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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 1996
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from..........to...........
The registrant meets the conditions set forth in General Instruction H (1)
(a) and (b) of Form 10-Q 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 203-843-8213
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 November 12, 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 Financial Services Corporation.
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HL FUNDING COMPANY, INC.
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Statements of Income - Quarter and
Nine Months Ended September 30, 1996 and 1995......................3
Balance Sheets - September 30, 1996 and
December 31,1995...................................................4
Statements of Cash Flows - Nine Months
Ended September 30, 1996 and 1995..................................5
Notes to Financial Statements......................................6
Item 2. Management's Narrative Analysis of
Results of Operations*
Nine Months Ended September 30, 1996 and 1995.......................8
Part II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K.............................9
Signature.............................................................10
Exhibit Index.........................................................11
(*) Item prepared in accordance with General Instruction H (2) of Form 10-Q.
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PART I. FINANCIAL INFORMATION
Item 1.
FINANCIAL STATEMENTS
The following unaudited financial statements reflect, in the opinion of
management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position, the results of
operations and the cash flows for the periods presented. Interim results are
not indicative of the results which may be expected for any other interim
period or the full year. For a description of accounting policies, see notes
to financial statements.
HL FUNDING COMPANY, INC.
STATEMENTS OF INCOME (LOSS)
<TABLE>
<CAPTION>
Quarter Ended For the Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
-----------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUES:
Interest income $ 3,214 $ 3,966 $ 5,276 $ 10,128
Program income 5,607 1,407 15,238 3,870
-----------------------------------------------------
Total revenues 8,821 5,373 20,514 13,998
Less: Interest on borrowings 4,035 994 10,999 2,283
-----------------------------------------------------
Net interest and program income 4,786 4,379 9,515 11,715
-----------------------------------------------------
NONINTEREST EXPENSES:
Accounting and administrative services 45,225 51,788 135,675 155,363
Legal and state fees 160 0 11,395 11,950
Other operating expenses 7,364 16,017 31,240 48,795
-----------------------------------------------------
Total expenses 52,749 67,805 178,310 216,108
-----------------------------------------------------
Loss before tax (47,963) (63,426) (168,795) (204,393)
Income tax benefit (16,788) (22,200) (59,079) (71,538)
-----------------------------------------------------
Net loss $(31,175) $(41,226) $(109,716) $(132,855)
-----------------------------------------------------
-----------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
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HL FUNDING COMPANY, INC.
BALANCE SHEETS
As of As of
September 30, December 31,
1996 1995
--------- ---------
ASSETS (unaudited)
Cash and cash equivalents $ 350,655 $ 68,582
Premium loans receivable 304,594 189,361
Prepaid SEC registration fees 23,112 23,230
Interest and administrative fees receivable on loans 22,424 7,185
Organizational costs 19,405 40,206
Federal income tax receivable 72,952 195,216
Deferred tax asset 9,283 28,165
--------- ---------
Total assets $ 802,425 $ 551,945
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDER'S EQUITY
Intercompany payables $ 272,097 $ 27,134
Intercompany loan payable 304,594 189,361
--------- ---------
Total liabilities 576,691 216,495
--------- ---------
Common stock, 100 shares authorized,
$1 par value, issued and
outstanding 100 shares 100 100
Capital surplus 749,900 749,900
Retained earnings (deficit) (524,266) (414,550)
--------- ---------
Total stockholder's equity 225,734 335,450
--------- ---------
Total liabilities and stockholder's equity $ 802,425 $ 551,945
--------- ---------
--------- ---------
The accompanying notes are an integral part of these financial statements.
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HL FUNDING COMPANY, INC.
STATEMENTS OF CASH FLOWS
For the Nine Months Ended
September 30,
1996 1995
--------- ---------
(Unaudited)
OPERATING ACTIVITIES:
Net loss $(109,716) $(132,855)
Adjustments to reconcile net loss to
net cash used for operating activities:
Amortization of organizational costs 20,800 20,800
Decrease (increase) in intercompany payable 244,963 (200,991)
Increase in other assets (15,120) (2,628)
Decrease (increase) in Federal income tax receivable 122,264 (74,417)
Decrease in deferred tax asset 18,882 2,879
--------- ---------
Cash used for operating activities 282,073 (387,212)
--------- ---------
INVESTING ACTIVITIES:
Premium loans (115,234) (37,537)
Organizational costs 0 0
--------- ---------
Cash used for investing activities (115,234) (37,537)
--------- ---------
FINANCING ACTIVITIES:
Intercompany loans 115,234 37,537
Capital contribution and stock issuance 0 0
--------- ---------
Cash provided by financing activities 115,234 37,537
--------- ---------
Net increase (decrease) in cash 282,073 (387,211)
Cash at beginning of period 68,582 621,507
--------- ---------
Cash at end of period $ 350,655 $ 234,296
--------- ---------
--------- ---------
The accompanying notes are an integral part of these financial statements.
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HL FUNDING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
NOTE 1 - ORGANIZATION
HL Funding Company, Inc. (HLFC) 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.
(Prior to December 19, 1995, ITT Hartford Group, Inc. was a wholly owned
subsidiary of ITT Corporation. On December 19, 1995, ITT Corporation
distributed all of the outstanding shares of ITT Hartford Group, Inc. to ITT
Corporation shareholders). 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 September 30, 1996, eighteen 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 ($348,482 and $66,408 as of September
30, 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.
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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.
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 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 rate plus 1.25%. The interest rate was 6.875% at September
30, 1996.
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
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 ITT Hartford Group,
Inc.'s U.S. Federal income tax return and received from ITT Hartford Group,
Inc. current income tax benefits computed in accordance with the tax sharing
arrangements between ITT Hartford Group, Inc. and its subsidiaries.
Subsequent to the spin-off of the ITT Hartford Insurance Group, Inc. from its
former parent ITT Corp., HLFC will not be included in the consolidated U.S.
Federal income tax return of ITT Hartford Group, Inc., and accordingly as of
September 30, 1996 HLFC will file as a member of a separate non-life
consolidated group with its immediate parent, Hartford Financial Services
Corporation. The effective tax rate in 1996 and 1995 approximated the U.S.
Statutory tax rate of 35%. The provision (benefit) for income taxes was as
follows:
September 30, 1996 December 31, 1995
Current $(61,959) $(195,216)
Deferred 2,880 (28,165)
--------- ----------
$(59,079) $(223,381)
--------- ----------
--------- ----------
As of September 30, 1996 and December 31, 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, $162 and $0
in 1995, 1994 and 1993, respectively.
7
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NOTE 6 - 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. 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.
Item 2. MANAGEMENT'S NARRATIVE ANALYSIS OF
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
OPERATING RESULTS
For the nine months ended September 30, 1996, HL Funding Company, Inc. (the
Company) had a net loss of $109,716 compared to a net loss of $132,855 for
the nine months ended September 30, 1995. Net losses in the comparative
periods were principally due to general operating expenses of the Company
exceeding short term interest and program income for the nine months ended
September 30, 1996 and 1995. The decrease in the net loss between September
30, 1996 and 1995 was principally due to lower expenses for salary and
overhead in 1996, and slightly higher program income generated from sales of
new contracts, partially offset by a decrease in non program interest income.
Through September 30, 1996, eighteen programs were sold by the Company
versus eight through September 30, 1995.
8
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PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See Exhibit Index
(b) None
9
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SIGNATURE
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.
November 12, 1996 HL Funding Company, Inc.
(Registrant)
by____________________________
George R. Jay
Secretary and Director
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION LOCATION
(2) Plan of acquisition, reorganization, arrangement,
liquidation or succession None
(4) Instruments defining the rights of security holders,
including indenture None
(11) Statement re computation of per share earnings None
(15) Letter re unaudited interim financial information None
(18) Letter re change in accounting principles None
(19) Previously unfiled documents None
(20) Report furnished to security holders None
(23) Published report regarding matters submitted to None
vote of security holders
(24) Consents of experts and counsel None
(25) Power of attorney None
(28) Additional exhibits None
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<CIK> 0000897998
<NAME> HL FUNDING CO. INC.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 350,655
<RECEIVABLES> 451,770
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 0
<PP&E> 0
<TOTAL-ASSETS> 802,425
<SHORT-TERM> 0
<PAYABLES> 576,691
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 0
<LONG-TERM> 0
0
0
<COMMON> 100
<OTHER-SE> 225,734
<TOTAL-LIABILITY-AND-EQUITY> 802,425
<TRADING-REVENUE> 0
<INTEREST-DIVIDENDS> 5,276
<COMMISSIONS> 0
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 15,238
<INTEREST-EXPENSE> 10,999
<COMPENSATION> 178,310
<INCOME-PRETAX> (168,795)
<INCOME-PRE-EXTRAORDINARY> (168,795)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (109,716)
<EPS-PRIMARY> (109,716)
<EPS-DILUTED> 0
</TABLE>
