-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JGB9cbuNlMtRXlHIJFFeB7B0OCsUi8lRp0cv1TWZnqHkvZ8apvd3XOXrO37z1CA9 UBOjcSB3WLzHo2vbGOrDlQ== 0000950144-99-003705.txt : 19990402 0000950144-99-003705.hdr.sgml : 19990402 ACCESSION NUMBER: 0000950144-99-003705 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LIBERTY CORP CENTRAL INDEX KEY: 0000059229 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 570507055 STATE OF INCORPORATION: SC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-05846 FILM NUMBER: 99580970 BUSINESS ADDRESS: STREET 1: P O BOX 789 STREET 2: 2000 WADE HAMPTON BLVD CITY: GREENVILLE STATE: SC ZIP: 29615 BUSINESS PHONE: 8032688283 MAIL ADDRESS: STREET 1: P O BOX 789 STREET 2: WADE HAMPTON BLVD CITY: GREENVILLE STATE: SC ZIP: 29602 10-K405 1 THE LIBERTY CORPORATION FORM 10-K405 1 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 For the fiscal year ended December 31, 1998 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission File Number 1-5846 THE LIBERTY CORPORATION - -------------------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) South Carolina 57-0507055 - ---------------------------------------- ------------------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Post Office Box 789, Wade Hampton Boulevard, Greenville, S. C. 29602 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (864) 609-8256 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange on Title of Each Class Which Registered - ----------------------------------------- ------------------------------------- Common Stock, no par value per share New York Stock Exchange Rights to Purchase Series A Participating Cumulative Preferred Stock New York Stock Exchange Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the Registrant as of March 15, 1999: Common Stock, No Par Value $989,371,471 -------------------------- ------------ The number of shares outstanding of each of Registrant's classes of common stock as of March 15, 1999: Common Stock, No Par Value 18,733,661 -------------------------- ---------- DOCUMENTS INCORPORATED BY REFERENCE Portions of The Liberty Corporation Annual Report to Shareholders for the year ended December 31, 1998 are incorporated into Part II, Items 5, 6, 7, and 8 by reference. Portions of The Liberty Corporation Proxy Statement for the Annual Meeting of Shareholders on May 4, 1999 are incorporated into Part III, Items 10, 11, 12, and 13 by reference. This report is comprised of pages 1 through 76. The exhibit index is on page 30. 2 PART I ITEM 1. BUSINESS GENERAL The Registrant, The Liberty Corporation ("Liberty" or "the Company") is a holding company incorporated under the laws of the state of South Carolina with broad powers to engage in business. Currently the Company's subsidiaries are operating in the television broadcasting, life insurance, and life insurance policy administration businesses. The Company's principal executive offices are in Greenville, South Carolina. The Company's broadcasting subsidiary, Cosmos Broadcasting Corporation, ("Cosmos") consists of eleven network affiliated stations principally located in the Southeast and Midwest, and a cable advertising company. The Company markets insurance products through Liberty Life Insurance Company ("Liberty Life"), which was founded in 1905. Additionally, Liberty is one of the nation's largest life insurance third-party administrators, providing administrative services for 4.4 million policies through Liberty Insurance Services Corporation ("LIS"). Additional information concerning Liberty's subsidiaries and divisions is included in "Management's Discussion and Analysis" in the Company's 1998 Annual Report to Shareholders, which is incorporated herein by reference. RECENT DEVELOPMENTS On February 2, 1999, the Company announced that it was considering a variety of restructuring alternatives that would more actively support the business objectives of its operating subsidiaries and enhance value for shareholders. While no decisions have been reached, options are being explored that could potentially lead to a spin-off of one of the businesses, a joint venture with another company or other possibilities. During 1998, the Company completed the acquisition of three television stations. In July 1998, the Company completed the acquisition of WALB television, a NBC affiliate, located in Albany, Georgia for a cash purchase price of $78.6 million. In November 1998, the Company completed the acquisition of KGBT television, a CBS affiliate, located in Harlingen, Texas for a cash purchase price of $42.9 million. In December 1998, the Company completed the acquisition of WWAY television, an ABC affiliate, located in Wilmington, North Carolina for a cash purchase price of $35.4 million. Funds for the acquisitions were obtained from the Company's credit facility. On April 8, 1998, the Company completed the sale of Pierce National Life Insurance Company ("Pierce") to Fortis, Inc. The Company received cash totaling approximately $139 million at closing. On December 31, 1997, Fortis, Inc. had purchased 2,660 newly issued shares of Pierce common stock for $37.2 million in cash. Subsequent to this stock purchase, Fortis, Inc. maintained a twenty-one percent ownership interest in the common stock of Pierce through the completion of the sale. LIS continues to administer the Pierce block of business and also began to provide similar administrative services to another subsidiary of Fortis, Inc. during 1998. In March 1998, the Company completed a tender offer program to repurchased 2,400,000 shares of its common stock at $52 per share. In addition, the Company repurchased 138,000 shares in the open market during 1998. The stock repurchases were funded with borrowings from Company's credit facility. In May 1997, Liberty completed the sale of its business rental properties and the majority of its business park land developments to a partnership in which the general partner is a publicly-traded real estate investment trust ("REIT"). Liberty received cash, a note receivable, and partnership units (which are convertible into shares of the REIT) in exchange for the properties. 2 3 TELEVISIONS BROADCASTING AND RELATED OPERATIONS The following table shows data on the stations owned by Cosmos.
Percentage Date Network of U.S. formed Market Network Contract Station television or Market Station Rank(1) Channel Affiliation Expiration(2) Rank(3) households(4) acquired - -------------------------------------------------------------------------------------------------------------- Louisville, KY WAVE-TV 48 3 NBC 2004 2 0.58% 1981 Toledo, OH WTOL-TV 66 11 CBS 1999 1 0.41 1965 Columbia, SC WIS-TV 86 10 NBC 2004 1 0.32 1953 Evansville, IN WFIE-TV 96 14 NBC 2004 1 0.28 1981 Harlingen, TX KGBT-TV 102 4 CBS 1999 3 0.25 1998 Montgomery, AL WSFA-TV 113 12 NBC 2004 1 0.23 1959 Albany, GA WALB-TV 148 10 NBC 2002 1 0.14 1998 Wilmington, NC WWAY-TV 152 3 ABC 2005 2 0.14 1998 Biloxi, MS WLOX-TV 158 13 ABC 2004 1 0.12 1995 Jonesboro, AK KAIT-TV 178 8 ABC 2004 1 0.08 1986 Lake Charles, LA KPLC-TV 179 7 NBC 2004 1 0.08 1986
(1) Market rank is based on the relative size of the designated market areas ("DMAs") among the 211 generally recognized DMAs in the U.S., based on A.C. Nielsen Co. ("Nielsen") estimates for the 1998-99 season. (2) Contracts may be subject to renewal provisions that effectively extend the expiration date. (3) Station rank in its market area based on Nielsen November 1998 ratings (from sign on to sign off) (4) Based on Nielsen estimates for the 1998-99 season NETWORK AFFILIATIONS. Each Cosmos station is affiliated with a major network. The affiliation contracts provide that the network will offer to the affiliated station a variety of network programs, for which the station has the right of first refusal against any other television station located in its community. The network typically retains the rights to sell a substantial majority of the advertising time during such broadcasts. For airing network programming the network pays the stations according to terms in its network affiliation contract. The major networks typically provide programming for approximately 90 hours of the average 135 hours per week broadcast by their affiliated stations. The NBC affiliation contracts with each of Cosmos' NBC affiliated stations have been continuously in effect for over forty years. Cosmos' CBS and ABC affiliation contracts have each been continuously in effect for over thirty years. Each network has the right to terminate its affiliation agreement in the event of a material breach of such agreement by a station and in certain other circumstances. Although Cosmos does not expect that its network affiliation agreements will be terminated and expects to continue to be able to renew its network affiliation agreements, no assurance can be given that such agreements will not be terminated or that renewals will be obtained on as favorable terms or at all. 3 4 SOURCES OF COSMOS' TELEVISION OPERATING REVENUES. The following table shows the approximate percentage of Cosmos' gross television operating revenues by source, excluding other income, for the three years ended December 31, 1998: - -------------------------------------------------------------------------------- 1998 1997 1996 Local and regional advertising 56% 62% 60% National spot advertising 28 29 26 Network compensation 7 8 8 Political advertising 9 1 6 - -------------------------------------------------------------------------------- Local and regional advertising is sold by each station's own sales representatives to local and other non-national advertisers or agencies. Generally these contracts are short-term, although occasionally longer-term packages will be sold. National spot advertising (generally a series of spot announcements between programs or within the station's own programs) is sold by the station or its sales representatives directly to agencies representing national advertisers. Most of these national sales contracts are also short-term, often covering spot campaigns running for thirteen weeks or less. Network compensation is the amount paid by the network to its affiliated stations for broadcasting network programs. Political advertising is generated by national and local elections, which can vary greatly from both market to market and year to year. A television station's rates are primarily determined by the estimated number of television homes it can provide for an advertiser's message. The estimates of the total number of television homes in the market and of the station's share of those homes is based on the Nielsen industry-wide television rating service. The demographic make-up of the viewing audience is equally important to advertisers. A station's rate card for national and local advertisers takes into account, in addition to audience delivered, such variables as the length of the commercial announcements and the quantity purchased. Because television stations rely on advertising revenues, they are sensitive to cyclical changes in the national and local economy. The size of advertisers' budgets, which are affected by broad economic trends, affect the broadcast industry in general. The strength of the local economy in each station's market also significantly impacts revenues. The advertising revenues of the stations are generally highest in the second and fourth quarters of each year, due in part to increases in consumer advertising in the spring and retail advertising in the period leading up to and including the holiday season. Additionally, advertising revenues in even-numbered years can benefit from demand for advertising time in Olympic broadcasts and advertising placed by candidates for political offices. A station's local market strength is the primary factor that buyers use when placing political advertising. From time to time, proposals have been advanced in Congress to require television broadcast stations to provide some advertising time to political candidates at no charge, which would potentially reduce advertising revenues from political candidates. Cosmos also has ancillary operations in cable advertising sales and a video production company. Revenues from these operations amount to $10.4 million, $7.5 million and $6.3 million for calendar years 1998, 1997 and 1996, respectively. The cable advertising sales are generated by CableVantage Inc., a marketing company designed to assist local cable operators in the sale of commercial time available in cable network programs. CableVantage was formed in 1994 to create business opportunities with cable operators and build revenues from programs and services specifically produced for cable. TELEVISION BROADCASTING COMPETITION. The television broadcasting industry competes with other leisure time activities for the time of viewers and with all other advertising media for advertising dollars. Within its coverage area a television station competes with other stations and with other advertising media serving the same area. The outcome of the competition among stations for advertising dollars in a market depends principally on share of audience, advertising rates and the effectiveness of the sales effort. The stations compete for television viewers against other local network affiliated and independent stations, as well as against cable and alternate methods of television transmission. The primary basis of this competition is program popularity. A majority of daily programming is supplied by the network with which each station is affiliated. In time periods in which the network provides programming, stations are primarily dependent upon the performance of the network programs in attracting viewers. Stations compete in non-network time periods based on the performance of its programming during such time periods, using a combination of self-produced news, public affairs and other entertainment programming, including 4 5 syndicated programs, that the station believes will be attractive to viewers. Cosmos believes that each of its stations has a strong competitive position in its local market, enabling it to deliver a high percentage of the local television audience to advertisers. Cosmos' commitment to local news programming is an important element in maintaining Cosmos' current market positions. The competition includes cable television, which brings additional television programming, including pay cable (HBO, Showtime, Movie Channel, etc.), into subscribers' homes in a television station's service area. Other sources of competition include home entertainment systems (including video cassette recorder and playback systems, videodiscs and television game devices), the Internet, multichannel multipoint distribution systems, wireless cable, satellite master antenna television systems and some low power in-home satellite services. Stations also face competition from high-powered direct broadcast satellite services, such as PrimeStar and DIRECTV, which transmit programming directly to homes equipped with special receiving antennas. Stations compete with these services both on the basis of service and product performance (quality of reception and number of channels that may be offered) and price (the relative cost to utilize these systems compared to broadcast television viewing). Further advances in technology may increase competition for household audiences and advertisers. Video compression techniques, now in use with direct broadcast satellites and in development for cable and wireless cable, are expected to permit greater numbers of channels to be carried within existing bandwidth. These technological developments, which are applicable to all video delivery systems including over-the-air broadcasting, have the potential to allow additional programming to highly targeted audiences. The ability to reach narrowly defined audiences may further fragment viewers and influence advertising spending. The television broadcasting industry is continually faced with such technological change and innovation. Cosmos is unable to predict the effect that technological changes will have on the broadcast television industry in general, or more specifically to its own operations. DIGITAL TELEVISION. Digital television is expected to be increasingly available to consumers over the next several years. During 1997, the FCC outlined the rollout plan for digital television, which is expected to bring digital television signals to over 50 million homes in the top 30 television markets by the year 2000. All other markets must provide digital broadcasts by May 2002. The rollout of digital television has created much debate from television operators as they must assess the cost to upgrade their current equipment to transmit the digital signal, when to begin the upgrade and when to begin the subsequent broadcasting of the digital signal. There is much uncertainty surrounding this because (1) much of the technology and hardware is newly developed and many operators may be inclined to postpone the conversions as long as possible to allow refinement of this new technology, and (2) the purchase of television sets required to view the digital signal is currently cost prohibitive for most viewers. Cosmos is currently assessing the impact of the conversion to digital television and plans to integrate as much of its required upgrades as possible into its scheduled capital expenditure plan that would be undertaken without regard to digital television. FEDERAL REGULATION OF BROADCASTING. Cosmos' broadcasting operations are subject to the jurisdiction of the FCC under the Communications Act. The Communications Act empowers the FCC, among other things, to issue, revoke or modify broadcasting licenses; to assign frequency bands; to determine the location of stations; to regulate the apparatus used by stations; to establish areas to be served; to adopt such regulations as may be necessary to carry out the provisions of the Communications Act and to impose certain penalties for violation of such regulations. The Communications Act prohibits the transfer of a license or the transfer of control or other change in control of a licensee without prior approval of the FCC. The Hipp family is considered by the FCC to have de facto control over Cosmos, and any action that would change such control would require prior approval of the FCC. The Telecommunications Act signed into law in 1996 (the "1996 Act") changed many existing regulations concerning, among other things, the ownership of television stations. Under previous regulations governing multiple ownership, a license to operate a television station generally would not be granted to any person (or persons under common control) if such person directly or indirectly held a significant interest in more than 12 television stations or less than 12 television stations if their audience coverage exceeded 25% of total United States households. The 1996 Act allows for unlimited ownership of stations as long as the audience coverage does not exceed 35% of total households. Previous FCC regulations also limited ownership of television stations by those having interests in cable television systems and daily newspapers serving the same service area as the television stations. The 1996 Act dropped the station/cable same market ownership prohibition. The 1996 Act also lengthened the term for which television broadcasting licenses may be granted from a 5 6 maximum term of five years to a maximum term of eight years. In the absence of adverse findings by the FCC as to the licensee's qualification, licenses are usually renewed without hearing by the FCC for additional eight year terms. Cosmos' renewal applications have always been granted without hearing for the full term. To date the loosening of the ownership provisions, as well as the other provisions included in the 1996 Act, have not had any significant direct impact on the operations of Cosmos. There are additional FCC regulations and policies, and regulations and policies of other federal agencies, principally the Federal Trade Commission, regulating network/affiliate relations, political broadcasts, children's programming, advertising practices, equal employment opportunity, carriage of television signals by cable systems, application and reporting procedures and other areas affecting the business and operations of television stations. EMPLOYEES As of December 31, 1998 Cosmos has 1,130 full-time employees and 143 part-time employees, with approximately 63 represented by either the American Federation of Radio and Television Artists or the International Brotherhood of Electrical Workers. Historically Cosmos has not experienced any labor problems and believes it has good relationships with its employees. 6 7 INSURANCE OPERATIONS - LIBERTY LIFE Liberty Life is a stock life insurance company engaged in the business of writing a broad range of individual life insurance policies and accident and health insurance policies. While Liberty Life is licensed in forty-nine states, and the District of Columbia, its focus has been the Southeast. In 1998, the largest percentages of its premium income were from South Carolina (23%), North Carolina (18%), Louisiana (8%), Texas (6%) and California (6%). The Company believes that Liberty Life's Agency division is the largest provider of home service business in the Carolinas and its LibertyDirect division is the second largest provider of optional mortgage insurance in the life insurance industry. Life insurance and annuity premiums contributed 68% of Liberty Life's total premiums in 1998, 72% in 1997, and 77% in 1996. Accident and health insurance premiums contributed the remainder. AGENCY DIVISION. The Agency Division is Liberty Life's largest division, contributing 51% of Liberty Life's premiums in 1998. Agents supporting this division operate out of 49 district offices selling primarily individual life insurance, including universal life and interest-sensitive whole life products, as well as health insurance. Historically much of the activity of the agents in this division (which was formerly referred to as Home Service) has focused on periodically visiting homes to sell policies and collect premiums, hence the name Home Service. Liberty Life's strategy in recent years has been to move Agency from a traditional home service life insurance model to one that is focused on being a competitive provider of financial security to the moderate income market. In November 1997, Liberty completed the rollout of a hand-held, pen-based computer (the "PriorityPad") to its entire Agency sales force. Loaded on the PriorityPad is Liberty's proprietary needs assessment methodology, the Priority Profile. This technology, combined with the Priority Profile methodology, allows the agent to go through an interactive sales presentation with the prospective customer. The PriorityPad also provides access to policy rates, and interacts with the home office policy database to update records necessary for the agent to better manage his or her customer base. Ultimately, this technology may be used for application entry or to automate other administrative processes. In the fall of 1998, Agency introduced a comprehensive set of processes that focus on improving the ability of the agents to serve the moderate income market and meet the strategic goals of accelerating new customer acquisition and improving customer retention. Although the Company has broadened this division's area of concentration beyond the Carolinas, principally through strategic acquisitions, the Company has maintained a regional focus for its Agency business in the Southeast. LIBERTYDIRECT. The LibertyDirect division contributed 46% of Liberty Life's premiums in 1998. This division has grown rapidly in recent years with premium income more than doubling since 1995. Historically this division has primarily sold decreasing term life, accident and disability insurance designed to fund the outstanding balance of a residential mortgage upon the death or disability of the insured. A staff of full-time representatives and independent brokers offer these products through more than 1,000 financial institutions located throughout the United States and has relationships with 12 of the top 15 mortgage servicing firms. The Company supports the marketing of these products through direct mail and phone solicitations. In addition to products related to the mortgage insurance, this division focuses on the development of new insurance or non-insurance products to market through direct response or point-of-sale marketing channels. Liberty will continue to seek new opportunities and new products to market through this division. PIERCE NATIONAL. Until April, 1998 the Company provided life insurance sold to pre-fund funerals through Pierce. As previously mentioned, the Company sold Pierce in April, 1998. The decision to sell Pierce was based on an assessment that Pierce would not be able to satisfactorily meet long term financial and marketing goals. 7 8 PREMIUM BREAKDOWN. The following table sets forth the insurance premiums and policy charges for Liberty Life's marketing and distribution divisions and Pierce National for the years ended December 31.
(In 000's) 1998 1997 1996 - ------------------------------------------------------------------------------- Liberty Life Agency $133,796 $135,305 $137,930 LibertyDirect 119,483 102,995 70,316 Other 7,405 6,978 8,472 - ------------------------------------------------------------------------------- Total Liberty Life 260,684 245,278 216,718 Pierce National 24,247 105,414 104,653 - ------------------------------------------------------------------------------- Total $284,931 $350,692 $321,371 - -------------------------------------------------------------------------------
UNDERWRITING PRACTICES. Liberty Life's underwriting practices for ordinary life insurance require medical examinations for applicants over age 60 or for policies in excess of certain prescribed face amounts. In accordance with the general practice in the life insurance industry, Liberty Life writes life insurance on substandard risks at increased premium rates. Generally, traditional life insurance for non-universal life products is written for amounts under $5,000 and typically no medical examination is required. Mortgage protection life insurance written through the LibertyDirect division is usually written without medical examination. REINSURANCE. Liberty Life uses reinsurance as a risk management tool in the normal course of business and, in isolated strategic transactions, to effectively buy or sell blocks of in force business. The Company has ceded $3.4 billion (18%) of its $18.9 billion insurance in force to other companies; however, the Company's insurance subsidiaries remain liable with respect to reinsurance ceded should any reinsurer be unable to meet the obligations it has or will assume. For the years ended December 31, 1998, 1997, and 1996 Liberty had ceded life insurance premiums of $23.2 million, $25.6 million, and $27.3 million, respectively. Accident and health premiums ceded made up the remainder of ceded premiums which were $9.1 million, $8.6 million, and $9.2 million for the years ended December 31, 1998, 1997 and 1996, respectively. RISK MANAGEMENT REINSURANCE TRANSACTIONS. Liberty Life reinsures with other insurance companies portions of the life insurance it writes in order to limit its exposure on large or substandard risks. The maximum amount of life insurance that Liberty Life will retain on any life is $300,000, plus an additional $50,000 in the event of accidental death. This maximum is reduced for higher ages and for special classes of risks. Insurance in excess of the retention limit is either automatically ceded under reinsurance agreements or is reinsured on an individually agreed basis with other insurance companies. Liberty Life has ceded a significant portion of its risks on accidental death and disability coverage to other insurance companies. Liberty Life also has coverage for catastrophic accidents. Liberty Life cedes, in the normal course of business, portions of its risks to a number of other insurance companies. 8 9 STRATEGIC REINSURANCE TRANSACTIONS. In 1991, 80% or $3.2 billion face amount of Liberty Life's General Agency Marketing Division net insurance in force was coinsured with Life Reassurance Corporation ("Life Re"). The original agreement with Life Re provided for the coinsurance of 50% of this division's insurance in force issued after 1991. Effective July 1, 1995, the amount coinsured on policies written after December 31, 1991, was increased to 80%. The total face value of amounts ceded to Life Re at December 31, 1998 was $2.2 billion. Under terms of the agreement, assets supporting the business ceded are required to be held in escrow. In order to facilitate the 1991 acquisition through reinsurance of a block of business from Kentucky Central Life Insurance Company, Liberty Life coinsured 50% of its Agency traditional life insurance business with Lincoln National Life Reinsurance Company. The Lincoln National reinsurance has been accounted for under generally accepted accounting principles as financial reinsurance. The reinsurance contract contains an escrow agreement that requires assets equal to the reserves reinsured, as determined under statutory accounting principles, be held in escrow for the benefit of this block of business. OPERATIONS. The administrative functions of underwriting and issuing new policies, and the ongoing servicing and claims settlement of in force policies, are provided by an affiliate, Liberty Insurance Services Corporation, at the home office in Greenville, South Carolina. The Company's strategy is to allow LIS to manage the administrative functions of its operations in order to take advantage of the expertise that LIS has developed to provide administrative services to the life insurance industry. LIS provides administrative support services for Liberty's approximately 2.5 million policies representing $18.9 billion of life insurance in force. The Company intends to continue its focus on reducing the unit costs of administrative services by increasing the volume of business through internal growth in those businesses, potentially through acquisitions of blocks of business similar in nature to its existing business, and by investing in technology to further improve efficiency in its operations. EMPLOYEES. At December 31, 1998 Liberty Life had approximately 1,650 employees. Approximately 1,200 of the employees are agents whose primary source of compensation is commissions on products sold, with the majority of the agents working for Liberty Life's Agency division. INSURANCE COMPETITION AND RATINGS. Liberty Life competes with numerous insurance companies, some of which have greater financial resources, broader product lines and larger staffs. In addition, banks and savings and loan associations in some jurisdictions compete with Liberty Life for sales of life insurance products, and Liberty Life competes with banks, investment advisors, mutual funds and other financial entities to attract investment funds generally. Competition in the Agency business is largely regional or local, highly dependent on the quality of the local management, and is less price competitive than other insurance markets. The Agency business involves frequent contacts by agents with their customers. While Liberty is de-emphasizing the home collection of premiums, Liberty believes it is important for agents to continue to meet with their customers regularly in order to adequately serve their insurance needs. The Company currently believes that it ranks second nationally in optional mortgage insurance (provided through its LibertyDirect division) with an estimated 24% market share. Approximately 31% of the market is believed to be held by the market leader. Various independent companies issue ratings assessing the ability of insurance companies to meet their policyholder and other contractual obligations, as well as assessing the overall financial performance and strength of companies. The most widely used ratings are those prepared and published by A.M. Best Company, Inc. Ratings by A.M. Best range from "A++" (Superior) to "F" (In Liquidation). Liberty Life's current A.M. Best rating is "A" (Excellent). The rating agencies base their ratings on information provided by the insurer and their own analysis, studies and assumptions. The ratings apply only to the specific company rated and do not extend to The Liberty Corporation as a whole, nor are the ratings a recommendation to buy, sell or hold securities. The agencies can change or withdraw their published ratings at any time the agency deems circumstances warrant a change. Should Liberty Life's rating be downgraded, sales of their products and persistency of the existing business could be adversely affected. Insurance company ratings are generally considered to be more important in the annuity and general agency markets, neither of which are major markets for Liberty Life. 9 10 INSURANCE REGULATION. Like other insurance companies, Liberty Life is subject to regulation and supervision by the state or other insurance department of each jurisdiction in which they are licensed to do business. These supervisory agencies have broad administrative powers relating to the granting and revocation of licenses to transact business, the licensing of agents, the approval of policy forms, reserve requirements and the form and content of required statutory basis financial statements. As to its investments, each of the Company's insurance subsidiaries must meet the standards and tests established by the National Association of Insurance Commissioners (the "NAIC") and, in particular, the investment laws and regulations of the states in which each subsidiary is domiciled. All states and jurisdictions have their own statutes and regulations, which vary in certain respects. However, the NAIC Model Act and regulations have tended to make the various states' regulation more uniform. The insurance companies are also subject to laws in most states that require solvent life insurance companies to pay guaranty fund assessments to protect the interests of policyholders of insolvent life insurance companies. The NAIC and state regulatory authorities require the Asset Valuation Reserve or "AVR" and the Interest Maintenance Reserve or "IMR" to be established as a liability on a life insurer's statutory basis financial statements, but do not affect financial statements of the Company prepared in accordance with generally accepted accounting principles. AVR establishes a statutory reserve for mortgage loans, equity real estate and joint ventures, as well as for fixed maturities and common and preferred stock. AVR generally captures all realized and unrealized gains and losses on such assets, other than those resulting from changes in interest rates. IMR captures the net gains or losses that are realized upon the sale of fixed income securities (bonds, preferred stocks, mortgage-backed securities and mortgage loans) and that result from changes in the overall level of interest rates, and amortizes these net realized gains or losses into income over the remaining life of each investment sold, thus limiting the ability of an insurer to enhance statutory surplus by taking gains on fixed income securities. The IMR and AVR requirements have not had a material impact on Liberty Life's surplus nor its ability to pay dividends to the parent company. In recent years the NAIC has approved and recommended to the states for adoption and implementation several regulatory initiatives designed to decrease the risk of insolvency of insurance companies in general. These initiatives include the implementation of a risk-based capital ("RBC") formula for determining adequate levels of capital and surplus and further restrictions on an insurance company's payment of dividends to its shareholders. To date, South Carolina has not adopted the NAIC risk-based capital model act; however, it does require prior notice to the South Carolina Commissioner of Insurance of dividend distributions to shareholders, and permits the Commissioner to disapprove or limit the dividend within 30 days of notice if the dividend or distribution is deemed an unreasonable strain on surplus. The NAIC risk-based capital model act or similar initiatives may be adopted by South Carolina or the various states in which Liberty Life and the Company's other insurance subsidiaries are licensed, but the ultimate content and timing of any statutes and regulations adopted by the states cannot be determined at this time. Under the NAIC's risk-based capital requirements, insurance companies must calculate and report information under a risk-based capital formula in their annual statutory financial statement. This information is intended to permit insurance regulators to identify and require remedial action for inadequately capitalized insurance companies, but is not designed to rank adequately capitalized companies. The NAIC requirements provide for four levels of potential involvement by state regulators for inadequately capitalized insurance companies, ranging from a requirement for the insurance company to submit a plan to improve its capital to regulatory control of the insurance company. The RBC ratios for Liberty Life indicate that Liberty Life's capital significantly exceeds the minimum capital requirements at December 31, 1998. Another NAIC Model Act limits dividends that may be paid in any calendar year without regulatory approval to the lesser of 10% of the insurer's statutory surplus at the prior year-end, or the statutory net gain from operations of the insurer (excluding realized capital gains and losses) for the prior calendar year. The current South Carolina statutes applicable to Liberty Life do not conform to the NAIC Model Act (South Carolina limits dividends to the greater of 10% of statutory surplus or gain from operations). Under current South Carolina law, without prior approval from the South Carolina Commissioner of Insurance, dividend payments from Liberty Life to the Company are limited to the greater of the prior year's statutory gain from operations or 10% of the prior year's statutory surplus. The maximum allowable dividend that can be paid in 1999 by Liberty Life without approval from the South Carolina Insurance Commissioner is $25.6 million. Actual dividends and distributions paid by Liberty Life were $22.0 million in 1998, $21.0 million in both 1997 and 1996. Under regulations effective July 1, 1995, the South Carolina Insurance Department must be notified of all dividends and distributions to shareholders within five days following the declaration, and at least ten days prior to the payment of the 10 11 dividend or distribution, and will have the authority to limit the amount of any dividends or distributions. Extraordinary dividends, defined as distributions that, together with all other distributions within a 12 month period, exceed the greater of the net gain from operations or 10% of statutory surplus, cannot be made without the approval of the South Carolina Insurance Department, unless the department has not disapproved the payment within 30 days following the notice of the declaration. In accordance with the rules and practices of the NAIC and in accordance with state law, every insurance company is generally examined once every three years by examiners from its state of domicile and from several of the other states where it is licensed to do business. The most recent examination of Liberty Life was for the three years ended December 31, 1994 has been completed and the report issued did not indicate any significant areas of concern. The Company's insurance subsidiaries are also subject to regulation as an insurance holding company system under statutes which have been enacted in their states of domicile and other states in which they are licensed to do business. Pursuant to these statutes, Liberty Life is required to file an annual registration statement with the Office of the Commissioner of Insurance and to report all material changes or transactions. In addition, these statutes restrict the ability of any person to acquire control (generally presumed at 10% or more) of the outstanding voting securities of the Company without prior regulatory approval. 11 12 INSURANCE OPERATIONS - LIBERTY INSURANCE SERVICES CORPORATION LIS provides a wide range of administrative support services, on a fee baisis, to unaffiliated life and health insurance companies as well as for the Company's insurance subsidiaries. These services include underwriting, issuance of policies, accounting, customer service and claims processing and adjudication. The services are tailored to support the special features of insurance products offered by the companies that desire these services. In addition LIS offers consulting services related to acquisition integration and planning. LIS believes that its offers services that will permit its customers to reduce their home office support costs and focus resources on marketing their insurance products. In marketing to unaffiliated life and health insurance companies the Company's strategy is to target three potential markets: - Insurance companies acquired by financial investors that either do not want to manage the back office administrative functions or lack experience in providing the required support. - Insurance companies that have closed blocks of business that are expensive to administer or are not core to their businesses. - Insurance companies that prefer to focus management resources on marketing At December 31, 1998, LIS had approximately 4.4 million policies under management. Approximately 1.9 million policies are administered for five unaffiliated clients and 2.5 million of the policies are administered for Liberty Life. In addition to the policies currently under management LIS has a new contract with SunAmerica to service, beginning in mid-1999, a block of 240,000 policies. COMPETITION. Outsourcing, or third party administration of insurance administrative support services, is a relatively new and emerging business. Most of LIS's competition for business opportunities is from vendors whose primary business is in insurance systems and software. LIS believes it can successfully compete with these companies because of its focus on the core business process of insurance administration and its experience and proven ability to provide a full range of insurance administrative services. EMPLOYEES. At December 31, 1998, LIS had approximately 740 employees. Substantially all of the employees are located at LIS headquarters in Greenville, South Carolina. 12 13 EXECUTIVE OFFICERS The following is a list of the Executive Officers of the Registrant indicating their age and certain biographical data. W. HAYNE HIPP, Age 59 Chairman of the Board of Liberty since May, 1995 Chairman of the Board of Cosmos since May, 1995 President and Chief Executive Officer of Liberty since September, 1981 Chairman of the Board of Liberty Life from September, 1989 to December 31, 1997 ROBERT E. EVANS, Age 44 President of Liberty Life since March, 1999 Managing Director, Insurance Services of Fleet Financial Group from 1995 to December 1998 Senior Vice President, Travelers Life and Annuity Business, Travelers Insurance from 1993 to 1995 Vice President, Travelers Insurance from 1986 to 1993 JENNIE M. JOHNSON, Age 51 President of Liberty Insurance Services Corporation since May, 1997 President of Pierce National Life Insurance Company from August, 1995 to April 1998 Vice President, Administration of Liberty from February, 1994 to August, 1995 Vice President, Planning of Liberty from February, 1986 to December, 1994 KENNETH W. JONES, Age 41 Corporate Controller of Liberty since May, 1997 Treasurer of Liberty Life since May, 1997 Assistant Controller of Liberty from September, 1994 to May, 1997 JAMES M. KEELOR, Age 56 President of Cosmos since February, 1992 Vice President, Operations, of Cosmos from December, 1989 to February, 1992 MARTHA G. WILLIAMS, Age 56 Vice President, General Counsel & Secretary of Liberty since January, 1982 Vice President, General Counsel & Secretary of Liberty Life since January, 1982 Secretary and Counsel of Cosmos since February, 1982 OTHER BUSINESS In addition to the operating subsidiaries, the Company has other minor organizations. These include the Company's administrative staff, an investment advisory company, a property development & management company and transportation operations. INDUSTRY SEGMENT DATA Information concerning the Company's industry segments is contained in the Notes to the Consolidated Financial Statements beginning on pages 25-28 of The Liberty Corporation Annual Report to Shareholders and is filed as Exhibit 13 on pages 69-73 of this report and is incorporated in this Item 1 by reference. 13 14 ITEM 2. PROPERTIES MAIN OFFICES. The main office of the Company, Liberty Life, Liberty Insurance Services, and Cosmos is located on a 30-acre tract in Greenville, SC, and consists of three buildings totaling approximately 360,000 square feet plus parking. The main office facilities are owned by the Company and Liberty Life. Liberty Life leases branch office space in various cities. Leases are normally made for terms of one to ten years. Cosmos owns its television broadcast studios, office buildings and transmitter sites in Columbia, SC; Montgomery, AL; Toledo, OH; Louisville, KY; Evansville, IN; Jonesboro, AR; Lake Charles, LA; Biloxi, MS; Albany, GA; Harlingen; TX and Wilmington, NC. ITEM 3. LEGAL PROCEEDINGS In January 1996, a lawsuit was filed by the Company against a software development company alleging breach of contract in connection with an agreement to develop a state-of-art software system to administer the Company's insurance operations. The suit seeks to recover amounts paid to the software developer and other costs incurred by the Company in the attempt to develop the system. In 1997, the software developer filed a counterclaim against the Company alleging breach of contract. Management, after consultation with legal counsel, believes this counterclaim is without merit and is a response to the suit filed by the Company. The Company intends to contest the counterclaim vigorously. The Company believes its lawsuit is meritorious; however, no estimated recovery is included in the accompanying financial statements. Other than the suit mentioned above, the Company is not currently engaged in legal proceedings of material consequence other than ordinary routine litigation incidental to its business. Any proceedings reported in prior filings have been settled or otherwise satisfied. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS None 14 15 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY STOCKHOLDER MATTERS Information concerning the market for the Company's Common Stock and related stockholder matters is contained on the inside back cover of The Liberty Corporation Annual Report to Shareholders and is filed as Exhibit 13 on page 38 of this report and is incorporated in this Item 5 by reference. ITEM 6. SELECTED FINANCIAL DATA Selected Financial Data for the Company is contained on page 31 of The Liberty Corporation Annual Report to Shareholders and is filed as Exhibit 13 on page 39 of this report and is incorporated in this Item 6 by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations is contained on pages 32-40 of The Liberty Corporation Annual Report to Shareholders and is filed as Exhibit 13 on pages 40-48 of this report and is incorporated in this Item 7 by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information related to quantitative and qualitative disclosures about market risk is contained on page 37 of The Liberty Corporation Annual Report to Shareholders and is included in Exhibit 13 on pages 44-45 of this report and is incorporated in this Item 7A by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION The Company's Consolidated Financial Statements and Report of Independent Auditors are contained on pages 5-30 of The Liberty Corporation Annual Report to Shareholders and is filed as Exhibit 13 on pages 49-74 of this report and are incorporated in this Item 8 by reference. Quarterly Results of Operations are contained on page 23 of The Liberty Corporation Annual Report to Shareholders and is included in Exhibit 13 on page 67 of this report and are incorporated in this Item 8 by reference ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None 15 16 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information concerning Directors of the Company is contained in The Liberty Corporation Proxy Statement for the May 4, 1999 Annual Meeting of Shareholders and is incorporated in this Item 10 by reference. Information concerning Executive Officers of the Company is submitted in a separate section of this report in Part I, Item 1 on page 13 and is incorporated in this Item 10 by reference. ITEM 11. EXECUTIVE COMPENSATION Information concerning Executive Compensation and transactions is contained in The Liberty Corporation Proxy Statement for the May 4, 1999 Annual Meeting of Shareholders and is incorporated in this Item 11 by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information concerning Security Ownership of Certain Beneficial Owners and Management is contained in The Liberty Corporation Proxy Statement for the May 4, 1999 Annual Meeting of Shareholders and is incorporated in this Item 12 by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information concerning Certain Relationships and Related Transactions is contained in The Liberty Corporation Proxy Statement for the May 4, 1999 Annual Meeting of Shareholders and is incorporated in this Item 13 by reference. 16 17 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) AND (2). LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES The following consolidated financial statements of The Liberty Corporation and Subsidiaries are included in the Company's Annual Report to Shareholders for the year ended December 31, 1998, filed as Exhibit 13 to this report and incorporated in Item 8 by reference: Consolidated Statements of Income - For the three years ended December 31, 1998 Consolidated Balance Sheets - December 31, 1998 and 1997 Consolidated Statements of Cash Flows - For the three years ended December 31, 1998 Consolidated Statements of Shareholders' Equity - For the three years ended December 31, 1998 Notes to Consolidated Financial Statements - December 31, 1998 Report of Independent Auditors The following consolidated financial statement schedules of The Liberty Corporation and Subsidiaries are included in Item 14(d): I- Summary of Investments II- Condensed Financial Statements of The Liberty Corporation (Parent Company) III- Supplementary Insurance Information IV - Reinsurance V - Valuation and Qualifying Accounts and Reserves All schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission, but which are excluded from this report, are not required under the related instructions or are inapplicable, and therefore have been omitted. 17 18 (a)(3). LIST OF EXHIBITS 3.1 Restated Articles of Incorporation, as amended through May 6, 1997 (filed with the Registrant's Quarterly Report on Form 10Q/A for the period ended March 31, 1997 and incorporated herein by reference) 3.2 Bylaws, as amended through February 2, 1999. 4.1 See Articles 4, 5, 7 and 9 of the Company's Restated Articles of Incorporation (filed as Exhibit 3.1) and Articles I, II and VI of the Company's Bylaws (filed as Exhibit 3.2). 4.2 See the Form of Rights Agreement dated as of August 7, 1990 between The Liberty Corporation and The Bank of New York, as Rights Agent, which includes as Exhibit B thereto the form of Right Certificate (filed as Exhibits 1 and 2 to the Registrant's Form 8-A, dated August 10, 1990, and incorporated herein by reference) with respect to the Rights to purchase Series A Participating Cumulative Preferred Stock. 4.3 See Credit Agreement dated May 1, 1998 (filed as Exhibit 10 to the Registrant's Quarterly Report on Form 10Q for the quarter ended March 31, 1998 and incorporated herein by reference). 10.1 See Credit Agreement dated May 1, 1998 (filed as Exhibit 4.3). 10.2 The Liberty Corporation Performance Incentive Compensation Program, as amended and restated on February 4, 1997, filed as Exhibit B to the Registrant's Proxy Statement dated March 27, 1997, and incorporated herein by reference. 11. The Liberty Corporation and Subsidiaries Consolidated Earnings Per Share Computation (incorporated herein by reference to Note 11 of the "Notes to Consolidated Financial Statements" on page 20 of The Liberty Corporation Annual Report to Shareholders for the year ended December 31, 1998) filed on page 64 of this report. 13. Portions of The Liberty Corporation Annual Report to Shareholders for the year ended December 31, 1998: Market for the Registrant's Common Stock and Related Security Stockholder Matters Selected Financial Data Management's Discussion and Analysis of Financial Condition and Results of Operations Financial Statements and Supplementary Information: Consolidated Statements of Income - For the three years ended December 31, 1998 Consolidated Balance Sheets - December 31, 1998 and 1997 Consolidated Statements of Cash Flows - For the three years ended December 31, 1998 Consolidated Statements of Shareholders' Equity - For the three years ended December 31, 1998 Notes to Consolidated Financial Statements - December 31, 1998 Report of Independent Auditors 21. The Liberty Corporation and Subsidiaries, List of Subsidiaries 23. Consent of Independent Auditors 24. Powers of Attorney applicable for certain signatures of members of the Board of Directors in Registrant's 10-K filed for the years ended December 31, 1983, 1985, 1989, 1994, 1995, 1996, and 1997. 27. Financial Data Schedule (Electronic Filing Only) (b). REPORTS ON FORM 8-K There were no reports on Form 8-K filed after September 30, 1998. 18 19 (c). EXHIBITS FILED WITH THIS REPORT 3.2 Bylaws as amended through February 2, 1999 11. The Liberty Corporation and Subsidiaries Consolidated Earnings Per Share Computation (incorporated herein by reference to Note 11 of the "Notes to Consolidated Financial Statements" on page 64 of The Liberty Corporation Annual Report to Shareholders for the year ended December 31, 1998). 13. Portions of The Liberty Corporation Annual Report to Shareholders for the year ended December 31, 1998: Market for the Registrant's Common Stock and Related Security Stockholder Matters Selected Financial Data Management's Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosures About Market Risk Financial Statements and Supplementary Information: Consolidated Statements of Income - For the three years ended December 31, 1998 Consolidated Balance Sheets - December 31, 1998 and 1997 Consolidated Statements of Cash Flows - For the three years ended December 31, 1998 Consolidated Statements of Shareholders' Equity - For the three years ended December 31, 1998 Notes to Consolidated Financial Statements - December 31, 1998 Report of Independent Auditors 21. The Liberty Corporation and Subsidiaries, List of Subsidiaries 23. Consent of Independent Auditors 27. Financial Data Schedule (Electronic Filing Only) 19 20 (d). CONSOLIDATED FINANCIAL STATEMENT SCHEDULES FILED WITH THIS REPORT I- Summary of Investments - December 31, 1998 II- Condensed Financial Statements of The Liberty Corporation (Parent Company) December 31, 1998 and 1997 III- Supplementary Insurance Information - For the Three Years Ended December 31, 1998 IV- Reinsurance - For the Three Years Ended December 31, 1998 V- Valuation and Qualifying Accounts and Reserves - For the Three Years Ended December 31, 1998 20 21 Schedule I THE LIBERTY CORPORATION AND SUBSIDIARIES SUMMARY OF INVESTMENTS DECEMBER 31, 1998 (In 000's)
Amount at Which Shown on Balance Type of Investment Cost Value Sheet - ----------------------------------------------------------- ---------- ---------- ---------- Fixed maturity securities, available for sale Bonds: United States Government and government agencies and authorities $ 127,200 $ 133,188 $ 133,188 States, municipalities, and political subdivisions -- -- -- Foreign governments -- -- -- Foreign corporate and other 38,851 38,464 38,464 Public utilities 87,864 98,147 98,147 Convertibles and bonds with warrants attached -- -- -- All other corporate bonds 607,908 627,890 627,890 Redeemable preferred stocks 35,121 37,489 37,489 ---------- ---------- ---------- Total 896,944 935,178 935,178 ---------- ---------- ---------- Equity securities, available for sale Common stocks: Public utilities -- -- Banks, trusts and insurance companies $ 7,622 $ 10,904 $ 10,904 Foreign other 1,189 1,267 1,267 Industrial, miscellaneous, and all other 36,411 41,124 41,124 Nonredeemable preferred stocks 9,132 10,363 10,363 ---------- ---------- ---------- Total 54,354 $ 63,658 63,658 ---------- ========== ---------- Mortgage loans on real estate 215,549 215,549 Investment real estate 34,788 34,788 Policy loans 90,653 90,653 Other long-term investments 21,256 21,256 Short-term investments 250 250 ---------- ---------- Total investments $1,313,794 $1,361,332 ========== ==========
21 22 Schedule II THE LIBERTY CORPORATION (PARENT COMPANY) CONDENSED BALANCE SHEETS DECEMBER 31, 1998 and 1997 (In $000's, except share data)
ASSETS 1998 1997 ------ --------- --------- Cash $ 4,062 $ 5,015 Fixed maturity securities 3,386 36,045 Equity securities 13,408 30,033 Loans, notes and other receivables 9,202 10,372 Investment properties, at cost less accumulated depreciation of $1,495 in 1998 and $1,319 in 1997 19,218 23,955 Other long-term investments 7,037 6,167 Buildings and equipment, at cost less accumulated depreciation of $15,813 in 1998 and $13,868 in 1997 16,150 18,077 Investment in affiliated companies* 524,223 683,472 Intercompany debt and advances* 236,816 94,173 Income taxes recoverable 9,719 6,360 Deferred income tax benefits (liabilities) (3,020) (5,744) Other assets 7,053 7,908 --------- --------- Total Assets $ 847,254 $ 915,833 ========= ========= LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY Liabilities: Notes, mortgages and other debt $ 283,000 $ 189,214 Accounts payable and accrued expenses 12,334 13,830 Other liabilities 595 605 --------- --------- Total Liabilities 295,929 203,649 Redeemable Preferred Stock: 1994-A Series, $35.00 redemption value, 198,259 and 504,168 shares issued and outstanding in 1998 and 1997, respectively 6,939 17,646 1994-B Series, $37.50 redemption value, 374,509 and 525,948 shares issued and outstanding in 1998 and 1997, respectively 14,028 19,723 --------- --------- Total Redeemable Preferred Stock 20,967 37,369 Shareholders' Equity: Common stock Authorized - 50,000,000 shares, no par value Issued and outstanding - 18,684,172 in 1998 and 20,712,686 in 1997 70,565 182,994 Convertible Preferred Stock, 1995-A Series, 599,985 shares issued and outstanding 20,999 20,999 Unearned stock compensation (7,596) (10,872) Accumulated other comprehensive income 26,749 61,850 Retained earnings 419,641 419,844 --------- --------- Total Shareholders' Equity 530,358 674,815 --------- --------- Total Liabilities, Redeemable Preferred Stock and Shareholders' Equity $ 847,254 $ 915,833 ========= =========
*Eliminated in consolidation. See notes to condensed financial statements. 22 23 Schedule II THE LIBERTY CORPORATION (PARENT COMPANY) CONDENSED STATEMENTS OF INCOME FOR THE THREE YEARS ENDED DECEMBER 31, 1998 (In $000's)
1998 1997 1996 -------- --------- -------- REVENUES Dividends from subsidiaries* $ 22,000 $ 74,814 $ 33,250 Interest-unaffiliated 1,816 561 676 Intercompany interest* 11,679 8,157 8,519 Realized investment gains (losses) (373) 5,504 (5,407) Other 13,620 18,318 27,123 -------- --------- -------- Total Revenues 48,742 107,354 64,161 EXPENSES Salaries and wages 7,035 17,507 18,240 Interest-unaffiliated 12,403 13,021 15,007 Intercompany interest* 1,753 2,193 2,471 Taxes and licenses 1,163 2,069 2,250 Depreciation and amortization 2,949 7,373 8,645 Loss from sale of subsidiary 13,811 -- -- Other 12,993 6,298 10,621 -------- --------- -------- Total Expenses 52,107 48,461 57,234 -------- --------- -------- Income (loss) before income taxes (3,365) 58,893 6,927 Income tax expense (benefit) 1,132 (5,746) (9,786) -------- --------- -------- Income (loss) before earnings of subsidiaries (4,497) 64,639 16,713 Earnings of subsidiaries net of dividends paid to parent* 22,741 7,385 21,230 -------- --------- -------- NET INCOME $ 18,244*** $ 72,024** $ 37,943*** ======== ========= ========
* Eliminated in consolidation. ** Differs from consolidated net income by $2,927 due to gains recognized on a consolidated basis previously recognized by subsidiaries on intercompany transactions. Gains were deferred on a consolidated basis until completion of the earnings process. *** Differs from consolidated net income by $483 and $603 in 1998 and 1996, respectively, due to gains deferred on a consolidated basis until completion of the earnings process. See notes to condensed financial statements. 23 24 Schedule II THE LIBERTY CORPORATION (PARENT COMPANY) CONDENSED STATEMENTS OF CASH FLOWS FOR THE THREE YEARS ENDED DECEMBER 31, 1998 (In $000's)
1998 1997 1996 ----------- ----------- ----------- OPERATING ACTIVITIES Net income $ 18,244 $ 72,024 $ 37,943 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,949 7,373 8,645 Provision for deferred income taxes 94 1,556 (1,143) Earnings from subsidiary operations, net of dividends paid to parent (22,741) (7,385) (21,230) Non-cash dividends paid to parent -- (39,370) -- Gain on disposal of assets (1,826) (2,011) (3,172) Realized investment (gains) losses 373 (5,504) 5,407 Loss on sale of subsidiary 13,811 -- -- Change in operating assets and liabilities: Decrease (increase) in intercompany debt and advances* 14,299 2,748 (79) (Increase) decrease in accounts and notes 1,170 (2,482) 2,063 receivable (Decrease) increase in accounts payable and (1,496) (2,996) 5,189 accrued expenses Decrease (increase) in other assets 855 1,065 892 Increase (decrease) in other liabilities, and accrued income taxes (3,369) 4,847 1,164 Other (966) 53 (2,083) ----------- ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 21,397 29,918 33,596 INVESTING ACTIVITIES Investment securities sold, matured, or redeemed 44,866 349 Cost of investment securities acquired (1,275) -- -- Purchase of investment properties (3,545) (7,563) (22,556) Sale of investment properties 9,112 49,601 13,982 Net cash received on sale of subsidiary 133,060 -- -- Net cash paid on purchase of broadcasting business (156,942) -- -- Other 6,175 923 1,270 ----------- ----------- ----------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 31,451 43,310 (7,304) FINANCING ACTIVITIES Proceeds from borrowings 3,265,000 2,505,000 2,957,704 Principal payments on debt (3,171,214) (2,559,007) (2,966,087) Dividends paid (18,447) (19,540) (18,366) Repurchase of common stock (131,114) -- -- Stock issued for employee benefit and performance incentive compensation programs 1,974 3,884 1,441 ----------- ----------- ----------- NET CASH (USED IN) FINANCING ACTIVITIES (53,801) (69,663) (25,308) INCREASE (DECREASE) IN CASH (953) 3,565 984 Cash at beginning of year 5,015 1,450 466 ----------- ----------- ----------- CASH AT END OF YEAR $ 4,062 $ 5,015 $ 1,450 =========== =========== ===========
*Eliminated in consolidation. See notes to condensed financial statements. 24 25 Schedule II THE LIBERTY CORPORATION (PARENT COMPANY) NOTES TO CONDENSED FINANCIAL STATEMENTS DECEMBER 31, 1998 1. NOTES, MORTGAGES AND OTHER DEBT The general debt obligations at December 31, 1998, are as follows: Average (In 000's) Interest Rate Amount ---------- ------------- -------- Notes due to banks, maturing in 2003 5.8% $283,000 In May 1998, the Parent Company refinanced its credit facility into a, $300 million revolving credit facility maturing in April, 2003. The Parent Company may request up to an additional $150 million under the new facility subject to approval by the bank group. Borrowings under the facility were used to refinance indebtedness, as well as to provide funds to meet working capital requirements. See Note 5 of The Liberty Corporation and Subsidiaries Consolidated Financial Statements which provides additional information as to this agreement. 2. DIVIDENDS TO PARENT COMPANY During 1998, the Parent Company received dividends from its subsidiaries of approximately $22 million. 3. RETAINED EARNINGS As of December 31, 1998 and 1997, retained earnings of $419,641,000 and $419,844,000 respectively, in The Liberty Corporation (Parent Company) financial statements differs from The Liberty Corporation and Subsidiaries consolidated financial statements. The difference of $851,000 and $368,000 at December 31, 1998 and 1997, respectively, relates to the elimination of gains on intercompany transactions on a consolidated basis. 25 26 Schedule III THE LIBERTY CORPORATION AND SUBSIDIARIES SUPPLEMENTARY INSURANCE INFORMATION FOR THE THREE YEARS ENDED DECEMBER 31, 1998 (In 000's)
Deferred Future Policy Other Policy Policy Benefits, Claims & Acquisition Cost of Business Losses, Claims Unearned Benefits Segment Costs Acquired and Loss Expenses Premiums Payable - ----------------------------------- ---------------- ------------------ -------------------- ---------------- ----------------- December 31, 1998 Agency $217,137 $30,769 $863,138 $1,960 $18,741 LibertyDirect 22,034 2,368 32,994 561 19,711 Corporate & Other 9,593 2,465 381,277 16,150 ---------------- ------------------ -------------------- ---------------- ----------------- Total $248,764 $35,602 $1,277,408 $2,521 $54,602 ================ ================== ==================== ================ ================= December 31, 1997 Agency $210,166 $33,724 $849,676 $1,868 $19,374 LibertyDirect 17,958 3,168 31,187 678 21,547 Pre-need 34,494 22,687 620,861 1,518 6,248 Corporate & Other 12,997 2,647 384,998 17,976 ---------------- ------------------ -------------------- ---------------- ----------------- Total $275,615 $62,226 $1,886,722 $4,064 $65,145 ================ ================== ==================== ================ ================= December 31, 1996 Agency $204,026 $37,553 $836,048 $1,851 $15,434 LibertyDirect 11,538 4,173 30,544 734 12,281 Pre-need 30,682 26,202 591,869 1,826 6,843 Corporate & Other 15,936 2,836 390,301 25,380 ---------------- ------------------ -------------------- ---------------- ----------------- Total $262,182 $70,764 $1,848,762 $4,411 $59,938 ================ ================== ==================== ================ =================
Benefits Accident & Net Claims, Losses Other Health Premium Investment & Settlement Amortization Operating Premiums Segment Revenue Income Benefits Expense Expenses Written - ---------------------------- ------------- --------------- ------------------ ----------------- ------------- --------------- 1998 Agency $133,796 $74,403 $95,856 $31,160 $58,811 $13,248 LibertyDirect 119,483 1,881 23,053 7,366 75,129 80,174 Pre-need 24,247 14,774 23,914 3,126 5,861 88 Corporate & Other 7,405 28,755 11,838 9,366 32,105 62 ------------- --------------- ------------------ ----------------- ------------- --------------- Total $284,931 $119,813 $154,661 $51,018 $171,906 $93,572 ============= =============== ================== ================= ============= =============== 1997 Agency $135,305 $71,050 $95,548 $27,872 $43,360 $13,679 LibertyDirect 102,995 1,989 23,112 5,681 62,339 64,525 Pre-need 105,414 56,078 97,860 10,513 26,079 338 Corporate & Other 6,978 29,202 11,407 1,498 27,721 172 ------------- --------------- ------------------ ----------------- ------------- --------------- Total $350,692 $158,319 $227,927 $45,564 $159,499 $78,714 ============= =============== ================== ================= ============= =============== 1996 Agency $137,930 $68,977 $94,503 $28,551 $44,162 $14,117 LibertyDirect 70,316 2,214 16,273 4,970 44,582 35,709 Pre-need 104,653 52,112 95,938 11,929 27,999 424 Corporate & Other 8,472 31,918 12,037 28,517 36,245 273 ------------- --------------- ------------------ ----------------- ------------- --------------- Total $321,371 $155,221 $218,751 $73,967 $152,988 $50,523 ============= =============== ================== ================= ============= ===============
26 27 Schedule IV THE LIBERTY CORPORATION AND SUBSIDIARIES -- REINSURANCE FOR THE THREE YEARS ENDED DECEMBER 31, 1998 (In 000's)
Amount Gross Ceded to Other Assumed From Net % of Amount Amount Companies Other Companies Amount Assumed to Net Year ended December 31, 1998 - ---------------------------------------------- Life Insurance in Force Agency $9,744,011 $239,508 $9,504,503 -- LibertyDirect 5,148,397 2,090 $15,100 5,161,407 0.3% Corporate & Other 3,973,020 3,120,946 852,074 -- ---------------- ---------------- --------------- ---------------- Total life insurance in force $18,865,428 $3,362,544 $15,100 $15,517,984 0.1% ================ ================ =============== ================ Insurance premiums and policy charges: Life, annuity and other considerations Agency $122,101 $1,736 $164 $120,528 0.1% LibertyDirect 38,744 (456) 39,200 -- Pre-need 24,183 27 24,156 -- Corporate & Other 29,492 21,907 7,585 -- ---------------- ---------------- --------------- ---------------- Total life, annuity and other considerations 214,519 23,214 164 191,469 0.1% Accident and health Agency 13,279 11 13,268 -- LibertyDirect 89,323 9,109 69 80,283 0.1% Pre-need 86 5 91 5.0% Corporate & Other (180) (180) -- ---------------- ---------------- --------------- ---------------- Total accident and health 102,508 9,120 74 93,462 0.1% ---------------- ---------------- --------------- ---------------- Total Insurance Premiums and Policy Charges $317,027 $32,334 $238 $284,931 0.1% ================ ================ =============== ================ Year ended December 31, 1997 - ---------------------------------------------- Life Insurance in Force Agency $9,708,545 $252,926 $9,455,619 -- LibertyDirect 5,200,591 3,859 $17,172 5,213,904 0.3% Pre-need 1,550,497 19,930 19 1,530,586 -- Corporate & Other 4,328,103 3,422,197 905,906 ---------------- ---------------- --------------- ---------------- Total life insurance in force $20,787,736 $3,698,912 $17,191 $17,106,015 0.1% ================ ================ =============== ================ Insurance premiums and policy charges: Life, annuity and other considerations Agency $123,346 $1,725 $121,621 -- LibertyDirect 38,418 14 $315 38,719 0.8% Pre-need 105,783 745 105,038 -- Corporate & Other 30,085 23,091 6,994 -- ---------------- ---------------- --------------- ---------------- Total life, annuity and other considerations 297,632 25,575 315 272,372 0.1% Accident and health Agency 13,684 2 2 13,684 LibertyDirect 72,369 8,613 520 64,276 0.8% Pre-need 341 1 36 376 10.0% Corporate & Other (16) (16) -- ---------------- ---------------- --------------- ---------------- Total accident and health 86,378 8,616 558 78,320 0.7% ---------------- ---------------- --------------- ---------------- Total Insurance Premiums and Policy Charges $384,010 $34,191 $873 $350,692 0.3% ================ ================ =============== ================ Year ended December 31, 1996 - ---------------------------------------------- Life Insurance in Force Agency $9,797,925 $269,785 $9,528,140 -- LibertyDirect 4,580,738 10,527 $13,035 4,583,246 0.3% Pre-need 1,564,079 33,284 64 1,530,859 -- Corporate & Other 4,753,785 3,773,501 980,284 ---------------- ---------------- --------------- ---------------- Total life insurance in force $20,696,527 $4,087,097 $13,099 $16,622,529 0.1% ================ ================ =============== ================ Insurance premiums and policy charges: Life, annuity and other considerations Agency $125,492 $1,675 $(1) $123,816 -- LibertyDirect 34,492 29 219 34,682 0.6% Pre-need 104,970 756 16 104,230 -- Other 33,373 24,833 8,540 -- ---------------- ---------------- --------------- ---------------- Total life, annuity and other considerations 298,327 27,293 234 271,268 0.1% Accident and health Agency 14,128 16 2 14,114 -- LibertyDirect 43,868 9,187 953 35,634 2.7% Pre-need 405 2 20 423 4.7% Corporate & Other (68) (68) -- ---------------- ---------------- --------------- ---------------- Total accident and health 58,333 9,205 975 50,103 1.9% ---------------- ---------------- --------------- ---------------- Total Insurance Premiums and Policy Charges $356,660 $36,498 $1,209 $321,371 0.4% ================ ================ =============== ================
27 28 Schedule V THE LIBERTY CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE THREE YEARS ENDED DECEMBER 31, 1998 (In 000's)
Additions ---------------------------- Balance at Charged to Charged to Balance at Beginning Costs and Other End Deducted From Asset Accounts of Period Expenses Accounts Deductions of Period - ---------------------------- ---------- ------------ ---------- ---------- ---------- Year Ended December 31, 1998 679(c) Accounts receivable - 2(b) reserve for bad debts $ 1,441 $ 837 $ 10 $ 444(a) $ 1,163 ---------- ------------ ---------- ----------- ---------- Year Ended December 31, 1997 Accounts receivable - 227(b) reserve for bad debts $ 2,310 $ 429 $ -- $ 1,071(a) $ 1,441 ---------- ------------ ---------- ----------- ---------- Year Ended December 31, 1996 Accounts receivable - 20(b) reserve for bad debts $ 1,975 $ 567 $ 101 $ 313(a) $ 2,310 ---------- ------------ ---------- ----------- ----------
Notes: (a) Uncollectible accounts written off, net of recoveries. (b) Reversal of reserves no longer required (c) Sale of subsidiary 28 29 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized, as of the 29th day of March, 1999 THE LIBERTY CORPORATION By: /s/ Hayne Hipp - ----------------------- -------------------------- Registrant Hayne Hipp President and Chief Executive Officer 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 indicated, as of the 29th day of March, 1999. By: /s/ Kenneth W. Jones *By: /s/ John H. Mullin III ---------------------------- ---------------------------- Kenneth W. Jones John H. Mullin III Corporate Controller Director *By: /s/ Rufus C. Barkley, Jr. *By: /s/ Benjamin F. Payton ---------------------------- ---------------------------- Rufus C. Barkley, Jr. Benjamin F. Payton Director Director *By: /s/ Edward E. Crutchfield *By: /s/ J. Thurston Roach ---------------------------- ---------------------------- Edward E. Crutchfield J. Thurston Roach Director Director *By: /s/ John R. Farmer *By: /s/ Eugene E. Stone, IV ---------------------------- ---------------------------- John R. Farmer Eugene E. Stone, IV Director Director By: /s/ Hayne Hipp *By: /s/ William B. Timmerman ---------------------------- ---------------------------- Hayne Hipp William B. Timmerman Director Director *By: /s/ W. W. Johnson *By: /s/ Martha G. Williams ---------------------------- ---------------------------- W. W. Johnson *Martha G. Williams, as Director Special Attorney in Fact *By: /s/ William O. McCoy ---------------------------- William O. McCoy Director 29 30 Annual Report on Form 10-K The Liberty Corporation December 31, 1998 Index to Exhibits
PAGE EXHIBITS NUMBER 3.2 The Liberty Corporation Bylaws as Amended through February 2, 1999. 31 11. The Liberty Corporation and Subsidiaries Consolidated Earnings Per Share Computation (incorporated herein by reference to Note 11 of the "Notes to Consolidated Financial Statements" on page 20 of The Liberty Corporation Annual Report to Shareholders for the year ended December 31, 1998). 64 13. Portions of The Liberty Corporation Annual Report to Shareholders for the year ended December 31, 1998: Market for the Registrant's Common Stock and Related Security Stockholder Matters 38 Selected Financial Data 39 Management's Discussion and Analysis of Financial Condition and Results of Operations 40-48 Quantitative and Qualitative Disclosures About Market Risk 44-45 Financial Statements and Supplementary Information: Consolidated Statements of Income - For the three years ended December 31, 1998 49 Consolidated Balance Sheets - December 31, 1998 and 1997 50-51 Consolidated Statements of Cash Flows - For the three years ended December 31, 1998 52 Consolidated Shareholders' Equity - For the three years ended December 31, 1998 53 Notes to Consolidated Financial Statements - December 31, 1998 54-73 Report of Independent Auditors 74 21. The Liberty Corporation and Subsidiaries, List of Significant Subsidiaries 75 23. Consent of Independent Auditors 76 27. Financial Data Schedule
30 EX-3.2 2 BYLAWS AS AMENDED 2-2-99 1 Exhibit 3.2 Bylaws as Amended February 2, 1999 THE LIBERTY CORPORATION BYLAWS ARTICLE I - SHAREHOLDERS Section 1. Annual Meetings. The annual meeting of the shareholders of the Company shall be held on such day during the first one hundred and fifty days of the calendar year as the Board of Directors may determine. Section 2. Special Meetings. Special meetings of the shareholders may be called at any time by a majority of the Board of Directors, the Chairman of the Board, the Chief Executive Officer, the President, or upon request of shareholders holding at least one-tenth of the outstanding stock of the Company entitled to vote at such meeting. Section 3. Place of Meetings. Each annual and special meeting of the shareholders shall be held at the principal office of the Company, or at such other place within or without the State of South Carolina as shall be designated by the Board of Directors or the officer calling such meeting. Section 4. Notice of Meetings. Written or printed notice stating the place, day and hour of meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be mailed by or at the direction of the Secretary, an Assistant Secretary or officer calling the meeting, not less than ten nor more than fifty days before the date of the meeting, to each shareholder of record, addressed to him at his address as it appears on the stock books of the Company, as of the date set pursuant to Section 4 of Article VI hereof. Section 5. Proxies. At a meeting of shareholders, a shareholder may vote by proxy executed in writing by the shareholder and filed with the Secretary of the Company, bearing date within eleven months prior to the meeting unless a longer period is provided therein and is permitted by law. In lieu of voting by proxy executed in writing, a shareholder may vote by proxy transmitted to the Secretary of the Company, or such other person or entity authorized by the Company to receive proxies, by telegram, cablegram, telephone, or other means of electronic transmission, provided that any such transmission must set forth or be submitted with information from which it can be determined that such transmission was authorized by the shareholder. Any copy, facsimile telecommunication or other reliable reproduction of such writing or transmission may be substituted or used in lieu of the original writing or transmission for any and all purposes for which the original writing or transmission could be used, provided that any such reproduction is a complete reproduction of the entire original writing or transmission. Section 6. Quorum. A majority of the issued and outstanding shares of the Company, present in person or by proxy and entitled to vote thereat, shall constitute a quorum at a meeting of shareholders. Section 7. Voting. Subject to the laws of the State of South Carolina with respect to multiple ownership of stock and the provisions of the Articles of Incorporation and Article VI hereof, each shareholder shall be entitled to one vote for each share of stock standing in his name on the books of the Company. Only those whose names appear as shareholders on the books of the Company, or their proxies or legal representatives, shall be entitled to vote or to participate in any meeting of shareholders. A majority of the votes cast at a duly called meeting at which a quorum is present shall decide any question that may come before the meeting, except as otherwise provided by law, these Bylaws or the Articles of Incorporation of the Company. Section 8. Control Share Statute. Article 1 of Title 36, Chapter 2 of the Code of Laws of South Carolina 1976 does not apply to control share acquisition of shares of this Corporation (as defined in such Article). Section 9. Shareholder Nominations and Proposals. At a meeting of the shareholders, only such business shall be conducted which has been properly brought before the meeting. To be properly brought before a meeting, 31 2 business must be specified in the notice of the meeting (or any supplement thereto) given by or at the direction of the Board of Directors, otherwise properly brought before the meeting by or at the direction of the Board of Directors, or otherwise properly brought before the meeting by a shareholder. For business to be properly brought before a meeting by a shareholder, the Secretary of the Company must have received written notice thereof from the shareholder describing the nomination or proposal not less than one hundred and twenty nor more than one hundred and fifty calendar days before the date of the Company's proxy statement released to shareholders in connection with the previous year's annual meeting; provided however, that in the event an annual meeting was not held during the previous year, or if the date of the current year's annual meeting has been changed by more than thirty days from the date of the previous year's meeting, the required notice by the shareholder of such nomination or proposal to be timely must be received by the Secretary of the Company within a reasonable time before the Company begins to print its proxy materials. In the case of shareholder nominations for election to the Board of Directors, the shareholder's notice to the Secretary shall set forth (a) as to each person whom the shareholder proposes to nominate for election or re-election as a director: (i) the name, age, business address and, if known, residence address, (ii) the principal occupation or employment for the past five years, (iii) the class and number of shares of the Company which are legally or beneficially owned, (iv) other directorships held, (v) the names of business entities of which each such nominee owns a ten percent or more legal or beneficial interest, and (vi) all other information with respect to the nominees required by the Federal proxy rules in effect at the time the notice is submitted; and (b) as to the shareholder giving the notice (i) the name and record address of the shareholder and (ii) the class and number of shares of capital stock of the Company which are legally or beneficially owned by the shareholder. In addition, the notice shall be accompanied by a written statement of each proposed nominee consenting to the proposed nomination, agreeing to serve as a director if elected, and confirming the accuracy of the information relating to the proposed nominee as set forth in the notice. The Company may require any proposed nominee to furnish such other information as may be reasonably required to determine the eligibility of such nominee to serve as a director of the Company. No person shall be eligible for election as a director of the Company unless nominated in accordance with the procedures set forth herein. In the case of shareholder proposals other than the election of directors, the shareholder's notice to the Secretary shall set forth as to each matter proposed to be brought before the meeting (i) a brief description of the business to be brought before the meeting, (ii) the name, business and residence address of each of the shareholders submitting the proposal, (iii) the principal occupation or employment of that shareholder, (iv) the class and number of shares of the Company which are legally or beneficially owned by such shareholder, (v) any material interest of the shareholder in such business, and (vi) such other information as the Board of Directors reasonably determines is necessary or appropriate. The Chairman of the meeting may, if the facts warrant, determine and declare to the meeting that a shareholder nomination or proposal was not made in accordance with the procedures prescribed in these Bylaws or is otherwise not in accordance with law. If the Chairman should so determine, he shall so declare to the meeting and the defective nomination or proposal shall be disregarded. Notwithstanding anything in these Bylaws to the contrary, no elections or other business shall be conducted at any meeting of the shareholders except in accordance with the procedures set forth in Section 9 of Article I hereof. 32 3 ARTICLE II - DIRECTORS Section 1. General Powers and Authority. The business and property of the Company shall be managed by the Board of Directors and they shall and may exercise all powers and authority of the Company except as limited by law, the Articles of Incorporation, or elsewhere by these Bylaws. They shall have power and authority to make all necessary rules and regulations for their government and for the regulation of the business of the Company which are not inconsistent with the Articles of Incorporation and these Bylaws, and shall have general management and control of the Company. The Board of Directors may delegate from time to time to any committee, officer or agent, such power and authority as permitted by law. Section 2. Number, Election and Terms. Except as otherwise fixed pursuant to Article 4 of the Restated Articles of Incorporation relating to the rights of the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation (the "Preferred Stock") to elect additional directors under specified circumstances, the number of directors shall be 12; provided however, that the number of directors may be fixed from time to time at any number, not less than 9 nor more than 16, by resolution adopted by the Board of Directors. The directors, other than those who may be elected under specified circumstances by the holders of any class or series of Preferred Stock, shall be classified, with respect to the time for which they severally hold office, into three classes, as nearly equal in number of members as possible, as determined by the Board of Directors. One such class shall hold office initially for a term expiring at the annual meeting of shareholders to be held in 1986, another class shall hold office initially for a term expiring at the annual meeting of shareholders to be held in 1987, and another class shall hold office initially for a term expiring at the annual meeting of shareholders to be held in 1988. At each annual meeting of shareholders, the successors to the class of directors whose term expires at that meeting shall be elected to hold office for a term expiring at the annual meeting of shareholders held in the third year following the year of their election, and the successor to any director previously elected by the directors pursuant to Section 3 below as a member of a class whose term is not expiring at that meeting shall be elected by the shareholders for the remainder of the full term of the class of directors in which the new directorship was created or the vacancy occurred. The members of each class of directors shall hold office until their successors are elected and qualified or until their earlier resignation, disqualification, disability, death or removal from office. Section 3. Newly Created Directorships and Vacancies. Except for any directors who may be elected under specified circumstances by the holders of any class or series of Preferred Stock, newly created directorships resulting from any increase in the number of directors and any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other cause shall be filled solely by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the Board of Directors. Any director elected in accordance with the preceding sentence shall hold office until the next shareholders' meeting at which directors of any class are elected and until such director's successor shall have been elected and qualified, or until his earlier resignation, disqualification, disability, death or removal from office. At the time of any increase in the number of directors, except in the case of directors elected in specified circumstances by the holders of any class or series of Preferred Stock, the Board of Directors shall specifically allocate the additional directorships among the three classes so as to make the three classes as nearly equal in number of members as possible. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director, but subject to this restriction, the Board of Directors shall effect and allocate any decrease in the number of directors in a manner and at such time or times so as to keep the three classes as nearly equal in number of members as possible. Section 4. Removal. Except for any directors who may be elected under specified circumstances by the holders of any class or series of Preferred Stock, any director may be removed from office, without cause, only by the affirmative vote of the holders of 80% of the combined voting power of the then outstanding shares of stock entitled to vote generally in the election of directors, voting together as a single class. Section 5. Regular Meetings. A regular meeting of the Board of Directors shall be held without other notice than this Bylaw immediately after, and at the same place as, the annual meeting of shareholders. The Board of 33 4 Directors may provide, by resolution, the date, time and place, either within or without the State of South Carolina, for the holding of additional regular meetings without other notice than such resolution. Section 6. Special Meetings. Special meetings of the Board of Directors may be called by the Executive Committee, the Chairman of the Board, the Vice Chairman of the Board, the Chief Executive Officer or upon request of a majority of the Board, and may be held at such time and place, either within or without the State of South Carolina, as may be specified in the notice thereof. To the extent permitted by applicable law, special meetings of the Board of Directors, or of any committee thereof, may be held by conference telephone communication. Section 7. Notice of Meetings. Notice of each special meeting of the Board of Directors, stating the time, manner and place where the meeting is to be held, shall be given by or at the direction of the Secretary or an Assistant Secretary by mailing the same to each director at his residence or business address not less than three days before such meeting, or by giving the same to him personally or telegraphing or telephoning the same to him at his residence or business address not later than the day before the day on which the meeting is to be held. Any and all requirements for call and notice of meetings may be dispensed with if all directors are present at the meeting or if those not present at the meeting shall at any time waive or have waived notice thereof. Section 8. Quorum and Manner of Action. A majority of the number of directors then in office shall constitute a quorum for the transaction of business at any meeting of the Board of Directors. Except as otherwise provided in the Restated Articles of Incorporation, the vote of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. Section 9. Compensation. The directors shall receive such fees, retainers, expenses and the like for attendance at meetings of the Board and performance of their duties, as may be determined by the Board of Directors; provided, however, that no salaried officer shall receive a fee or retainer for attendance at such meetings or performance of such Board duties. ARTICLE III - COMMITTEES Section 1. Executive Committee. The Executive Committee shall consist of not less than two members, all of whom shall be members of the Board of Directors. Except as otherwise limited by law, the Executive Committee shall be vested with full authority to act for and on behalf of the Board of Directors in the management of the business and affairs of the Company and to do all things, including actions specified by these Bylaws to be performed by the Board of Directors, in the same manner and with the same authority and effect as if such acts had been performed by the Board of Directors. The members of the Executive Committee shall be elected by the Board of Directors and shall serve at the pleasure of the Board of Directors. The Board of Directors shall designate the chairman of such committee, or if for any reason the Board shall fail to designate the chairman, then such committee shall elect its own chairman. Meetings of each such committee shall be held at such times and places as may be determined by its chairman or as may be agreed upon by members of the committee. A quorum at any meeting of such committee shall consist of a majority of the committee, and any action taken by such committee shall require the assent of at least a majority of the members who are present. Notice of meetings shall be given in the same manner as for special meetings of the Board of Directors. Any action taken by the Executive Committee shall be deemed to be action taken by the Board of Directors and shall be binding on the Company, but the Board of Directors shall at all times have the power to reverse and overrule any action taken by such committee, provided that the exercise of such power by the Board of Directors shall not in any way abrogate the obligations or duties owing by the Company to third parties who have acted in reliance on the action taken by such committee. All proceedings by such committee and all action taken by each such committee shall be reported to the Board of Directors at the meeting of the Board of Directors next following such proceedings or action. 34 5 Section 2. Other Committees. There shall be such other committees consisting of directors, officers and employees of the Company as the Board of Directors, chairman of the Board, or the Chief Executive Officer of the Company may appoint from time to time. Section 3. Compensation. Members of committees shall receive such fees, retainers and expenses for attendance at committee meetings and performance of committee duties as may be determined by the Board of Directors; provided, however, that no salaried officer of the Company shall receive a fee or retainer for attendance at such meetings or performance of such committee duties. ARTICLE IV - OFFICERS Section 1. Designation and Number. The officers of the Company shall be a Chairman of the Board, a Chief Executive officer, a President, one or more Vice-Presidents, a Secretary, a Treasurer, and a controller, with such designation of rank, powers and duties as the Board of Directors may from time to time designate and determine. Such other officers or assistant officers as may be deemed necessary may be elected or appointed by the Board of Directors with such duties and powers as the Board may from time to time designate and determine. Any two or more of said offices may be held by one person at the same time, except that the Chairman, Chief Executive Officer, or President may not also be the Secretary or Treasurer. Section 2. Election and Tenure. The officers of the Company shall be elected annually at the first regular meeting of the Board of Directors held after each annual meeting of shareholders, or at a special meeting called for that purpose if for any reason officers should not be elected at such first meeting, and shall hold office until the first regular meeting of the Board of Directors held after the next annual meeting of shareholders and their successors are duly elected and qualified; provided, however, that any officer may be removed from office by the Board of Directors at any regular or special meeting, meeting, and any vacancy in any office, however caused, may be filled by the Board of Directors at any regular or special meeting. Section 3. Duties of Officers. The Board of Directors shall, from time to time, in its discretion, designate and prescribe the duties incident to each office, and it may, at any time, expressly authorize any officer to perform any duty or function which is usually performed by any other officer. Section 4. Salaries. The salaries of the officers shall be fixed from time to time by the Board of Directors or by a committee of the Board. No officer shall be prevented from receiving such salary by reason of the fact that he is also a director of the Company. ARTICLE V - INDEMNIFICATION OF DIRECTORS AND OFFICERS To the extent permitted by and subject to the laws of the State of South Carolina, any present or former director, officer or employee of the Company, or any person who, at the request of the Company, express or implied, may have served as a director or officer of another Company in which this Company owns shares or of which this Company is a creditor, shall be entitled to reimbursement of expenses and other liabilities, including attorney's fees actually and reasonably incurred by him and any amount owing or paid by him in discharge of a judgment, fine, penalty of costs against him or paid by him in a settlement approved by a court of competent jurisdiction, in any action or proceeding, including any civil, criminal or administrative action, suit, hearing or proceeding, to which he is a party by reason of being or having been a director, officer or employee of this or such other Company. To the extent permitted by and subject to the laws of the State of South Carolina, the Company is authorized to purchase and maintain insurance on behalf of any present or former director, officer, or employee of the Company, or any person who, at the request of the Company, express or implied, may have served as a director or officer of another company in which this Company owns shares or of which this Company is a creditor, against any liability 35 6 asserted against him and incurred by him in any such capacity or arising out of his status as such together with such costs, fees, penalties, fines and the like with respect thereto, all as set forth hereinabove. This section is not intended to extend or to limit in any way the rights and remedies provided with respect to indemnification of directors, officers, employees, and other persons provided by the laws of the State of South Carolina but is intended to express the desire of the shareholders of this Company that indemnification be granted to such directors, officers, employees and other persons to the fullest extent allowable by such laws. ARTICLE VI - CAPITAL STOCK Section 1. Certificates of Stock. The shares of the Corporation shall be represented by certificates, provided that the Board of Directors of the Corporation may provide by resolution or resolutions that some or all of any or all classes or series of its stock shall be uncertificated shares. Notwithstanding the adoption of such a resolution by the Board of Directors, every holder of stock represented by certificates and every holder of uncertificated shares, upon request, shall be entitled to have a certificate, which shall be in such form as may be prescribed by the Board of Directors, shall be signed by the Chairman, Vice Chairman, Chief Executive Officer, President or a Vice President and by the Treasurer or the Secretary or an Assistant Secretary, and shall be sealed with the Company's seal or a facsimile thereof; provided, however, that if the certificate is countersigned by a transfer agent or any assistant transfer agent, or is registered by a registrar, other than the Company itself or an employee of the Company, such certificates may be signed with the facsimile signatures of the officers authorized to execute such certificates. All certificates shall be consecutively numbered or otherwise identified. Except as otherwise expressly provided by law, the rights and obligations of the holders of uncertificated stock and the rights and obligations of the holders of certificates representing stock of the same class and series shall be identical. Section 2. Stock Record. The name and address of the person or entity to whom shares of the capital stock are issued, together with the certificate number, if a certificate is issued, number of shares and date of issue, shall be entered on the stock transfer books of the Company. All certificates surrendered to the Company for transfer shall be canceled, and no new certificate or record of uncertificated shares shall be issued or made until the former certificate for a like number of shares shall have been surrendered and canceled. In the case of a lost, destroyed or mutilated certificate, a new certificate of stock or record of uncertificated shares may be issued or made therefor upon such terms and indemnity to the Company as the Board of Directors may prescribe. Section 3. Transfer of Stock. Transfer of stock of the Company shall be made on the books of the Company by direction of the person or entity named in the certificate or, in the case of uncertificated shares, by the person or entity in whose name shares stand on the books of the Company, or his attorney, lawfully constituted in writing, and upon the surrender of the certificate or certificates for such shares, where certificated, properly endorsed, with such evidence of the authenticity of such transfer, authorization and other matters as the Company or its agents may reasonably require, and accompanied by any necessary stock transfer tax stamps; or if the Board of Directors shall by resolution so provide, transfer of stock may be made in any other manner provided by law. Any such resolution providing for the issuance of uncertificated shares shall not apply to shares represented by a certificate until such certificate is surrendered to the Company. The person or entity in whose name shares stand on the books of the Company shall be deemed by the Company to be the owner thereof for all purposes. Section 4. Closing Stock Transfer Books and Fixing Record Date. The Board of Directors shall have power to close the stock transfer books of the Company for a period not exceeding fifty days preceding the date of any meeting of shareholders, payment of dividends, allocation of rights, change, conversion or exchange of capital stock, or the date of determining shareholders for any other purpose. In lieu of closing the stock transfer books, in order to determine the holders of record of the Company's stock who are entitled to notice of meetings, to vote at a meeting or adjournment thereof or to receive payment of any dividend or allotment of rights, or to exercise rights with respect to any change, conversion or exchange of capital stock, or to give consent, or to make a determination of the shareholders of record for any other purpose, the Board of Directors of the Company may fix in advance a record date for such 36 7 determination of shareholders, which date shall not be more than fifty days prior to the date of the action which requires such determination, nor, in the case of a shareholders' meeting, shall it be less than ten days in advance of such meeting. ARTICLE VII - AMENDMENTS Section 1. Amendment by Shareholders. These Bylaws may be added to, amended or repealed, by the majority vote of the entire outstanding stock of the Company at any regular meeting of the shareholders, or at any special meeting, where such proposed action has been announced in the call and notice of such meeting. Section 2. Amendment by Board of Directors. Subject to the right of the shareholders to adopt, amend or repeal Bylaws, the Board of Directors shall have the power to adopt, amend or repeal Bylaws, by an affirmative vote of a majority of all directors then holding office, provided that notice of the proposal to adopt, amend or repeal the Bylaws is included in the notice to the directors with respect to the meeting at which such action takes place. 37 EX-13 3 PORTIONS OF THE ANNUAL REPORT 1 CORPORATE INFORMATION - ------------------------------------------------------------------------------- THE LIBERTY CORPORATION AND SUBSIDIARIES STOCK DATA The Liberty Corporation's Common Stock is listed on the New York Stock Exchange under the symbol LC. As of December 31, 1998, 1,195 shareholders of record in 40 states, the District of Columbia, Canada and Australia held the 18,684,172 Common Stock shares outstanding. Quarterly high and low stock prices and dividends per share as reported by the Wall Street Journal were: - ------------------------------------------------------------------------------- Market Price Per Share Quarterly Dividend High Low Per Share - ------------------------------------------------------------------------------- 1998 - ------------------------------------------------------------------------------- Fourth Quarter $49.38 $36.25 $0.22 Third Quarter 52.31 38.31 0.22 Second Quarter 52.50 47.88 0.22 First Quarter 52.94 44.88 0.20 1997 - ------------------------------------------------------------------------------- Fourth Quarter $47.31 $42.56 $0.20 Third Quarter 45.75 40.25 0.20 Second Quarter 42.00 38.38 0.20 First Quarter 43.38 37.38 0.185 1996 - ------------------------------------------------------------------------------- Fourth Quarter $41.25 $32.25 $0.185 Third Quarter 35.88 30.12 0.185 Second Quarter 33.38 30.88 0.185 First Quarter 36.00 33.00 0.17 The Company expects to continue its policy of paying regular cash dividends, although there is no assurance as to future dividends because they are dependent on future earnings, capital requirements and financial condition. Also, the payment of dividends is subject to the restrictions described in Notes 5 and 9 of the Consolidated Financial Statements. CO-REGISTRAR AND CO-TRANSFER AGENT Wachovia Bank, N.A. Winston-Salem, North Carolina 1-800-633-4236 Written shareholder correspondence and requests for transfer should be sent to: Wachovia Shareholder Services C/O Boston EquiServe P.O. Box 8217 Boston, Massachusetts 02266-8217 The Bank of New York 101 Barclay Street New York, New York 10286 1-800-524-4458 For a free copy of the 10-K or other information contact: The Liberty Corporation Shareholder Relations Box 789 Greenville, SC 29602 Telephone (864) 609-8256 LIBERTY ON THE WEB For the latest news releases and corporate and business unit information, you can access Liberty on the web at www.libertycorp.com Annual Meeting The Liberty Corporation will hold its annual meeting on Tuesday, May 4, 1999, at 10:30 a.m. in The Liberty Corporation Headquarters, Greenville, South Carolina. All Shareholders are invited to attend. 38 2 SELECTED FINANCIAL DATA - ------------------------------------------------------------------------------- THE LIBERTY CORPORATION AND SUBSIDIARIES
(In 000's, except per share data) 1998 1997 1996 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------------------------- Revenues * $ 584,264 $ 660,256 $ 619,097 $ 605,681 $ 540,361 $ 472,945 Income Before Income Taxes & Cumulative Effect of Accounting Changes $ 49,101 $ 111,577 $ 56,499 $ 88,795 $ 38,868 $ 77,324 Net Income $ 17,761 $ 74,951 $ 37,340 $ 59,353 $ 26,178 $ 39,147 Earnings Per Diluted Share $ 0.80 $ 3.34 $ 1.66 $ 2.72 $ 1.26 $ 2.01 Change in Net Unrealized Investment Gains and Losses $ (34,766) $ 21,789 $ (18,260) $ 111,095 $ (58,286) $ 1,276 Dividends Per Common Share $ 0.86 $ 0.785 $ 0.725 $ 0.665 $ 0.62 $ 0.56 Depreciation and Amortization $ 19,672 $ 20,870 $ 22,387 $ 19,034 $ 16,019 $ 13,522 Expenditures for Property and Equipment $ 11,630 $ 10,006 $ 10,554 $ 13,288 $ 9,616 $ 15,465 Assets $ 2,410,683 $3,184,758 $ 3,060,765 $3,034,296 $ 2,667,264 $2,187,033 Notes, Mortgages and Other Debts $ 285,000 $ 191,914 $ 247,861 $ 258,444 $ 231,647 $ 149,489 Redeemable Preferred Stock $ 20,967 $ 37,369 $ 45,599 $ 45,667 $ 45,816 -- Consolidated Shareholders' Equity $ 529,507 $ 674,447 $ 580,861 $ 575,762 $ 395,589 $ 433,845
*See Notes 6 and 16 regarding 1998 dispositions and acquisitions 39 3 MANAGEMENT'S DISCUSSION AND ANALYSIS - ------------------------------------------------------------------------------- THE LIBERTY CORPORATION AND SUBSIDIARIES The Liberty Corporation ("Liberty", "the Company" or "the parent company") is a holding company with operations in broadcasting and insurance. The Company's broadcasting subsidiary, Cosmos Broadcasting, ("Cosmos") consists of eleven network affiliated stations in the Southeast and Midwest and a cable advertising company. Six of the stations are affiliated with NBC, three with ABC, and two with CBS. The Company markets its insurance products through its insurance subsidiary, Liberty Life Insurance Company ("Liberty Life"). Additionally, Liberty is one of the nation's largest life insurance third-party administrators, providing administrative services for over 4.4 million policies through Liberty Insurance Services Corporation ("LIS"). FORWARD-LOOKING INFORMATION The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Certain information contained herein or in any other written or oral statements made by, or on behalf of the Company, are or may be viewed as forward looking. The words "expect", "believe", "anticipate" or similar expressions identify forward-looking statements. Although the Company has used appropriate care in developing any such forward-looking information, forward-looking information involves risks and uncertainties that could significantly impact actual results. These risks and uncertainties include, but are not limited to, the following: changes in national and local markets for television advertising; changes in general economic conditions, including the performance of financial markets and interest rates; competitive, regulatory, or tax changes that affect the cost of or demand for the Company's products; and adverse litigation results. The Company undertakes no obligation to publicly update or revise any forward looking statements, whether as a result of new information, future developments, or otherwise. SIGNIFICANT EVENTS AND TRANSACTIONS In February 1999, the Company announced that it was considering a variety of restructuring alternatives that would more actively support the business objectives of its operating subsidiaries and enhance value for shareholders. While no decisions have been reached, options are being explored that could potentially lead to a spin-off of one of the businesses, a joint venture with another company or other possibilities. During 1998, the Company completed the acquisition of three television stations. In July 1998, the Company completed the acquisition of WALB television, a NBC affiliate, located in Albany, Georgia for $78.6 million. In November 1998, the Company completed the acquisition of KGBT television, a CBS affiliate, located in Harlingen, Texas for $42.9 million. In December 1998, the Company completed the acquisition of WWAY television, an ABC affiliate, located in Wilmington, North Carolina for $35.4 million. The purchase of these stations was funded using proceeds from the Company's credit facility. On April 8, 1998, the Company completed the sale of Pierce National Life Insurance Company ("Pierce") to Fortis, Inc. The Company received cash totaling approximately $139 million at closing. The Company recognized a loss on the sale of Pierce of $18.9 million in the first quarter of 1998. On December 31, 1997, Fortis, Inc. had purchased 2,660 newly issued shares of Pierce common stock for $37.2 million in cash. Subsequent to this stock purchase, Fortis, Inc. maintained a twenty-one percent ownership interest in the common stock of Pierce through the completion of the sale. LIS continues to administer the Pierce block of business and also began to provide similar administrative services to another subsidiary of Fortis, Inc. during 1998. In March 1998, the Company completed a tender offer program whereby it repurchased 2,400,000 shares of its common stock at $52 per share. In addition, the Company repurchased 138,000 shares in the open market during 1998. The stock repurchases were funded with borrowings from Company's credit facility. In May 1997, Liberty completed the sale of its business rental property and the majority of its business park development projects to a partnership in which the general partner is a publicly-traded real estate investment trust ("REIT"). Liberty received cash, a note receivable, and partnership units (which are convertible into shares of the REIT) in exchange for the properties. The properties sold were held by both Liberty Life and the parent company, and had a book value of approximately $71.2 million at the sale date. The total consideration received on the sale of the real estate was approximately $79.8 million including the note receivable and the partnership units of the REIT. The cash proceeds of approximately $35 million from the sale were used to repay debt. SUMMARY OF CONSOLIDATED RESULTS OF OPERATIONS (In 000s) 1998 1997 1996 - ------------------------------------------------------------------------------- Revenues $584,264 $660,256 $619,097 - ------------------------------------------------------------------------------- Operating earnings $53,320 $70,909 $66,032 Net realized investment gains (losses) 861 4,042 (1,748) Loss of sale of subsidiary (18,919) -- -- Special charges (17,501) -- (26,944) - ------------------------------------------------------------------------------- Net income $17,761 $74,951 $37,340 - ------------------------------------------------------------------------------- THE YEAR 1998 COMPARED WITH THE YEAR 1997 For 1998, consolidated revenues were $584.3 million, a 12% decrease from the prior year. Excluding Pierce's results from both periods, revenues increased 9% for the year. The increase was attributable to broadcasting revenues which were up $21.6 million, or 16%, over the prior year. Also contributing to the increase were premiums from the LibertyDirect segment of Liberty Life, which increased 16% over the prior year. Operating earnings for 1998 of $53.3 million declined 25% compared with 1997. The reduction in earnings from having only one quarter of Pierce earnings in 1998, financing costs associated 40 4 with the share repurchases and higher corporate litigation related expenses combined to reduce operating earnings. Net income for the year was $17.8 million, and included special charges of $17.5 million, the $18.9 million loss on the sale of Pierce, and realized investment gains of $0.9 million. Significant components of the $17.5 million special charge include amounts related to developing and implementing an Activity Value Analysis process to redistribute resources into areas of the Company that are growing and reduce costs where necessary; expensing of previously capitalized costs of projects that are no longer expected to be implemented and projects where primary additional functionality was limited to compliance with year 2000; additional deferred acquisition cost amortization on universal life products from changes in interest rate assumptions; and a provision for additional taxes related to certain universal life products. THE YEAR 1997 COMPARED WITH THE YEAR 1996 Consolidated 1997 revenues of $660.3 million were up 7% compared with the $619.1 million reported for 1996. Liberty Life's LibertyDirect segment revenue increase of $32.5 million accounted for the majority of the consolidated revenue increase. Consolidated net income for 1997 was $75.0 million, an increase of $37.6 million from the $37.3 million reported for 1996. The amounts reported for 1996 included special charges of $26.9 million. Excluding the special charges, net income for 1996 was $64.3 million, and 1997 earnings increased $10.7 million (17%) over the adjusted 1996 earnings. The increase in 1997 was primarily the result of a $5.8 million positive fluctuation in net realized investment gains and operating earnings growth in LibertyDirect and Pierce. The special charges for 1996 resulted from a detailed study of the profitability of all of Liberty's insurance products. The study identified a small group of products whose mortality and expense experience was significantly worse than assumed when the products were sold. Approximately $22 million of the special charges were provisions for losses related to these products. In addition to the product-related charges, the Company expensed previously deferred costs associated with acquiring and modifying an administrative system for the Company's pre-need business based on a decision to move to a new administrative platform. All of the special charges represented non-cash items, and had no material impact on the insurance subsidiaries' statutory financial condition. BUSINESS SEGMENTS The Company operates primarily in the television broadcasting and life insurance industries. The Company has six reportable segments which are defined based on the products and services provided. Television broadcasting is one segment. The five reportable segments comprising the Insurance Operations are Agency, LibertyDirect, Insurance administration, Pre-need, and Corporate and Other. In the life insurance industry the Company currently markets products through Liberty Life and provides insurance administrative services through LIS. Prior to the sale of Pierce in April 1998, the Company also marketed pre-need life insurance through Pierce. Additional segment information is included in Note 18 to the Consolidated Financial Statements. BROADCASTING RESULTS OF OPERATIONS (In 000s) 1998 1997 1996 - ------------------------------------------------------------------------------- Gross broadcasting revenues $159,461 $137,898 $137,336 Agency commissions 22,383 19,005 19,433 - ------------------------------------------------------------------------------- Net broadcasting revenues 137,078 118,893 117,903 Expenses 87,655 76,679 75,534 - ------------------------------------------------------------------------------- Income before interest and taxes 49,423 42,214 42,369 - ------------------------------------------------------------------------------- Interest expense 12,533 8,348 8,630 - ------------------------------------------------------------------------------- Income before income taxes 36,890 33,866 33,739 - ------------------------------------------------------------------------------- Income taxes 14,157 12,140 13,455 - ------------------------------------------------------------------------------- Net income $ 22,733 $ 21,726 $ 20,284 - ------------------------------------------------------------------------------- As noted earlier, Cosmos completed three acquisitions in 1998. The acquisitions are included in the broadcasting results from the date acquired and impact the comparability of 1998 results with prior years. THE YEAR 1998 COMPARED WITH 1997 Gross broadcasting revenues increased $21.6 million (16%) in 1998 compared with 1997. Excluding the impact of the 1998 acquisitions, gross broadcasting revenues increased $13.8 million, or 10%. The remainder of the comparison of 1998 with 1997 will focus on same station results and exclude the impact of the 1998 acquisitions. Higher political revenues in 1998 provided the majority of the revenue increase, with political revenues increasing $10.3 million over 1997 levels. While 1998 was not a major national election year, there were contested political races and issues in several of Cosmos' markets. Cosmos capitalized on the overall strength of its stations in the local markets to capture a significant portion of the political dollars spent in its markets. Local revenues were up 3% and national revenues down 2% compared with 1997. The volume of political spending had a negative impact on local revenue growth as the political advertising displaced other advertisers during portions of the year. National revenues were soft in most Cosmos markets all year. On a same station basis broadcasting expenses increased $6.5 million (8%) in 1998 compared with 1997. The expense increase was high due to expenditures for operations and projects designed to build future revenue. Also, as more fully explained in the review of insurance segment results, Cosmos absorbed $1.5 million in higher expenses related to amounts that were previously borne by the Corporate and Other segment. Interest expense increased $4.2 million in 1998 directly related to the financing of the 1998 acquisitions. Cosmos does not have its own credit facility. All of Cosmos interest expense and related debt is paid, or payable, to the parent company. The interest rate charged is 41 5 intended to approximate the rate Cosmos would pay if it had a separate credit facility. For 1998 and 1997 the interest rate was 8%. The effective income tax rate for 1998 was 38.4% compared with 35.8% in 1997. Both rates were lower than the combined federal and state statutory rate of 39.5%. In 1998 a tax benefit was obtained from implementation of tax planning strategies. In 1997 a tax benefit was recorded related to the settlement of outstanding tax issues. THE YEAR 1997 COMPARED WITH 1996 Gross broadcasting revenues for 1997 were $137.9 million compared with $137.3 million in 1996. Although 1997 was expected to be an off year in the revenue cycle due to the lack of major political races and Olympic Games, Cosmos managed to report increases in all revenue categories that more than offset a decline of over $7.0 million in political revenues from the prior year. Cosmos major sources of revenue growth were from national and local advertising due to the over strength of the economy. Broadcasting expenses rose 2% in 1997 compared with the 1996 levels. As previously discussed, Cosmos also benefited from a favorable $1.3 million adjustment to income tax expense in 1997. CASH FLOW INFORMATION Additional measures of broadcasting performance are based on cash flow. Cash flow information is included for the broadcasting segment because such data is commonly used as a performance measure for broadcasting companies by investors for, among other items, measuring a company's debt, and debt service, capacity. This cash flow information is not, and should not be used as, an alternative or substitute for the net income or cash flows included in the Company's Consolidated Financial Statements, and is not a measure of financial performance under generally accepted accounting principles. (In 000s) 1998 1997 1996 - ------------------------------------------------------------------------------- Cash Flow and Related Information Broadcast cash flow (1) $62,031 $51,884 $52,489 - ------------------------------------------------------------------------------- Station cash flow (2) 65,406 55,031 55,681 - ------------------------------------------------------------------------------- Broadcast cash flow margin (3) 45.3% 43.6% 44.5% - ------------------------------------------------------------------------------- Capital expenditures $7,277 $5,752 $6,030 - ------------------------------------------------------------------------------- (1) Broadcast cash flow is defined as earnings before depreciation and amortization, interest expense, non-operating income and expenses, and income taxes. (2) Station cash flow is broadcast cash flow plus cash headquarters expenses. (3) Broadcast cash flow divided by net broadcasting revenue The 1998 acquisitions added $3.6 million to both broadcast and station cash flow. Excluding the impact of the acquisitions, broadcast cash flow increased 13% in 1998 compared with 1997. Cash flow for 1997 was down 1% compared with 1996. The cash flow amounts were impacted by the same items as previously discussed for revenues and expenses. INSURANCE RESULTS OF OPERATIONS (in 000's) 1998 1997 1996 - ------------------------------------------------------------------------------- Operating revenues (1) Insurance premiums and policy charges $284,931 $350,692 $321,371 Net investment income 119,813 158,319 155,157 Service contract revenues 18,217 7,121 7,751 - ------------------------------------------------------------------------------- Total operating revenues $422,961 $516,132 $484,279 - ------------------------------------------------------------------------------- Operating earnings before income taxes $45,456 $71,485 $65,997 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PRO FORMA INFORMATION Pro forma revenues (2) $378,001 $354,640 $327,578 Pro forma operating earnings before income taxes (3) $38,507 $40,471 $40,817 - ------------------------------------------------------------------------------- (1) Excluding realized investment gains and losses and intersegment revenues (2) Excluding Pierce operating revenues (3) Pro forma adjusting for the combined impact of the sale of Pierce and the financing cost associated with the share repurchase as if both transactions had occurred at the beginning of each period presented. Pro forma operating revenues for 1998 increased $23.4 million, or 7%, compared with pro forma 1997 revenues. The LibertyDirect segment revenues for 1998 were $121.4 million, up $16.4 million, or 16%, from 1997 levels, with substantially all of the growth coming from an accidental death product. The LIS contract with Fortis resulted in revenues increasing $11.1 million in 1998 compared with 1997 revenues. Revenues for the Agency segment totaled $208.2 million in 1998, essentially the same as for 1997. Pro forma income before income taxes from insurance operations for 1998 was $38.5 million, a decrease of $2.0 million compared with pro forma $40.5 million reported in 1997. Higher non-recurring litigation expenses in 1998 accounted for the decline. In 1998, Liberty incurred costs in connection with the settlement and conclusion of litigation over an acquisition-related contract dispute. Expenses continue in connection with a previously disclosed suit against a software development company where Liberty is the plaintiff. Litigation related costs incurred for these two cases, which is reported in the Corporate and Other segment decreased pretax operating earnings $5.0 million in 1998 compared with 1997. 42 6 INSURANCE SEGMENT RESULTS 1998 1997 1996 - ------------------------------------------------------------------------------- SEGMENT OPERATING REVENUES (excluding intersegment revenues) Agency $208,199 $206,355 $206,907 LibertyDirect 121,364 104,984 72,530 Liberty Insurance Services 18,217 7,121 7,751 Pierce National 39,021 161,492 157,065 Corporate and Other 36,160 36,180 40,326 - ------------------------------------------------------------------------------- OPERATING REVENUES $422,961 $516,132 $484,579 PRE TAX OPERATING EARNINGS Agency $22,372 $39,575 39,691 LibertyDirect 15,816 13,852 6,705 Liberty Insurance Services (1,304) 325 965 Pierce National 6,120 27,040 21,199 Corporate and Other 2,452 (9,307) (2,563) - ------------------------------------------------------------------------------- Pre tax earnings from operations $45,456 $71,485 $65,997 - ------------------------------------------------------------------------------- THE YEAR 1998 COMPARED WITH 1997 With the sale of Pierce and the substantially reduced investment in real estate, the parent company operations primarily support Liberty Life and LIS and, to a lesser extent Cosmos. As a result significantly more of the parent company costs are being charged or allocated to the segments. Because more costs are charged directly to the insurance segments. The segment most significantly impacted by the change in expense charges and allocations was Agency, the largest segment in terms of revenues and assets. A significant portion (estimated to be approximately $7.0 million) of the decline in Agency pre-tax operating earnings is related to change in the expense reporting. Agency also had higher direct expenses primarily related to technology costs from equipping its field force with the PriorityPad sales tool. In addition to higher general expenses Agency also had approximately $3.3 million in higher deferred policy acquisition cost amortization expense. The higher deferred acquisition cost amortization relates primarily to changes in the systems and methodology used to amortize deferred acquisition costs for Agency's interest sensitive products. The system and methodology changes increased the amortization expense over what had been recognized in prior years using the previous system and estimates. Going forward, subject to changes in actual experience, the amount of interest sensitive deferred acquisition cost amortization is expected to be comparable to the amounts recognized in 1998. Offsetting a portion of the higher general expenses and deferred acquisition amortization expense was higher investment income. Investment income in Agency increased $3.4 million compared with 1997 levels as Agency benefited from the decision in 1997 to sell its commercial real estate portfolio and redeploy the proceeds into investments that have higher current yields. If the interest environment that existed at the end of 1998 continues throughout 1999, it is expected that investment income in Agency will be lower in 1999 than it has been in recent years. Strong premium growth and good mortality results enabled LibertyDirect to increase earnings by $1.9 million in 1998, overcoming an estimated $3.5 million increase in allocated expenses. LibertyDirect's primary source of premiums is from products sold to pay mortgage balances on the death or disability of the insured. Lapses in this line are influenced by, among other factors, the level of mortgage loan refinancing activity. While interest rates were low in 1998 leading to periods of higher refinancing activity, there has not been a significant impact to date on LibertyDirect's lapse experience. Liberty Insurance Services reported an operating loss of $1.3 million before income taxes in 1998. This compares with income before income taxes of $0.3 million in 1997. Higher expenses associated with the start up of the Fortis contract was the primary cause for the fluctuation in pretax earnings. The contract was not expected to contribute to earnings in 1998 but is expected to be profitable in future periods. LIS operations include intersegment profits of approximately $0.6 million from servicing Liberty Life business in 1998 and no significant intersegment profits in 1997. The improvement in the Corporate and Other segment in 1998 compared with 1997 came predominantly from the shift in expenses to the other segments and lower net interest costs. THE YEAR 1997 COMPARED WITH 1996 Operating earnings before income taxes for the Agency segment were level with 1996 amounts. Total revenues and all expense categories were similar in amounts between the periods. LibertyDirect experienced strong premium and profit growth in 1997 compared with 1996. The LibertyDirect segment reported a $32.5 million (45%) increase in premiums and a $7.1 million (107%) increase in pretax operating earnings over 1996. LIS pretax earnings from operations were $0.3 million, a decline of $0.7 million from the $1.0 million reported in 1996. INVESTMENTS As of December 31, 1998, Liberty's consolidated investment portfolio was carried at $1.4 billion compared with $2.1 billion at the end of 1997. Approximately 69% of consolidated invested assets were in fixed maturity securities (bonds and redeemable preferred stocks), 16% was in mortgage loans, 7% in policy loans, with the balance consisting of equity securities (5%), real estate (2%), and other long-term investments (1%). The overall average credit rating of fixed maturity securities as of December 31, 1998 was A+. Less than investment grade securities comprised 4.9% of the fixed maturity portfolio at December 31, 1998, compared with 3.2% at December 31, 1997. 43 7 - ------------------------------------------------------------------------------- Bond Portfolio Quality Rating Chart AAA 33.0% AA 11.5% A 18.1% BBB 32.5% Below BBB 4.9% - ------------------------------------------------------------------------------- Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities" requires that all debt and equity securities be classified into one of three categories -- held to maturity, available for sale, or trading. As of December 31, 1998 and 1997, all securities have been classified as available for sale and are carried at fair value. SFAS 115 requires that available for sale securities be carried at fair value, with unrealized gains and losses, net of adjustment for deferred income taxes and deferred acquisition costs related to universal life products, reported directly in shareholders' equity. The fair value of Liberty's fixed maturity portfolio, and the related adjustment to shareholders' equity, is significantly affected by changes in the overall interest rate environment. During 1998 and 1997 interest rates fluctuated within a relatively narrow range. In 1998, there was a decrease in shareholders' equity of $10.9 million resulting from a decline in the fair value of the portfolio. During 1997 shareholders' equity increased $21.8 million as a result of changes in the fair value of securities. While the volatility experienced in the last two years has not been as great as that experienced in other periods, there could be significant fluctuations in shareholders' equity as a result of carrying securities at market value if interest rates change significantly. - ------------------------------------------------------------------------------- Fixed Maturity Securities Ratio of Fair Value to Amortized Cost Chart 1998 104.3% 1997 105.4% 1996 103.6% 1995 106.1% 1994 95.7% 1993 107.4% - ------------------------------------------------------------------------------- Although Liberty's entire fixed maturity and equity security portfolios have been classified as available for sale, Liberty pursues a value-oriented, as opposed to a trading-oriented, investment philosophy in the management of its securities portfolios. Accordingly, turnover in the portfolios has historically been relatively low and has related primarily to restructuring portfolios acquired through acquisitions or to manage Liberty's tax position. Gains trading, which Liberty believes is short-sighted, is not consistent with its investment philosophy of longer term value-oriented investing. In an environment where yields have approached historic lows, Liberty's focus remains on prudently managing credit, interest rate and liquidity risk, the primary investment risks within a fixed income portfolio. Approximately 27% of Liberty's $935 million fixed maturity portfolio at December 31, 1998, was composed of mortgage-backed securities. This compares with approximately 38% at year-end 1997. Certain mortgage-backed securities are subject to significant prepayment risk or extension risk due to changes in interest rates. In periods of declining interest rates mortgages may be repaid more rapidly than scheduled as borrowers refinance higher rate mortgages to take advantage of the lower current rates. As a result, holders of mortgage-backed securities may receive large prepayments on their investments that cannot be reinvested at interest rates comparable to the rates on the prepaid mortgages. In a rising interest rate environment, refinancings are significantly curtailed and the payments to the holders of the securities decline, limiting the ability of the holder to reinvest at the higher interest rates. Mortgage-backed pass-through securities and sequential collateralized mortgage obligations ("CMO's"), which comprised 12% of the book value of Liberty's mortgage-backed securities at December 31, 1998, and 19% at year-end 1997, are sensitive to prepayment or extension risk. The remaining 88% of Liberty's mortgage-backed investment portfolio at December 31, 1998, consisted of planned amortization class ("PAC") instruments. This compares to 81% at December 31, 1997. These investments are designed to amortize in a more predictable manner by shifting the primary prepayment and extension risk of the underlying collateral to investors in other tranches of the CMO. PAC's are tranches of CMO's specifically designed to protect against prepayment or extension risk. In periods of declining interest rates, prepayments are first applied to the non-PAC tranches of the CMO, creating improved call protection for the PAC tranches. Only after all non-PAC tranches have been paid off are prepayments applied to the PAC tranche. In periods of increasing interest rates, prepayments are first applied to the PAC tranche, thus reducing extension risk for PACs. As a result, PACs have a more stable cash flow than most other mortgage securities because they have better call protection and less extension risk. Mortgage loans of $215.5 million comprised 16% of the consolidated investment portfolio at December 31, 1998. This compares to mortgage loans of $244.8 million, or 11%, of the consolidated investment portfolio at December 31, 1997. Substantially all of these mortgage loans are commercial mortgages with a loan-to-value ratio not exceeding 75% when made. Approximately 52% of these loans at December 31, 1998, are concentrated in North and South Carolina; and 88% are in the states of North Carolina, South Carolina, Tennessee, Georgia and Virginia. Mortgage loan delinquencies, defined as payments 60 or more days past due, have historically been low and were 0.22% at the end of 1998 compared to the latest available industry rate of 0.57%. As discussed above, Liberty's consolidated investment portfolio including fixed maturity securities available for sale, mortgage loans and other financial instruments such as policy loans and debt swap agreements (see Note 5 to the Consolidated Financial Statements) are subject to market risks including the risk of changes in interest rates at varying maturities. Additionally, the 44 8 Company's equity securities available for sale portfolio is subject to market risk including equity pricing risk. As typical in the industry, certain life insurance products of the Company contain minimum rate guarantees regarding interest credited (see Note 4 to the Consolidated Financial Statements). The Company employs various methodologies to manage its exposures to interest rate risks. The asset/liability matching process focuses primarily on the management of interest rate risk of the Company's insurance operations. Liberty monitors the duration of insurance liabilities compared to the duration of assets backing the various insurance lines of business to evaluate the timing of cash flows becoming available from the assets to fund the expected benefits of the insurance liabilities. The Company's goal with such an analysis is to balance the risk and profitability for each insurance line of business and for the Company as a whole. The Company considers the timing of cash flows arising from market risk sensitive instruments and insurance products under varying interest rate scenarios as well as the correlated impact on reported earnings under those scenarios. The following table of various hypothetical interest rate scenarios illustrates the estimated impact to Liberty's earnings for the next year, based on the assumptions contained in the Company's model, if such scenarios materialized: Estimated Incremental Increase or Decrease in CHANGE IN INTEREST RATE Earnings (in 000s) - ------------------------------------------------------------------------------- Increase 1 percent $ 841 Decrease 1 percent (1,965) These estimates were derived by modeling estimated cash flows of the Company's available for sale fixed maturity securities, mortgage loans, policy loans and interest rate swaps. Changes in interest rates illustrated above assume parallel shifts in the yield curve graded pro-rata over four quarters. Incremental income (loss) is net of taxes at 35%. Estimated cash flows produced in the model assume reinvestments representative of Liberty's current strategy and calls/prepayments which would result when the issuers or borrowers can benefit financially based upon the difference between prepayment penalties and new money rates under each scenario. The estimated incremental increase or decrease in earnings from the indicated changes in interest rates relates only to the earnings provided directly from fixed maturity securities, mortgage loans, policy loans and debt. In addition, any fluctuation in interest rates would change the Company's earnings because of the impact of the changes on other components of the Company's operations that are directly and indirectly influenced by the change in interest rates, or because of the impact of the underlying economic conditions that caused interest rates to change have on the demand for the Company's products and services. Liberty's portfolio of equity securities is exposed to price risk. The Company held equity securities with a market value of $63.7 million at December 31, 1998, including $12.7 million in Liberty Properties Trust, a non-affiliated real estate investment trust. The majority of stocks within the portfolio are considered to be small or mid-capitalization stocks (below $5 billion in market capitalization) and most closely correlate with the performance of the S&P MidCap 400 Index. If the market value of the S&P MidCap 400 Index, and of Liberty Property Trust specifically, declined 10% from December 31, 1998 values, the market value of the Company's common stock portfolio could be expected to decrease by approximately $6.4 million. Additional disclosures concerning the fair values in relation to the carrying values of Liberty's financial instruments are included in Note 17 to the Consolidated Financial Statements. As of December 31, 1998 and 1997, investment real estate totaled $34.8 million and $49.2 million, representing 2% of consolidated investment portfolio at both periods. The portfolio consists primarily of residential land and lots in various stages of development and completion. Liberty does not currently plan to make any future investments in new investment real estate properties but will continue to manage the existing portfolio to maximize the value to the Company. Substantially all of the remaining investment real estate is located in South Carolina. Liberty has experienced pre-tax impairments on investment assets of $0.6 million, $7.2 million and $4.3 million for the years ended December 31, 1998, 1997, and 1996, respectively. The high level of impairments in 1997 was due to approximately $6.6 million of write-downs associated with the remaining residential properties which are being carried at the lower of cost or fair market value less costs to sell, and write-downs taken on an oil and gas investment. While the level of impairments is not predictable, management does not expect impairments to have a significant impact on Liberty's results of operations or liquidity. LIQUIDITY AND CAPITAL RESOURCES In May 1998, Liberty entered into a $300 million credit facility maturing in April, 2003, replacing the previous $275 million facility that was scheduled to mature in 1999. The Company may request up to an additional $150 million under the current facility, subject to the approval of the participating lenders. The credit agreement contains various restrictive and financial covenants typical of a credit facility of this size and nature. These restrictions primarily pertain to limitations on the quality and types of investments and prescribed ratios of consolidated debt to consolidated total capital and fixed charges coverage. Liberty funded the 1998 purchases of three television stations, with a total purchase of approximately $156.9 million, from borrowings under the credit facility. 45 9 - ------------------------------------------------------------------------------- Debt to Capital Ratio Chart Excluding Unrealized Investment Gains and Losses 1998 35.2% 1997 22.8% 1996 29.7% 1995 31.4% 1994 31.9% 1993 25.9% - ------------------------------------------------------------------------------- Liberty has entered into interest rate swaps to minimize the impact of a potential significant rise in short-term interest rates on Liberty's outstanding variable-rate debt. See Note 5 to the Consolidated Financial Statements for additional discussion of these contracts. In 1994, Liberty issued 668,207 shares of Series 1994-A Voting Cumulative Preferred Stock ("1994-A Series") having a total redemption value of $23.4 million, or $35.00 per share, in connection with the acquisition of State National Capital Corporation and 598,656 shares of Series 1994-B ("1994-B Series") Voting Cumulative Preferred Stock having a total redemption value of $22.4 million, or $37.50 per share, in connection with the acquisition of American Funeral Assurance Company. The shares have preference in liquidation and each share is entitled to one vote on any matters submitted to a vote of the shareholders of the Company. Both the Company and the holders of the preferred stock have the right to redeem any or all of the shares from time to time beginning five years and one month after the date of issue in exchange for cash or shares of the Company's common stock. There is no sinking fund for the redemption of either series of preferred stock. Both the 1994-A and 1994-B series of preferred stock are considered redeemable preferred stock and are classified outside permanent equity. At December 31, 1998, there were 198,259 shares outstanding for the 1994-A Series and 374,059 shares outstanding for the 1994-B Series. These shares are eligible to be redeemed beginning in March, 1999 and Liberty expects to call them for redemption in 1999. In 1995, Liberty issued 599,985 shares of Series 1995-A Voting Cumulative Convertible Preferred Stock, having a total redemption value of $21.0 million, or $35.00 per share, in connection with the acquisition of WLOX-TV. The Company has the right to redeem any or all of the shares from time to time at any time beginning five years and one month after the date of issue in exchange for cash, common stock, or a combination of both. Generally, the amount of consideration on the 1995-A Series will be equivalent to $35.00 per share plus the amount of any accumulated and unpaid dividends. There is no sinking fund for the redemption of the preferred stock. These shares are considered common stock equivalents for financial reporting purposes. The National Association of Insurance Commissioners (the "NAIC") has Risk-Based Capital ("RBC") requirements for life/health insurance companies to evaluate the adequacy of statutory capital and surplus in relation to investment and insurance risks such as asset quality, mortality and morbidity, asset and liability matching, and other business factors. The RBC formula is used by states as an early warning tool to identify companies that potentially are inadequately capitalized for the purpose of initiating regulatory action. In addition, the formula defines minimum capital standards that supplement the current system of low fixed minimum capital and surplus requirements on a state-by-state basis. The RBC ratios for Liberty Life indicate that Liberty Life's capital significantly exceeds the minimum capital requirements at December 31, 1998. The parent company's short-term cash needs consist primarily of: (1) working capital requirements, (2) interest on corporate debt, and (3) dividends to shareholders. The parent company's primary long-term cash need is the repayment of corporate debt. The parent company depends primarily on dividends and debt service payments paid to it by its subsidiaries to meet its short-term and long-term cash needs. Historically, Liberty's primary businesses have provided sufficient liquidity to fund their own operations as well as the operations of the parent company. Liberty receives funds from Liberty Life primarily in the form of dividends. Dividends from each insurance subsidiary are restricted under applicable state law. Annual dividends in excess of maximum amounts prescribed by state statutes ("extraordinary dividends") may not be paid without the approval of the insurance commissioner of each state in which an insurance subsidiary is domiciled. See Note 9 to the Consolidated Financial Statements. On a consolidated basis, Liberty's net cash flow from operating activities was $24.8 million for 1998 compared with $61.8 million for 1997 and $74.2 million for 1996. Liberty's net cash used in investing activities was $44.8 million in 1998 compared with net cash provided of $2.8 million in 1997 and net cash used of $88.9 million in 1996. The net cash used in investing activities in 1998 was primarily related to the purchase of television stations, with a portion of the cash to fund the purchases generated from the sale of Pierce. The primary sources of net cash provided by investing activities in 1997 was the sale of the commercial real estate as described previously, and the sale of Pierce National stock to Fortis, Inc. The net cash used in investing activities in 1996 was primarily related to the purchase of investment securities. Cash flow used in financing activities for 1998 was $25.1 million. During 1998 the Company repurchased 2,538,000 shares of its common stock for $131.1 million. Of the amount repurchased $125.5 million was repurchased through a tender offer with the balance purchased in the open market. Other than the stock repurchases, cash flow related to financing activities fluctuates primarily based on the level of borrowings or debt repayment. In 1997, cash flow used in financing activities was $39.6 million, compared with cash provided by financing activities of $7.7 million in 1996. At December 31, 1998 outstanding debt totaled $285 million and the debt to capital ratio was 35%. The Company believes that its current level of cash and expected future cash flows from operations are sufficient to meet the needs of its business and to satisfy its debt service. If suitable opportunities arise for additional acquisitions, Liberty believes it can arrange for additional credit or use Common Stock or Preferred Stock as payment for all or part of the 46 10 consideration for such acquisitions; or Liberty may seek additional funds in the equity or debt markets. Under Liberty's credit facility there exists no restriction on acquisition funding, however, the total debt to capital ratio is limited to 35%. Because the debt to capital ratio was 35% at December 31, 1998 the current credit facility would have to be modified or re-negotiated to permit a significant amount of additional debt. Management believes liquidity risk of the insurance operations is minimized by investment strategies that stress high quality assets and an integrated asset/liability matching process. Investments are primarily in intermediate to long-term maturities in order to match the long-term nature of insurance liabilities. Liberty has a relatively small block of universal life products that are interest-sensitive. Liberty actively manages the rates credited on these policies to maintain an acceptable spread between the earned and credited rate. In addition, Liberty has an integrated asset/liability matching process to minimize the liquidity risk that is associated with interest-sensitive products. Accordingly, most long-term investments are held to maturity and interim market fluctuations present no significant liquidity problems. Liberty's only use of derivative financial instruments is to minimize the exposure on its variable rate debt. Other Company commitments are shown in Note 8 to the Consolidated Financial Statements. Further discussion of investments and valuation is contained in Notes 1, 2 and 17 to the Consolidated Financial Statements. IMPACT OF THE YEAR 2000 The Year 2000 issue is the result of computer programs written to use two digits rather than four to define the applicable year. Any of the Company's computer programs or hardware that have date sensitive software or embedded chips may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations including among other things, a temporary inability to process transactions, send premium billings, pay personnel properly, or engage in normal business activities. The Company has determined that it will be required to modify or replace significant portions of its software and certain hardware so that its systems will properly utilize dates beyond December 31, 1999. The Company currently believes that with modifications and replacements to software and certain hardware, the Year 2000 issue will be mitigated. However, if the required modifications and replacements are not made or are not completed timely, the Year 2000 issue could have a material impact on the operations of the Company. The Company's plan to resolve the Year 2000 issue involves the following four phases: assessment, remediation, testing, and implementation. The Company has completed the full assessment of all systems that could be significantly affected by the Year 2000. The completed assessment indicated that a number of the Company's information technology systems could be affected, particularly the insurance administration, billing, and commissioning systems. The Company also completed an assessment of the equipment used at the television stations. In addition, the Company is gathering information about the Year 2000 compliance status of its significant suppliers and business partners and is continuing to monitor their compliance. PROGRESS IN BECOMING YEAR 2000 COMPLIANT As mentioned previously the Company has completed the assessment phase to determine its information technology exposures. Liberty is 100% complete with its assessment phase, approximately 99% complete on the remediation phase, 65% complete with its testing phase and has implemented a number of business critical Year 2000 compliant systems. The Company plans to be significantly complete with its testing efforts by March 31, 1999. Completion of the implementation phase for all significant systems is expected by June 30, 1999. The Company is approximately 90% complete in the remediation phase of its operating equipment used in the broadcasting operations. The Company is approximately 95% complete with the testing of its remediated operating equipment. Once testing is complete, the operating equipment will be ready for immediate use. Testing and implementation of affected equipment is expected to be 100% complete by June 30, 1999. NATURE AND LEVEL OF IMPORTANCE OF THIRD PARTIES AND THEIR EXPOSURE TO THE YEAR 2000 The Company's insurance collection system interfaces directly with significant third party vendors including a large number of banks and financial institutions. The Company is in the process of working with its primary third party vendors to ensure that the Company's systems that interface directly with third parties are Year 2000 compliant by December 31, 1999. The Company has completed its remediation efforts on its collection system and is 95% complete with the testing phase. Testing of all significant systems that are tied to vendor interfaces was completed by December 31, 1998. The Company is asking its critical vendors to provide, in written form, documentation relating to their Year 2000 compliance. To date, Liberty is not aware of any significant supplier or subcontractor with a Year 2000 issue that would materially impact the Company's results of operations, liquidity, or capital resources. However, the Company has no means of ensuring that its suppliers or subcontractors will be Year 2000 ready. The inability of the Company's suppliers or subcontractors to complete their Year 2000 resolution process in a timely fashion could materially impact the Company, although the effect of non-compliance by significant suppliers or subcontractors is not fully determinable. The Company will continue to monitor correspondence from significant suppliers and subcontractors and develop contingency plans where deemed appropriate. RISK AND RISK FACTORS Management believes it has an effective program in place to resolve the Year 2000 issue in a timely manner. As noted above, the Company has not yet completed all necessary phases of the Year 2000 program. In the event that the Company, for unforeseen 47 11 reasons, does not complete any additional phases, the Company would be unable to correctly issue certain insurance policies, invoice customers, collect payments or pay agents properly. Disruptions in the economy generally resulting from Year 2000 issues could also adversely affect the Company. Additionally, the Company could be subject to litigation for computer systems product failure, such as, equipment shutdown or failure to properly date business records. The amount of potential liability and lost revenue cannot be reasonably estimated at this time. CONTINGENCY PLANS The Company has contingency plans for certain critical applications and is working on such plans for others. These contingency plans involve, among other actions, manual workarounds and adjusting staffing strategies. Additionally, the Company has decided to remediate and test older systems that are planned for replacement during the first half of 1999. Thus, if replacement projects are delayed for any reason, the older systems will function beyond the Year 2000. YEAR 2000 COSTS The Company is using both internal and external resources to reprogram or replace, test and implement the software and equipment to ensure it is Year 2000 compliant. The Company has implemented several major systems projects during the last three and one-half years that were not specifically performed to remediate Year 2000 issues. However, during the course of those projects, systems have been modified to ensure that they were Year 2000 compliant. The total cost of the projects to be undertaken for which a component of the project, or the entire project, has to do with remediating the Year 2000 problem is estimated to be approximately $18.4 million and is being funded through operating cash flows. Of the total, approximately $11.1 million is expected to be expensed, with the remainder to be capitalized as it relates primarily to upgrading or replacing systems for business reasons other than the Year 2000. To date the Company has incurred approximately $16.1 million of costs ($6.9 million capitalized and $9.2 million expensed). Of this total, the amounts in 1998 include approximately $4.1 million capitalized and $8.7 million expensed, including $7.3 million included in the special charges. NEW ACCOUNTING PRONOUNCEMENTS In June, 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities". This standard is required to be adopted in years beginning after June 15, 1999. The Company has not determined when it will adopt this standard. The Statement will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will be either offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The Company's use of derivatives is limited to fixing the cost of borrowings on a portion of the outstanding debt. The Company has not yet determined what the effect of Statement 133 will be on the earnings and financial position of the Company, but it is not expected to be material. 48 12 CONSOLIDATED STATEMENTS OF INCOME THE LIBERTY CORPORATION AND SUBSIDIARIES (In $000's, except per share data)
For the Years Ended December 31 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------------- REVENUES Insurance premiums and policy charges $284,931 $350,692 $ 321,371 Broadcasting revenues 159,461 137,898 137,336 Net investment income 119,813 158,319 155,221 Service contract revenues 18,217 7,121 7,751 Realized investment gains (losses) 1,842 6,226 (2,582) - ---------------------------------------------------------------------------------------------------------------------- Total revenues 584,264 660,256 619,097 - ---------------------------------------------------------------------------------------------------------------------- EXPENSES Policyholder benefits 154,661 227,927 218,751 Insurance commissions 79,659 78,939 66,483 General insurance expenses 87,988 67,270 73,790 Amortization of deferred acquisition costs and cost of business acquired 51,018 45,564 73,967 Broadcasting expenses 109,161 95,588 94,867 Interest expense 14,208 13,209 15,139 Loss on sale of subsidiary 13,811 -- -- Other expenses 24,657 20,182 19,601 - ---------------------------------------------------------------------------------------------------------------------- Total expenses 535,163 548,679 562,598 - ---------------------------------------------------------------------------------------------------------------------- Income before income taxes 49,101 111,577 56,499 Provision for income taxes 31,340 36,626 19,159 - ---------------------------------------------------------------------------------------------------------------------- Net income $ 17,761 $ 74,951 $ 37,340 - ---------------------------------------------------------------------------------------------------------------------- EARNINGS PER COMMON SHARE - ---------------------------------------------------------------------------------------------------------------------- Basic earnings per common share $ 0.80 $ 3.50 $ 1.67 - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- Diluted earnings per common share $ 0.80 $ 3.34 $ 1.66 - ----------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 49 13 CONSOLIDATED BALANCE SHEETS THE LIBERTY CORPORATION AND SUBSIDIARIES (In 000's)
At December 31 1998 1997 - ------------------------------------------------------------------------------------------------------------------------- ASSETS Investments: Fixed maturity securities Available for sale, at market, cost of $896,944 in 1998 and $1,587,587 in 1997 $ 935,178 $1,673,888 Equity securities, primarily at market, cost of $54,354 in 1998, $55,992 in 1997 63,658 74,568 Mortgage loans 215,549 244,821 Investment real estate, at cost less accumulated depreciation $12,212 in 1998, $10,742 in 1997 34,788 49,169 Policy loans 90,653 100,322 Other long-term investments 21,256 18,459 Short-term investments 250 250 - ------------------------------------------------------------------------------------------------------------------------- Total Investments 1,361,332 2,161,477 - ------------------------------------------------------------------------------------------------------------------------- Cash 16,633 61,786 Accrued investment income 13,508 21,723 Receivables net of bad debt reserves, $1,163 in 1998, $1,441 in 1997 69,536 69,433 Receivable from reinsurers 275,602 278,165 Deferred acquisition costs 248,764 275,615 Cost of business acquired 35,602 62,226 Buildings and equipment, at cost, less accumulated depreciation $127,502 in 1998, $114,473 in 1997 101,523 74,338 Intangibles related to television operations, at cost, net of amortization $37,465 in 1998, $29,168 in 1997 212,842 90,080 Goodwill related to insurance acquisitions, at cost, net of amortization $9,133 in 1998, $10,929 in 1997 22,868 33,950 Other assets 52,473 55,965 - ------------------------------------------------------------------------------------------------------------------------- Total Assets $2,410,683 $3,184,758 - -------------------------------------------------------------------------------------------------------------------------
50 14
(In 000's) At December 31 1998 1997 - --------------------------------------------------------------------------------------------------------------------------- LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY Liabilities: Policy liabilities: Future policy benefits $ 1,279,929 $ 1,890,786 Claims and benefits payable 30,247 36,991 Policyholder funds 24,355 28,154 - --------------------------------------------------------------------------------------------------------------------------- 1,334,531 1,955,931 Notes and mortgages payable 285,000 191,914 Accrued income taxes 7,348 3,282 Deferred income taxes 122,650 173,562 Accounts payable and accrued expenses 106,523 106,191 Other liabilities 4,157 4,902 Minority interest -- 37,160 - --------------------------------------------------------------------------------------------------------------------------- Total Liabilities 1,860,209 2,472,942 - --------------------------------------------------------------------------------------------------------------------------- Redeemable Preferred Stock: 1994-A Series, $35.00 redemption value, 198,259 and 504,168 shares issued and outstanding in 1998 and 1997, respectively 6,939 17,646 1994-B Series, $37.50 redemption value, 374,059 and 525,948 shares issued and outstanding in 1998 and 1997, respectively 14,028 19,723 - --------------------------------------------------------------------------------------------------------------------------- Total Redeemable Preferred Stock 20,967 37,369 - --------------------------------------------------------------------------------------------------------------------------- Shareholders' Equity: Common stock Authorized - 50,000,000 shares, no par value Issued and outstanding - 18,684,172 shares in 1998, 20,712,686 shares in 1997 70,565 182,994 Convertible preferred stock 1995-A Series, 599,985 shares issued and outstanding 20,999 20,999 Preferred stock Authorized - 10,000,000 shares Issued and outstanding - 1,172,303 shares in 1998, 1,630,101 shares in 1997 Unearned stock compensation (7,596) (10,872) Retained earnings 418,790 419,476 Accumulated other comprehensive income 26,749 61,850 - --------------------------------------------------------------------------------------------------------------------------- Total Shareholders' Equity 529,507 674,447 - --------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------- Total Liabilities, Redeemable Preferred Stock and Shareholders' Equity $ 2,410,683 $ 3,184,758 - ---------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 51 15 CONSOLIDATED STATEMENTS OF CASH FLOWS THE LIBERTY CORPORATION AND SUBSIDIARIES (In 000's)
For the Years Ended December 31 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 17,761 $ 74,951 $ 37,340 Adjustments to reconcile net income to net cash provided by operating activities: (Decrease) increase in policy liabilities (13,320) 7,390 5,545 Increase in accounts payable and accrued expenses 7,717 2,571 14,050 Increase in receivables (1,146) (6,600) (4,645) Amortization of deferred acquisition costs and cost of business acquired 51,018 45,564 73,967 Policy acquisition costs deferred (52,337) (55,312) (51,122) Realized investment (gains) losses (1,842) (6,226) 2,582 Gain on sale of operating assets (1,826) (2,011) (3,172) Loss on sale of subsidiary 13,811 -- -- Depreciation and amortization 19,672 20,870 22,387 Amortization of bond premium and discount (6,858) (7,575) (5,835) Provision for deferred income taxes (4,312) 1,613 (8,905) All other operating activities, net (3,584) (13,394) (7,957) - ----------------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 24,754 61,841 74,235 - ----------------------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Investment securities sold 78,583 128,513 181,572 Investment securities matured or redeemed by issuer: 171,166 100,031 75,369 Cost of investment securities acquired (274,631) (288,053) (322,633) Mortgage loans made (57,192) (50,067) (38,845) Mortgage loan repayments 57,079 35,535 21,111 Purchase of investment properties, buildings and equipment (16,274) (21,552) (43,926) Sale of investment properties, buildings and equipment 20,933 63,164 37,858 Purchases of short-term investments (8,255) (42,423) (73,602) Sales of short-term investments 8,255 42,423 73,352 Cash received on issuance of Pierce National Life common stock -- 37,160 -- Net cash received on sale of subsidiary 133,060 -- -- Net cash paid on purchase of television stations (156,942) -- -- All other investment activities, net (602) (1,940) 823 - ----------------------------------------------------------------------------------------------------------------------------------- NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (44,820) 2,791 (88,921) - ----------------------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Proceeds from borrowings 3,265,000 2,505,000 2,957,704 Principal payments on debt (3,171,914) (2,560,947) (2,970,011) Dividends paid (18,447) (19,540) (18,366) Stock issued for employee benefit and compensation programs 1,974 3,884 1,441 Repurchase of common stock (131,114) -- -- Return of policyholders' account balances (31,606) (38,949) (35,966) Receipts credited to policyholders' account balances 61,020 70,932 72,917 - ----------------------------------------------------------------------------------------------------------------------------------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (25,087) (39,620) 7,719 - ----------------------------------------------------------------------------------------------------------------------------------- (DECREASE) INCREASE IN CASH (45,153) 25,012 (6,967) Cash at beginning of year 61,786 36,774 43,741 - ----------------------------------------------------------------------------------------------------------------------------------- CASH AT END OF YEAR $ 16,633 $ 61,786 $ 36,774 - -----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 52 16 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY THE LIBERTY CORPORATION AND SUBSIDIARIES (Amounts in 000's except per share data)
UNEARNED ACCUMULATED COMMON CONVERTIBLE STOCK OTHER SHARES COMMON PREFERRED COMPEN- COMPREHENSIVE RETAINED OUTSTANDING STOCK STOCK TION INCOME EARNINGS TOTAL(1) - ----------------------------------------------------------------------------------------------------------------------------------- Balance at January 1, 1996 20,061 $ 158,735 $ 20,999 $ (6,050) $56,987 $345,091 $575,762 Net income 37,340 37,340 Net unrealized investment losses (18,260) (18,260) Foreign currency translation adjustment 795 795 Dividends - Common Stock - $0.725 per share (14,666) (14,666) Dividends - Redeemable Preferred Stock - $2.10 per share (2,652) (2,652) Dividends - Convertible Preferred Stock - $1.75 per (1,048) (1,048) share Stock issued for employee benefit and performance incentive compensation 152 4,641 (1,118) 3,523 programs Stock issued for conversion of Redeemable preferred stock 2 67 67 - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1996 20,215 $ 163,443 $ 20,999 $ (7,168) $39,522 $364,065 $580,861 - ----------------------------------------------------------------------------------------------------------------------------------- Net income 74,951 74,951 Net unrealized investment gains 21,789 21,789 Foreign currency translation adjustment 539 539 Dividends - Common Stock - $0.785 per share (15,957) (15,957) Dividends - Redeemable Preferred Stock - $2.10 per share (2,535) (2,535) Dividends - Convertible Preferred Stock - $1.75 per share (1,048) (1,048) Stock issued for employee benefit and performance incentive compensation programs 268 11,320 (3,704) 7,616 Stock issued for conversion of redeemable preferred stock 230 8,231 8,231 - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1997 20,713 $ 182,994 $ 20,999 $(10,872) $61,850 $419,476 $674,447 - ----------------------------------------------------------------------------------------------------------------------------------- Net income 17,761 17,761 Net unrealized investment losses (34,766) (34,766) Foreign currency translation adjustment (335) (335) Dividends - Common Stock - $0.86 per share (15,846) (15,846) Dividends - Redeemable Preferred Stock - $2.10 per share (1,551) (1,551) Dividends - Convertible Preferred Stock - $1.75 per (1,050) (1,050) share Stock issued for employee benefit and performance incentive compensation programs 51 3,897 3,276 7,173 Stock issued for conversion of redeemable preferred stock 458 14,788 14,788 Stock repurchased as part of tender or on open market (2,538) (131,114) (131,114) - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1998 18,684 $ 70,565 $ 20,999 $ (7,596) $26,749 $418,790 $529,507 - -----------------------------------------------------------------------------------------------------------------------------------
(1) Comprehensive income, which includes the aggregate of net income, net unrealized investment gains (losses) and foreign currency translation adjustment, was $19,875, $97,279, and $(17,340) for 1996, 1997 and 1998, respectively. See notes to consolidated financial statements. 53 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ---------------------------------------------------------------------- THE LIBERTY CORPORATION AND SUBSIDIARIES 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial statements of The Liberty Corporation and Subsidiaries (the Company) include the accounts of the Company after elimination of all significant intercompany balances and transactions. The primary subsidiaries of the Company are Liberty Life Insurance Company, Pierce National Life Insurance Company (doing business as FamilySide) through April 8, 1998 (see Note 6), Liberty Insurance Services Corporation (collectively referred to as the insurance operations) and Cosmos Broadcasting Corporation. ORGANIZATION - The Company's operations include the sale and service of life insurance products in the United States and Canada and television broadcasting operations in the United States. The insurance operations are licensed to do business in 49 states plus the District of Columbia. While the majority of the Company's assets and revenues are generated from its insurance operations, the Company also is a major television group broadcaster, owning and operating eleven network affiliated television stations throughout the southeastern and midwestern states. Information on the Company's operations by segment is included in Note 18 of this report. USE OF ESTIMATES AND ASSUMPTIONS - Financial statements prepared in accordance with generally accepted accounting principles require management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes to the consolidated financial statements. Actual results could differ from those estimates and assumptions. INSURANCE PREMIUMS AND POLICY CHARGES - Revenues for traditional life insurance and accident and health insurance are recognized over the premium paying period as they become due. For limited payment whole life products, the excess of the premiums received over the portion of the premiums required to provide for benefits and expenses is deferred and recognized in income over the anticipated life of the policy. For universal life products, revenues consist of policy charges for the cost of insurance, administration of the policies and surrender charges during the period. Policy issue fees are deferred and recognized in income over the life of the policies in relation to the incidence of expected gross profits. POLICYHOLDER BENEFITS - Benefits for traditional life insurance and accident and health insurance products include claims paid during the period, accrual for claims reported but not yet paid, accrual for claims incurred but not reported based on historical claims experience modified for expected future trends, and changes in the liability for future policy benefits. Benefits for universal life products are the amount of claims paid in excess of the policy value accrued to the benefit of the policyholder plus interest credited on account values. FUTURE POLICY BENEFITS include insurance reserves and policy maintenance expenses for traditional life insurance and accident and health insurance. Future policy benefits are associated with earned premiums so as to recognize profits over the premium paying period. This association is accomplished by recognizing the liabilities for insurance reserves on a net level premium method based on assumptions deemed appropriate at the date of issue (or as of the date of acquisition for acquired blocks of business) as to future investment yield, mortality, morbidity, withdrawals and maintenance expenses and including margins for adverse deviations. Interest assumptions are based on Company experience. Mortality, morbidity, and withdrawal assumptions are based on recognized actuarial tables or Company experience, as appropriate. Accident and health reserves consist principally of unearned premiums and claims reserves, including provisions for incurred but unreported claims. Insurance reserves for universal life products are determined following the retrospective deposit method and consist of policy values that accrue to the benefit of the policyholder, unreduced by surrender charges. DEFERRED ACQUISITION COSTS - Acquisition costs incurred by the Company in the process of acquiring new business are deferred and amortized to income as discussed below. Costs deferred consist primarily of com-missions and certain policy underwriting, issue and agency expenses that vary with and are primarily related to production of new business. COST OF BUSINESS ACQUIRED is the value assigned the insurance inforce of acquired insurance companies at the date of acquisition. For traditional insurance products, the amortization of deferred acquisition costs and the cost of business acquired is recognized in proportion to the ratio of annual premium revenue to the total anticipated premium revenue, which gives effect to actual terminations. Deferred acquisition costs and the cost of business acquired are amortized over the premium paying period (not to exceed 30 years) of the related policies. Anticipated premium revenue is determined using assumptions consistent with those utilized in the determination of liabilities for insurance reserves. For universal life products, the deferred acquisition costs are amortized in relation to the incidence of expected gross profits over the life of the policies (not to exceed 30 years). Gross profits are equal to revenues, as defined previously, plus investment income (including applicable realized investments gains and losses) less expenses. Expenses include interest credited to policy account balances, policy administration expenses, and expected benefit payments in excess of policy account balances. INVESTMENTS - The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities" effective January 1, 1994. SFAS No. 115 requires that all debt and equity securities be classified into one of three categories -- held to maturity, available for sale, or trading. The Company currently has no securities classified as held to maturity or trading. Investments are reported on the following basis: - - Fixed maturities classified as available-for-sale are stated at fair value with unrealized gains and losses, after adjustment for deferred income taxes and deferred acquisition costs related to 54 18 universal life products, reported directly in shareholders' equity. Fair values for fixed maturity securities are based on quoted market prices, where available. For fixed maturity securities not actively traded, fair values are estimated using values obtained from independent pricing services or, in the case of private placements, are estimated by discounting expected future cash flows using a current market rate applicable to the yield, credit quality, and maturity of the investments. - - Equity securities (common stocks and nonredeemable preferred stocks) are all considered available for sale and are carried at fair value. The fair values for equity securities are based on quoted market prices. - - Mortgage loans on real estate are carried at amortized cost, less an allowance for credit losses and provisions for impaired value, where appropriate. The Company provides for estimated credit losses related to the mortgage loans where it is probable that all amounts due according to the contractual terms of the mortgage agreement will not be collected. This provision for credit losses is based on discounting the expected cash flows from the loan using the loan's initial effective interest rate, or the fair value of the collateral for certain collateral dependent loans. - - Investment real estate is carried at cost less accumulated depreciation and provisions for impaired value where appropriate. Depreciation over the estimated useful lives of the properties is determined principally using the straight-line method. - - Policy loans are carried at cost. - - Other long-term investments are carried at cost which includes provisions for impaired value where appropriate. Included in other long-term investments are investments in venture capital funds. - - Short-term investments are carried at cost which approximates fair value. UNREALIZED INVESTMENT GAINS AND LOSSES on investments carried at fair value, net of deferred taxes and adjustment for deferred acquisition costs related to universal life products, are recorded directly in shareholders' equity. REALIZED INVESTMENT GAINS AND LOSSES are recognized using the specific identification method to determine the cost of investments sold. Gains or losses on the sale of real estate held for investment are included in realized investment gains (losses), in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" which is discussed below. Gains and losses on the sale of real estate acquired for development and resale are included in net investment income. Realized gains and losses include write-downs for impaired values of investment assets. The Company establishes impairments on individual, specific assets at the time the Company judges the assets to have been impaired and this impairment can be estimated (see Note 2). BUILDINGS AND EQUIPMENT are recorded at cost. Depreciation over the estimated useful lives of the properties is determined principally using the straight-line method. INTANGIBLE ASSETS arose in the acquisition of certain television stations. Amounts not being amortized ($4,071,000) represent the excess of the total cost over the underlying value of the tangible and amortizable intangible assets acquired prior to 1970. Amounts being amortized are expensed principally over forty years. GOODWILL arose in the acquisition of insurance companies and is being amortized over lives ranging from twenty to forty years. FOREIGN CURRENCY TRANSLATION has been accounted for in accordance with SFAS No. 52, "Foreign Currency Translation." The assets and liabilities of the Canadian operations of FamilySide are translated into U.S. dollars at the rate of exchange in effect at the respective balance sheet date. Net exchange gains and losses resulting from translation are included as a separate component of shareholders' equity. Revenues and expenses are translated at average exchange rates for the year. Gains and losses from foreign currency transactions are included in net income. INTEREST RATE CAPS AND SWAPS are used to limit the impact of changing interest rates on the Company's debt, which is all floating rate (see Note 5). The net interest effect of the swap transaction is reported as an adjustment to interest expense as incurred. Interest rate caps are occasionally used to protect a portion of the remaining debt against significant increases in interest rates. Premiums paid for the interest rate caps are being amortized to interest expense over the terms of the caps. INCOME TAXES are computed using the liability method required by Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". Under SFAS 109, deferred tax assets and liabilities are determined based on the differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and law that will be in effect when the differences are expected to reverse. STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" was adopted by the Company effective January 1, 1996. This statement prescribes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill that are used in the business, as well as establishing accounting standards for long-lived assets and certain identifiable intangibles to be disposed of. Under the provisions of the statement, certain of the Company's investment real estate assets were required to be valued at fair value, rather than net realizable value as previously required. The adoption of this standard resulted in a $1,800,000 charge which was reported as a component of realized investment gains and losses in 1996. STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123, "Accounting for Stock-Based Compensation" was adopted by the Company on January 1, 1996. This statement requires companies to measure the fair value of employee stock options at the date granted and expense the estimated fair value of grants or, alternatively, disclose the pro forma impact on net income and earnings per share of the grants in the notes to the financial statements. The Company has adopted SFAS 123 by disclosing 55 19 the pro forma net income and earnings per share impact. The pro forma amounts are not materially different from the actual amounts reported (see Note 10). STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128, "Earnings Per Share" was adopted by the Company on December 31, 1997. This statement replaces Accounting Principles Board Opinion No. 15, "Earnings Per Share" ("APB 15") by making the requirements for earnings per share information more consistent with international accounting standards. SFAS 128 replaces the presentation of primary earnings per share with basic earnings per share, which is a simpler calculation that assumes no dilution for common stock equivalents. Basic earnings per share is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period. In addition to basic earnings per share, diluted earnings per share must also be presented, which is calculated similar to fully diluted earnings per share as calculated under APB 15. The adoption of this standard did not result in material differences in the earnings per share as previously reported (see Note 11). STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 130, "Reporting Comprehensive Income" was adopted by the Company January 1, 1998. This statement requires companies to report and display comprehensive income and its components as part of the general financial statements. The most significant items which affect the Company's comprehensive income are the change in unrealized security gains and losses and the change in the foreign currency translation adjustment, both items of which have historically been reported only as a component of shareholders' equity. STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131") was adopted by the Company retroactively in 1998. This statement establishes standards for the way that public companies report information about operating segments in annual financial statements and requires that companies report selected information about operating segments in interim financial reports. The financial information to be reported includes segment profit or loss, certain revenue and expense items, and segment assets and reconciliations to corresponding amounts in the general purpose financial statements. It also establishes requirements for related disclosures about products and services, geographic areas, and major customers (see Note 18). STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 133, "Accounting for Derivative Instruments and Hedging Activities" was issued by the Financial Accounting Standards Board in June, 1998. The Statement will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will be either offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The Company's use of derivatives is limited to fixing the cost of borrowings on a portion of the outstanding debt. This standard is required to be adopted in years beginning after June 15, 1999 and the Company has not determined when it will adopt this standard. The Company has not yet determined what the effect of Statement 133 will be on the earnings and financial position of the Company, but it is not expected to be material. RECLASSIFICATIONS have been made in the 1997 and 1996 Consolidated Financial Statements to conform to the 1998 presentation. 2. INVESTMENTS Amortized cost and estimated fair values of investments in available for sale securities at December 31, 1998 and 1997 are as follows: Gross Gross Amortized Unrealized Unrealized Fair 1998 (In 000s) Cost Gains Losses Value - -------------------------------------------------------------------------------- AVAILABLE FOR SALE: Fixed maturity securities US government obligations $4,561 $340 --- $4,901 Foreign Corporate and Other 38,851 1,433 1,820 38,464 Corporate securities 609,619 35,873 6,399 639,093 Mortgage-backed securities 243,913 9,301 494 252,720 - -------------------------------------------------------------------------------- Total 896,944 46,947 8,713 935,178 Equity securities 54,354 13,481 4,177 63,658 - -------------------------------------------------------------------------------- Total $951,298 $60,428 $12,890 $998,836 - -------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair 1997 (In 000s) Cost Gains Losses Value - -------------------------------------------------------------------------------- AVAILABLE FOR SALE: Fixed maturity securities US government obligations $15,248 $571 $12 $15,807 Foreign Government 7,537 48 22 7,563 Foreign Corporate and Other 104,607 8,210 558 112,259 Corporate securities 847,826 47,886 1,897 893,815 Mortgage-backed securities 612,369 32,213 138 644,444 - -------------------------------------------------------------------------------- Total 1,587,587 88,928 2,627 1,673,888 Equity securities 55,992 21,326 2,750 74,568 - -------------------------------------------------------------------------------- Total $1,643,579 $110,254 $5,377 $1,748,456 - -------------------------------------------------------------------------------- 56 20 Realized gains (losses) and the change in unrealized gains (losses) on the Company's fixed maturities and equity securities are summarized as follows: Total Gains Fixed Equity (Losses) on (In 000s) Maturities Securities Investments - -------------------------------------------------------------------------------- 1998 Realized investment gains (losses) $131 $1,947 $2,078 Change in unrealized investment gains (losses) (10,629) (8,026) (18,655) - -------------------------------------------------------------------------------- Combined $(10,498) $(6,079) $(16,577) - -------------------------------------------------------------------------------- 1997 Realized investment gains (losses) $ (150) $ 8,755 $ 8,605 Change in unrealized investment gains (losses) 33,975 4,416 38,391 - -------------------------------------------------------------------------------- Combined $ 33,825 $13,171 $ 46,996 - -------------------------------------------------------------------------------- 1996 Realized investment gains (losses) $ (2,864) $10,160 $ 7,296 Change in unrealized investment gains (losses) (31,389) 289 (31,100) - -------------------------------------------------------------------------------- Combined $(34,253) $10,449 $(23,804) - -------------------------------------------------------------------------------- The schedule below details consolidated investment income and related investment expenses for the years ended December 31. (In 000s) 1998 1997 1996 - -------------------------------------------------------------------------------- Interest on Bonds $84,971 $123,932 $113,016 Mortgage loans 19,804 21,191 19,858 Policy loans 4,601 4,981 4,932 Short-term investments 933 708 600 Dividends on Preferred stocks 3,490 4,543 6,196 Common stocks 512 574 1,050 Investment property rentals 771 4,121 9,712 Net gain on investment real estate held for development 3,123 3,838 6,518 Other investment income 7,122 6,705 5,643 - -------------------------------------------------------------------------------- Total investment income 125,327 170,593 167,525 Investment expenses 5,514 12,274 12,304 - -------------------------------------------------------------------------------- Net investment income $119,813 $158,319 $155,221 - -------------------------------------------------------------------------------- Proceeds from sales of fixed maturities and the related gross realized gains and losses for the three years ended December 31are shown below. The amounts shown below do not include those related to unscheduled redemptions or prepayments, nor do they reflect any impairments taken during the years presented. (In 000s) 1998 1997 1996 - -------------------------------------------------------------------------------- Proceeds from sales $52,548 $83,978 $157,425 Gross realized gains 947 315 1,088 Gross realized losses (2,051) (1,489) (4,832) The following investment assets were non-income producing for the twelve months ended December 31, 1998: Balance Sheet (In 000s) Amount - -------------------------------------------------------------------------------- Investment real estate $ 10,118 Other long-term investments 21,510 Mortgage loans 2,028 - -------------------------------------------------------------------------------- Total $ 33,656 - -------------------------------------------------------------------------------- For the year ended December 31, 1998, the Company incurred realized losses of $3,453,000 due to impairment of assets included in the year-end investment portfolio. Cumulative provisions for impairments on the total investment portfolio by asset category at December 31, 1998, are as follows: Cumulative Provision (In 000s) for Impairments - -------------------------------------------------------------------------------- Mortgage loans $ 734 Investment real estate 8,942 Other long-term investments 1,416 - -------------------------------------------------------------------------------- Total $ 11,092 - -------------------------------------------------------------------------------- The amortized cost and estimated fair value of fixed maturities at December 31, 1998, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Amortized Fair (In 000s) Cost Value - -------------------------------------------------------------------------------- Due in one year or less $ 17,818 $ 18,161 Due after one year through five years 103,857 109,605 Due after five years through ten years 224,512 234,900 Due after ten years 306,844 319,792 - -------------------------------------------------------------------------------- 653,031 682,458 Mortgage-backed securities primarily maturing in five to twenty-five years 243,913 252,720 - -------------------------------------------------------------------------------- Total $896,944 $935,178 - -------------------------------------------------------------------------------- 57 21 3. REINSURANCE AGREEMENTS The Company uses reinsurance as a risk management tool in the nor mal course of business and in isolated, strategic assumption transactions to effectively buy or sell blocks of in force business. The reinsurance contracts do not relieve the Company from its contract with its policyholders, and it remains liable should any reinsurer be unable to meet its obligations. At December 31, 1998, $3.4 billion (18%) of the Company's total $18.9 billion gross insurance in force was ceded to other companies. In the accompanying financial statements, insurance premiums and policy charges, policy-holder benefits and deferred acquisition costs are reported net of reinsurance ceded with policy liabilities being reported gross of reinsurance ceded. Amounts paid or deemed to be paid for reinsurance contracts are recorded as reinsurance receivables. The cost of reinsurance related to long-duration contracts is accounted for over the life of the underlying reinsured policies using assumptions consistent with those used to account for the underlying policies. In 1991 Liberty Life entered into an agreement with Life Reassurance Corporation (Life Re) to coinsure the Company's General Agency Division's universal life policies in force. The initial agreement provided for 80% coinsurance on policies in force at December 31, 1991, and 50% coinsurance on policies issued subsequent to such date. Effective July 1, 1995, the amount coinsured on policies written after December 31, 1991 was increased to 80%. Under the terms of the agreement, assets supporting the business ceded are required to be held in escrow. At December 31, 1998, Liberty Life's interest in the assets held in escrow consisted of investments with an amortized cost of $66.2 million and a fair value of $69.5 million. Comparable book and fair value at December 31, 1997 was $63.3 million and $66.5 million, respectively. These investments had an average rating of AA-. The total face value of insurance ceded to Life Re at December 31, 1998, was $2.2 billion and the Company has recorded a receivable related to this transaction from Life Re of $252.0 million as of December 31, 1998. Currently, Life Re has an A.M. Best rating of A+. During 1998 and 1997, Liberty Life had ceded premiums and policy charges of $16.3 million and $17.1 million, respectively, under the agreement. Effective September 30, 1991, Liberty Life entered into an agreement to coinsure 50% of its Home Service line of business. Under generally accepted accounting principles this agreement has been treated as financial reinsurance, and no reserve reduction had been taken for the business ceded. The reinsurance contract contains an escrow agreement that requires assets equal to the reserves reinsured, as determined under statutory accounting principles, be held in escrow for the benefit of this block of business. At December 31, 1998, the amortized cost and fair value of the invested assets held in escrow was $238.3 million and $252.1 million, respectively. The insurance subsidiaries also reinsure with other insurance companies portions of the life insurance they write in order to limit exposure on large or substandard risks. Due to this broad allocation of reinsurance with several insurance companies, there exists no significant concentration of credit risk. The maximum amount of life insurance that Liberty Life will retain on any life is $300,000, plus an additional $50,000 in the event of accidental death. This maximum is reduced for higher ages and for special classes of risks. Insurance in excess of the retention limits is either automatically ceded under reinsurance agreements or is reinsured on an individually agreed basis with other insurance companies. The effect of reinsurance on premiums and policy charges and benefits was as follows for the years ending December 31: (In 000s) 1998 1997 1996 - -------------------------------------------------------------------------------- Direct premiums and policy charges $317,027 $384,010 $356,660 Reinsurance assumed 238 873 1,209 Reinsurance ceded (32,334) (34,191) (36,498) - -------------------------------------------------------------------------------- Net premiums and policy charges $284,931 $350,692 $321,371 - -------------------------------------------------------------------------------- Gross benefits $180,611 $257,685 $243,584 Reinsurance recoveries (25,950) (29,758) (24,833) - -------------------------------------------------------------------------------- Net benefits $154,661 $227,927 $218,751 - -------------------------------------------------------------------------------- 4. DEFERRED ACQUISITION COSTS, COST OF BUSINESS ACQUIRED AND FUTURE POLICY BENEFITS A summary of the changes in deferred acquisition costs is as follows: (In 000s) 1998 1997 1996 - -------------------------------------------------------------------------------- Beginning balance $275,615 $262,182 $265,188 Deferred during the year 52,337 55,312 51,122 Amortized during the year (46,363) (37,069) (57,812) Adjustment related to unrealized investment (gains) losses 2,357 (4,508) 3,712 Insurance in force ceded/ sold (35,248) --- --- Foreign currency translation 66 (302) (28) - -------------------------------------------------------------------------------- Ending balance $248,764 $275,615 $262,182 - -------------------------------------------------------------------------------- Included in amortization for 1996 is $20.1 million of costs determined not to be recoverable from future premiums on certain lines of business. Actual experience on these lines of business was significantly less favorable than what was projected at the time the policies were sold. The insurance in force ceded/sold is in connection with the sale of Pierce National Life Insurance Company in 1998. Also in 1998, the Company recognized an additional $6.4 million of amortization for the unlocking of the interest spread assumptions on interest-sensitive products. 58 22 A summary of the changes in costs of business acquired through acquisitions is as follows: (In 000s) 1998 1997 1996 - -------------------------------------------------------------------------------- Beginning balance $62,226 $70,764 $86,925 Interest accrued 3,366 5,070 5,860 Related to insurance in force ceded/ sold (21,975) --- --- Foreign currency adjustment 6 (43) (6) Amortized during the year (8,021) (13,565) (22,015) - -------------------------------------------------------------------------------- Ending balance $35,602 $62,226 $70,764 - -------------------------------------------------------------------------------- The Company accounts for these costs in a manner consistent with deferred acquisition costs. The Company's interest rate used to amortize these costs is 7.85% for a majority of the asset. Periodically, the Company performs tests to determine that the cost of business acquired remains recoverable from future premiums from the business acquired. During 1996 the Company determined that actual experience was materially different than what was assumed at the time of acquisition for certain blocks of acquired business. Accordingly, $6.1 million of cost of business acquired was determined not to be recoverable based on the expected present value of the future cash flows from the business. The charge was included in amortization expense. There were no similar charges in either 1998 or 1997. Under current assumptions, amortization of cost of business acquired, prior to consideration of accrued interest implicit in the calculation of the amortization, for the next five years is expected to be as follows: (In 000s) Amortization - -------------------------------------------------------------------------------- 1999 $6,099 2000 5,447 2001 4,909 2002 4,367 2003 4,091 The liabilities for traditional life insurance and accident and health insurance policy benefits and expenses are computed using a net level premium method, including assumptions based on the Company's experience, modified as necessary to reflect anticipated trends and to include provisions for possible unfavorable deviations. Reserve interest assumptions are graded and range from 3.5% to 9.5%. Such liabilities are, for some plans, graded to equal statutory values or cash values at or prior to maturity. The weighted average assumed investment yield for all traditional life and accident and health policy reserves was 5.9% for 1998 for Liberty Life Insurance Company, 6.7% and 6.6% for 1997 and 1996 which includes Pierce National Life Insurance Company in addition to Liberty Life Insurance Company. Benefit reserves for traditional life insurance policies include certain deferred profits on limited-payment policies that are being recognized in income over the policy term. Policy benefit claims are charged to expense in the period that the claims are incurred. Benefit reserves for universal life insurance and investment products are computed under a retrospective deposit method and represent policy account balances before applicable surrender charges. Policy benefits and claims that are charged to expense include benefit claims incurred in the period in excess of related policy account balances. Interest crediting rates for universal life and investment products range from 4% to 6.25% in 1998, 4.0% to 6.45% in 1997, and 4.0% to 6.75% in 1996. Participating business accounts for approximately 1% of the Company's life insurance in force and premium income. The dividend to be paid is determined annually by the Board of Directors. 5. DEBT The debt obligations at December 31 are as follows: Interest (In 000s) Rate 1998 1997 - -------------------------------------------------------------------------------- Borrowings under revolving credit agreement 5.8% $283,000 $188,000 Mortgage loans on investment property 8.0% --- 1,214 Other --- 2,000 2,700 - -------------------------------------------------------------------------------- Total $285,000 $191,914 - -------------------------------------------------------------------------------- Maturities of the debt obligations at December 31, 1998, are as follows: Maturities (In 000s) Amount - -------------------------------------------------------------------------------- 1999 $700 2000 650 2001 650 2002 --- 2003 283,000 Thereafter --- - -------------------------------------------------------------------------------- Total $285,000 - -------------------------------------------------------------------------------- In May 1998, the Company refinanced its credit facility into a new, $300 million revolving credit facility maturing in April, 2003. The Company may request up to an additional $150 million under the new facility subject to approval by the bank group. The Company's borrowings against the revolving credit facility were $283,000,000 at December 31, 1998. During 1998, the maximum amount outstanding on the new revolving facility amounted to approximately $283,000,000 with an average balance outstanding of approximately $223,000,000 and an average weighted interest rate of 5.8%. The Company has the option to solicit money market interest quotes from the bank group for borrowings under the revolving 59 23 credit facility. The revolving credit agreement also provides for borrowing at interest rates based on a formula that incorporates the use of the London Interbank Offered Rate ("LIBOR") plus an interest rate margin. A facility fee is charged on the facility based on the $300,000,000 total commitment. The facility fee and the interest rate margin for the revolving credit facility are all based upon the ratio of consolidated debt to cash flow, as defined in the credit agreement. The credit agreement contains various restrictive and financial covenants typical of a credit facility of this size and nature. These restrictions primarily pertain to limitations on the quality and types of investments and defined ratios of consolidated debt to consolidated total capital and fixed charges coverage. As of December 31, 1998, the Company was in compliance with all covenants under its debt agreement, or events of noncompliance had been waived. The Company has entered into interest rate swap agreements as a means of managing interest rate exposure on its floating rate debt. The agreements are contracts to exchange fixed and floating interest rate payments periodically over the life of the agreements, without the exchange of the underlying notional amounts. The Company pays the counterparty a fixed rate and the counterparty pays the Company interest at a floating rate based on three month LIBOR. The interest differential to be paid or received on the swaps is accrued and included in interest expense for financial reporting purposes. The agreements are with major financial institutions and the Company's credit exposure is limited to the value of the interest rate swap that has, or may become favorable to the Company. Information about the interest rate swaps follows: Fixed Rate Notional Paid by Amount Expiration Date Company (in 000's) - -------------------------------------------------------------------------------- March, 2004, cancelable in March, 2002 5.75% $80,000 September, 2003 cancelable in September, 2001 4.91% $100,000 The swap cancellation options may only be exercised by the counterparties. Interest paid, net of amounts capitalized, amounted to approximately $12,654,000, $13,576,000, and $18,102,000 in 1998, 1997, and 1996, respectively. Interest capitalized amounted to $583,000, $1,071,000, and $2,367,000 in 1998, 1997, and 1996, respectively. 6. DISPOSITIONS On April 8, 1998, the Company completed the sale of Pierce National Life Insurance Company ("Pierce") to Fortis, Inc. The Company received cash totaling approximately $139 million at closing. The Company recognized an after-tax loss of the sale of Pierce of $18.9 million in the first quarter of 1998. On December 31, 1997, Fortis had purchased 2,660 newly issued shares of Pierce common stock for $37,160,000 in cash. Subsequent to this stock purchase, Fortis, Inc. maintained a twenty-one percent ownership interest in the common stock of Pierce through the completion of the sale. For financial reporting purposes, Fortis' interest in Pierce is included in the financial statements as minority interest. 7. REDEEMABLE PREFERRED STOCK On February 24, 1994, the Company issued 598,656 shares of Series 1994-B Voting Cumulative Preferred Stock having a total redemption value of $22,449,000, or $37.50 per share, in connection with the acquisition of American Funeral Assurance Company. Additionally, on April 1, 1994, the Company issued 668,207 shares of Series 1994-A Voting Cumulative Preferred Stock having a total redemption value of $23,387,000, or $35.00 per share, in connection with the acquisition of State National Capital Corporation. The shares have preference in liquidation, and each share is entitled to one vote on any matters submitted to a vote of the shareholders of the Company. In accordance with the financial reporting requirements of the Securities and Exchange Commission, the preferred stock has been classified outside of permanent equity as Redeemable Preferred Stock. Both the Company and the holders of the preferred stock have the right to redeem any or all of the shares from time to time beginning five years and one month after the date of issue in exchange for cash or shares of the Company's common stock. The Company will determine the form of all redemptions, which will consist of cash, common stock, or a combination of both. Generally, the amount of consideration on the 1994-A Series will be equivalent to $35.00 per share plus the amount of any accumulated and unpaid dividends; and for the 1994-B Series will be equivalent to $37.50 per share plus the amount of any accumulated and unpaid dividends. In addition, each share of the 1994-A Series and 1994-B Series is convertible, at the option of the shareholder, at any time into one share of the Company's common stock (plus a corresponding attached right to acquire a share of the Company's Series A Participating Cumulative Preferred Stock). As of December 31, 1998, 469,948 shares of the 1994-A Series and 224,597 shares of the 1994-B Series have been converted by the shareholders. There is no sinking fund for the redemption of either series of preferred stock. Dividends shall be paid on the 1994-A Series at the rate of 6% per annum and on the 1994-B Series at the rate of 5.6% per annum. Dividends accrue daily, are cumulative, and are payable quarterly. Both the 1994-A Series and the 1994-B Series are on a parity in rank with all other series of preferred stock of the Company whether or not such series exist now or are created in the future, with respect to payment of all dividends and distributions, unless a series of preferred stock expressly provides that it is junior or senior to the 1994-A and 1994-B Series. No dividends or distributions on the Company's common stock shall be declared or paid until all accumulated and unpaid dividends on the 1994-A Series and 1994-B Series have been declared and set aside for payment. 60 24 8. COMMITMENTS AND CONTINGENCIES In January 1996, a lawsuit was filed by the Company against a software development company alleging breach of contract in connection with an agreement to develop a state-of-art software system to administer the Company's insurance operations. The suit seeks to recover amounts paid to the software developer and other costs incurred by the Company in the attempt to develop the system. In 1997 the software developer filed a counterclaim against the Company alleging breach of contract. Management, after consultation with legal counsel, believes this counterclaim is without merit and is a response to the suit filed by the Company. The Company intends to contest the counterclaim vigorously. The Company believes its lawsuit is meritorious; however, no estimated recovery is included in the accompanying financial statements. The Company and its subsidiaries are also defendants in various law- suits arising primarily from claims made under insurance policies. Where applicable, these lawsuits are considered in establishing the Company's policy liabilities. It is the opinion of management and legal counsel that the settlement of these actions will not have a material effect on the financial position or results of operations of the Company. The Company has lease agreements, primarily for branch offices, data processing and telephone equipment, which expire on various dates through 2007, none of which are material capital leases. Most of these agreements have optional renewal provisions covering additional periods of one to ten years. All leases were made in the ordinary course of business and contain no significant restrictions or obligations. Annual rental expense amounted to approximately $6,911,000, $6,275,000, and $5,601,000 in 1998, 1997, and 1996, respectively. Future commitments under operating leases are shown below: Data Processing Branch and Telephone (in 000's) Offices Equipment Other Total - -------------------------------------------------------------------------------- Year 1999 $1,349 $3,226 $566 $5,141 2000 820 2,168 160 3,148 2001 554 307 86 947 2002 383 --- 33 416 2003 196 --- --- 196 Thereafter 481 --- --- 481 - -------------------------------------------------------------------------------- Total $3,783 $5,701 $845 $10,329 - -------------------------------------------------------------------------------- At December 31, 1998, the Company had commitments for additional investments and other items totaling $29,594,000. 9. SHAREHOLDERS' EQUITY On February 28, 1995, the Company issued 599,985 shares of Series 1995-A Voting Cumulative Convertible Preferred Stock having a total redemption value of $20,999,475 or $35.00 per share in connection with the acquisition of WLOX-TV. The shares have preference in liquidation, and each share is entitled to one vote on any matters submitted to a vote of the shareholders of the Company. Each share of preferred stock is convertible at the option of the holder into one share of common stock. The Company has the right to redeem any or all of the shares from time to time at any time beginning five years and one month after the date of issue in exchange for cash, common stock, or a combination of both. Generally, the amount of consideration on the 1995-A Series will be equivalent to $35.00 per share plus the amount of any accumulated and unpaid dividends. There is no sinking fund for the redemption of the preferred stock. Dividends shall be paid on the preferred stock at the rate of 5% per annum. Dividends accrue daily, are cumulative, and are payable quarterly. The 1995-A Series preferred stock is on a parity in rank with all other series of preferred stock of the Company whether or not such series exist now or are created in the future, with respect to payment of all dividends and distributions, unless a series of preferred stock expressly provides that it is junior or senior to the 1995-A Series. No dividends or distributions on the Company's common stock shall be declared or paid until all accumulated and unpaid dividends on the 1995-A Series have been declared and set aside for payment. The Company has adopted a Shareholder Rights Plan and declared a dividend of one preferred stock purchase right for each outstanding share of common stock. Upon becoming exercisable, each right entitles the holder to purchase for a price of $150.00 one one-hundredth of a share of Series A Participating Cumulative Preferred Stock. All of the rights may be redeemed by the Company at a price of $.01 per right until ten business days (or such later date as the Board of Directors determines) after the public announcement that a person or group has acquired beneficial ownership of 20 percent or more of the outstanding common shares ("Acquiring Person"). Upon existence of an Acquiring Person, the Company may redeem the rights only with the concurrence of a majority of the directors not affiliated with the Acquiring Person. The rights, which do not have voting power and are not entitled to dividends, expire on August 7, 2000. The rights are not exercisable until ten business days after the public announcement that a person has become an Acquiring Person or after the commencement of a tender offer or exchange offer if, upon consummation, such person or group would become an Acquiring Person. If, after the rights become exercisable, the Company becomes involved in a merger or certain other major corporate transactions, each right will entitle its holder, other than the Acquiring Person, to receive common shares with a deemed market value of twice such exercise price. There are 10,000,000 shares of preferred stock, no par value per share authorized for issuance. At December 31, 1998, there were 1,172,303 shares of preferred stock outstanding (see Note 7 for 61 25 discussion of Redeemable Preferred Stock), and 140,000 shares of preferred stock were reserved for issuance in connection with the Shareholder Rights Plan. Shareholders' equity as determined under generally accepted accounting principles of the Company's insurance subsidiaries was $503,328,000 and $720,904 at December 31, 1998 and 1997, respectively. The comparable amounts as determined under statutory accounting practices were $146,786,000 and $212,513,000 at December 31, 1998 and 1997, respectively. The amount that retained earnings exceeds statutory unassigned surplus ($330,084,000) is restricted and, therefore, not available for dividends. Without regulatory approval, dividends are generally limited to prior year statutory gain from operations. The components of unrealized appreciation on fixed maturity securities available for sale and equity securities in the balance sheet caption accumulated other comprehensive income (see Note 19) as of December 31 are as follows: (In 000s) 1998 1997 - -------------------------------------------------------------------------------- Carrying value of securities $998,836 $1,748,456 Amortized cost of securities 951,298 1,643,579 - -------------------------------------------------------------------------------- Net unrealized appreciation 47,538 104,877 Adjustment to deferred acquisition costs (6,387) (8,745) Deferred income taxes (14,402) (34,617) - -------------------------------------------------------------------------------- Total $ 26,749 $ 61,515 - -------------------------------------------------------------------------------- In March 1998, the Company completed a stock tender offer under which the Company repurchased 2,400,000 shares of its common stock at $52.00 per share. In addition, the company repurchased in the open market 138,000 shares during 1998. 10. STOCK OWNERSHIP AND STOCK OPTION PLANS The Company has a Performance Incentive Compensation Program (the "Program") which provides that the Compensation Committee of the Board of Directors may grant: (a) incentive stock options within the meaning of Section 422 of the Internal Revenue Code; (b) non-qualified stock options; (c) performance units; (d) awards of restricted shares of the Company's common stock; (e) awards of unrestricted shares of the Company's common stock; (f) phantom stock units; (g) or any combination of the foregoing to outside directors, officers and key employees. Only common stock, not to exceed 4,300,000 shares, may be delivered under the Program; and shares so delivered will be made available from the authorized but unissued shares or from shares reacquired by the Company, including shares purchased in the open market. The aggregate number of shares that may be acquired by any participant in the Program is limited to a maximum of 400,000 stock options during a single calendar year and a maximum of 100,000 shares of other stock-based awards during a single calendar year. As of December 31, 1998, 83 outside directors, officers and employees were participants in the Program. Restricted shares awarded to participants under the Program generally vest in equal annual installments, generally over the five-year period commencing on the date the shares are awarded. Vesting of restricted shares may be contingent on the achievement of certain performance goals as established by the Compensation Committee at the time of the grant. Non-vested shares may not be assigned, transferred, pledged or otherwise encumbered or disposed of. During the applicable restriction period, the Company retains possession of the certificates for the restricted shares with executed stock powers attached. Participants are entitled to dividends and voting rights with respect to the restricted shares. Stock options under the Program are issued at least 100% of the market price on the date of grant, are vested over such period of time, which may not be less than one year, as may be established by the Compensation Committee, and expire no more than ten years after the grant. Of the non-qualified options outstanding, 355,783 were exercisable at December 31, 1998; 349,609 were exercisable at December 31, 1997; and 323,900 were exercisable at December 31, 1996. The options expire on various dates beginning May 17, 1999, and ending November 4, 2008. There were no incentive stock options outstanding at either December 31, 1998 or December 31, 1997. Incentive stock options totaling 25,500 were outstanding and exercisable at December 31, 1996. In accordance with the provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), the Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations in accounting for its plans and does not recognize compensation expense for its stock-based compensation plans other than for awards of restricted shares. Expense is recognized over the vesting period of the restricted shares, and totaled $2,297,000, $2,330,000, and $2,143,000, for the years ended December 31, 1998, 1997 and 1996, respectively. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of the grant, no compensation expense is recognized. Pro forma information regarding net income and earnings per share is required by SFAS 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that statement. The weighted average estimated fair value for the options at the date of grant using a Black-Scholes option pricing model, and the weighted average assumptions using to determine the estimated fair value are as follows: 1998 1997 1996 - -------------------------------------------------------------------------------- Estimated fair value $10.92 $10.65 $8.39 Underlying assumptions used to determine estimated fair value: Risk free interest rate 5.1% 6.3% 6.6% Dividend yield 2.0% 2.0% 2.0% Expected stock price volatility 0.17 0.16 0.16 Weighted average expected life 7 YEARS 7 years 7 years 62 26 The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures the estimated fair value of the options is amortized to expense over the options' vesting periods. The Company's pro forma information is as follows: In $000s, except per share 1998 1997 1996 amounts - -------------------------------------------------------------------------------- Net Income: As Reported $17,761 $74,951 $37,340 Pro forma 17,063 75,554 37,201 Basic Earnings per Share: As Reported $0.80 $3.50 $1.67 Pro forma 0.76 3.48 1.66 Diluted Earnings per Share: As Reported $0.80 $3.34 $1.66 Pro forma 0.76 3.32 1.65 Because SFAS 123 is applicable only to options granted subsequent to December 31, 1994, its pro forma effect will not be fully reflected until 1999. The following schedule summarizes activity in the Program during the three years ending December 31, 1998.
Restricted Shares Incentive Stock Options Non-Qualified Stock Options - ----------------------------------------------------------------------------------------------------------------------------- Number of Market Price Number of Average Number of Average Shares at Date Given Options Exercise Price Options Exercise Price - ----------------------------------------------------------------------------------------------------------------------------- Outstanding at 12/31/95 275,044 51,165 $18.50 513,200 $24.54 Awarded 109,375 $ 32.09 -- 129,945 32.97 Vested (83,564) 25.51 Exercised (25,665) 18.50 (37,800) 21.81 Forfeited (9,600) 25.86 -- (9,100) 23.20 - ----------------------------------------------------------------------------------------------------------------------------- Outstanding at 12/31/96 291,255 25,500 18.50 596,245 $26.52 Awarded 209,340 40.63 340,600 40.63 Vested (66,399) 28.18 Exercised (25,500) 18.50 (78,900) 25.03 Forfeited (90,223) 27.39 (15,135) 30.24 - ----------------------------------------------------------------------------------------------------------------------------- Outstanding at 12/31/97 343,973 -- -- 842,810 $32.29 AWARDED 60,825 51.00 247,940 45.65 VESTED (37,180) 31.09 EXERCISED (105,061) 23.76 FORFEITED (73,291) 39.59 (55,399) 36.24 - ----------------------------------------------------------------------------------------------------------------------------- OUTSTANDING AT 12/31/98 294,327 -- -- 930,290 $36.58 - -----------------------------------------------------------------------------------------------------------------------------
The following table summarizes information concerning currently outstanding and exercisable stock options:
WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE RANGE OF NUMBER REMAINING EXERCISE NUMBER EXERCISE EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE - --------------------------------------------------------------------------------------------------------------------------------- $16.25-$26.00 210,000 3.8 years $24.23 187,340 $24.04 $26.01-$51.00 720,290 8.4 years 40.18 168,443 34.37 - --------------------------------------------------------------------------------------------------------------------------------- Total or weighted average 930,290 7.3 years $36.58 355,783 $28.93 - ---------------------------------------------------------------------------------------------------------------------------------
At December 31, 1998, there were 1,059,169 shares of the Company's stock reserved for future grants under the Program. 63 27 11. EARNINGS PER SHARE The Company has adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). SFAS 128 replaces Accounting Principles Board Opinion No. 15, "Earnings Per Share" ("APB 15") and requires disclosure of basic earnings per share and diluted earnings per share. Basic earnings per share excludes all potentially dilutive securities from the calculation and is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. The diluted earnings per share computation is computed similarly to the fully diluted earnings per share calculation under APB 15. The following tables reconcile the numerators and denominators for the basic and diluted earnings per share calculations for the years ended December 31, 1998, 1997 and 1996: For the year ended 1998 ------------------------------------ ($000s except per share Shares Per amounts) Income (Denom- Share (Numerator) inator) Amount ------------------------------------ Net income $17,761 Less: Preferred stock dividends (2,601) --------- BASIC EPS Income available to common shareholders 15,160 18,806 $0.80 ======== Effect of Dilutive Securities: Stock Options --- 149 Redeemable preferred stock --- --- Convertible preferred stock --- --- ------------------------ DILUTED EPS Income available to common shareholders plus assumed conversions $15,160 18,955 $0.80 ================================== For the year ended 1997 --------------------------------- ($000s except per share Shares Per amounts) Income (Denom- Share (Numerator) inator) Amount --------------------------------- Net income $74,951 Less: Preferred stock dividends (3,583) ----------- BASIC EPS Income available to common shareholders 71,368 20,406 $3.50 ========= Effect of Dilutive Securities: Stock Options --- 220 Redeemable preferred stock 2,535 1,208 Convertible preferred stock 1,048 600 ----------------------- DILUTED EPS Income available to common shareholders plus assumed conversions $74,951 22,434 $3.34 ================================== For the year ended 1996 ---------------------------------- Shares Per ($000s except per share Income (Denom- Share amounts) (Numerator) inator) Amount ---------------------------------- Net income $37,340 Less: Preferred stock dividends (3,700) ---------------------------------- BASIC EPS Income available to common shareholders 33,640 20,150 $1.67 ======== Effect of Dilutive Securities: Stock Options --- 153 Redeemable preferred stock --- --- Convertible preferred stock --- --- ---------------------- DILUTED EPS Income available to common shareholders plus assumed conversions $33,640 20,303 $1.66 ================================= In March 1998, the Company completed a tender offer program whereby it repurchased 2,400,000 shares of the outstanding common stock of the Company. In addition, the company repurchased in the open market 138,000 shares during 1998. 12. EMPLOYEE BENEFITS In February 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits". This standard revised the disclosure requirements currently required by adding certain required disclosures and eliminating others. This standard is effective for fiscal years beginning after December 15, 1997 and was adopted by the company in 1998. The Company has several postretirement plans that provide medical and life insurance benefits for qualified retired employees. The post-retirement medical plans are generally contributory with retiree contributions adjusted annually to limit employer contributions to predetermined amounts. The postretirement life plans provide free insurance coverage up to a maximum of $5,000 for retirees prior to January 1, 1993, of the Company with the exception of Cosmos, whose retirees are insured with an outside company. 64 28 Net periodic postretirement benefit cost was $1,422,000, $1,378,000, and $1,494,000 for the years ended December 31, 1998, 1997, and 1996, respectively, and included the following components: - -------------------------------------------------------------------------------- (In $000s) 1998 1997 1996 - -------------------------------------------------------------------------------- Medical Life Medical Life Medical Life - -------------------------------------------------------------------------------- Service cost $143 $ -- $ 143 $ -- $ 162 $ -- Interest cost 981 298 936 299 1,042 290 - -------------------------------------------------------------------------------- Net periodic postretirement benefit cost $1,124 $298 $1,079 $299 $1,204 $290 - -------------------------------------------------------------------------------- The following schedule reconciles the accumulated postretirement benefit obligation included in the balance sheets as of December 31, 1998, 1997, and 1996 (in 000's): 1998 1997 1996 - -------------------------------------------------------------------------------- Medical and Life Benefits Benefit obligation at beginning of year $18,379 $18,543 $18,487 Service cost 143 143 162 Interest cost 1,279 1,235 1,332 Plan participants' contributions 644 557 531 Benefits paid (1,954) (1,993) (1,860) Plan expenses (115) (106) (109) - -------------------------------------------------------------------------------- Benefit obligation at end of year $18,376 $18,379 $18,543 - -------------------------------------------------------------------------------- The following schedule reconciles the status of the Company's plans with the unfunded postretirement benefit obligation included in its balance sheets at December 31: 1998 1997 - -------------------------------------------------------------------------------- (In $000s) Medical Life Medical Life - -------------------------------------------------------------------------------- Retirees $13,573 $3,673 $12,052 $4,221 Fully eligible active plan 518 --- 820 60 participants Other active plan participants 279 --- 928 57 - -------------------------------------------------------------------------------- Accumulated postretirement benefit 14,370 3,673 13,800 4,338 obligation Unrecognized net gain (loss) 20 313 712 (471) - -------------------------------------------------------------------------------- Accrued postretirement benefit $14,390 $3,986 $14,512 $3,867 obligation - -------------------------------------------------------------------------------- The weighted-average discount rate is 7.0% and 7.5% for 1998 and 1997, respectively. At December 31, 1998, a 8% annual rate of increase in the per capita cost of covered medical benefits is assumed for 1999. The rate is to decrease by 1% per year to 5.5% in 2002 and remain at that level thereafter. At December 31, 1997, the weighted-average annual assumed rate of increase in the per capita cost of covered medical benefits was 8.5% for 1998, and was assumed to decrease to 8% in 1999, then decrease 1% per year to 5.5% in 2002 and thereafter. Assumed health care cost trends rates have a significant effect on the amounts reported for the medical plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects (in 000's): 1% Increase 1% Decrease - -------------------------------------------------------------------------------- Effect on total of service and interest rate components $ 89 $ (75) Effect on post retirement benefit obligation 921 (777) The Company has a retirement and savings plan for substantially all of its employees. The plan has features of both a profit sharing plan and a voluntary Thrift Plan qualified under Section 401(k) of the Internal Revenue Code. The profit sharing component of the Plan allows for contributions to be made to the Plan at the discretion of the Board of Directors. Contributions for this component of the Plan were $5,187,000, $4,853,000, and $4,959,000 in 1998, 1997, and 1996, respectively. The 401(k) component of the Plan allows employees to contribute to the Plan and the Company will make a matching contribution of up to 3% of the employees' compensation. The Company's matching contribution percentage may be changed at the discretion of each participating subsidiary's Board of Directors. The Company's contributions for this component of the Plan were $2,509,000, $2,379,000, and $2,218,000 in 1998, 1997, and 1996, respectively. 13. PROVISION FOR INCOME TAXES The provision for income taxes consists of the following: (In 000s) 1998 1997 1996 - -------------------------------------------------------------------------------- Current: Federal $34,372 $34,595 $25,717 State and local 1,280 418 2,347 - -------------------------------------------------------------------------------- Total current 35,652 35,013 28,064 Deferred: Federal (3,981) 1,923 (8,460) State and local (331) (310) (445) - -------------------------------------------------------------------------------- Total deferred (4,312) 1,613 (8,905) - -------------------------------------------------------------------------------- Total tax provision $31,340 $36,626 $19,159 - -------------------------------------------------------------------------------- Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. 65 29 Significant components of the Company's deferred tax liabilities and assets as of December 31, 1998 and 1997 are as follows: (In 000s) 1998 1997 - -------------------------------------------------------------------------------- Insurance operations deferred tax liabilities: Deferred acquisition costs $ 66,682 $ 84,862 Policy liabilities 6,912 20,325 Market discount on investments 9,891 11,476 Tax over book partnership losses 1,325 1,118 Unrealized investment gains recognized in equity 14,402 34,617 Deferred and Uncollected Premiums 1,631 --- Software Development Costs 3,604 --- Non-insurance companies deferred tax liabilities: Book over tax basis in acquired television station 12,665 13,884 Book over tax basis in investment property transferred to partnership 3,629 5,310 Unrealized investment gains recognized in equity 92 1,517 Tax over book depreciation 4,071 5,161 Tax over book amortization 3,057 3,593 Other 2,210 1,953 - -------------------------------------------------------------------------------- Total deferred tax liabilities 130,171 183,816 - -------------------------------------------------------------------------------- Insurance operations deferred tax assets: Employee benefit accruals 6,000 6,048 Non-insurance companies deferred tax assets: Net operating loss carryover 358 358 Book over tax partnership losses 1,163 3,848 - -------------------------------------------------------------------------------- Total deferred tax assets 7,521 10,254 - -------------------------------------------------------------------------------- Net deferred tax liability $122,650 $173,562 - -------------------------------------------------------------------------------- At December 31, 1998 and 1997, the Company had unrealized gains from securities classified as available for sale and equity securities of $47,539,000 and $104,877,000, respectively, for which a deferred tax liability has been established. The reconciliation of income tax computed at the U.S. federal statutory tax rates to income tax expense is: (In 000s) 1998 1997 1996 - -------------------------------------------------------------------------------- Federal income tax rate 35% 35% 35% Rate applied to pre-tax income $17,185 $39,052 $19,775 Tax exempt interest and dividends (562) (1,036) (1,166) Sale of subsidiary 9,942 --- --- State and local income taxes 790 248 1,233 Other 3,985 (1,638) (683) - -------------------------------------------------------------------------------- Provision for income taxes $31,340 $36,626 $19,159 - -------------------------------------------------------------------------------- The Company has net operating loss carryforwards of $1,023,000 at December 31, 1998 and 1997, which will expire between the years 2006 and 2009. The utilization of these carryforwards are subject to special rules which provide that these loss carryforwards can only be utilized through earnings from the non-life insurance companies. Income taxes paid were approximately $29,709,000, $35,644,000, and $30,047,000 in 1998, 1997, and 1996, respectively. Under prior tax law, a portion of the life insurance subsidiaries' earnings was not taxed when earned. Such accumulated income ("policyholders' surplus") amounts to approximately $65,293,000 at December 31, 1983 and, under the Tax Reform Act of 1984, was frozen at that amount. That amount is not taxable unless it is distributed to the Company, unless it exceeds certain limitations under the Internal Revenue Code, or unless the income tax deferral status of the account is modified by future tax legislation. The Company does not intend to take actions nor does it expect any events to occur that would cause tax to be payable on policyholders' surplus; therefore, no income tax provision on that amount has been made in the accompanying financial statements. However, if such taxes were assessed, the amount of the taxes payable would be approximately $22,853,000. 66 30 14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) Quarterly results of operations for each of the years ended December 31, 1998 and 1997, are as follows:
Quarter Ended - -------------------------------------------------------------------------------------------------------------- 1998 (In 000s except per share amounts) March 31 June 30 Sept. 30 Dec. 31 - -------------------------------------------------------------------------------------------------------------- Revenues $ 168,522 $138,639 $135,966 $141,137 - -------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes $ 11,353 $ 25,344 $ 16,939 $ (4,535) - -------------------------------------------------------------------------------------------------------------- Net income (loss) $ (2,423) $ 16,268 $ 10,907 $ (6,991) - -------------------------------------------------------------------------------------------------------------- Basic Earnings (loss) per common share $ (0.15) $ 0.85 $ 0.56 $ (0.42) - -------------------------------------------------------------------------------------------------------------- Diluted Earnings (loss) per common share $ (0.15) $ 0.82 $ 0.55 $ (0.42) - --------------------------------------------------------------------------------------------------------------
Quarter Ended - -------------------------------------------------------------------------------------------------------------- 1997 (In 000s except per share amounts) March 31 June 30 Sept. 30 Dec. 31 - -------------------------------------------------------------------------------------------------------------- Revenues $159,917 $170,454 $166,684 $163,201 - -------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes $ 24,122 $ 31,850 $ 30,994 $ 24,611 - -------------------------------------------------------------------------------------------------------------- Net income (loss) $ 15,867 $ 20,398 $ 20,229 $ 18,457 - -------------------------------------------------------------------------------------------------------------- Basic Earnings (loss) per common share $ 0.74 $ 0.96 $ 0.94 $ 0.86 - -------------------------------------------------------------------------------------------------------------- Diluted Earnings (loss) per common share $ 0.71 $ 0.92 $ 0.90 $ 0.81 - --------------------------------------------------------------------------------------------------------------
In 1998, there was an after-tax loss of $18.9 million on the sale of Pierce National Life Insurance Company booked in the first quarter. Included in this after-tax amount was a pre-tax loss of $13.8 million and a tax provision of $5.1 million . Liberty's tax basis in Pierce National was less than the net consideration received resulting in a taxable gain on the transaction and an additional tax liability to the company. The sale of Pierce has also resulted in lower revenues for the second, third, and fourth quarters. Liberty undertook an analysis beginning in the third quarter to better redistribute resources into areas of the company that are growing and to reduce costs where necessary. In addition, Liberty embarked on a re-engineering of its Agency sales group in 1998. In the fourth quarter it launched "Agency of the Future", a program which it believes will increase sales, lower lapses and slow agent turnover. Costs associated with the analysis and beginning implementation of the resource reallocation are part of an after-tax accounting charge of $17.5 million during the fourth quarter. Other significant items included in this charge are: expensing of previously capitalized cost of projects that are no longer expected to be implemented and projects where primary additional functionality is limited to compliance with year 2000; additional deferred acquisition cost amortization on universal life products from changes in interest rate assumptions; and a provision for additional taxes related to certain universal life products. 15. STATUTORY RESULTS OF OPERATIONS Statutory net income of the Insurance Group for each of the years ended December 31, 1998, 1997, and 1996 was $30.4 million, $53.0 million, and $42.8 million, respectively. 16. ACQUISITIONS During 1998, the Company completed the acquisition of three television stations. In July, 1998, the Company completed the acquisition of WALB television, a NBC affiliate, located in Albany, Georgia for $78.6 million. In November 1998, the Company completed the acquisition of KGBT television, a CBS affiliate, located in Harlingen, Texas for $42.9 million. In December 1998, the Company completed the acquisition of WWAY television, an ABC affiliate, located in Wilmington, North Carolina for $35.4 million. All of these acquisitions have been accounted for as purchases, and the results of operations included in the accompanying consolidated financial statements since the date of acquisition. The purchase of these stations was funded using proceeds from the Company's credit facility. 17. FAIR VALUES OF FINANCIAL INSTRUMENTS SFAS No. 107, "Disclosures about Fair Value of Financial Instruments" requires the disclosure of the estimated fair value of all financial instruments, including both assets and liabilities unless specifically exempted. The following methods were used to estimate the fair values of the Company's financial instruments. - Cash and short-term investments: The carrying amounts reported in the balance sheet for these instruments approximate their fair values. - Investment securities: Fair values for fixed maturity securities are based on quoted market prices, where available. For fixed maturity securities not actively traded, fair values are estimated using values obtained from independent pricing services or, in the case of private placements, are estimated by discounting expected future cash flows using a current market rate applicable to the yield, credit quality, and maturity of the investments. The fair values for equity securities are based on quoted market prices. 67 31 - Mortgage loans and policy loans: The fair values for mortgage loans and policy loans are estimated using discounted cash flow analyses, using interest rates currently being offered for similar loans to borrowers with similar credit ratings. Loans with similar characteristics are aggregated for purposes of the calculations. - Other long-term investments: Other long-term investments consist primarily of venture capital investments. The Company determined that it was not practicable to estimate the fair values of its venture capital investments because of a lack of primary and secondary market prices and the inability to estimate fair values without incurring excessive costs. The Company's investment in venture capital totaled $21,510,000 and $18,924,000 at December 31, 1998 and 1997, respectively. - Policy liabilities: Fair values for the Company's liabilities under investment-type insurance contracts that are not subject to policyholder mortality or morbidity risk are estimated using discounted cash flow calculations, based on interest rates currently being offered for similar contracts with remaining maturities consistent with those for the contracts being valued. - Short and long-term debt: Substantially all of the Company's short and long-term debt is floating rate debt. Accordingly, the carrying amount approximates its fair value. - Other liabilities: Fair values on film contract obligations related to the Company's broadcasting operations were determined by discounting future cash flows using current fixed borrowing rates for similar types of borrowing arrangements. - Interest Rate Swap: Fair value of the interest rate swap is based on an estimate provided by the financial institution which is the counterparty to the swap, and was determined by discounting the value of estimated future cash flows. The carrying amounts and estimated fair values of the Company's financial instruments are as follows:
1998 1997 - ---------------------------------------------------------- ---------------------------------- --------------------- Estimated Estimated Carrying Fair Carrying Fair (in 000s) Amount Value Amount Value - ---------------------------------------------------------- ---------------------------------- --------------------- ASSETS Fixed maturity securities available for sale $935,178 $935,178 $1,673,888 $1,673,888 Equity securities 63,658 63,658 74,568 74,568 Mortgage loans 215,549 216,665 244,821 250,889 Policy loans 90,653 88,380 100,322 97,960 Other long-term investments 21,256 21,256 18,459 18,459 Short-term investments and cash 16,883 16,883 62,036 62,036 LIABILITIES Investment-type insurance contracts 15,336 13,744 79,317 75,450 Notes, mortgages and other debt 285,000 285,000 191,914 191,914 Film contract obligations included in other liabilities 10,345 9,342 9,738 8,765 Interest rate swap -- 2,736 --- 87
SFAS No. 107 excludes insurance contract liabilities, except for investment-type contracts, from the definition of financial instruments. However, the fair value of the liabilities under all insurance contracts is taken into consideration in the overall management of interest rate risk. Because of the exclusion of the majority of the Company's insurance contracts as well as other non-financial assets and liabilities from fair value disclosure, care should be taken in deriving conclusions about the Company's financial position based on the fair value information presented above. 68 32 18. SEGMENT INFORMATION The Company operates primarily in the television broadcasting and life insurance industries. In the life insurance industry the Company currently markets products through Liberty Life Insurance Company and provides insurance administrative services through Liberty Insurance Services Corporation ("LIS"). Prior to the sale of Pierce in April 1998, the Company also marketed pre-need life insurance through Pierce. The Company has six reportable segments which are defined based on the products and services provided. The five reportable segments comprising the Insurance Operations are Agency, LibertyDirect, Pre-need, Insurance Administration and Corporate and Other. Television broadcasting is sixth segment. Within insurance operations Liberty Life's Agency division markets various life insurance products to individuals including individual life, health and interest sensitive whole life products. The LibertyDirect division of Liberty Life primarily markets term life, accident and disability insurance designed to pay a residential mortgage balance upon the death or disability of the insured. Subsequent to the sale of Pierce, the Company is no longer active in the pre- need segment; however, separate disclosure is included due to the significance of the segment in 1997 and 1996. The operations of LIS comprise the insurance administration segment and LIS provides back office insurance administration services including underwriting, policy issuance, accounting, customer service and claims processing to internal and external insurance clients. The Corporate and Other segment includes activities of the parent company and minor subsidiaries, the operations of Liberty Life not part of either Agency or LibertyDirect, and earnings on surplus of Liberty Life not allocated to the reportable segments. Surplus is allocated to Agency and LibertyDirect based on a formula intended to approximate the amount of capital necessary to support the business in those segments. The television broadcasting segment is comprised of the operations of Cosmos Broadcasting ("Cosmos"). Cosmos owns and operates eleven television stations, primarily in the southeast and midwest. Each of the stations is affiliated with a major network, with six NBC affiliates, three ABC affiliates, and two CBS affiliates. The Company evaluates segment performance based on several factors. For segments that are comprised of a separate company (LIS and Cosmos) the primary factor is net income excluding unusual, non-operating items. For those segments that are not separate companies performance in evaluated based on income before income taxes excluding realized gains and losses and unusual, non-operating items. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Intersegment service revenues reported by the insurance administration segment are based upon agreements between LIS and the affiliate purchasing the services. For the year ended December 31, 1998, income before income taxes for LIS included approximately $640,000 earned from services provided to affiliates. There were no significant intersegment profits in 1997 or 1996. Foreign assets are not material and for 1998 substantially all of the Company's revenue was derived from the United States. Pierce had Canadian operations and, for 1997 and 1996, revenues from Canada amount to less than 5% of consolidated revenues. The following tables summarize financial information by segment for the periods ended December 31, 1998, 1997 and 1996, respectively. The adjustment column reflects unallocated realized investment gains and losses, unallocated income taxes and unusual, non-operating items. 69 33
Liberty LIS Cosmos - As of and for the Liberty Life Pierce Insurance Total Television Total year ended Life Liberty National - Admin- Corporate Adjust- Insurance Broad- Elimini- Consoli- December 31, 1998 Agency Direct Pre-need istration & Other ments(3) Operations casting ations dated - ----------------------------------------------------------------------------------------------------------------------------------- Revenues Premiums and policy fees $133,796 $119,483 $24,247 $ 7,405 $284,931 $ 284,931 Net investment income 74,403 1,881 14,774 28,755 119,813 119,813 Servicing fees $ 18,217 18,217 18,217 Broadcasting revenues $159,461 159,461 Intersegment revenues: Servicing fees 34,257 34,257 ($34,257) Interest income 12,533 12,533 (12,533) Realized investment gains (losses) $ 1,842 1,842 1,842 - ----------------------------------------------------------------------------------------------------------------------------------- Total revenues 208,199 121,364 39,021 52,474 48,693 1,842 471,593 159,461 (46,790) 584,264 Policy benefits 95,856 23,053 23,914 12,228 (390) 154,661 154,661 Insurance commissions 14,391 62,462 2,249 557 79,659 79,659 Operating expenses 44,420 12,667 3,612 53,778 16,717 14,831 146,025 99,029 (34,257) 210,797 Amortization expense(1) 31,160 7,366 3,126 2,531 6,835 51,018 11,009 62,027 Interest expense 14,208 14,208 12,533 (12,533) 14,208 Loss on sale of subsidiary 13,811 13,811 13,811 - ----------------------------------------------------------------------------------------------------------------------------------- Total expenses 185,827 105,548 32,901 53,778 46,241 35,087 459,382 122,571 (46,790) 535,163 Income (loss) before income taxes 22,372 15,816 6,120 (1,304) 2,452 (33,245) 12,211 36,890 49,101 Income tax expense (benefit) 2,209 (509) 15,483 17,183 14,157 31,340 ----------------- ----------------- ---------- Net income (loss) $ 3,911 ($795) ($4,972) $ 22,733 $ 17,761 ================= ================= ========== Segment assets $1,430,597 $ 88,140 $ 0 $4,640 $561,882 $2,085,259 $325,424 $2,410,683 Expenditures for property and equipment (2) $ 0 $1,717 $ 3,457 $ 5,174 $ 6,456 $ 11,630
(1) For insurance segments amortization expense includes goodwill amortization, amortization of deferred policy acquisition costs and cost of business acquired, and depreciation of buildings and equipment. For the broadcasting segment amortization expense includes the amortization of intangibles related to television operations and depreciation of buildings and equipment. (2) Fixed assets are not allocated to segments that are not separate companies. (3) Special charges of $17.5 million after tax were recognized in 1998 and $26.9 million after tax were recognized in 1996 and are included in the adjustments column. 70 34
Liberty LIS Cosmos - As of and for the Liberty Life Pierce Insurance Total Television Total year ended Life Liberty National - Admin- Corporate Adjust- Insurance Broad- Elimini- Consoli- December 31, 1997 Agency Direct Pre-need istration & Other ments(3) Operations casting ations dated - ------------------------------------------------------------------------------------------------------------------------------------ Revenues Premiums and policy fees $135,305 $102,995 $105,414 $6,978 $350,692 $350,692 Net investment income 71,050 1,989 56,078 29,202 158,319 158,319 Servicing fees $7,121 7,121 7,121 Broadcasting revenues $137,898 137,898 Intersegment revenues: Servicing fees Interest income 8,348 8,348 ($8,348) Realized investment gains (losses) $6,226 6,226 6,226 ------------------------------------------------------------------------------------------------------------- Total revenues 206,355 104,984 161,492 7,121 44,528 6,226 530,706 137,898 (8,348) 660,256 Policy benefits 95,548 23,112 97,860 11,407 227,927 227,927 Insurance commissions 14,696 53,668 9,907 668 78,939 78,939 Operating expenses 28,664 8,671 16,172 6,796 27,053 87,356 85,801 173,157 Amortization expense(1) 27,872 5,681 10,513 1,498 45,564 9,883 55,447 Interest expense 13,209 13,209 8,348 (8,348) 13,209 ------------------------------------------------------------------------------------------------------------- Total expenses 166,780 91,132 134,452 6,796 53,835 452,995 104,032 (8,348) 548,679 Income (loss) before income taxes 39,575 13,852 27,040 325 (9,307) 6,226 77,711 33,866 111,577 Income tax expense 9,064 116 15,306 24,486 12,140 36,626 ------------------- --------------------- ---------- Net income $17,976 $209 $53,225 $21,726 $74,951 =================== ===================== ========== Segment assets $1,427,860 $61,313 $881,117 $5,868 $640,652 $3,016,810 $167,948 $3,184,758 Expenditures for property and equipment(2) $574 $-- $3,680 $4,254 $5,752 $10,006
(1) For insurance segments amortization expense includes goodwill amortization, amortization of deferred policy acquisition costs and cost of business acquired, and depreciation of buildings and equipment. For the broadcasting segment amortization expense includes the amortization of intangibles related to television operations and depreciation of buildings and equipment. (2) Fixed assets are not allocated to segments that are not separate companies. (3) Special charges of $17.5 million after tax were recognized in 1998 and $26.9 million after tax were recognized in 1996 and are included in the adjustments column. 71 35
Liberty LIS Cosmos - As of and for the Liberty Life Pierce Insurance Total Television Total year ended Life Liberty National - Admin- Corporate Adjust- Insurance Broad- Elimini- Consoli- December 31, 1996 Agency Direct Pre-need istration & Other ments(3) Operations casting ations dated - ----------------------------------------------------------------------------------------------------------------------------------- Revenues Premiums and policy fees $137,930 $70,316 $104,953 $8,472 ($300) $321,371 $321,371 Net investment income 68,977 2,214 52,112 31,854 64 155,221 155,221 Servicing fees $7,751 7,751 7,751 Broadcasting revenues $137,336 137,336 Intersegment revenues: Servicing fees 5,408 5,408 ($5,408) Interest income 8,630 8,630 (8,630) Realized investment gains (losses) (2,582) (2,582) (2,582) ------------------------------------------------------------------------------------------------------------- Total revenues 206,907 72,530 157,065 13,159 48,956 (2,818) 495,799 137,336 (14,038) 619,097 Policy benefits 94,503 16,273 95,938 12,187 (150) 218,751 218,751 Insurance commissions 15,978 37,979 11,594 595 337 66,483 66,483 Operating expenses 28,184 6,603 16,405 12,194 21,247 14,066 98,699 85,040 (5,408) 178,331 Amortization expense(1) 28,551 4,970 11,929 2,351 26,166 73,967 9,927 83,894 Interest expense 15,139 15,139 8,630 (8,630) 15,139 ------------------------------------------------------------------------------------------------------------- Total expenses 167,216 65,825 135,866 12,194 51,519 40,419 473,039 103,597 (14,038) 562,598 Income (loss) before income taxes 39,691 6,705 21,199 965 (2,563) (43,237) 22,760 33,739 56,499 Income tax expense (benefit) 7,212 494 (197) 5,704 13,455 19,159 ------------------- --------------------- ---------- Net income (loss) $13,987 $471 $17,056 $20,284 $37,340 =================== ===================== ========== Segment assets $1,378,893 $45,794 $827,728 $5,707 $633,166 $2,891,288 $169,477 $3,060,765 Expenditures for property and equipment (2) $1,267 $-- $3,257 $4,524 $6,030 $10,554
(1) For insurance segments amortization expense includes goodwill amortization, amortization of deferred policy acquisition costs and cost of business acquired, and depreciation of buildings and equipment. For the broadcasting segment amortization expense includes the amortization of intangibles related to television operations and depreciation of buildings and equipment. (2) Fixed assets are not allocated to segments that are not separate companies. (3) Special charges of $17.5 million after tax were recognized in 1998 and $26.9 million after tax were recognized in 1996 and are included in the adjustments column. 72 36 19. COMPREHENSIVE INCOME In 1998, the Company adopted Statement of Financial Accounting Standards No. 130 (SFAS 130) "Reporting Comprehensive Income," which required the Company to reclassify, for financial reporting purposes only, certain amounts shown below which were previously included as separate components in Shareholders' Equity, and are now included in Accumulated other comprehensive income on the Consolidated Balance Sheets. After making these balance sheet reclassifications, the following amounts were included in accumulated other comprehensive income at December 31, 1998 and December 31, 1997 (in 000's): 1998 1997 - -------------------------------------------------------------------------------- Accumulated Other Comprehensive Income Item Unrealized appreciation on available for sale fixed maturity and equity securities $26,749 $61,515 Foreign currency translation --- 335 - -------------------------------------------------------------------------------- Total $26,749 $61,850 - -------------------------------------------------------------------------------- The components of other comprehensive income (loss) and the related tax effects, for the years 1998, 1997, and 1996 are as follows (in 000's): Amount Income Tax Amount Before (Expense) Net of 1998 Taxes Benefit Taxes - -------------------------------------------------------------------------------- Unrealized gains on available for sale securities $45,179 $(15,812) $29,367 Less: reclassification adjustment for gains realized in net income (4,028) 1,410 (2,618) - -------------------------------------------------------------------------------- Net unrealized gains $41,151 $(14,402) $26,749 - -------------------------------------------------------------------------------- Total comprehensive income $41,151 $(14,402) $26,749 - -------------------------------------------------------------------------------- Amount Income Tax Amount Before (Expense) Net of 1997 Taxes Benefit Taxes - -------------------------------------------------------------------------------- Unrealized gains on available for sale securities $101,617 $(36,537) $65,080 Less: reclassification adjustment for gains realized in net income (5,484) 1,919 (3,565) - -------------------------------------------------------------------------------- Net unrealized gains $96,133 $(34,618) $61,515 Foreign currency translation 515 (180) 335 - -------------------------------------------------------------------------------- Total comprehensive income $96,648 $(34,798) $61,850 - -------------------------------------------------------------------------------- Amount Income Tax Amount Before (Expense) Net of 1996 Taxes Benefit Taxes - -------------------------------------------------------------------------------- Unrealized gains on available for sale securities $72,607 $(26,149) $46,458 Less: reclassification adjustment for gains realized in net income (10,357) 3,625 (6,732) - -------------------------------------------------------------------------------- Net unrealized gains $62,250 $(22,524) $39,726 Foreign currency translation (314) 110 (204) - -------------------------------------------------------------------------------- Total comprehensive income $61,936 $(22,414) $39,522 - -------------------------------------------------------------------------------- 73 37 REPORT OF INDEPENDENT AUDITORS TO THE BOARD OF DIRECTORS AND SHAREHOLDERS THE LIBERTY CORPORATION We have audited the accompanying consolidated balance sheets of The Liberty Corporation and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1998. 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Liberty Corporation and subsidiaries at December 31, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Greenville, South Carolina February 9, 1999 74 EX-21 4 LIST OF SUBSIDIARIES 1 Exhibit 21 THE LIBERTY CORPORATION AND SUBSIDIARIES LIST OF SUBSIDIARIES DECEMBER 31, 1998
Jurisdiction of Percentage of Voting Stock Incorporation Owned by Immediate Parent ----------------------------- ----------------------------- A. The Liberty Corporation S.C. B. Liberty Life Insurance Company S.C. 100 C. Park Avenue Associates, Inc. S.C. 100 C. Exchange Place Corporation N.C. 100 C. Greensboro Holdings, Inc. S.C. 100 C. State National Fire Insurance Company Louisiana 100 C. State National Title Guaranty Company Louisiana 100 C. State National Mortgage Corporation Louisiana 100 B. Liberty Insurance Services Corporation S.C. 100 B. Cosmos Broadcasting Corporation S C. 100 C. CableVantage Inc. S.C. 100 D. Special Services Corporation S.C. 100 D. Hampton Insurance Agency, Inc. S.C. 100 D. The Liberty Marketing Corporation S.C. 100 D. Bent Tree Corporation Georgia 100 D. TLC Business Ventures, Inc. S.C. 100 D. LC Insurance Limited Bermuda 100 D. Liberty Capital Advisors, Inc. S.C. 100 D. Liberty Properties Group, Inc. S.C. 100 D. LPG Development Corporation S.C. 100 D. SouthChase Development Corporation S.C. 100 D. LIBCO of Florida, Inc. Florida 100 D. LPC of S. C., Inc. S.C. 100 D. Johnson/Liberty LLC S.C. 22 D. Commerce Center of Greenville, Inc. S.C. 100
A. Separate condensed financial statements filed as a schedule to the consolidated financial statements. Also included in the consolidated financial statements. B. Separate financial statements not filed. Included in the consolidated financial statements. C. Consolidated with the applicable parent. D. Minor subsidiaries. Included in the condensed financial statements of The Liberty Corporation. 75 EX-23 5 CONSENT OF INDEPENDENT AUDITORS 1 Exhibit 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference and the inclusion herein in this Annual Report (Form 10-K) of The Liberty Corporation of our report dated February 9, 1999, included in the 1998 Annual Report to Shareholders of The Liberty Corporation and included in Form 10-K in Exhibit 13. Our audits also included the financial statement schedules of The Liberty Corporation listed in Item 14(a). These schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-34314) pertaining to the 1983 Performance Incentive Compensation Program, in the Registration Statement (Form S-8 No. 33-34816) pertaining to The Liberty Corporation and Adopting Related Employers' 401(k) Thrift Plan, in the Registration Statement (Form S-8 No. 33-34814) pertaining to The Cosmos Broadcasting Corporation Profit Sharing Retirement Plan and Trust, in the Registration Statement (Form S-8 No. 33-34815) pertaining to The Liberty Corporation Profit Sharing Plan and Trust, in the Registration Statement (Form S-8 No. 333-22591) pertaining to The Cosmos Broadcasting Corporation Retirement and Savings Plan, in the Registration Statement (Form S-8 No. 333-22285) pertaining to The Liberty Corporation Retirement and Savings Plan, and in the Registration Statement (Form S-8 No. 333-30151) pertaining to The Performance Incentive Compensation Program of our report dated February 9, 1999 with respect to the consolidated financial statements and schedules of The Liberty Corporation included and incorporated by reference in the annual report on Form 10-K for the year ended December 31, 1998. /s/ Ernst & Young LLP Greenville, South Carolina March 25, 1999 76 EX-27 6 FINANCIAL DATA SCHEDULE
7 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 935,178 0 0 63,658 215,549 34,788 1,361,332 16,633 275,602 284,366 2,410,683 1,279,929 0 30,247 24,355 285,000 20,967 20,999 70,565 437,943 2,410,683 284,931 119,813 1,842 177,678 154,661 51,018 167,647 49,101 31,340 17,761 0 0 0 17,761 .80 .80 0 0 0 0 0 0 0
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