FORM 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark one)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 (Fee Required)
For the fiscal year ended December 31, 1995
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (No fee required)
For the transition period from..........to...........
The registrant meets the conditions set forth in General Instruction J (1) (a)
and (b) of Form 10-K and is therefore filing this form with the reduced
disclosure format.
Commission file number 33-58862
HL FUNDING COMPANY, INC.
Incorporated in the State of Connecticut 06-1362143
(I.R.S. Employer Identification No.)
P.O. Box 2999, Hartford, Connecticut 06104-2999
(Principal Executive Offices)
Telephone number 860-843-8213
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months and (2) has been subject to such filing requirements for the
past 90 days. Yes X No .
--- ---
As of March 25, 1996 there were outstanding 100 shares of common stock, $1 par
value per share, of the registrant, all of which were directly owned by Hartford
Life Insurance Company.
1
HL FUNDING COMPANY, INC.
Annual Report for 1995 on Form 10-K
TABLE OF CONTENTS
Item Page
---- ----
Part I 1 Business of HL Funding Company, Inc.** 3
2 Properties ** 3
3 Legal Proceedings 3
4 *
Part II 5 Market for HL Funding Company's Common Stock
and Related Stockholder Matters 4
6 *
7 Management's Narrative Analysis of Results of Operations** 4
8 Financial Statements and Supplementary Data 4
9 Disagreements on Accounting and Financial Disclosure 4
Part III 10 *
11 *
12 *
13 *
Part IV 14 Exhibits, Financial Statements, Schedules and Reports on Form 8-K 4
Signatures II-1
Exhibit Index II-2
* Omitted pursuant to General Instruction J(2) of Form 10-K
** Item prepared in accordance with General Instruction J(2) of
Form 10-K.
2
Part I
Item 1. Business of HL Funding Company, Inc.
A. Organization
HL Funding Company, Inc. (the Company or HLFC) offers and administers programs
whereby participants obtain life insurance coverage from various ITT Hartford
Group, Inc. affiliated insurance companies. Under the programs, insurance
premiums are paid by participants through a series of loans from HLFC. Loans to
participants are secured by participants' ownership in shares of regulated
investment companies. The loans to participants are funded with proceeds from a
loan arrangement with HLIC. All programs are ten years in length. Upon program
conclusion, loan balances and accrued interest become due.
HLFC is a corporation formed in the State of Connecticut on February 8, 1993.
HLFC is a wholly owned subsidiary of Hartford Life Insurance Company (HLIC),
which is ultimately a subsidiary of Hartford Fire Insurance Company (Hartford
Fire) and ITT Hartford Group, Inc. HLFC's registration statement became
effective on March 16, 1994.
Item 2. Properties
The Company occupies office space in Simsbury, Ct, leased by Hartford Fire.
Expenses associated with these offices are allocated on a direct and indirect
basis to the life insurance subsidiaries of Hartford Fire.
Item 3. Legal Proceedings
HLFC is not involved in any pending or threatened litigation in which claims for
monetary damages are or would be asserted.
3
Part II
Item 5. Market for HL Funding Company's Common Stock and Related Stockholder
Matters
All of HLFC's outstanding shares are ultimately owned by Hartford Fire which is
ultimately a subsidiary of ITT Hartford Group, Inc.
HLFC has issued and outstanding 100 shares of common stock at a par value of $1
per share.
Item 7. Management's Narrative Analysis of Results of Operations
For the years ended December 31, 1995 and 1994, HL Funding Company, Inc. had
losses of $171,027 and $243,825, respectively. The 1995 and 1994 losses
reflect operating expenses for the accounting and administration of HLFC's
programs exceeding net interest and program income in each year. Ten programs
were sold during 1995 and a total of thirteen active programs existed as of
December 31, 1995. At December 31, 1995, premium loans receivable were
$189,361 and interest loans were $2,972.
Item 8. Financial Statements and Supplementary Data
See Index to Financial Statements.
Item 9. Disagreements on Accounting and Financial Disclosures
None.
Item 14. Exhibits, Financial Statements, Schedules, and Reports on Form 8-K
(a) Documents Filed
(1) See Index to Financial Statements
(2) See Exhibit Index
(b) No reports on Form 8-K have been filed during the last quarter of 1995
4
INDEX TO FINANCIAL STATEMENTS
Report of Independent Public Accountants F-2
Statements of Income (Loss) for the years ended December 31, 1995 and
December 31, 1994, and for the period from inception, February 8, 1993,to
December 31, 1993 F-3
Balance Sheets as of December 31, 1995 and December 31, 1994 F-4
Statements of Changes in Stockholder's Equity for the years
ended December 31, 1995 and December 31, 1994, and for the period
from inception, February 8, 1993, to December 31, 1993 F-5
Statements of Cash Flows for the years ended December 31, 1995 and
December 31, 1994, and for the period from inception,
February 8, 1993, to December 31, 1993 F-6
Notes to Financial Statements F-7-8
All schedules have been omitted because they are not applicable or the amounts
are insignificant, immaterial or the information has been otherwise supplied in
the financial statements or notes thereto.
REPORT OF MANAGEMENT
The management of HL Funding Company, Inc. (the Company) is responsible for the
preparation and integrity of the information contained in the accompanying
financial statements and other sections of the Annual Report. The financial
statements are prepared in accordance with generally accepted accounting
principles, and, where necessary, include amounts that are based on
management's informed judgments and estimates. Other information in the Annual
Report is consistent with the financial statements.
The Company's financial statements are audited by Arthur Andersen LLP,
independent public accountants. Management has made available to Arthur
Andersen LLP the Company's financial records and related data and believes that
the representations made to the independent public accountants are valid and
complete.
The Company's system of internal controls is a major component of management's
responsibility for the fair presentation of the financial statements. The
internal controls, including accounting controls and the internal auditing
program, are designed to provide reasonable assurance that the assets are
safeguarded, transactions are executed in accordance with management's
authorization and are properly recorded, and fraudulent financial reporting is
prevented or detected.
The Company's internal controls provide for the careful selection and training
of personnel and for appropriate segregation of responsibilities. The controls
are documented in written codes of conduct, policies, and procedures that are
communicated to the Company's employees. Management continually monitors the
system of internal controls for compliance. The Company's internal auditors
perform independent tests of accounting procedures and records to assess the
overall effectiveness of the Company's internal controls. They also make
recommendations for improving internal controls, policies and practices.
Management takes appropriate action in response to each recommendation from the
internal auditors and the independent public accountants.
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholder and Board of Directors of HL Funding Company, Inc.:
We have audited the accompanying balance sheets of HL Funding Company, Inc.
(a Connecticut corporation and wholly owned subsidiary of Hartford Life
Insurance Company) as of December 31, 1995 and 1994, and the related
statements of income (loss), changes in stockholder's equity and cash flows
for each of the two years in the period then ended and for the period from
inception, February 8, 1993, to December 31, 1993. 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 financial statements referred to above present fairly, in
all material respects, the financial position of HL Funding Company, Inc. as
of December 31, 1995 and 1994, and the results of its operations and its
cash flows for each of the two years in the period then ended, and for the
period from inception, February 8, 1993, to December 31, 1993, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Hartford, Connecticut
March 25, 1996
F-2
HL FUNDING COMPANY, INC.
STATEMENTS OF INCOME (LOSS)
For the Year Ended For the Year Ended For the Period From
December 31, December 31, Inception (February 8, 1993
1995 1994 To December 31, 1993)
-------------- -------------- --------------------------
Revenues:
Interest income $ 13,247 $ 8,347 $ 464
Program income 8,540 427 0
-------------- -------------- --------------
Total revenues 21,787 8,774 464
Less: Interest on borrowings 5,462 85 0
-------------- -------------- --------------
Net interest and program income 16,325 8,689 464
-------------- -------------- --------------
Noninterest expenses:
Accounting and administrative services 207,150 266,612 0
Legal and state fees 11,950 51,776 0
Other operating expenses 60,344 65,416 0
-------------- -------------- --------------
Total expenses 279,444 383,804 0
-------------- -------------- --------------
(Loss) income before tax (263,119) (375,115) 464
Income tax (benefit) expense (92,092) (131,290) 162
-------------- -------------- --------------
Net (loss) income $ (171,027) $ (243,825) $ 302
-------------- -------------- --------------
-------------- -------------- --------------
The accompanying notes are an integral part of these financial statements.
F-3
HL FUNDING COMPANY, INC.
BALANCE SHEETS
As of As of
December 31, December 31,
1995 1994
-------------- ------------------------
Assets
Cash and cash equivalents $ 68,582 $ 621,507
Premium loans receivable 189,361 18,473
Prepaid SEC registration fees 23,230 23,438
Interest and administrative fees receivable on loans 7,185 177
Organizational costs 40,206 67,939
Federal income tax receivable 195,216 115,288
Deferred tax asset 28,165 16,002
-------------- ------------------------
Total assets $551,945 $ 862,824
-------------- ------------------------
-------------- ------------------------
Liabilities and Stockholder's Equity
Intercompany payable $ 27,134 $ 337,874
Intercompany loan payable 189,361 18,473
-------------- ------------------------
Total liabilities 216,495 356,347
-------------- ------------------------
Common stock, 100 shares authorized,
$1 par value, issued and
outstanding 100 shares 100 100
Capital surplus 749,900 749,900
Retained earnings (deficit) (414,550) (243,523)
-------------- ------------------------
Total stockholder's equity 335,450 506,477
-------------- ------------------------
Total liabilities and stockholder's equity $ 551,945 $ 862,824
-------------- ------------------------
-------------- ------------------------
The accompanying notes are an integral part of these financial statements.
F-4
HL FUNDING COMPANY, INC.
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
Total
Common Capital Retained Stockholder's
Stock Surplus Earnings (Deficit) Equity
------ ------- ------------------ --------------
Balance February 8, 1993 (Inception) $ - $ - $ - $ -
Capital contribution and stock issuance 100 99,900 0 100,000
Net income 302 302
------- --------- --------- ----------
Balance December 31, 1993 100 99,900 302 100,302
Capital contribution 650,000 650,000
Net loss (243,825) (243,825)
------- --------- --------- ----------
Balance December 31, 1994 100 749,900 (243,523) 506,477
Net loss (171,027) (171,027)
------- --------- --------- ----------
Balance December 31, 1995 $100 $749,900 $(414,550) $ 335,450
------- --------- --------- ----------
------- --------- --------- ----------
F-5
HL FUNDING COMPANY, INC.
STATEMENTS OF CASH FLOWS
For the Year Ended For the Year Ended For the Period From
December 31, December 31, Inception (February 8, 1993
1995 1994 To December 31, 1993)
--------------- --------------- ------------------------
Operating Activities:
Net (loss) income $ (171,027) $ (243,825) $ 302
Adjustments to reconcile net (loss) income to
net cash used for operating activities:
Amortization of organizational costs 27,733 25,468 0
Decrease (increase) in intercompany payable (310,740) 316,852 21,022
Increase in other assets (6,800) (177) (23,276)
Increase in Federal income tax receivable (79,928) (115,450) 0
Increase in deferred tax asset (12,163) (16,002) 0
--------------- --------------- ------------------------
Cash used for operating activities (552,925) (33,134) (1,952)
--------------- --------------- ------------------------
Investing Activities:
Premium loans (170,888) (18,473) 0
Organizational costs 0 0 (93,407)
--------------- --------------- ------------------------
Cash used for investing activities (170,888) (18,473) (93,407)
--------------- --------------- ------------------------
Financing Activities:
Intercompany loans 170,888 18,473 0
Capital contribution and stock issuance 0 650,000 100,000
--------------- --------------- ------------------------
Cash provided by financing activities 170,888 668,473 100,000
--------------- --------------- ------------------------
Net (decrease) increase in cash (552,925) 616,866 4,641
Cash at beginning of period 621,507 4,641 0
--------------- --------------- ------------------------
Cash at end of period $ 68,582 $ 621,507 $ 4,641
--------------- --------------- ------------------------
--------------- --------------- ------------------------
The accompanying notes are an integral part of these financial statements.
F-6
HL FUNDING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1995 and 1994
Note 1 - Organization
- ---------------------
HL Funding Company, Inc. (HLFC) was formed in the State of Connecticut on
February 8, 1993. HLFC is a wholly owned subsidiary of Hartford Life
Insurance Company (HLIC). All of the outstanding shares of HLIC are
ultimately owned by Hartford Fire Insurance Company (Hartford Fire), which is
owned by ITT Hartford Group, Inc. On March 26, 1993, HLFC issued 100 shares
($1 par) of stock to HLIC for $100. On May 28, 1993 and September 30, 1994,
additional capital contributions of $99,900 and $650,000, respectively, were
made by HLIC.
HLFC offers and administers programs whereby participants obtain life insurance
coverage from HLIC and Hartford Life and Accident Insurance Company, an
affiliate of HLIC. Under the programs, insurance premiums are paid on behalf of
participants through a series of loans from HLFC. Loans to participants are
secured by participants' ownership in shares of regulated investment companies.
Premium loans receivable are funded with proceeds from a loan arrangement with
HLIC. Programs can be up to ten years in length. Upon a program's conclusion,
the related loan balances and accrued interest become due.
Management expects the administrative costs of issuing and maintaining the
programs will be offset by: a) fees charged to program participants, b) interest
charged to participants for insurance premium loans to the extent that the
interest charged exceeds the cost to HLFC of obtaining funds to finance the
programs, and c) interest income earned on investments held by HLFC. Through
December 31, 1995, thirteen programs were sold.
Note 2 - Significant Accounting Policies
- ----------------------------------------
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles.
REVENUES AND EXPENSES
Interest and fees from investments and premium loans receivable are recognized
as revenue when earned. Expenses, which are primarily allocated from
affiliates, are recognized when incurred.
ORGANIZATIONAL COSTS
Organizational costs are amortized over a three year period.
CASH AND CASH EQUIVALENTS
Cash equivalents include an investment ($66,408 and $617,866 as of December 31,
1995 and 1994, respectively) in Hartford Liquid Asset Trust (see Note 3).
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation.
F-7
Note 3 - Transactions with Affiliates
- -------------------------------------
HLIC provides administrative services to HLFC, including use of its facilities
and personnel, and allocates a portion of its expenses to HLFC. For the periods
ended December 31, 1995, 1994 and 1993, this allocation was $207,150, $266,612
and $0, respectively.
HLFC initially invested the capital contributions in Hartford Liquid Asset
Trust, a short term investment pool of liquid securities, in which companies
of the ITT Hartford Insurance Group, Inc. participate. Pursuant to the terms
of the Trust Agreement, the purpose of the Trust is to invest funds in a less
costly manner in assets which achieve a high level of current income as well
as maintain liquidity and preserve capital. The Trust investments are
restricted to cash and investments having a stated maturity date of 12 months
or less from the date of purchase. Interest earned by the Trust is allocated
to each participant based on their pro-rata share of principal contributions.
HLFC's funds for financing the programs are obtained through a promissory note
agreement with HLIC. The agreement allows HLIC to advance to HLFC funds in an
amount up to $7,000,000. The interest rate for the note is equal to the 90 day
LIBOR plus 125 basis points. The rate was 7.063% and 6.75% at December 31, 1995
and 1994, respectively. For the periods ended December 31, 1995, 1994 and 1993,
interest expense was $5,462, $85, and $0, respectively.
Note 4 - Fair Value of Financial Instruments
- --------------------------------------------
Cash and cash equivalent, interest, fees and tax receivable, premium loans
receivable and intercompany loan payable amounts reflected in the balance sheet
approximate fair value.
Note 5 - Income Taxes
- ---------------------
HLFC is included in ITT Hartford Group, Inc.'s consolidated U.S. Federal income
tax return and remits to (receives from) ITT Hartford Group, Inc. a current
income tax provision (benefit) computed in accordance with the tax sharing
arrangements between ITT Hartford Group, Inc. and its subsidiaries. The
effective tax rate in 1995 and 1994 approximated the U.S. Statutory tax rate of
35%. The provision (benefit) for income taxes was as follows:
1995 1994 1993
---- ---- ----
Current $ (79,929) $(115,288) $ 162
Deferred (12,163) (16,002)
----------- ----------- --------
$ (92,092) $(131,290) $ 162
----------- ----------- --------
----------- ----------- --------
As of December 31, 1995 and 1994, the deferred tax asset was primarily due to
organizational expenses capitalized for tax return purposes until the start
of business of HLFC. Income taxes paid were $ 0, $162 and $ 0 in 1995, 1994
and 1993, respectively.
Note 6 - Premium Loans
- ----------------------
All premium loans to participants are secured by participants' shares of
mutual funds, which include open-end investment companies registered under
the Investment Company Act of 1940. When loans are originated, customers
must pledge mutual fund shares valued at 2.5 times the yearly premiums being
financed. During the life of the loan, the fair market value of the
collateralized mutual fund shares must equal at least 1.5 times the amount of
the total loan, or the participant must pledge additional shares to achieve
this level. The loan will be liquidated if the fair market value of the
collateral-to-loan ratio falls below 1.3. Effective January 1, 1995, HL
Funding Company, Inc. adopted Statement of Financial Accounting Standard Nos.
114 and 118, "Accounting by Creditors for Impairment of a Loan." These
standards change the method by which the allowance for loan losses is
determined for impaired loans. Since all premium loans are secured by
collateral, with fair market value exceeding the loan value, there was no
impact to the financial position or future results of operations of HL
Funding Company, Inc. as a result of the adoption of the new accounting
standards on January 1, 1995.
F-8
SIGNATURES
Pursuant to the requirements of section 13 or 15d of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HL Funding Company
March 25, 1995 by
------------------- -------------------
Date George R. Jay
Secretary and Controller
Pursuant to the requirements of the Securities Exchange Act of 1934 this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date identified.
Signature Title Date
--------- ----- ----
Principal Executive Officer
---------------------------
Lowndes A. Smith President and Director March 25, 1996
Principal Accounting Officer
---------------------------
George R. Jay Secretary and Controller March 25, 1996
---------------------------
Linda Godkin Secretary and Director March 25 , 1996
---------------------------
Donald E. Waggaman, Jr. Treasurer and Director March 25, 1996
---------------------------
Timothy M. Fitch Secretary March 25, 1996
No annual report or proxy material has been sent to the stockholder.
II-1
EXHIBIT INDEX
-------------
Exhibit
Number Location Description
------- -------- -----------
2 Plan of acquisition, reorganization, None
arrangement, liquidation or succession
3(A) Articles of Incorporation Incorporated by
reference to HL Funding
S-1 Registration Statement
filed March, 1994
(File No. 33-58862)
3(B) By-laws Incorporated by
reference to HL Funding
S-1 Registration Statement
filed March, 1994
(File No. 33-58862)
4 Instruments defining the rights of
security holders, including indentures None
9 Voting trust agreement None
10 Material contracts None
11 Statement of computation of per share earnings Not required to be filed
12 Statements of computation of ratios Not required to be filed
13 Annual report to security holder, Form None
10-K or quarterly report to security holder
18 Letter regarding change in accounting principles None
19 Previously unfiled documents None
22 Subsidiaries of the Registrant None
23 Published report regarding matters None
submitted to vote of security holder
24 Consents of experts and counsel None
25 Power of attorney Incorporated by
reference to HL Funding
S-1 Registration Statement
filed March, 1994
(File No. 33-58862)
28 Additional exhibits None
29 Information from reports furnished to Not required to be filed
state insurance regulatory authorities
II-2