-----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, NcBl7DVGC7WtsibznQjzipS7pljEbWev/n+p6Ygu69MCg7MHx3ktBdRIyv9dA9BZ 18ymgVWDmkn2YrUhzXGAHA== 0000950144-98-003648.txt : 19980331 0000950144-98-003648.hdr.sgml : 19980331 ACCESSION NUMBER: 0000950144-98-003648 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: CSX SROS: NYSE SROS: PHLX 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: 98579130 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 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K (Mark One) [XX] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 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 Title of Each Class on 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 16, 1998: Common Stock, No Par Value $ 966,457,052 -------------------------- ------------- The number of shares outstanding of each of Registrant's classes of common stock as of March 16, 1998: Common Stock, No Par Value 18,608,078 -------------------------- ---------- DOCUMENTS INCORPORATED BY REFERENCE Portions of The Liberty Corporation Annual Report to Shareholders for the year ended December 31, 1997 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 5, 1998 are incorporated into Part III, Items 10, 11, 12, and 13 by reference. This report is comprised of pages 1 through 65. The exhibit index is on page 27. 2 PART I ITEM 1. BUSINESS GENERAL The Registrant, The Liberty Corporation ("Liberty" or "the Company") is a holding company with subsidiaries operating in the life insurance, policy administration, and television broadcasting industries. The Company's primary insurance subsidiaries are Liberty Life Insurance Company ("Liberty Life") and Pierce National Life Insurance Company ("Pierce National"). In November, 1997, the Company announced that it had agreed to sell Pierce National to Fortis, Inc.. Under the agreement Fortis will acquire Pierce for $180 million cash, subject to certain adjustments. The sale is expected to close in April 1998. In addition to Liberty Life and Pierce National, Liberty Insurance Services Corporation ("Liberty Insurance Services") is one of the nation's largest life insurance third-party administrators, providing administrative services for over 4.5 million policies. Other subsidiaries of the Company provide investment advisory services to the Company's insurance subsidiaries and unaffiliated insurance companies, and property development and management services to the Company. The Company's television broadcasting subsidiary, Cosmos Broadcasting Corporation ("Cosmos"), currently owns and operates eight network affiliated television stations. Additional information concerning Liberty's subsidiaries and divisions is included in "Management's Discussion and Analysis" in the Company's 1997 Annual Report to Shareholders, which is incorporated herein by reference. STRATEGY; RECENT DEVELOPMENTS On March 11, 1998, the Company completed a tender offer whereby it repurchased 2.4 million shares of its outstanding common stock for $52.00 per share. The tender offer was funded through the Company's credit facility. As previously mentioned, during November 1997, the Company announced an agreement to sell Pierce National for $180 million. The Company completed an in-depth analysis of the Pierce National business and determined that it would not be able to meet the Company's profit and sales objectives, and as a result the decision was made to divest this business. The proceeds from the sale will be used to repay debt under the Company's credit facility. The current estimate of the loss on the sale is between $14 million and $18 million. On December 31, 1997, Fortis purchased 2,660 newly issued shares of Pierce common stock for $37.2 million. Subsequent to this stock purchase, Fortis maintained a twenty-one percent ownership interest in the common stock of Pierce as of December 31, 1997. 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. The Company's principal strategy is to grow internally and through selective acquisitions, while maintaining its emphasis on cost controls. The Company's operations are generally focused in niche markets where Liberty believes it has the products and expertise to serve the market better than its competitors. Prior to 1995, the Company had an aggressive acquisition policy focused on both its Agency and pre-need businesses. While the Company has not completed any insurance acquisitions since 1994, Liberty will continue to consider acquisitions that complement or fit with the Company's on-going marketing divisions and product lines. Management's philosophy regarding broadcasting acquisitions is to make selective acquisitions in local markets where it can be among the dominant television stations. On February 28, 1995, the Company completed the acquisition of WLOX-TV in Biloxi, Mississippi, bringing to eight the total number of television stations in Cosmos. The purchase price of $40.1 million was funded with a combination of redeemable preferred stock, cash and a note payable. WLOX is an ABC affiliate that carries strong local news and is the top station in its market. 2 3 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. For 1997, the largest percentages of its premium income were from South Carolina (25%), North Carolina (18%), Louisiana (9%) and Texas and California (each at 5%). The Company believes that Liberty Life is the largest provider of home service business in the Carolinas. Life insurance and annuity premiums contributed 72% of Liberty Life's total premiums in 1997, 77% in 1996, and 84% in 1995. Accident and health insurance premiums contributed the remainder. Liberty Life markets its insurance products through its Agency and Specialized Marketing divisions. At December 31, 1997, Liberty Life had approximately 470 employees in its home office in Greenville. AGENCY DIVISION. The Agency Division is Liberty Life's largest division, contributing 55% of Liberty Life's premiums in 1997. Agents supporting this division sell primarily individual life, including universal life and interest-sensitive whole life products, as well as health insurance. As of December 1997, the Company had approximately 1,370 agents, managers and support staff in this division operating out of 50 district offices. These agents periodically visit the insureds' homes and businesses to sell policies and collect premiums. In November 1997, Liberty completed the rollout of a hand-held, pen-based computer to its entire Agency sales force. This technology allows the agent to go through an interactive sales presentation with the prospective customer, provides access to policy rates, and interacts with the home office policy database to update customer records. Ultimately, this technology will also be used for application entry, among other things. This state-of-art technology is expected to greatly increase the efficiencies of Liberty's agent's in producing new policies. Liberty is de-emphasizing the home collection component of the agent's job by encouraging premium payment through electronic funds transfer or mail-in payment. 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. SPECIALIZED MARKETING DIVISION. The Specialized Marketing Division contributed 42% of Liberty Life's premiums in 1997. This division primarily sells decreasing term life, accident and disability insurance designed to extinguish the unpaid portion 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. The Company supports the marketing of these products through direct mail and phone solicitations. In addition to the products mentioned above, 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. Pierce National (doing business as FamilySide) provides life insurance products which pre-fund funeral services, referred to as pre-need policies. Pierce National, a stock life insurance company acquired in July 1992, is domiciled in California, but its principal executive and administrative offices are in Greenville, South Carolina. Pre-need policies consist primarily of ordinary life insurance policies for which the premiums are paid in a single payment at the outset or primarily over a three, five or ten-year period. Pierce National is currently licensed in forty-three states, the District of Columbia, and all of the Canadian provinces and territories. The largest percentages of premium income for 1997 came from Canada (17%), Mississippi (10%) and California (10%). As previously mentioned, the Company reached an agreement to sell Pierce National for $180 million. This sale is expected to close in April 1998. 3 4 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) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------ Liberty Life Home Service $135,506 $137,930 $138,714 Mortgage Protection 102,995 70,316 53,105 General Agency Marketing 4,349 4,881 5,966 Other 2,428 3,591 3,235 - ------------------------------------------------------------------------------------------------------ 245,278 216,718 201,020 Pierce National 105,414 104,653 130,350 - ------------------------------------------------------------------------------------------------------ Total $350,692 $321,371 $331,370 - ------------------------------------------------------------------------------------------------------
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 Specialized Marketing division is usually written without medical examination. Substantially all pre-need policies are written for amounts under $5,000, and no medical examination is required unless the applicant requests a preferred rate. REINSURANCE. The Company's insurance subsidiaries use reinsurance in two distinct ways: first, as a risk management tool in the normal course of business and second, in isolated strategic transactions to effectively buy or sell blocks of in force business. The Company has ceded $3.7 billion (18%) of its $20.8 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, 1997, 1996, and 1995 Liberty had ceded life insurance premiums of $25.6 million, $27.3 million, and $27.8 million, respectively. Accident and health premiums ceded made up the remainder of ceded premiums which were $8.6 million, $9.2 million, and $6.9 million for the years ended December 31, 1997, 1996 and 1995, 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. The maximum amount of life insurance Pierce National will retain on any life is $50,000. 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 and Pierce National also have coverage for catastrophic accidents. At December 31, 1997, Liberty Life and Pierce National had ceded, in the normal course of business, portions of their risks to a number of other insurance companies. 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, 1997 was $2.4 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 4 5 assets equal to the reserves reinsured, as determined under statutory accounting principles, be held in escrow for the benefit of this block of business. The Company uses assumption reinsurance to effectively acquire blocks of in force business by acting as the "reinsurer" for other insurance companies. For instance, the Company acquired the Kentucky Central and Estate Assurance blocks in this manner. OPERATIONS. The administrative functions of underwriting and issuing new policies, and the ongoing servicing and claims settlement of in force policies, are provided by Liberty Insurance Services at the home office in Greenville, South Carolina. The Company's strategy is to consolidate the administrative functions of its operations in order to have a unified service platform across the business units and improve operating leverage through productivity improvements. Liberty Insurance Services provides administrative support services for Liberty's approximately 2.5 million policies representing $20.8 billion of life insurance in force, of which $3.7 billion of insurance in force has been ceded to other companies. Approximately 155,000 policies representing $3.5 billion of life insurance in force were issued during 1997. The Company intends to continue its focus on reducing the unit costs of administrative services by increasing the volume of business through acquisitions of blocks of business similar in nature to its existing business, by internal growth in those businesses, and by investing in technology to further improve efficiency in its operations. LIBERTY INSURANCE SERVICES. Liberty Insurance Services provides a wide range of home office support services to the Company's insurance subsidiaries, as well as for unaffiliated life and health insurance companies on a fee basis. These services include underwriting, issuance of policies, accounting, customer service and claims processing and adjudication and can be tailored to support the special features of insurance products offered by other companies that desire these services. In marketing to unaffiliated life and health insurance companies the Company's strategy is to target (i) insurance companies that have closed blocks of business that are expensive to administer, (ii) insurance companies that have start-up or new product lines requiring new support levels, (iii) small to midsize insurance companies that cannot justify large investments in home office technology, and (iv) insurance companies acquired by financial investors lacking experience in providing home office support. Liberty Insurance Services believes that its economies of scale will permit its customers to reduce their home office support costs and focus resources on marketing their insurance products. In connection with the sale of Pierce National Life, Liberty Insurance Services negotiated a five-year, $51 million servicing contract whereby it will administer all of the Fortis preneed business, including the Pierce business being sold. With the addition of this contract, Liberty Insurance Services has approximately 4.5 million policies under management. INSURANCE COMPETITION AND RATINGS The Company's insurance subsidiaries compete with numerous United States and Canadian 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 the Company's insurance subsidiaries for sales of life insurance products, and the insurance subsidiaries compete 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. Liberty emphasizes to its agents the importance of taking advantage of these contacts to establish personal relationships which the Company believes add stability to its Agency business. The Company currently believes that it ranks second nationally in mortgage protection insurance (provided through its Specialized Marketing division) with an estimated 21% market share. Approximately 85% of the mortgage protection market share is believed to be held by four companies and approximately 32% 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). In the Best Week published December 23, 1996, Liberty Life was rated "A" (Excellent). In the Best Week published November 24, 1997, Pierce National's rating of "B++" (Very Good) was placed under review as a result of the announcement of the sale of Pierce to Fortis. Liberty Life also has a current 5 6 claims-paying rating of "AA-" (Very High) by Duff & Phelps Credit Rating Co. 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 or Pierce National's rating be downgraded, sales of their products and persistency of the existing in-force 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 or Pierce National. INSURANCE REGULATION. Like other insurance companies, the Company's insurance subsidiaries are 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 (including the Canadian provinces where Pierce National is also licensed) 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 the Company's insurance subsidiaries' surplus nor the insurance subsidiaries' 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 the Company's insurance subsidiaries significantly exceed the minimum capital requirements at December 31, 1997. Another NAIC Model Act limits dividends that may be paid in any calendar year without regulatory approval to the lesser of (i) 10% of the insurer's statutory surplus at the prior year-end, or (ii) the statutory net gain from operations of the 6 7 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 1998 by Liberty Life without approval from the South Carolina Insurance Commissioner is $36.4 million. Actual dividends and distributions paid by Liberty Life were $21.0 million in 1997, $21.0 million in 1996, and $20.0 million in 1995. 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 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. The current California statutes applicable to Pierce National limit dividend payments to the Company to the greater of 10% of statutory surplus or the prior year's net gain from operations (excluding realized capital gains and losses). Pierce National paid dividends to Liberty in 1997 of $40.3 million, of which $10.3 million represented an allowable dividend under the California statutes. The balance of $30 million represented an extraordinary dividend that was approved by the California Insurance Commissioner. Pierce did not pay any dividends to Liberty in 1996 and paid $2.7 million in dividends in 1995. 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. Examinations of Liberty Life and Pierce National for the three years ended December 31, 1994 have been completed and the reports issued did not indicate any significant areas of concern. The Office of the Superintendent of Financial Institutions - Canada, and the Canadian provinces regulate and supervise the Canadian operations of Pierce National in the same manner as the NAIC and the states. Separate financial statements are required to meet the Canadian regulatory requirements and a separate examination is conducted by the Canadian regulatory agencies. 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 and Pierce National are 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. 7 8 BROADCASTING OPERATIONS Cosmos currently owns and operates the following television stations, seven of which were ranked No. 1 in their market by the November 1997 Nielsen ratings (sign-on to sign-off).
Station Primary Market Affiliation VHF/UHF ------- -------------- ----------- ------- WAVE-TV Louisville, Kentucky NBC VHF WIS-TV Columbia, South Carolina NBC VHF WSFA-TV Montgomery, Alabama NBC VHF KPLC-TV Lake Charles, Louisiana NBC VHF WTOL-TV Toledo, Ohio CBS VHF KAIT-TV Jonesboro, Arkansas ABC VHF WFIE-TV Evansville, Indiana NBC UHF WLOX-TV Biloxi, Mississippi ABC VHF
Cosmos has 830 full-time employees and 105 part-time employees, including its cable sales operations in Aiken, SC, Columbia, SC, Florence, SC, Greenwood, SC, Horry County, SC, Sumter, SC, Montgomery, AL and Frankfort, KY. NETWORK AFFILIATES. Each Cosmos station is affiliated with one of the major networks - NBC, ABC, CBS. The affiliation contracts provide that the network will offer to the affiliated station a variety of network programs, both sponsored and unsponsored, for which the station has the right of first refusal against any other television station located in its community. The station has the right to reject or accept the programs offered by the network and also has the right to broadcast programs either produced by the station or acquired from other sources. The major networks provide their affiliated stations with programming and sell the programs, or commercial time during the programs, to national advertisers. The major networks typically provide programming for approximately 90 hours of the approximately 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 approximately thirty years. 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, 1997:
Year ended December 31 1997 1996 1995 - ------------------------------------------------------------------------------------------------------- Local and Regional Advertising 62% 60% 60% National Spot Advertising 29 26 28 Network Compensation 8 8 9 Political Advertising 1 6 3
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 paid by the network to its affiliated stations for broadcasting network programs that include advertising sold by the network to agencies representing national advertisers. Political advertising is generated by national and local elections, which is by definition very cyclical. 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 8 9 those homes is based on the AC 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. The payments by a network to an affiliated station are largely determined by the total homes delivered and is based on the local market rating strength of the affiliate and the audience it helps bring to the network programs. 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. 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 local advertisers. Cosmos' commitment to local news programming, combined with syndicated programming, are important elements in maintaining Cosmos' current market positions. Another source of competition is 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. Cable television competes for the station's viewing audience and, on a more modest scale, its advertising. Federal law now requires that cable operators negotiate with television operators for the right to carry a station's signal (programs) on cable systems. Cosmos recently used this "retransmission consent" negotiation to forge long-term partnerships with cable operators with the purpose of developing secondary revenue streams from programs and services specifically produced for cable. In 1994 Cosmos formed CableVantage Inc., a marketing company designed to assist local cable operators in the sale of commercial time available in cable network programs. Subscription Television, an over-the-air pay television service, and Multipoint Distribution Service, a microwave- distributed pay television service, also compete for television audiences. In addition, licenses are now being granted for Multichannel Multipoint Distribution Service. None of these services has yet significantly fractionalized the audiences of commercial television stations. Two other television broadcast services are providing consumers with additional technical delivery/programming opportunities. Low power television, sometimes referred to as "neighborhood TV," is authorized to operate in a limited coverage area. Authorizations are being granted by the Federal Communication Commission ("FCC") on a lottery basis. Direct Broadcast Satellite, which transmits television signals from satellite transponders to parabolic home antennae, is now being actively marketed. DIGITAL TELEVISION. Digital television is expected to become 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 (i.) much of the new technology and hardware is experimental and untested, and many operators may be inclined to postpone the conversions as long as possible to allow refinement of this new technology, and (ii.) the television sets required to view the digital signal are expected to initially be cost prohibitive for most viewers to purchase. Liberty is currently assessing the impact of the conversion to digital television, and plans, to the extent possible, to integrate as much of its 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 9 10 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 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. The loosening of the ownership provisions, as well as the other provisions included in the 1996 Act, are not expected to have any immediate 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 CATV systems, application and reporting procedures and other areas affecting the business and operations of television stations. 10 11 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 58 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 January, 1979 - February, 1988; September, 1989 - December 31, 1997 Chairman of the Board of Cosmos - May , 1989 - February, 1992 JENNIE M. JOHNSON, Age 50 President of Pierce National Life Insurance Company since August, 1995 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 40 Corporate Controller of Liberty since May, 1997 Assistant Controller of Liberty from September, 1994 to May, 1997 Treasurer of Liberty Life since May, 1997 JAMES M. KEELOR, Age 55 President of Cosmos since February, 1992 Vice President, Operations, of Cosmos from December, 1989 to February, 1992 RONALD F. LOEWEN, Age 50 President of Liberty Life since January, 1997 General Manager of WIS-TV from April, 1990 to December, 1996 MARTHA G. WILLIAMS, Age 55 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 11 12 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 Selected Financial Data on page 27 of The Liberty Corporation Annual Report to Shareholders and is filed as Exhibit 13 on page 30 of this report and is incorporated in this Item 1 by reference. ITEM 2. PROPERTIES MAIN OFFICES. The main office of the Company, Liberty Life, Pierce National, 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; and Biloxi, Mississippi. 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. In December 1995, a lawsuit was filed against the Company alleging breach of contract. The lawsuit relates to a transaction in which the Company was unsuccessful in acquiring certain entities partially owned by the plaintiff. Management, after consultation with legal counsel, believes the lawsuit is without merit and intends to contest the suit vigorously. Other than the suits 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. 12 13 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS None 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 28 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 27 of The Liberty Corporation Annual Report to Shareholders and is filed as Exhibit 13 on page 29 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 28-36 of The Liberty Corporation Annual Report to Shareholders and is filed as Exhibit 13 on pages 30-39 of this report and is incorporated in this Item 7 by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION The Company's Consolidated Financial Statements and Report of Independent Auditors are contained on pages 6-26 of The Liberty Corporation Annual Report to Shareholders and is filed as Exhibit 13 on pages 40-61 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 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 5, 1998 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 11 and is incorporated in this Item 10 by reference. 13 14 ITEM 11. EXECUTIVE COMPENSATION Information concerning Executive Compensation and transactions is contained in The Liberty Corporation Proxy Statement for the May 5, 1998 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 5, 1998 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 5, 1998 Annual Meeting of Shareholders and is incorporated in this Item 13 by reference. 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, 1997, filed as Exhibit 13 to this report and incorporated in Item 8 by reference: Consolidated Balance Sheets - December 31, 1997 and 1996 Consolidated Statements of Income - For the three years ended December 31, 1997 Consolidated Statements of Cash Flows - For the three years ended December 31, 1997 Consolidated Statements of Shareholders' Equity - For the three years ended December 31, 1997 Notes to Consolidated Financial Statements - December 31, 1997 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. 14 15 (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 November 5, 1996 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 March 21, 1995 (filed as Exhibit 10 to the Registrant's Quarterly Report on Form 10Q for the quarter ended June 30, 1995 and incorporated herein by reference). 10.1 See Credit Agreement dated March 21, 1995 (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 22 of The Liberty Corporation Annual Report to Shareholders for the year ended December 31, 1997) filed on page 56 of this report. 13. Portions of The Liberty Corporation Annual Report to Shareholders for the year ended December 31, 1997: 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 Balance Sheets - December 31, 1997 and 1996 Consolidated Statements of Income - For the three years ended December 31, 1997 Consolidated Statements of Cash Flows - For the three years ended December 31, 1997 Consolidated Statements of Shareholders' Equity - For the three years ended December 31, 1997 Notes to Consolidated Financial Statements - December 31, 1997 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's10-K filed for the years ended December 31, 1983, 1985, 1989, 1994, 1995, 1996, and 1997. 27. Financial Data Schedule (Electronic Filing Only) 15 16 (B). REPORTS ON FORM 8-K The following reports on Form 8-K were filed after September 30, 1997: (1) A Current Report on Form 8-K dated November 13, 1997 was filed with respect to the agreement to sell Pierce National Life Insurance Company to Fortis, Inc. for $180 million cash. (2) A Current Report on Form 8-K dated February 2, 1998 was filed with respect to the news release announcing the fourth quarter 1997 and 1997 annual results of The Liberty Corporation (3) A Current Report on Form 8-K/A dated November 13, 1997 was filed with respect to the restatement and amendment of the Pro Forma Condensed Financial Statements of The Liberty Corporation and Subsidiaries originally filed with the Current Report on Form 8-K dated November 13, 1997 (C). EXHIBITS FILED WITH THIS REPORT 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 22 of The Liberty Corporation Annual Report to Shareholders for the year ended December 31, 1997). 13. Portions of The Liberty Corporation Annual Report to Shareholders for the year ended December 31, 1997: 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 Balance Sheets - December 31, 1997 and 1996 Consolidated Statements of Income - For the three years ended December 31, 1997 Consolidated Statements of Cash Flows - For the three years ended December 31, 1997 Consolidated Statements of Shareholders' Equity - For the three years ended December 31, 1997 Notes to Consolidated Financial Statements - December 31, 1997 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 year ended December 31, 1997. 27. Financial Data Schedule (Electronic Filing Only) 16 17 (D). CONSOLIDATED FINANCIAL STATEMENT SCHEDULES FILED WITH THIS REPORT I- Summary of Investments - December 31, 1997 II- Condensed Financial Statements of The Liberty Corporation (Parent Company) December 31, 1997 and 1996 III- Supplementary Insurance Information - For the Three Years Ended December 31, 1997 IV- Reinsurance - For the Three Years Ended December 31, 1997 V- Valuation and Qualifying Accounts and Reserves - For the Three Years Ended December 31, 1997 17 18 Schedule I THE LIBERTY CORPORATION AND SUBSIDIARIES SUMMARY OF INVESTMENTS DECEMBER 31, 1997 (In 000's)
Amount at Which Shown on Type of Investment Cost Value Balance Sheet - -------------------------------------------------------------------------- --------- --------------- Fixed maturity securities, available for sale Bonds: United States Government and government agencies and authorities $ 393,459 $ 414,767 $ 414,767 States, municipalities, and political subdivisions --- --- --- Foreign governments 7,537 7,563 7,563 Foreign corporate and other 104,607 112,259 112,259 Public utilities 138,977 151,819 151,819 Convertibles and bonds with warrants attached --- --- --- All other corporate bonds 903,406 946,218 946,218 Redeemable preferred stocks 39,601 41,262 41,262 ---------- ---------- ---------- Total 1,587,587 1,673,888 1,673,888 ---------- ========== ---------- Equity securities, available for sale Common stocks: Public utilities --- --- Banks, trusts and insurance companies $ 3,289 $ 8,997 $ 8,997 Industrial, miscellaneous, and all other 42,952 54,443 54,443 Nonredeemable preferred stocks 9,751 11,128 11,128 ---------- ---------- ---------- Total 55,992 $ 74,568 74,568 ---------- ========== ---------- Mortgage loans on real estate 244,821 244,821 Investment real estate 49,169 49,169 Policy loans 100,322 100,322 Other long-term investments 18,459 18,459 Short-term investments 250 250 ---------- ---------- Total investments $2,056,600 $2,161,477 ========== ==========
18 19 Schedule II THE LIBERTY CORPORATION (PARENT COMPANY) CONDENSED BALANCE SHEETS DECEMBER 31, 1997 and 1996 (In $000's, except share data)
ASSETS 1997 1996 ------ ----------- ---------- Cash $ 5,015 $ 1,450 Fixed maturity securities 36,045 598 Equity securities 30,033 2 Loans, notes and other receivables 10,372 7,890 Investment properties, at cost less accumulated depreciation of $1,319 in 1997 and $10,118 in 1996 23,955 79,941 Other long-term investments 6,167 6,139 Buildings and equipment, at cost less accumulated depreciation of $13,868 in 1997 and $11,919 in 1996 18,077 19,066 Investment in affiliated companies* 683,472 657,194 Intercompany debt and advances* 94,173 96,921 Income taxes recoverable 6,360 10,823 Deferred income tax benefits (liabilities) (5,744) 1,026 Other assets 7,908 8,973 ----------- ---------- Total Assets $ 915,833 $ 890,023 =========== ========== LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY ---------------------------------------------------------------- Liabilities: Notes, mortgages and other debt $ 189,214 $ 243,221 Accounts payable and accrued expenses 13,830 16,826 Other liabilities 605 221 ----------- ---------- Total Liabilities 203,649 260,268 Redeemable Preferred Stock: 1994-A Series, $35.00 redemption value, 504,168 and 668,207 shares issued and outstanding in 1997 and 1996, respectively 17,646 23,387 1994-B Series, $37.50 redemption value, 525,948 and 592,334 shares issued and outstanding in 1997 and 1996, respectively 19,723 22,212 ----------- ---------- Total Redeemable Preferred Stock 37,369 45,599 Shareholders' Equity: Common stock Authorized - 50,000,000 shares, no par value Issued and outstanding - 20,712,686 in 1997 and 20,214,738 in 1996 182,994 163,443 Convertible Preferred Stock, 1995-A Series, 599,985 shares issued and outstanding 20,999 20,999 Unearned stock compensation (10,872) (7,168) Unrealized appreciation on fixed maturity securities available for sale and equity securities of subsidiaries 61,515 39,726 Cumulative foreign currency translation adjustment 335 (204) Retained earnings 419,844 367,360 ----------- ---------- Total Shareholders' Equity 674,815 584,156 ----------- ---------- Total Liabilities, Redeemable Preferred Stock and Shareholders' Equity $ 915,833 $ 890,023 =========== ==========
*Eliminated in consolidation. See notes to condensed financial statements. 19 20 Schedule II THE LIBERTY CORPORATION (PARENT COMPANY) CONDENSED STATEMENTS OF INCOME FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (In $000's)
1997 1996 1995 ---------- ----------- ----------- REVENUES Dividends from subsidiaries* $ 74,814 $ 33,250 $ 45,331 Interest-unaffiliated 561 676 1,151 Intercompany interest* 8,157 8,519 8,303 Realized investment gains (losses) 5,504 (5,407) (3,195) Other 18,318 27,123 30,059 -------- -------- -------- Total Revenues 107,354 64,161 81,649 EXPENSES Salaries and wages 17,507 18,240 9,803 Interest-unaffiliated 13,021 15,007 14,867 Intercompany interest* 2,193 2,471 4,072 Taxes and licenses 2,069 2,250 1,508 Depreciation and amortization 7,373 8,645 5,275 Other 6,298 10,621 20,874 -------- -------- -------- Total Expenses 48,461 57,234 56,399 Income before income taxes 58,893 6,927 25,250 Income tax benefits (5,746) (9,786) (7,359) -------- -------- -------- Income before earnings of subsidiaries 64,639 16,713 32,609 Earnings of subsidiaries net of dividends paid to parent* 7,385 21,230 27,928 -------- -------- -------- NET INCOME $ 72,024** $ 37,943*** $ 60,537*** ======== ======== ========
* 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 $603 and $1,184 in 1996 and 1995, respectively, due to gains deferred on a consolidated basis until completion of the earnings process. See notes to condensed financial statements. 20 21 Schedule II THE LIBERTY CORPORATION (PARENT COMPANY) CONDENSED STATEMENTS OF CASH FLOWS FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (In $000's)
1997 1996 1995 ----------- ----------- ----------- OPERATING ACTIVITIES Net income $ 72,024 $ 37,943 $ 60,537 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 7,373 8,645 5,275 Provision for deferred income taxes 1,556 (1,143) 2,740 Earnings from subsidiary operations, net of dividends paid to parent (7,385) (21,230) (27,928) Non-cash dividends paid to parent (39,370) --- --- Gain on disposal of assets (2,011) (3,172) (3,231) Realized investment (gains) losses (5,504) 5,407 3,195 Change in operating assets and liabilities: Decrease (increase) in intercompany debt and advances* 2,748 (79) (27,434) (Increase) decrease in accounts and notes receivable (2,482) 2,063 (1,209) (Decrease) increase in accounts payable and accrued expenses (2,996) 5,189 2,478 Decrease (increase) in other assets 1,065 892 (1,250) Increase (decrease) in other liabilities, and accrued income taxes 4,847 1,164 (5,927) Other 53 (2,083) 1,144 ----------- ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 29,918 33,596 8,390 INVESTING ACTIVITIES Reduction in investment in subsidiaries* --- 4,048 Investment securities sold 349 Purchase of investment properties (7,563) (22,556) (34,177) Sale of investment properties 49,601 13,982 31,997 Net cash paid on purchase of broadcasting business --- --- (5,638) Other 923 1,270 (9,264) ----------- ----------- ----------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 43,310 (7,304) (13,034) FINANCING ACTIVITIES Proceeds from borrowings 2,505,000 2,957,704 1,901,001 Principal payments on debt (2,559,007) (2,966,087) (1,888,820) Dividends paid (19,540) (18,366) (16,814) Stock issued for employee benefit and performance incentive compensation programs 3,884 1,441 2,908 ----------- ----------- ----------- NET CASH USED IN FINANCING ACTIVITIES (69,663) (25,308) (1,725) INCREASE (DECREASE) IN CASH 3,565 984 (6,369) Cash at beginning of year 1,450 466 6,835 ----------- ----------- ----------- CASH AT END OF YEAR $ 5,015 $ 1,450 $ 466 =========== =========== ===========
*Eliminated in consolidation. See notes to condensed financial statements. 21 22 Schedule II THE LIBERTY CORPORATION (PARENT COMPANY) NOTES TO CONDENSED FINANCIAL STATEMENTS DECEMBER 31, 1997 1. NOTES, MORTGAGES AND OTHER DEBT The general debt obligations at December 31, 1997, are as follows:
Average (In 000's) Interest Rate Amount --------- ------------- --------- Notes due to banks 6.2% $188,000 Mortgage loans on investment property 8.0 1,214 -------- $189,214 ========
On March 21, 1995, the Parent Company completed the restructuring of its $325 million revolving credit facility into a new $375 million, multi-tranche credit facility which will mature on various dates beginning in March 1999. Borrowings under the new facility were used to refinance indebtedness under the $325 million facility, as well as to provide funds to meet working capital requirements. During 1997 the Company terminated the convertible loan commitment and reduced the amount available under the revolving facility by $50 million. See Note 5 of The Liberty Corporation and Subsidiaries Consolidated Financial Statements provides additional information as to this agreement. The maturities of the general debt obligations at December 31, 1997 are as follows:
(In 000's) Amount ---------- -------- 1998 $41,214 1999 148,000 2000 --- 2001 --- 2002 --- Thereafter --- -------- $189,214 ========
2. COMMITMENTS AND CONTINGENT LIABILITIES The Parent Company has guaranteed a $7 million letter of credit for an unaffiliated marketing company. As of December 31, 1997, $20 thousand was outstanding under the letter of credit. In connection with the sale of the Company's business rental property and business park land developments during May, 1997, the Company has guaranteed approximately $37 million of debt of the Purchaser of the properties. 3. DIVIDENDS TO PARENT COMPANY During 1997, the Parent Company received dividends from its subsidiaries of approximately $74.8 million. Of this total, approximately $39.4 million was in the form of securities that were transferred to the Parent Company. 4. RETAINED EARNINGS As of December 31, 1997 and 1996, retained earnings of $419,844,000 and $367,360,000 respectively, in The Liberty Corporation (Parent Company) financial statements differs from The Liberty Corporation and Subsidiaries consolidated financial statements. The difference of $368,000 and $3,295,000 at December 31, 1997 and 1996, respectively, relates to the elimination of gains on intercompany transactions on a consolidated basis. 22 23 Schedule III THE LIBERTY CORPORATION AND SUBSIDIARIES SUPPLEMENTARY INSURANCE INFORMATION FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (In $000's)
Deferred Future Policy Other Policy Policy Cost of Benefits, Claims & Acquisition Business Losses, Claims Unearned Benefits Segment Costs Acquired and Loss Expenses Premiums Payable - ------------------------------------------------------------------------------------------------------------------------------------ December 31, 1997 - ----------------- Life/Health Insurance $275,615 $62,226 $1,886,722 $4,064 $65,145 December 31, 1996 - ------------------------------------------------------------------------------------------------------------------------------------ - ----------------- Life/Health Insurance $262,182 $70,764 $1,848,762 $4,411 $59,938 December 31, 1995 - ----------------- Life/Health Insurance $265,188 $86,925 $1,807,339 $4,078 $51,442
Amortization of Deferred Benefits Acquisition Accident & Net Claims, Losses Costs and Other Health Premium Investment & Settlement Cost of Business Operating Premiums Segment Revenue Income Benefits Acquired Expenses Written - ---------------------------------------------------------------------------------------------------------------------------- 1997 ---- Life/Health Insurance $350,692 $155,007 $227,927 $45,564 $146,206 $78,714 1996 ---- Life/Health Insurance $321,371 $150,413 $218,751 $73,967 $140,294 $50,523 1995 ---- Life/Health Insurance $331,370 $144,483 $236,774 $43,780 $122,400 $33,867
23 24 Schedule IV THE LIBERTY CORPORATION AND SUBSIDIARIES REINSURANCE FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (In $000's)
Percentage of Ceded to Amount Amount Gross Other Assumed From Net Assumed to Amount Companies Companies Amount Net ---------------------------------------------------------------------------- Year ended December 31, 1997 ---------------------------- 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 $ 297,632 $ 25,575 $ 315 $ 272,372 0.1% Accident and health 86,378 8,616 558 78,320 0.7% -------------------------------------------------------------- TOTAL $ 384,010 $ 34,191 $ 873 $ 350,692 ============================================================== Year ended December 31, 1996 ---------------------------- 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 $ 298,327 $ 27,293 $ 234 $ 271,268 0.1% Accident and health 58,333 9,205 975 50,103 1.9% -------------------------------------------------------------- TOTAL $ 356,660 $ 36,498 $ 1,209 $ 321,371 ============================================================== Year ended December 31, 1995 ---------------------------- Life insurance in force $ 21,334,019 $ 4,554,569 $ 17,578 $ 16,797,028 0.1% ============================================================== Insurance premiums and policy charges: Life, annuity and other considerations $ 325,571 $ 27,843 $ 169 $ 297,897 0.1% Accident and health 39,226 6,898 1,145 33,473 3.4% -------------------------------------------------------------- TOTAL $ 364,797 $ 34,741 $ 1,314 $ 331,370 ==============================================================
24 25 Schedule V THE LIBERTY CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (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, 1997 Accounts receivable - 227(b) reserve for bad debts $ 2,310 $ 429 $ --- $ 1,071(a) $ 1,441 --------- ----------- ------------ ------------- -------------- Notes and other loans receivable - discounts $ --- $ --- $ --- $ --- $ --- --------- ----------- ------------ ------------- -------------- Investment properties - valuation reserves $ --- $ --- $ --- $ --- $ --- --------- ----------- ------------ ------------- -------------- Year Ended December 31, 1996 Accounts receivable - 20(b) reserve for bad debts $ 1,975 $ 567 $ 101 $ 313(a) $ 2,310 --------- ----------- ------------ ------------- -------------- Notes and other loans receivable - discounts $ --- $ --- $ --- $ --- $ --- --------- ----------- ------------ ------------- -------------- Investment properties - valuation reserves $ --- $ --- $ --- $ --- $ --- --------- ----------- ------------ ------------- -------------- Year Ended December 31, 1995 Accounts receivable - 334(b) reserve for bad debts $ 1,493 $ 858 $ 48 $ 90(a) $ 1,975 --------- ----------- ------------ ------------- -------------- Notes and other loans receivable - discounts $ --- $ --- $ --- $ --- $ --- --------- ----------- ------------ ------------- -------------- Investment properties - valuation reserves $ --- $ --- $ --- $ --- $ --- --------- ----------- ------------ ------------- --------------
Notes: (a) Uncollectible accounts written off, net of recoveries. (b) Reversal of reserves no longer required. 25 26 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 30th day of March, 1998 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 30th day of March, 1998. By: /s/ Ken W. Jones *By: /s/ Buck Mickel ----------------- --------------- Ken W. Jones Buck Mickel Corporate Controller Director *By: /s/ Rufus C. Barkley, Jr. *By: /s/ John H. Mullin III ----------------------------- ---------------------- Rufus C. Barkley, Jr. John H. Mullin III Director Director *By: /s/ Edward E. Crutchfield *By: /s/ Benjamin F. Payton ------------------------- ---------------------- Edward E. Crutchfield Benjamin F. Payton Director Director *By: /s/ John R. Farmer *By: /s/ J. Thurston Roach ------------------ --------------------- John R. Farmer J. Thurston Roach Director Director By: /s/ Hayne Hipp *By: /s/ Eugene E. Stone, IV -------------- ----------------------- Hayne Hipp Eugene E. Stone, IV Director Director *By: /s/ W. W. Johnson *By: /s/ William B. Timmerman ----------------- ------------------------ W. W. Johnson William B. Timmerman Director Director *By: /s/ William O. McCoy *By: /s/ Martha G. Williams -------------------- ---------------------- William O. McCoy *Martha G. Williams, as Director Special Attorney in Fact
26 27 Annual Report on Form 10-K The Liberty Corporation December 31, 1997 Index to Exhibits
Exhibits Page Number ------------ ------------- 11. The Liberty Corporation and Subsidiaries Consolidated Earnings Per Share 56 Computation (incorporated herein by reference to Note 11 of the "Notes to Consolidated Financial Statements" on page 22 of The Liberty Corporation Annual Report to Shareholders for the year ended December 31, 1997). 13. Portions of The Liberty Corporation Annual Report to Shareholders for the year ended December 31, 1997: Market for the Registrant's Common Stock and Related Security Stockholder 28 Matters Selected Financial Data 29 Management's Discussion and Analysis of Financial Condition and Results of 30-39 Operations Financial Statements and Supplementary Information: Consolidated Balance Sheets - December 31, 1997 and 1996 40-41 Consolidated Statements of Income - For the three years ended December 31, 1997 42 Consolidated Statements of Cash Flows - For the three years ended December 31, 43 1997 Consolidated Shareholders' Equity - For the three years ended December 31, 1997 44 Notes to Consolidated Financial Statements - December 31, 1997 45-61 Report of Independent Auditors 62 21. The Liberty Corporation and Subsidiaries, List of Significant Subsidiaries 63 23. Consent of Independent Auditors 64 24. Powers of Attorney applicable for certain signatures of members of the Board of Directors in Registrant's 10-K filed for the year ended December 31, 1997. 65 27. Financial Data Schedule (for SEC use only).
27 EX-13 2 PORTIONS OF THE LIBERTY CORPORATION ANNUAL REPORT 1 EXHIBIT 13 STOCK DATA The Liberty Corporation's Common Stock is listed on the New York Stock Exchange. Its symbol is LC. As of December 31, 1997, 1,251 shareholders of record in 40 states, the District of Columbia, Canada and Australia held the 20,712,686 Common Stock shares outstanding. Quarterly high and low stock prices and dividends per share as reported by the Wall Street Journal were:
Quarterly Market Price Per Share Dividend Per High Low Share ---------------- ----------------- ---------------- 1997 - ------------------------------- Fourth Quarter 47 5/16 42 9/16 .20 Third Quarter 45 3/4 40 1/4 .20 Second Quarter 42 38 3/8 .20 First Quarter 43 3/8 37 3/8 .185 1996 - ------------------------------- Fourth Quarter 41 1/4 32 1/4 .185 Third Quarter 35 7/8 30 1/8 .185 Second Quarter 33 3/8 30 7/8 .185 First Quarter 36 33 .17 1995 - ------------------------------- Fourth Quarter 34 31 1/4 .17 Third Quarter 33 3/4 27 5/8 .17 Second Quarter 28 1/4 25 3/4 .17 First Quarter 27 1/2 24 3/4 .155
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 AGENTS - ------------------------------------------------------------------------------- Wachovia Bank, N.A. The Bank of New York Winston-Salem, North Carolina 101 Barclay Street 1-800-633-4236 New York, New York 10286 1-800-524-4458 Written shareholder correspondence and requests for transfer should be sent to: Wachovia Shareholder Services P.O. Box 8217 Boston, Massachusetts 02266-8217 For a Copy of the 10-K or other information, contact: The Liberty Corporation Shareholder Relations Box 789 Greenville, SC 29602 Telephone (864) 609-8256 Stock Exchange Listing: New York Stock Exchange Symbol: LC Annual Meeting The Liberty Corporation will hold its annual meeting on Tuesday, May 5, 1998, at 10:30 a.m. in The Liberty Corporation Headquarters, Greenville, South Carolina. All Shareholders are invited to attend. 28 2 SELECTED FINANCIAL DATA The Liberty Corporation and Subsidiaries December 31, 1997
(In 000's, except per share data) 1997 1996 1995 1994 1993 1992 - ----------------------------------------------------------------------------------------------------------------------------------- Revenues Insurance $ 509,093 $ 482,500 $ 486,980 $ 439,451 $ 384,132 $ 305,934 Broadcasting 137,898 137,336 119,529 97,381 87,984 89,989 Parent & Minor Subsidiaries 22,978 17,008 19,090 19,600 16,089 20,301 Adjustments & Eliminations (9,713) (17,747) (19,918) (16,071) (15,260) (13,468) - ----------------------------------------------------------------------------------------------------------------------------------- Total Revenues * $ 660,256 $ 619,097 $ 605,681 $ 540,361 $ 472,945 $ 402,756 - ----------------------------------------------------------------------------------------------------------------------------------- Income (Loss) Before Income Taxes & Cumulative Effect of Accounting Changes Insurance $ 89,183 $ 50,009 $ 83,483 $ 31,590 $ 71,518 $ 53,962 Broadcasting 33,866 33,739 27,127 21,701 16,180 16,859 Parent & Minor Subsidiaries (15,921) (28,686) (19,994) (14,423) (12,846) (13,690) Adjustments & Eliminations 4,449 1,437 (1,821) -- 2,472 4,768 - ----------------------------------------------------------------------------------------------------------------------------------- Consolidated Income Before Income Taxes & Cumulative Effect of Accounting Changes $ 111,577 $ 56,499 $ 88,795 $ 38,868 $ 77,324 $ 61,899 - ----------------------------------------------------------------------------------------------------------------------------------- Net Income (Loss) Insurance $ 60,473 $ 34,196 $ 56,582 $ 21,803 $ 33,459 $ 35,369 Broadcasting 21,726 20,284 16,590 12,919 12,217 10,262 Parent & Minor Subsidiaries (10,175) (18,117) (12,635) (8,544) (8,141) (8,153) Adjustments & Eliminations 2,927 977 (1,184) -- 1,612 3,407 - ----------------------------------------------------------------------------------------------------------------------------------- Net Income $ 74,951 $ 37,340 $ 59,353 $ 26,178 $ 39,147 $ 40,885 - ----------------------------------------------------------------------------------------------------------------------------------- Earnings Per Diluted Share ** $ 3.34 $ 1.66 $ 2.72 $ 1.26 $ 2.01 $ 2.51 - ----------------------------------------------------------------------------------------------------------------------------------- Change in Net Unrealized Investment Gains (Losses) $ 21,789 $ (18,260) $ 111,095 $ (58,286) $ 1,276 $ (78) - ----------------------------------------------------------------------------------------------------------------------------------- Dividends Per Common Share $ .785 $ 0.725 $ 0.665 $ 0.62 $ 0.56 $ 0.515 - ----------------------------------------------------------------------------------------------------------------------------------- Depreciation and Amortization Insurance $ 3,614 $ 3,815 $ 4,515 $ 5,125 $ 3,286 $ 3,424 Broadcasting 9,884 9,927 9,244 6,276 6,566 6,848 Parent & Minor Subsidiaries 7,372 8,645 5,275 4,618 3,670 4,628 - ----------------------------------------------------------------------------------------------------------------------------------- Total Depreciation and Amortization $ 20,870 $ 22,387 $ 19,034 $ 16,019 $ 13,522 $ 14,900 - ----------------------------------------------------------------------------------------------------------------------------------- Capital Expenditures Insurance $3,387 $ 4,391 $ 4,413 $ 2,270 $ 5,814 $ 3,618 Broadcasting 5,752 6,030 5,863 3,900 2,168 2,513 Parent & Minor Subsidiaries 999 470 3,012 3,446 7,483 698 - ----------------------------------------------------------------------------------------------------------------------------------- Total Capital Expenditures $ 10,138 $ 10,891 $ 13,288 $ 9,616 $ 15,465 $ 6,829 - ----------------------------------------------------------------------------------------------------------------------------------- Assets Insurance $ 2,905,726 $2,785,468 $2,769,619 $ 2,494,264 $ 2,057,126 $ 1,937,908 Broadcasting 167,948 169,477 168,672 98,705 101,982 110,849 Parent & Minor Subsidiaries 915,226 878,182 873,933 666,319 581,406 565,135 Adjustments & Eliminations (804,142) (772,362) (777,928) (592,024) (553,481) (539,014) - ----------------------------------------------------------------------------------------------------------------------------------- Total Assets $ 3,184,758 $3,060,765 $3,034,296 $ 2,667,264 $ 2,187,033 $ 2,074,878 - ----------------------------------------------------------------------------------------------------------------------------------- Notes, Mortgages and Other Debts $ 191,914 $ 247,861 $ 258,444 $ 231,647 $ 149,489 $ 176,632 - ----------------------------------------------------------------------------------------------------------------------------------- Redeemable Preferred Stock $ 37,369 $ 45,599 $ 45,667 $ 45,816 --- --- - ----------------------------------------------------------------------------------------------------------------------------------- Consolidated Shareholders' Equity $ 674,447 $ 580,861 $ 575,762 $ 395,589 $ 433,845 $ 389,188 - -----------------------------------------------------------------------------------------------------------------------------------
* See Note 16 to the Consolidated Financial Statements related to the 1995 acquisition. ** The earnings per share amounts prior to 1997 have been re-stated as required to comply with Statement of Financial Accounting Standards No. 128, "Earnings Per Share". See Note 11 to the Consolidated Financial Statements for further discussion of SFAS 128. 29 3 - ------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS - ------------------------------------------------------------------------------- The Liberty Corporation and Subsidiaries The Liberty Corporation is a holding company with operations in insurance and broadcasting. Liberty ("the Company") markets its insurance products through its two insurance subsidiaries, Liberty Life Insurance Company and Pierce National Life Insurance Company (doing business and marketing products under the brand name "FamilySide"). Additionally, Liberty is one of the nation's largest life insurance third-party administrators, providing administrative services for over 4.5 million policies through Liberty Insurance Services Corporation. The Company's broadcasting subsidiary, Cosmos Broadcasting, consists of eight network affiliated stations in the Southeast and Midwest. Five stations are affiliated with NBC, two with ABC, and one with CBS. SIGNIFICANT TRANSACTIONS On May 14, 1997, Liberty completed the sale of its business rental property and the majority of its business park land 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. Concurrent with the decision to sell its business rental property and business park land developments Liberty also de-emphasized its residential real estate operations. Future investments in residential real estate operations are expected to be limited to the amount necessary to complete on-going residential projects and the existing portfolio will be reduced as projects currently under development are sold. For financial reporting purposes all residential properties have been classified as held for disposal and are reported at the lower of cost or the fair market value less cost to sell. Liberty has recognized realized investment losses of approximately $6.6 million on its residential properties as a result of writing them down to net realizable value. The total net realized gain on the real estate transactions (including expenses associated with the sale and the residential write-downs) was approximately $1.2 million. On November 13, 1997, the Company announced that it had agreed to sell its wholly-owned subsidiary, Pierce National Life Insurance Company, to Fortis, Inc.. Under the agreement Fortis will acquire Pierce for $180 million cash, subject to certain adjustments, payable at closing. In connection with the sale of Pierce, the Company entered into a multi-year $51 million administrative services contract with Fortis, Inc. in which Liberty will provide back office administrative services for the pre-need insurance operations of Fortis. During December 1997, Fortis purchased newly issued shares of Pierce National for $37.2 million in cash, resulting in Fortis owning approximately 21% of the outstanding stock of Pierce at December 31, 1997. The company anticipates recognizing a loss on the sale of Pierce of approximately $14 million to $18 million. The sale is expected to close in the first quarter of 1998 pending final regulatory approvals. On February 10, 1998, the Company announced a tender offer whereby the Company planned to repurchase up to 2 million shares of its outstanding common stock pursuant to a "Dutch Auction" self-tender offer. The offer closed on March 11, 1998 and the Company repurchased 2.4 million shares of its common stock (including an additional 400,000 as a result of exercising its option to purchase an additional 2% of its outstanding common shares) for $52.00 per share under the offer. The stock purchase was funded from the Company's current credit facility. The combined effect of these transactions is expected to be slightly dilutive to earnings for 1998. SUMMARY OF CONSOLIDATED RESULTS OF OPERATIONS 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 a special charge of $26.9 million related principally to losses on unprofitable insurance products.
(In 000s) 1997 1996 1995 - ------------------------- ----------- ----------- ------------ Revenues $660,256 $619,097 $605,681 - ------------------------- ----------- ----------- ------------ Income before income taxes $111,577 $ 56,499 $ 88,795 Income taxes 36,626 19,159 29,442 - ------------------------- ----------- ----------- ------------ Net income $ 74,951 $ 37,340 $ 59,353 - ------------------------- ----------- ----------- ------------
30 4 Adjusting for the special charges of $26.9 million in 1996, net income was $64.3 million, resulting in an increase in 1997 of $10.7 million (17%) over the adjusted 1996 earnings. The increase for 1997 was primarily the result of earnings growth of $2.1 million in the insurance operations (which included approximately $9.3 million of realized losses associated with the sale of the commercial real estate owned by Liberty Life and certain residential writedowns as previously mentioned), $1.4 million in Cosmos Broadcasting, with the remainder primarily from investment gains in the parent company associated with the sale of the Company's commercial real estate. 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 wrote-off 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 for pre-need. All of the charges represented non-cash items, and had no material impact on the insurance companies' statutory financial condition. Consolidated net income for 1996 was $37.3 million ($64.3 million excluding the special charges) and compares with $59.4 million earned in 1995. The adjusted 1996 increase over 1995 was primarily the result of earnings growth of $3.7 million in Cosmos Broadcasting. Consolidated 1997 revenues of $660.3 million were up 7% compared with the $619.1 million reported in 1996. A $26.6 million increase in insurance operations and a $14.0 million increase in the parent company contributed to the increase. Liberty Life's revenue increase of $24.9 million drove the insurance operations and was due to significant premium growth in the Specialized Marketing Division. The FamilySide pre-need operations reported an increase of $2.3 million. The growth in the parent company was related to approximately $10.5 million of net gains realized on the sale of its business rental property and the majority of its business park land development projects. Consolidated 1996 revenues of $619.1 million were up $13.4 million (2%) over the $605.7 million reported in 1995. A $17.8 million increase in broadcasting operations was partially offset by a $4.5 million decline in insurance revenues. Contributing to the decline in insurance operations revenues was a decrease of $23.9 million in the FamilySide pre-need operations as actions taken in mid-1995 to increase the profitability of the product portfolio had a detrimental impact on 1996 revenues. The Company has adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128") which changes the requirements for earnings per share disclosure. The new standard requires presentation 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 income available to common shareholders by the weighted average number of common shares outstanding. Diluted earnings per share reflects the potential dilution that could occur if all securities or other contracts to issue common stock were exercised or converted into common stock. Further discussion of earnings per share is contained in Note 11 to the Consolidated Financial Statements. BUSINESS SEGMENTS - ------------------------------------------------------------------------------- Chart 1 Consolidated Income from Operations (in millions) Data 1997 $70.9 1996 $66.0 1995 $60.8 1994 $52.9 1993 $45.4 1992 $37.1
- ------------------------------------------------------------------------------- Liberty reports the results of its business operations in two segments: Insurance and Broadcasting. The insurance segment consists of Liberty's insurance operations, which markets life and health insurance through its three primary distribution systems, Agency, Specialized Marketing, and FamilySide. The broadcasting segment consists of Cosmos Broadcasting, which owns and operates eight network-affiliated television stations in the Southeast and Midwest. Activities of Corporate and other include financing and real estate operations. In order to make more meaningful comparisons, the segment data excludes the effect of realized investment gains and losses and special charges. 31 5 A reconciliation of the segment operations to net income is as follows: (In 000s) 1997 1996 1995 - ---------------------------------------------------------- Segment Operating Earnings: Insurance $62,947 $56,508 $54,789 Broadcasting 21,726 20,284 16,590 Corporate and other (13,764) (10,760) (10,546) - ---------------------------------------------------------- Total operating earnings 70,909 66,032 60,833 - ---------------------------------------------------------- Net realized investment gains (losses) 4,042 (1,748) (1,480) Special charges --- (26,944) --- - ---------------------------------------------------------- Net income $74,951 $37,340 $59,353 - ---------------------------------------------------------- Diluted Earnings per Share: Operating earnings $ 3.16 $ 2.98 $ 2.79 Net realized investment gains (losses) .18 (0.09) (0.07) Special charges --- (1.23) --- - ---------------------------------------------------------- Diluted Earnings per Share $ 3.34 $ 1.66 $ 2.72 - ----------------------------------------------------------
INSURANCE RESULTS OF OPERATIONS Operating earnings from insurance operations for 1997 were $62.9 million, an increase of 11% over the $56.5 million reported in 1996. Liberty Life's operating earnings increased $2.7 million to $44.8 million in 1997. Liberty Life's Specialized Marketing division continued to experience strong premium and profit growth primarily from one product line. This division reported a $32.7 million increase in premiums and a $4.9 million (110%) increase in operating earnings over 1996. The Specialized Marketing product line historically has contributed a relatively small portion of Liberty Life's earnings but over the past three years it has shown substantial growth. The Agency division of Liberty Life reported earnings that were level with the prior year. The FamilySide pre-need operating earnings of $18.0 million in 1997 represented a 29% increase compared with 1996. The increase resulted from a modest increase in premium revenues and a $3.9 million improvement in net investment income. - ------------------------------------------------------------------------------- Chart 2 Insurance Operations Income from Operations (in millions) Data 1997 $62.9 1996 $56.5 1995 $54.8 1994 $46.4 1993 $41.4 1992 $35.7
- ------------------------------------------------------------------------------- Operating earnings from insurance operations for 1996 were $56.5 million, an increase of 3% over the $54.8 million reported in 1995. Liberty Life's operating earnings increased $1.4 million to $42.0 million in 1996. Strong premium and profit growth from an accidental death product in Liberty Life's Specialized Marketing division was partially offset as the Agency division reported lower profits due primarily to higher deferred policy acquisition cost amortization resulting from higher lapse experience. The FamilySide pre-need operating earnings of $14.0 million in 1996 represented a 3% increase compared with 1995. The increase in 1996 earnings came notwithstanding a 20% decline in premiums in 1996 compared with 1995. Several actions taken in 1995 and 1996 to consolidate the operations and improve the profitability of several prior year acquisitions combined to have a negative impact on premium revenues in 1996. Insurance Operating Earnings (in 000s)
1997 1996 1995 - ------------------------------------------------------------------ Revenues (exclusive of realized investment gains and losses) Insurance premiums and policy charges $350,692 $321,671 $331,370 Net investment income 155,007 150,349 144,483 Service contract revenues 7,121 7,751 9,025 - ------------------------------------------------------------------ Total revenues 512,820 479,771 484,878 Policy benefits 227,927 218,901 236,774 Commissions 78,939 66,146 54,583 General insurance expenses 67,480 64,326 68,246 Amortization of deferred acquisition costs and cost of business 45,564 47,142 43,697 acquired Other --- 21 114 - ------------------------------------------------------------------ Income from operations before income taxes 92,910 83,235 81,464 Income taxes 29,964 26,727 26,675 - ------------------------------------------------------------------ Income from operations $ 62,946 $ 56,508 $ 54,789 - ------------------------------------------------------------------
32 6 Insurance Operations Revenues * (in millions) Data 1997 512.8 1996 479.8 1995 484.9 1994 451.3 1993 369.8 1992 306.7
* Excluding realized investment gains and losses Revenues from insurance operations increased 7% to $512.8 million in 1997. Liberty Life reported an increase in operating revenues of $29.2 million, almost all of which was generated in the Specialized Marketing division. FamilySide reported an increase in operating revenues of $4.4 million, primarily from higher investment income. For 1996 revenues from insurance operations were $479.8 million, a decrease of $5.1 million compared with 1995. Liberty Life had a $17.5 million increase on the strength of the growth in Specialized Marketing premiums. Offsetting the growth in Liberty Life was a $21.3 million reduction in FamilySide operating revenues as premiums declined for the reasons previously discussed. Pie Charts Insurance Premiums and Policy Charges 1997 Agency 39% FamilySide Pre-need 30% Specialized Marketing 29% Other 2% 1996 Agency 43% FamilySide Pre-need 32% Specialized Marketing 22% Other 3%
Policy benefits as a percent of premium were 65% in 1997, compared with 68% in 1996 and 71% in 1995. The decline in the ratio from 1996 to 1997 and from 1995 to 1996 was more a function of a change in the mix of business than an actual decline in mortality. The growth of Specialized Marketing premiums has the effect of reducing the overall benefit to premium ratio. The death benefit on the product that is providing the growth in Specialized Marketing is fully reinsured and there is no mortality cost associated with the product. The FamilySide products are primarily limited-pay or single pay products that have higher benefit to premium ratios than other Liberty products. Adjusting for the fluctuation in ratio caused by the change in mix of business, the Liberty Life benefit-to-premium ratio was 70% in 1997 compared with 68% in 1996, and the benefit-to-premium ratio for FamilySide was 93% and 91% for 1997 and 1996, respectively. Overall, the benefit-to-premium ratio for 1997 was within the expected levels, considering that claims are inherently variable and will fluctuate, particularly when measured over a short period of time. The commission-to-premium ratio was 23% in 1997, compared with 21% and 16% in 1996 and 1995, respectively. Similar to the benefit-to-premium ratio, the increase for 1997 over 1996 and for 1996 over 1995 was caused primarily by a change in the mix of business due to the growth of the Specialized Marketing accidental death product. The product is marketed by a third party marketing group. Payments to the group include the traditional commissions as well as compensation for certain general and administrative functions performed by the marketing group. For financial reporting purposes all payments to the marketing group are classified as commissions. General insurance expenses increased $3.2 million in 1997 from the amounts reported in 1996. The majority of this increase occurred in Liberty Life where the Company recognized charges to increase reserves on a self-insured health plan and charges related to a system conversion. Excluding Liberty Insurance Services expenses from all years, the expense-to-premium ratio was 17% for 1997, compared with 18% for 1996 and 1995. Amortization of deferred acquisition costs and cost of business acquired decreased $1.6 million from 1996. The amortization-to-premium ratio was 13% in 1997, compared with 15% and 13% in 1996 and 1995, respectively. The primary variable in the amortization expense from year to year is policy persistency, or lapses. Lapse experience in 1997 in Liberty Life's Agency division was slightly below the prior year. Lapse experience in 1996 was higher than the previous two years resulting in higher levels of amortization expense in 1996 compared with 1995. During 1996 FamilySide recorded a one-time adjustment related to a master file conversion that resulted in higher amortization expense, and accounted for the majority of the decrease in 1997 from the prior year. Specialized Marketing lapses are influenced by, among other factors, the level of mortgage loan refinancing activity. Mortgage loan interest rates have been gradually decreasing over the last couple of years and the trend has continued into early 1998. Assuming the low interest rates begin to result in a large number of refinancings, there is a risk that the Specialized Marketing lapses could increase as a result of the loans on which this protection is carried being refinanced; however, there has not been any marked increase in the level of Specialized Marketing lapses to date. 33 7 BROADCASTING RESULTS OF OPERATIONS
(In 000s) 1997 1996 1995 - ------------------------------------------------------------- Gross broadcasting revenues $137,898 $137,336 $119,529 Agency commissions 19,005 19,433 16,378 - ------------------------------------------------------------- Net broadcasting revenues 118,893 117,903 103,151 Broadcasting expenses 76,679 75,534 67,568 - ------------------------------------------------------------- Income from operations before interest and 42,214 42,369 35,583 taxes Interest expense 8,348 8,630 8,456 - ------------------------------------------------------------- Income from operations before income taxes 33,866 33,739 27,127 - ------------------------------------------------------------- Income taxes 12,140 13,455 10,537 - ------------------------------------------------------------- Income from operations $ 21,726 $ 20,284 $ 16,590 - -------------------------------------------------------------
Gross broadcasting revenues for 1997 were $137.9 million compared with $137.3 million in 1996. Although 1997 was expected to be a down 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 national and local advertising due to the continued strength in the economy, as well as revenue from its cable operations. Cable advertising sales, a business Cosmos entered in 1994, produced revenue of $7.5 million in 1997, compared with $6.3 million in 1996 and $5.1 million in 1995. Gross broadcasting revenues for 1996 were $137.3 million, an increase of $17.8 million (15%) from 1995. All revenue categories increased in 1996, with political revenues more than doubling to $8.1 million as Cosmos capitalized on the strength on its stations in its local markets to capture a significant portion of the political dollars spent. The Summer Olympics also provided incremental revenue as 5 of the 8 Cosmos stations are NBC affiliates. Broadcasting expenses rose only 2% in 1997 compared with the 1996 levels. This compares with a 12% increase in 1996 over the 1995 levels. A portion of the expense increase in 1996 came from the cost of the extensive coverage of the Olympics. Cosmos also benefited from a favorable $1.3 million adjustment to income tax expense during 1997. - ------------------------------------------------------------------------------- Broadcasting Operations Income from Operations (in millions) 1997 $21.7 1996 $20.3 1995 $16.6 1994 $12.9 1993 $ 9.7 1992 $10.3
- ------------------------------------------------------------------------------- An additional measure of broadcasting performance is operating cash flow, defined as operating earnings before depreciation and amortization, interest, taxes and corporate expenses. Operating cash flow, and the related efficiency ratio (operating cash flow divided by revenues net of agency commissions) are measurements of broadcasting operating margins. For the year broadcasting cash flow was $51.9 million compared to $52.5 million in 1996 and $44.9 million in 1995. The efficiency ratio was 44% in 1997, compared with 45% in 1996 and 43% in 1995. - ------------------------------------------------------------------------------- Broadcasting Operations Cash Flow (in millions) 1997 $51.9 1996 $52.5 1995 $44.9 1994 $33.0 1993 $27.8 1992 $28.2
- ------------------------------------------------------------------------------- The Company closed the acquisition of WLOX-TV on February 28, 1995. The purchase price of $40.1 million was funded with a combination of 599,985 shares of 1995-A Series convertible preferred stock with a stated value of $35 per share; cash of $5.6 million; and a note payable for $13.5 million. The Company continues to look for attractive opportunities within the broadcasting industry for future acquisitions. Recognizing that the value of broadcast properties is very high in the current market, Cosmos will selectively evaluate acquisition opportunities that fit our goal of operating stations that are the premier provider of news and programming in our markets. CORPORATE AND OTHER Corporate and other includes general corporate activities such as the overall management, legal and finance operations, debt service on debt not allocated to segments, intercompany eliminations and 34 8 the operations of Liberty Properties Group and Liberty Capital Advisors. The increased loss in Corporate and Other was due to higher expense levels in the parent company and lower earnings in the remaining real estate operations. There was no significant change in the financial results in this area for 1996 compared with 1995. IMPACT OF YEAR 2000 The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs that have time-sensitive software 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 notices, or engage in similar normal business activities. The Company has completed an assessment and will have to modify or replace portions of its software so that its systems will function properly with respect to dates in the year 2000 and thereafter. The Company believes that with modifications to existing software and conversions to new software, the Year 2000 issue will not pose significant operational problems for its computer systems. The Company has initiated formal communications with all of its significant suppliers and vendors to determine the extent to which the Company's interface systems are vulnerable to those third parties' failure to remediate their own Year 2000 issues. The Company's total Year 2000 project costs and estimates to complete include the estimated costs and time associated with the impact of third party Year 2000 issues based on information presently available. However, there can be no guarantee that the systems of other companies on which the Company's systems rely will be timely converted and would not have an adverse effect on the Company's systems. The Company has begun the process of reprogramming, replacing and testing software for Year 2000 modifications. The Company anticipates being substantially complete with the Year 2000 project by December 31, 1998. The Company has implemented several major systems projects during the last three 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 are Year 2000 compliant. The total cost of the projects undertaken beginning in 1995 for which a component of the project, or the entire project, had to do with remediating the Year 2000 problem is estimated to be approximately $17 million and is being funded through operating cash flows. Of the total, approximately $2.3 million will be expensed as incurred, 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 $9.3 million dollars of costs ($8.7 million capitalized and $0.6 million expensed). INVESTMENTS As of December 31, 1997, Liberty's consolidated investment portfolio was carried at $2.2 billion compared with $2.1 billion at the end of 1996. Approximately 77% of consolidated invested assets were in fixed maturity securities (bonds and redeemable preferred stocks), 11% were in mortgage loans, 5% in policy loans, with the balance consisting of equity securities (4%), real estate (2%), and other long-term investments (1%). The overall average credit rating of fixed maturity securities as of December 31, 1997 was AA-. Less than investment grade securities comprised 3.2% of the fixed maturity portfolio at December 31, 1997, compared with 2.6% at December 31, 1996. - ------------------------------------------------------------------------------- Bond Portfolio Quality Rating AAA 46.2% AA 10.4% A 19.5% BBB 20.7% Below BBB 3.2%
- ------------------------------------------------------------------------------- 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, 1997 and 1996, 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 1997 and 1996 interest rates have been relatively stable. In 1997, there was an increase in equity resulting from an increase in the fair value of the portfolio of $21.8 million, whereas during 1996 shareholders' equity decreased $18.3 million as a result of changes in fair value of security holdings. The 1997 and 1996 results were in marked contrast to the significant fluctuations reported in 1995, when, as interest rates fell throughout the year, shareholders' equity increased $111.1 million, reflecting the change in the fair value of the portfolio. While the volatility experienced in the last two years was not as great as that experienced in 1995, it is likely that there 35 9 will continue to be significant fluctuations in shareholders' equity as a result of carrying fixed maturity securities at market value. Fixed Maturity Securities Ratio of Fair Value to Amortized Cost Chart 1997 105.4% 1996 103.6% 1995 106.1% 1994 95.7% 1993 107.4% 1992 107.9%
Although Liberty's entire fixed maturity and equity security portfolios have been classified as available for sale, Liberty follows a value-oriented, as opposed to a trading-oriented, investment philosophy concerning its securities portfolios. Accordingly, turnover in the portfolios has historically been 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. Throughout 1997 and continuing into 1998, yields were at historically low levels and the yield curve is relatively flat. In this environment, in order to generate incremental returns above market yields without sacrificing credit quality, it may be necessary to more actively trade securities. Approximately 40% of Liberty's $1.7 billion fixed maturity portfolio at December 31, 1997, was composed of mortgage-backed securities. This compares with approximately 45% at year-end 1996. 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 19% of the book value of Liberty's mortgage-backed securities at December 31, 1997, and 17% at year-end 1996, are sensitive to prepayment or extension risk. The remaining 81% of Liberty's mortgage-backed investment portfolio at December 31, 1997, consisted of planned amortization class ("PAC") instruments. This compares to 83% at December 31, 1996. 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 $244.8 million comprised 11% of the consolidated investment portfolio at December 31, 1997. This compares to mortgage loans of $230.9 million, or 11%, of the consolidated investment portfolio at December 31, 1996. Substantially all of these mortgage loans are commercial mortgages with a loan-to-value ratio not exceeding 75% when made. Approximately 53% of these loans at December 31, 1997, are concentrated in North and South Carolina; and 92% are in the states of North Carolina, South Carolina, Virginia, Florida, Georgia, Tennessee and Louisiana. Mortgage loan delinquencies, defined as payments 60 or more days past due, have historically been low and were 1.0% at the end of 1997 compared to the latest available industry rate of 1.3%. As of December 31, 1997 and 1996, investment real estate totaled $49.2 million and $132.7 million, representing 2% and 6%, respectively, of the consolidated investment portfolio. As previously mentioned, the decline is due to the sale of the Company's business rental property and the majority of its business park land development projects during the second quarter of 1997. The majority of the remaining residential property is located in South Carolina and Georgia. Liberty has experienced pre-tax impairments on investment assets of $7.2 million, $4.3 million and $9.5 million for the years ended December 31, 1997, 1996, and 1995, respectively. The high level of impairments in 1997 was due to approximately $6.6 million of writedowns 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. The high level of write-downs in 1995 was due primarily to 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. 36 10 LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY In March 1995, Liberty entered into a $375 million multi-tranche credit facility. The facility consisted of a $225 million revolving credit facility maturing in 1999; a $100 million seven year term loan facility; and a $50 million facility substantially identical to the revolving facility, which was convertible into terms substantially identical to the term facility anytime prior to March 1997. In March 1997, the Company terminated the $50 million convertible loan commitment and reduced the amount available under the revolving credit agreement by $50 million, thereby reducing the total amount available under the facility to $275 million consisting of the $100 million term loan facility and the $175 million revolving facility. In August 1997, the Company repaid the term portion of its previous credit facility, using a combination of funds available under the revolving portion of the facility and short term borrowings from various lending institutions. Additionally, the Company repaid approximately $35.0 million under the revolving facility using the cash proceeds from the sale of its business rental property and the majority of its business park land development projects. The current credit facility contains various restrictive covenants typical of a credit facility agreement of this size and nature. These restrictions primarily pertain to levels of indebtedness, limitations on payment of dividends, limitations on the quality and types of investments, and capital expenditures. Additionally, Liberty must also comply with several financial covenant restrictions under the revolving credit agreement including defined ratios of consolidated debt to cash flow, consolidated debt to consolidated total capital, and fixed charges coverage. In January 1998, the Company entered into a short term loan agreement for $140 million whereby the Company may borrow any amount up to $140 million to use for financing the stock repurchase plan as previously discussed, or for other general operating purposes. Any amount borrowed under this agreement matures and is to be paid in full on March 31, 1998. In February 1998, Liberty initiated the process of refinancing its current remaining facility into a new $300 million credit facility, with an option to borrow up to an additional $150 million for a total commitment of $450 million. The new revolving credit facility is expected to mature five years from the date of closing of the facility. The sale of Pierce National Life is expected to close during the first quarter of 1998. The Company will use a portion of the proceeds from the sale to repay debt under the credit facility. During March 1998, the Company borrowed approximately $125 million under the facility to fund the repurchase of 2.4 million shares of its common stock pursuant to the stock tender transaction previously discussed. Debt to Capital Ratio Excluding Unrealized Investment Gains and Losses 1997 22.8% 1996 29.7% 1995 31.4% 1994 31.9% 1993 25.9% 1992 31.4%
Liberty has entered into interest rate swaps and caps in an attempt 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 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 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. 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. 37 11 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 the insurance subsidiaries significantly exceed the minimum capital requirements at December 31, 1997. CASH FLOWS The parent company's short-term cash needs consist primarily of: (1) working capital requirements, (2) interest on corporate debt, (3) dividends to shareholders and (4) funds for real estate investments. The parent company's primary long-term cash need is the repayment of corporate debt. The parent company depends primarily on dividends, debt service payments and consolidated tax return benefits paid to it by its subsidiaries to meet its short-term and long-term cash needs. Historically, Liberty's primary businesses - insurance and broadcasting - have provided sufficient liquidity to fund their operations and the operations of the parent company. Liberty receives funds from its insurance subsidiaries 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 $61.8 million for 1997 compared with $74.2 million for 1996 and $87.4 million for 1995. Liberty's net cash provided by investing activities was $2.8 million for 1997 compared with net cash used of $88.9 million in 1996 and $133.6 million in 1995. The sources of net cash provided in 1997 was the sale of the commercial real estate as described previously, and the sale of Pierce National Stock to Fortis, Inc.. For financial reporting, notes receivable of approximately $17.3 million and partnership units of the REIT received as consideration for the real estate are non-cash items and are not reported in the Statement of Cash Flows. The net cash used in investing activities in 1996 and 1995 was primarily to fund the purchase of investment securities. Cash flow from 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 and $38.4 million in 1996 and 1995, respectively. The Company used cash proceeds of approximately $35 million from the sale of real estate to repay debt in 1997. Debt repayments exceed borrowing proceeds by $55.9 million in 1997 and by $12.3 million in 1996. In 1995 proceeds from borrowings exceeded debt repayments by $11.4 million. As a result of its activities, Liberty had a net increase in cash of $25.0 million in 1997, a decrease in cash of $7.0 million in 1996 and a $7.7 million decrease in 1995. Liberty believes that its current level of cash and future cash flows from operations is sufficient to meet the needs of its business and to satisfy its debt service. If suitable opportunities arise for additional acquisitions, Liberty plans to draw on its revolving credit facility or use Common Stock or Preferred Stock as payment of all or part of the consideration for such acquisitions; or Liberty may seek additional funds in the equity or debt markets. As previously mentioned, during the first quarter of 1998 the Company used a substantial amount of the proceeds from the sale of Pierce National to repurchase common stock. Under Liberty's credit facility, there exists no restriction on acquisition funding; however, consolidated debt is limited to a maximum of $385 million and the total debt to capital ratio is limited to 35%. At December 31, 1997 outstanding debt totaled $191.9 million and the debt to capital ratio was 22.8%. 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. Most states have laws requiring solvent life insurance companies to pay guaranty fund assessments to protect the interests of policyholders of insolvent life insurance companies. Due to the recent increase in the number of companies that are under regulatory supervision, there is expected to be an increase in assessments by state guaranty funds. Under present law, most assessments can be recovered through a credit against future premium taxes. Liberty has reviewed its exposure to potential assessments, and the effect on its financial position and results of operations is not expected to be material. 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. 38 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. 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 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. 39 12 CONSOLIDATED BALANCE SHEETS THE LIBERTY CORPORATION AND SUBSIDIARIES (In 000's)
At December 31 1997 1996 - -------------------------------------------------------------------------------------------------------------------------- ASSETS Investments: Fixed maturity securities Available for sale, at market, cost of $1,587,587 in 1997 and $1,465,213 in 1996 $1,673,888 $1,517,539 Equity securities, primarily at market, cost of $55,992 in 1997, $61,431 in 1996 74,568 75,591 Mortgage loans 244,821 230,910 Investment real estate, at cost less accumulated depreciation $10,742 in 1997, 49,169 132,696 $13,619 in 1996 Policy loans 100,322 98,816 Other long-term investments 18,459 22,470 Short-term investments 250 250 - -------------------------------------------------------------------------------------------------------------------------- Total Investments 2,161,477 2,078,272 - -------------------------------------------------------------------------------------------------------------------------- Cash 61,786 36,774 Accrued investment income 21,723 20,817 Receivables net of bad debt reserves, $1,441 in 1997, $2,310 in 1996 69,433 64,074 Receivable from reinsurers 278,165 277,578 Deferred acquisition costs 275,615 262,182 Cost of business acquired 62,226 70,764 Buildings and equipment, at cost, less accumulated depreciation $114,473 in 1997, 74,338 79,808 $106,513 in 1996 Intangibles related to television operations, at cost, net of amortization $29,168 in 90,080 93,979 1997, $25,269 in 1996 Goodwill related to insurance acquisitions, at cost, net of amortization $10,929 in 33,950 35,608 1997, $9,315 in 1996 Other assets 55,965 40,909 - -------------------------------------------------------------------------------------------------------------------------- Total Assets $3,184,758 $3,060,765 - --------------------------------------------------------------------------------------------------------------------------
40 13
At December 31 1997 1996 - ------------------------------------------------------------------------------------------------------------------------- LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY Liabilities: Policy liabilities: Future policy benefits $1,890,786 $1,853,173 Claims and benefits payable 36,991 31,450 Policyholder funds 28,154 28,488 - ------------------------------------------------------------------------------------------------------------------------- 1,955,931 1,913,111 Notes and mortgages payable 191,914 147,861 Long-term debt --- 100,000 Accrued income taxes 3,282 5,163 Deferred income taxes 173,562 163,139 Accounts payable and accrued expenses 106,191 101,209 Other liabilities 4,902 3,822 Minority interest 37,160 --- - ------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------- Total Liabilities 2,472,942 2,434,305 - ------------------------------------------------------------------------------------------------------------------------- Redeemable Preferred Stock: 1994-A Series, $35.00 redemption value, 504,168 and 668,207 shares issued and outstanding in 1997 and 1996, respectively 17,646 23,387 1994-B Series, $37.50 redemption value, 525,948 and 592,334 shares issued and outstanding in 1997 and 1996, respectively 19,723 22,212 - ------------------------------------------------------------------------------------------------------------------------- Total Redeemable Preferred Stock 37,369 45,599 - ------------------------------------------------------------------------------------------------------------------------- Shareholders' Equity: Common stock Authorized - 50,000,000 shares, no par value Issued and outstanding - 20,712,686 shares in 1997, 20,214,738 shares in 1996 182,994 163,443 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 - 1,630,101 shares in 1997, 1,860,526 shares in 1996 Unearned stock compensation (10,872) (7,168) Unrealized appreciation on fixed maturity securities available for sale and equity securities 61,515 39,726 Cumulative foreign currency translation adjustment 335 (204) Retained earnings 419,476 364,065 - ------------------------------------------------------------------------------------------------------------------------- Total Shareholders' Equity 674,447 580,861 - ------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------- Total Liabilities, Redeemable Preferred Stock and Shareholders' Equity $3,184,758 $3,060,765 - -------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 41 14 CONSOLIDATED STATEMENTS OF INCOME THE LIBERTY CORPORATION AND SUBSIDIARIES (In $000's, except per share data)
For the Years Ended December 31 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------- REVENUES Insurance premiums and policy charges $350,692 $321,371 $331,370 Broadcasting revenues 137,898 137,336 119,529 Net investment income 158,319 155,221 148,670 Service contract revenues 7,121 7,751 9,025 Realized investment gains (losses) 6,226 (2,582) (2,913) - ------------------------------------------------------------------------------------------------------------------------- Total revenues 660,256 619,097 605,681 - ------------------------------------------------------------------------------------------------------------------------- EXPENSES Policyholder benefits 227,927 218,751 236,774 Insurance commissions 78,939 66,483 54,583 General insurance expenses 67,270 73,790 67,703 Amortization of deferred acquisition costs and cost of business acquired 45,564 73,967 43,780 Broadcasting expenses 95,588 94,867 83,849 Interest expense 13,209 15,139 15,047 Other expenses 20,182 19,601 15,150 - ------------------------------------------------------------------------------------------------------------------------- Total expenses 548,679 562,598 516,886 - ------------------------------------------------------------------------------------------------------------------------- Income before income taxes 111,577 56,499 88,795 Provision for income taxes 36,626 19,159 29,442 - ------------------------------------------------------------------------------------------------------------------------- Net income $ 74,951 $ 37,340 $ 59,353 - ------------------------------------------------------------------------------------------------------------------------- EARNINGS PER COMMON SHARE - ------------------------------------------------------------------------------------------------------------------------- Basic earnings per common share $ 3.50 $ 1.67 $ 2.80 - ------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------- Diluted earnings per common share $ 3.34 $ 1.66 $ 2.72 - -------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 42 15 CONSOLIDATED STATEMENTS OF CASH FLOWS THE LIBERTY CORPORATION AND SUBSIDIARIES (In 000's)
For the Years Ended December 31 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------ OPERATING ACTIVITIES Net income $ 74,951 $ 37,340 $ 59,353 Adjustments to reconcile net income to net cash provided by operating activities: Increase in policy liabilities 7,390 5,545 18,845 Increase (decrease) in accounts payable and accrued expenses 2,571 14,050 (3,964) Increase in receivables (6,600) (4,645) (3,311) Amortization of deferred acquisition costs and cost of business acquired 45,564 73,967 43,780 Policy acquisition costs deferred (55,312) (51,122) (54,522) Realized investment (gains) losses (6,226) 2,582 2,913 Gain on sale of operating assets (2,011) (3,172) (3,231) Depreciation and amortization 20,870 22,387 19,034 Amortization of bond premium and discount (7,575) (5,835) (7,485) Provision for deferred income taxes 1,613 (8,905) 6,225 All other operating activities, net (13,394) (7,957) 9,803 - ------------------------------------------------------------------------------------------------------------------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 61,841 74,235 87,440 - ------------------------------------------------------------------------------------------------------------------------ INVESTING ACTIVITIES Investment securities sold - Available for sale 128,513 181,572 155,670 Investment securities matured or redeemed by issuer: Available for sale 100,031 75,369 32,913 Held to maturity --- --- 35,494 Cost of investment securities acquired - Available for sale (288,053) (322,633) (329,918) Mortgage loans made (50,067) (38,845) (32,905) Mortgage loan repayments 35,535 21,111 22,712 Purchase of investment properties, buildings and equipment (21,552) (43,926) (62,955) Sale of investment properties, buildings and equipment 63,164 37,858 49,103 Purchases of short-term investments (42,423) (73,602) (43,607) Sales of short-term investments 42,423 73,352 50,871 Cash received on issuance of Pierce National Life common stock 37,160 --- --- Net cash paid on purchase of television station --- --- (5,140) All other investment activities, net (1,940) 823 (5,828) - ------------------------------------------------------------------------------------------------------------------------ NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 2,791 (88,921) (133,590) - ------------------------------------------------------------------------------------------------------------------------ FINANCING ACTIVITIES Proceeds from borrowings 2,505,000 2,957,704 1,901,901 Principal payments on debt (2,560,947) (2,970,011) (1,890,521) Dividends paid (19,540) (18,366) (16,814) Stock issued for employee benefit and compensation programs 3,884 1,441 2,909 Return of policyholders' account balances (38,949) (35,966) (32,637) Receipts credited to policyholders' account balances 70,932 72,917 73,653 - ------------------------------------------------------------------------------------------------------------------------ NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (39,620) 7,719 38,491 - ------------------------------------------------------------------------------------------------------------------------ INCREASE (DECREASE) IN CASH 25,012 (6,967) (7,659) Cash at beginning of year 36,774 43,741 51,400 - ------------------------------------------------------------------------------------------------------------------------ CASH AT END OF YEAR $ 61,786 $ 36,774 $ 43,741 - ------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 43 16 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY THE LIBERTY CORPORATION AND SUBSIDIARIES (Amounts in 000's except per share data)
UNEARNED UNREALIZED CUMULATIVE COMMON CONVERTIBLE STOCK SECURITY FOREIGN SHARES COMMON PREFERRED COMPEN- APPRECIATION CURRENCY RETAINED OUTSTANDING STOCK STOCK SATION (DEPRECIATION) TRANSLATION EARNINGS TOTAL - ---------------------------------------------------------------------------------------------------------------------------------- Balance at January 1, 1995 19,841 $ 152,956 --- $ (5,319) $ (53,109) $(1,491) $302,552 $395,589 Net income 59,353 59,353 Net unrealized investment gains 111,095 111,095 Dividends - Common Stock - $0.665 per share (13,283) (13,283) Dividends - Redeemable Preferred Stock - $2.10 per share (2,658) (2,658) Dividends - Convertible Preferred Stock - $1.4583 per (873) (873) share Foreign currency translation adjustment 492 492 Stock issued for employee benefit and performance incentive compensation 216 5,631 (731) 4,900 programs Stock issued as part of the purchase price of 20,999 20,999 acquisitions Stock issued for conversion of redeemable preferred stock 4 148 148 - ---------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1995 20,061 158,735 20,999 (6,050) 57,986 (999) 345,091 575,762 Net income 37,340 37,340 Net unrealized investment losses (18,260) (18,260) 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 Foreign currency translation adjustment 795 795 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) 39,726 (204) 364,065 580,861 Net income 74,951 74,951 Net unrealized investment gains 21,789 1,789 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) Foreign currency translation adjustment 539 539 Stock issued for employee benefit and performance incentive 268 11,320 (3,704) 7,616 compensation programs 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) $61,515 $ 335 $419,476 $674,447 - ----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 44 17 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) and 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 and all Canadian provinces and territories. 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 eight network affiliated television stations throughout the southeastern and midwestern states. Information on the Company's operations by segment is included on page 27 of this report (see Note 18). 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 commissions 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. Prior to the adoption of SFAS No. 115, all fixed maturity securities were carried at amortized cost. On November 15, 1995, the Financial Accounting Standards Board issued a Special Report, "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities". In accordance with the provisions in that Special Report, on 45 18 December 31, 1995, the Company chose to reclassify all securities previously classified as held to maturity to available for sale. The market value and amortized cost of the securities transferred were $307,100,000 and $281,691,000, respectively, at December 31, 1995. As a result of the transfer, shareholders' equity was increased $14,645,000 (net of deferred income taxes and adjustment to deferred acquisition costs related to universal life products) to reflect the unrealized gain on securities previously carried at cost. 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 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. - - 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 and oil and gas properties. - - 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. 114, "Accounting by Creditors for Impairments of a Loan" and Statement of Financial Accounting Standards No. 118, "Accounting by Creditors for Impairments of a Loan--Income Recognition and Disclosures" were adopted by the Company effective January 1, 1995. Under the standards, 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. The initial adoption of the standards resulted in recording an allowance for credit losses of $507,000 ($330,000 after-tax), which was included as a component of realized investment gains (losses) in the consolidated statement of income. 46 19 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. 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 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 issued by the Financial Accounting Standards Board in June, 1997. This statement will require companies to report and display comprehensive income and its components as part of the general financial statements. The most significant items which will 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. The Company will adopt this standard January 1, 1998. STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131") was issued by the Financial Accounting Standards Board in June, 1997. This statement, which is effective for years beginning after December 15, 1997, 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. The Company has not completed its review of Statement 131, but the adoption of Statement 131 will not affect results of operations or financial position, but will affect the disclosure of segment information. The Company will adopt this standard retroactively in 1998. RECLASSIFICATIONS have been made in the 1996 and 1995 Consolidated Financial Statements to conform to the 1997 presentation. 47 20 2. INVESTMENTS Amortized cost and estimated fair values of investments in available for sale securities at December 31, 1997 and 1996 are as follows:
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 States and political subdivisions --- --- --- --- 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 55,992 21,326 2,750 74,568 securities - ---------------------------------------------------------------------------- Total $1,643,579 $110,254 $ 5,377 $1,748,456 - ----------------------------------------------------------------------------
Gross Gross Amortized Unrealized Unrealized Fair 1996 (In 000s) Cost Gains Losses Value - --------------------------------------------------------------------------- AVAILABLE FOR SALE: Fixed maturity securities US government $ 14,795 $ 255 $ 83 $ 14,967 obligations States and political subdivisions 50 1 --- 51 Foreign Government 7,080 184 3 7,261 Foreign Corporate 98,669 6,452 488 104,633 and Other Corporate securities 697,521 27,665 5,130 720,056 Mortgage-backed 647,098 24,924 1,451 670,571 securities - ---------------------------------------------------------------------------- Total 1,465,213 59,481 7,155 1,517,539 Equity securities 61,431 17,074 2,914 75,591 - ---------------------------------------------------------------------------- Total $1,526,644 $76,555 $10,069 $1,593,130 - ----------------------------------------------------------------------------
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 - -------------------------------------------------------------- 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) - ------------------------------------------------------------- 1995 Realized investment gains (losses) $ (2,347) $ 8,071 $ 5,724 Change in unrealized investment gains 136,197 13,779 149,976 (losses) - ------------------------------------------------------------- Combined $ 133,850 $ 21,850 $ 155,700 - -------------------------------------------------------------
The schedule below details consolidated investment income and related investment expenses for the years ended December 31.
(In 000s) 1997 1996 1995 - ------------------------------------------------------------ Interest on Bonds $123,932 $113,016 $107,825 Mortgage loans 21,191 19,858 18,247 Policy loans 4,981 4,932 4,872 Short-term 708 600 752 investments Dividends on Preferred stocks 4,543 6,196 6,624 Common stocks 574 1,050 1,180 Investment property 4,121 9,712 9,238 rentals Net gain on investment real estate held for development 3,838 6,518 6,947 Other investment income 6,705 5,643 3,269 - ------------------------------------------------------------ Total investment income 170,593 167,525 158,954 Investment expenses 12,274 12,304 10,284 - ------------------------------------------------------------ Net investment income $158,319 $155,221 $148,670 - ------------------------------------------------------------
Proceeds from sales of fixed maturities and the related gross realized gains nd losses for the three years ended December 31 are shown below. The amounts hown below do not include those related to unscheduled redemptions or repayments, nor do they reflect any impairments taken during the years resented.
(In 000s) 1997 1996 1995 - ------------------------------------------------------------ Proceeds from sales $83,978 $157,425 $111,260 Gross realized gains 315 1,088 1,750 Gross realized losses (1,489) (4,832) (3,910)
48 21 The following investment assets were non-income producing for the twelve months ended December 31, 1997:
Balance Sheet (In 000s) Amount - ------------------------------------------------------------ Investment real estate $ 6,997 Other long-term investments 18,924 Mortgage loans 27 - ------------------------------------------------------------ Total $ 25,948 - ------------------------------------------------------------
For the year ended December 31, 1997, the Company incurred realized losses of $7,228,000 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, 1997, are as follows:
Cumulative Provision (In 000s) for Impairments - ------------------------------------------------------------- Mortgage loans $ 2,190 Investment real estate 8,610 Other long-term investments 15,080 Fixed maturities 1,709 - ------------------------------------------------------------- Total $ 27,589 - -------------------------------------------------------------
The amortized cost and estimated fair value of fixed maturities at December 31, 1997, 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 $ 24,591 $ 24,904 Due after one year through five years 226,616 242,289 Due after five years through ten 320,949 339,579 years Due after ten years 403,062 422,672 - -------------------------------------------------------------- 975,218 1,029,444 Mortgage-backed securities primarily maturing in five to twenty-five years 612,369 644,444 - -------------------------------------------------------------- Total $1,587,587 $1,673,888 - --------------------------------------------------------------
3. REINSURANCE AGREEMENTS The Company uses reinsurance as a risk management tool in the normal 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, 1997, $3.7 billion (18%) of the Company's total $20.8 billion gross insurance in force was ceded to other companies. In the accompanying financial statements, insurance premiums and policy charges, policyholder 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, 1997, Liberty Life's interest in the assets held in escrow consisted of investments with an amortized cost of $63.3 million and a fair value of $66.5 million. Comparable book and fair value at December 31, 1996 was $58.5 million and $59.9 million, respectively. These investments had an average rating of AA+. The total face value of insurance ceded to Life Re at December 31, 1997, was $2.4 billion and the Company has recorded a receivable related to this transaction from Life Re of $254.4 million as of December 31, 1997. Currently, Life Re has an A.M. Best rating of A+. During 1997 and 1996, Liberty Life had ceded premiums and policy charges of $17.1 million and $18.6 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, 1997, the amortized cost and fair value of the invested assets held in escrow was $235.9 million and $253.7 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. The maximum amount of life insurance that FamilySide will retain on any life is $50,000. 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. 49 22 The effect of reinsurance on premiums and policy charges and benefits was as follows for the years ending December 31:
(In 000s) 1997 1996 1995 - --------------------------------------------------------------- Direct premiums and policy charges $384,010 $356,660 $364,797 Reinsurance assumed 873 1,209 1,314 Reinsurance ceded (34,191) (36,498) (34,741) - --------------------------------------------------------------- Net premiums and policy charges $350,692 $321,371 $331,370 - --------------------------------------------------------------- Gross benefits $257,685 $243,584 $249,861 Reinsurance recoveries (29,758) (24,833) (13,087) - --------------------------------------------------------------- Net benefits $227,927 $218,751 $236,774 - ---------------------------------------------------------------
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) 1997 1996 1995 - ------------------------------------------------------------- Beginning balance $262,182 $265,188 $259,799 Deferred during the year 55,312 51,122 54,522 Amortized during the year (37,069) (57,812) (32,594) Adjustment related to unrealized investment (gains) losses (4,508) 3,712 (10,327) Insurance in force ceded --- --- (6,331) Foreign currency (302) (28) 119 translation - ------------------------------------------------------------- Ending balance $275,615 $262,182 $265,188 - -------------------------------------------------------------
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. A summary of the changes in costs of business acquired through acquisitions is as follows:
(In 000s) 1997 1996 1995 - -------------------------------------------------------------- Beginning balance $70,764 $86,925 $98,056 Interest accrued 5,070 5,860 6,621 Foreign currency 55 adjustment (43) (6) Amortized during the year (17,807) (13,565) (22,015) - -------------------------------------------------------------- Ending balance $62,226 $70,764 $86,925 - --------------------------------------------------------------
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 7.77% 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 1997 or 1995. 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 - --------------------------------------------- ----------------- 1998 $12,464 1999 10,093 2000 9,006 2001 7,938 2002 7,587
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 6.7% for 1997 and 6.6% for both 1996 and 1995. 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 4.0% to 6.45% in 1997, 4.0% to 6.75% in 1996, and 5.5% to 6.8% in 1995. 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. 50 23 5. DEBT The debt obligations at December 31 are as follows:
Interest (In 000s) Rate 1997 1996 ---------------------------------------------------------- Borrowings under revolving credit agreement and lines of credit 6.2% $188,000 $140,000 Long-term debt --- --- 100,000 Mortgage loans on investment property 8.0% 1,214 3,703 Other --- 2,700 4,158 ---------------------------------------------------------- Total $191,914 $247,861 ----------------------------------------------------------
The mortgage loans are secured by property with a net carrying value of $10.9 million at December 31, 1997. Maturities of the debt obligations at December 31, 1997, are as follows:
Maturities (In 000s) Amount ------------------------------------------------------------ 1998 $ 41,914 1999 148,700 2000 650 2001 650 2002 --- Thereafter --- ------------------------------------------------------------ Total $191,914 ------------------------------------------------------------
On March 21, 1995, the Company refinanced its then-existing $325,000,000 revolving credit facility into a new $375,000,000, multi-tranche credit facility. The facility consisted of a $225,000,000 three-year revolving credit facility; a $100,000,000 seven-year term loan facility; and a $50,000,000 facility substantially identical to the revolving facility, which was convertible into terms substantially identical to the term facility within two years of the closing date of the loan. The revolving portion of the loan matures in 1999, and the term portion was scheduled to be repaid in twenty quarterly installments of $5,000,000 commencing June 1997, and ending in March 2002. In March 1997, the Company terminated the $50,000,000 convertible loan commitment and reduced the amount available under the revolving facility by $50,000,000, thereby reducing the total facility by $100,000,000. In August 1997, the Company repaid the term portion of the facility using a combination of funds available under the revolving portion of the facility and short term borrowings from various lending institutions. Additionally, the Company repaid approximately $35,000,000 of debt under the revolving facility during 1997 using the cash proceeds from the sale of its business rental property and the majority of its business park land development projects. The Company's borrowings against the revolving credit facility were $148,000,000 at December 31, 1997. During 1997, the maximum amount outstanding on the revolving facility amounted to approximately $152,000,000 with an average balance outstanding of approximately $128,000,000 and an average weighted interest rate of 5.88%. In addition to the revolving facility, the Company also uses several lines of credit to manage day-to-day cash flow. The outstanding amount and total amount available under lines of credit at December 31, 1997 was $40,000,000. The average balance outstanding on available lines of credit was approximately $26,000,000 during 1997, with a maximum borrowing of $67,000,000 and an average weighted interest rate of 6.19%. The Company has the option to solicit money market interest quotes from the bank group for borrowings under the revolving 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 $175,000,000 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 covenants typical of a credit facility of this size and nature. These restrictions primarily pertain to levels of indebtedness, limitations on payment of dividends, limitations on the quality and types of investments, and capital expenditures. Additionally, the Company must also comply with several financial covenant restrictions under the revolving credit agreement, including defined ratios of consolidated debt to cash flow, consolidated debt to consolidated total capital, and fixed charges coverage. As of December 31, 1997, the Company was in compliance with all covenants under its debt agreement. In January 1998, the Company entered into a short term loan agreement for $140,000,000 whereby the Company may borrow any amount up to $140,000,000 to use for financing the repurchase of shares of common stock of for other general operating purposes. Any amount borrowed under this agreement will mature and is payable in full on March 31, 1998. In February 1998, the Company initiated the process of refinancing its current credit facility. It is expected that the new facility will be a committed $300,000,000 revolving facility, with an option to borrow up to an additional $150,000,000. It is expected that the new facility will mature five years from the closing date. The Company has entered into interest rate swap and cap agreements as a means of managing its interest rate exposure on its floating rate debt. The interest rate swap effectively fixes the interest rate on $85,000,000 of floating rate debt as of December 31, 1997 at 5.965% plus the interest rate margin and will expire in March, 2002. The agreement is a contract to exchange fixed and floating interest rate payments periodically over the life of the agreement without the exchange of the underlying notional amounts. The Company will pay the counterparty interest at 5.965%, and the counterparty will pay the Company interest at a variable rate based on the 3-month LIBOR rate. The notional principal amount under the agreement will be reduced by $5,000,000 per quarter. The interest differential to be paid or received on interest rate swaps is accrued and included in interest expense for financial reporting purposes. The agreement is with a major financial institution and the 51 24 Company's credit exposure is limited to the value of the interest-rate swap that has, or may become favorable to the Company. The Company has occasionally entered into interest rate caps in an attempt to minimize the impact of a potential significant rise in short-term interest rates on the Company's outstanding floating rate debt. As of December 31, 1997, the Company had no outstanding caps. The Company is generally required to pay an up-front fee related to these instruments at inception of the contract, which is amortized straight-line over the term of each contract. Interest paid, net of amounts capitalized, amounted to approximately $13,576,000, $18,102,000, and $14,021,000 in 1997, 1996, and 1995, respectively. Interest capitalized amounted to $1,071,000, $2,367,000, and $2,303,000 in 1997, 1996, and 1995, respectively. 6. MINORITY INTEREST On November 13, 1997, the Company announced an agreement to sell Pierce National Life Insurance Company ("Pierce") to Fortis, Inc. for $180,000,000 cash. The transaction is expected to close in April 1998, subject to regulatory approvals. The current estimate of the loss on the sale is between $14 million and $18 million. On December 31, 1997, Fortis 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 as of December 31, 1997. 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, 1997, 164,039 shares of the 1994-A Series and 72,708 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. 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. In December 1995, a lawsuit was filed against the Company alleging breach of contract. The lawsuit relates to a transaction in which the Company was unsuccessful in acquiring certain entities partially owned by the plaintiff. Management, after consultation with legal counsel, believes the lawsuit is without merit and intends to contest the suit vigorously. The Company and its subsidiaries are also defendants in various lawsuits 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. In connection with the sale of the Company's business rental property and business park land development projects during May 1997, the Company has guaranteed approximately $37 million of debt of the purchaser of the properties. 52 25 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. Future commitments under operating leases are not material. Annual rental expense amounted to approximately $6,275,000, $5,601,000, and $5,825,000 in 1997, 1996, and 1995, respectively. Most states have laws requiring solvent life insurance companies to pay guaranty fund assessments to protect the interests of policyholders of insolvent life insurance companies. Due to the recent increase in the number of companies that are under regulatory supervision, there is expected to be an increase in assessments by state guaranty funds. Under present law, most assessments can be recovered through a credit against future premium taxes. The Company has reviewed its exposure to potential assessments, and the effect on its financial position and results of operations is not expected to be material. At December 31, 1997, the Company had commitments for additional investments and other items totaling $54,061,000. 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, 1997, there were 1,630,101 shares of preferred stock outstanding (see Note 7 for 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 operations was $724,639,000 and $669,411,000 at December 31, 1997 and 1996, respectively. The comparable amounts as determined under statutory accounting practices were $212,513,000 and $183,506,000 at December 31, 1997 and 1996, respectively. The amount that retained earnings exceed statutory unassigned surplus ($449,817,000) 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 the balance sheet caption unrealized appreciation on fixed maturity securities available for sale and equity securities in shareholders' equity as of December 31 are as follows:
(In 000s) 1997 1996 - -------------------------------------------------------------- Carrying value of securities $1,748,456 $1,593,130 Amortized cost of securities 1,643,579 1,526,644 - -------------------------------------------------------------- Net unrealized appreciation 104,877 66,486 Adjustment to deferred acquisition costs (8,745) (4,236) Deferred income taxes (34,617) (22,524) - -------------------------------------------------------------- Total $ 61,515 $ 39,726 - --------------------------------------------------------------
On February 10, 1998, the Company announced a stock tender offer whereby the Company planned to repurchase up to 2,000,000 shares of its common stock pursuant to a "Dutch Auction" self tender offer. The offer closed on March 11, 1998 and the Company repurchased 2,400,000 shares of its common stock (including an additional 400,000 shares as a result of exercising its option to purchase an additional 2% of its outstanding common shares) for $52.00 per share under the offer. 53 26 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, 1997, 90 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 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 incentive stock options outstanding, 25,500 were exercisable at December 31, 1996; and 51,165 were exercisable at December 31, 1995. Of the non-qualified options outstanding, 349,609 were exercisable at December 31, 1997; 323,900 were exercisable at December 31, 1996; and 290,480 were exercisable at December 31, 1995. The options expire on various dates beginning July 1, 1998, and ending July 2, 2007. The Company has adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). In accordance with the provisions of 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 $2,330,000, $2,143,000, and $1,714,000 for the years ended December 31, 1997, 1996 and 1995, 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 fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for 1997, 1996 and 1995, respectively: risk free interest rates of 6.3%, 6.6% and 6.2%; dividend yields of 2%; volatility factors of the expected market price of the Company's common stock of .16 for each period; and a weighted average expected life of 7 years for each period. The weighted average fair value of options granted for the three years ending December 31, 1997, 1996 and 1995, respectively was $10.65, $8.39 and $6.73. 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 period. The Company's pro forma information is as follows:
IN $000S, EXCEPT PER SHARE AMOUNTS 1997 1996 1995 - -------------------------------------------------------------------- Net Income: As Reported $74,951 $37,340 $59,353 Pro forma $74,554 $37,201 $59,309 Basic Earnings per Share: As Reported $ 3.50 $ 1.67 $ 2.80 Pro forma $ 3.48 $ 1.66 $ 2.80 Diluted Earnings per Share: As Reported $ 3.34 $ 1.66 $ 2.72 Pro forma $ 3.32 $ 1.65 $ 2.72
54 27 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, 1997.
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 1/1/95 262,634 81,465 $18.31 540,600 $23.97 Awarded 108,915 26.35 --- 56,500 26.80 Vested (80,679) 24.98 Exercised (30,300) 17.98 (37,900) 21.20 Forfeited (15,826) 26.84 --- (46,000) 23.37 - ------------------------------------------------------------------------------------------------------------------------- Outstanding 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 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 12/31/97 343,973 --- --- 842,810 $32.29 - -------------------------------------------------------------------------------------------------------------------------
The following table summarizes information concerning currently outstanding and exercisable stock options:
WEIGHTED AVERAGE RANGE OF NUMBER REMAINING WEIGHTED AVERAGE WEIGHTED AVERAGE EXERCISE PRICES OUTSTANDING CONTRACTUAL LIVE EXERCISE PRICE NUMBER EXERCISABLE EXERCOSE PRICE - ------------------------------------------------------------------------------------------------------------------------- $16.25-$26.00 316,500 4.3 years $23.73 262,180 $23.29 $29.38-$40.63 526,310 8.7 37.44 87,429 31.20 - ------------------------------------------------------------------------------------------------------------------------- 842,810 7.1 $32.29 349,609 $25.27 - -------------------------------------------------------------------------------------------------------------------------
At December 31, 1997, there were 1,239,244 shares of the Company's stock reserved for future grants under the Program. 55 28 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, 1997, 1996 and 1995:
($000s) For the year ended 1997 Per- Income Shares Share (Numerator) (Denominator) Amount ---------------------------------- Net income $74,951 Less: Preferred stock (3,583) dividends ----------- 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 ==================================
($000s) For the year ended 1996 Per- Income Shares Share (Numerator) (Denominator) Amount ---------------------------------- Net income $37,340 Less: Preferred stock (3,700) dividends ---------------------------------- 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 ==================================
For the year ended 1995 ($000s) Per- Income Shares Share (Numerator) (Denominator) Amount ---------------------------------- Net income $59,353 Less: Preferred stock (3,531) dividends ----------- BASIC EPS Income available to common shareholders 55,822 19,951 $2.80 ======= Effect of Dilutive Securities: Stock Options --- 119 Redeemable preferred stock 2,658 1,265 Convertible preferred stock 873 502 -------------------- DILUTED EPS Income available to common shareholders plus assumed conversions $59,353 21,837 $2.72 =================================
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. The impact of this transaction if it had occurred prior to December 31, 1997, would be to reduce the number of shares outstanding and increase the earnings per share for the year ended December 31, 1997. 56 29 12. EMPLOYEE BENEFITS The Company has several postretirement plans that provide medical and life insurance benefits for qualified retired employees. The postretirement 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. Net periodic postretirement benefit cost was $1,378,000, $1,494,000, and $1,506,000 for the years ended December 31, 1997, 1996, and 1995, respectively, and included the following components:
- -------------------------------------------------------------- (In $000s) 1997 1996 1995 - -------------------------------------------------------------- Medical Life Medical Life Medical Life - -------------------------------------------------------------- Service $ 143 $ -- $ 162 $ $ 140 $ -- cost -- Interest 936 299 1,042 290 1,082 284 cost - -------------------------------------------------------------- Net periodic postretire- ment benefit $1,079 $299 $1,204 $290 $1,222 $284 cost - --------------------------------------------------------------
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:
1997 1996 - -------------------------------------------------------------- (In $000s) Medical Life Medical Life - -------------------------------------------------------------- Retirees $12,052 $4,221 $11,374 $4,121 Fully eligible active plan 820 60 802 --- participants Other active plan participants 928 57 936 --- - -------------------------------------------------------------- Accumulated postretirement benefit 13,800 4,338 13,112 4,121 obligation Unrecognized net gain (loss) 712 (471) 1,657 (347) - -------------------------------------------------------------- Accrued postretirement benefit $14,512 $3,867 $14,769 $3,774 obligation - --------------------------------------------------------------
At December 31, 1997, the weighted-average annual assumed rate of increase in the per capita cost of covered medical benefits is 8.5% for 1998, and is assumed to decrease to 8% in 1999, then decrease 1% per year to 5.5% in 2002 and thereafter. At December 31, 1996, the health care cost trend rate assumption was 9.0% for 1997 and the rate graded down by 0.5% per year to 8% in 1999, then decreased 1% per year to 5.5% in 2002 and thereafter. A 1% increase in the per capita cost of health care benefits results in a $929,000 increase in the accrued postretirement benefit obligation and an $85,000 increase in postretirement benefit expense. The assumed weighted average discount rate used in determining the accrued postretirement medical and life benefit obligation was 7.5% at both December 31, 1997 and 1996. 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 revises 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 is not expected to significantly change the disclosures made by the Company. 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 $4,853,000, $4,959,000, and $5,067,000 in 1997, 1996, and 1995, 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 $2,379,000, $2,218,000, and $2,102,000 in 1997, 1996, and 1995, respectively. 57 30 13. PROVISION FOR INCOME TAXES The provision for income taxes consists of the following:
(In 000s) 1997 1996 1995 - ---------------------------------------------------------- Current: Federal $34,595 $25,717 $21,761 State and local 418 2,347 1,456 - --------------------------------------------------------- Total current 35,013 28,064 23,217 Deferred: Federal 1,923 (8,460) 6,226 State and local (310) (445) (1) - --------------------------------------------------------- Total deferred 1,613 (8,905) 6,225 - --------------------------------------------------------- Total tax provision 36,626 $19,159 $29,442 - ---------------------------------------------------------
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. Significant components of the Company's deferred tax liabilities and assets as of December 31, 1997 and 1996, are as follows:
(In 000s) 1997 1996 - ---------------------------------------------------------- Insurance operations deferred tax liabilities: Deferred acquisition costs $ 84,862 $ 86,469 Policy liabilities 20,325 22,177 Market discount on investments 11,476 11,869 Tax over book partnership losses 1,118 1,249 Unrealized investment gains recognized in equity 34,617 22,524 Non-insurance companies deferred tax liabilities: Book over tax basis in acquired television station 13,884 19,973 Book over tax basis in investment property transferred to 5,310 --- partnership Unrealized investment gains recognized in equity 1,517 --- Tax over book depreciation 5,161 7,024 Tax over book amortization 3,593 4,086 Other 1,953 --- - ---------------------------------------------------------- Total deferred tax liabilities 183,816 175,371 - ---------------------------------------------------------- Insurance operations deferred tax assets: Employee benefit accruals 6,048 6,128 Other --- 597 Non-insurance companies deferred tax assets: Net operating loss carryover 358 358 Book over tax partnership losses 3,848 2,838 Other --- 2,311 - ---------------------------------------------------------- Total deferred tax assets 10,254 12,232 - ---------------------------------------------------------- Net deferred tax liability $ 173,562 $163,139 - ----------------------------------------------------------
At December 31, 1997 and 1996, the Company had unrealized gains from securities classified as available for sale and equity securities of $104,877,000 and $66,486,000, 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) 1997 1996 1995 - ----------------------------------------------------------- Federal income tax rate 35% 35% 35% Rate applied to pre-tax income $39,052 $19,775 $31,078 Tax exempt interest and dividends (1,036) (1,166) (1,384) State and local income taxes 248 1,233 948 Other (1,638) (683) (1,200) - ----------------------------------------------------------- Provision for income taxes $36,626 $19,159 $29,442 - -----------------------------------------------------------
The Company has net operating loss carryforwards of $1,023,000 at December 31, 1997 and 1996, 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 $35,644,000, $30,047,000, and $21,199,000 in 1997, 1996, and 1995, 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 or unless it exceeds certain limitations under the Internal Revenue Code. 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. 58 31 14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) Quarterly results of operations for each of the years ended December 31, 1997 and 1996, are as follows:
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 $ 0,994 $ 24,611 - ---------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 15,867 $ 20,398 $ 20,229 $ 18,457 - ---------------------------------------------------------------------------------------------------------------------- Basic Earnings per common share $ 0.74 $ 0.96 $ 0.94 $ 0.86 - ---------------------------------------------------------------------------------------------------------------------- Diluted Earnings per common share $ 0.71 $ 0.92 $ 0.90 $ 0.81 - ----------------------------------------------------------------------------------------------------------------------
Quarter Ended - ---------------------------------------------------------------------------------------------------------------------- 1996 (In 000s except per share amounts) March 31 June 30 Sept. 30 Dec. 31 - ---------------------------------------------------------------------------------------------------------------------- Revenues $146,708 $152,352 $156,469 $163,568 - ---------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes $ 20,660 $ 24,465 $(16,231) $ 27,605 - ---------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 14,055 $ 16,300 $(10,820) $ 17,805 - ---------------------------------------------------------------------------------------------------------------------- Basic Earnings (loss) per common share $ 0.65 $ 0.76 $ (0.58) $ 0.84 - ---------------------------------------------------------------------------------------------------------------------- Diluted Earnings (loss) per common share $ 0.64 $ 0.74 $ (0.58) $ 0.80 - ----------------------------------------------------------------------------------------------------------------------
During the third quarter of 1996, and concurrent with a realignment of the Company's management structure, the Company completed a detailed study of its insurance product lines, including products currently being marketed as well as those previously sold by the Company's subsidiaries (including recently acquired companies). This study identified several specific products, marketing programs, underwriting and service methods that were inconsistent with the Company's current strategies and profit objectives. Based on this analysis, the Company took a $26.9 million after-tax charge, which principally represented the write-off of deferred acquisition costs where recovery was no longer assured due to actual experience on these products being worse than originally assumed. In addition to the product-related charges, the Company wrote-off previously deferred costs associated with acquiring and modifying an administrative system for the Company's pre-need business. With the realignment previously mentioned, a decision was made to move to a new administrative platform for pre-need. All of the charges represented non-cash items, and had no material impact on the insurance companies' statutory financial condition. 15. STATUTORY RESULTS OF OPERATIONS Statutory net income of the Insurance Group for each of the years ended December 31, 1997, 1996, and 1995 was $53.0 million, $42.8 million, and $32.4 million, respectively. 16. ACQUISITIONS In February 1995, the Company completed the acquisition of WLOX television located in Biloxi, Mississippi. WLOX-TV is affiliated with the ABC television network. This acquisition was accounted for as a purchase, and the results of operations of WLOX have been included in the accompanying consolidated financial statements since the date of acquisition. The purchase price of $40.1 million was funded through a combination of proceeds from the Company's credit facility totaling $5.6 million, a new class of convertible preferred stock totaling $21.0 million (see Note 9), and notes payable totaling $13.5 million. 59 32 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. - - 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 and investments in oil and gas producing property. 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 $18,924,000 and $20,376,000 at December 31, 1997 and 1996, 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. 60 33 The carrying amounts and estimated fair values of the Company's financial instruments are as follows:
1997 1996 - -------------------------------------------------------------------------------------------------------------------------------- Estimated Estimated Carrying Fair Carrying Fair (in 000s) Amount Value Amount Value - -------------------------------------------------------------------------------------------------------------------------------- ASSETS Fixed maturity securities available for sale $1,673,888 $1,673,888 $1,517,539 $1,517,539 Equity securities 74,568 74,568 75,591 75,591 Mortgage loans 244,821 250,889 230,910 230,166 Policy loans 100,322 97,960 98,816 94,451 Other long-term investments 18,459 18,459 22,470 22,470 Short-term investments and cash 62,036 62,036 37,024 37,024 Interest rate swap --- --- --- 505 LIABILITIES Investment-type insurance contracts 79,317 75,450 76,573 72,437 Notes, mortgages and other debt 191,914 191,914 147,861 147,861 Long-term debt --- --- 100,000 100,000 Film contract obligations included in other liabilities 9,738 8,765 8,154 7,382 Interest rate swap --- 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. 18. BUSINESS SEGMENT INFORMATION The Company is actively engaged through its subsidiaries in two major business segments: insurance and broadcasting. Sales between the various subsidiaries of the Company are not material and are eliminated. Information for these segments is contained in the Selected Financial Data on page 27 and, with respect to the years 1995 through 1997, is incorporated by reference. 61 34 MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING The consolidated financial statements included in this Annual Report have been prepared by management which is responsible for the integrity and fair presentation of the financial data and related disclosures. The consolidated financial statements are in accordance with generally accepted accounting principles and necessarily include amounts that are based on management's estimates and assumptions. Management believes that the consolidated financial statements fairly reflect the Company's financial position and results of operations. To gather and control financial data, the Company maintains accounting systems supported by internal controls that provide reasonable assurance over the preparation of reliable financial statements. Management believes that a high level of internal control is maintained by the selection and training of qualified personnel, by the establishment and communication of accounting and business policies, and by internal audits. Ernst & Young LLP, independent auditors, are engaged to audit and to render an opinion as to whether the Company's financial statements, considered in the entirety, present the Company's financial condition and operating results fairly. Their audit is conducted in accordance with generally accepted auditing standards, and their report is included on this page. The Audit Committee of the Board of Directors, composed of four outside directors, reviews the Company's accounting and auditing policies and meets regularly with the Company's internal audit staff and the independent auditors. 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, 1997 and 1996, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Greenville, South Carolina February 6, 1998 62 EX-21 3 LIST OF SUBSIDIARIES 1 Exhibit 21 THE LIBERTY CORPORATION AND SUBSIDIARIES LIST OF SUBSIDIARIES DECEMBER 31, 1997
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. Pierce National Life Insurance Co. California 79 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 Investment Group, Inc. S.C. 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. 63 EX-23 4 CONSET 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 6, 1998, included in the 1997 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, and 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 6, 1998 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, 1997. /s/ Ernst & Young LLP Greenville, South Carolina March 24, 1998 64 EX-24 5 POWERS OF ATTORNEY 1 Exhibit 24 SPECIAL POWERS OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS that I, William B. Timmerman, Director of The Liberty Corporation, do hereby appoint Martha G. Williams and R. David Black, or either of them, Special Attorney for me and in my name and on my behalf to sign the Annual Report on Form 10-K and any amendments thereto for The Liberty Corporation to be filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, for each fiscal year ended December 31, and generally to do and to perform all things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 6th day of May, 1997. /s/ William B. Timmerman ------------------------ William B. Timmerman Director, The Liberty Corporation A South Carolina Corporation 65 EX-27 6 FINANCIAL DATA SCHEDULE
7 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 1,673,888 0 0 74,568 244,821 49,169 2,161,477 61,786 278,165 337,841 3,184,758 1,890,786 0 36,991 28,154 191,914 37,369 20,999 182,994 470,454 3,184,758 350,692 158,319 6,226 145,019 227,927 45,564 146,209 111,577 36,626 74,951 0 0 0 74,951 3.50 3.34 0 0 0 0 0 0 0
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