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, 1997
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, 1998, 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.
(1)
HL FUNDING COMPANY, INC.
Annual Report for 1997 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
* Item 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
Prior to December 31, 1996, HL Funding Company, Inc. (the Company or HLFC)
offered and administered programs whereby participants obtained life insurance
coverage from The Hartford Financial Services Group, Inc. (The Hartford) and
various affiliated insurance companies. Under the programs, insurance premiums
were paid by participants through a series of loans from HLFC. Loans to
participants were secured by participants' ownership in shares of regulated
investment companies. The loans to participants were funded with proceeds from
a loan arrangement with Hartford Life Insurance Company (HLIC). All programs
were ten years in length. Upon program conclusion, loan balances and accrued
interest became due. During 1997, management of the Company initiated and
completed a plan to terminate the Company's programs.
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 Life Inc., which is ultimately
approximately 80% owned by The Hartford. It is management's current intention
to dissolve the Company during 1998.
Item 2. Properties
The Company occupies office space in Simsbury, Connecticut which is leased by
Hartford Fire Insurance Company (Hartford Fire), a subsidiary of The Hartford.
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 Life, Inc.
which is ultimately an approximately 80% owned 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 Results of Operations
For the years ended December 31, 1997 and 1996, the Company had losses of
$39,884 and $138,637, respectively. During 1997, management of the Company
informally initiated and completed a plan to terminate the Company's programs.
The 1997 losses reflect noninterest other operating expenses, including
write-offs of premium loans and certain other assets, exceeding interest income.
As part of the termination and conclusion of the Company's programs, interest
did not continue to accrue on outstanding participant premium loans during 1997,
the Company was not required to pay interest on its promissory note to HLIC and
all accounting, administrative, legal, state and other operating fees or
expenses were paid by The Hartford's affiliates on behalf of the Company. The
1996 losses reflect noninterest expenses for the accounting and administration
of HLFC's programs exceeding net interest and program income.
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 Exhibit Index
(b) No reports on Form 8-K have been filed during the last quarter
of 1997.
(4)
INDEX TO FINANCIAL STATEMENTS
Report of Independent Public Accountants F-2
Statements of Income (Loss) for the years ended December 31, 1997,
1996 and 1995 F-3
Balance Sheets as of December 31, 1997 and 1996 F-4
Statements of Changes in Stockholder's Equity for the years ended
December 31, 1997, 1996 and 1995 F-5
Statements of Cash Flows for the years ended December 31, 1997,
1996 and 1995 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 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
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 Hartford Life, Inc. 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, 1997 and 1996, 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, 1997. These
financial statements are the responsibility of HL Funding Company, Inc.'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, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997 in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Hartford, Connecticut
January 27, 1998
F-2
HL FUNDING COMPANY, INC.
STATEMENTS OF INCOME (LOSS)
For the Years Ended
December 31,
1997 1996 1995
--------- --------- ---------
Net interest and program income:
Interest income $ 15,181 $ 10,171 $ 13,247
Program income 0 22,896 8,540
--------- --------- ---------
Total revenues 15,181 33,067 21,787
Less: Interest on borrowings 0 16,426 5,462
--------- --------- ---------
Net interest and program income 15,181 16,641 16,325
--------- --------- ---------
Noninterest expenses:
Accounting and administrative services 0 180,900 207,150
Legal and state fees 0 15,840 11,950
Other operating expenses 77,037 33,188 60,343
--------- --------- ---------
Total expenses 77,037 229,928 279,443
--------- --------- ---------
Loss before tax benefit (61,856) (213,287) (263,118)
Income tax benefit (21,972) (74,650) (92,091)
Net loss $ (39,884) $(138,637) $(171,027)
--------- --------- ---------
--------- --------- ---------
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,
1997 1996
------------ ------------
ASSETS
Cash and cash equivalents $ 232,751 $ 351,564
Premium loans receivable 0 320,611
Prepaid SEC registration fees 0 23,086
Interest and administrative fees receivable on loans 0 29,205
Organizational costs 0 12,472
Deferred tax asset 0 8,323
---------- ----------
Total assets $ 232,751 $ 745,261
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDER'S EQUITY
Intercompany loan payable $ 62,410 $ 320,611
Other intercompany payables 0 206,427
Federal income tax payable 13,412 21,410
---------- ----------
Total liabilities 75,822 548,448
---------- ----------
---------- ----------
Common stock, 100 shares authorized,
issued and outstanding,
$1 par value 100 100
Capital surplus 749,900 749,900
Retained (deficit) earnings (593,071) (553,187)
---------- ----------
Total stockholder's equity 156,929 196,813
---------- ----------
Total liabilities and stockholder's equity $ 232,751 $ 745,261
---------- ----------
---------- ----------
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 (Deficit) Earnings Equity
------ ---------- ------------------ -------------
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
Net loss - - (39,884) (39,884)
------ ---------- ----------- ----------
Balance, December 31, 1997 $ 100 $ 749,900 $ (593,071) $ 156,929
------ ---------- ----------- ----------
------ ---------- ----------- ----------
The accompanying notes are an integral part of these financial statements.
F-5
HL FUNDING COMPANY, INC.
STATEMENTS OF CASH FLOWS
For the Years Ended
December 31,
1997 1996 1995
---- ---- ----
OPERATING ACTIVITIES:
Net loss $ (39,884) $ (138,637) $ (171,027)
Adjustments to reconcile net loss to
net cash (used for) provided by operating activities:
Decrease (increase) in other assets 52,291 (21,876) (6,800)
Amortization of organizational costs 12,472 27,734 27,733
Decrease (increase) in Federal income tax receivable 0 211,218 (95,930)
Decrease in deferred tax asset 8,323 21,410 0
(Decrease) increase in other intercompany payables (206,427) 179,293 (310,740)
(Decrease) increase in Federal income tax payable (7,998) 3,840 3,839
---------- ----------- -----------
Cash (used for) provided by operating activities (181,223) 282,982 (552,925)
---------- ----------- -----------
INVESTING ACTIVITIES:
Collection (issuance) of premium loans receivable 320,611 (131,250) (170,888)
---------- ----------- -----------
Cash provided by (used for) investing activities 320,611 (131,250) (170,888)
---------- ----------- -----------
FINANCING ACTIVITIES:
(Payments on) proceeds from intercompany loan payable (258,201) 131,250 170,888
---------- ----------- -----------
Cash (used for) provided by financing activities (258,201) 131,250 170,888
---------- ----------- -----------
Net (decrease) increase in cash and cash equivalents (118,813) 282,982 (552,925)
Cash and cash equivalents at beginning of year 351,564 68,582 621,507
---------- ----------- -----------
Cash and cash equivalents at end of year $ 232,751 $ 351,564 $ 68,582
---------- ----------- -----------
---------- ----------- -----------
The accompanying notes are an integral part of these financial statements.
F-6
HL FUNDING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
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 Life, Inc.,
which is approximately 80% owned by The Hartford Financial Services 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). It is management's current intention to dissolve the Company
during 1998.
Prior to 1997, HLFC offered and administrated programs whereby participants
obtained life insurance coverage from HLIC and Hartford Life and Accident
Insurance Company, the direct parent of HLIC. Under the programs, insurance
premiums were paid on behalf of participants through a series of loans from
HLFC. Loans to participants were secured by participants' ownership in shares
of regulated investment companies. Premium loans receivable were funded with
proceeds from a loan arrangement with HLIC. Programs could have been up to ten
years in length. Upon a program's conclusion, the related loan balances and
accrued interest became due.
Management expected the administrative costs of issuing and maintaining the
programs to 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 exceeded 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 1997, management of the Company initiated and completed an informal plan to
terminate the Company's programs. The participants were notified of
management's intent to terminate the programs and were given the following
options; (1) selling enough shares of registered investment companies to pay
back the premium loan, (2) use of 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. As part
of the termination and conclusion of the program, interest did not accrue on the
premium loans during 1997. As of December 31, 1997, premium loans, from the
existing seventeen programs as of December 31, 1996, had been paid back to the
Company with the exception of three loans totaling $62,410, which were written
off during the year. No new programs were sold during 1997.
In accordance with management's plans to terminate the programs, no interest
income on participant premium loans was recognized, recorded or accrued for
during 1997. Additionally, during 1997, operating expenses, including
accounting and administrative services, legal and state fees and certain other
operation expenses, previously allocated by The Hartford's affiliates to the
Company in prior years, were paid for by those affiliates.
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.
F-7
REVENUES AND EXPENSES
Interest and fees from investments and premium loans receivable were recognized
as revenue when earned. Expenses, which were primarily allocated from
affiliates, were recognized when incurred.
ORGANIZATIONAL COSTS
Organizational costs were amortized over a three year period.
CASH AND CASH EQUIVALENTS
Cash equivalents include an investment ($233,122 and $341,722 as of December 31,
1997 and and December 31, 1996, 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.
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. In accordance
with plans to terminate the program, affiliates of The Hartford did not allocate
administrative expenses to HLFC during the period. Such expenses were paid for
by those affiliates.
HLFC invests a portion of its assets in Hartford Liquid Asset Trust (the Trust),
a short term investment pool of liquid securities, in which companies of 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 was previously allocated to each program participant based
on their pro-rata share of principal contributions.
HLFC's funds for financing the programs were obtained through a promissory note
agreement with HLIC. The agreement allowed 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. In accordance with management's plan to
terminate the programs, HLIC did not require recognition, recording or accrual
of interest on this note during 1997.
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, 1997 and 1996, HLFC will file as a member of a separate non-life
consolidated group with its immediate parent, HFSC. The effective tax rate in
1997, 1996 and 1995 approximated the U.S.
F-8
Statutory tax rate of 35%. The provision (benefit) for income taxes was as
follows:
December 31, 1997 December 31, 1996 December 31, 1995
----------------- ----------------- -----------------
Current $ (30,295) $ (78,490) $ (95,930)
Deferred 8,323 3,840 3,839
----------------- ----------------- -----------------
$ (21,972) $ (74,650) $ (92,091)
----------------- ----------------- -----------------
----------------- ----------------- -----------------
As of December 31, 1996, the deferred tax asset was primarily due to
organizational expenses capitalized for tax return purposes until the start of
business of HLFC. Income taxes received were $25,428 and $311,035 for years
1997 and 1996, respectively.
NOTE 5 - PREMIUM LOANS
All premium loans to participants were 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 and ranged
from 8.5% to 9% in 1995. In connection with the management's plan to terminate
the program, interest did not accrue on the premium loans during 1997. When
loans were originated, customers pledged 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 equaled at least 1.5 times
the amount of the total loan, or the participant pledged additional shares to
achieve this level. The loan was liquidated if the fair market value of the
collateral-to-loan ratio fell 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 changed the method by
which the allowance for loan losses is determined for impaired loans. Since all
premium loans were 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 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 30, 1998 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 30, 1998
Principal Accounting Officer
- ----------------------------
George R. Jay Secretary March 30, 1998
- ----------------------------
Lynda Godkin Secretary and Director March 30, 1998
- ----------------------------
Donald E. Waggaman, Jr. Treasurer and Director March 30, 1998
- ----------------------------
Timothy M. Fitch Secretary March 30, 1998
No annual report or proxy material has been sent to the stockholder.
II-1
EXHIBIT INDEX
Exhibit
Number Description Location
- ------- ----------- --------
2 Plan of acquisition, reorganization,
arrangement, liquidation or succession None
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 quarterly report to security holder None
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
insurance regulatory authorities Not required to be filed
II-2