ANY SHARES NOT REQUIRED TO BE REDEEMED TO SATISFY THE ACCOUNT
INDEBTEDNESS WILL BE RELEASED FROM PLEDGE AND RE-REGISTERED TO THE
PARTICIPANT.
The Company intends to enforce its rights whenever the 130% requirement
is breached. If the Company is holding shares available for pledge, it will
pledge such shares with itself in order to maintain a Participant's 130%
margin requirement. No mutual fund shares pledged by the Company to secure
payment of one Participant's Account Indebtedness may be redeemed in order
to satisfy the payment of another Participant's Account Indebtedness.
(iii) Account Indebtedness at Renewal--At the time of renewal, a
Participant must have qualified shares pledged to the Company equal to
least 150% of the Participant's Account Indebtedness. The 150% renewal
requirement may be met in one of four ways: (a) a Participant's qualified
shares already pledged in the Program may have a value in excess of 150% of
the Account Indebtedness; (b) if the Company is holding additional
qualified shares available for pledge as custodian for the Participant
under the Agency Agreement, then the Company may automatically pledge
sufficient additional shares to cover the 150% requirement; (c) if the
Company is not holding enough qualified shares, then the Participant may
make the necessary shares available for pledge by purchasing additional
shares at least 31 days prior to the renewal date; or (d) a Participant may
make a cash payment to reduce the Account Indebtedness to no more than
66.66% of the value of the shares pledged in the Program. If the 150%
margin requirement is not met in one of these four ways, prior to the
renewal of a loan, the Company will terminate the Program. The Company may
notify a Participant 31 days prior to a renewal date if it appears that the
150% requirement may not be met, but the Company is under no obligation to
provide such notice.
(iv) Renewal Loan Margin Requirement--The Company requires at renewal
that a new premium loan be secured by qualified shares which have not been
previously pledged to the Program. The new qualified shares must have a
value of at least 250% of the new premium loan. If qualified shares are not
available to be pledged by the Company as custodian for the Participant,
then the Participant must provide additional qualified shares with a value
of at least 250% of the new premium loan before the life insurance policy
can be renewed within the Program.
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(c) A Participant's Personal Deficiency Resulting from the Loans
The Loans which the Company makes to Participants to finance insurance
premiums are made without recourse. Consequently, a Participant will not be
responsible for payment of a deficiency in the event the value of the pledged
shares is not sufficient to pay his entire Account Indebtedness. A Participant
should not infer from this that a Program will not result in a loss to him. The
appreciation of value of mutual fund shares and the costs and expenses of the
Program (including interest and fees) all will have a bearing on whether the
Participant incurs a loss in a Program.
(d) Release of Collateral
If at any time the redemption value of all the shares held in the
Participant's account exceeds 250% of the Participant's Account Indebtedness
for all Programs except those using certain no-load funds, the Participant may,
upon written request to the Company, have such excess released to him either in
shares or in cash. Shares are valued at their net asset value for redemption
purposes.
8. ADDITIONAL MUTUAL FUND SHARE PURCHASES
A Participant is under no obligation to make additional purchases of mutual
fund shares once a Program is initiated, except to the extent necessary to meet
the margin and collateral requirements described above. Failure to make
additional purchases generally may result in termination of a Participant's
Program since the amount of collateral required to secure a Participant's
Account Indebtedness will increase correspondingly with the amount of each
borrowing. Similarly, failure to purchase additional mutual fund shares in
order to prevent a decline in the aggregate redemption value of the pledged
shares below 130% of a Participant's Account Indebtedness will result in a sale
of existing collateral and termination of the Participant's Program.
Accordingly, many Participants must make investments, some as often as monthly,
in shares which are transferred into the name of the Company as custodian for
the Participant and held until they become qualified shares. These qualified
shares then will be pledged by the Company to itself if the value of the shares
previously pledged with the Company declines below the margin and collateral
requirements.
9. STATUS REPORTS
The Company, upon request, will furnish to each Participant annually a
statement of his Program account indicating the amount of his Account
Indebtedness and a current prospectus of the Company with respect to its
Programs. Annual and interim reports and current prospectuses of the mutual
fund(s) selected generally will be forwarded to Participants directly by the
particular funds. Current prospectuses and annual and interim reports of any
variable universal life insurance policy will be forwarded to Participants
directly by the issuing Insurance Company. Participants will receive
confirmations when mutual fund investments are made. The Company will, at any
time upon request, furnish a Participant with a statement of the total
redemption value of his pledged shares compared with his Account Indebtedness.
Annual reports of the Company containing financial statements reported upon by
independent auditors will also be furnished to a Participant at any time upon
request.
10. PROGRAM MODIFICATION
Subject to the minimum premium requirement of $480 annually for all Programs
except those using certain no-load funds for which the minimum premium
requirement is $5,000 and an annual premium, the amount of insurance and the
premium(s) to be financed may be reduced. If increased insurance protection is
20
<PAGE>
desired, a Participant may add either a new or existing policy, but only within
six weeks of the annual anniversary date of his Program. The cost of
acquisition (including the placement fee) must be paid by a Participant upon
the issuance of a new policy. If a Participant who is also the owner of the
Program's insurance policy desires to terminate the Program or modify the
insurance protection, he can surrender the policy (providing it has sufficient
cash value) and obtain extended term coverage (if available), an insurance
policy with reduced coverage, or a paidup policy for a reduced amount. Provided
the appropriate authorization form is on file with the Company, a Participant
or, if authorized, the Participant's registered representative, may direct the
redemption or exchange of mutual fund shares by telephone to the Company. The
Company will employ procedures that it believes are reasonable in order to
confirm that instructions communicated to it by telephone are genuine. These
procedures include (i) any Participant or registered representative providing
instructions by telephone to redeem or exchange shares must be on a recorded
telephone line, (ii) all such Participants or registered representatives must
supply the Company with personal identification information at the time of
redemption or exchange for verification purposes, and (iii) all transactions
relying on telephone instructions will be verified by a written confirmation
statement sent by the mutual fund to the Participant. If these "reasonable
procedures" or other procedures that may be developed are not employed in order
to confirm that instructions communicated by telephone to the Company are
genuine, the Company may be liable for any losses due to unauthorized or
fraudulent instructions.
The Company will not be liable to the Participant or any third party if the
Participant is unable to reach the Company by telephone. The Participant may be
unable to implement a telephone transaction during periods of drastic economic
or market change.
This telephone transaction privilege may be terminated or modified upon 60
days written notice to the Participants.
A Participant may likewise re-direct his periodic investment from one mutual
fund to another fund available in the Programs. The Company assesses an
additional charge to redeem shares of one mutual fund so that a Participant may
purchase another mutual fund's shares. See "Summary of Charges." Presently
there is no limit on the number of times a Participant may modify his Program;
however, the Company reserves the right at any time to limit the number of
times a Participant may modify his Program.
11. TERMINATION
Programs are entirely voluntary and may be terminated at any time by a
Participant, upon written notice mailed or transmitted via facsimile to the
Company. A Program will be terminated by the Company upon the occurrence of any
of the following: (i) the death of the Participant; (ii) the death of all
insureds covered by a policy issued as part of a Program; (iii) failure to meet
minimum collateral requirements due to a decline in the value of the mutual
fund shares securing premium loans; (iv) failure to meet minimum investment
requirements due to a decrease in insurance premiums advanced under a Program
unless waived by the Company to the extent permitted by law; (v) failure to
provide sufficient collateral to secure loans for premiums due under the
Program; (vi) inability of the Company to provide or arrange for financing of
premiums; (vii) failure of the Participant's bank to honor checks made payable
to the Company from the Participant's account. A Participant should clearly
understand that in the event of any of the above circumstances a Program may be
terminated by the Company without prior notice to the Participant. Programs
must be terminated not later than ten years from the due date of the initial
premium financed (unless extended at the option of the Company).
21
<PAGE>
If a Participant terminates his Program, he must pay his Account Indebtedness
in full, plus interest, to the date of payment. The Company also charges a $100
termination fee and liquidation charges unless the termination is at the end of
the tenth year of the Program. If the Company terminates a Program with prior
notice to a Participant, the Participant must pay his Account Indebtedness
within seven business days after a notice of termination. In either case, if a
Participant's Account Indebtedness is not paid, the Company has the right to
redeem as many of the Participant's qualified shares as necessary to pay his
debt.
To pay his Account Indebtedness, a Participant may: (i) redeem his mutual
fund shares and surrender his life insurance policy for its cash value; (ii)
redeem such shares and, if he has the right, borrow on the cash surrender value
of the life insurance policy, keeping the policy in force; (iii) redeem his
mutual fund shares only and independently continue the insurance; (iv) retain
his mutual fund shares and, if he has the right, surrender the insurance policy
for its cash value, if any; or, (v) retire the debt from funds unrelated to the
mutual fund shares or the insurance policy. The cash value of the insurance
policy alone will not provide adequate funds to liquidate all of the
accumulated indebtedness.
The continuance of the Program is dependent upon the Company's ability to
provide, or to arrange for, the financing of insurance premiums for
Participants. A Participant's Program may be involuntarily terminated if such
financing cannot be obtained by the Company. See "The Programs--Financing of
the Programs by the Company."
A Participant must maintain certain margin and collateral requirements in
order to avoid termination of his Program. See "The Programs--Insurance Premium
Loans to Participants."
12. RIGHTS OF PARTICIPANTS
(a) Program Rights
Participants in the Programs have certain rights in connection with the
Programs themselves (as distinct from the mutual funds shares and insurance
acquired in the Programs). These rights include the right to receive status
reports, the right to modify a Program, and the right to terminate a Program
entirely. See generally "The Programs--Status Reports; Program Modification;
Termination." However, Participants are not stockholders in the Company or any
of its affiliates and have no voting rights or other interests therein; except
that Participants who purchase shares of the Fund Group will have the rights
and interests of a shareholder with respect to the Fund Group.
(b) Voting of Mutual Fund Shares
The mutual fund(s) selected by a Participant will advise him of any meeting
where his shares may be voted and furnish him with a proxy statement and
appropriate voting forms. It is the responsibility of the Participant to
complete and return the proxy statement in order to vote his mutual fund
shares. The Company will vote the Participant's pledged shares or shares
available for pledge only if the Participant gives the Company specific written
instructions accompanied by a signed proxy. If such instructions and the signed
proxy are not received, the Company will take no action with respect to voting
the Participant's shares.
13. FINANCING OF THE PROGRAMS BY THE COMPANY
The Company's funds for financing the Programs are currently obtained through
Loan Agreements and Company-Lender Agreements (together the "Agreements") with
Colonial and Chubb Life. The Agreements provide for revolving credit
arrangements under which Colonial will make advances to the Company in an
22
<PAGE>
amount not to exceed $29,000,000 and Chubb Life will make advances to the
Company in an amount not to exceed $20,000,000. The loans are made at short
term lending rates agreed upon by the Company and its Lenders which are subject
to change in accordance with the Agreements. The Agreements contain minimum
collateral requirements co-extensive with the minimum collateral requirements
for Participants set forth herein. If the value of all of the Participants'
shares pledged to the Company declines below 130% of the Company's
indebtedness, Colonial or Chubb Life may demand that the Company redeem any
shares from Participant's Programs which do not meet the Company's margin and
collateral requirements and liquidate that portion of the Company's
indebtedness.
Under the Agreements, the failure of the Company to repay its debts gives
Colonial the right to terminate its obligation to make future advances and
declare all outstanding principal and interest to be due and payable. In this
event, the Company will not renew any Programs by making further loans to
Participants, and will redeem the qualified collateral to satisfy its
indebtedness to Colonial.
If the Company is unable to borrow funds in the future or to continue to
borrow funds under the 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. In addition, its ability to renew existing
loans may be impaired to the point of terminating, without notice to
Participants, all Programs at their loan renewal dates. The Company is under no
contractual obligation to continue to make loans on future Program renewal
dates; however, it intends to continue making such loans as long as funds are
available to it.
The Company may in the future borrow funds from affiliated or 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. All future material affiliated transactions and
loans will be generally available on terms no less favorable to the Company
than those from unaffiliated third parties; and all future material affiliated
transactions and loans, and any forgiveness of loans, will be approved by a
majority, if any, of the independent outside members of the Company's board of
directors not having any interest in the transactions.
- --------------------------------------------------------------------------------
SELECTED FINANCIAL DATA
- --------------------------------------------------------------------------------
SELECTED STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Year Ended December 31
Total Revenue......... $ 3,590,273 $ 3,004,114 $ 2,699,890 $ 2,475,154 $ 2,600,084
Net Income............ $ 458,294 $ 514,505 $ 330,545 $ 218,462 $ 32,190
Dividends Per Common
Share................ -- -- -- -- --
SELECTED BALANCE SHEET
DATA:
December 31,
Total Assets.......... $42,241,816 $ 3,773,719 $27,905,714 $22,930,802 $21,140,780
Loan Payable.......... $38,889,535 $30,924,833 $25,382,406 $21,413,588 $19,680,593
</TABLE>
23
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 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 funds 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 Participants'
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 $40,805,159 at December
31, 1994. Annual amounts due to the Company were as follows:
<TABLE>
<CAPTION>
2000-
1995 1996 1997 1998 1999 2004
---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Collateral loans receivable..................... $2.4 $2.8 $3.0 $2.7 $3.3 $26.6
(in millions)
</TABLE>
The Company's funds for financing the Programs are currently obtained through
Loan Agreements with its affiliates, Colonial and 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 December 31, 1994 (or during 1994)
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 December 31, 1994 was
4.60% and ranged from 3.25% to 8.85% during the year.
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.
24
<PAGE>
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 December 31, 1994 were
$39,500,000 compared to $31,300,000 at December 31, 1993. Funds borrowed at
December 31, 1994 represent $26,000,000 from Colonial and $13,500,000 from
Chubb Life. At December 31, 1993 funds borrowed represented $26,000,000 from
Colonial and $5,300,000 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.
A schedule of amounts due to related parties as of December 31, 1994 is
presented below. 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 1994 and 1993 was provided by Participants' loan
repayments, administrative fees for the placement and maintenance of Programs
and interest earned on investments.
LOAN SCHEDULE AS OF DECEMBER 31, 1994:
<TABLE>
<CAPTION>
LOAN FACE DAYS TO MATURITY
SOURCE DATE (MILS) RATE MATURITY DATE
- ------ -------- ------ ----- -------- --------
<S> <C> <C> <C> <C> <C>
Chubb Life.............................. 12/30/94 $10.0 6.53% 31 01/03/95
09/29/94 1.0 8.85% 365 09/29/95
10/25/94 0.5 8.85% 339 09/29/95
11/17/94 1.0 8.85% 316 09/29/95
12/28/94 1.0 8.85% 275 09/29/95
-----
$13.5
Colonial................................ 04/18/94 $ 2.3 4.95% 270 01/13/95
08/18/94 14.5 5.37% 270 05/15/95
10/25/94 9.2 6.10% 269 07/21/95
-----
$26.0
</TABLE>
25
<PAGE>
RESULTS OF OPERATIONS
The Company concluded the year ended December 31, 1994 with net operating
income of $458,294 as compared to net operating income of $514,505 in 1993 and
$330,545 in 1992.
Total revenues through December 31, 1994 were $3,590,273 versus $3,004,114 in
1993 and $2,699,890 in 1992. 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. Collateral loans receivable as of
December 31, 1994 were $40,805,159 as compared to $33,348,372 in 1993 and
$27,559,447 in 1992. Comparatively, collateral loan interest was $3,094,809,
$2,523,551 and $2,214,579 for the years ended December 31, 1994, 1993, and
1992. The average interest rate charged to each Participant's outstanding loan
balance was 8.65%, 8.50% and 9.14% for the years 1994, 1993 and 1992,
respectively.
The Company's collateral loans receivable, collateral loan interest and
average interest rate charged to each Participant's loan balance for the three
years ended December 31 are summarized as follows:
<TABLE>
<CAPTION>
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
Collateral loans receivable.............. $40,805,159 $33,348,372 $27,559,447
Collateral loan interest................. $ 3,094,809 $ 2,523,551 $ 2,214,579
Average Participant interest rate........ 8.65% 8.50% 9.14%
</TABLE>
Interest expense on the Loan Agreements increased in 1994 as compared to 1993
due to increases in interest rates and amounts borrowed by the Company.
Interest expense decreased, however, in 1993 compared to 1992 due to declining
interest rates during 1993 even though the Company borrowed additional amounts
during that year. The Company's outstanding loans payable, interest expense and
average cost of borrowings for the three years ended December 31 are summarized
as follows:
<TABLE>
<CAPTION>
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
Loans Payable............................ $38,889,535 $30,924,833 $25,382,406
Interest expense......................... $ 1,516,229 $ 973,490 $ 1,013,582
Average loan interest rate............... 4.60% 3.50% 4.44%
</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 December 31, 1994, were
$1,308,976 as compared to $1,239,079 in 1993, and $1,184,881 in 1992.
The Company may increase the interest rate charged to Participants to a
maximum of the prime interest rate plus 3% as its costs 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
26
<PAGE>
services. For the years ended December 31, 1994, 1993 and 1992, the number of
programs administered by the Company were 6,662, 6,328, and 5,782,
respectively.
Investment income earned by the Company increased in 1994 as compared to 1993
due to changes in the level of cash and investments held year to year.
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, 1993 and 1992
and does not expect to receive any fees in 1995.
- --------------------------------------------------------------------------------
LEGAL MATTERS
- --------------------------------------------------------------------------------
1. LITIGATION
In the ordinary course of business, legal proceedings involving the Company
periodically arise. Currently, the Company is not the subject of any material
pending legal proceedings.
2. LEGAL OPINIONS
The validity of the securities offered hereby has been passed upon for the
Company by Charles C. Cornelio, Esquire, Vice President, Counsel and Assistant
Secretary to Chubb Life.
- --------------------------------------------------------------------------------
EXPERTS
- --------------------------------------------------------------------------------
This Registration Statement includes on the following pages, the Company's
annual financial statements. The consolidated balance sheets of the Company at
December 31, 1994 and 1993, and the consolidated results of operations and cash
flows for each of the three years in the period ended December 31, 1994,
appearing in this Prospectus and Registration Statement, have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon,
appearing elsewhere herein, and are included in reliance upon such report,
given upon the authority of such firm as experts in accounting and auditing.
27
<PAGE>
HAMPSHIRE FUNDING, INC. AND SUBSIDIARY
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.......................... F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations and Retained Earnings................ F-4
Consolidated Statements of Cash Flows...................................... F-5
Notes to Consolidated Financial Statements................................. F-6
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Hampshire Funding, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheets of Hampshire
Funding, Inc. and Subsidiary as of December 31, 1994 and 1993, and the related
consolidated statements of operations and retained earnings and cash flows for
each of the three years in the period ended December 31, 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Hampshire Funding, Inc. and Subsidiary at December 31, 1994 and 1993, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1994, in conformity with generally
accepted accounting principles.
As discussed in Note 2 to the financial statements, in 1994 the Company changed
its method of accounting for postemployment benefits, and in 1993, the Company
changed its method of accounting for postretirement benefits other than
pensions, and income taxes.
ERNST & YOUNG LLP
Boston, Massachusetts
January 27, 1995
F-2
<PAGE>
HAMPSHIRE FUNDING, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1993
----------- -----------
<S> <C> <C>
Assets:
Cash and cash equivalents............................ $ 1,311,399 $ 327,667
Accounts receivable from customers................... 47,215 37,680
Federal income taxes recoverable..................... 78,043
----------- -----------
Total Current Assets............................. 1,436,657 365,347
Collateral notes receivable (including accrued interest
of $1,027,677 in 1994 and $856,868 in 1993)........... 40,805,159 33,348,372
Limited partnership investment......................... 60,000
----------- -----------
Total Assets..................................... $42,241,816 33,773,719
=========== ===========
Liabilities and Stockholder's Equity:
Liabilities:
Due to affiliates.................................. $ 1,188,275 1,073,665
Accrued expenses and other liabilities............. 316,250 373,999
Federal income taxes payable....................... 11,760
----------- -----------
Total Current Liabilities........................ 1,504,525 1,459,424
Loans payable to affiliates (net of prepaid interest
of $610,465 in 1994 and $375,167 in 1993)........... 38,889,535 30,924,833
----------- -----------
Total Liabilities................................ 40,394,060 32,384,257
----------- -----------
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.................................. 1,247,756 789,462
----------- -----------
Total Stockholder's Equity....................... 1,847,756 1,389,462
----------- -----------
Total Liabilities and Stockholder's Equity....... $42,241,816 $33,773,719
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
HAMPSHIRE FUNDING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Interest on collateral notes receivable.. $3,094,809 $2,523,551 $2,214,579
Program participant fees................. 464,851 457,636 428,794
Interest on investments.................. 30,613 22,927 21,517
Partnership syndication fees............. 35,000
---------- ---------- ----------
3,590,273 3,004,114 2,699,890
Operating Expenses:
Interest on loan agreements.............. 1,516,229 973,490 1,013,582
General and administrative............... 1,308,976 1,239,079 1,184,881
Realized loss on investments............. 60,000
---------- ---------- ----------
2,885,205 2,212,569 2,198,463
---------- ---------- ----------
Income before income taxes............... 705,068 791,545 501,427
Federal income tax (benefit):
Current................................ 257,593 283,525 170,882
Deferred............................... (10,819) (6,485)
---------- ---------- ----------
246,774 277,040 170,882
---------- ---------- ----------
Net Income........................... 458,294 514,505 330,545
Retained earnings (deficit) at beginning of
year...................................... 789,462 274,957 (55,588)
---------- ---------- ----------
Retained earnings at end of year........... $1,247,756 $ 789,462 $ 274,957
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
HAMPSHIRE FUNDING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1994 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
Operating activities:
Net Income......................... $ 458,294 $ 514,505 $ 330,545
Adjustments to reconcile net income
to net cash used in operating
activities:
Increase in accounts receivable
from customers.................. (9,535) (11,160) (20,226)
Increase (decrease) in accrued
expenses and other liabilities.. (57,749) 126,277 112,100
Increase (decrease) in due to af-
filiates........................ 114,610 (311,931) 1,040,332
Increase in collateral notes re-
ceivable........................ (7,456,787) (5,788,925) (5,329,138)
Change in federal income taxes
payable (recoverable)........... (89,803) (3,273) (18,509)
(Increase) decrease in prepaid
interest on affiliated loan
agreements...................... (235,298) (157,573) 68,818
------------ ------------ ------------
Net cash used in operating ac-
tivities...................... (7,276,268) (5,632,080) (3,816,078)
Investing activities:
Write off (purchase) of limited
partnership investment............ 60,000 (60,000)
Net cash provided by investing ac-
tivities.......................... 60,000 (60,000)
Financing activities:
Proceeds from affiliated loan
agreements........................ 73,400,000 59,000,000 70,500,000
Principal payments on affiliated
loan agreements................... (65,200,000) (53,300,000) (66,600,000)
------------ ------------ ------------
Net cash provided by financing
activities.................... 8,200,000 5,700,000 3,900,000
------------ ------------ ------------
Increase in cash and cash
equivalents................... 983,732 67,920 23,922
Cash and cash equivalents at begin-
ning of year........................ 327,667 259,747 235,825
------------ ------------ ------------
Cash and cash equivalents at end of
year................................ $ 1,311,399 $ 327,667 $ 259,747
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
HAMPSHIRE FUNDING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The accompanying consolidated financial
statements include the accounts of Hampshire Funding, Inc. ("Hampshire") and
its wholly-owned subsidiary, Hampshire Syndications, Inc. Hampshire is a
wholly-owned subsidiary of Chubb Life Insurance Company of America ("Chubb
Life"). Affiliates of Chubb Life include The Colonial Life Insurance Company of
America ("Colonial"), Chubb Sovereign Life Insurance Company ("Chubb
Sovereign"), Chubb America Service Corporation ("CASC"), Chubb Investment
Advisory Corporation and Chubb Securities Corporation ("Chubb Securities"),
which are all 100% owned by Chubb Life. Chubb Life is 100% owned by The Chubb
Corporation ("Chubb").
Transactions with Affiliates: Hampshire offers and administers Programs
whereby Participants obtain life insurance coverage from Chubb Life, Colonial
and Chubb Sovereign. Under the Programs, insurance premiums are paid by
Participants through a series of loans from Hampshire which are recorded as
"collateral notes receivable." Loans to the Participants are secured by
Participants' ownership in shares of regulated investment companies. The loans
to Participants are funded substantially with the proceeds from loan
arrangements with Colonial and Chubb Life (see Note 6). Chubb Securities is a
registered broker-dealer that buys and sells the shares for Participants. The
fair value of a Participant's secured investment company shares must exceed
150% of the total loan balance plus accrued interest (Participant's total
Account Indebtedness). If the value of the shares pledged as collateral to
Hampshire declines below 130% of the Participant's total Account Indebtedness,
Hampshire will terminate the Program and liquidate shares sufficient to repay
the indebtedness. All Programs are ten years in length. Upon Program
conclusion, loan balances and accrued interest become due.
Collateral notes receivable from Participants were $40,805,159 at December
31, 1994. Annual amounts due to Hampshire under collateral notes receivable
were as follows:
<TABLE>
<CAPTION>
2000-
1995 1996 1997 1998 1999 2004
---- ---- ---- ---- ---- -----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Collateral notes receivable..................... $2.4 $2.8 $3.0 $2.7 $3.3 $26.6
</TABLE>
Substantially all general and administrative expenses are allocated to
Hampshire by CASC in accordance with mutually agreed upon cost allocation
methods which Hampshire and CASC believe reflect a proportional allocation of
common expenses and which are commensurate for the performance of the
applicable duties.
Recognition of Revenues and Expenses: Interest on collateral notes
receivable and administrative fees charged to Participants for establishing and
maintaining Programs are recognized as revenue when earned. Partnership
syndication fees represent fees earned by Hampshire Syndications, Inc. from its
limited partnership investment. No such fees were earned in 1994 or 1993.
Cash Equivalents: For purposes of reporting cash flows, cash equivalents
include cash invested in securities purchased under repurchase agreements and
short-term corporate notes, all of which have remaining maturities of three
months or less at the date of purchase.
F-6
<PAGE>
HAMPSHIRE FUNDING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1994, Hampshire entered into a reverse repurchase agreement
with the Bank of New Hampshire ("Bank") in the amount of $158,000. The
agreement matures on January 31, 1995. This reverse repurchase agreement is
included in cash equivalents in the accompanying consolidated balance sheet.
Hampshire requires that the market value of the underlying securities provided
as collateral for repurchase agreements be a minimum of 100% of their
contractual resale price to the Bank.
Short-term corporate notes are carried at cost which approximates market
value.
2. CHANGE IN ACCOUNTING PRINCIPLES
Effective January 1, 1994, Chubb Life and Hampshire adopted SFAS No. 112,
"Employers' Accounting for Postemployment Benefits." SFAS No. 112 requires that
the expected cost of providing postemployment benefits, principally severance,
disability and unemployment benefits, to former or inactive employees, their
beneficiaries and covered dependents be accrued during the years that the
employees render the necessary service. Prior to 1994, the pay as you go, or
cash method was used to recognize the cost of these benefits. The cumulative
effect of this change as of January 1, 1994 was immaterial to Hampshire.
Hampshire's allocated portion of such 1994 costs was $6,280, which has been
included in General and Administrative expenses in the accompanying financial
statements.
Effective January 1, 1993, Chubb Life and Hampshire adopted SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other than Pensions." SFAS
No. 106 requires that the expected cost of providing postretirement benefits,
principally health care and life insurance, to employees, their beneficiaries
and covered dependents be accrued during the years that the employees render
the necessary service. Prior to 1993, the pay-as-you-go, or cash method was
used to recognize the cost of these benefits. The cumulative effect of this
change as of January 1, 1993 was immaterial to Hampshire. Hampshire's allocated
portion of such costs was $24,631 and $18,530 in 1994 and 1993, respectively,
which has been included in General and Administrative expenses in the
accompanying financial statements.
Chubb Life and Hampshire also adopted SFAS No. 109, "Accounting for Income
Taxes," as of January 1, 1993. SFAS No. 109 prescribes an asset and liability
method of accounting for income taxes, rather than the deferred method
previously used. The objective of the asset and liability method is to
recognize an asset or liability for the expected future tax effects
attributable to differences between the financial reporting and the tax basis
of assets and liabilities, based on the enacted tax rates and other provisions
of tax law. The cumulative effect of such change as of January 1, 1993 was
immaterial to Hampshire. Of the $78,043 federal income taxes recoverable at
December 31, 1994, $10,819 represents a deferred tax asset related to the post-
retirement benefits and postemployment benefits expense of $30,911 recorded in
1994. The deferred tax asset at December 31, 1993 was $6,485, which also
related to postretirement benefits.
3. FEDERAL INCOME TAXES
The operations of Hampshire are included in the consolidated federal income
tax return of Chubb. Federal income tax is allocated by Chubb Life as if
Hampshire filed a separate income tax return. Deferred tax assets and
liabilities are recognized for the expected future tax effects attributable to
temporary differences between the financial reporting and tax bases of assets
and liabilities, based on enacted tax rates and other
F-7
<PAGE>
HAMPSHIRE FUNDING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
provisions of tax law. Federal income taxes have been provided at the statutory
rate of 35% in 1994 and 1993 and 34% in 1992.
Hampshire made income tax payments to Chubb of $336,577, $280,313 and
$189,391 in 1994, 1993 and 1992, respectively.
4. RETIREMENT BENEFITS
Hampshire participates in the Pension Plan for the Employees of Chubb Life
and Participating Affiliates, a defined benefit plan, which covers
substantially all of its employees. Accumulated plan benefits, plan net assets
and net periodic pension costs by component for Hampshire is not determinable.
Costs allocated by Chubb Life to Hampshire during 1994 relative to the Pension
Plan were $24,269.
Certain health and life insurance benefits for all eligible retired employees
are provided by Chubb Life. Benefits are paid as covered expenses are incurred.
Health care coverage is contributory. Retiree contributions vary based upon a
retiree's age, type of coverage and years of service with Hampshire. Life
insurance coverage is noncontributory. The expected cost of providing these
postretirement benefits to employees and their beneficiaries and covered
dependents are being accrued during the years that the employees render the
necessary service.
5. OPTION AND INCENTIVE PLANS
As a subsidiary of Chubb, Hampshire and its employees are eligible to
participate in the following option and incentive plans:
The Employee Stock Ownership Plan (ESOP) is funded through semi-annual
contributions in amounts determined at the discretion of Chubb's Board of
Directors. A portion of Chubb common stock is allocated to eligible
employees as contributions are made by Chubb.
The Capital Accumulation Plan, a savings plan, is funded by employee
contributions. Hampshire makes a matching contribution equal to 100% of
each eligible employee's pre-tax elective contributions, up to 4% of the
employees compensation. Contributions are invested at the election of the
employee in Chubb's common stock or in various other investment funds.
Hampshire's proportionate share of costs related to these option and
incentive plans was $39,394 for the year ended December 31, 1994.
Total costs allocated by Chubb Life to Hampshire, during the year presented
relative to the above benefits, have been included in General and
Administrative expenses in the accompanying financial statements. Amounts
allocated to Hampshire in years prior to 1994 relative to the above benefit
plans were immaterial.
6. LOAN AGREEMENTS
Since 1989, Hampshire's funds for financing premium loans have been obtained
through loan agreements with affiliates. Hampshire has a loan agreement with
Colonial providing for a $29,000,000 revolving line of
F-8
<PAGE>
HAMPSHIRE FUNDING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
credit. The interest rate is variable and is based on Colonial's cost of short-
term funds. The range of interest rates at December 31, 1994 on this loan were
from 4.95% to 6.10%. At December 31, 1994, Hampshire had borrowed $26,000,000
under the agreement with Colonial. On September 29, 1994, Hampshire amended its
loan agreement with Chubb Life to provide for a $20,000,000 revolving line of
credit, representing an increase of $10 million from the previous loan
agreement. The interest accrues at a rate not to exceed prime plus 250 basis
points per annum. Presently, interest is being charged to Hampshire at current
short term rates (6.53% at December 31, 1994) on the first $10 million and at
the rate which Hampshire charges their clients (8.85%) on any loan balance over
$10 million. At December 31, 1994, Hampshire had borrowed $13,500,000 under
this agreement with Chubb Life. The balance on the loan was increased to $14
million subsequent to December 31, 1994. Hampshire expects that it will be able
to obtain financing for the forseeable future.
Interest paid, including prepayments, on the loan agreements was $1,751,527,
$1,131,064 and $944,764 in 1994, 1993 and 1992, respectively.
F-9
