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.
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.
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.
Part II
Item 5.
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.
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.
Item 8. Financial Statements and Supplementary Data
See Index to Financial Statements.
Item 9.
Item 9. Disagreements on Accounting and Financial Disclosures
None.
Item 14.
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
Report of Independent Public Accountants
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
Balance Sheets as of December 31, 1995 and December 31, 1994
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
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
Notes to Financial Statements -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.
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
HL FUNDING COMPANY, INC.
STATEMENTS OF INCOME (LOSS)
The accompanying notes are an integral part of these financial statements.
HL FUNDING COMPANY, INC. BALANCE SHEETS
The accompanying notes are an integral part of these financial statements.
HL FUNDING COMPANY, INC. STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
HL FUNDING COMPANY, INC. STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these financial statements.
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.
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:
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.
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.
No annual report or proxy material has been sent to the stockholder.
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