UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(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, 1996
OR
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required)
For the transition period from..........to...........
Commission file number 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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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 February 10, 1997, there were outstanding 100 shares of common stock, $1
par value per share, of the registrant, all of which were directly owned by
Hartford Financial Services Corporation.
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.
HL FUNDING COMPANY, INC.
Annual Report for 1996 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, Inc's Common Stock
and Related Stockholder Matters 4
6 *
7 Management's Narrative Analysis of the 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. (The Hartford) 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 Hartford Life Insurance
Company (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.
From February 8, 1993 to July 14, 1996, HLFC was a wholly owned subsidiary of
HLIC. On July 15, 1996, a reorganization took place and the outstanding stock
of HLFC was contributed to Hartford Financial Services Corporation (HFSC) by
HLIC. HFSC is a wholly owned subsidiary of HLIC. All of the outstanding
shares of HLIC are ultimately owned by Hartford Fire Insurance Company
(Hartford Fire), which is owned by The Hartford. HLFC's registration
statement became effective on March 16, 1994.
ITEM 2. PROPERTIES
The Company occupies office space in Simsbury, Connecticut which is 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 INC.'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 The Hartford.
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 THE RESULTS OF OPERATIONS
For the years ended December 31, 1996 and 1995, The Company had losses of
$138,637 and $171,027, respectively. The 1996 and 1995 losses reflect non
interest expenses for the accounting and administration of HLFC's programs
exceeding net interest and program income in each year. Five programs were
sold during 1996 and a total of seventeen active programs existed as of
December 31, 1996. Premium loans receivable were $320,611 and interest loans
receivable were $28,805 as of December 31, 1996.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents Filed:
(1) See Index to Financial Statements.
(2) See Exhibits Index.
(b) No reports on Form 8-K have been filed during the last quarter of
1996.
(4)
INDEX TO FINANCIAL STATEMENTS
Report of Independent Public Accountants F-2
Statements of Income (Loss) for the years ended December 31, 1996,
1995 and 1994 F-3
Balance Sheets as of December 31, 1996 and 1995 F-4
Statements of Changes in Stockholder's Equity for the years ended
December 31, 1996, 1995 and 1994 F-5
Statements of Cash Flows for the years ended December 31, 1996,
1995 and 1994 F-6
Notes to Financial Statements F-7-9
All schedules not listed above 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. Management believes these
statements present fairly the Company's financial position and results of
operations, and, that any information contained in the Annual Report is
consistent with the financial statements.
Management has made available the Company's financial records and related
data to Arthur Andersen LLP, independent public accountants, in order for
them to perform an audit of the Company's financial statements. Their report
appears on Page F-2.
An essential element in meeting management's responsibilities is the
Company's system of internal controls. These controls, which include
accounting controls and the internal auditing program, are designed to
provide reasonable assurance that assets are safeguarded, and transactions
are properly authorized, executed and recorded. The controls, which are
documented and communicated to employees in the form of written codes of
conduct and policies and procedures, provide for the careful selection of
personnel and for appropriate division of responsibility. Management
continually monitors for compliance, while the Company's internal auditors
independently assess the effectiveness of the controls and make
recommendations for improvement. Also, Arthur Andersen LLP took into
consideration the Company's system of internal controls in determining the
nature, timing and extent of its audit tests.
Another important element is management's recognition of its responsibility
for fostering a strong, ethical climate, thereby ensuring that the Company's
affairs are transacted according to the highest standards of personal and
professional conduct. The Company has a long-standing reputation of integrity
in business conduct and utilizes communication and education to create and
fortify a strong compliance culture.
The Audit Committee of the Board of Directors of The Hartford, composed of
non-employee directors, meets periodically with the external and internal
auditors to evaluate the effectiveness of the work performed by them in
discharging their respective responsibilities and to ensure their
independence and free access to the Committee.
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 Financial
Services Corporation) as of December 31, 1996 and 1995, and the related
statements of income (loss), changes in stockholder's equity and cash flows
for each of the three years in the period ended December 31, 1996. 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, 1996 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Hartford, Connecticut
February 10, 1997
F-2
HL FUNDING COMPANY, INC.
STATEMENTS OF INCOME (LOSS)
FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
------------------ ------------------ ------------------
Net interest and program income:
Interest income..................................... $ 10,171 $ 13,247 $ 8,347
Program income...................................... 22,896 8,540 427
---------- ---------- ----------
Total revenues.................................... 33,067 21,787 8,774
Less: Interest on borrowings........................ 16,426 5,462 85
---------- ---------- ----------
Net interest and program income................... 16,641 16,325 8,689
---------- ---------- ----------
Noninterest expenses:
Accounting and administrative services.............. 180,900 207,150 266,612
Legal and state fees................................ 15,840 11,950 51,776
Other operating expenses............................ 33,188 60,343 65,416
---------- ---------- ----------
Total noninterest expenses........................ 229,928 279,443 383,804
---------- ---------- ----------
Loss before tax benefit........................... (213,287) (263,118) (375,115)
Income tax benefit.................................... (74,650) (92,091) (131,290)
---------- ---------- ----------
Net loss.......................................... $ (138,637) $ (171,027) $ (243,825)
---------- ---------- ----------
---------- ---------- ----------
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,
1996 1995
------------ ------------
Assets
Cash and cash equivalents........................................ $ 351,564 $ 68,582
Premium loans receivable......................................... 320,611 189,361
Prepaid SEC registration fees.................................... 23,086 23,230
Interest and administrative fees receivable on loans............. 29,205 7,185
Organizational costs............................................. 12,472 40,206
Federal income tax receivable.................................... -- 211,218
Deferred tax asset............................................... 8,323 12,163
------------ ------------
Total assets................................................... $ 745,261 $ 551,945
------------ ------------
------------ ------------
Liabilities and Stockholder's Equity
Intercompany payable............................................. $ 206,427 $ 27,134
Intercompany loan payable........................................ 320,611 189,361
Federal income tax payable....................................... 21,410 --
------------ ------------
Total liabilities.............................................. 548,448 216,495
------------ ------------
------------ ------------
Common stock, 100 shares authorized, $1 par value, 100 shares
issued and outstanding......................................... 100 100
Capital surplus.................................................. 749,900 749,900
Retained deficit................................................. (553,187) (414,550)
------------ ------------
Total stockholder's equity..................................... 196,813 335,450
------------ ------------
Total liabilities and stockholder's equity....................... $ 745,261 $ 551,945
------------ ------------
------------ ------------
The accompanying notes are an integral part of these financial statements.
F-4
HL FUNDING COMPANY, INC.
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
RETAINED TOTAL
COMMON CAPITAL EARNINGS STOCKHOLDER'S
STOCK SURPLUS (DEFICIT) EQUITY
---------- ---------- ---------------- ------------
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
Net loss................................................. -- -- (138,637) (138,637)
---------- ---------- ---------------- ------------
Balance, December 31, 1996............................... $ 100 $ 749,900 ($ 553,187) $ 196,813
---------- ---------- ---------------- ------------
---------- ---------- ---------------- ------------
The accompanying notes are an integral part of these financial statements.
F-5
HL FUNDING COMPANY, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
------------------ ------------------ ------------------
Operating Activities:
Net loss...................... $(138,637) $ (171,027) $ (243,825)
Adjustments to reconcile net
loss to net cash (used for)
operating activities:
Amortization of organizational
costs....................... 27,734 27,733 25,468
Increase (decrease) in
intercompany payable........ 179,293 (310,740) 316,852
Increase in other assets...... (21,876) (6,800) (177)
Increase (decrease) in Federal
income tax receivable....... 211,218 (95,930) (115,450)
Decrease (increase) in
deferred tax asset.......... 3,840 3,839 (16,002)
Increase in Federal
income tax payable.......... 21,410 -- --
--------- ------------ -------------
Cash provided by (used for)
operating activities............ 282,982 (552,925) (33,134)
--------- ------------ -------------
Investing Activities:
Premium loans................. (131,250) (170,888) (18,473)
--------- ------------ -------------
Cash used for investing
activities.................. (131,250) (170,888) (18,473)
--------- ------------ -------------
Financing Activities:
Intercompany loans............ 131,250 170,888 18,473
Capital contribution.......... -- -- 650,000
--------- ------------ -------------
Cash provided by financing
activities.................... 131,250 170,888 668,473
--------- ------------ ------------
Net increase (decrease) in
cash........................ 282,982 (552,925) 616,866
Cash and cash equivalents at
beginning of year........... 68,582 621,507 4,641
--------- ------------ ------------
Cash and cash equivalents at
end of year................. $351,564 $ 68,582 $ 621,507
--------- ------------- ------------
--------- ------------- ------------
The accomopanying notes are an integral part of these financial statements.
F-6
HL FUNDING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1--ORGANIZATION
HL Funding Company, Inc. (HLFC or the Company) was formed in the State of
Connecticut on February 8, 1993 as a wholly owned subsidiary of Hartford Life
Insurance Company (HLIC). On July 15, 1996, a reorganization took place and
the outstanding stock of HLFC was contributed to Hartford Financial Services
Corporation (HFSC) by HLIC. HFSC is a wholly owned subsidiary of 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.
(The Hartford). (Prior to December 19, 1995, The Hartford was a wholly owned
subsidiary of ITT Corporation. On December 19, 1995, ITT Corporation
distributed all of the outstanding shares of The Hartford to ITT Corporation
shareholders).
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, 1996, seventeen programs were sold.
In January, 1997, management of the Company initiated an informal plan to
terminate the Company's program. The participants have been notified of
management's intent to terminate the program and were given the following
options: (1) selling enough shares of registered investment companies to pay
back the premium loan, (2) use of the life insurance policy cash value (or
some portion of it) to pay back the premium loan, (3) some combination of (1)
and (2) and (4) use of other personal assets to pay back the premium loan.
Management believes that the informal plan to terminate the Company's program
should not significantly change the carrying value of the assets on the
balance sheets as of December 31, 1996.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles.
Certain reclassifications have been made to prior year financial statements
to conform to current year presentation.
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 ($341,722 and $66,408 as of December
31, 1996 and December 31, 1995, 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.
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.
These amounts are reported as intercompany payable on the balance sheets.
HLFC invests a portion of its assets in Hartford Liquid Asset Trust, a short
term investment pool of liquid securities, in which companies of the The
Hartford 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 rate plus 1.25 %, and the note is payable on demand. The interest
rate was 6.8125 % at December 31, 1996.
NOTE 4--INCOME TAXES
From inception of the Company through December 19, 1995, HLFC was included in
the consolidated filing of ITT Corporation. For the period December 20--31,
1995, HLFC participated in the consolidated filing of The Hartford's U.S.
Federal income tax return and received from The Hartford current income tax
benefits computed in accordance with the tax sharing arrangements between The
Hartford and its subsidiaries. Subsequent to the spin-off of The Hartford
from its former parent, ITT Corporation, HLFC will not be included in the
consolidated U.S. Federal income tax return of The Hartford and accordingly
as of December 31, 1996, HLFC will file as a member of a separate non-life
consolidated group with its immediate parent, HFSC. The effective tax rate in
1996, 1995 and 1994 approximated the U.S. Statutory tax rate of 35%. The
provision (benefit) for income taxes was as follows:
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
----------------- ----------------- -----------------
Current.......... $ (78,490) $ (95,930) $ (115,288)
Deferred......... 3,840 3,839 (16,002)
----------- ----------- ------------
$ (74,650) $ (92,091) $ (131,290)
----------- ----------- ------------
----------- ----------- ------------
As of December 31, 1996 and 1995, 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, $0 and $162 in 1996, 1995 and
1994, respectively.
F-8
NOTE 5--PREMIUM LOANS
All premium loans to participants are secured by participants' share of
mutual funds, which include open-end investment companies registered under
the Investment Company Act of 1940. Interest on loans was 9% in 1996, ranged
from 8.5% to 9% in 1995 and was 8% in 1994. 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, the
Company 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 the Company as a result of the adoption of
the new accounting standards on January 1, 1995.
NOTE 6--FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and cash equivalents, interest, fees and tax receivable, premium loans
receivable and intercompany loan payable amounts reflected in the balance
sheet approximate fair value.
F-9
SIGNATURES
Pursuant to the requirements 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.
March 18, 1997 HL FUNDING COMPANY, INC.
- - -------------- (REGISTRANT)
DATE
BY
-------------------------------
GEORGE R. JAY
SECRETARY
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 18, 1997
Principal Accounting Officer
- - --------------------------------
George R. Jay Secretary March 18, 1997
- - --------------------------------
Lynda Godkin Secretary and Director March 18, 1997
- - --------------------------------
Donald E. Waggaman, Jr. Treasurer and Director March 18, 1997
- - --------------------------------
Timothy M. Fitch Secretary March 18, 1997
No annual report or proxy material has been sent to the stockholder.
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION LOCATION
- - ----------- --------------------------------------------------- ---------------------------------------------------
2 Plan of acquisition, reorganization, arrangement, None
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 indenture None
9 Voting trust agreement None
10 Material contracts None
11 Statement of computation of per share earnings Not required to be filed
12 Statement of computation of ratios Not required to be filed
13 Annual report to security holder, Form 10-K or None
quarterly report to security holder
18 Letter re change in accounting principles None
19 Previously unfiled documents None
22 Subsidiaries of the Registrant None
23 Published report regarding matters submitted to None
vote of security holders
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 state Not required to be filed
insurance regulatory authorities
II-2